The São Paulo Municipal tax authorities recently released two Normative Opinions which are adding a lot of controversy to the tax arena and may affect several service providers located in the city.
Normative Opinion No. 1, issued in March, states that the placement of advertisement – including dissemination, provision and insertion of advertising and publicity in radio and TV broadcasting, websites, Internet pages or electronic addresses on the Internet, and outdoor billboards - should be classified in item 17.06 of the list of services provided by the Municipal Law No. 13.701/2003 (and by Complementary Law No. 116/03). This specific item of the Service List provides for taxation on advertising services, including sales promotion, campaign planning or advertising systems, creation of illustration, texts and other materials. In other words, the municipal tax authorities concluded that the placement of advertisement is a type of advertising service. Furthermore, the Normative Opinion provides that all private rulings issued in the past contrary to the Normative Opinion provisions should be deemed overruled.
In practice, this means that, as of the publishing of the Normative Opinion, companies that run the business of placement of advertisement will be subject to ISS taxation, according to the position adopted by the municipal tax authorities. This also affects taxpayers who have obtained favorable private rulings in the past acknowledging that no ISS was due on placement of advertisement, who will now be subject to the provisions of the Normative Opinion and, thus, shall collect the ISS. The tax authorities will likely apply this interpretation with retroactive effects, which means they could go back five years to charge the tax on the services rendered during this period.
Notwithstanding the position of the tax authorities, there are arguments to support that the relevant activities are not subject to ISS taxation, as Complementary Law No. 116/03 - the national law currently in force that regulates the ISS - does not list them as services subject to the ISS. In fact, the specific item which provided for the ISS taxation on 'display of advertising' was vetoed by the Brazilian President. Other argument in favor of the non taxation is that the mere display of advertising is not indeed a service, as it does not imply ‘doing something in favor of the client’ – which is the legal concept adopted by Brazilian Courts with respect to the qualification of a given activity as a service.
In any case, given the position of the tax authorities and the likelihood of being assessed, service providers who may be affected by this Normative Opinion may decide to anticipate the discussion and file a preventive measure (writ of mandamus) to avoid a tax challenge, or else wait for the tax assessment and eventually start a litigation procedure. We understand there are sound arguments to defend that the activity had a specific item in the Service List which has been vetoed, meaning that, unless there is a change in legislation, there would be no grounds to reclassify it under other service code to charge the tax.
The São Paulo authorities also issued Normative Opinion No. 02/2016, defining what should be viewed as "result" for the purposes of the ISS tax levy on the export of services.
This is also a very controversial discussion. According to Complementary Law No. 116/03, exports of services abroad are not subject to the ISS. Notwithstanding the above, the relevant law clarifies that services developed in Brazil, whose results occur within the country, do not qualify as service exports, regardless of whether the payment is made by a non-resident company. In other words, the key element for characterizing an exportation of service is verification on where the results take place.
The concept of result has long been debated among tax practitioners. The majority of the doctrine is in favor of the interpretation that ‘result’ should be the actual enjoyment of the services, no matter where it has been developed. On the contrary, the Brazilian Superior Court of Appeals (Superior Tribunal de Justiça – STJ), while ruling on a specific appeal (REsp # 831124), decided that that expression ‘result’ should be interpreted as the ‘conclusion’ of the service. More recently, Brazilian lower courts started to adopt a different interpretation, stating that the result of the service should be the effective application or utilization of the services, taking a more economic approach to this concept.
The São Paulo Tax authorities have now clearly stated their understanding that "result" should be viewed as the development of the service itself, "being irrelevant the fact that any benefits or consequences connected to such activities are enjoyed or verified abroad or by a non- resident abroad." Thus, for the São Paulo authorities, the result occurs in Brazil provided that the service is rendered in the country. As occurs in the Normative Opinion previously mentioned, it is expected that the tax authorities will apply this interpretation with retroactive effects and may challenge taxpayers for the services rendered in the past five years.
In our view, even though case law is not settled yet, the most reasonable approach is to take into consideration the place of enjoyment of the services. If the execution/performance of the services were the key element, then the exportation of services would occur in very few cases, i.e. only when the service is executed abroad, in which case (i) the exemption rule would have very limited reach and (ii) the situation, in fact, would not even be an ‘exportation’, as the service would be completely executed in another country.
As mentioned, service providers should be aware of the Normative Opinions above mentioned as they will be adopted by the tax authorities in São Paulo, likely with retroactive effects.