The Service Tax (imposto sobre serviços ;
ISS) is a municipal tax levied on general services not subject
to ICMS (state VAT) which is collected by state tax authorities
and levied upon: (i) the sales of goods; (ii) inter-municipal
and interstate transportation services; and (iii) communication
services, which means ISS and ICMS shall not be levied upon the
ISS is calculated based on service fees charged by the
service provider. Brazil’s Constitution and the
Supplementary Law 116/2003 provide the general guidelines of
In addition, in order to charge and inspect ISS, the
Brazilian Constitution provides the Municipalities the autonomy
to enact their own legislation, regulating the levy of the tax
and the compliance with all related obligations. Municipalities
shall act in accordance with the provisions of all the rules
set forth in the Brazilian Constitution and the Supplementary
According to the Brazilian Institute of Geography and
Statistics (IBGE), there are 5,570 municipalities in Brazil,
which means that there are potentially 5,570 different sets of
legislation and types of collection system for such
In order to grant some consistency to the tax system,
general provisions established by Federal Constitution and
Supplementary Law determine:
- Services eligible for purposes of taxation are only those
not comprised by ICMS;
- In order to be taxed by municipalities, services shall be
described in a list provided by the Supplementary Law;
- The maximum tax rate is 5%;
- The minimum tax rate is 2%.
In spite of the intention to standardise the ISS taxation in
accordance with the parameters described above, the levy of
such tax has been subject to many disputes, particularly due to
the following aspects:
In this context, Supplementary Law 157/2016 was enacted and
established important changes in the Supplementary Law
116/2003, with the intention of solving some of these
controversies and granting more certainty on the taxation of
services in Brazil, as will be described below.
- Tax war: In order to attract
investments to their territories, Municipalities establish
mechanisms to reduce the overall tax burden levied upon the
fees arising from the service to a lower amount than 2%. This
situation has been dubbed the 'tax war’ in
- Characterisation issue, ICMS and ISS
disputes: Conflicts arise between state and
municipal tax authorities for purposes of characterisation of
some activities as taxed by ICMS or ISS.
The enforcement of such rules by the municipalities depend
on the enactment of their own legislation.
Supplementary Law 157/2016 expressly determines that the
minimum overall tax burden to be defined by municipalities
shall be 2%. No incentives or any other mechanism that could
result on a tax burden lower than 2% shall be granted.
Non-compliance with this rule leads to the following
- Legislation enacted for these purposes are null and does
not have any effect;
- Taxpayers that have paid the taxes according to this
legislation have the right to reimburse the taxes paid;
- Authorities may be deemed criminally liable in the event
of any action or omission allowing the grant or the
maintenance of such incentives since such actions are
characterised as an administrative improbity ("ato de
In what regards to this matter, it is possible to conclude
that legislation brings more certainty to the ISS taxation,
once the minimum and maximum thresholds are expressly defined
by legislation with the relevant penalties.
Characterisation issue, ICMS and ISS
As described above, ISS is levied on services not taxed by
ICMS. On the other hand, services taxed by ISS are expressly
described in the list provided by Supplementary Law
Hence, for purposes of defining taxation, it is important to
check whether the activities are characterised as a
communication, inter-municipal or inter-state transportation
service, which will be taxed by ICMS or if they are
characterised as one of the services described in the list
provided by the Supplementary Law. In addition, there is
controversy about the taxation of software, whether it is
characterised as a "licence" taxed by ISS or as a good taxed by
Historically, many disputes have arisen from this, since tax
authorities and taxpayers diverge in the definition of the
activities performed and companies faced some tax assessments
due to this scenario.
Supplementary Law 157/2016 brought some clarity regarding
the characterization for purposes of ISS levy, thus amending
the list of services originally provided by Supplementary Law
116/03. Main services described by new legislation and the
relevant controversies faced by companies in Brazil are
(i) Processing, storage or hosting of data, texts,
images, videos, electronic pages, apps, among other forms and
Previously, only the processing data activity was described
as taxed by ISS. There still is a discussion in Brazil about
what activities fall under such definition.
The new wording intends to bring certainty regarding
taxation of ISS on the activities described above, although
there are grounds to sustain that such imposition is
unconstitutional in view of the fact that activities such as
data hosting may not be characterized as a service as defined
by the Constitution.
(ii) Provision of audio, video, image and text
content via the internet without any definitive assignment
Supplementary Law 116/2003 did not describe such activity as
taxed by ISS, which has strengthened the understanding of state
tax authorities for the levy of ICMS.
Tax authorities from the state of São Paulo have
already said, in private rulings 13194/2016, 10382/2016,
8741/2016, 8740/2016 and 8714/2016, that: "whether the software
is acquired in a physical media, downloaded or used through the
'cloud’ (streaming), it characterises as a sale
transaction of a good, for ICMS purposes". This means that
state tax authorities are seeking to reach out the income
arising from the distribution of software through download and
even through streaming.
Supplementary Law 157/2016 amended the list of services
including a specific item describing the activities of
"enabling audio, video, image and text content via the
internet, without any definitive assignment, taking into
account the tax immunities for books, newspapers and
The new wording brings clarity about the levy of ISS and
will serve as a very good argument to avoid ICMS taxation.
(iii) Text insertion, illustrations and other
advertising and publicity materials, by any means (with the
exception of books, newspapers, periodicals and broadcasting
services of sounds and images subject to free
This is another activity that was not expressly provided by
Supplementary Law 116/2003.
The São Paulo state tax authorities have issued tax
assessment against internet companies in order to charge ICMS
on the activities related to advertisement on internet sites.
State tax authorities understand that placement of
advertisements on the internet are characterised as
communication services and the amount paid by announcers to the
companies shall be subject to ICMS.
New wording provided by Supplementary Law 157/2016 intends
to bring certainty to such services and the relevant taxation
by ISS, but other discussions may arise according to the text
approved by the Congress due to the fact that controversy
remains regarding who is the entity in charge for the insertion
and who is the entity in charge for the placement and disposal
of advertisement on internet.
Supplementary Law 157/2016 intended to bring more certainty
related to the tax burden applied for some activities. It is a
very good instrument to ease the tax war. In addition, it
intends to bring more certainty to the taxation of such
activities and may be useful to avoid and solve controversies
and disputes among states, municipalities and taxpayers.
This article was prepared by Marcel Alcades Theodoro of
Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados,
International Tax Review’s
Brazilian disputes correspondent firm.