Below we provide our comments on the taxation of electric power supply, in relation to both internal and interstate transactions, as follows:
I. Tax on the Circulation of Goods and on Services of Interstate and Intermunicipal Transportation and Communication (“ICMS”)
I.1. Levy of ICMS on Internal Transactions of Electric Power Distribution
With respect to internal transaction of electric power distribution, except as otherwise provided in the State law, the ICMS is levied on internal transactions to end consumers, be them individuals or legal entities.
In this respect, as a general rule, the liability for assessment and payment of the ICMS in internal transactions of electric power distribution is attributed:
(i) To the distributing company responsible for operating the distribution network in the State, which carries out the transaction relating to the circulation of electric power destined to an establishment or domicile located in the territory for it to be consumed therein by the respective addressee, whenever such addressee, in the capacity as consumer, is connected to a distribution or transmission line that is part of the network operated by it, due to the execution of:
a) an electric power supply agreement executed with it under the regime of the concession or permission held by it;
b) agreements for the connection and use of the respective distribution network, executed with it for purposes of consumption of the electric power acquired by the addressee by means of purchase agreements agreed by it, even if with third parties, located in this or in another State, in the free contracting environment;
c) any other type of agreement executed with it for purposes of delivery of electric power for consumption by the addressee.
(ii) to addressees that are directly connected to the basic transmission network in the capacity as consumers and which promote the entry of electric power into their establishment or domicile, located in the territory of the State of São Paulo, to consume it therein in view of the execution of an electric power purchase agreement executed in the free contracting environment.
In the event of internal transactions with electric power to be used in the sale or manufacturing of other products, as a general rule, the States usually grant ICMS deferral in all transactions with electric power that do not involve the supply thereof to an end consumer.
Please note that this rule may be different, depending on the State applicable to the specific case.
In addition, in relation to the ICMS tax base in the internal transactions with electric power, as a general rule, the price of the electric power supply transaction applies, it being understood that the tax rates vary in accordance with the law applicable in each State.
For example, below we inform the ICMS rates with respect to electric power transactions relating to São Paulo and Rio de Janeiro, as follows:
in the State of São Paulo, as set forth in article 52, item V, of the São Paulo State ICMS Regulation (RICMS), the following tax rates apply:
- twelve percent (12%) in relation to residential accounts that present a monthly consumption of up to two hundred (200) kWh;
- twenty-five percent (25%) in relation to residential accounts that present a monthly consumption above two hundred (200) kWh;
- twelve percent (12%) whenever it is used in the passenger electrified public transport;
- twelve percent (12%) in transactions with electric power used in rural properties, which are understood as those that actually engage in farming or cattle raising and are enrolled with the ICMS Record of Taxpayers.
in the State of Rio de Janeiro, as set forth in article 14, item VI, of Law No. 2.657/1996, the following tax rates apply:
- eighteen percent (18%) for a monthly consumption of up to 300 kilowatts/hour;
- twenty-seven percent (27%) for a monthly consumption above 300 kilowatts/hour until a monthly consumption of 450 kilowatts/hour;
- twenty-eight percent (28%) for a monthly consumption above 450 kilowatts/hour;
- six percent (6%) whenever it is used in the passenger electrified public transport.
I.2. Levy of ICMS on Interstate Electric Power Distribution transactions
The supply of electric power to individuals or legal entities located in different States is not subject to the levy of ICMS, as provided in article 155, item X, letter “b”, of the Brazilian Federal Constitution.
However, the distribution of electric power shall only be granted this immunity if the acquiring individual or legal entity uses the electric power to produce goods or provide services for sale or manufacture (i.e., to benefit from the immunity, the power may not be sold to end consumers), pursuant to the provisions of article 2, paragraph 1, item III, of Supplementary Law No. 87/96.
Therefore, in interstate transactions involving electric power, the ICMS shall be levied if the acquirer is the end consumer of the electric power.
Please note that there are court orders 1 pursuant to which the companies that acquired electric power in interstate transactions for use in the manufacture or sale of other products were deemed end consumers of the power, thus attracting the levy of ICMS upon said transactions. This discussion is still not defined, because the Brazilian Federal Supreme Court (STF) still needs to try Special Appeal (RE) 748.543 with general repercussion (issue 689), which means that the final outcome of this trial will affect all taxpayers that are in this same situation.
With respect to the tax base, the taxpayer shall use as tax base to calculate the ICMS the price of the electric power supply transaction.
Please note that the specific ICMS rate of each of the States shall apply on such tax base. For example, below we inform the ICMS rates relating to São Paulo and Rio de Janeiro:
State of São Paulo:
As provided in article 52, item II, of the RICMS/SP, the following tax rates shall apply:
- whenever the sale is made to the States located in the North, Northeast and Mid West Regions and to the State of Espírito Santo: seven percent (7%); and
- whenever the sale is made to the States of the South and Southeast Regions: twelve percent (12%)
State of Rio de Janeiro:
As provided in article 14, item III, of Law No. 2.657/1996 and in article 4 of Law No. 7.183/2015, the following tax rates shall apply:
- whenever the addresses, regardless if they are the respective taxpayers or not, are located in the North, Northeast, Mid West Regions and in the State of Espírito Santo: seven percent (7%);
- whenever the addresses, regardless if they are the respective taxpayers or not, are located in the other regions: twelve percent (12%).
II. Social Integration Program (“PIS”) and Social-Security Financing Contribution (“COFINS”).
The transactions involving the supply of electric power are subject to the levy of PIS and COFINS at the joint rate of 9.25% of the price of the transaction.
III. Other considerations
Please note that in the Free Contracting Environment (ACL), there are structures enabling a reduction in the tariffs of use on the portion of power that is self-produced and consumed.
As a general rule, from among other specific characteristics, the reduction in the tariff of use applies to hydroelectric generation ventures with power equal to or lower than five thousand kilowatts (5,000 kW) and for those based on solar and wind sources, biomass and qualified cogeneration, including originating from urban and rural solid waste. The power injected in the transmission or distribution systems shall be lower than or equal to thirty thousand kilowatts (30,000 kW).
1- “TAX LAW. ICMS. ELECTRIC POWER. INTERSTATE TRANSACTION. SALE TO END CONSUMER. The Tax on the Circulation of Goods and Provision of Services is not levied on the exit of electric power from the territory of a State to be levied upon entry into the territory of another; implementation, by article 155, item II, paragraph 2, item X, letter ‘b’, of the Brazilian Federal Constitution, on the one part, and by article 2, paragraph 1, item III, of Supplementary Law No. 87, of 1996, on the other part, of the tax policy of attributing collection of the tax to the State of destination whenever the transaction involves electric power. If the electric power integrates a subsequent manufacturing or sale cycle without being consumed, the tax is not levied; it shall be levied if the electric power is consumed in the process of manufacturing or sale of other products. Precedent of the Federal Supreme Court. (Special Appeal (RE) No. 198.088, SP, reporting Justice Ilmar Galvão). Special appeal heard, but denied.” (Superior Court of Justice (STJ), Justice ARI PARGENDLER, Special Appeal (REsp) 1340323 / RS, electronic Journal of Courts (DJE) March 31, 2014)
De Luca, Derenusson, Schuttoff & Advogados
Rua Fidêncio Ramos, 195 – 10º andar
BR-04551-010 São Paulo – SP
Tel (11) 3040 4040