*By Dr. Manuel dos Santos
The paradox is amazing revealed among the advances that the Federal Revenue Service of Brazil (RFB) has achieved in the use of information technology in its activities in recent decades, as opposed to the setbacks and legal uncertainty that this same body generates when it proposes to interpret the legislation that establishes the taxation of goods and services in the area of information technology.
Many experienced the era in which income tax returns were submitted on printed forms and filed in huge queues that formed at bank branches, or when requests for federal tax compensation were carried out through physical processes that took years to be analyzed .
Currently, however, virtually “everything is digital” in the relationship with the Federal Revenue Service: bookkeeping, tax bookkeeping, compliance with ancillary obligations (RAIS, DIRF and DCTF), issuing guides and paying taxes, and even obtaining clearance certificates. These are some examples of the digitization of RFB processes which, as a user of information technology services, is an example for the country and has gained worldwide recognition for its pioneering spirit.
On the other hand, when the RFB returns to interpreting the taxation of goods and services in the information technology area, the body collects a multitude of “shaves” inconceivable, distancing itself to such an extent from reality that it raises the question as to whether it is a policy tendentiously directed in order to increase collection, via a fanciful interpretation of the tax regulations applicable to the sector.
Attempt to legislate and disfigure the concept of “imported software” for tax purposes
Unfortunately, we can present a history with several examples that help to support these considerations of mine, including discussions that were pacified and are being resumed, such as the one about the concept of “imported software”, through the RFB’s attempt to change through a simple normative instruction (IN RFB Nº 2.121, published on December 15, 2022) the definition (concept) of what is an “imported software”.
With this “simple” intervention and without having the power to legislate, the RFB wanted to establish how “imported” the software “produced by a legal entity whose head office is not located in the country”. However, such wording is not based on any previously published norm - nor on Law No. 10.833/03, nor on any other pre- or post-existing legal framework. If this IN had taken off, the sector would have increased from 3.0% to 7.6% in COFINS and an increase from 0.65% to 1.65% in PIS. In other words, if companies “embarked on this leaky canoe”, they would stop paying PIS/COFINS, adding together 3.65%, to collect 9.25%! An increase of 5.5% in the tax burden on billing in operations involving software that “they were not produced by a company based in Brazil”, in the exclusive view of the RFB. It should be noted that it is currently impossible to precisely define the place where the software was developed, especially in front of the existence of hybrid work (if not completely remote), which is a universal reality.
Next, I will focus on three more recent misconceptions that can lead to an increase in the tax burden. One involves the interpretations of the RFB that tried to impute the payment of royalties to the IT sector and the legal uncertainty that still persists. The other two misconceptions concern the supposed assessment of Presumed Profit in software revenues and the taxation of the acquisition or renewal of software licenses abroad.
Before moving forward, I consider it important to point out that software distribution and commercialization rights emerged with art. 29, of Law 7.646/87[1], were ratified by the wording of article 10, of Law 9.609/98[2], are expressly mentioned in §1º-A, of Law 10.168/00[3], fit if in art. 767 of the RIR (Internal Revenue Regulation – decree 9.580/2018) and has its roots in article 72 of Law 9.430/1996.
Improper charging of royalties
Among the primary activities in the software sector, the commercialization in the Brazilian territory of computer programs of foreign origin (“distribution”) prevails, making, in return for this right, remittances abroad as remuneration for the rights of commercialization or distribution of these software programs. computer. Said shipments represent operating costs necessary for the activities of these companies and the maintenance of their respective production sources.
It is worth mentioning that payments for such expenses represent the main cost linked to the software distribution activity in Brazil. Despite the clear fulfillment of these costs to the requirements of article 299 of the RIR (usual, necessary and revenue generating), from the year 2014 onwards, several companies that carry out operations with related persons, were surprised with the drawing up of notices of infraction demanding IRPJ and CSLL (contribution on net income), on the grounds that “the expenses of software use license, configuring royalties of a copyright nature, are found as a general rule and are non-deductible when paid to members, in accordance with art. 353, I, of RIR/99”, and would be characterized by non-deductibility, as provided for in line “d” of the sole paragraph of art. 71 of Law No. 4,506 of 1964.
Despite the inadequate conceptualization when saying that the payments would be made “as royalties, only the recent publication of the Consultation Solution (SC) COSIT 182/2019 brought some relief to the sector, as this solution defined that payments for the right to distribute/commercialize software that are made to indirect controllers, belonging to the same economic group, do not imply, by themselves, the aforementioned indeductibility. However, even after the publication of the cited SC, the RFB still maintains the understanding of the non-deductibility of payments when they are made to direct controllers, which leads to the persistence of legal uncertainty.
In compliance with the request of the sector – which for more than three years was in permanent contact with the professionals of the Ministry of Economy, accompanying the elaboration and processing of the norm until its effective publication – on 06/14/2023, Law nº 14,596 was sanctioned, which disposes about transfer pricing and eliminated the articles of laws 4,341 and 4,506 that limited the deductibility of “royalties”, with which, as of taxable events occurring after 01/01/2023, companies will be able to record as costs the expenses with commercialization rights or distribution of computer programs. However, the risks of eventual assessments by the Federal Treasury remain due to the accounting as costs, in relation to the expenditure on rights for the sale or distribution of software on operations carried out up to 12/31/2022, as well as the discussions in the administrative and judicial spheres regarding the notices of infraction that had already been drawn up prior to the enactment of Law No. 14,596 . It is clear that this dispute is the result of the interpretive mistake by the RFB regarding the effective nature of the software commercialization or distribution rights, which receive tax treatment as “remuneration, in any capacity, in any way right" and in no way be confused with "royalties”.
It is important to note that this aloof treatment by the Ministry of Economy body responsible for overseeing federal taxes regarding the deductibility of such rights: 1) drove away international companies that intended to operate in the country in the IT sector; 2) created "tight skirt” to the managers of the Brazilian units of multinational companies that operate here, in the arduous task of trying to justify before their headquarters the infraction notices issued against these companies, and 3) made it impossible for these companies to decide to make new investments in Brazil.
Changes in understanding and increase in the tax burden
With regard to divergences in calculating the Assumed Profit in software revenues, we will see that, contrary to the understanding expressed in numerous other Consultation and Divergence solutions, since Consultation Solution DISIT/SRRF07 No. 99, of 04/15/2003, up to SC DISIT-SRRF/06 Nº 6022/21, which maintain that “the sale (development and editing) of ready-to-use software (standard or off-the-shelf) is classified as the sale of goods, and the percentage for determining the IRPJ calculation base is 8% on gross revenue", on February 7, 2023, after twenty years, the Federal Revenue Service of Brazil published Consultation Solution COSIT Nº 36/2023, through which it modified the understanding that prevailed for years and defined that the percentage of 32% must be applied on the gross revenue for calculating presumed profit in relation to revenue from “ready-to-use software (standard or off-the-shelf)”, unexpectedly quadrupling the taxes paid by companies in this segment with IRPJ and CSLL.
As if these two misconceptions were not enough, on June 6, 2023, the RFB published COSIT Consultation Solution No. acquisition or renewal of license to use software, for own use, intended for final consumers. The new rule does not directly affect the activity of economic exploitation of software, but even so, technical flaws that tarnish the image of the RFB can be identified in this new regulation.
The aforementioned regulation defines that, regardless of customization or the means used for delivery, the aforementioned payments would characterize royalties and would be subject to withholding income tax (IRRF), as a rule, at the rate of 15% (fifteen percent). In addition, for the same reasons, such remittances will also be subject to the PIS/Pasep Contribution and the Social Security Financing Contribution (Cofins). We reiterate, however, that remittances in payment of license to use and rights to distribute and commercialize software receive tax treatment as “remuneration, in any capacity, in any form of law”, since they represent a different kind of law, a straight own, one specific remuneration, right that is totally distinct from “royalties”.
There is yet another mistake in the text of COSIT Consultation Solution No. 107, of 06/06/2023, when it refers to “TECHNICAL MAINTENANCE SERVICES. VERSION UPDATE WITHOUT PURCHASING A NEW LICENSE”, maintaining that remittances inherent to such payments would be subject to CIDE-Remittances (10%). It happens that the customer (licensee) is willing to pay the “monthly/annual fee by way of update, not with the concern of being able to use the so-called “technical support”. When making payments for thetechnical maintenance and version upgrade services”, the licensee (user) seeks exactly the right to receive “the improvements, the new versions, the bug fixes, the new releases” that are released by the owner of the software during the warranty period or during the term of the “maintenance/update”. in fact, the substance of the services of “update" of software version resides in delivery of "software"”. So, the “license renewala” (or “update”) has the same nature of the initial licensing. Based on this certainty – that the initial license and the renewal of the software use license are equivalent – and, considering that §1º-A, of art. 2 of Law 10.168/00 expressly declares the non-incidence of CIDE about “remuneration for the license to use the software”, it can be said that Consultation Solution No. 107/2023 contemplates a serious mistake when it sustains the incidence of CIDE on “the remuneration in case of contracting a technical maintenance service for updating the version of the software itself”.
It doesn't matter if these clashes occur due to lack of familiarity with the themes related to the software sector and information technology services, or if they result from superior commands, addressed to Federal Tax Agents in the sense that, in their manifestations on tax matters, they invariably express the “interpretation more favorable to the Tax Authorities”. AND unequivocally, however, that the events reported above attest that the manifestations emanating from the Special Secretariat of the Federal Revenue of Brazil have subverted the command contained in article 110 of the National Tax Code, which establishes that “tax law can't change the definition, content and scope of INSTITUTES, concepts and forms of private law, used, expressly or implicitly, by the Federal Constitution, by the Constitutions of the States, or by the Organic Laws of the Federal District or of the Municipalities, to define or limit tax powers”, raising legal issues. Such interpretations and solutions are weakening legal certainty and creating a hostile environment that destabilizes the important and transversal market for software and IT services.
*Dr. Manoel dos Santos, Legal Director of ABES – Brazilian Association of Software Companies
[1] Art. 29. Approval and registration will be granted to the deeds and contracts, relating to programs of external origin, which establish remuneration of the author, assignee resident or domiciled abroad, at the right price per copy and respective technical documentation, which does not exceed the average world price practiced in the distribution of the same product, not being allowed payment calculated according to the production, income or profit of the assignee or user.
[2] Art. 10. The acts and contracts in readcommercialization rights license relating to computer programs of external origin…”
[3]§ 1O-A. The contribution addressed in this article does not focus on the remuneration by license or of marketing or distribution rights computer program, except when involving the transfer of the corresponding technology.
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