PIS and COFINS Credits on Advertising Expenses

The Taxpayers Council (CARF), in the hearing of the appeal filed in the administrative proceeding No. 10540.721182/2016-78, maintained the favorable 1st level decision which acknowledged Lojas Insinuante S.A.´s right to offset PIS and COFINS credits related to advertising expenses.

The administrative proceeding above mentioned refers to a tax assessment issued to collect amounts of PIS and COFINS under the allegation that Lojas Insinuante S.A. unlawfully (i) did not include the revenues of advertising and marketing (which are paid by the suppliers to reimburse the company for the marketing of the sold products) in the social contributions tax basis; and (ii) offset PIS and COFINS credits related to advertising and marketing expenses.

The Brazilian IRS took the view that, at the time the tax assessment was issued, the credits related to advertising and marketing expenses could not have been offset, since the Brazilian legislation only allowed the offset for credits of expenses incurred with inputs (with a narrow approach of the tax authority according to which only goods and services directly related to the taxable revenue qualify as such).

However, the Lower Administrative Court and the Taxpayers Council understood that, if the tax authorities consider that the revenues of advertising and marketing must be included in the PIS and COFINS tax basis, so the credits related to advertising and marketing expenses can be offset, even if such activities are a so-called secondary purpose of the company.

Although the decision issued in the administrative proceeding No. 10540.721182/2016-78 considered the peculiarities of the specific case, this is an important precedent for companies that practice – even in a secondary purpose – activities of advertising and marketing.