Reflections on the incidence of ICMS or ISS on software and digital goods
In the universe where cloud, internet, software and artificial intelligence will reign, the tax authorities’ attention tends to focus on middle activities, where technologies that will allow companies to explore new markets and business models will be inserted.
Innovations and technologies added to goods and services may have an effect in a given country, but developed and controlled anywhere in the world, without the need of a physical or permanent establishment.
In this scenario, taxation on intangible goods and services tends to quickly match and surpass the collection of tangible goods, intensifying the dispute over the tax breakdown.
Important challenges still need to be overcome in terms of taxing the digital economy: who can tax, who will be taxed, when to tax, what to tax, where to tax and how much to tax, are still unanswered questions when we think about technologies and look at the current tax system.
In the middle of industry 4.0, Brazil still works with tax definitions of industry 1.0 and 2.0, as is the case with the concept of establishment, inputs and other issues related to physical taxation. The revolution is already taking place and here we are still discussing proposals for tax reform based on an economic model that, in a very short time, will be totally obsolete.
Companies, on the other hand, cannot ignore the discussions, being essential for the production planning, price elaboration, definition of commercial and distribution policies, among other business issues, to know and understand the taxation of the technologies inserted in their products and services.
At the same time, five Direct Unconstitutionality Actions (ADI) involving the issue are being processed at the Supreme Court: ADI 1945, questioning provisions of the Law of the State of Mato Grosso, in process since 1999, and four more recent, ADI 4623/2011, also against a provision of State law of Mato Grosso, ADI 5576/2016, which challenges the rules of the State of São Paulo, ADI 5659/2017, against Minas Gerais legislation, and ADI 5958/2018, questioning the ICMS Agreement 106/2107.
Of these, three were scheduled for March 18 (ADI 5659, ADI 1945 and ADI 4623), in addition to RE 688223/2012 – PR, with recognized general repercussion, in which a cell phone company questions the incidence of ISS on licensing or assignment contracts of right to use computer programs (software) developed in a personalized way.
Regarding the ADI, until now, only one preliminary decision was made at the ADI 1945, which, however, took 11 years for the Supreme Court to manifest. At the time, in 2010, the Court’s understanding was of the possibility of the ICMS levying on software acquired through electronic data transfer, and the inexistence of tangible goods or merchandise in the strict sense is irrelevant. However, there is still no decision on the merits, which awaits consideration by the plenary of the Court.
The other four ADI have not yet been the subject of any decision, However, there has been a statement by the Attorney General’s Office regarding the possibility of taxing software by ICMS, removing the interpretation of the occurrence of double taxation with the ISS.
There is a huge legal uncertainty for the companies that develop, supply, contract, financial intermediaries and acquire software and digital goods. If, on the one hand, they are waiting for a statement from the Federal Supreme Court regarding the constitutionality of the ICMS requirement, which may take years, as in the case of ADI 1945, on the other hand, they are obliged to take immediate decisions, considering the rules, in force and effective, to which they are submitted through the tax authorities, in their day-to-day business.
Therefore, software operations, given the dispute by tax entities, have become increasingly costly and fiscally complex, increasing the insecurity of those who have the task of applying the tax overlapping Law to each fact.
In addition to technical knowledge of the nature of the software subject to negotiation, in order to identify the correct taxation, it is up to the agents to protect themselves through contractual clauses that allow the transfer to the value of the contract, of any future changes in the tax rules.
Likewise, it is imperative to constantly monitor any changes in the positioning of administrative authorities or even courts, in order to adapt their business and maintain the economic and financial balance of the contracts. In the end, the tax burden will reach the end users, purchasers of the software, who will support the transfer of taxes on the acquisition of the technologies.
Given the difficult task of identifying the correct taxation of software in the current context, it is up to each party involved to do its own planning, including outlining the appropriate strategy regarding possible discussions in the administrative or judicial sphere, if applicable.
For companies that have not yet filed their own lawsuit or have not joined collective ones, it is recommended to evaluate the opportunity and convenience of doing so, given the proximity of the STF judgments, mentioned above, involving the matter.
Our Law Firm, through the Tax Advisory and Litigation Center, is available to assist companies in making the most appropriate decision for their business, considering the dichotomy ISS X ICMS on software and digital goods.