New understanding of the municipality of São Paulo regarding the tax on services and its export

November / 2016

Complementary Law No.116/2003 established in its Article 2, the tax on services exception for service exports, stating that “services developed in Brazil, whose result is verified, even if payment is made by a resident abroad”. Thus, in order to know if the provision of service rendering abroad is exempt from the ISS, must be identified where the “result of the service” has been verified.

In order to provide criteria for such identification, the Municipality of São Paulo, on 04/26/2016, issued the Legal Opinion No. 02/2016, establishing the following: “Is considered as ‘result’, (...) the accomplishment of the activity described in the list of services (...), being irrelevant that any benefits or consequences arising from this activity are enjoyed or verified abroad or by residents abroad”.

However, since its publication this Legal Opinion had been the subject of numerous criticisms, because there would only have the export of service and its consequent exemption from the tax when this service was developed (materially realized) and completed abroad.

For example, the elaboration in Brazil of an engineering project to be delivered to legal entities domiciled abroad would not constitute service exports, therefore this operation would be subject to the tax on service. In this case, there would only be the export and the consequent exemption from the tax on service if the project were drawn up abroad.

There were so many critics that the Municipality of São Paulo drew back, publishing on 11.9.2016 a new Legal Opinion to repeal that mentioned above, bringing the following criteria: “The service rendered by an establishment located in São Paulo shall be deemed to be exported when the person, the material/immaterial element or economic interest on which the service falls is located abroad.”

According to this new understanding, the criterion no longer depends on the performance of the service itself, and goes to the economic utility provided by the provision of services and the benefit obtained by the principal. Applying the reasoning to the previous example, the elaboration of an engineering project in Brazil to be delivered to a legal entity domiciled abroad would be considered an export and, consequently, would be exempt from the tax on services.

However, the new Legal Opinion still deserves criticism for addressing in its sections of art. 2th, situations in which there will be no exports of services and, therefore, will be taxed. This is the case of “Research and development services of any nature”, when the researched base is located in the national territory, and also of the “Computer and related services”, if the system, computer program, database or equipment is linked to a person located in Brazil.

It should be emphasized that in these cases, the chosen criterion (“research database is in national territory” and “computer program, database or equipment linked to a person located in Brazil”) Does not correspond to the possibility of economic interest abroad and, thus, the service is considered to be “exported”.

Take as an example the case of a company abroad that intends to install a subsidiary in Brazil and hires research services of the Brazilian market niche to be carried out by a Brazilian company in order to verify the economic viability of the operation. In this case, would it be possible to sustain that there would be an export of service and consequent exemption from the tax on service? In our view, yes, since the usefulness of the service, which is to provide the feasibility analysis of the operation, is being enjoyed abroad.

On the other hand, following the criterion of the Legal Opinion, there would be no export, because the research database (Brazilian market) is in national territory. Despite these imperfections, which can be discussed in the judicial sphere, the Legal Opinion has its merit in providing legal certainty to the taxpayer, Since it attributes predictability to the inspection and collection criteria used by the Municipality of São Paulo.