Changes to Services Tax (ISS) legislation
Legislative Branch has created a bureaucracy contrary to what technology offers by minimizing the trade and logistics barrier of the distance between service provider and customer.
Although Services Tax (“ISS”) is a Municipal tax, general guidelines are provided through Federal Complementary Law #116/2003 (“Law #116”) issued at the Federal level. Law #116 also provides for a list of activities that should be subject to the levy of ISS.
Federal Complementary Law #157/2016, published on December 30th, 2016 (“Law #157”), introduced changes to the rules related to the levy of ISS by modifying Law #116 to the introduction of some services in the list of services subject to ISS, such as transfers by streaming and development and design of computer software including tablets, smartphones and similar.
One of the most relevant changes refers to those provisions that had initially been vetoed by the President of the Republic. These provisions established the possibility of ISS being collected in the municipality where the customer is located (and not in the municipality where the service provider is located, as described in the amended Law #116) of the following activities: health insurance services, services provided by credit card administrators, brokerage, leasing, franchising and factoring.
The text of the presidential veto also removed the possibility of collection at the domicile of the customer in the case of granting some benefit that would reduce the ISS rate to less than 2%, regardless of the activity performed, even if the customer were Immune or exempt person.
However, the presidential veto was recently overturned in Congress, thus prevailing the original text of Law #157.
The motivation for the veto was that such devices “contravene the logic of taxation of these services, which should occur in the place where the analysis of registration, deferment and control of the financing granted occurs, and not according to the domicile of the customer” and “they would imply a high operational cost to the companies.”
Brazil has more than 5,000 municipalities. With the transfer of the ISS collection competence to the city hall of the city where the customer is located new requirements have been created for the service providers who maintain their businesses and offer their services throughout the country. In this case, for example, a health plan company that operates in São Paulo will need to collect taxes in all cities in which it provides services.
Under the pretext of equally dividing the ISS between producing and consuming municipalities, in fact the Legislative Branch has created a bureaucracy contrary to what technology offers by minimizing the trade and logistics barrier of the distance between supplier and customer.
The new system will certainly make business more expensive and unfeasible, especially for small companies that carry out such activities, in a clear distortion that obviously will lead various companies and associations to the Judiciary.