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New legislation on taxation of services in Brazil

Brazilian flagpole

On December 30 2016, Supplementary Law 157/2016 was enacted to establish noteworthy changes in regards to the tax levied on the rendering of services in Brazil.

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 same transaction/activity.

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 the ISS.

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 Law 116/2003.

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 service.

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:

  • 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 Brazil;

  • 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.

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.

The enforcement of such rules by the municipalities depend on the enactment of their own legislation. 

Tax war

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 consequences:

  • 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 improbidade administrativa”).

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 disputes

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 116/2003.

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 ICMS.

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 described below:

(i) Processing, storage or hosting of data, texts, images, videos, electronic pages, apps, among other forms and akin

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 – streaming

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 journals”.

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 reception).

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.

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