September 15, 2020

Tax Credit

TR Soluções estimates that the tax credits arising from over-collected PIS/PASEP and COFINS contributions on electricity bills over the last 60 months will impact distribution concessionaires' cash flow by approximately BRL 51.2 billion. The study assumes these credits will be recorded during tariff repositioning events over the next five years, and that the funds will be treated as negative financial components in the required-revenue calculation for tariff events. Under these conditions, on average, the impact of reversing these credits should be negative, on the order of 11 pp in 2021.

With the final, unappealable rulings favorable to electricity distribution companies recognizing their right to exclude the Tax on the Circulation of Goods and Services (ICMS) from the calculation base for the PIS/PASEP and COFINS social contributions, these companies gained the right to a tax credit from Brazil's Federal Revenue Service (RFB), stemming from amounts overcharged in the past [1].

The credit claimed relates to compensation for tax credits arising from undue payments made in the 60 months prior to filing the claim, plus the Selic rate, under the terms of Precedent (Súmula) 213 of the Superior Court of Justice (STJ).

To gather input for the regulatory treatment to be given to the matter, in March 2020 the National Electric Energy Agency (ANEEL) opened Subsidy Request No. 05/2020.

In parallel, the first reversals of these tax credits were carried out in August 2020 for the concessionaires EDP Espírito Santo and Cemig-D.

To assess the impact of these reversals on the tariff events of distribution concessionaires and permission holders across the country, a new feature was implemented in SETE (Energy Tariff Estimation Service) that allows tariff projections to be built factoring in the reversal of tax credits.

Simulation results indicate that, as early as 2021, with the inflow of funds from the reversals, the average tariff variation should be a 4.5% reduction. Without the funds from tax credits, that variation would be a 6.0% increase.

The possible effects of Provisional Measure 998/2020 on tariff events expected from 2021 onward were factored into the adopted scenario. Additionally, the figures indicated for tariff components are averages: each distribution company will see different tariff impacts depending on the volume of credits it's entitled to.

On March 16, 2020, ANEEL opened Subsidy Request No. 05/2020 to gather input on the treatment to be given to tax credits arising from lawsuits concerning the exclusion of ICMS from the PIS/PASEP and COFINS calculation base. Contributions were accepted through May 15, 2020.

As part of this subsidy request, ANEEL raised the following questions, whose answers should help shape the procedures to be adopted by the regulator on this topic [1]:

• How should the credits obtained by distribution companies be returned to end electricity consumers?
• And how long should this return take to complete?
• For what reasons, how, and to what extent is it necessary to recognize — through incentives, premiums, or reimbursement of legal costs incurred — the actions of the concession holders who worked through this tax matter and who, in the end, benefit the consumers in their respective concession area?
• What are the alternatives for operationalizing the credit return, and their implications?

Following this, on June 2, 2020, Circular Letter No. 11/2020-DIR/ANEEL was sent to 54 distribution companies and 57 electricity permission holders, with the following requests [2]:

• Copies of relevant legal filings needed to understand the lawsuit's course, including the initial complaint, appeals, appeals to higher courts, briefs and similar documents, rulings and appellate decisions, and certificates of final judgment;
• For cases without a final unappealable ruling only, submit a legal report covering the case's progress, an assessment of the likelihood of success, and estimated timelines for conclusion;
• Accounting data, including contingencies and provisions, accompanied by an auditor's opinion and, if available, independent audits;
• Total and updated amounts of the credit claimed;
• Any court-ordered fund withdrawals;
• Taxes and tax charges collected, except court costs, fees, and legal expenses;
• Copy of administrative proceedings for credit recognition, qualification, and approval filed with the Federal Revenue Service, including the main filing, attachments, and decisions (interlocutory and final on the merits) from that body.

In response to Circular Letter No. 11/2020, only 24 distribution companies reported figures for the credit claimed, totaling a partial amount of BRL 37.4 billion.

Table 1 - Tax Credit Amounts Claimed

Source: TR Soluções, based on public ANEEL information from Administrative Proceedings 48500.001747/2020-22 and 48513.018451/2020-00.

The relationship between the credits reported as claimed and each of the 24 distribution companies' captive and free markets, over a 60-month period, produced state-level reference parameters.

These parameters, combined with 60 months of known historical captive and free market data, were used to estimate the claimed credits that hadn't been reported by other agents. So, based on the values declared as claimed credits by 24 distribution companies, TR Soluções estimated that the remaining 30 distribution companies and 57 permission holders are entitled to claim BRL 13.8 billion from the RFB. The total tax credits, built up over the last five years, could therefore reach BRL 51.2 billion.

EDP Espírito Santo reported, in response to Circular Letter No. 11/2020-DIR/ANEEL, that the total, updated amount of the credit claimed came to BRL 747 million.

Through Letter CT-EDP-ES-027/202013, the concessionaire requested the reversal of part of that amount — BRL 159 million — for tariff moderation, as a financial component. [3]

In the distribution company's 2020 tariff proceeding, the following points related to the matter were highlighted [3]:

• The lawsuit reached a final, unappealable ruling, making the right clear and certain;
• The credits had already been approved by the RFB;
• The receivable asset from the RFB was recorded in the company's accounts and flagged in a specific account as a liability payable to EDP ES's consumers;
• Between December 2019 and July 2020, the company actually offset BRL 159.17 million of the credits it held with the Federal Revenue Secretariat.

In his vote justifying the decision, the rapporteur-director of the proceeding, Sandoval Feitosa, noted, in approving the reversal request, that: "...there is no basis for claiming legal uncertainty or lack of protection for trust between regulator and regulated entity. The financial component considered is exactly the one requested by the regulated agent itself. Furthermore, this is not a matter of an expectation of a right or of a tax credit, but of amounts that were actually offset and are held by the concessionaire — that is, already formally recorded in its accounts with the consumer itself indicated as the beneficiary."

On July 16, 2008, Cemig-D filed an ordinary lawsuit seeking a declaration that including ICMS in the PIS/PASEP and COFINS calculation base was unconstitutional [4].

Between August 2008 and August 2011, the distribution company adopted a legal strategy under which, even while collecting amounts in the tariff to pay the tax, it chose not to fully pass them on to the RFB and instead made court deposits. This resulted in a total of BRL 1,195,966.00 [4].

In this year's review of Cemig-D's tariff proceeding, the company stated it would not return the amounts to its consumers until the matter was definitively regulated by ANEEL. In this regard, ANEEL's board understood that using the amounts in this specific tariff proceeding would violate the principles pointed out by the Attorney's Office in Opinion No. 188/2020/PFANEEL/PGF/AGU, issued for the ruling on Cemig-D's 2020 Annual Tariff Adjustment case [3].

However, after the publication of Approval Resolution No. 2,707, of June 25, 2020, which approved the concessionaire's 2020 Annual Tariff Adjustment, requests for reconsideration were filed, with suspensive effect.

Among the requests filed, that of Senator Rodrigo Pacheco (Democratas/MG) argues, among other things, that the final, unappealable court ruling resulted in a BRL 6.2 billion credit for Cemig-D [5].

In observance of the principles of adversarial proceedings and full defense, through Letter 199/2020– DIR/ANEEL, of July 30, 2020, Cemig-D was given the opportunity to assess the arguments raised by the petitioners, present its counterarguments, and state its position regarding recording a financial liability in the 2020 tariff adjustment related to the appeal tied to withdrawing the court deposit, in full or in part [4].

On August 5, 2020, through Letter DPR-0268A/2020, Cemig-D submitted to ANEEL for consideration a proposal to reverse, this year, the amount of BRL 714,339,000.00 to consumers in its concession area [4].

On August 18, 2020, ANEEL partially granted the reconsideration requests filed, so that the 2020 Annual Tariff Adjustment would include a negative financial component related to part of the funds resulting from the withdrawal of court deposits, originating from the lawsuit filed by Cemig-D [4].

The amounts already reversed in August 2020 were treated by ANEEL as a negative financial component in the required-revenue calculation for the EDP ES and Cemig-D tariff proceedings. Subsequently, for tariff calculation purposes, these amounts were allocated to the Distribution System Usage Tariff (TUSD) and the Electricity Tariff (TE) in proportion to the cost elements forming these tariff components. TR Soluções adopted the same calculation procedure in its simulations of tariff repositioning for the 39 distribution companies monitored by the SETE platform, as shown in Table 2.

Table 2 - Possible Tariff Repositioning for 2021

Source: TR Soluções.

Since the tax credits built up over five years, as a way to simulate the impact of reversing these credits on tariff repositioning events, TR Soluções assumed, for calculating tariff projections, that the reversal would also take place over five years.

Results from the simulations indicate that, under these conditions, application tariffs would show an average negative repositioning of 4.5% in 2021. Considering that, without this change, the forecast was for an average adjustment of 6%, the outlook is that tax credits will have an average impact of about 10.5 pp on next year's tariff events.

It's important to stress that the repositioning figures indicated for 2021 are averages. Each distribution company will see different variations depending on the concession's intrinsic characteristics.

Table 3 - Possible Tariff Repositioning

Source: TR Soluções.

Keeping this billions-of-reais reversal flow going over five years should keep tariffs practically stable throughout the period the reversal flow is in effect. But once it ends, in 2025 under the scenario set out here, tariffs would return, in 2026, to their pre-reversal level.

These simulations reflect the assumptions adopted by TR Soluções regarding the final amount of tax credits claimed by the agents (BRL 51.2 billion), as well as the timeline for realizing these credits (five years). Opening a specific public consultation on the topic, after TS No. 05/2020, with the resulting publication of a normative resolution, should establish the regulatory procedures ANEEL will actually adopt in future tariff events.

Despite the uncertainties around these points, and considering the real-world cases of tax-credit reversal in tariff repositioning already experienced, the importance of this matter for tariff projections is beyond question.

Given how relevant these calculations are for companies specifically and for the power sector in general, TR invites users of its systems to check the online information already available in SETE. It's worth noting that, beyond analyzing the scenario proposed by TR, users can set up alternative scenarios, aiming to improve their own analyses for decision-making.

[1] Source: Technical Note No. 37/2020–SFF/SGT/SRM/SMA/ANEEL from ANEEL Administrative Proceeding 48500.001747/2020-22, Opening a Subsidy Request for the Agency to formulate its position on the treatment to be given by electricity distribution companies to tax credits arising from lawsuits concerning the exclusion of ICMS from the PIS/PASEP and COFINS calculation base.

[2] Source: Circular Letter No. 11/2020-DIR/ANEEL, Administrative Proceeding 48500.001747/2020-22. TS No. 05/2020. Tax credits arising from the exclusion of ICMS from the PIS/PASEP and COFINS calculation base. Request for copies and information.

[3] Source: Rapporteur's Vote, ANEEL Administrative Proceeding 48500.007059/2019-32, EDP – Espírito Santo's 2020 Annual Tariff Adjustment, effective from August 7, 2020.

[4] Source: Rapporteur's Vote, ANEEL Administrative Proceeding 48500.007033/2019-94, Reconsideration requests filed by Cemig Distribuição's Consumer Council – Concemig, by Federal Deputy Weliton Fernandes Prado and State Deputy Elismar Fernandes Prado, and by Senator Rodrigo Otávio Soares Pacheco, against Approval Resolution No. 2,707, of June 25, 2020, which approved the concessionaire's 2020 Annual Tariff Adjustment.

[5] Source: Letter from Senator RODRIGO OTÁVIO SOARES PACHECO, ANEEL Administrative Proceeding 48513.018451/2020-00.