Brazilian companies did not anticipate this curveball: A growing number of states are enacting provisions making businesses co-liable for taxes on products sold by independent third-party sellers through their marketplaces.
The move quickly escalated into a discussion among many businesses in online sales, e-commerce, and food and package deliveries, as well as other types of marketplaces potentially affected by the provisions. Although grounded by legitimate goals, states have approved broad rules that are setting the stage for more litigation and less cooperation by taxpayers. Just recently, Rio de Janeiro’s Supreme Court confirmed the validity of such a provision for that state.
Certain affected companies could move to challenge the regulation in federal court. However, an alternative solution exists, designed to reflect best practices and a modern public policy approach at its best.
‘Most Complicated Tax in the World’
ICMS, as we know it, is a state tax associated with the transit and/or sale of goods and certain types of services within and between states in Brazil. It has been referred to as “the most complicated tax in the world,” requiring several hours just to follow simple routine compliance. Because of its complex nature and a fairly high average rate, small businesses tend to seek measures that can result in lower tax collection. State tax authorities, however, tend to introduce measures to fight tax evasion, sometimes in an uncoordinated way.
The co-liability imposed on so-called “marketplaces” is another chapter of this ongoing story, and it unfolded very quickly. This time around, tax authorities chose to address potential tax evasion among small businesses by targeting intermediaries and large corporations that facilitate sales for third-party sellers.
Ceará—a state usually at the forefront of discussions when it comes to introducing tax measures out of the ordinary—was the first state to target third-party sales in 2019. Mato Grosso, Bahia, and Paraíba followed. Rio de Janeiro introduced similar measures in April 2020, although it conditioned co-liability provisions to some types of irregular activities. Rio de Janeiro’s State Supreme Court confirmed the provision this year, signaling a loss for taxpayers.
Some of the statutory language used by these states to create value-added co-liability on e-commerce and marketplaces is arguably broad, potentially bringing legal uncertainty and more controversy to ICMS, which is already a target of heavy criticism by local experts.
More Controversy Ahead?
The Brazilian case has created controversy and raised a variety of arguments. Some are rhetorical in nature—most apps and marketplaces aren’t state taxpayers and are only required to collect taxes to cities. Under such an argument, co-liability would be hit by jurisdiction constraints.
Other technical arguments are presented to say that marketplaces aren’t attached or associated with the sale itself (which triggers the taxable event), and the co-liability therefore would be incompatible with federal law standards.
The co-liability provision has yet to be challenged in federal court, with a predictable outcome still relatively far on the horizon. The grounds for ICMS co-liability arguably do exist, although laid out in very general terms that, unsurprisingly, open the door to tax controversy. When taxpayers decide to bring the issue to federal court, they likely will be met with a high level of uncertainty.
There is, however, an existing middle-ground solution that can potentially be negotiated: usage of the Declaração de Informações de Meios de Pagamento, or DIMP report, which gathers transaction level data such as sales amount, date, origin, tax ID of seller, etc.
A Conciliatory Solution
Some taxpayers have met with tax authorities from several states to discuss the implications of co-liability provisions. Ceará, Paraíba, Alagoas, and Mato Grosso were open to accepting reporting obligations as a replacement to the co-liability. Negotiations took place in early 2020, and a preliminary format was agreed on, one already applicable for financial institutions and collection agents: the DIMP. This solution was later ratified by Confaz, a federal body in which states come together to propose uniform standards for state taxes. However, to this date, the co-liability provision still exists with the DIMP obligation and was not eliminated by states.
Reporting transactions with authorities can satisfy the incremental need for tax oversight on a relatively new sector of the economy and avoid a more invasive provision, such as collecting taxes on behalf of others. That type of reporting is a conciliatory solution that reflects an increasing need for negotiation between tax authorities and taxpayers. The solution has been historically adopted for payment processing companies in Brazil.
Marketplace companies can use DIMP and leverage databases at their disposal to gather relevant information for tax authorities, as long as user data privacy is respected. Some already operate with a large volume of transactions daily, using SQL language to extract and analyze information for internal purposes.
This might seem like a privilege of large marketplace companies, but all companies are—or are in the process of—operating digitally, especially those with retail and delivery functions. Not so long ago, the “digital economy” was the word of the hour. Now, there’s no longer a digital economy, but a digitalization of the economy as a whole. All companies are going digital to survive, and the Covid-19 situation has accelerated that process.
DIMP for marketplaces is a productive way to achieve the government’s goal of more efficient oversight against potential tax avoidance. It’s a modern and simple alternative that doesn’t carry the bureaucratic burden of centralized tax collection—an outdated solution that dates back to when information technology was virtually nonexistent.
The OECD has pointed to reporting as a valid, unified approach to improve tax collaboration worldwide. As seen in recent discussions involving digital taxes by more than 30 countries, uncoordinated measures tend to bring more uncertainty and discourage investments. Taxation can largely benefit from simpler measures and a centralized discussion from a governing body such as Confaz.
Besides reporting of transactions, states can exercise their prerogatives and build consensus around a unified federal measure, choosing to present solutions to tax evasion in the form of federal regulation. As rightfully pointed out by one of the Brazilian Supreme Court justices in a recent case on city taxes, the fiscal crisis in some states often compels desperate treasury authorities to seek new ways of increasing tax revenue. These measures tend to make abrupt changes to tax rules at the expense of good governance.
Companies need to dedicate resources to their businesses instead of being compelled to take the place of tax authorities in auditing third parties. Companies should instead supply tax authorities with the necessary information to facilitate tax audits. In the words of an unknown author: Companies need to invest in more engineers, not lawyers. Don’t take me wrong—I’m a lawyer myself.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Rafael Benevides is an international tax manager at Meta Platforms, Inc., the parent company of Facebook. He is a tax counsel with extensive experience in the technology sector, focusing on international tax issues, tax compliance, and tax controversy.
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