Brazilian Tax Authorities’ Understanding on Software Transactions
Erika Tukiama e Nathália Fraga assinam capítulo na edição de julho da revista Wolters Kluwer Tax & Accounting. Confira:
Brazilian Tax Authorities’ Understanding on Software Transactions
In the past months, the General Tax Coordination (“COSIT”) has issued several tax rulings regarding cross border and domestic transactions involving software.
How such transactions must be taxed is still a controversial issue in Brazil due to the different levels of federations units interested in collecting taxes (municipalities, States and the Federal Union) and the subject becomes even more complex in view of the new technologies and high tech solutions that are each day being offered in the market.
One big surprise came with COSIT Conflict Resolution Ruling 18/17 through which an already pacified issue involving the taxation on the import of standard software was modified. In the past, tax authorities used to (correctly) understand that remittances made abroad for the licensing of standard software (off-theshelf) were not subject to the withholding income tax (“WHT”).
Such former understanding was in line with the case law of the Federal Supreme Court (“STF”) that established that standard software (multiple copies manufactured in large scale, in an uniform manner and intended for the use of undetermined number of users) has a merchandise nature. If considered as a good, the import of such type of software was not subject to WHT, inclusive if there was no physical media (downloaded software).
In Conflict Resolution Ruling 18/17, COSIT states that:
- The licensing of commercialization and distribution of software (usually transacted between Brazilian distributors and foreign companies) differs from the licensing for the right to use the software (generally applicable to transactions between Brazilian distributors and end consumers);
- For cases involving the licensing of commercialization and distribution of software, STF’s case law mentioned above is not applicable as this precedent only refers to cases of licensing for the right to use the software. Thus, the characterization of standard software would be irrelevant for the commercial/distribution relationship between the Brazilian distributor and the foreign company;
- Payments made abroad by Brazilian companies for the right to commercialize the software fall under the concept of royalties, which are subject to the: (i) 15% WHT (tax havens are taxed at a 25% rate) and (ii) 10% contribution for the intervention in the economic domain (“CIDE”), in case there is a technology transfer (i.e. when the source code of the software is provided and the acquirer of the license is able to modify the program). COSIT clearly stated that CIDE is not levied if no technology transfer occurs.
As from the issuance of this new understanding, taxpayers who do not follow this procedure become now more exposed to tax assessments as COSIT’s conflict resolution rulings are binding to all federal tax authorities. Discussions at the administrative and judicial spheres remain, however, available.
In terms of new technologies, COSIT Ruling Request 191/17 made public the Brazilian tax authorities’ first opinion on the tax treatment applicable to remittances made abroad for the payment of Software as a Service, known as SaaS. The case analyzed involves a Brazilian company engaged in the sale, maintenance and development of data processing systems. In summary, such Brazilian company: (i) makes payments to a foreign company for the authorization (via password) to access and use two different SaaS (one regarding utilities package with protection against computer virus and spam and another regarding the use of a virtual platform enabling a database access and the participation in conference calls, meetings and trainings); and (ii) subsequently, provides the access and use authorization to Brazilian users.
According to COSIT’s position, the license to use a SaaS must be regarded as a provision of a technical service and subject to the WHT and CIDE. Tax authorities considered that the user: (a) does not acquire the software nor receive it to be installed in his hardware, but rather pays periodic fees to mere access the utilities package of the software that is, in its turn, hosted in the cloud (undefined location); (b) is not allowed to modify the program’s characteristics, being the foreign company the one responsible for the management and maintenance of the software and provision of helpdesk services; and (iii) does not pay for any author’s right but only for an access service. As additional reasoning, tax authorities also relied on the wording of the agreement entered into between the Brazilian company and the foreign company according to which the payments made abroad were made in compensation for the rendering of a package of services.
COSIT clarified that the case at hand should not be subject to the taxation applicable to the licensing of the right to commercialize SaaS as, in this specific case, the Brazilian company previously acquires the access authorization to only then resell it to users in Brazil (please note that this ruling was issued few days before Conflict Resolution Ruling 18/17).
The concept of technical services was here applied as, under COSIT’s understanding, the case involves specific computing knowledge, related to automated structures with clear technological content and, thus, the remittances made abroad for its remuneration are subject to the general 15% WHT and 10% CIDE.
Taxation on SaaS will certainly be deeper analyzed and discussed in the future as this subject is not as simple as tax authorities treated it.
In what refers to domestic transactions, COSIT Ruling 230/17 discussed the application of the tax rules that impose the obligation of domestic wit hholdings of Income Tax, Social Contribution on Net Profit (“CSLL”) and Social Contributions on Revenues (“PIS/COFINS”) on payments for professional services. Tax authorities analyzed then if the following activities should be regarded as professional services that were subject to said taxation: (i) commercialization of standard software and updates; (ii) commercialization of permanent and temporary use license of general and nonexclusive software; and (iii) maintenance and technical support of this software.
Except for item (iii) above, COSIT stated that the concept of professional services brought by income tax rules (which also applies for the purposes of CSLL and PIS/COFINS) does not comprise the services mentioned above, reason why such taxes would not be levied on their remuneration. COSIT considered, however, that the payments made for the maintenance and technical support services would be subject to CSLL and PIS/COFINS as the tax rules governing such contributions establish taxation over the maintenance of movable assets.
Different topics were also analyzed by Brazilian tax authorities in other tax rulings, as follows:
- Under the deemed profit system, the commercialization of standard software (a) subject to minimum modifications/adjustments to an already final product and aiming at attending certain client’s needs shall be considered as a merchandise transaction; and (b) that is significantly altered and modified into a new version for the client’s needs shall be characterized as a provision of services. The performance of technical services focused on the maintenance of the proper functioning of the program (either standard or not), regardless if the provider is legally or contractually obliged to perform them, shall be characterized as a provision of services for tax purposes (COSIT Ruling 235/17);
- For the purpose of calculating the Special Tax Regime for Small Businesses system, it was understood that, according to STF’s case law mentioned above, the resale of permanent and temporary license of standard software, through download, has a commercial nature (resale of merchandise) (COSIT Ruling 231/17); and
- Partial or total updates on standard software acquired through physical support or through download has a merchandise sale nature for the purposes of the levy of Social Security Contributions on Gross Revenues (COSIT Ruling 18/17).
As mentioned, any solution on this matter remains unclear and several further decisions from tax authorities and Courts are still to come.
By Erika Tukiama and Nathália Fraga; Machado Associados Advogados e Consultores, São Paulo, Brazil