Tax Law and the Internet

Anna Flávia Moreira e Flaviano de Oliveira

Law focuses on social facts and, if social facts change, the Law also needs to adapt in order to maintain its effectiveness on the new horizons of reality. In this sense, the network society, based on the economic and technological paradigm of information not only reflects in new social practices, but it also changes the experience of space and time as parameters of social experience.

For this reason, the transition from traditional mass media to a system of horizontal networks organized around the Internet and wireless communication introduced a cultural transformation, which is fundamental since virtuality has become an essential dimension of our reality, as emphasized by the teacher-coordinator of the Fiscal Studies Center of FGV, Eurico Marcos Diniz de Santi. By combining the new technological paradigm of information (network society) and produced and accumulated theoretical and practical knowledge, we have incalculable changes to take place in Law, including in dogmatic Tax Law.

Practical matters

With the advent of the Internet, new platforms that influence tax law arose, a fact that was noted by the interaction of this segment with information technology, with the banking system and the managers of credit cards, which provide data about the taxpayer. The Public Digital Bookkeeping System (“Sistema Público de Escrituração Digital” – Sped), for example, is a mirror of reality within a large system shared by the Union, the states and the municipalities.

Similarly, these new platforms open the debate about the analysis of practical issues, such as the recent discussion on the impact of the new rules for the collection of ICMS on e-commerce. In addition, it seems important to discuss taxation of cloud computing, due to the need to tax an activity that appeared extremely quick and generated a great amount of wealth and externalities of various orders.

From this new reality, therefore, we should rethink the relationship between taxation and democracy, especially because of the quantity and quality of information and accessory obligations that are held by the tax authorities as a result of new technological information paradigm.

Implications of the new ICMS on e-commerce

For the sake of further discussion, we also analyze the Constitutional Amendment (C.A.) No. 87, of April 2015, which changed the system of ICMS on sales of goods and the rendering of services to end consumers located in other states. This new rule about ICMS affects virtual transactions made by phone or online by sellers or service providers and consumers from different units of the federation.

The measure stems from the outburst of e-commerce in Brazil. Before the CA 87/2015, the state of residence of the buyer or the goods’ destination had no involvement in the collected tax, which benefited more developed units of Federation. The amendment came, then, to correct a tax distortion that allowed the collection of all the ICMS only by the state where the headquarters of the virtual store are, with the intention of sharing the collected tax, gradually, with the destination state of the product sales  or the service providing.

Thus, it ensures the division of the ICMS revenue between supplier and recipient states, levied on goods and services purchased at a distance, by  Internet and phone. It is, therefore, an attempt to compensate states that have no headquarter distribution centers, which are more concentrated in the South and Southeast.

In practice, the complexity of the AC 87/2015 has as a consequence the increase of the cost and the time spent with accounting firms and a greater number of tax and accounting errors, which in turn carry more assessments by the tax authorities. Consequently, it increases the number of administrative and judicial disputes between taxpayers and the Exchequer.

The Constitutional Amendment made tax management even more complex, which is already known for its difficult calculation. For this reason, the National Confederation of Commerce (“Confederação Nacional do Comércio” – CNC), Sebrae and national institutions linked to e-commerce appealed to the Supreme Court against the constitutional amendment that changed the ICMS on interstate sales to e-commerces. The Supreme Court even granted an injunction suspending certain effects of AC / 87. The main complaint of virtual stores that sell to other states, whose routine was changed by the new rule of the ICMS, lies in extending the tax burden and especially, the bureaucracy in business by opting National Simples.

Tax treatment of cloud computing

In relation to the tax treatment of cloud computing – a technology that allows the user to run programs, work different files and have access to various types of information without maintaining any of these items stored in the computer’s own memory – there is a mystery to tax lawyers and economists around the world. Cloud computing enables access to a range of configurable computing resources (networks, servers, storage platforms, applications, and services).

Therefore, users can access their  files remotely, in the “cloud”, although, in fact, this data is allocated on hard drives somewhere on the planet – most of the time, fractionated between hard disks installed in various locations. The point to emphasize, for the purpose of this explanation, is that the tax authorities and the Brazilian taxpayers are attentive and curious about the best tax treatment to be given to this technology.

From the set of taxes and ancillary obligations that make up the Brazilian tax system, the best way seems to be taxing activity through “ISSQN”. The tax on services, which is a municipal competence, concerns, as the name suggests, the provision of services of any nature, whether provided or enjoyed within the national territory or even that its provision is from outside or there had been started.

Simple would be, therefore, to match  the services provided through cloud computing technology to the scope of incidence of the ISS, if was not for art. 1 of LC 116/2003, which regulates the tax. The law makes clear the need for inclusion in the list annexed to it the factual assumption on which it intends to charge the tax on services, but there is no provision for the collection of available services “in the cloud”. The difficulty in choosing the ISS as a means to tax the activity dos not involve the discussion about whether the activities worked with cloud computing meet or not the characteristics of the provision of service, simply because the activity is not even in the list attached to the LC 116 / 2003.

About the authors

Anna Flávia Moreira Silva is a researcher at the Institute for Research on Internet & Society. Undergraduate Law Student at the Federal University of Minas Gerais (UFMG). Member of the Study Group on Internet, Innovation and Intellectual Property (GNet) and of the Study Group on Tax Procedure Law (GEPT) at UFMG. Interested and works in areas such as Finance and Tax Law, International Private Law and Internet Law.

Flaviano de Oliveira Santos Neto is an undergraduate Law student at Universidade Federal de Minas Gerais, member of the Study Group on Internet, Innovation and Intellectual Property (GNet) and of the Study Group on Tax Law Procedures. Is interesested in: Tax Law, Financial Law, Business Law and Internet Law.