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Consolidating the Brazilian payments industry

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Jorge F Lopes and Paula Zugaib Destruti of Pinheiro Neto explore the role of taxation, among other variables, which have contributed to the growth and stabilisation of the payments industry in Brazil.

Over the past decade, Brazilian public authorities have been moving towards a greater decentralisation of banking and financial services via a lighter regulatory framework. In the electronic payments industry, Law No. 12,865/13 has set the ground for new technology companies to become a part of the Brazilian payment system and diversify further the provision of payment services to merchants and cardholders. 

A study conducted by the Administrative Council for Economic Defense in 2019, however, shows that the industry has been facing growing verticalisation, as traditional financial institutions run to control the main links of payment arrangements. In 2017, more than 80% of credit and debit card transactions were captured and transmitted by three main local acquirers, which are controlled by the four biggest Brazilian banks, even though the fourth and fifth biggest players in the segment have successfully carried out initial public offerings (IPOs) in international stock exchanges, in 2018. 

Evidently, taxation has not been the sole key driver for such market consolidation. Unrecoverable costs (such as software development and marketing), economy of scale, attachment of the clientele to known trademarks, as well as the need to have a relevant client list to engage in new business, are considered the main barriers to the entry of new players in the Brazilian electronic payments market. 

Nonetheless, one must not underestimate the role that Brazilian taxes have played to accelerate this consolidation process. They motivate the development of multiple activities by big players, and also inhibit the rise of entrants, which may be subject to double or even triple taxation on their fees, as the case may be. 

In fact, while the sale of goods is taxed on a value-added basis, services rendering are subject (besides other federal taxes) to a specific municipal tax – tax on services (ISS) – which is levied at rates ranging from 2% to 5% on the gross price of the services rendered to the customer, without any type of deductions or credits, thus entailing a clear cumulative effect. 

In payment arrangements, this cumulative nature of the ISS is aggravated due to the number of players involved: 

  • Issuers of payment instruments; 

  • Payment arrangers; 

  • Acquirers and sub-acquirers that capture and transmit the information related to sales made by accredited establishments, linking the merchants to the payment arrangements. 

In a regular purchase, the money flows from issuers to acquirers and sub-acquirers (with the exception of the payment arrangers, which are remunerated per transaction but generally do not engage in the money flow), while each party withholds its fees directly from the payment to be eventually liquidated to the merchants.

In this process, however, there is great uncertainty in Brazilian tax law on whether each party must be taxed by the ISS on a price of services that includes the fees withheld by other players along the payment arrangement chain, or whether each party should be taxed based upon the exact price charged for their own services. Specifically, acquirers and sub-acquirers might be double or even triple taxed in relation to interchange fees or on amounts payable to payment arrangers, thus undermining the healthy competition among payment platforms in the Brazilian market. 

The long-awaited Brazilian tax reform might eliminate this problem, in that the main bills being analysed in Congress (PEC 45/19 and PEC 110/19) intend to transform the ISS, along with other Brazilian taxes, into a true VAT-like goods and services tax. While that is unlikely to happen, a series of changes have been implemented on the rules governing the ISS imposed on certain specific services, including those relating to purchases made with credit/debit cards and similar payments means. Next in this line is Bill No. 170 of 2020, which is pending review by the Senate and under which an interpretation can be made that each such payment arrangement participant is ultimately rendering services to the merchant, in a way that its ISS tax base should be the price charged for its own services only. 

In addition to all these double taxation issues that have long been hindering the Brazilian payments industry, the executive branch has publicly spoken about creating a new federal electronic payments tax, which could be levied at rates from 0.2% to 0.4% on payments made electronically. If at all passed, this tax should be clearly detrimental to the local payment industry, especially for the lower margin service providers.

The efforts made by local authorities to put an end to exclusivity agreements between issuers and payment arrangers while fostering the participation of other players in payment arrangements were essential, but tax policy must as well be thought in a way as to secure due competition in the payments industry, particularly at the level of acquirers/sub-acquirers. 

Jorge F Lopes

T: +55 11 3247 8791


Paula Zugaib Destruti 

T:+55 11 3247 8528


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