The Administrative Council of Tax Appeals (Carf) unanimously decided to exclude from the calculation base of the Corporate Income Tax (IRPJ) and the Social Contribution on Net Profit (CSLL) the values arising from positive foreign exchange variations in an international contract worth US$ 1 billion. The decision in Administrative Process No. 17227.721274/2021-17 was rendered by the 1st Panel of the 2nd Chamber of the 1st Section in a recent judgment analyzing the tax assessment by the Federal Revenue of Brazil against a multinational in the oil and gas sector.

The Federal Revenue claimed that the gains from foreign exchange variations constituted income and should be taxed as operational profit. However, the councilors determined that there was no effective realization of income by the company — it was merely an exchange rate fluctuation, without financial settlement of the contract, which precluded the taxation.

The Panel responsible for the analysis further emphasized that the contract involved future obligations, not yet settled, and therefore, the exchange rate effects cannot be confused with accounting profit. According to the reporting councilor, considering the mere currency appreciation as a taxable base could lead to taxation of an unrealized amount.

Thus, the decision represents a significant precedent for companies with foreign currency contracts, particularly in sectors like infrastructure, energy, and foreign trade, which deal with large volumes and significant currency exposure. Besides potentially benefiting companies with future contracts in dollars by restricting the incidence of IRPJ and CSLL only to effectively realized income, this precedent benefits taxpayers exposed to foreign exchange variations and long-term international contracts.

Notes:

1. CARF (Administrative Council of Tax Appeals) – A Brazilian governmental body responsible for resolving tax disputes between the Federal Revenue Service and taxpayers.
2. IRPJ (Corporate Income Tax) – A tax in Brazil levied on the net profits of companies.
3. CSLL (Social Contribution on Net Profit) – A Brazilian federal tax on the net profit of companies, which aims to fund social security programs.