Originally published in the July 8 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
Brazil’s 2008 tax reform bill (Constitutional Amendment Project No. 233/2008), which is currently under discussion in the House Special Tax Reform Commission, may adversely affect the taxation of software and electronic goods (e-goods that are downloadable from the Internet).
Two amendments to the tax reform propose to make software and e-goods subject to the new state value added tax. Those items are currently subject to the local service tax (ISS), with a maximum rate of 5 percent. If the new VAT were to apply to software and e-goods, the tax burden could be as high as 25 percent, the rate currently applicable to telecommunications. The tax reform bill provides that the new state VAT would have only a few rates — possibly five — and that all taxable transactions would fall under one of the rates.
Lawmaker Nárcio Rodrigues on May 28 proposed amendment 116, which would add to the tax reform Item III (e) of article 155-A. The amendment would provide that the new VAT would apply to the “delivery or reception of intangible goods, like software.” The amendment explicitly mentions software, but it could be applicable to any intangible goods, like copyrights, downloadable goods (for example, music, video, software), and online subscriptions. Many of those items are currently subject to ISS, and some taxpayers have adopted a more aggressive approach, suggesting that not even ISS should apply.
If the amendment is approved as proposed, the software industry will be heavily affected. Today, after years of battle in courts, software is subject to ISS, and the maximum rate is 5 percent. But to attract software houses and dealers to their territories, many municipalities have reduced rates to as low as 2 percent. Even if the VAT rate is relatively low, such as 7 percent (applicable to many technology goods), the tax burden on software would increase dramatically.
Lawmaker Paulo Renato Souza on May 15 proposed amendment 282. Although similar in purpose to amendment 116, it does not specifically address software. However, it goes further, applying the new VAT to any electronic transfer of goods. It provides that the new VAT would apply to goods transferred by electronic means and that the taxable event would be deemed to occur if consumption was complete, even if originated from abroad. To justify the amendment, Souza says it aims to close loopholes in the tax laws and make electronic commercial transactions taxable.
In another proposal in the amendment 282, Souza proposes that the lease and rent of movable and immovable property be subject to the VAT. The lease of immovable property is subject to neither ISS nor the current state VAT (ICMS), while the taxation of the lease of movable property is still a controversy in court, and even the Supreme Court has ruled that no ISS should apply to leasing activities.
The tax reform amendments are still in the early stages, as they must be debated and voted on in the House Tax Reform Special Commission, the House of Representatives, and the Senate.
State governments are now lobbying to have the tax reform include that as many transactions as possible be subject to the new state VAT. Software and e-commerce associations should be aware of those attempts to change taxation and lobby to have them excluded from the tax reform.
Experts estimate that Brazil has 39 million Internet users, of which almost 10 million have used the Internet to make online purchases, disbursing BRL 6.3 billion (approximately $3.93 billion) in 2007 alone, an increase of 43 percent from 2006.
David Roberto R. Soares da Silva