Brazil: New taxable services and tackling harmful tax competition
International Tax Review is part of the Delinian Group, Delinian Limited, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2023

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Brazil: New taxable services and tackling harmful tax competition

Sao Paulo cityscape

Supplementary Law 157/16 regarding the municipal service tax (ISS) was brought in to allow the taxation of new services and to reduce the harmful tax competition between municipalities.

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 ( and Gabriel Caldiron Rezende (, members of Machado Associados’ indirect tax team.

more across site & bottom lb ros

More from across our site

Yusuf Akhmadi of Indonesia’s Directorate General of Taxation reports on the country’s latest domestic and cross-border initiatives to clamp down on tax evasion
The new rate is a blow to Samsung, while two law firms have made significant tax hires into their respective Washington DC offices
Rema Serafi, KPMG’s first-ever female vice chair for tax, talks about breaking the mould in an exclusive interview with ITR
The metal multinational’s victory, in a case worth $12 million, continues the trend of companies coming out on top against India’s revenue department
Guy Bud and Matthew Greene from litigation firm Stewarts review a dispute on tiered partnerships, which raises questions on corporation tax and partnership law
The stagnating pay and tax bonuses cap follow slashed payouts for the deals team and business consolidation in the last month
A greater UN role has been secured after disagreements between developed and developing countries over the OECD’s influence in global tax reform
The US-based firm picks up investment fund specialist Ceinwen Rees, while Ireland nearly doubles its corporation tax receipts in three years
The order comes amid controversy over another of David Collard’s companies’ tax and TP affairs
NASSCOM, which represents over 3,000 Indian companies, has argued for the removal of the segmentation rule