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Software law: dispute between states and municipalities around taxes

The year started with major challenges for the software industry in the country. Software taxation in Brazil has already been an ongoing discussion for a few years. This discussion intends to determine whether the taxation falls under the State Value-added Tax on the Circulation of Goods (ICMS) – a State tax- , or the Tax on Services (ISS) – a municipal tax -; or neither.

The dispute concerns the concept of software in Brazilian legislation and its tax treatment. Computer programs were defined by Law No. 9,609 / 98, which granted them the same copyright protection as that of literary works. The so-called ‘Software Law’ has further established that the use of a computer program will be licensed.

This concept, however, did not prevent the beginning of a dispute between States and Municipalities for the taxation of software companies.

At the state level, it is understood that software – as with other digital goods and merchandise – is subject to the ICMS tax, under the premise that the absence of physical support is absolutely irrelevant, given the dematerialization of the concept of merchandise already accepted since the 1988 Constitution, which included the supply of electric energy in the ICMS tax field. The states also rely on the injunction granted by the Federal Supreme Court to review the legislation of the state of Mato Grosso in ADIN 1945, granted in 2010, discussing the incidence of ICMS on software download.

On the other side, the municipalities understand it differently, in the sense that everything that is not merchandise is subject to taxation by the ISS Tax, provided that it is included in Complementary Law 116/03. For municipalities, services are intangible goods within the context of economic production.

Therefore, what happened was that states and municipalities considered themselves competent to charge each of their taxes, but with state taxation temporarily suspended.

Recently, a factor has surfaced to bring back this dispute: the ICMS Agreement No. 106 published on October 5, 2017, brought missing parameters and regulated various aspects of ICMS taxation regarding software operations, among other transactions equally relevant in the digital scope. The state tax was then established to the final consumer of the software, contrary to the general constitutional rule.

Norms were also issued to operationalize such taxation, as well as a tax substitution rule, with credit card operators being responsible for the retention of ICMS taxes on import transactions.

It appears that the ICMS Agreement extrapolated its attribution by seeking to reverse state taxation competencies, part of the federative pact consolidated in the Federal Constitution, according to which, as a general rule, ICMS focuses on the various stages of production up to consumption and not only in consumption. In similar situations the Supreme Court has already recognized the unconstitutionality of the deliberations of the states (RE 680089 / SE).

Thus, it is not yet defined whether the software download operations are taxable by ICMS or ISS taxes. The fact is that, when the customers see the rules of the Agreement implemented by the states, they will have to deal with the double requirement of ICMS and ISS, and several other ancillary obligations.

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