Brazil - Controversies in the taxation, by ICMS, on digital goods.
Publicado em 11 de outubro de 2017
Agreement CONFAZ #106/17, published last week, deals with ICMS collection procedures for transactions with digital goods traded through electronic data transfer.
In this context, the new rule determines, among other issues, that ICMS will be due in the state where the customer of the digital asset is domiciled. Only operations destined to the end consumer will be taxed, not including prior transactions.
The Agreement becomes effective as from April 1st 2018, but it will be necessary for each state to change the local legislation so that the new provisions are applied.
The controversies start with the competition between states and municipalities to tax such transactions, according to their respective field of competence. The conflict matters since the transaction could be taxed in a range from 2% to 5% (if subject to municipal service tax) or from 4% to 25% (in case of state VAT).
In general terms, Brazilian Federal Constitution, in the art. 155, II, provides that, it is incumbent upon the States to impose taxes on transactions related to the movement of goods, even if started abroad.
To Municipalities, on the other hand, art. 156 allows to create taxes on services of any nature, not included in art. 155, II above, defined in supplementary law.
Take into consideration that the Software Federal Law (#9609/98), determines that such transactions must be done by license agreements and, if the ownership remains with the author, it’s likely that municipalities stay requiring service tax, according to item 1.05 of Supplementary Law #116/03 (licensing or assignment of rights to use computer programs).
In the case of ICMS taxation of digital goods transferred electronically, other aspects can be questioned since there is no definition in the law about the characterization of digital items as goods for State VAT purposes.
Article 110 from Brazilian Tax Code establishes that:
“Tax law can not change the definition, content and scope of institutes, concepts and forms of private law, used expressly or implicitly, by the Federal Constitution, by the Constitutions of the States, or by the Organic Laws of the Federal District or of the Municipalities, to define or limit tax jurisdiction.”
In addition, the definition of local of taxable event for state VAT should occur through a supplementary law and not by CONFAZ agreement. This is the provision of art. 146 of Federal Constitution, as follow:
“It is incumbent upon the supplementary law to establish general rules on tax legislation, especially on the definition of taxes and their types, as well as, in relation to taxes set forth in the Constitution, the respective taxable event, calculation bases and taxpayers.”
Taxpayers have to prepare themselves to start paying state VAT on such transactions as from April 2018. The owner of website or an electronic platform that sells the software will be in charge of such payment.
Other players involved in the transaction can be responsible for that, according to the Agreement #106: (i) Those who offer, sell or deliver the digital goods to the consumer due to a contract entered into with the seller; (ii) the financial intermediary, including the credit card administrator or other ways of payment; (iii) the acquirer of the digital goods, in case of lack of state tax ID of the site owner or electronic platform; or (iv) the credit or debit card administrator or the financial intermediary responsible for the exchange, in the import transactions.
Certainly, in any case the total tax will be passed to the price, impacting directly the effective user of the digital goods. Other discussions can arise from that, e.g., the possibility or not of recovering the respective VAT credit on such transactions.
For those taxpayers who don’t agree with the new taxation, there is the alternative to take the case to the Courts, either because of the concept of goods for State VAT purposes; the competence of states or municipalities to tax such transactions or; finally, to discuss the appropriate law to define the place of tax event.
Any decision must be made after a deeply analysis about market impacts, cash and P&L effects and, also, legal arguments to go ahead with a potential lawsuit, if any.