The Brazilian Supreme Court will examine, under the binding precedent regime ("general repercussion"), the constitutionality of applying the withholding mechanism to collect the Municipal Tax on Services (ISS) in relation to services rendered by a taxpayer in a different city from its headquarters.

The case was brought by the Data Processing Companies Union (SEPROSP) in a lawsuit challenging the decision issued by the São Paulo Court of Appeals that obliged companies without establishments in the city of São Paulo to be registered as taxpayer in the Municipal Tax Administration Office of São Paulo. This rule was created by the São Paulo authorities to discourage companies from moving to other cities in order to benefit from a lower ISS rate and create virtual establishments with no substance.

In the Supreme Court, SEPROSP contends that the withholding of the ISS tax by the service recipient results in double taxation, given that the ISS over services rendered is already paid in favor of the municipality in which the establishment is effective located. It also points out the municipal lack of tax legitimacy to make the service recipients —whose providers are outside their territory—as ad hoc tax agents, given that the imposition of such an obligation could only be implemented through federal complementary law. The Union thus alleges a violation of Article 30, item I, Article 146 and Article 152 of the Federal Constitution, as well as the principle of territoriality.

The Supreme Court decision, even though focused on this specific rule of Law 14.042/2005, may guide similar discussions related to withholding rules created by other cities.