Brazil plans to tax non-resident digital services

Thu Nov 9, 2017

In a move that will have major implications for digital businesses across the globe Brazil – home to 120 million internet shoppers – is about to change how digital services are taxed.

Brazil digital services tax

A Brazilian State Agreement (Convênio ICMS 1062017) has revealed plans to tax digital services – e.g. games, streaming services, music and image downloads, etc — via the State tax mechanism (ICMS). ICMS is a state tax applied in Brazil’s federal states to the supply of goods and services. The ICMS rate also varies from State-to-State, of which there are 27 (the Federal District and 26 federal states). The standard rate is 17% but is 18% in some states and 19% in others.

The Brazilian plan — due to come into effect on April 1, 2018 — would possibly see the ICMS collected via the platform through which the transaction is performed, or via an Intermediary.

This is major news for digital sellers with customers in Brazil but no physical presence, an increasingly common trait as commerce evolves.

Six months to comply with Brazilian law

These companies have less than six months to change internal systems and processes to become compliant with these new Brazilian State laws. Remember, there are 27 States in Brazil and if you have a consumer in one of these States then you will have to comply with these new rules.

This follows on from Rio de Janeiro’s attempt to tax services such as Netflix. Back in December 2016, Brazil passed a law to extend the tax on services (Imposto sobre Serviços (or ISS)) to streaming services. The ISS law extension required such streaming services to pay the levy to the municipalities where their customers are based. Netflix, as is the case across the globe, is very popular in Brazil with 3.57 million subscribers in Q4 2016. It is Netflix’s fourth largest market after the US, the UK, and Canada.

In 2016 the number of digital buyers, someone who purchased a good or service online (as distinct from someone who buys a physical product), was 60.5 million. By 2019, this number is expected to rise to over 80 million people: a 30% increase.

Part of an international tax trend

This trend of taxation recalibration is happening across the globe as traditional systems evolve, through legislation, to account for the phenomenal growth of the digital economy. It has led to initiatives such as the OECD’s BEPS project (where Action 1 dealt specifically with the tax challenges of the digital economy) and ongoing discussions at G20 level.

In early November 2017 at a seminar in Berkeley, California, the OECD gathered key stakeholders in the digital economy for a public consultation. The goal of the seminar and consultation was to understand the consequences of the digitalisation of the economy.

The use of the word ‘digitalisation’ was significant as it’s clear that we are now well beyond referring to the digital economy as a sector. Today, the digital economy is the economy and this gives rise to a state of flux as we observe in Brazil where there are plans to modernise taxation systems that were designed for more traditional methods of commerce.

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