Brazil Court Ruling Risks US$7B Tax Loss

BRAZIL · TAX

Brazil’s top court voted 6 to 5 to shrink two federal taxes. The government sizes the possible cost at up to US$7.0 billion.

Brazil’s Supreme Federal Court ruled on Wednesday, 21 October, that a city services tax is not company revenue. The 6 to 5 decision could cost the federal government up to BRL 35.4 billion (about US$7.0 billion).

The tax, called ISS, is charged by Brazilian cities on services and no longer counts in the base for PIS and Cofins. This ISS tax ruling matters to US investors because it hits federal revenue and refunds to service companies.

What the Supreme Court Decided

The full bench decided Recurso Extraordinário 592.616, known as Topic 118 of general repercussion. That label means the outcome should guide the handling of other similar cases in lower courts.

The thesis adopted says ISS is a simple financial inflow that only passes through a company’s books. It is therefore not revenue, and PIS and Cofins cannot be charged on it.

PIS and Cofins are federal social contributions on company revenue, charged at 9.25% in the main non-cumulative regime. For every BRL 1,000 (about US$199) of ISS removed from the base, federal receipts fall by BRL 92.50 (about US$18.41).

The case began as an appeal by Viação Alvorada, a passenger bus company in Porto Alegre, against a regional federal court. That court, the TRF-4, had upheld the inclusion of ISS in the base.

How the Six to Five Vote Split

The Supreme Federal Court (STF) is Brazil’s top court and has the last word on constitutional questions. Its bench stood at 5 to 5 before Justice Luiz Fux cast the deciding vote.

Fux said ISS is a mere financial entry that companies later pass on to the public treasury. He also said it would be very difficult to apply the ruling to past years, because that would harm public finances.

The rapporteur, retired Justice Celso de Mello, voted to remove ISS, and retired Justices Rosa Weber and Ricardo Lewandowski agreed. Under court rules, the votes of retired justices stay in the count.

Justices Cármen Lúcia and André Mendonça also backed removal, which with Fux made six votes. Mendonça had earlier suggested limiting the ruling’s effects to the future.

Justice Dias Toffoli opened the dissent, joined by Alexandre de Moraes, Edson Fachin, Gilmar Mendes and retired Justice Luís Roberto Barroso. They argued that ISS is built into the price of a service and so remains taxable revenue.

Fachin, who presides over the court, voted with the minority. Gilmar Mendes joined Toffoli’s dissent.

The BRL 35.4 Billion Question

The BRL 35.4 billion (about US$7.0 billion) estimate comes from the fiscal risks annex of Brazil’s 2026 budget guidelines law. The Treasury and the Attorney General’s office prepared it, and it rates the case as a possible risk.

The estimate covers five years of possible refunds plus the yearly effect of ending the charge. The government itself says this is a maximum that may not fully materialise.

Conversions in this article use the rate of BRL 5.02 per US$1 on 22 October 2026. That rate is from the open exchange rate service open.er-api.com.

The ruling follows the 2017 “tese do século”, in which the court removed the state tax ICMS from the same base. In a separate ruling this month, the court voted 7 to 4 to keep ICMS presumed credits out of the base.

The government had priced that case at BRL 16.5 billion (about US$3.3 billion). By simple addition, the two losses would total BRL 51.9 billion (about US$10.3 billion) if both were realised in full.

Why the Final Bill Is Still Open

The court did not decide from when the ruling applies. That question, called modulation, will determine how much companies can recover for past years.

Fux proposed that the ruling apply only from publication of the trial record, with exceptions for cases and tax disputes already pending. Mendonça backed that approach, which would sharply cut the refund bill.

Fachin noted that the court usually settles modulation later, when appeals against a ruling are heard. Several justices who voted have retired, so their successors may sit on that review.

Gilmar Mendes said the topic will inevitably return through appeals. The court has not yet published the full written ruling, A Crítica de Campo Grande reported.

What It Means for US Readers

A US owned company that pays ISS in Brazil on software, consulting or logistics may now owe less PIS and Cofins. Whether it can also recover past payments depends on modulation and on its own legal case.

Holders of Brazilian government bonds should watch the fiscal cost, which the government lists as a risk rather than a booked loss. The ruling does not change what cities collect, only the federal tax base.

Earlier reports cover the ICMS credits ruling, the farm pension levy decision and the budget shift of US$4 billion. More context is in the Brazil news hub and the Brazil guide for newcomers.

What Is Not Known

The share of the BRL 35.4 billion (about US$7.0 billion) that will ever be paid is unknown, because modulation is undecided. No Finance Ministry response to the ruling was found.

The STF’s own website could not be opened, so the vote count rests on Consultor Jurídico and other outlets. They agree on the 6 to 5 split and the thesis text, though they credit retired justices’ seats differently.

The BRL 35.4 billion figure is quoted from the budget law annex by several outlets, but the annex itself was not opened. The size of any refunds also depends on company filings that are not public.

What Comes Next

Appeals for clarification, called embargos de declaração, are the next step, and the court is expected to weigh modulation then. None of the reports gives a date.

The decision does not itself order any refund, and it does not change what cities collect. A ruling for the future only would sharply reduce the fiscal hit compared with the BRL 35.4 billion maximum.

Frequently Asked Questions

What did Brazil’s Supreme Court decide on ISS?

On 21 October the court ruled, by 6 votes to 5, that ISS is outside the PIS and Cofins base. It treats ISS as money that only passes through a company’s books.

How much could the ISS ruling cost the government?

The government’s 2026 budget guidelines law lists a possible impact of up to BRL 35.4 billion (about US$7.0 billion). That is a maximum that covers five years of refunds and may not fully materialise.

What are PIS and Cofins?

They are federal social contributions on company revenue that help fund social security. The main regime charges 9.25% on revenue.

Will companies get refunds for past years?

That is not yet decided. The court must still rule on modulation, which fixes whether the ruling applies only to the future or also to past years.

What is the tese do século?

It is the nickname of the court’s 2017 ruling that excluded the state tax ICMS from the PIS and Cofins base. The ISS case applies the same logic to a city tax.

Sources: Consultor Jurídico, 21 October; Gazeta do Povo, 21 October; A Crítica de Campo Grande, 21 October; Tribuna do Sertão (Agência O Globo), 21 October; Painel Político, 21 October; Poder360, 21 October; Exchange rates, open.er-api.com (all accessed 22 October 2026).