Despite reforms at a national level aiming to correct structural distortions in Brazil’s Service Tax (ISS), it remains complex even for experienced local entrepreneurs.
Brazil’s complex tax environment is confusing not only for foreign companies looking to invest in the country, but even for the most experienced Brazilian entrepreneurs.
Service Tax (ISS)
In the context of the Brazilian service tax (Imposto sobre Serviços or ISS) it’s not unusual to observe challenges like competition between tax collecting entities, rules that are in disagreement with the national tax structure and a definition of services that require caution and attention from whoever is interpreting them.
Although Constitutional Amendment No. 29/2000 established minimum and maximum tax rates to mitigate the effects of the so-called Tax War (Guerra Fiscal, in Portuguese), certain municipalities use other deceptions to ensure benefits to potential investors.
Through Complementary Law No. 116/2003, national ISS law was established with the purpose of standardizing the tax, improving its range and placating controversies of the previous rule. However tax managers continue to face the same challenges.
- municipalities granting unilateral tax benefits in order to attract investments
- disputes over the concept of results of export services
- inaccurate service definitions, creating ambiguous interpretations for certain types of services
- sudden changes to the tax bookkeeping system
- the creation of various registries by certain municipalities
- difficulties in the delivery of accessory obligations, the issuance of payment slips among others.
Due to gaps in the structural plan and the plurality of Municipal Administrators (approximately 5,500) the ISS – instead of smoothing operational difficulties - has proved to be a challenging tax for companies and tax managers both in theory and in practice.
Is there a solution for companies?
The ISS has been used as a bargaining tool in the search for investments and tax collection, and we are still waiting for a tax solution that puts Brazilian municipalities on an equal footing.
Many municipalities offer rate deductions and calculations to attract companies; however, it is important to pay attention to the pros and cons beyond these tax incentives.
One should take into account that Brazil is a large country and consequently, cities and states have different characteristics that may negatively impact or benefit business.
Within the complex Brazilian accounting and tax scenario, several other laws and variables must be taken into account when choosing the location to headquarter your company, whether you are thinking of expanding or establishing in Brazil for the first time.