One of the main doubtful matters in Brazilian tax law is the levy of Service Tax (ISS) on export of services. The Complementary Law 116/2003 states that the ISS is not levied on the export of services to abroad, but it clarifies that the exemption is not applied to services rendered in Brazil if the outcome is verified within the country, even if the payment is made from a foreigner.
Basically, the exemption takes into account three circumstances, as follows:
a) Country where the service is performed;
b) Country where the outcome is verified; and
c) Country where the payer is located.
Regarding the first circumstance, we may conclude that the ISS is not levied when the service is performed out of the Brazilian territory. However, differently from some lectures, I have the opinion that such circumstance is not based on factual evidences, but, on the contrary, is determined by the law.
In our understanding, the Complementary Law 116/2003 always establishes the place where the service is rendered, based on the type of service. For the majority of the services, the law determines that service is considered performed in the City where the service provider has its establishment. For the remaining few services, the law states that the service is considered performed in the City where the service is effectively rendered.
In order to clarify such provisions, let me explain it better by adopting two examples: the first one is the architecture service. When an architect performs its services, the law determines that the ISS is rendered in the City where the architecture company is located, even if the service is effectively rendered in another City. Differently, in case of a construction service, the law determines that the service is rendered in the City where the construction is effectively performed, and the City where the constructor is located is not important.
Applying the same examples for the export, we would say that, in case of architecture service sold to a foreigner, the service will always being considered performed within the Brazilian territory, even if the architect travels to abroad to render its services (totally or partially).
On the other hand, if a Brazilian constructor is hired to construct a building out of the country, the service should be considered performed abroad, even if part of the service is effectively rendered in Brazil.
Based on that assumption, we conclude that, for few services listed on items I to XXII of the Article 3 of the Complementary Law, the ISS is not levied if the service is effectively rendered abroad.
On the other hand, for the majority of the services taxed by the ISS, the service is considered performed in Brazil based on the fact that the service provider has its establishment within the Brazilian territory. For such cases, the ISS exemption depends on the second circumstance, as mentioned below.
When the service is rendered in Brazil, the ISS exemption applies if the outcome is verified abroad. The concept of service outcome is very controversial nowadays. Basically, there are four different interpretations, as follows:
a) The outcome is verified in the country where the service is
b) The outcome is verified in the country where the service is concluded;
c) The outcome is verified in the country where the service is useful (from the service acquirer perspective); and
d) The outcome is verified in the country where the service acquirer is located.
The first and second possibilities, in our view, (a) should be discussed in the context of the first circumstance, because they are not related to the outcome, and (b) are very complex, and would require several evidences to prove exactly in which country the service (and part of the service) is rendered, which is not feasible for several services. The last option does not seem good because it is connected with the third circumstance, which will be addressed below.
As a result, in our opinion, the best option is the third one. In this case, the service performed in Brazil will not be taxed if it is useful for a foreign company or individual.
Finally, the last circumstance that must be considered is the payment. Differently from the others, this circumstance is not relevant to the exemption. According to the law, the fact that the hiring party is abroad and pays for the service from abroad is not important to characterize the export of services from ISS purposes.
In summary, as you can see, there are several discussions related to the export of services, which generates doubts and uncertainty in the taxpayers. We hope the Brazilian Supreme Court decides soon the situations in which the ISS is not levied.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.