The Taxation of Transactions Involving Digital Goods and Merchandise by the  State of São Paulo – Brazil

Impressive technological evolution has caused a mismatch between the rules governing the digital sector and reality. Identifying which taxes are applicable to transactions involving digital goods and merchandise in Brazil is a real challenge.

In the State of São Paulo, the State Value-Added Tax (ICMS) regulation (RICMS/SP) set forth, in 2016, that until it was defined where the ICMS taxable event occurred (to define the establishment liable for paying the tax), the ICMS levied on transactions with digital goods and merchandise by download or streaming would not be due.

With the enactment of an ICMS Agreement between the States (CONFAZ) on October 5, 2017, it was defined that in domestic shipments and imports of digital goods and merchandise (such as software, programs, electronic games, applications, digital files and the like), which are standardized (even if they have been or can be adapted) and sold by means of download, the ICMS:

(a) Will be due to the State where the acquirer is domiciled or established; and

(b) Shall be paid by the legal entity that owns the website or digital platform which sells or provides the digital goods and merchandise.

Therefore, the legal entities holding websites or electronic platforms shall be registered as ICMS taxpayers in all States where they have transactions with end-consumers.

Based on the ICMS Agreement, the State of São Paulo enacted a Decree (published on December 23, 2017), revoking the previous ICMS exemption determined and enacted an Ordinance (published on March 24, 2018) which enables the collection of ICMS on transactions with digital goods and merchandise by means of download – meaning that the ICMS has been effectively enforceable in the State of São Paulo for said electronic transactions since April 1, 2018.

Below we highlight the following rules from the Decree and Ordinance:

■ The website or electronic platform constitutes an independent establishment for ICMS purposes;

■ The Treasury Department of the State of São Paulo may grant special regimes for compliance with ancillary obligations;

■ The sole transaction taxable is that undertaken with the end-consumer, being the prior transaction(s) exempt for ICMS purposes, while the ICMS Agreement is in force;

■ The website or electronic platform must have a specific registration in the State of São Paulo, even if it has other establishments registered as ICMS taxpayers in this State. This obligation is also applicable for websites and platforms that sell digital goods and merchandise exempt from or not taxed under the ICMS; and

■ The establishments are obliged to issue electronic invoices for each final transaction with the end-consumer, but not the transactions which preceded it.

However, these new provisions have brought more difficulties and legal uncertainty to taxpayers due to their formal and material issues.

In this sense, the ICMS Agreement violated Article 146 of the Federal Constitution when it defined the liable taxpayer and the State to which the tax should be paid; this definition should be contained in a supplementary law.

The new rules have also generated a conflict between the Brazilian States and municipalities, to the extent that, pursuant to Article 156 of the Federal Constitution, municipalities have the competence to charge Tax on Services (ISS), including in relation to services in the technology industry. In other words, with the new rules the same events would apparently be taxed by the States (ICMS) and municipalities (ISS). For taxpayers, an important question, among others, remains: which tax is levied and who is the legitimate creditor?

In this context, the regulation brought an important clarification determining that the ICMS will be levied in case of download – definitive cession – of audio, images, videos and text. Therefore, it is possible to assume that the ICMS will not be due in relation to streaming activity, which is subject to the ISS.

Furthermore, although the ICMS Agreement provides for the levy of the tax on imports of digital goods and merchandise carried out by download, the São Paulo regulations do not address the levy of the ICMS on imports.

In this complex situation, a favorable point is that there is a reduction of the ICMS tax base in transactions with digital goods and merchandise, so that the total ICMS tax burden is 5 percent of the value of the transaction (as opposed to the usual 18 percent).

In conclusion, São Paulo's new rules have increased the tax ancillary obligations (which will become even more complex and costly), the tax burden (in transactions that were not previously taxed under the ICMS) and the taxpayer's legal uncertainty, which could become even worse when other States adapt their rules to the ICMS Agreement. New disputes have already resulted in the tax courts in the technology sector.

This article was first published by Wolters Kluwer – Global Tax Weekly, June, 2018.