Current Brazilian tax legislation regarding technology transfer and general cross-border service import is a shoddy composition of recent badly drafted statutes (filled with vague and undefined terms) and almost antediluvian statutes made for a different time. A time during which most of the means of delivery and services currently rendered were not even dreamed of.
Such legal framework, in league with a local tax authority whose ethos is seeing the taxpayer as an opponent, was pivotal in order to create the current tax environment which, because of a serious case of overlapping taxes (of which Brazilian Income tax merely plays a part), allow for a tax burden of over 40% of the price of the service.
In this sense, the case of cross-border technical services is an interesting one. Because of issues related to qualification under the Double Taxation Agreements Brazil has ratified during the years, it is important for Brazilian tax authorities to define all kinds of service as technical.
This motivation, accompanied by a lack of any legal framing by Congress, has prompted tax authorities to push forward their expansive “interpretation” of what should be considered technical services.
Under such interpretation, it is very complex to locate any service that would not be considered a technical one. Even on those services that were accepted (e.g. agency services) by the tax authorities to be general services, the rendered decisions usually fail to provide relevant markers that would allow taxpayers to extract legal reasoning behind the ruling and “test” their services against it. Hence, it is not uncommon to see rulings that determine that a given activity which very likely would not be considered technical services in any other circumstance to be so.
The analysis which the taxpayer must conduct in order to determine the correct taxation only increases if a software is somehow involved in the transaction. Was the software tailor-made to the Brazilian client? Was the software merely installed? Has the software undergone any customization whatsoever? How was the software delivered? Is the source-code available to the Brazilian client? These are just some of the questions (which sometimes may not have simple answers) that the Brazilian taxpayers must answer in order to determine the correct tax burden.
Suppose the taxpayer never “had” the software in the first place. Suppose the Brazilian taxpayer uses the software in a virtual environment of which access is granted through payment of a recurrent fee. This somewhat new business model known as cloud computing, as was to be expected, still eludes a clear treatment by the Brazilian tax legislation.
Moreover, Brazilian Courts have not given the matter enough attention and the few rulings rendered until now tend to be against the taxpayer and to overlook important aspects of cloud computing.
Cloud computing tends to be segregated in three more or less static groups: Infrastructure as a Service (IaaS); Platform as a Service (PaaS) and Software as a Service (SaaS). Each with its own particularities and built to address very different needs. It must be mentioned that, in this case, the term “service” tends to be misleading as these activities tend to refer to the “rent” of software that otherwise would have to be acquired.
Although the debate about the taxation of cloud computing in Brazil is still in its early stages, it should be stressed that the mere access to a virtual environment housed in a server in a different jurisdiction by itself should not be considered a service and by extension also not a technical service.
Determination of any transaction involving cloud computing should by default be considered a (technical) service simply because of a lacking legal environment and a fastidious tax authority. Attention must always be given to the actual aspects and particularities involving each transaction (be it IaaS, PaaS or SaaS) in order to correctly determine if a service was actually rendered to the Brazilian taxpayer or if it simply used available tools without intervention.
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Raphael de Campos Martins was an associate and partner at Pacheco Neto Sanden Teisseire Law Firm.