DEBATE: The changes in Brazil's e-commerce taxes

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Monday, February 1, 2016

New rules for taxation of online sales by Brazilian states went into effect during January. The new framework includes staggered changes to how revenue from the Brazilian state VAT tax (ICMS) on interstate e-commerce is divided.

The measures are controversial and have sparked debate in the industry. BNamericas spoke to analysts, companies and digital traders to find out what they have to say about it.

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The amendment to the taxation system for e-commerce is intended to correct a distortion in the current system, where the payment of the ICMS takes place in the state of origin, where the virtual store is established, while the state where the buyer is located, or the state of destination of the goods purchased, receives nothing.

The problem with this system is that it creates friction between the states and mostly benefits the more industrialized states of the nation, such as São Paulo.

Under the new terms, the destination state will eventually receive 100% of the ICMS tax after a four-year period of adaptation. This year, 40% of ICMS revenues from e-commerce transactions will go to the destination state, and 60% to the state of origin. It will then be split 60:40 in 2017, 80:20 in 2018 and finally, in 2019, 100% will do to the destination state.

According to Gabriel Lima, CEO of eNext, a company that works on preparing and implementing e-commerce projects, "the changes allow smaller states to have a larger slice of the pie." He says that the US faces the same kind of dilemma and has not yet been able to resolve how states collect taxes on e-commerce.

"On the other hand, these measures have the potential to increase costs and bureaucracy for retailers, who will have to issue two different tax collection forms, one for the state of origin and the other for the destination state," Lima said.

And what's more, this clashes with Simples Nacional, a law that allows micro and small companies to have a unified tax system, Lima said.

In a document sent this week to the Brazilian finance ministry, São Paulo commerce federation (Fecomercio-SP) asks for companies registered in Simples Nacional to be excluded from the new rules. The entity also suggests a single, unified electronic database to be used by all states and by all other virtual retailers.

According to FecomércioSP, the Brazilian constitution secures differentiated tax policies for small and micro enterprises, which represent 70% of Brazilian virtual retailers, even though they only account for around 20% of e-commerce revenues.

Along the same lines, the Brazilian lawyers association (OAB) and the national commerce association (CNC) filed a direct unconstitutionality action (Adin) with the supreme court against splitting the ICMS, specifically because of that.

According to Victor Auilo Haikal, digital rights lawyer and professor, the measure is positive because it tackles tax asymmetries, but he stresses that the law regulating the Simples Nacional regime must be respected. 

Another issue raised by Haikal is that many retailers will have to adapt their electronic invoice systems in light of the changes, which will increase costs. Some of them, he said, are in "stand-by" mode by considering that the tax changes could be suspended by the courts.

In the view of Renato Opice Blum, founder of the digital law office Opice Blum, the division of the ICMS tax, albeit fair, could even lead to some retailers refusing to make sales to specific states.

In a statement, the government's national finance policy council, Confaz, which also includes state treasury departments, said that the measures reduce inequalities and tax imbalance within the country and most states have been awaiting the changes for more than a decade.

According to Confaz, the "exclusion" of companies registered in the Simples Nacional regime is not possible.

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