In place in the Brazilian legal system since 2004, the modulation of the effects of precedents is a technique primarily employed by higher courts to prevent a new interpretation of the law from having retroactive implications. It establishes a temporal framework, ensuring that the new understanding applies only to future cases.
This method is an exception to the general rule and is typically used to protect past events or ongoing judicial actions from being affected. It brings greater legal certainty on the issue, aiming to prevent radical shifts in case law from causing harm to taxpayers who relied on the revoked precedent.
In Brazilian tax matters, the modulation of effects has been increasingly used by higher courts, but for a different reason—the financial impact of such decisions on public treasury.
In a survey conducted by local media in 2021, over 90% of total tax-related cases had their effects modulated by the Supreme Federal Court (STF).
In the same year, the most impactful issue modulated by the Supreme Court was the thesis regarding the exclusion of ICMS (a VAT-style state tax) from the calculation bases of PIS and Cofins (social contribution on gross revenue) – the so-called “century thesis” (RE 574706, Theme 69).
Given the significant financial impact of the decision on public treasury, the National Treasury took action to apply modulation, aiming to reduce the losses not only in future assessments but also to reclaim amounts improperly collected from taxpayers over the years. The STF’s decision on modulation in this matter took over four years to be analyzed.
After this period, several crucial theses were discussed and modulated by the STF, such as the prohibition of an increased ICMS rate on energy and telecommunications (RE 714139, Theme 745) in 2022 and the exemption of ICMS on the transfer of goods between establishments of the same owner located in different states (ADC 49) in 2023.
Another highly sensitive issue judged by the STF that had an impact on the modulation of effects—specifically in relation to the absence of modulation—was the ruling on Themes 881 and 885, which encompassed the discussion regarding res judicata in tax matters.
In this judgment, issued in early 2023, the Supreme Court ruled that a final decision with res judicata status can lose its effects when there is a new contrary pronouncement by the Court. The request for the modulation of effects was denied, with a vote of 6 to 5. A new modulation request was sought by taxpayers, but there is still no set date for judgment, and the prospects of achieving it remain uncertain.
Despite the modulation of effects limiting the rights of taxpayers, in practice, it is evident that the exception has become the rule with the growing use of the institution by higher courts. It is increasingly necessary for taxpayers to keep track of the issues brought to the agenda of higher court hearings.