By Brazil Stock Guide – Brazil’s tax appeals court, the CARF, has voided a R$324.3 million ($65 million) tax assessment against Arcos Dorados, the operator of McDonald’s in Brazil, after finding that tax authorities failed to properly assess technical evidence when classifying some of the chain’s best-selling products.
The case covers the 2018–2019 period and centers on whether cones, sundaes and milkshakes sold by McDonald’s should be taxed as ice cream or as dairy beverages under Brazil’s federal tax system. The distinction is decisive: it determines whether the products are subject to a 9.25% federal tax burden or benefit from a zero-rate regime.
Tax difference that drives the dispute
Under Brazil’s non-cumulative tax framework, ice cream and frozen desserts are subject to the full levy on gross revenue, with PIS at 1.65% and Cofins at 7.6%, totaling 9.25%. By contrast, dairy beverages — a category that includes products such as yogurt — qualify for a zero rate of both taxes under federal law designed to encourage the consumption of milk-based products. That 9.25-percentage-point gap explains both the size of the assessment and the strategic importance of the case.
Not ice cream, says the court
Brazil’s Federal Revenue Service had argued that McDonald’s desserts should be treated as frozen desserts, denying access to the tax benefit. The company countered that the products qualify as dairy beverages, with more than 51% milk content and physical characteristics consistent with high-viscosity liquids, not fully frozen solids.
In its ruling, the CARF said the tax authority cannot rely on assumptions or consumer perception. Instead, it must examine technical and laboratory evidence. The panel criticized the lower administrative decision for ignoring expert reports and simply applying an internal tax interpretation without analyzing the specific products sold by the company. According to the evidence submitted, the desserts do not undergo the same freezing process as traditional ice cream and retain liquid properties at the point of sale — a distinction that places them closer, for regulatory purposes, to dairy beverages.
Limits to automatic interpretations
The ruling also curbs the automatic application of internal tax guidance issued by Brazil’s IRS. While such guidance is binding within the tax authority, the CARF stressed that it does not override the taxpayer’s right to a full evidentiary review, particularly in disputes involving technical classification.
The judges also highlighted an internal inconsistency: the same IRS guidance admits that milkshakes may qualify for the zero-rate regime if technical requirements are met, yet the assessment applied the higher tax uniformly across all products.
Big volumes in a tropical market
The dispute carries particular weight in Brazil, where McDonald’s operates more than 2,000 restaurants, making the country one of the brand’s largest markets outside the U.S. In a tropical climate, cold desserts such as cones and sundaes are high-volume, everyday products, not niche menu items. That commercial reality magnifies the tax impact, turning product classification into a strategic issue rather than a technical footnote.