Federal Supreme Court ruling: Securities Commission issues instructions for disclosure of financial statements

Recommendations address recent Supreme Court decision and apply to financial statements for the year ended 12/31/2022

On February 13, the Brazilian Securities and Exchange Commission (CVM) published CVM/SNC/SEP Circular Letter No. 01/23 , issuing instructions that should be followed during the preparation and disclosure of financial statements for the accounting period ended December 31, 2022.

The notice states that, before carrying out the preparation or the voluntary resubmission of financial statements, investor relations managers of publicly-held companies and their auditors should be mindful of the Brazilian Federal Supreme Court’s (STF) full bench decision pronounced on February 8 regarding claim preclusion (also known as ‘res judicata’) on tax matters.

What did the Supreme Court rule?

In the trial of Extraordinary Appeals (REs) Nos. 949,297 and 955,227, on February 8, the justices of the Federal Supreme Court unanimously held that final decisions on tax matters are effectively overturned if there is a judgement to the contrary by the Supreme Court on the same matter at a later date.

The ruling applies to taxes paid on a regular basis, with ongoing treatment, such as the Corporate Income Tax (IRPJ), the Social Contribution on Net Profit (CSLL), and Contributions to the Program for Social Integration and Social Security Financing (PIS/Cofins).

For the CSLL tax, the Supreme Court held that its collection was constitutional, in the trial of the Direct Action for Declaration of Unconstitutionality (ADI) No. 15 in 2007. At the time, many legal entities were exempt from paying the CSLL as they had disputed its collection in court and had the case dismissed in their favor. Now, tax authorities may charge those same companies that stopped paying the tax after the Supreme Court’s ruling, plus accrued interest and indexation.

It should be pointed out that the Supreme Court’s decision does not apply to taxes levied only once on any given taxable event, as is the case with the Real Estate Conveyance Tax (ITBI). For instance, should a final and unappealable court decision rule out the ITBI tax levied on Real Estate, parties that benefited from such decision will remain entitled to the tax exemption, regardless if the Supreme Court rules otherwise at a later point in time.

At which point after the Supreme Court’s ruling is the collection enforceable?

According to the justices, as a general rule, if a tax that has been contested in court is declared constitutional, its collection will only be enforceable in the following year, in accordance with the principle of tax anteriority. However, if the tax in question is a contribution, tax authorities may require its collection after three months following the judgment.

As far as the CSLL is concerned, its collection had already been declared valid by the Supreme Court as early as 2007, therefore amounts that have not been paid since then can already be demanded by tax authorities, provided that they file a tax claim within a five-year period of limitation.

How does that impact a company’s Financial Statements?

In view of the Supreme Court’s decision, the Securities and Exchanges Commission (CVM) issued a circular letter stating that Financial Statements for years ended December 31, 2022 must be prepared not only with CVM Resolution No. 44 in mind, but also in compliance with the following technical pronouncements issued by the Accounting Pronouncements Committee (CPC):

• CPC Pronouncement No. 24 – Events after the reporting period - particularly item 9, subitem 'a'.
• CPC Pronouncement No. 25 – Provisions, Contingent Liabilities and Contingent Assets, particularly item 16, subitems 'a' and 'b'.

By calling attention to the above pronouncements, CVM aims to ensure the quality of the information disclosed to the market, with a focus on the declaration of the existence of a court order or payments stemming from a lawsuit after the end of the accounting period to which the statements refer, and on the probability of existence of a present obligation at the balance sheet date.

Financial statements in good standing

The experts at Domingues e Pinho Contadores have a keen eye for the latest regulations to ensure that your company’s financial statements are prepared in full compliance with the current standards. You can rely on our support: dpc@dpc.com.br.