Withholding of municipal service tax controversy settled by Brazilian Supreme Court
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

Withholding of municipal service tax controversy settled by Brazilian Supreme Court

Sponsored by

Withholding of the municipal service tax is unconstitutional

Mauri Bornia and Gabriel Caldiron Rezende of Machado Associados discuss the decision of the Brazilian Federal Supreme Court, which deemed the withholding of the municipal service tax unconstitutional in certain cases.

The municipal service tax (ISS) has always been the subject of severe controversies related to the municipality to where it should be paid. 

This is because, as a rule, the ISS is payable to the municipality where the establishment providing the service is located, regardless of where the service receiver is located. Based on this, several municipalities granted ISS tax benefits, which resulted in a lower tax burden, to attract service providers.

Seeking tax reduction, but without setting up a new establishment, it became common for malicious companies to simulate their existence in municipalities with lower ISS, giving rise to several controversies when a party engaged a service provider located in another municipality.

Although the law in force provides for severe measures against the granting of ISS tax benefits, aimed at maintaining a national ISS tax burden between 2% and 5%, municipalities still view service providers from other municipalities with some scepticism, especially regarding their actual existence in another municipalities.

To avoid tax frauds, the municipality of São Paulo created the registration of service providers from other municipalities (CPOM), which required service providers of certain services established in other municipalities to enroll in such registry. 

If these providers failed to register, the law established that the service receiver in São Paulo should withhold and pay the ISS in favour of the city of São Paulo, even if the tax was due originally to the municipalities where the providers were established. Failure to withhold and pay the ISS would subject the service receiver to penalties. 

As a result, several service providers ended up suffering double ISS taxation – one from the municipality where they were established, and again by São Paulo, where the service receiver was located.

Inspired by São Paulo, several other municipalities established similar obligations, and the failure to comply with this rule would subject the company to withhold the ISS.

This obligation was taken to the courts and, after several years of discussion, the Brazilian Federal Supreme Court (STF) decided in Extraordinary Appeal 1167509 that it is unconstitutional for a legal rule to establish that a service provider not established in that municipality must register before a municipal administration body, and impose on the service receiver the withholding of the ISS when such ancillary obligation is not complied with.

Although the decision evaluated the obligation imposed by the city of São Paulo, its range is broad and applies to any municipal law that imposes the registration of the same type and ISS withholding.

Despite this decision, on March 23 2021, the Brazilian Association of Capital Cities’ Finance Departments (ABRASF) filed a motion for clarification aiming at discussing, among other matters, when the effects of the decision will become enforceable. 

ABRASF intends that the decision becomes enforceable only for future events, as of the publication of the decision, which, for practical effects, would legitimise ISS charges made in the past, making the withholding unconstitutional only for future facts.

On April 30 2021, the STF concluded the judgment of the case, denying the motion for clarification. Based on this, service providers could take measures to recover undue withholdings and service receivers may challenge ISS withholdings charges.

Mauri Bornia

Partner, Machado Associados

E: mb@machadoassociados.com.br

Gabriel Caldiron Rezende 

Partner, Machado Associados



more across site & bottom lb ros

More from across our site

As German clients attempt to comply with complex cross-border rules, local advisers argue that aggressive tax authorities are making life even harder
Based on surveys covering more than 25,000 in-house lawyers, the series provides insights into what law firms must score highly on when pitching to in-house counsel
The UK tax authority reportedly lost a case due to missing a deadline; in other news, Canada has approved pillar two legislation
There will always be multinationals trying to minimise tax by pushing the boundaries of their cross-border arrangements, Rob Heferen claimed
HMRC’s attempts to crack down on fraudulent tax relief claims are well-meaning, but the agency risks penalising genuinely innovative businesses, writes Katy Long of ForrestBrown
Argentina, Brazil, Mexico and South Africa are among the countries the OECD believes could benefit from the simplified TP rules
It comes despite an offshore enabler penalty existing in the UK throughout the entire period
It is extraordinary that tax advisers in the UK can offer their services without having to join a professional body. This looks like it is coming to an end, Ralph Cunningham writes
Meet the esteemed judges who are assessing the first-ever Social Impact Awards
The ‘big four’ firm has also vowed to spend more on nurturing junior talent; in other news, Blick Rothenberg has hired a pair of tax partners
Gift this article