The challenge of taxing digital goods and services
International Tax Review is part of Legal Benchmarking Limited, 4 Bouverie Street, London, EC4Y 8AX
Copyright © Legal Benchmarking Limited and its affiliated companies 2024

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

The challenge of taxing digital goods and services

Sponsored by

Pink digital calculator on green background

Brazil’s technological revolution is developing at speed, generating a divergence between legislation and reality. Ana Cláudia Akie Utumi of Utumi Advogados explores why applying taxes to transactions involving digital goods and services remains a challenge.

One of the key concerns for governments across the world relates to ensuring businesses pay their fair share of tax. This includes contributions in relation to activities carried out through so-called digital services, which are performed through a technological platform.

Unsurprisingly, this is not something simple to achieve. Most of these services can be performed from anywhere in the world, reaching clients in all sorts of locations.

For the purposes of our analysis, it is useful to identify the different types of digital businesses, as follows:

  • Digital intermediation of tangible goods, which are marketplaces of all types of products, including food, clothing, electronics, books, etc.

  • Digital intermediation of physical services, in which the digital means serve to connect services providers with clients, such as platforms that intermediate house renting, transportation services, etc.

  • Digital provider/intermediary of intangible goods, including streaming, apps, software, files, etc.

In the first and second cases, it is difficult to identify the location of the intermediary, but because there is a 'traditional' supply of goods and services, these items are subject to taxation, as well as their providers.

However, in the third case, it is difficult to identify the location of the digital services provider or intermediary, who may be operating from anywhere in the world. In several cases, the 'point of contact' with those providers/intermediaries with a certain client is solely the website and the client's credit card.

In view of this scenario, authorities in different countries are studying how to ensure minimum revenues to the country where the client is situated. The OECD is also advancing studies on a proposal to align the taxation of the digital economy, as a part of the BEPS Action 1 report.

In January 2020, the OECD published the 'Statement by the OECD/G20 Inclusive Framework on BEPS on the Two-Pillar Approach to Address the Tax Challenges Arising from the Digitalisation of the Economy.'

Pillar 1 intends to establish criteria to determine economic nexus with countries in order to allocate tax revenues of multinational groups who develop digital businesses. The OECD clarifies that: "On Pillar 1, the Policy Note recognised that in the balance are: the allocation of taxing rights between jurisdictions; fundamental features of the international tax system, such as the traditional notions of permanent establishment and the applicability of the arm's-length principle; the future of multilateral tax co-operation; the prevention of unilateral measures; and the intense political pressure to tax highly digitalised MNEs."

Pillar 2, also known as the global anti-base erosion (GloBE) proposal, "focuses on the remaining BEPS issues and seeks to develop rules that would provide jurisdictions with a right to 'tax back' where other jurisdictions have not exercised their primary taxing rights or the payment is otherwise subject to low levels of effective taxation", the OECD said.

Brazil has been involved in the discussion because it is a part of the BEPS Inclusive Framework (IF) and, for the time being, Brazil has not created any specific digital service tax.

However, it does not mean that there is no taxation on digital business in Brazil. In fact, there are taxes in Brazil that play the same role as a digital services tax. The purpose of this article is to give an overview of taxation on digital businesses in Brazil.

Taxing digital businesses in Brazil

When thinking about the big multinational groups operating in the digital industry – such as Amazon, Google, Facebook, Uber, Airbnb, and Netflix, among others – most of them have subsidiaries in Brazil to develop their activities to local customers.

One of the most important discussions concerns whether services rendered by technology companies are subject to taxation by the state value-added tax (ICMS) or municipal service tax (ISS). This is a discussion that does not exist in most other countries, as they normally charge a single sales tax or value-added tax (VAT). In Brazil, there are effectively five taxes that play a similar role to VAT, which are:

a) Two social contributions on revenues (PIS and COFINS);

b) Tax on manufactured products (IPI);

c) ICMS; and

d) ISS.

In relation to ICMS, this is a tax that is generally levied on the circulation of goods/merchandise (mercadorias = res in mercancia). The Federal Constitution included in the scope of ICMS: (a) providing interstate or intermunicipal transportation services; and (b) providing communication services. In digital businesses, the constant discussion is whether a certain business characterises providing communication services or not, and/or whether such business characterises sales/assignments of a digital good. In both cases, by being considered communication services or a digital/intangible good, state governments could impose ICMS.

ISS, on the other hand, may be potentially levied on all other services, i.e. all services that are not under the ICMS scope. The services that are effectively taxable are those included in the "list of services" of Supplementary Law No. 116/2003. All services that are not under the ICMS scope and are not included in this list are exempt from ISS.

On businesses developed by digital companies, there are two constant discussion points:

a) are they characterised as "providing communication services"?;

b) if not, in which item of the list of services are they included?

For ICMS purposes, the concept is that "providing communication services" is different from communicating. Who provides these services is an intermediary to the communication process, to the relationship between the sender of a certain message and its recipient, and not the owner, the sender or the recipient of the message.

The states have already decided to impose ICMS on software, programs, electronic games, apps, electronic files and similar intangibles, understanding that these items are intangible goods. Therefore, even though they are intangibles in the state's view, they fit in the concept of goods.

In 2015, the states agreed by means of covenant (convênio) ICMS No. 181/2015 to grant a reduction to 5% of ICMS in transactions with software, programs, electronic games, apps, electronic files and similar, made available by any means, including by electronic transfer of data.

Taxing digital businesses by ISS

Municipalities impose ISS on IT services that the legislation (Supplementary Law No. 116/2013) as follows:

1. IT and similar services

1.01. Analysis and development of systems

1.02. Programming

1.03. Processing, storage or hosting of data, text, images, videos, electronic pages, apps and information systems, among other formats, and similar

1.04. Elaboration of computer programs, including electronic games, independently of the constructive architecture of the machine in which the program will run, including tablets, smartphones and similar

1.05. Licensing or assignment of computer program right of use

1.06. IT advisory and consulting

1.07. IT support, including installation, configuration and maintenance of computer program and data bases

1.08. Planning, elaboration, maintenance and update of electronic pages

1.09. Supply, without definite assignment, of audio, video, image and text contents by means of internet, respected the exemption of books, newspapers and periodic publication (except distribution of contents by providers of conditioned access services referred in Law No. 12,485, of September 12 2011, subject to ICMS)

In addition to these services, another situation that is subject to ISS and significant for digital businesses relates to intermediation, as such services of any kind are also subject to ISS.

ISS rates vary, depending on the municipality and the type of services, ranging between 2% and 5%. For example, in the case of São Paulo, IT services are subject to 2.9% and intermediation services are taxed at 5%.

Intermediation or IT services?

Digital means have increased proximity between buyers and sellers, providers and consumers. In several countries, it is not difficult to find demands that used to be hidden and have since exploded after the creation of new technological devices and functions.

In the past, when someone wanted to book a private car, it was necessary to search for this type of service, call a proper company and book the car. Often, this would take until the next day or at least several hours after the call. Increasingly, it has just become a matter of opening the car booking app – such as Uber, Cabify, etc. – and requesting a car that can arrive in a few minutes.

Several small businesses have subsequently gained market visibility with the so-called marketplaces, following Amazon's early footsteps. Businesses of all sizes make use of digital intermediaries to have access to customers that, in the past, were impossible or very difficult to reach.

In this scenario, where digital means serve as an intermediary between a customer and physical goods/physical services, it is clear that technology companies are rendering intermediation services to the suppliers. So, Uber and Cabify are not rendering transportation services, but rather serving as an intermediary between the client and the drivers.

Software licensing

In relation to software licensing, the states claim that there is ICMS, since software is characterised as intangible goods and intangible merchandise and is, as such, subject to ICMS. The states, by means of Covenant No. 107/2017, regulated ICMS on intangible merchandise:

First Clause: The transactions with digital goods and intangible merchandise, such as software, programs, electronic games, apps, electronic files and similar items, which are standardised, even if they may be adapted, traded by means of electronic transfer of data, will observe the dispositions of this covenant.

Second Clause: The transactions with digital goods and merchandise regulated by this covenant, commercialised by means of electronic transfer of data, with parties that are not the final customer are exempt from ICMS.

Third Clause: The tax will be charged by the state where the customer is located on the internal transactions and on importations by means of website or electronic platform of sales, even those subject to periodical payment, of digital goods and merchandise transferred by electronic means.

Fourth Clause: The legal entity owner of the website or electronic platform that performs the sale or makes available digital goods and merchandise, even if they are subject to periodical payments, is the ICMS taxpayer and must register with the states in which they practice local or importation transactions with final consumer (…).

Fifth Clause: In transactions referred to in this covenant, the states may attribute responsibility for collecting the tax:

I – to who performs the offer, sale or delivery of the digital good or merchandise to the taxpayer, by means of electronic transfer of data, as a consequence of the contract signed with this marketplace;

II – to the financial intermediary, including the administrator of credit cards or other payment means;

III – to the acquirer of the digital good or merchandise, in case the taxpayer or the responsible parties described in the prior items are not registered in the final customer's state;

IV – to the credit or debit card administrator or financial intermediator responsible for performing remittances to abroad to pay the importation of digital goods or merchandise.

It is clear that states consider that all sales of what they define as "digital goods or merchandise" are subject to ICMS, and attribute tax responsibility not only for the sellers of digital goods, but also to intermediaries such as marketplaces and credit card companies.

On the other hand, municipalities claim that software licensing cannot be viewed as a sale of merchandise, as there is no transfer of title, but merely a permission for the customer to have the right to use the software. Licence of use, which they claim is present in any software or app made available to consumers, is subject to ISS and not to ICMS. Supplementary Law No. 116/2013 determines that the license of use of software is deemed as services and subject to ISS.

In the middle of such a discussion, there are some taxpayers that want to pay the proper tax but get confused on whether to pay ICMS to states, or ISS to municipalities. Moreover, a lack of compliance with these obligations is subject to severe penalties and, depending on the city or state, the fine may reach 100% of the amount of the transaction.

In a landmark case in 1998, the Supreme Court defined that 'off-the-shelf software' fitted into the concept of goods or merchandise, while 'sole copy software' needed to be treated as services to the extent that it was adapted to a particular user. The Supreme Court ruled as follows in relation to software licensing, which it called 'sole copy software':

"On transactions of 'licensing or assignment of right of use of a computer program', subject under debate, not having as object a merchandise, but rather an incorporeal asset, effectively states cannot impose ICMS: from this impossibility, however, it does not result in exclusion from constitutional field of ICMS incidence of mass produced copies of computer programs sold in retail stores – as it is the case of so-called 'off-the-shelf' software – which, materialised in a corpus mechanicum of intellectual creation of the program constitute merchandise made available in the commerce"

It is fair to remember that, by the time that the Supreme Court produced this decision, off-the-shelf software was indeed 'off-the-shelf', since vendors used to sell software inserted in physical media such as diskettes or CDs, in such a way that the Supreme Court makes reference to 'corpus mechanicum', i.e. a physical body containing computer programs.

Because of the lack of material means on software and other media sales, many taxpayers are disputing in court that they are subject to ISS, and not to ICMS. However, for the time being, there is no clear definition from the superior courts – the Superior Court of Justice and the Supreme Court – in such a way that taxpayers are subject to this uncertainty and are having to decide whether they should observe municipal or state laws.

Music and video streaming

Another field of discussion in relation to ISS versus ICMS is music and video streaming. States argue that companies that develop this kind of business must pay ICMS because they are rendering communication services. Municipalities argue that they are licensing content to the consumer, who never takes title over such content, but rather permission to listen and watch for a time, in retribution for a fee.

Supplementary Law No. 116/2013, ruling ISS, establishes streaming as part of services subject to ISS. There is exception in relation to cable TVs, whose activities are subject to the telecommunications authority's (ANATEL) permission and to taxation by ICMS.

The states argue that streaming is exactly the evolution of cable TVs, and being based on internet access does not exclude their characterisation as communication services.

This is another debate that superior courts need to define to give certainty to taxpayers. In the meantime, due to Supplementary Law No. 116/2013, most taxpayers developing streaming in Brazil are paying ISS.

Rendering digital services from abroad

Services rendered by non-resident companies – digital or non-digital services – are subject to high taxation in Brazil. Existing taxes play the role of what other countries are creating and calling a digital services tax.

When an individual or company pays any kind of fee rendered by non-resident entities, there is an obligation to withholding (a) income tax (WHT) at 15%; and (b) ISS to the municipality where the payer is, normally at 5% (rate depends on type of services and municipality).

In addition, if the payer/contractor is a Brazilian company, this payer also needs to pay (c) social contributions on importation (PIS/COFINS importation), at a rate of 9.25% with gross-up calculation; and (d) special tax on royalties and services (CIDE/royalties) at a rate of 10%.

Overall, considering the amounts supported by service providers and service contractors, the taxation on importation of any kind of services reach 40%.

In relation to WHT, there is a chance of avoiding paying it, if the service provider is located in a country with a double taxation treaty with Brazil. Also, the services must not fall under the concept of 'technical services'. If this is the case, then it is possible to claim application of Article 7 of the treaties, which determines income taxation in the country of residence. However, in the case of technical services, most treaties in place with Brazil state that income taxation is based on Article 12 – royalties – that allow taxation in both countries.

In relation to digital services taxation, there is a lack of taxation when there are individuals paying for these services, since in most cases they are not aware of their obligations to withhold and collect WHT and ISS. On the other hand, authorities have not started to inspect individuals on these obligations either, nor have they imposed such obligations on financial intermediaries, such as credit or debit card administrators.

As such, there is no reason to create local digital services taxes when Brazil has so many taxes imposed on services in general, including digital ones.


Local companies operating in the digital economy are subject to uncertainty on whether to pay ICMS or ISS in their businesses, unless it is an intermediary, in which case ISS applies.

Foreign companies with local clients, despite of the lack of digital services tax in Brazil, are subject to significant withholding taxation – ISS and income tax, and local companies that contract these services must also support significant taxation, represented by PIS/COFINS importation and CIDE/royalties.

With all these taxes and tax disputes in place, it is unlikely that Brazil will adopt any of the OECD recommendations based on pillars 1 and 2 during the short-term future because Brazil has already assured its tax revenues.

Ana Cláudia Akie Utumi



Utumi Advogados

Tel: +55 11 4118 2323

Ana Cláudia Akie Utumi is the founding partner of Utumi Advogados. She has more than 25 years of experience in the tax area, 17 of which are as tax head of a large Brazilian full-service law firm.

She practices in the areas of tax consulting and tax litigation, advising business families, local and multinational companies from a wide range of sectors and industries in Brazilian and international tax matters.

Among other notable positions of responsibility, She is a member of the Practice Council of the International Tax Program of New York University and of the Steering Group of the Women of International Fiscal Association (IFA) Network – WIN. She is also a guest lecturer on MBA courses and at the LLM international taxation course from the University of Zurich.

more across site & bottom lb ros

More from across our site

Sharma, managing director for A&M in the United Arab Emirates, tells ITR about intense time pressures, mimicking Jurgen Klopp and what makes tax cool
AI will speed up some of the most laborious TP processes without making human input redundant, argues Hank Moonen, CEO of TaxModel
Firms with a broad geographic reach are more likely to win work, especially from global companies with high turnovers, according to survey data of nearly 29,000 corporate counsel
Australian businessman Gordon Merchant used EY’s advice to offset an A$85 million capital gain, according to the Federal Court
Griggs has been drafted in ahead of schedule as the incumbent Tim Ryan departs for Citigroup; while the Netherlands plans to scrap a 15% share buyback tax
Authorities must ensure that Russian firms do not use transfer pricing schemes to increase profits made from oil sold in different markets, advocacy organisations have argued
Fallet, a partner at law firm Mauger Muniz Advogados in Brazil, tells ITR about his passion for tax law, the leaders who inspired him, and what makes tax cool
The former chief operating officer will assume the role on July 1
Ahead of next week's Indirect Tax Forum in London, ITR spoke with Christian Van Der Valk of Sovos about how different governments and companies are embracing e-invoicing
Konrad Jeczewski has alleged he was threatened with negative reviews before being made redundant by EY Australia
Gift this article