The law of taxation has always relied on concepts drawn from other branches of law. However, many such concepts are inappropriate in light of technological advancements and the advent of the Internet. For example, the concepts of 'merchandise', 'frontier' and 'taxpayer' are becoming so outdated as to make effective taxation practically impossible. Such difficulties are far from being resolved.

If a tangible product is purchased offline, value added tax on sales and services (ICMS) is levied when the merchandise leaves the vendor's establishment. Difficulties arise when an intangible product is purchased online. There is no physical delivery if a computer game is purchased and downloaded, so at what point is the ICMS taxable? When does the merchandise leave the vendor's establishment? What is the vendor's 'establishment'? Is it the website that is accessed for the purchase, or the provider that hosts the website?

Supplemental Law 87/1996 contains a definition of 'establishment' which may cover some websites. It determines that an 'establishment' is a private or public location where activities are carried out on a temporary or permanent basis, and where merchandise is stored. Thus, a computer from which the files of the computer game are downloaded by a purchaser could be characterized as an 'establishment'.

The drawbacks faced by both the public finance authorities and taxpayers do not end there. For example, if the purchaser, website and host provider are located in different places, which state is competent to charge the tax levied? A supplemental law is needed to address such conflicts of jurisdiction.

The concept of 'permanent establishment', which was established in the Model Convention of the Organization for Economic Cooperation and Development (OECD) to avoid double taxation, is also becoming outdated. The concept is problematic for the purposes of identifying the presence of a company in a foreign country and in justifying the taxation of its profits.

In order to avoid double taxation, the OECD considers the taxable event for the withholding of income tax at source to occur upon receipt of the monies by the place of residence. Again, difficulties may arise in determining the whereabouts of the beneficiaries of the services rendered through electronic transactions, particularly if they are located in tax havens. It seems more appropriate for the withholding of tax to take place at the payment source.

Given the increase in online commercial transactions, the identification and adaptation of the 'establishment' concept is of great importance, both in international operations for the purposes of income tax and double taxation agreements, and at the domestic level, for the purposes of ICMS.

For further information on this topic please contact Ricardo Barretto or Carolina Ragazzi de Aguirre at Barretto Ferreira, Kujawski, Brancher e Gonçalves – Sociedade de Advogados by telephone (+55 11 3066 5999) or by fax (+55 11 3167 4735) or by email ([email protected] or [email protected]).