Distortion of tax substitution
Source: DCI, 07/05/2009
The three levels of government, the Union, states and municipalities, have increasingly used tax substitution as a way of centralizing taxation in one of the links in the production chains and thereby obtaining greater revenues with less enforcement efforts.
The State of São Paulo, specifically, has increased this expedient by adding a large number of products that are subject to this type of taxation.
However, tax substitution has limits, many of which have already been surpassed, giving rise to judicial measures by aggrieved taxpayers.
For the subject to be understood, it is necessary to recall some basic concepts that seem to pass by without their tax authorities being aware.
There is an immovable constitutional principle regarding taxation, which is the strict legality of taxation, according to which the taxpayer can only be required to pay the amount of the tax that is consistent with his legal description, not a penny more. It is a natural defense of the private property against the State's collection power, which would otherwise be discretionary, unlimited, autocratic.
Therefore, the taxpayer should only pay what is described in the law, without being able to “expand” legal concepts (extensive interpretation of the taxable event) and without being able to use “analogy” with a similar factual situation (creation in fact generator does not exist).
The hypothesis of tax incidence described in the law must occur in business practice so that the taxpayer is then obliged to collect taxes for the public coffers.
Otherwise (or otherwise), although it may be claimed that the law “forgot” to tax certain hypotheses or that the law was “unfair” in not taxing certain products or people or even that the law leads to evident economic distortions, yet thus, the taxpayer has nothing to pay if the legal hypothesis did not occur or, to put it another way, if the transaction made did not conform exactly to the terms provided for by law.
As we are talking about a constitutional principle, the law that hurts you will be unconstitutional, that is, it will not exist in the legal world, as long as it is declared by the Judiciary.
One of the natural consequences of the principle of strict legality of taxation is the need to have a legal (and not economic) relationship between the taxpayer and the taxable event, since it would not be easy for the tax authorities to circumvent the principle by attributing the tax to the person who it has no relation, even if respecting the legal hypothesis.
Normally, the person who has a direct and immediate relationship with the taxable event, as described in the law (the service provider regarding the service tax, the industrial establishment with regard to the tax on industrialized products, the trader in the regard to the tax on the circulation of goods).
Exceptionally, the law may attribute the tax to others, as long as there is an indirect or mediated relationship.
To maintain the examples, the service payer can withhold tax at the time of payment (withholding agent), the raw material supplier to the industrial establishment can anticipate the payment (tax substitution) and the trader can estimate the estimated tax for the next circulation stage (ditto). In all of these exceptional cases, however, there can be no increase in the tax burden of the true taxpayer, under penalty of offending the principle of strict legality of taxation.
The cases of tax substitution began in the field of tax on industrialized products, in those productive chains with few large manufacturers that supply thousands of traders (cigarettes and beverages).
Some factors explained (as they explain today) the advantage of substitution.
Firstly, it is a federal tax in which there is no question of several jurisdictions, with complex credit and debit mechanisms such as the ICMS, or with doubts about which municipalities to collect, as in ISS.
Second, the concentration of large manufacturers justified (as it justifies) the advance collection with evident advantages of inspection and collection.
Finally, the next merchants in the chain would resell the product (as they do) to final consumers, when there is no question of possible credits when purchasing.
What works for the IPI should not necessarily be applied to the ICMS, a state tax that carries with it one of the most complex and inefficient tax structures, as a result of the distortions (most unconstitutional) that government officials have been introducing over time in its conception original, of great simplicity, by the way.
The use of tax substitution in any sales in the middle of the production chain gives the process, by definition, a difference between what should be collected by the replaced trader, if there was no substitution, and the amount that ends up being paid by the substitute.
This picture is like this for the simple reason that the substitute can never be aware of two variables of the merchants following him in the chain: his selling price (basis for his tax debt) and his credit structure (basis for the calculation end of tax).
As will be seen in a subsequent article, the distortions are enormous.
For this reason, the indiscriminate use of tax substitution has generated an offense to the principle of strict legality of taxation, giving taxpayers harmed legal action that will annul the administrative or regulatory acts that have created most of the hypotheses of substitution created so far.