Federal taxation of software: increase in the tax burden and new disputes with the Tax Authorities

The taxation of operations involving software has been controversial for over a decade and 2023 has been a year of relevant news on the subject. In the first half of the year, the Federal Revenue of Brazil (RFB) issued some responses to formal enquiries, which bind all of its inspection activity and which in practice could mean an increase in the tax burden, making transactions involving software carried out by Brazilian companies more expensive.

The origin for the adjustments made by the RFB was the judgment, by the Federal Supreme Court (STF), of Theme 590 (ADIs nº 5,659 and nº 1,945). In summary, the STF examined the indirect taxation of the license to use computer programs, prevailing the understanding that, in this type of operation, only the Tax on Services (ISS) and not the Tax on Circulation of Goods (ICMS) should be levied, since it has the nature of a service (and not the sale of goods).

We will deal with two main points that were addressed by the RFB in its new binding guidelines, with the potential of great impact for the taxpayer.

The first point, related to the corporate taxation of companies that trade software, was the classification of software license transactions as a rendering of services for Presumed Profit purposes (IRPJ/CSLL calculation system that considers only earned revenues and involves the application of fixed margins to arrive at the tax calculation basis). In COSIT Consultation Solution No. 36 (dated February 15, 2023), the RFB defined that software licensing would be revenue from services, subject to the assumed margin of 32% (and not the general margins of 8% and 12%, much lower, which were usually adopted by the market). That is, overnight, the effective IRPJ/CSLL charge increased from 3.08% to 10.88% for companies in this situation (i.e., an almost 8% increase!).

The second point of the “reform” promoted by the RFB was related to the taxation levied on payments made by Brazilian companies in contracting software licenses from a foreign entity (“Import” of software). The great innovation of COSIT Consultation Solution No. 107 (of June 6, 2023) was related to PIS/COFINS-Import.

This is because if, on the one hand, the RFB defined that, for IRRF and CIDE purposes, remittances abroad to pay for the right to use software would be in the nature of “royalties” (not changing the position that already existed in the past), for PIS/COFINS-Importation the position that prevailed was that it would be remuneration for services, so that such contributions would be levied at the combined rate of 9.25% on imported software. In other words, also from one day to the next, there is a virtual increase in the tax burden of 9.25% on the cost of software licenses “imported” by Brazilian companies.

These measures have an immediate effect (since the publication of the Consultation Solutions in the Official Gazette) and, as already anticipated, result in an increase in the tax burden, in addition to the risk of fines for Brazilian taxpayers who transact software and who adopt procedures different from those conveyed by the tax authorities.

At a time when we are currently discussing a tax reform of consumption and income, it can be seen that, at the end of the day, many of the Government’s efforts are in obtaining new (and creative) sources of revenue. The effect of this movement will certainly bring more litigation and questions before the tax authorities.

We should wait for the next chapters on this subject. But one thing is certain: the effects of the STF decision on software taxation should not stop here and new adjustments will come up in the near future, leaving taxpayers to closely monitor this evolution and question the harmful measures perpetrated by the Public Administration.