• Taxation of domestic and cross border transactions with software in Brazil

    By Carlos Eduardo Navarro


    1. Assumptions and preliminary comments

    First of all, it is important to clarify that this article aims to address the taxation on the software itself, which, in Brazil, is different from the taxation imposed on physical media where the software is recorded (flash drive, CD, DVD, etc.)1, mainly because the software is an intangible asset, and the media is tangible.

    Secondly, given that the Brazilian tax system is very complex, this article will focus on the indirect taxes charged by the Brazilian authorities.

    2. Taxation on import of software

    When a Brazilian company acquires software from abroad, the taxation depends on the type of software. According to the Brazilian Supreme Court2, there are two different types of software (from a tax perspective): (i) standard software (off-the-shelf)3, and (ii) software on demand. The standard software must be taxed as a merchandise, while software on demand is taxed as a service.

    In this scenario, a Brazilian company that acquires standard software from abroad must pay the following taxes: (i) State VAT over goods ("ICMS"), and (ii) tax on exchange transaction ("IOF"). The ICMS should be paid to the State where the Brazilian importing company is located, and in accordance with the law of such given State. In the State of São Paulo, for instance, my understanding is that the ICMS is currently not due, in view of lack of legal definition of how the tax shall be calculated. The IOF should be paid at a 0.38%-rate over the net amount remitted abroad.

    Differently, a Brazilian company that hires a foreigner (company or individual) to develop a software by its order will acquire a service (not a merchandise). Brazil currently imposes a very high taxation on service import, charging more than 5 different taxes on the remittance abroad of service fee , generally being: (i) 15% withholding income tax ("WHT") for technical services or 25% for non-technical services (a 25% WHT is generally applicable on remittances to tax heavens) ; (ii) 2% to 5% municipal tax on service ("ISS"); (iii) 9.25% social contributions on import of service ("PIS/COFINS-Import"); (iv) 10% contribution for economic intervention in the public domain ("CIDE")4; and (v) 0.38% IOF. The taxpayer of WHT and ISS is the non-resident service provider, but the Brazilian importing party is liable to withhold and pay them (all ancillary obligations fall exclusively on the Brazilian importing party). All the others taxes (PIS/COFINS-Import, CIDE and IOF) are due and borne by the Brazilian importing party itself.

    3. Taxation on domestic sales of software

    On the domestic sale of software, the same segregation between standard (merchandise) and on demand (service) software is necessary.

    Thus, when a Brazilian company sells standard software, in principle it should pay collect ICMS and PIS/COFINS. The effective charge of ICMS will also depend on the State where the seller is located. In case the seller is located in the State of São Paulo, currently the tax authorities (i) do not charge the tax if the software is not recorded in a physical media (cloud computing, streaming, download, etc.), and (ii) charge ICMS at a 5%-rate5 when the software is recorded in a media.

    There are currently two systems applicable to PIS/COFINS: a cumulative system and a non-cumulative system. The non-cumulative system is generally mandatory to Brazilian legal entities subject to income tax ("IRPJ") on the actual profit system ("lucro real", in Portuguese)6. Under PIS/COFINS non-cumulative system, the PIS/COFINS paid on the acquisition of goods and services that are used as inputs on the companies' activities can be recovered as credit and, thus, they can be offset against the PIS/COFINS levied on monthly gross revenue. Usually, the applicable rates are 1.65% for PIS and 7.6% for COFINS. On the other hand, companies that are subject to the IRPJ's deemed profit system ("lucro presumido", in Portuguese)7 are generally subject to the PIS/COFINS cumulative system, in which the offsetting of credits is not authorized. However, in this system, the PIS/COFINS applicable rates are usually lower: 0.65% for PIS and 3% for COFINS.

    Finally, in case the Brazilian company sells software on demand to its clients, it is considered a service provider, which means that the following taxes will be due: (i) PIS/COFINS, and (ii) ISS. Specifically with regard to PIS/COFINS in this situation, it is import to know that revenues deriving from the development of software are necessary subject to the cumulative regime, even if the company is subject to the lucro real.

    The ISS is due to the Municipality where the service provider is located. ISS is a non-recoverable tax, which means that the ISS paid on the service used as an input for the contracting company cannot be used as credit to offset the ISS due by such compaby. The ISS rate cannot be lower than 2% or higher than 5% on the service fee.

    1. Although it is obvious, it is very common that the Brazilian courts mix up the software and the media, for tax perspective.
    2. Extraordinary Appeal No. 199.464.
    3. In principle, the customized software is taxed as the standard.
    4. In case the software's source code is not transferred to the Brazilian importer, CIDE is not levied.
    5. 5% over the sales price, in a cumulative system (with no credits and debits).
    6. The actual profit system is mandatory in certain circumstances, such as when the company: (i) accrues over BRL 78 million of revenues in the previous year, (ii) is engaged in activities of banking, brokerage of bonds, securities and exchange, securities dealership, private insurance, factoring, amongst others, (iii) earns profits, income or capital gains originated from abroad (revenues derived from the provision of services abroad are not considered as income from abroad for this purpose), (iv) enjoys tax benefits that result in the reduction of IRPJ, etc. Under the actual profit system, IRPJ (and also the social contribution on income – "CSLL") is levied on profits ascertained by the company, on an accrual basis, pursuant to the Brazilian generally accepted accounting principles, with certain adjustments (additions and/or exclusions) set forth by tax laws.
    7. If the company is not mandatorily subject to the actual profit system mentioned above, it may choose to calculate the IRPJ and the CSLL based on the deemed profit system. According to the deemed profit system, the taxable profits are calculated based on percentages of the company's gross revenues, which vary depending on the activity that generated the revenues. Under this system, deductions from taxable profits and offsetting of tax losses are not allowed.
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  • The information provided in this article is for general information purposes only. The information is not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified professional on any specific matter.

Carlos Eduardo Navarro

Carlos Eduardo Navarro is based in São Paulo, Brazil. Navarro has specialized in advising Brazilian and foreign companies and individuals on tax and customs laws for more than 10 years. Carlos Navarro is regularly interviewed by leading business editions and has authored and co-authored several articles in recognized Brazilian and international journals. Navarro is also lecturer at the Fundação Getulio Vargas business and law schools in São Paulo.

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