February 27, 2023

Tax Credits: How Long Will the Windfall Last?

Helder Sousa*

Recognizing PIS/Cofins tax credits in energy tariffs has been delivering an average 8.3% discount on residential energy bills. In practice, that means a tariff BRL 57/MWh lower, against an average value of BRL 686/MWh excluding taxes and tariff flags.

Given how significant this impact is, and the fact that nearly half the credits have already been returned to consumers, TR Soluções carried out an analysis to show how the reversal of tax credits has, on average, reduced tariffs in recent years, and also identified how much longer tariffs are expected to be affected by these discounts.

Figure 1 - Tax Credits: Annual Amount Realized and Projected, and Average Impact on Residential Consumer Tariffs

* factors in the results of all 2022 extraordinary tariff reviews, including Enel RJ's.

Source: TR Soluções, SETE system

Context and Regulatory Evolution

Tax credits correspond to the return of amounts overpaid by consumers due to including the Tax on the Circulation of Goods and Services (ICMS) in the calculation base for the federal PIS/Pasep and Cofins social contributions. This return stems from distribution companies' successful lawsuits challenging that practice.

Amounts and timelines vary by company. For concessionaires that filed suit before the Federal Supreme Court (STF) ruled on the matter, on 3/15/2017, credits retroact five years from the date the lawsuit was filed. For distribution companies that filed suit after that 2017 ruling, the reach retroacts only to that date. The total amount expected to be reversed in tariffs is estimated at more than BRL 60 billion.

The first lawsuit of this kind was filed by the former Companhia Energética do Ceará (Coelce, now Enel CE), in 2001. So all amounts overpaid by Ceará consumers since 1996 became tax credits whose reversal in the energy tariff began in 2021. After that first lawsuit, other distribution companies started filing suit, with the vast majority doing so in 2017. The reversal of credits, in turn, began in Cemig's and EDP ES's tariff proceedings, in 2020.

This happened because, after 16 years working through the courts, in October 2017 a ruling was published on the STF's full-bench judgment of Extraordinary Appeal No. 574,706-PR, with general repercussion regarding the understanding that ICMS cannot be part of the calculation base for PIS/Pasep and Cofins.

Discounts for Everyone

In 2022, given an average increase of 17.8% applied to distribution companies with tariff events in the first four months of the year, lawmakers took decisive action to prevent significant tariff swings. The result was Law No. 14,385/2022, which required ANEEL to recognize, in 2022 tariffs, all tax credits already offset by distribution companies, and to fully direct these credits toward reducing tariffs. The legislation even provided for the possibility of extraordinary tariff reviews.

As a result, of the more than BRL 60 billion consumers are entitled to, about BRL 28 billion has already been recognized in tariff proceedings carried out between 2020 and 2022.

This move, which helped ensure an average residential tariff variation of 10.5% last year, ended up cooling administrative discussions about the possibility of concessionaires keeping part of the recognized amounts for the benefit of their own controlling shareholders. The matter hasn't been forgotten, however: as recently reported, the association representing distribution companies' interests filed a Direct Action of Unconstitutionality with the STF against Article 1 of that law, which requires tax credits to be fully recognized in tariffs.

Timeline for the Return

Regardless of distribution companies' actions, and based on public information filed with ANEEL regarding distribution companies' maximum capacity to offset tax credits, as well as the total amounts and those already recognized in tariffs, TR Soluções analyzed how long it will take for each company to complete the full reversal.

Table 1 shows what was factored into the estimate: total tax credit for each of the 53 concessionaires, the year the lawsuits' reach extends to, the year the credit reversal began, and the amount already factored into tariff events since 2020.

Table 1 - Tax Credits by Concessionaire

Source: TR Soluções, SETE system