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Brazil: Municipal service tax – controversial aspect of the exports of services

The uncertainty in the municipal service tax legislation regarding the export of services from Brazil is causing debate about cross-border transactions. Ricardo M Debatin da Silveira and Gabriel Caldiron Rezende of Machado Associados argue that the municipal tax authorities’ interpretation of the law is wrong.

The Brazilian Municipal Service Tax (ISS) is a tax governed at the national level by Supplementary Law 116/03. It is levied on the provision of services expressly listed in such law, with tax rates varying from 2% to 5%, depending on the service provided, to be applied on the service price.

As it is a municipal tax, each of the more than 5,500 Brazilian municipalities must issue its own ISS legislation to impose the tax, in accordance with the general guidelines of the mentioned law.

Supplementary Law 116/03 sets forth that the exports of services are exempt from the ISS, except when the service is performed in Brazil and its outcome is also verified in this country, even if a foreign party pays for the services. To this effect, it is possible to conclude that the ISS will not be triggered, thus typifying the tax exemption on services exports, when:

  • the service is fully performed and concluded abroad by a Brazilian provider; or
  • the service is fully performed in Brazil, but its outcome is verified abroad.

There is no debate about the first situation. When the services are fully provided abroad, the Brazilian municipalities do not have the authority to charge the ISS because such services are out of their jurisdictions.

On the other hand, regarding the second case, though the legislation apparently sets forth clear rules about the requirements for the ISS tax exemption on services exports, it does not define what should be interpreted as “service outcome”. This legal uncertainty has been causing many debates between Brazilian service providers and municipal tax authorities when the service is fully performed in Brazil, but in favor of a foreign party.

Thus, in view of the lack of a proper definition of the expression “service outcome”, doubts arise in connection with the criteria to be met for properly enjoying such ISS tax exemption.

The municipal tax authorities have been interpreting service outcome as referring to the conclusion of the service provision, thus applying the tax exemption only when the conclusion of the service provision is physically verified abroad. Considering this, the ISS would not be triggered only if the service provider physically travels to another country to conclude the service.

Not settled
The Brazilian Superior Court of Justice (STJ), in Special Appeal 831.124-RJ, decided on August 15 2006, analysed the provision of repair services to the turbines of a foreign airplane that was damaged in Brazil. The STJ ruled that the work developed by the service provider in Brazil would not qualify as a service export because the purpose of the engagement – its outcome – was the actual equipment repair, which was fully concluded in Brazil, though such service was obtained by a foreign party. Thus, in the Court’s view, the outcome occurred in Brazil, as the service was provided and the aircraft was located in the country.

Though the STJ rendered its decision in accordance with the municipal tax authorities, it is the only precedent from that court on the matter, and was judged many years ago. In our view, this means the discussion is not settled definitively.

There is a doctrinal understanding that does not agree with the municipal tax authorities, stating that they are violating the intention of the tax exemption on service exports. In this sense, the purpose of the tax exemption is to increase the presence of Brazilian services, goods, and technology abroad, thus providing an inflow of foreign funds, increasing the country’s wealth.

The municipal tax authorities’ interpretation of the legislation ultimately reduces the range of the ISS tax exemption, making service provisions by Brazilians less competitive, as it increases their cost.

In our opinion, the expression service outcome should be interpreted as the benefits derived from the service rendered, so that the ISS tax exemption may be enjoyed when the benefits of the services are verified abroad.

The Court of Justice of the State of São Paulo (TJ/SP) has been deciding likewise, that is, the service outcome is actually the benefits derived, and that the place where the service was concluded should not be deemed as the main factor for typifying service export, removing the municipal tax authorities’ interpretation.

In this situation, we believe that there are strong arguments to challenge the current municipal tax authorities’ interpretation as regards the expression service outcome and, based on the recent precedents of TJ/SP, to build a new STJ case law.

Ricardo M Debatin da Silveira (rsilveira@machadoassociados.com.br) and Gabriel Caldiron Rezende (grezende@machadoassociados.com.br) are members of Machado Associados’ indirect tax team, the principal Brazil correspondents for the Indirect Tax channel of www.internationaltaxreview.com.

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