Brazil’s federal tax agency has changed the rules for taxing software for the third time this year. Brazilian companies that buy software and cloud services from international vendors may now have to pay two federal taxes (PIS-Cofins and Imports) that they did not pay before. This means paying an additional 9.25 percent on each transaction, which is particularly problematic for small and medium-sized businesses.
The changes stem from debates over the nature of international patent technologies that have been going on for at least two decades and are likely to face legal challenges in the coming months. In addition, the tax reform bill passed yesterday by the lower house of Congress also tends to increase taxation on software and IT companies in general (read more below).
In late 2003, the revenue service decided to classify software into two distinct types: standard software, which is intended for a broader audience and is readily available for download, and on-demand software, which is tailored to the specific needs of the customer and can be customized accordingly.
Because of their different nature, each solution was taxed differently. While companies buying standard software had to pay ICMS, a state tax on goods and services, those buying on-demand software had to pay ISS, a municipal tax on services.
Another change came in December 2021, when the Supreme Court ruled that all software is a service. As a result, the licensing of any type of program, regardless of its nature, became subject to ISS collection.
The change, implemented in the midst of the Covid pandemic and the massive adoption of new technologies, was seen as a turning point, as it affected the subsidiaries of technology giants (such as...
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