To settle a long-standing quarrel over the sharing of the Brazilian state VAT revenue (called ICMS that stands for tax on operations for circulation of goods and on the rendering of interstate and intercity transport and communication services), federal lawmakers have decided to change the Federal Constitution by approving the Amendment to the Constitution n.º 87 (“Amendment 87”).

The amendment changed § 2 of article 155 of the Federal Constitution and created article 99 in the Act of Transitional Constitutional Provisions. Its the scope is a system for collection of ICMS levied on operations to ship goods and render services to end users – whether they are the ICMS taxpayers or not – located in another state.

As to operations to ship goods and render services to end users (i.e., persons that will not resell or use the goods as input in production process) located in another state, it should be emphasized that the Federal Constitution used to stipulate that: i) the interstate rate would apply if the end user were the ICMS taxpayer, or ii) the internal rate – set by the state where the recipient of the goods is – would apply if the recipient were not the ICMS taxpayer. Furthermore, according to the constitutional provision that has been changed, in the situation described in “i” above the state where the recipient is located is entitled to the tax for the difference between the internal tax rate (where the recipient is) and the interstate tax rate – aka “differential rates”.

Take notice the law currently sets three tax rates for interstate (involving two states) operations, to wit: 4% on imported products or products containing over 40% of imported content; 7% on operations leaving from Southern and Southeastern states (except for Espírito Santo) and heading to Northern, Northeastern, Middle-Eastern states and Espírito Santo; 12% applicable to other situations. The internal tax rate, in turn, is always set by the state within which the operation takes place.

Because of this rule, and before the change Amendment 87 introduced, in interstate operations where the buyer was not the ICMS taxpayer (i.e., the buyer was not a reseller or a producer that would use the goods as input), the ICMS used to be fully collected by the shipping state at the internal tax rate.

The approval of Amendment 87 aimed at correcting distortions in the VAT revenue that has been growing due to e-commerce, in other words: a virtual transaction, in which a buyer is not inside a business place within buyer’s own state to buy goods.

The new text of the constitutional provision now mandates that the interstate tax rate applies to operations to ship goods and render services to end users – whether they are the ICMS taxpayers or not – in a different state, while the tax for the difference between the internal rate of the destination state and the interstate rate is payable to the state where the recipient is.

The new wording also mandates that the ICMS for the difference between the internal and the interstate tax rates is payable: a) by the recipient if the recipient is the taxpayer, or b) by the shipper if the shipper is not the taxpayer.

Amendment 87 also created article 99 in the Act of Transitional Constitutional Provisions, which stipulates that on a transitional basis the tax for the difference between the internal and the interstate tax rates will be shared between the origin and destination states, as follows:

  1. for the year 2015: twenty percent (20%) to the state of destination and eighty percent (80%) to the state of origin;
  2. for the year 2016: forty percent (40%) to the state of destination and sixty percent (60%) to the state of origin;
  3. for the year 2017: sixty percent (60%) to the state of destination and forty percent (40%) to the state of origin;
  4. for the year 2018: eighty percent (80%) to the state of destination and twenty percent (20%) to the state of origin;
  5. as of 2019: one hundred percent (100%) to the state of destination.

It is worthy of remark that Amendment 87 becomes valid on the date it was published and takes effect in the following year, ninety (90) days after its publication. This wording, in our opinion, leads to legal uncertainty as it sets the amendment is effective as from 2016 and mandates, at the time, that differential rates be shared this current year.

Although it is feasible, in legal terms, to argue Amendment 87 becomes effective in 2016 only, the possibility the states might enforce the amendment this year cannot be obviated. Should they do so, the enforcement can be questioned with good chance of success.

We believe the states will change the rules for regulation of such obligations. And we will timely explain any such changes if they are made.