The ISS is levied on the provision of services listed in the
supplementary law.
On December 29 2016, the Brazilian federal government
published Supplementary Law 157/16, which altered the general
guidelines of the tax that were established by Supplementary
Law 116/03. The amendments made some new services subject to
ISS and introduced unprecedented measures to limit the granting
of tax benefits by municipalities.
New taxable services
Supplementary Law 157/16 introduced some activities in the
list attached to Supplementary Law 116/03 that will now be
subject to the ISS, which includes:
- 1.03 – Processing, storage or hosting of data,
texts, images, videos, electronic pages, applications, and
information systems, among other formats, contrary to the
previous wording that stated only data processing;
- 1.09 – Provision, without permanent transfer, of
audio, video, image, and text content through the internet,
respecting the immunity of books, newspapers and periodicals
(except for content distribution by providers of conditional
access services, as per Law 12485/11, subject to the state
value-added tax – ICMS); and
- 17.25 – Insertion of texts, drawings and other
advertising materials in any media (except in books,
newspapers, periodicals and in radio broadcasting and
broadcasting of sounds and images with free reception).
As per the Federal Supreme Court’s case law and
Articles 155, II, and 156, III, of Federal Constitution,
activities that do not characterise an effective "obligation to
do", or which typify a service subject to the ICMS
(communication and interstate and inter-municipal transports),
cannot be subject to the ISS.
Therefore, to verify the constitutionality of the inclusion
of these activities in the list of services subject to the ISS,
it is necessary to assess if the activity does typify a service
provision not subject to the state’s
jurisdiction.
As an example, items 1.03 and 17.25 mentioned above allow
the levy of the ISS on streaming services and exhibition of
third party advertising material. We believe that the inclusion
of such activities in the ISS taxable services list might not
solve the previous controversies, as the states may still
sustain their understanding that they are communication
services. This matter will probably be taken to court to find a
resolution.
To charge the ISS on such activities, each municipality must
change its legislation in relation to the new services that are
now taxable. Furthermore, the levy of the ISS cannot be carried
out in the same year of the publication of the new municipal
legislation, and only after 90 days of such publication. In
practical terms, we believe that the levy of the ISS on such
new taxable services will only occur from 2018.
Measures to avoid harmful tax competition
Pursuant to the Brazilian Federal Constitution,
supplementary law should determine the minimum and maximum ISS
rates and, while it was not enacted, the minimum rate was 2%
and the granting of benefits that resulted in a lower tax
burden was prohibited. Upon the issue of Supplementary Law 116,
only the maximum rate was defined, corresponding to 5%.
As the ISS is usually paid to the municipality where the
service provider is located, to attract new companies and
investments to their territories, several municipalities grant
ISS benefits such as the reduction of the ISS taxable basis of
establishments located there, thus reducing the ISS payable to
under 2%.
On the one hand, the granting of ISS benefits managed to
draw companies away from capitals to smaller municipalities in
the search for a tax reduction. On the other hand, this measure
led to harmful tax competition between municipalities, most
notably because of:
- Companies that simulated their existence in a favoured
ISS municipality only to enjoy tax benefits;
- Municipalities where the service receiver is located that
charged ISS from service providers located in other
municipalities, even though the ISS was paid to the service
provider’s municipality;
- Several court disputes between municipalities that try to
nullify the tax benefits granted by other municipalities;
and
- Municipalities that grant new benefits when their
benefits are nullified by courts, perpetuating the
discussions.
In an attempt to reduce such tax competition, Supplementary Law
157/16 brought in the minimum ISS rate of 2% and stated that
any law or act that grants ISS benefits that reduce its burden
to under 2% of the service price is deemed null.
To ensure compliance with this rule, Supplementary Law
157/16 also changed Law 8429/92, which established the
sanctions applicable in case of administrative improbity.
Accordingly, any act or omission to grant, apply or maintain a
financial or tax benefit that reduces the ISS burden to under
2% of the service price is now considered as administrative
improbity.
Irrespective of any criminal, civil or administrative
penalties provided for in specific legislation, the penalty for
the agent responsible for such administrative improbity might
be the loss of his/her public office, suspension of his/her
political rights for five to eight years, and a civil fine of
up to three times the amount of the financial or tax benefit
granted.
This is an unprecedented measure in Brazil to avoid harmful
tax competition. In practical terms, mayors or other public
authorities that grant or maintain ISS tax benefits may be
personally liable for the tax collection reduction that the
municipalities might suffer.
This article was prepared by Carolina Romanini Miguel
(cmiguel@machadoassociados.com.br
) and Gabriel Caldiron Rezende (grezende@machadoassociados.com.br
), members of Machado Associados’
indirect tax team.