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The digital economy: A challenge to the legality principle in Brazil

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The legality principle ensures that the law must clearly define the nature of the taxes and its effects.

Emir Nunes de Oliveira Neto and Felipe Bernardelli of Pinheiro Neto consider how the development of the digital economy continues to question the traditional notions of the legality principle in Brazil.

The Brazilian Federal Constitution (BFC) expressly determines that federal, state and local governments are forbidden to demand or to raise taxes without an enforcing law. This rule originates within the Brazilian tax system, and the premise is that the tax authorities should not validly demand taxes unless there is a formal law backing up the respective charge.

The legality principle ensures that the law must clearly define the nature of the taxes and its effects. It must take into account the taxes listed in the BFC, its triggering events, the calculation basis and the effect on taxpayers. Therefore, laws that create these taxes must observe the provisions of the BFC, otherwise they would face the penalty of being deemed unconstitutional. 

Historically, the Brazilian Supreme Court has ruled in favour of taxpayers, based on the violation of the legality principle, whenever the concepts embedded in the tax law have not been in line with the concepts brought by the BFC. In this sense, Justice Luiz Gallotti in Extraordinary Appeal No. 71.758 – RTJ 66/165 voted that “if the law could call as purchase and sale what is not purchase, as export what is not export, as income what is not income, all the tax system established by the Constitution would be ruined”.

The majority of the concepts entrenched in the taxes enumerated in the BFC such as manufactured products, merchandise and auto-vehicles, were formulated during the late 1980s or before, when the digital economy was incipient in the world. 

In view of the recent developments of the digital economy, a completely new group of business activities have emerged from the market such as e-commerce services, crowdfunding and payment arrangements. As a result, the interest of the tax administration has immediately arise due to its obvious contributive capacity.

It so happens that the activities of the digital economy represent a significant challenge to the legality principle as traditionally interpreted by Brazilian courts, as the concepts embedded in the existing taxes are clearly obsolete for the purposes of imposing adequate taxation to this sector. 

Needless to say that the uncertainty regarding the correct tax treatment applicable to the digital economy would be extremely detrimental to the country’s interest in view of the prospective loss of revenue and the potential litigation involving the tax administration. 

In The Wealth of Nations, economist and philosopher Adam Smith predicted: “the certainty of what each individual ought to pay is, in taxation, a matter of so great importance that a very considerable degree of inequality, it appears, I believe, from the experience of all nations, is not near so great an evil as a very small degree of uncertainty”.

On the other hand, the flexible nature of the legality principle as enforced by the judiciary on a case-by-case basis, in view of the identification of obsolete concepts in the existing taxes, would contribute even more to the tax uncertainty and would create distortions between competitors of the same sector. 

Despite the above, the Brazilian Supreme Court has softened its traditional interpretation of the legality principle, recognising that the adoption of archaic concepts would create tax misrepresentations. This can also be inferred from the judgment of Justice Cezar Peluso who noted in Extraordinary Appeal No. 592.905-SC that “the modern world is extremely more complex to be explained in the light of the economy of the roman world or in the light of the institutes then enforceable”.

In view of the above, the best alternative from the country’s perspective would be the implementation of a substantial tax reform. This may face strong resistance from federal, state and municipal governments, where the modernisation of the underlying concepts of the taxes foreseen in the BFC would act as an instrument to simultaneously preserve the legality principle and to assure certainty regarding the adequate taxation of the digital economy.

Emir Nunes de Oliveira Neto

T: +55 21 2506 1637


Felipe Bernardelli de Azevedo Marinho

T: +55 21 2506-1645


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