The transaction report is a solution to Brazil’s tax liability rules

Brazilian companies have not anticipated this curve: an increasing number of states are adopting provisions making companies co-responsible for taxes on products sold by independent third-party sellers through their marketplaces.

The decision quickly turned into a discussion among many online retail, e-commerce, and food and package delivery businesses, as well as other types of marketplaces potentially impacted by the provisions. Although based on legitimate goals, states have approved blanket rules that open the door to more litigation and less cooperation from taxpayers. Most recently, the Supreme Court of Rio de Janeiro upheld the validity of such a provision for that state.

Some affected companies may challenge the settlement in federal court. However, an alternative solution exists, designed to reflect best practices and a modern approach to public policy at its best.

“The most complicated tax system 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 called “the most complicated tax in the world”, requiring several hours just to follow simple routine compliance. Due to its complex nature and a fairly high average rate, small businesses tend to look for measures that can lead to lower tax collection. State tax authorities, however, tend to put in place measures to combat tax evasion, sometimes in an uncoordinated manner.

The co-responsibility imposed on the so-called “markets” is another chapter in this unfolding story, and it has unfolded very quickly. This time around, tax authorities have chosen to tackle potential tax evasion among small businesses by targeting intermediaries and large companies that facilitate sales for third-party sellers.

Ceará, a state usually at the forefront of discussions when it comes to introducing outlandish tax measures, 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 made co-responsibility provisions conditional on certain types of irregular activity. The Rio de Janeiro state Supreme Court upheld the provision this year, signaling a loss to taxpayers.

Some of the legislative language used by these states to create value-added co-responsibility on e-commerce and marketplaces is arguably broad, potentially bringing legal uncertainty and more controversy to ICMS, which is already the the target of strong criticism from local experts.

More controversy to come?

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 for cities. In such an argument, co-responsibility would be subject to jurisdictional constraints.

Other technical arguments are presented to say that the marketplaces are not attached or associated with the sale itself (which triggers the triggering event), and co-responsibility would therefore be incompatible with the norms of federal law.

The co-liability clause has yet to be challenged in federal court, with a predictable outcome still relatively far in the horizon. The grounds for co-responsibility of ICMS doubtless exist, although stated in very general terms which, unsurprisingly, open the door to tax controversy. When taxpayers decide to take the matter to Federal Court, they will likely face a high level of uncertainty.

There is, however, an existing intermediate solution that can potentially be negotiated: the use of the Declaração de Informações de Meios de Pagamento, or DIMP report, which gathers transaction-level data such as sales amount, date, origin , the seller’s tax identification number. , etc.

A conciliatory solution

Some taxpayers have met with multiple state tax authorities to discuss the implications of joint liability provisions. Ceará, Paraíba, Alagoas and Mato Grosso were willing to accept reporting obligations in lieu of co-responsibility. Negotiations took place at the beginning of 2020, and a preliminary format was agreed, already applicable for financial institutions and collection agents: the DIMP. This solution was then endorsed by Confaz, a federal body in which states come together to propose uniform standards for state taxes. However, to date, the co-responsibility clause still exists with the DIMP obligation and has not been removed by the States.

Reporting transactions to the authorities can satisfy the additional need for tax oversight in a relatively new sector of the economy and avoid a more intrusive provision, such as collecting taxes on behalf of others. This type of declaration is a conciliatory solution which reflects a growing need for negotiation between the tax administration and taxpayers. The solution has historically been adopted for payment processors in Brazil.

Marketplace companies can use DIMP and leverage the databases available to them to gather information relevant to tax authorities, as long as the confidentiality of user data is respected. Some already operate daily with a large volume of transactions, using the SQL language to extract and analyze information for internal purposes.

It may seem like a privilege of the big companies in the market, but all businesses operate or are operating digitally, especially those with retail and delivery functions. Not so long ago, the “digital economy” was the buzzword. From now on, there is no longer a digital economy, but a digitization of the economy as a whole. All businesses are going digital to survive, and the Covid-19 situation has accelerated this process.

The DIMP for Markets is a productive way to achieve the government’s goal of more effective oversight against potential tax avoidance. It’s a modern, simple alternative that doesn’t support the bureaucratic burden of centralized tax collection – an outdated solution that dates back to when information technology was virtually non-existent.

The OECD has indicated that the declaration is a valid and unified approach to improving tax cooperation worldwide. As seen in recent discussions on digital taxes in more than 30 countries, uncoordinated measures tend to create more uncertainty and discourage investment. Taxation can greatly benefit from simpler measures and a centralized discussion of a governing body such as Confaz.

In addition to transaction reporting, 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 regulations. As one of the judges of the Brazilian Supreme Court rightly pointed out in a recent municipal tax case, the fiscal crisis in some states often forces desperate treasury authorities to look for new ways to raise revenue. tax. These measures tend to abruptly change tax rules to the detriment of good governance.

Businesses need to dedicate resources to their business rather than being forced to substitute themselves to the tax authorities to control third parties. Companies should instead provide the tax authorities with the information necessary to facilitate tax audits. In the words of an unknown author: Companies need to invest in more engineers, not lawyers. Don’t get me wrong, I’m a lawyer myself.

This article does not necessarily reflect the views of the Bureau of National Affairs, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Raphael Benevides is head of international tax at Meta Platforms, Inc., the parent company of Facebook. He is a tax advisor with extensive experience in the technology sector, focusing on international tax matters, tax compliance and tax controversies.

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