New Brazil digital services tax law under discussion

By Francisco Lisboa Moreira, Tax Partner, Bocater Advogados, São Paulo, Brazil & Doris Canen, International Tax LLM, Kings College/UK, São Paulo, Brazil

 Brazil is considering yet another bill aiming to enact a digital service tax.

The bill, submitted August 18, envisions a tax called the Social Contribution on Digital Services (“Contribuição Social sobre Serviços Digitais” ). The tax would be levied on gross income derived from digital services provided by large technology companies.

The main justification for the proposed legislation (“Projeto de Lei Complementar” n. 218/2020) is the need to obtain revenue to cover losses resulting from the coronavirus pandemic, which has reduced the overall wealth of Brazilian families.

It was also stated that “digital companies operate with no physical presence” and that “even when they settle physically in a given country, may shift their gains to other countries, where they are less taxed.”

The proposal clearly mentions that its inspiration is the French digital services tax legislation and also recognizes the need to redesign national tax systems to capture the income generated by the digital companies. 

The proposal clearly mentions that its inspiration is the French digital services tax legislation and also recognizes the need to redesign national tax systems to capture the income generated by the digital companies. 

The proposed legislation defines digital services as the provision of any type of data digitally and including electronic files, applications, software, music, video, texts, games and related items, and the availability of electronic apps that may allow the transfer of any digital content between users.

The revenue raised by Brazil’s digital tax will be fully used to cover basic minimum wage income programs instituted at the federal level.

Brazil’s digital tax will be triggered upon the generation of revenue deriving from advertisement on a digital platform for a user located in Brazil (device located in the country); the availability of a digital platform that may allow interaction between users aiming to sell goods or to provide services between such users, as long as one of them is located in Brazil; and the transmission of data of users located in Brazil and collected during the use of a digital platform or generated by these users.

The Brazil digital tax will be due at a 3% rate by digital companies that have obtained income in Brazil and that belong to an economic group that has reached, in the previous calendar year, a worldwide group revenue exceeding R$. 4,5 billion (USD 820 million approx.).

The calculation basis shall be the revenue made in Brazil. The draft legislation requires that the cross-border data revenue related to advertisement and data transmission be apportioned to the exhibition to Brazilian users (advertisement) and prorated based on the number of Brazilian users (data transmission).

So far, Brazil has three other proposed bills under review. PLP n. 131/2020, of Senator Zenaide Maia, aims to include in the existing law 10,833/03 a rule to tax digital platforms at a 10.6% on revenue connected to the Brazilian operation when “making available, by electronic communications, a digital interface that allows users to contact other users” and “selling to advertisers by its agents, with the objective of placing advertisement in a digital interface based on such user data preferences.”

A second bill, the CBS draft legislation (PL n. 3887/2020), provides that digital platforms must collect the new CBS Tax (which would replace the existing PIS and COFINS) on sales in which the seller does not issue an invoice.

Finally, the CIDE-Digital proposed law, PL n. 2358/2020, would create a digital services tax very similar to the one being proposed in this most recent initiative.  

It should be remembered that all projects share the same characteristic – they propose to introduce a “contribution” which is a tax figure foreseen in the Brazilian legislation that obliges the state to spend the revenue collected on a public need foreseen by the law – normally to cover for social security expenses, the basic income programs (such as in the PLP n. 218/2020), or the national fund for technological and scientific development, (which is the case of PL n. 2358/2020).

A contribution with such design would not qualify as an income tax eligible for credit against the income tax due in the residence country.