Co-written by Marcos Vinícius Passarelli Prado

  1. Introduction

Technological development has promoted countless changes in the several fields of human performance. Such changes are seen since the dawn of civilization, such as the Industrial Revolution, up to the present time with the novel Internet. Of all the fields where changes are seen and felt, Law is the one deserving special mention. Actually, the entire range of social relations (employee/employer, national and international trade, services provision, tax collection etc.) is subject to Law.

The Brazilian State must adjust to this new scenario and this is now seen in various of its administrative actions, such as the electronic transmission of official communications of the State: the Official Gazettes.

Within this context, it is important to have a look at the unquestionable effects of the latest changes caused by the coming and expansion of the Internet on the Law, specially the Tax Law.

Access to the Internet enables users to perform several operations, such as "virtual navigation"; electronic mail and chat rooms access; purchase and sale of goods; service provision; researches and an endless number of other operations that human creativity, couple with the technology, may accomplish.

In view of this dynamic universe of potential user operations, it is in the interest of the Brazilian State to exercise its legislative authority, ruling such relation and keeping them under to Law. Surely, according to users’ point-of-view, the effective need of such a legislative exercise could be questioned.

Issues related to the operations carried out on the Internet and its tax implications are already covered by the Tax Law, especially those regarding provision of services and purchase and sale of goods, which express economic content.

The authority to levy these operations must be indicated starting with a constitutional analysis. Thus, the legislative authority that is vested by the Federal Constitution in the Federal Union, States, Federal District and Municipalities (Brazilian public entities), through the Law, is what allows the design, implementation and collection of possible taxes.

It is important to point out that each one of these public entities has an exclusive tax authority (design, implement and collect). Therefore, according to the Federal Constitution, some of the services rendered via the Internet will be solely taxed by the Municipalities, while others, such as telecommunication services or purchase and sale of goods, will be taxed solely by States.

Furthermore, since the worldwide net of computers has become just another means for its users, it is possible to see that certain operations carried out via the Internet would have the same taxation as if they were not so carried out via the Internet.

This new scenario created by the Internet and its relationship with the Brazilian Tax Law is the topic of this article.

  1. E-commerce

The commercial operations performed on the Internet involving tangible goods (for instance, acquisition of compact discs or even of automobiles), is regularly taxable by States upon the application of the Sales Tax (Imposto sobre Circulação de Mercadoria e Servicos – "ICMS").

In this context, it is important to highlight the following aspects: (i) States are constitutionally authorized to tax operations involving circulation (purchase and sale) of goods (art. 155, II, Brazilian Federal Constitution), (ii) Complementary Law number 87/96 lays down the rules by which all States must abide, and (iii) each State has approved the respective Law authorizing the collection of ICMS within their respective territories. Consequently, there is no doubt about the possibility of taxing commercial operations carried out via the Internet, which legal requirements have already been set forth in each State’s legal systems.

As far as operations involving purchase and sale of tangible goods via the Internet are concerned, some administrative procedures might still need a specific legal tuning, such as duties accomplishable by taxpayers to ensure formal completion of business operation concerned.

Obviously, States may or may not exercise their tax authority and other than tax factors may lead the States to postpone the ICMS collection over such operations, i.e., as an incentive for the development of an economic sector (and said temporary "non-exercise" of legislative authority does not affect in any way the future tax collection).

Taxation of the operations carried out via the Internet should also be considered in view of the acquisition of non-tangible goods, such as acquisitions of software by means of download.

In relation to this specifically, there is divergent opinions as to the nature of software in the Brazilian legal system: should it be regarded as merchandise, being consequently subject to ICMS collection, or should its use be regarded as provision of data processing and programming services (which would allow the collection of Service Tax – "ISS" – by Municipalities).

According to the Brazilian Supreme Federal Court, States have adequate authority to levy ICMS on the download by users of software available on the net and the economic nature evidences the commercial feature in its (software) circulation. And the fact that the software acquired via the Internet has no physical character does not interfere with this feature (and, consequently, taxation by the ICMS), since it is available to an uncertain number of users.

However, States legislation requires a physical character to define the ICMS tax basis and non-existence of such a support renders the ICMS collection impossible. We believe no ICMS is collectable on the downloads of software until situation is duly ruled by specific Law.

We conclude that, while States should tax non-tangible goods acquisitions via the Internet by means of the ICMS, non-existence of specific legal provisions to that matter renders any taxation impossible.

  1. Internet Service Providers

Once again we have come across a gray area that involves the identification of the competent public entity for the taxation of certain services rendered whitin the ambit of the World net of computers by some companies denominated as Internet Service Providers ("ISP").

An ISP is usually the owner and operator (a company) of a big computer that functions as a server connected to several telephone lines and modems that in turn are directly connected to the Internet. Access thereto is sold to subscribers so that they can individually have access the Internet from their home or office computers. In other words, using the existing telecommunication networks, an ISP offers its subscribers (users) access to the Internet.

Considering that most of the ISP’s in Brazil charges their users monthly for the access to the Internet public entities have interest in taxing such services. However, the first important thing is to identify the public entity with authority to tax.

Therefore, it is critical to determine the nature of services provided by ISPs: in case of communication service, it is taxable by the ICMS and tax authority is the States’ (article 155, II, of the Brazilian Federal Constitution); otherwise, it is service taxable by the Municipalities (article 156, III, of the Brazilian Federal Constitution) by ISS, tax levied on services.

The analysis of these apparently conflicting tax matters (we used "apparently" because any existing conflicts would be inconceivable by reason of the expressed limits of each public entity's authority, according to the Federal Constitution) includes mandatorily the assessment of legal provisions in the Brazilian legal system.

According to article 60 of the Brazilian "General Telecommunications Law" (Law number 9.472/97), the definition of "telecommunication services" is as follows: "a set of activities that render telecommunications supply feasible, including the transmission, emission or reception, by wire, radio-electricity, optical media or any other electromagnetic process, of symbols, characters, signal, texts, sounds or information of any kind".

On the other hand, article 61 of same Law defines other kinds of services that are simply related to but should not be taken as telecommunication services: the "Value-added Services". According to said article, "Value-added Services" is defined as follows: "the activity adding on new utilities related to the access to, storage, display, handling or retrieval of information to a telecommunications service supporting said value-added service and with which does not blend".

As mentioned above, the provision of telecommunication services is required if one wants to access the Internet and this prior connection (through telephone lines, optical media, satellites, etc.) will be the basis of any and all communication that may occur.

However, services rendered by ISPs do not blend with telecommunication services rather consist of a plus to the latter, adding on new usage. Therefore, according to article 61 of the "General Telecommunications Law", it is clearly a "Value-added Service", out of the scope of States and, consequently, taxation by the ICMS.

Once identified the juridical nature of service rendered by ISP, the possible conclusion is that taxation is under the Municipal authority, according to the article 156, III, of the Brazilian Federal Constitution.

Except for the interstate and intermunicipal transportation and communication services, all other services named "services of any kind", are within the scope of Municipalities’ tax authority.

However, according to the Brazilian legal system, said authority can only be exercised upon the previous issue of a Complementary Law by the Federal Union to define such services. And this law has already been approved: Decree-Law number 406/68, and subsequently amended by Complementary Law number 56/87.

In this regard, current understanding of the Supreme Court and the Higher Court of Appeals is that the services as listed under said Federal Law alone (Decree-Law no. 406/68) can be taxed by Municipalities by the Service Tax (Imposto sobre Serviços de Qualquer Natureza – "ISS").

Despite such an understanding, we believe that to condition the Municipal districts tax competence on the prior issuance of a Complementary Law for the Federal Union would violate the Federal Constitution.

Anyway, based on this or Superior Courts’ understanding, we are strongly convinced that the existence of a Federal or Municipal Law is required to render taxation of services rendered by ISPs legal. And, at this present moment, such a law does not exist.

Consequently, without the due legal authorization, some Municipalities are constantly using the analogy to enlarge the ISS taxable events to include among them the services rendered by ISPs. It is a clear violation of the Federal Constitution and its principle of strict legality in tax matters (no one shall be forced to collect tax that has not been provided for by Law). In the Municipality of São Paulo, for instance, tax authorities have been regarding such services as data processing.

This issue is already under analysis of the Judiciary Power: a sentence, rendered in August, 2000, suspends the ISS supposedly payable by a major IPS in the Municipality of São Paulo.

According to the judge of said case "there is no room for discussion that should there be any economic capacity, profit, and income, taxation will exist, to finance the State activities since it is the same entity that promotes the conditions for development of economic and social life" however "it is just as correct to say that the Brazilian tax system is organized in such a manner that for a tax to be collected, a specific law must be in place."

Claudio de Abreu is a partner of, and Marcos Vinícius Passarelli Prado is an associate lawyer at Amaro, Stuber e Advogados Associados

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.