Thought leadership from our experts

Tax Complexity – National Changes to the Brazilian Tax on Services (ISS)

Per the Brazilian Constitution, the authority to impose taxes is assigned to federal, state and municipal governments (in addition to the Federal District, which has the same taxing power assigned to states and municipalities combined).

Since the country has 27 states (including the Federal District) and more than 5,500 municipalities, the Brazilian Constitution also established that a national supplementary law (approved by Brazil's Congress) must set forth general rules on taxation and general guidance on how the municipal and state taxes can be charged. Such national legislation must also create rules to avoid conflicts of taxing authority among the different federative entities.

Nevertheless, the implementation of each specific tax must be carried out by law, approved by the legislative branch of the federative entity entitled to charge it. This law must establish the applicable rates and ancillary obligations, among other matters.

The most relevant tax at the municipal level is the Tax on Services (ISS), which is generally charged on the price of services rendered in Brazil or imported from abroad by Brazilian customers. The relevant rates range from 2% to 5%.

Per Article 3 of National Supplementary Law 116/03, such tax is generally paid to the municipality in which the service provider's establishment is located. Exceptions relate to specific activities for which alternative connections were considered more important in defining the municipality to which such tax should be paid.

As an example, construction services are taxed where building sites are located. Surveillance security services, in turn, are taxed where the person or goods under surveillance are located.

These few exceptions are justified by the fact that such services, by their very nature, have a stronger link with the jurisdiction where the service has been rendered.

However, on December 29, 2016, Brazil's Congress approved Supplementary Law 157, which provided that operations such as health plans, leasing of goods, managing of credit and debit cards, and managing of financial funds are to be taxed in the municipality in which the customer is located and not in the one in which the service provider is located.

Since customers can be located in any of Brazil's 5,570 municipalities service providers are now required to comply with the tax legislation of each of these municipalities.

In addition to this chaotic compliance environment, such new rules have created substantial legal uncertainty. Indeed, the new rules have not defined the concept of "customer", which is of absolute importance in identifying which municipality is entitled to collect the specific tax.

Indeed, if a health plan is contracted by a company to provide benefits to its employees, who is the "customer" of this service? The company that pays for it or an employee working elsewhere who is the final beneficiary of the service?

Other example is the managing of financial funds. Per the applicable rules, funds are not legal persons in Brazil. Nevertheless, they are able to enter into financial agreements and, consequently, have obligations to comply with (including the collection of taxes).

In view of the above, one may ask: who is the customer of the service rendered by the manager of a financial fund – the fund itself or an individual / legal entity that owns part or all of the fund?

The answers to such questions are truly important in view of the fact that the company and the employee (in the case of health plans) and the fund managers and its owners (in the case of financial funds) can be located in different municipalities. This creates a conflict regarding which municipality has authority to collect the Tax on Service.

Hence, it is clear that, in addition to severely increasing the tax compliance burden, Supplementary Law 157/16 has, actually, done the opposite of what it was intended. Indeed, it creates conflicts concerning entitlement among municipalities instead of avoiding them.

Because of this, different associations that represent taxpayers throughout the country have filed unconstitutionality suits with Brazil's Supreme Court to challenge the validity of the rules introduced by Supplementary Law 157/17.

On March 23, 2018, the Reporting Judge of the Supreme Court, Mr. Alexandre de Moraes, rendered a preliminary monocratic injunction that: (a) suspended the validity of these new rules in relation to the aforementioned services, and (b) re-established the taxing authority of the municipality in which the service provider's establishment is located. In the near future, this decision will be reviewed by the Plenary Session of the Brazilian Supreme Court.

The supporters of the new rules state that Brazil is merely adapting its tax legislation to achieve consistency with the guidance of the Organization for Economic Cooperation and Development (OECD), which has issued papers addressing how the destination principle may help countries to synchronize international tax legislation.

The destination principle was certainly not designed by the OECD to be applied to situations in which customers of services can be located in more than 5,500 different localities. Indeed, in the international arena, there are approximately 190 countries, and most active commerce is surely limited to less than a half of them.

Hence, it is simply inaccurate to say that the adoption of the destination principle in relation to the Tax on Services in Brazil (ISS) derives from a recommendation of the OECD.

Indeed, the OECD undoubtedly has not looked into the chaotic consequences that applying such principle to Brazil's internal Tax on Service would cause.

For all of the above reasons, the Brazilian Supreme Court is expected to confirm the unconstitutionality of the rules introduced by Supplementary Law 157/17.


  1. President of the Brazilian Financial Law Association (ABDF). Member of the executive committee of the International Fiscal Association (IFA). President of the British Chamber of Commerce in Rio de Janeiro (BRITCHAM-RJ). Member of the General Council of the Brazilian Bar Association, branch of Rio de Janeiro (OAB/RJ).
  2. National representative of the Young International Fiscal Association (IFA). Member of the Tax Committee of the Brazilian Bar Association, branch of Rio de Janeiro (OAB/RJ). Member of the Brazilian Financial Law Association (ABDF).