Topics on Digital Taxation
It is known that digital taxation is one of the most controversial legal issues today.
There is no country in the world where tax law is not completely and thoroughly legislated, since it represents an acute and concrete intervention by the State over private property. Even in countries where the Common Law legal system is adopted, such as the United States and United Kingdom, tax legislation is eminently positive, in order to guarantee a legal certainty on issues.
In Brazil and other countries as well, regarding the theme, the following problem then arises: is the current legislation satisfactorily capable of resolving tax disputes arising from the real and ongoing revolution in commerce and services brought by the Internet?
Brazil is a huge digital market. Besides being the largest market in Latin America (210 million inhabitants), it has a hugely digitalized society. Therefore, the importance of this market.
In this brief article, we aim to discuss some of the controversial issues regarding taxation of digital goods in Brazil. For many of the controversies, there is no right, definitive answer, that has to be caveated on a case by case scenario. But we aim to at least point out what are the main issues in digital taxation in Brazil nowadays.
Part of the controversy regarding taxation in the digital environment concerns the existing distinction between services and circulation of goods. Different taxes apply to each of these operations.
ISSQN (Tax on Service of Any Nature), that is a burden on services and the ICMS (Tax on Circulation of Goods and Services), that applies on circulation of goods (sales). The problematical issue is mainly to determine what is service and what is a goods/asset sale in the cyber environment.
Would the license of use of an application be considered by the government the sales of such license or a software disposing of a service? Are streaming services selling a service or a good (the right to listen songs, for instance?) Many other internet applications will face the problem in interpreting the distinction between services and goods, a controversy that does not exist, for instance, in Europe, where the IVA covers all the operations.
The problem is real because the taxes are different and the government entities that impose are also different.
This issue was somehow already discussed by the Federal Supreme Court (RExt. 199.464) in the past (1998) but within conditions that are not at all similar to the ones that permeate the current digital economy environment. It was decided that the standard software, that equally commercialized to all, would be considered a sale of a good, and cause the imposition of the state ICMS tax. On the other side, the software produced by order or a specific request by the consumer would be taxed as a service, by the municipalities, using the ISS, as long as there is a specific provision in the ISS Law of each city.
The discussion was rekindled in the present, since the Supreme Court’s decision in 1998 referred to the “shelf software”, specifically mentioning its physical characteristic, which is the fact it was sold in a physical means, usually in format of CDs (or at the time, the diskettes!).
Currently, software is not usually sold in CDs as it used to be, but most often via streaming or download. In the absence of the materiality of the means, some municipalities, such as São Paulo, for example (Normative Opinion No. 1, regulating the municipal ISS law), understand that the operation is not the sales of a good but rather a service and the right tax to be collected is the ISS and not the ICMS, generating a double collection of taxes by state and municipality that can be avoided only through a judicial measure.
Because current apps or applications look like software, but in their characterization they can somehow differentiate themselves from them, taxation on the download of the apps may also raise a question.
In a typical provision of services, even if there is no doubt that the applicable tax is the ISS, debates also exist. The biggest debate is about what the doctrine calls “Principle of Territoriality”.
As a rule, the ISS collection will be directed to the Municipality where the service was provided or, if it is impossible to discriminate it, it will be collected by the Municipality where the service provider is located or, on internationally provided services, the domicile of the beneficiary of the service.
It is known that the Internet has also brought incentives for the contracting of services provided by a foreign company with it. These services are often fully realized abroad. Then it would be the municipality of residence of the contractor/payer in Brazil competent for the collection of ISSQN. But there are great legal controversies about the constitutionality of the imposition of the ISSQN over importation of services. It would not be constitutional to impose such a tax over services fully performed out of Brazil.
It may be that there is not even the imposition of the ISS on importation by a certain municipality or there is no collection procedure instituted.
These are some of the current themes inserted in the digital taxation scenario in Brazil.
It is worth to note that a seller of goods or services in Brazil, notwithstanding the controversies, has to control collection/payment procedures for each city or state. That can be duly organized through a consistent consultancy in Brazil. With the use of adequate software, the company can pay without hassle taxes for each federate member.
Also, a fact is that the taxpayer sometimes collects tributes that are not properly due or charged in duplicity. Tax planning carried out by experienced professionals is even more urgent in the Digital Age, since there is a gray area due to the novelty of those themes and some legal strategies can be drawn in order to avoid risks, surprises and unnecessary payments.
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