The ICMS is a state value-added tax levied on the domestic circulation and import of goods and the rendering of communication and certain types of transportation services. Its primary directives are set forth by the Brazilian Federal Constitution, and it is governed, at the national level, by Supplementary Law 87/96. As Brazil is composed of 26 states and one federal district, each one has its own ICMS legislation, which must comply with the general guidelines of the Supplementary Law and the Federal Constitution.
Broadly speaking, software is an intangible asset, consisting of a set of instructions that enable data processing on computers, commanding its functions. For Brazilian civil law purposes, the use of software must be subject of a license agreement, in accordance with Law 9609/98.
For tax purposes, however, the Brazilian Federal Supreme Court (STF), analysing Extraordinary Appeal (RE) 176.626/SP of 1998 and RE 199.464/SP of 1999, ruled that off-the-shelf (standard) software, usually produced on a uniform basis and sold on a large scale as multiple copies to any interested consumer, has the character of goods and, therefore, the taxation applicable to the circulation of goods – subject to the ICMS – shall apply.
Even though these appeals only produced effects for the parties involved in the lawsuits, they were important precedents on software taxation in Brazil, serving as guidance for taxpayers, tax authorities, and Brazilian courts.
In the state of São Paulo, by means of State Decree 51619/07, the Government created an ICMS taxable basis specific to transactions with software, which is only twice the market value of the software physical media. Therefore, when a software is transferred by means of download there is no physical media and, hence, there is no ICMS taxable basis and levy.
However, on September 29 2015, this decree was revoked by State Decree 61522/15. Consequently, for transactions carried out with software as of January 1 2016, the general rule established by Supplementary Law 87/96 as regards the ICMS taxable basis will apply.
Thus, the ICMS taxable basis will be:
(i) on domestic transactions, the transaction amount; and
(ii) on imports, the amount informed on the import document, plus import duty, excise tax (IPI), social contributions PIS-Import and COFINS-Import, the amount due for the ICMS itself, tax on financial transactions (IOF), and any other taxes, fees, contributions and customs expenses levied on imports.
Such change will surely make a considerable impact on the technological sector, as it will bring about a substantial increase in the ICMS burden on transactions with software in the state of São Paulo. Other specific rules are applied by the other states, a few of which still maintain more favourable conditions for taxpayers.
This situation may rekindle discussions regarding the ICMS levy on transactions with software, which have been going on for a long time.
Ricardo M Debatin da Silveira (rsilveira@machadoassociados.com.br) and Gabriela Pizani Gonçalves (ggoncalves@machadoassociados.com.br) are members of Machado Associados’ indirect tax team, principal International Tax Review correspondents in Brazil.
