Revisiting the Distinction between Exemption and Zero-rating

Abstract

This paper revisits the distinction traditionally upheld in Brazilian Tax Law between exemption and “zero-rating’’, based on the interpretation to be given to Article 3, § 2, II, of statutes n. 10.637/02 and n. 10.833/03, which addresses the maintenance of the right to credit under the non-cumulative regime of social contributions on revenue in cases involving the acquisition of inputs not subject to the payment of such contributions, including in cases of exemption, when the output transaction of the resulting product is taxed. It examines whether the term “exemption”, as used in the legal provision, should be interpreted in a broad sense (encompassing any form of tax relief that renders the input not subject to the payment of contributions) or in a narrow sense (covering only a specific type of tax relief that alters the material aspect of the taxable event in such a way as to prevent the occurrence of the triggering event of the principal obligation). This inquiry is relevant in determining whether inputs acquired at a “zero-rating”, used in goods or services whose output is taxed by the contributions, give rise to the right to a tax credit. To this end, the paper examines the concepts of non-cumulativity and the alleged legislative discretion in shaping this regime with respect to social contributions; the polysemy of the term “exemption” and the widespread distinction between its narrow meaning and the “zero-rating”; the requirement under Article 111 of the National Tax Code (Código Tributário Nacional) for a literal interpretation of certain legal provisions; and the issue concerning the prohibition on the Judiciary acting as a positive legislator.