The production and consumption of goods and services has
born the heaviest tax burden in Brazil for years, which has
brought forward a series of disputes and challenges between
Brazilian taxpayers and municipalities. For that reason, the
area has been widely viewed as the main focus of tax reform in
In a 2015 survey published by the OECD, Brazil has the
second highest number of administrative tax proceedings
(209,777), losing only to Canada (215,668). Only France has
more than 200,000 cases (208,843), with the other countries
surveyed having less than 60,000.
In relation to value, Brazil has the largest percentage of
tax proceedings, with the money spent on such endeavours
accounting for 2.4% of GDP. In most of the surveyed countries,
this proportion is below 1% (Canada - 1%, Mexico - 0.5%, and
South Africa - 0.3%, respectively the three next highest).
These fiscal disputes hinder business development,
contributing to the so-called 'Brazil cost'. Tax Reform, which
was widely mentioned in the context of recent Presidential
elections in late 2018, is supposed to address those
Tax reform’s primary goal is the simplification
of taxation through the aggregation of five production,
consumption, and services taxes charged at the federal, state
and municipal level, collected in destination or origin
depending on the case. These include:
- ICMS, a value added tax on goods, communication and
transport services by states;
- ISS, a municipal tax on specific services listed in
- IPI, a federal excise type tax;
- COFINS, a federal tax on revenues of any nature; and
- So these taxes would all become one unique IBS, a tax on
goods and services, to be collected by place of destination
of service/goods (consumer).
The wide array of consumer taxes and respective rules
regarding tax credits or cumulative regimes creates a conflict
between tax jurisdictions at the federal, state and municipal
levels, and is one of the main problems faced by legal entities
in Brazil, particularly in digital services and products. There
is a great effort by tax collecting entities to characterise
certain activities as taxable events in legislation to create
legal certainty to businesses who are structuring their
organisation with tax considerations.
Among the activities that create this type of conflict
includes software, which can be ambiguously defined as a
product or service and taxed by different municipalities and by
The same occurs with online advertising, which is considered
by state tax authorities as a type of communication service
(although not stated in legislation), yet municipal legislation
notes online advertising is a service taxed by ISS.
More broadly, technological development has caused a
reduction in the value of VAT-ICMS collected, which has
traditionally been based on the circulation of tangible goods.
As a result, there is growing momentum to broaden the concept
of communication services so that activities with a
technological component are included, ultimately causing
tension when identifying services taxable by ICMS and those
subject to ISS.
The proposed tax reform advocates one unique tax that will
include the shipment of goods and rendering of services, while
focusing on intangibles, assignment and licensing of rights,
the leasing of goods, as well as import operations.
In theory, a taxation on destination, and the proposed
unification of indirect taxes, could potentially reduce a
significant part of the litigation arising from the segregation
of merchandise and service, but on the other hand, could
exacerbate problems associated with identifying tax
jurisdictions and the place of the final consumer.
Several reform initiatives were made in the past five
decades, all with basically the same goals: to reduce
bureaucracy, reduce the number of taxes and litigation, and
better share the collection between states, municipalities and
the federal government.
However, none of them actually became a reality, so other
ways were developed to find solutions to Brazil’s
tax system, including the creation of specialised tax justice,
alternative models of conflict resolution such as arbitration,
and a specific tax model for the digital economy.
||Renata Correia Cubas
This article was written by Renata Correia Cubas of