Brazil proposal requires foreign digital platforms to collect new consumption tax

By Francisco Lisboa Moreira, Tax Partner, Bocater Advogados, Brazil

In the context of broader tax reform, the Brazilian government on July 21 presented before Congress a bill aiming to create a new indirect tax, the Contribuição sobre Bens e Serviços (CBS), which would replace two existing indirect taxes – the PIS and COFINS.

This new bill would increase indirect tax rates in Brazil and includes provisions that make digital platforms responsible for the tax liabilities non-resident sellers of physical and digital goods.

Brazil consumption tax

Brazil currently has, broadly speaking, five main indirect consumption taxes: the PIS, COFINS, ISS, ICMS, and IPI.

There are two proposals for constitutional amendments (PEC 45 and PEC 110), which aim to centralize the collection of consumption taxes at the federal level and merge all five taxes into one.

The CBS bill, (Projeto de Lei) n. 3887/2020, should be understood as an effort to permit this unification, which may occur this year. 

The government’s act of presenting a bill instead of a provisional measure (which would come into force immediately subject to later approval by the Congress) appears to be an effort to reduce the controversy surrounding its introduction.

However, the tax rates would rise from 9.25% (PIS and COFINS combined) to 12% for the CBS.

The new tax works on a debit and credit system, similar to a value-added tax system. 

Digital platform tax collection

The bill also makes important changes to the taxation of non-resident sellers of physical and digital goods.

First, articles 5 and 6 of the bill create the concept of digital platforms, which are responsible for collecting the CBS due on transactions made through their intermediation whenever the seller does not issue an electronic invoice, regardless of whether the transaction is inbound or within-the-country.

The tax covers any entity that acts as an intermediary for suppliers and buyers in non-physical buy-sell transactions, including electronic sales.

According to art. 61 of the bill, the CBS is also levied in the importation of goods and services from abroad. The definition of services also includes the “assignment and licensing of rights, including intangibles.”

For non-resident sellers or intermediaries of goods, art. 65, V attributes responsibility for collecting the tax to the digital platform. Non-resident platforms must enroll before the Brazilian Tax Authority, under terms still to be regulated.

The digital platforms must pay the CBS due on transactions involving digital services or intangibles purchased by Brazilian individuals.

State taxation of digital platforms

On a side note, Brazilian states are increasingly holding digital platforms responsible for their seller’s tax liabilities.

Recently, the states of Rio de Janeiro (Law 8795/20), Bahia (Law 14183/19), Mato Grosso (Law 10978/19), Ceará (Law 16904/19), and Paraiba (Law 11615/19) have introduced legislation attributing responsibility to the digital intermediary (normally marketplaces) for transactions taking place within its system.

Other consumption taxes

From a policy perspective, it seems inevitable that the CBS will cover most B2C digital transactions, and that sometimes these transactions will also attract an ISS and ICMS levy.

This is because the concept of a digital good is being applied by the cities, under which any digital sale could be deemed as a service (a process triggered by Complementary Law 157), and by the states, where a digital item may also be treated as a good.

This contradictory interpretation is possible in Brazil, where the political branches (federal, state, and municipal) have sovereignty to tax within the scope authorized by the Federal Constitution. This framework, designed in 1988 and not updated to reflect the advance of the digital economy, results in overlapping of taxing powers.

This is yet one more reason why Brazilian constitutional reform is so needed.