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Impacts of tax overhaul for digital economy companies


Gabriela de Souza Conca; Ana Carolina Fernandes Carpinetti; Luiz Roberto Peroba Barbosa

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​Introduced by federal representative Baleia Rossi and conceived by the Fiscal Citizenship Center (C.CiF), Proposal for Constitutional Amendment - PEC No. 45/2019 aims to simplify the Brazilian tax system by consolidating taxes on consumption into a single tax. At this time, no changes in income tax are being discussed.

According to PEC No. 45/2019, consumption taxes (IPI, ICMS, ISS, PIS and COFINS) would be replaced with one single tax on consumption of goods and services (IBS), whose collection system follows the international standards of the VAT tax. The premise behind the design of IBS tax is that it will apply to all onerous transactions involving tangible or intangible assets (license of use, assignment of rights, etc.), regardless of their designation.

IBS tax would be originally set at a uniform reference rate for each federative entity, to be applied indistinctly to all transactions with goods and services. The final tax burden on consumption would be the result of the sum of the rates applied by each federative entity and, according to studies presented, is expected to reach the initial rate of 25%.

One of the concerns voiced by digital economy companies is that they would have to cope with a significant tax hike if such rate is confirmed.

Currently, the consumption tax on local transactions varies from 5.65% to 14.25%, depending on the nature of the activity performed (the ISS tax rate varies from 2% to 5%, according to the classification of the service rendered), and on the PIS/COFINS ascertainment system adopted (3.65% if the company adopts the estimated profit regime, or 9.25% if the company adopts the actual profit regime).

In international remittances, which are quite usual in this segment, the taxes encompassed by the tax overhaul currently account for a tax burden ranging from 2% to 14.25%, according to the nature of the remittance (ISS tax varies from 2% to 5%, depending on the classification of the remittance by the municipality, and PIS/COFINS is levied at 9.25% on importation of services, while licenses/assignment of rights is not encompassed in the concept of services).

PEC No. 45/2019 is not intended to increase the overall tax burden with higher consumption tax revenues, but rather offer security to investors and provide transparency to consumers, who will actually bear the tax burden. As a result, despite the rise in tax burden following implementation of IBS tax, companies are expected to benefit from simplification of the system, possibility of fully using the credits arising from the tax paid in the previous stages, considerable reduction in the number of ancillary obligations and associated costs, and reduction in uncertainty and in litigations alike.

Another point worthy of note concerns the collection of IBS tax in the place of destination, where the goods or services are consumed. The identification of the place of destination will be essential for applying the correct rates at state and municipal levels, and is especially challenging when it comes to the digital economy. The new law to be enacted should provide for clear-cut criteria to identify where consumption takes place in case of transactions involving intangible assets and provision of services.

This is so because, despite dealing with one single tax with payment centralized in a Management Committee, the total amount due will be composed of three different rates: federal, state and municipal rates (9%, 14% and 2%, respectively, corresponding to the reference rates estimated by the authors of the proposal). All federative entities may increase or reduce such rates by enacting laws in this respect, so the rates to be applied to each transaction may vary, depending on the state or municipality where the consumer is located.

PEC No. 45/2019 provides for a 10-year transition period for companies to bring them into line with the changes and to avoid any drastic impact given the investments made during the effectiveness of the previous regime. During that period, the IBS tax rate should increase progressively, whereas the ICMS, ISS, IPI, PIS and COFINS rates are reduced progressively to a zero rate.

In order for such proposal to become effective, it must be approved by at least 3/5 of both Houses (House of Representatives and Senate) in two rounds of voting.

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