People purchasing software via credit card also pay withholding tax

A reader asked me interesting questions about the taxation of software licenses sold to Brazilian individuals (end customers). 

He linked me to this article about problems foreign companies face to invoice Brazilian customers. 

Selling through a subscription model in Brazil. 

The article is very good in laying down a practical business perspective of the problem. 

His questions to me was: "is there realy a withholding tax when you send a normal invoice or get a payment via credit card, made by an individual"?

Apparently, his accountants thought it was very odd that a country would limit its online sales in such way. 

Here is my answer: 

The withholding income tax works the same for companies and individuals, for the greater part. 

In short, withholding tax is due even when payments are made via credit card. However, there is little government oversight so most customers just don't bother to pay it. 

But, if you start selling to hundreds or thousands of customers in Brazil, the local bank, credit card company or payment gateway will probably start asking questions and will try to make you responsible for collectint the income tax. 

Also, you won't be able to sell to corporate clients in Brazil, who simply cannot dodge the taxation. 

The usual solutions are: 

a) sale of a master license to your distributor in Brazil, who will then resell it;

b) incorporate in Brazil"
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You may find more information about this topic in this post:

0% withholding tax on services - if you are from the right country

BRAZILIAN TAXATION OF IMPORTED SOFTWARE - SERVICES --SAAS

  

Since so many readers have asked, I`m presenting a very simplified tax tables for importation of software into Brazil. 

Please do not  take this as a final answers to your questions. This is just the very basics. A lot more of data is needed before you can make a decision. For example: should you incorporate in Brazil and sell through a subsdiary? Should you invoice services separately? 

Also, some convetions to avoid double taxation may apply, with the effect of reducing or cancelling the withholding tax. 

So, take this with a grain of salt and look for specialized advice before issuing any invoices. 

1.            SOFTWARE LICENSES

IRRF – WITHHOLDING TAX

15%*

*25% for tax havens.

Some cities may also charge the service tax:

ISSQN

2%*

NOTE: Some states, including São Paulo, are trying to charge additional 18% of ICMS (state VAT) tax over licensing of software, whenever the software is considered “off the shelf” software. 

Special measures should be taken to ensure that the state will not apply this additional tax.

2.             TECHNICAL SERVICES AND CONSULTANCY

IRRF	15%*
CIDE	10%
PIS/Importação	1,65%
Cofins/Importação	7,6%
ISSQN	2%-5%

  *25% for tax havens.

VoIP services exempt from VAT and service tax - one more chapter in Brazilian software taxation

Valor, a Brazilian newspaper, has published that two provisional decisions by judges in São Paulo have exempted provider of Voice over IP services (skype, etc.) from state VAT and Municipal City Tax.

Portuguese link here. 

Software taxation in Brazil still does not have clear boundaries (check, for example, this article). Many things are uncertain, either due to lack of codified legislation or due to lack of jurisprudence.

I will monitor this lawsuit. Let's see how the court of appeal rules on this. Could be good news. 

Selling engineering services in Brazil

Please also read:

Reduction in the Brazilian taxation of imported services - if you are from the right country

I have been talking to a lot of engineering companies lately.

Most of them want to know two things:

How much in taxes will the Brazilian clients pay when they import my engineering services?

And

Why so much? Is Brazil crazy? Don't you know you need engineers desperately?


The reaction is understandable. After all the due calculations, a Brazilian client may pay 50% in taxes, over the original cost of the service. (For a breakdown of this, please read my article on "taxes over software importation in Brazil". Taxation over software and services is very similar)

Usual solutions to this problem are the incorporation of a Brazilian subsidiary, the creation of a JV between the engineering company and the buyer in Brazil or some kind of technology transference agreement that will allow part of the service to be performed in Brazil. The use of non double taxation agreements complements all the above.

Each of those partial solutions also brings new questions.

For instance,  Brazilian law is not clear on the issue of services invoiced from a subsidiary in Brazil directly to the Brazilian customer,  but partially performed by the controlling company of that subsidiary (for example, a team of game developers in Moldova that has a sales team in Brazil). Should transfer pricing rules apply in this case?

Also, JV agreements do not fully solve the problem.  How much investment should be registered for the foreign party that brings 100k in cash, but allow access to cutting edge software?

On top of that, it must be stressed that the Brazilian revenue service has an internal directive that comands its agents to disregard NDT agreements. If you want to see the law being applied, you must file a lawsuit (some french oil drillers that provided services to Petrobras have Recently won a case).

The use of offshore companies to channel payments has been common. But recent changes on regulation of offshore subsidiaries brought uncertainty to this method.

At the end of the day, each of my clients chooses a different mix of solutions, trying to balance tax economy and safety.

What do you do when you face this problem?

How can foreign companies fight unfair public biddings in Brazil

Here follows an email forwarded to a client that was having problems with competitiveness in Brazilian public biddings, in which we suggested some measures to resolve it.

Dear Patrick "Eel" O'Brian,

We have evaluated several document, emails and news reports regarding the current and planned public biddings to be performed in Minas Gerais state, regarding the purchase of software.

The most important issues have proved to be the unfair competition in the public bidding, due to a pre determined technology being explicitly or implicitly favored in the public call for offers;

We have been asked about legal alternatives for forcing Minas Gerais government and public companies to provide a more competitive selection of suppliers.

In response to that, we shall make a number of considerations.

a)   Brazilian constitution and federal laws explicitly reject unfair public biddings.

b)   The existence of pre determined bids (licitações dirigidas) is well known in Brazil. There is massive jurisprudence that condemns such practice.

c)   The most usual legal action against unfair bidding procedures is the “mandado de segurança”, an emergency injunction that can be filed whenever a public officer or public agent is engaged in illegal activities, provided that the illegality is clear to see and not dependent on the production of evidence. For example: formal or procedural mistakes, lack of publicity, lack of competence, clear violation of the due process of law.  A mandado de segurança can be used before, during or immediately after a public bidding takes place. It usually cannot be used after the conclusion of the agreement between the public agent and the winning company. In this last case, an ordinary procedure shall be filed.

d)   In this specific case, we believe that the use of Mandado de Segurança is justified. We must survey the current status of the contract before advising if it is still possible to file it against all the public biddings relevant to the case, or only against the ones not yet completed.

e)    The Mandado de Segurança may be filed by any person. This includes ordinary citizens, associations, companies and, of course, public agents (attorneys at law, etc.). It is not common for foreign companies to file a Mandado de Segurança. But there is no prohibition to that.

We hope these considerations help you in advancing your resolutions.

Who owns the 2016 Olympics in Brazil

See also:

Intellectual property and 'fair use' under Brazilian Law

Singapore and Brazil sign MOU on intellectual property cooperation 

Recently, I have worked on a case involving the Brazilian Olympic Committee and the protection of trademarks related to the Brazilian 2016 Olympics.

One of my clients, a software company, has received a notification from a law firm connected to the Olympic Committee. The notification required him to stop using the  words "Olympics 2016" in one of the apps he was distributing for free. 

It is important to mention that my client at no time suggested in his product that he was a representative of the Olympic Committee. His product also lacked commercial purposes, having purely informational purposes for the general public.

Nevertheless, he received the notification. Why did this happen? 

This is mainly due to the so-called Olympic Act (Brazilian Law No. 12035, from 2009), which determines an extremely rigid monopoly over the protection of Brazilian Olympic names and brands.

This law, which is much more rigid than any other Brazilian laws relating to intellectual property, does not recognize the so-called "innocent use" or "fair use" (on this subject, please, read this other post “Intellectual property and 'fair use' under Brazilian Law”).

The law gives the same treatment for both commercial and non-commercial use of Olympics related symbols. 

This can lead to nonsense situations, where initiatives aimed at informing the public about the Olympics end up being considered as unlawful acts,  simply because of the use of the words "Olympics 2016".

I have heard similar stories regarding the 2014 World Cup. 

Any comments?

See also:

Intellectual property and 'fair use' under Brazilian Law

Singapore and Brazil sign MOU on intellectual property cooperation 

Electronic payments in Brazil - A telecom business, more than a bank one

Brazil  has just published a provisional measure (which has the force of a  bill) that regulates electronic payments in the country (link to the Portuguese text).

Brazilians already make heavy use of credit and debit cards. So, this is not the news.

What is new is that the new rules put electronic payment providers under the control supervision of the Brazilian Central Bank. Think of pay pal, bitcoin, small credit card companies, etc.

The credit card giants, such as Visa and Master Card, will also be subject to a higher degree of supervision. It is like they were integrated to the Brazilian bank system.

This has some benefits, such as a higher level of security, as well as disadvantages, such as more bureaucracy and elevation of costs.

The rules are very broad, and will depend heavily of further regulations to be issued by Brazilian Central Bank.

A central point, that many people might have overseen, is that electronic payment by cell phone have been clearly described as a joint responsibility of the Brazilian Central Bank and the Brazilian Telecom Agency (Anatel).

So, I will probably be posting about a joint rule to be issued by Anatel and the Central Bank very soon.

A curious fact: I have been receiving calls from providers of electronic payments software since last year. Probably, the telecom operators already knew about the new rules and started asking for proposals abroad.

They were well informed! The rules are finally here.

If you also want to sell your payment software in Brazil, I'd recommend you to read about taxation of software in Brazil.

What do you think about it?

Brazilian (and Chinese) Business Law Trends for 2013.

This post, as many others, has been inspired by Dan Harris' China Law Blog.  The link to the original post is also at the bottom.

Interestingly, some China trends he mentioned are the opposite of the Brazilian legal trends on the same subjects. It invites comparison:

1. China will step up even further its crackdown on foreigners in China violating its visa/immigration laws. 

1. Brazil is set to make immigration easier, specially for specialized workers. Legal changes are expected to take place in March, 2013.

2. China will increase its efforts to root out and shut down illegal and unregistered foreign businesses. 

2. Brazil is not seeing any special movement on this area.

3. China will increase its tax collection efforts.

3. Brazil is already super effective in tax collection. What we are about to see, though, is an increase in the control and taxation of international service and software sales. The Brazilian Revenue Service has just put the "Siscoserv" in place. This system controls every international service transaction in the country. Personally, I see it as a harbinger of tax increase. After all, the government does not have much left to tax.

4. China: Litigation is increasing.

4. Brazil: Arbitration is increasing. The Brazilian courts are broken, and everybody knows that. Arbitration is the only safe harbor for international investors. 

Other trends that were not mentioned for China, but are relevant for Brazil:

5. Infrastructure regulation will remain uncertain, as the government sorts out how to fix the legal mess it made in 2012.

6. Regulatory compliance for consumer goods (toys, medicines, electronics) will soar. 
  As more and more imported products flow to the Brazilian economy, the pressure from the Brazilian industries will generate more and more non-tariff barriers to imports. It has just begun. 

What do you think?

China's Business Law Trends for 2013. Booorrring. | China Law Blog

Proud about tax planning: Google and me

Google's boss has just said that he is proud of Google's tax avoidance strategy (see below)

I'm also proud of Google's strategy to dodge taxes. That is what I do for a living and I must say that Google's lawyers have created a beautiful work of art when doing the company's tax planning. It is all there: offshore companies, subsidiaries, Dutch sandwich, money centers, tax havens. Bravo!

But Google must take UK and America's threats of taxing them seriously. They may look at Brazil and find out that the Brazilian government has seriously limited the use of offshore companies and tax havens by automatically taxing any gains from foreign subsidiaries the moment they are put on the books, and not when they are transferred to the controlling company (this last option would be the most usual in the civilized world).

Vale, the mining company, is waiting for a judgment on the legality of the Brazilian awkward (by awkward I mean unjust and crazy) tax regime. Some 15 billion US dollars are being claimed by the government. (By the way, check the development of a similar case here)

In order to avoid this kind of taxation, Brazilian companies are now making heavy use of the few Non double taxation agreements that Brazil has signed. Austria is a personal favorite, but the Netherlands are very popular.

Google, don't let the government be evil! Dodge the dogs and lions.

By the way, if you are a Brazilian individual with more than 40k USD on a bank, I'd recommend you to move your money abroad. Brazilian government has too much control over it, and the online system for money seizure is a real letdown for any businessman.

NOTE: For the pro government intervention readers (which should be none), here is the opposite view: http://treasureislands.org/google-boss-eric-schmidt-takes-a-dim-view-of-capitalism/.

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Google boss: I'm very proud of our tax avoidance scheme

Google's Chairman Eric Schmidt said £2.5 billion tax avoidance 'is called capitalism'

From:http://www.independent.co.uk/news/uk/home-news/google-boss-im-very-proud-of-our-tax-avoidance-scheme-8411974.html

The head of the internet giant Google has defiantly defended his company’s tax avoidance strategy claiming he was “proud” of the steps it had taken to cut its tax bill which were just “capitalism”.

In an interview in New York Eric Schmidt, Google’s Chairman, confirmed the company had no intention of paying more to the UK exchequer. Documents filed last month show that Google generated around £2.5 billion in UK sales last year but paid just £6m in corporation tax.

The Californian based search giant has also been revealed to have sheltered nearly $10bn of its revenues in Bermuda allowing it to avoid some $2bn in worldwide income taxes in 2011.

But Mr Schmidt said such schemes were legitimate and the company paid taxes “in the legally prescribed ways”.

“I am very proud of the structure that we set up. We did it based on the incentives that the governments offered us to operate,” he said.

The Silicon Valley boss went on to suggest that Google would not turn down the opportunity to draw on the big savings allowed under the law in the countries it operates in: “It’s called capitalism. We are proudly capitalistic. I’m not confused about this.”

He also ruled out following Starbucks in voluntarily handing more money over to the UK Government.

“There are lots of benefits to [being in Britain],” he said.

“It's very good for us, but to go back to shareholders and say, 'We looked at 200 countries but felt sorry for those British people so we want to [pay them more]', there is probably some law against doing that.”

Mr Schmidt’s defiant stance is unlikely to find favour on either side of the Atlantic with both the American and European Governments searching to find ways of forcing “stateless” internet companies such as Google to pay more tax.

The issue will be raised by George Osborne when Britain takes over the chairmanship of the G8 and will also be investigated by the Organisation for Economic Co-operation and Development (OECD).

Last week the Chancellor said he was committed to “leading the international effort” to prevent international companies transferring profits away from major economies, including Britain, to tax havens.

“We will put more resources into ensuring multi-national companies pay their proper share of taxes,” he said. “With Germany and now France, we have asked the OECD to take this work forward and we will make it an important priority of our G8 Presidency next year.”

Tonight Margaret Hodge, chairman of the powerful House of Commons Public Accounts Committee, which recently cross examined Google UK on its tax affairs said Mr Schmidt should be ashamed rather than proud of his company’s tax bill

“For Eric Schmidt to say that he is ‘proud’ of his company’s approach to paying tax is arrogant, out of touch and an insult to his customers here in the UK,” she said.

“Ordinary people who pay their taxes unquestioningly are sick and tired of seeing hugely profitable global companies like Google use every trick in the book to get out of contributing their fair share.

Google should recognise its obligations to countries like the UK from which it derives such huge benefits, and pay proper corporation tax on the profits it makes from economic activity here. It should be ashamed, not proud, to do anything less.
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