Brazilian Tax Review - December 2017

States vs. Municipalities: ICMS Agreement 106/2017 Enhances the Conflict over Digital Goods Taxation (including Streaming and Software)

There is an ongoing and significant conflict in Brazil between states and municipalities to decide who has the power to tax transactions involving digital goods, including streaming services and software, especially after the recent approval of ICMS Agreement 106/2017 by the states.

Regarding software, the dispute involves a historical position of the Brazilian Constitutional Court (STF) that standard software ("off-the shelf") distributed through retail stores is a good and, for this reason, should be subject to the Tax on the Circulation of Merchandise and Services (Imposto sobre Circulação de Mercadorias e Serviços), or ICMS, which is a state tax, whenever distributed in a physical medium (CD-ROMs etc.).

However, subsequently to the consolidation of the precedent, the Brazilian Congress passed Supplementary Law 106/2003, which lists software licensing as a service subject to the Service Tax (Imposto sobre Serviços), or ISS, which is a municipal tax. More recently, in 2010, and in a preliminary injunction, the STF allowed the ICMS to be collected even when the software is purchased through download, with no physical medium (even thought this case has not been finally decided yet).

As a result, even though in theory the ICMS and ISS taxes cannot be levied on the same transaction, based on the precedents, states are now charging ICMS on downloaded software under the argument that, despite its intangibility, it still could be deemed a good. The same rational applies to other digital goods.

With respect to streaming, similarly to software, the Brazilian Congress has recently passed Supplementary Law 157/2016, which lists streaming as a service for ISS purposes. Yet again, the states are ignoring this and considering this service to be subject to the ICMS.

Litigation will possibly be needed to resolve this dispute since it is likely both states and municipalities will continue levying the ICMS and ISS taxes on the same taxable events.

New Rules to Change Investment Fund Taxation in Brazil

On October 30, 2017, the Brazilian government published Provisional Measure 806/2017, which makes significant changes to the tax treatment of certain types of Brazilian investment funds, as described below.

Closed-End Funds ("Fundos de Investimento Fechados") - From May 2018, investors will be subject to automatic withholding...