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Unlike several countries around the world, which taxes goods and services in a unified way and according to the destination rule, in Brazil there is no tax equivalent to the Value Added Tax (VAT). There is still a fragmentation of the taxable base of consumption, that comprises five different taxes, levied by different entities (Municipalities, States, and the Federal Government).
Regarding service transactions, each of the more than five thousand Municipalities in Brazil have the jurisdiction to create and collect service taxes, known in Portuguese as “Imposto sobre Serviços”, in short, “ISS”, according to the Article 166, III of the current Brazilian Federal Constitution.
Additionally, the complementary legislation establishes the elements of the general rule of taxation for ISS, through the Decree-Law No. 406/1968, partially revoked, and the Complementary Law No. 116/2003 (LC 116). These are general rules that Municipalities must follow when charging ISS within their territories.
One of these general rules concerns the taxable event for ISS, the act of providing a service, which comprises an obligation of the service provider to perform a certain action. Taking into consideration (i) the Brazilian private law definition of a service as “an obligation to perform”, and (ii) the taxation principles provided for in the Brazilian Federal Constitution, the constitutional definition of a taxable service is the human service provision to third parties (core activity), with economic substance and business nature, under the private law regime, and aimed to obtain a material or immaterial resource .
As for the place of occurrence of this triggering event, the 3rd Article of the LC 116 specifically establishes that the service is considered rendered in, and the service tax is due to, the city where the service provider establishment is based, or, in its absence, where the provider has its permanent address.
Therefore, when defining the jurisdiction to charge ISS, the LC 116 kept the origin rule provided for the extinct Article 12 of the Decree-law No. 406/1968. It also kept the strategy to list exceptional situations in which the service tax is due to the city where the service is performed, namely, where the services are taken (destination rule), according to its 3rd Article, items I to XXV .
The collection based on the origin rule and the multiple competent authorities to charge service taxes in Brazil made the ISS’ active jurisdiction (namely, where the tax should be collected) the pivotal element of the so-called “tax war” among the Municipalities, resulting in tax litigation and a high compliance cost for taxpayers.
The economic and social evolution have made this situation even more complex: especially after the Covid-19 pandemic, the use of technologies to strengthen the physical-digital relation has been intensified, allowing completely remote services provisions, without the need of a physical establishment for the service provider, since employees can work permanently from alternative locations as their homes, co-working spaces, cafés and libraries.
Given this context, this article aims to identify the challenges in defining the place of collection of the ISS in Brazil and alternatives that are suitable for services involving remote work.
“Service provider establishment” definition and the controversies regarding its application
As a rule, ISS is due to the Brazilian city where the service provider establishment is, or, in its absence, where the provider has its permanent address, according to the abovementioned 3rd Article of the LC 116. Its subparagraphs I to XXV, however, list the exceptional situations in which the ISS is due to the city where the services are performed.
Also, according to LC 116, the “service provider establishment” correspond to “the place where the taxpayer develops its activity of providing services, permanently or temporarily, and configures an economic or professional unity, being irrelevant to characterize it the dominations of headquarters, branch, agency, service station, branch office, representative or contact office or any others that may be used”  (4th Article).
Influenced by the private law concepts, which contribute to the construction of this concept , the “service provider establishment” definition can be summarized in the company’s business unit that represents the habitual core activity’s exercise, assuming the existence of goods, corporeal or incorporeal, organized to enable the exercise of economic activity.
The service provider establishment is, thus, the place where the ISS taxable event occurs, coinciding with the identification of the Municipality competent for its collection.
In other words, to identify the service provider establishment it is important to verify where the necessary organization for the exercise of the taxed business activity is arranged, that is, where the service contracted by the client is effectively carried out.
And it is precisely the identification of the service provider establishment, regarding the ISS collection, which has generated a massive tax litigation, notably in the hypotheses in which the service is performed in a different Municipality from the service provider establishment.
The Theme 355 of the Brazilian Superior Court of Justice (“STJ”), which involves the levy of ISS on leasing activities, acted as a guideline to define (i) service provider establishment, and (ii) the Municipality competent to collect the service tax in case of inter-municipal services.
When analyzing such activities in a repetitive appeal, the STJ held that the ISS is due where the service is effectively provided, where the relationship is perfected, thus understood as the place where it is proven that there is an economic or professional unit of the financial institution with sufficient decision-making powers to grant and approve financing (REsp No. 1.060.210/SC), regardless of where the operational activities were performed.
Some tax authorities, such as the Municipality of São Paulo, have interpreted this STJ ruling restrictively, that is, in the sense that, regarding the collection of service tax, the company’s headquarters are where its leaders and directors work. Based on this construction, tax assessment notices are issued to collect ISS in São Paulo/SP when the company’s headquarters are based in another city, but agreements are signed, and boarding meetings are held in São Paulo/SP.
Avoiding this restrictive interpretation is always a challenge for taxpayers, who must provide documentary evidence that the core of the service provisions and the necessary human resources for the exercise of the taxable activities are in the territory of the city where the ISS was collected.
Therefore, according to the STJ ruling issued in the REsp No. 1.060.210/SC, the place where the leaders hold its corporate meetings, sign meetings minutes, and conclude agreements is irrelevant for determining the ISS active jurisdiction. What matters for ISS incidence is the place where the service is effectively rendered, that is, the place where the taxpayer gathers the human, technical and operational resources required for the development of the activity contracted by the service acquirer.
The challenging definition of the competence for ISS assessment regarding remote services
If the services that are rendered in person already cause great legal uncertainty for taxpayers, the dilemma is even greater concerning services that are rendered exclusively remotely.
The locomotion restriction measures imposed by the Covid-19 pandemic have significantly changed work relations, especially the globalization process of remote services. Telework is now a reality for most companies, in which employees can develop their activities from anywhere in Brazil or the world.
When the services are rendered fully remotely, the company does not need a physical establishment to perform its core business, so, in the current economic context, the concept of “service provider establishment” seems inadequate for the purpose of defining the competent Municipality to charge the ISS.
Similarly, even if there is no clear economic or professional unit, we trust that it also does not fit the reality of fully remote service provisions to determine the Municipality where ISS will be due according to the place of domicile of the service provider company, pursuant to the 3rd Article of LC 116.
This is because LC 116 does not define which place must be considered as the service provider’s domicile (the domicile of the partner, manager, administrator or of the person providing the service, or the place where the company is registered?). The definition of tax domicile applicable to legal entities in Article 127, II and paragraph 1 of the Brazilian Tax Code also does not solve the problem, because it foresees the need for a physical location of (i) the headquarters, (ii) the assets of the company, or (iii) of the occurrence of the facts that gave rise to the tax obligation.
Thus, in view of the inadequacy of the classic and formal concept of establishment to define the territorial aspect of the ISS due on fully remote services, would it be possible to characterize the place where the employee provides services in telework regime as part of the economic or professional unit of the company that constitutes the core of the exercise of its activity?
That is, considering that for the purposes of characterizing the service provider establishment, under the terms of Article 4 of LC 116, the denominations of head office, branch, agency etc. are irrelevant, would it be possible to consider that the place where the company’s core activity is performed remotely could be a “service provider establishment” for tax purposes, even in the absence of a formally constituted branch?
Even if the answers to these questions were affirmative, there are several challenges to collect ISS according to the residence or domicile of each employee on telework. In addition to the lack of an adequate legal basis that would allow the collection of ISS according to this method, it is important to consider the operational difficulty of collecting ISS in several Municipalities and the high compliance cost for companies to fulfill the main and ancillary tax obligations.
The fact is that LC 116 does not provide answers as to which Municipality would be competent to collect ISS when it comes to fully remote services. This circumstance, in addition to creating a substantial legal uncertainty for taxpayers, will certainly lead to new and relevant tax litigation on the subject.
It is no news that the so-called “tax war” has been aggravated by the concession of tax benefits by the Municipalities, in the form of reduction of the ISS’ calculation basis and rate, to attract companies and investments. This practice, apart from creating complexity in the definition of the competence to collect ISS in the case of inter-municipal services, is also an incentive to abusive tax planning, especially involving the maintenance of “fictitious establishments” in municipalities where taxation is more advantageous.
If the tax competence of ISS in case of services that are rendered in a Municipality other than the one where the provider’s physical establishment is located still causes litigation, the problem is even greater when we consider the pandemic scenario that has expanded the globalization of fully remote services.
As seen above, the definition and identification of the “service provider establishment” or the “service provider’s domicile” are not sufficient to determine to which Municipality the ISS should be collected in case of fully remote services, especially due to the needless of a physical establishment to provide the services.
To consider the place where the company’s employees perform its core activity as the “service provider establishment” for the purposes of collection of ISS is also not the definitive solution to this dispute. In addition to the absence of an adequate legal basis that allows the collection of ISS in this manner, it would be practically impossible to fulfill tax obligations in multiple jurisdictions.
Shifting the jurisdiction to the Municipality where the final customer is located seems to be a plausible solution and in line with the practice of most countries in the world, in which consumption of goods and services is taxed at the destination. However, the implementation of this solution would also run into the difficulties mentioned in the previous paragraph and would require alternatives to make this type of taxation feasible, in addition to the need for legislative change.
It is undeniable that the identification of the competent Municipality to tax services rendered remotely is a new and complex issue that requires in-depth reflection not only on the formal concept of service provider establishment as foreseen in LC 116 and supported by case law, but also on the need to change the criterion for taxation on consumption at destination, which is present in the discussions on the Brazilian tax reform (Constitutional amendment proposals No. 45 and 110).
Breno Ferreira Martins Vasconcelos
Josy de Oliveira Almeida
Thais Romero Veiga Shingai
 Gonçalves, José Artur Lima – The ISS, the supplementary law N.116/2003, and the franchise contracts, in Greatest current issues of Tax Law, p. 287.
 Including the modifications made by supplementary laws N. 157/2016 and 175/2020.
 Free translation.
 According to the Brazilian Tax Code:
“Article 109. The private law general principals are used for researching definition, content and scope of its institutes, concepts and forms, but not for defining the respective tax effects.”
“Art. 110. The tax law cannot change the definition, content and reach 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 competencies.”