Brazil: New Legislation Creates Controversies Regarding The Tax On Services In Brazil

New legislation, which changed municipal taxes levied on activities such as leasing services, credit and debit card administration and the administration of investment funds and portfolios may be challenged by corporate taxpayers.

In view of the questions raised by our clients in the light of the amendments made in the Complementary Law No. 157 ("CL 157/2016"), dated December 29, 2016, we found it opportune to share our impressions about the changes, which affected the legislation governing the Tax on Services of any Nature ("TS"), especially as they regard to the municipalities entitled to collect the tax.

Article 3 of CL 116/2003 states that, as a general rule, the TS is considered to be due in the city of the establishment of the service renderer. To the exceptions already foreseen, CL 157/2016 added others, such as those that more directly affect the financial institutions, since they changed the tax jurisdiction of the tax to the municipality of residence of the contractor, in the cases of leasing services, as well as those provided by credit and debit card administrators and administration of investment funds and portfolios.

In addition to the difficult and costly practical applicability, which violates the principle of reasonableness, since the companies are required to register in all municipalities in which they have clients domiciled (Brazil has more than 5,500 municipalities ), the new rules still bring a laconic wording, from which arises innumerable questions. There was also a clear distortion of the tax incidence hypothesis constitutionally foreseen for the TS, which, in the final analysis, ends up aggravating the already serious scenario of dispute for tax revenues among municipalities.

For a better outline of the issue, we will consider its external context, where the lawsuits challenging the constitutionality filed in the Supreme Court are pending, as well as a Draft Supplementary Law related to the simplification of ancillary obligations arising from such normative changes.

However, before going into the merits of such questions, it is necessary to make brief comments on the main concepts related to the TS, in light of the Federal Constitution and its legislation, a framework in which it inserts CL 157/2016.


First of all, it is essential to emphasize that the Federal Constitution ("FC / 88") gave municipalities the power to institute the tax on services of any nature, to be defined in a complementary law, a competent instrument to resolve conflicts of jurisdiction and establish general norms in tax matters.

In fact, the complementary law referred to in FC / 88, CL 116/03, establishes the basic guidelines regarding the TS, defining, within the limits granted by the Constitutional Text, the essential elements for the exercise of tax jurisdiction by the Municipalities, which are: taxable event, calculation basis, maximum rate, active and passive subjects and municipality of rendering of services, for purposes of tax collection.

In addition, CL 116/03, in its Annex, redrafted the List of Services and, in compliance with that determined in item I, paragraph 3, of article 156 of FC/ 88, determined as the maximum rate for the collection of the tax the percentage of 5% (five percent).

In this context, the provision established by CL 157/2016, which assigns to the domicile of the service taker the responsibility for collecting the TS, as a vehicle for introducing standards, has been enforceable since the date of its publication (12/30/2016). Notwithstanding, with regard to the modification of the rules of competence for collecting the tax - object of our analysis - there was a veto by the President of the Republic when it was first published. This amendment, however, was maintained by the National Congress, which was enacted on May 31, 2017 and published on June 1 of that same year.

The norms conveyed through complementary law can be classified in norms of conduct and standards of normative production, as our doctrine attests:

"(...) From now on, it is worth asserting: the norm conveyed by the complementary law will be higher if it presents itself as a norm of normative production in relation to that transmitted by ordinary law, according to the determinations of Brazilian Positive Law.

In this sense, it is correct to say that the norm conveyed by the complementary tax law, according to Brazilian Positive Law, can be a norm of conduct or a norm of normative production.

When the complementary tax law conveys the norm of conduct (tax norm), it will have the same hierarchy as an ordinary law.


On the other hand, the complementary law can convey normative production norm. It does so when it regulates the manner in which the norms conveyed by ordinary law are created, modified or extinguished. "

Thus, standards of conduct are those that once edited are self-enforcing, not depending on others to discipline behavior. Its simple promulgation and publication are sufficient to produce the desired effects, imposing, immediately, provided that certain constitutional principles, duties and obligations are respected to the active and passive subjects of the tax obligation.

Normative production standards, in turn, are those that serve as parameters for taxing entities, limiting their competence to discipline tax matters. The taxing entity, in this case, for the exercise of the power to tax, must adapt its respective legislation to the rules established by the complementary law; that is, they depend on regulation.

There are, however, mixed cases in which the complementary law provides in its legal body both rules of conduct and normative production, to the extent that some devices are self-enforcing while others are not.

Within this context, CL 157/16 establishes legal parameters that must be observed by the Municipalities and the Federal District, in the regulation and collection of the TS, and should be complemented by legislation of each locality to become effective, in honor of the Principle of Legality inscribed in item I of Art. 150 of FC / 88.

It should be mentioned that it is not enough for the complementary law to exercise its role granted by FC / 88, but it is also essential to observe, as the best doctrine defends, the constitutional principles that result in the application of the Principle of Strict Tax Legality:

"The tax phenomenon, as a state activity, obeys the principle of legality, but not the simple general legality that governs all administrative acts and activities. It is subordinated to a specific legality, which, in fact, translates into the principle of reservation of law. This specific legality constitutes a constitutional guarantee of the taxpayer, in the form of a limitation of the power to tax that prohibits the Union, the States, the Federal District and the Municipalities from demanding or increasing taxes without law establishing it (article 150, I). This principle of strict tax legality is made up of two principles that complement each other: the reservation of law and the precedence of the tax law (article 150, I and III). (...)"

It is therefore verified the need of the taxing entities - active subjects of the tax in question - to approve within their respective territorial competences, a specific law that allows them to complete the legislative process, without which the collection of the tax, in our opinion, would not be valid.

In the specific case of the change produced in article 3 of CL 116/03, we share the understanding that the Municipalities should adapt to the rule imposed by the article in question, by specific municipal law to be approved, a presupposition adopted for the analysis of the issues in this work.

As a result, municipal legislative adjustments must provide that the TS is due at the place where the companies´ clients are domiciled, regarding the aforementioned services.

In compliance with this duty, the municipalities of Rio de Janeiro and São Paulo, which, in their areas of competence, published Laws 6,263 / 2017 and 16,757 / 2017, respectively, through which they adapted their legislation of regency to the changes resulting from CL 157/2016, and therefore, the municipal tax will have conditions of requirement from this year on (January and February, respectively).


For a fruitful opinion on the measures to be taken in the context of the uncertain scenario regarding the competence outlined in CL 157/2016, it is necessary to consider the external aspects of the discussion, namely the filing of constitutionality control measures with such scope, as well as Complementary Law Project 445/2017, which aims to reduce its deleterious effects in relation to the ancillary obligations arising from such innovation.

a) Constitutionality Control Measures: Direct Actions of Unconstitutionality ("DAUs") and Claim for Non-compliance with Basic Precept ("CNBP")

The discussion around the issue has gained contours that escape the controversy posed at the individual level of each of the legal entities affected by the changes imposed by CL 157/2016.

In fact, DAUs and CNBP were filed aiming to challenge the changes in tax jurisdiction for TS requirements. Despite the extinction of some of the constitutionality measures introduced, the following actions remain healthy:

DAU 5835: filed by the National Confederation of the Financial System ("CONSIF") and the National Confederation of General Insurance Companies, Private Pension and Life, Supplementary Health and Capitalization (CNSEG), on the grounds that the changes made by CL 157/2016, as regards to the competence to collect the TS, in addition to contravening constitutional provisions (conditio sine qua non), bring harmful effects not only to taxpayers, who may be charged by more than one municipality in the face of the same generating fact, as well as for the alleged active subjects of the obligation, who may not receive amounts due to them as a consequence of the judicialization of the matter.

The arguments of noncompliance with the constitutional distribution of tax competences stand out because the FC considered the provision of services - which in most cases does not occur at the domicile of the service taker - as the core of the TS archetype.

In the abovementioned DAU, the President of the Federal Supreme Court ("FSC"), Minister Carmen Lúcia, who, supported by the absence of urgency to justify the measure, rejected a request for a reconsideration filed by CONSIF and CNSEG, which had the purpose of reiterating the need for a preliminary injunction.

DAU 5862: filed by the Humanist Solidarity Party ("PHS"), based not only on the "displacement of competence" for the collection of the ISS, but also on violation of the principles of tax precedence and legal certainty by LC 157/2016 .

DAU 5862 was distributed for prevention to Minister Alexandre de Moraes, rapporteur of the other ADIs questioning the rule. In view of the relevance of the constitutional matter and its special significance for social order and legal certainty, the minister adopted in this case the rite of article 12 of Law 9.868 / 1999 (DAU Law), which allows for the trial of the case by the Plenary of the STF directly on merit, without prior review of the injunction. Information was requested from the National Congress and the President of the Republic, to be provided within ten days. He then ordered the referral of the case to the Attorney General's Office and the Prosecutor-General of the Republic, successively, within five days, to express their views on the matter.

CNBP 499: filed by the National Confederation of Health, Hospitals and Establishments and Services ("CNS"), based on violation of the principle of the taxpayer's collaborative capacity, tax feasibility, free initiative and reasonableness and proportionality in taxation, since its applicability will result in the multiplication of ancillary obligations to be fulfilled by the operators.

Therefore, considering that the result of the judgment of the DAUs or the CNBP has an effect against all and binding on the other organs of the Judiciary Power, the Federal, State and Municipal Public Administration, it can not be disregarded for purposes of determining the best strategy to be adopted by taxpayers who are subject to the regulatory impacts of CL 157/2016.

b) Draft Supplementary Law No. 445/2017

Still, with regard to the problematic issue regarding the costly ancillary obligations imposed by CL 157/2016, it is important to note that the Federal Senate approved on 12/12/2017, Complementary Law Project 445/2017 (LP CL 445/2017) , providing for the national standard to be adopted for collection of the TS, in relation to the services dealt with in sub-items 4.22, 4.23, 5.09, 10.04, 15.01 and 15.09 of the Services List attached to CL 116/2003, as amended by CL 157/2016.

Indeed, in the context in which each service provider is obliged to collect the TS from all municipalities where its consumers reside, the legislator has created an electronic system of unified standard for tax calculation, in order to simplify its collection on activities that, although developed at the service providers' headquarters, are intended for consumers throughout the national territory, such as health insurance, leasing, credit card administrators, consortium management, and the management of investment funds.

The scope of the new system to be developed is the centralized declaration by the TS taxpayers of the information about their operations, so that the system apprehends the tax due to each of the municipalities where its consumers reside, thus enabling payment through of a single electronic transfer (TED).

Going by the other procedural innovations proposed by the LP, we highlight the prohibition of the institution of any other ancillary obligation by the Municipalities and Federal District, including the requirement of registration in the municipal and district registers or licenses and permits for opening establishments. Such change, if approved, will meet the expectations of a large part of the taxpayers affected by the new rules of the ISS, who are now obliged to potentially comply with up to 5,570 different accessory obligations, corresponding to each of the existing Municipalities in the Federation, due to the change in tribute.


In view of the above context, we consider the adoption of the following strategies as pertinent:

  1. initiate decentralized collections following LCL 157/16, and: (a) identify the municipalities where the service providers reside, for (b) further analysis of their legislation to distinguish both those who already have conditions to demand the tax in 2018 (which are those that have already published their local laws in 2017), as well as possible differences of interpretation regarding the concept of service taker and resulting (c) collection for the Municipalities already eligible for taxation.
  2. starting from the same methodology of the previous hypothesis, identifying the municipalities in which the service providers reside, only those who concentrate the largest volume of the customer portfolio will be collected, and the rest will be provisioned until a definition is reached, either in relation to the DAUs / CNBP, or to CLP 445/2017 and the consequent beginning of operationalization of the centralized collection system.


In view of the uncertainty surrounding the question of the displacement of competence for collection of the ISS, the suggested judicial measures can be classified as preventive or repressive:

a) Preventive Judicial Measure for collection Based on the premise that CL 157/16 is unconstitutional, while it exceeded its function by changing the competence initially granted by FC / 88 for institution and ISS requirement on leasing services, as well as those provided by the credit and debit card administrators and the client funds and portfolios, moving it from the host city of the service provider to the municipality where its clients reside, it will be necessary to search by a judicial procedure aimed at preserving the competence originally granted by FC / 88 to the municipalities of the service providers.

In this case, the action must be proposed at the company's headquarters and would have in its passive pole both the municipality of its own headquarters and all other potentially legitimized to demand the TS.

Such action would entail the realization of judicial deposits of the tax reputed to be due by the taxpayer, which would have against the Municipalities demanded in the passive pole the effects of the suspension of the demandability of the tax credit, in the form of item II of art. 151 of the National Tax Code (Law No. 5,172 of October 26, 1966 - "CTN").

b) Judicial Measure Repressive to the collection: Given the scenario in which the Municipalities differ in their interpretations regarding the concept of "service taker", resulting in more than one municipality claiming for the same TS, it will be possible to:

a) file the assignment of payment of the tax involved in each operation, based on item III, article 164, of the CTN, in view of the requirement, by more than one legal entity of identical tax (TS) on the same generator event. In case, if the claim is deemed valid, the deposit will revert in favor of the Municipality declared a legitimate creditor, equivalent to the payment of the TS due.

b) pay for one of the Municipalities, elected as legitimate for collection - in this case, the municipal entity for which collection was already taking place, without any questioning arising - with the individual questioning of each tax assessment issued by the other municipalities, regarding the TS levied on the same operations.

c) question, through a Declaratory Action on the Existence of Legal-Tax Relation (in relation to the Municipality that is deemed to be the competent one), cumulated with a Declaration of Non-Existence of Legal-Tax Relation (in relation to all other Municipalities that set in their legislations provisions considering the TS due in the city where the service takers are domiciled).

Such action would be based on article 19, item I and article 46, paragraph 4, of the Code of Civil Procedure ("CPC"), which would result in the competence, to adjudicate the case, of the Public Finance Forum of the taxpayer's headquarters or the municipality where the services are being rendered.

As a way of centralizing the discussion and avoiding the proliferation of lawsuits, it is possible that, after the filing of the lawsuit, the President of the Court of Justice of the State of São Paulo ("TJ / SP") is requested to initiate an Incident ("IRDR"), under the terms of article 977, II, of the CPC, which, admitted, would justify the request, to STF, for the suspension of all claims that deal with the same issue, in accordance with article 982, paragraph 3 of the CPC, which suspension, if granted, would reach the entire national territory.

That is, with the filing of a single fact and two incidents on the matter, the processing of any other actions in the national territory, including tax foreclosures, would be obstructed and the resulting tax returns could only be finalized after a final and unappealable decision by the Supreme Court about the topic.

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.

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