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Tech Roundup Feb. 28, 2020 | Should Brazil charge a digital tax?

. Feb 28, 2020
Digital Tax Brazil Photo: Koshiro K/Shutterstock

You’re reading The Brazilian Report‘s weekly tech roundup, a digest of the most important news on technology and innovation in Brazil. This week’s topics: What Brazilian lawmakers think about a digital tax. Tech made a mark on the 2020 Carnival. The fight over Brazil’s listed companies. And more.


Should Brazil charge a digital tax? 

The discussion on tax reform in Brazil

has so far largely ignored digital services—a hot-button issue in many countries abroad. But as Congress is about to come up with a <a href="https://brazilian.report/newsletters/brazil-daily/2020/02/20/brazilian-congress-tax-reform-cid-gomes-shot-police-strike/">definitive tax reform proposal</a>, uniting the bills currently pending in the lower house, it is time for Brazil to tackle this issue.</p> <p><strong>Digital tax: global scenario. </strong>The Organization for Economic Development and Cooperation (OECD) is hosting talks with 137 countries to find a common international framework for digital taxes by year-end. In January, the U.S. and France—which is leading European efforts on the matter—<a href="https://www.reuters.com/article/us-davos-meeting-digitaltax/france-u-s-agree-to-push-global-digital-tax-talks-forward-idUSKBN1ZM1LT">agreed to push talks of a global digital tax forward</a>.&nbsp;</p> <p>Such a move was far from being guaranteed, as Washington D.C. and Paris have traded barbs over France&#8217;s decision to impose tariffs on big tech companies. The French government charges 3 percent on the revenue tech companies earn providing services in the country. The UK could also adopt a similar measure, as may Spain.</p> <p>In an emailed statement to <strong>The Brazilian Report</strong>, the OECD Deputy Director for Tax Policy and Administration Grace Perez-Navarro warned that “should the Inclusive Framework negotiations stall or fail, it is likely that we will see more countries take unilateral measures.” According to her, Brazil—being one of the 24 members of the Steering Group—had a leadership role in the Inclusive Framework.</p> <p><strong>Brazil. </strong>The Economy Ministry has not presented its own reform plan yet. In an interview with <em>Reuters</em>, <a href="https://brazilian.report/podcast/2019/08/07/brazil-tax-reform-congress-2019/">Vanessa Canado</a>—one of the ministry&#8217;s special advisors currently working on a draft bill—said Brazil should wait for an international solution for the issue. The ministry has yet to reply to <strong>The Brazilian Report</strong>&#8216;s request for comment.</p> <p><strong>Current situation. </strong>Streaming services in Brazil pay municipal service tax (ISS), which has rates of up to 5 percent. Major technology companies such as Google and Amazon have branches in Brazil, therefore have to pay <a href="https://valor.globo.com/reforma-tributaria/artigo/digital-tax-faz-sentido-tributar-a-tecnologia-no-brasil.ghtml">income tax</a>.</p> <p><strong>Possibilities. </strong>Fagner Souza, a tax expert at consultancy firm Mazars, believes that a value-added tax model charging duties at the destination to be the best alternative for companies headquartered in Brazil. Congressman Baleia Rossi has made such a proposal in the lower house. However, “in practice, these companies are headquartered in tax havens, so what European countries have been doing is taxing them on revenues, as is the case of when tax is charged at the source [and not the destination]. When credit card companies register the payment, the tax is already paid,” he told <strong>The Brazilian Report</strong>.</p> <p>Mr. Souza added that doing so in Brazil could be considered as being too similar to the much-maligned <a href="https://brazilian.report/business/2019/09/11/cpmf-economy-ministry-central-bank-new-tax/">financial transactions tax (CPMF)</a>—which would spark a backlash from the population. The current tax reform discussions have received at least two amendments aiming at the creation of a European-style digital services tax.</p> <p>For Ms. Perez-Navarro, “any potential tax reform in Brazil should include a solution for collecting VAT on the online sales of goods and services.”&nbsp;</p> <p><strong>What are the risks? </strong>If the current bill is passed as is, Brazil would adopt a Goods and Services Tax (IBS), in the model of a VAT. Mr. Souza argues that the biggest problem in this approach is having the same rate for both, which could make digital services far more expensive. “For services, you cannot have 20-to-25-percent tax rates. You must exclude manufactured goods tax (IPI) and state goods and services tax (ICMS), which currently do not apply to them. Increasing taxation like this would make services unviable in Brazil and could stimulate tax evasion.”</p> <p><strong>Reactions. </strong>On February 18, a group of businesspeople led by former tax secretary Marcos Cintra and Flávio Rocha, CEO of retailer Riachuelo, publicly declared themselves against both existing tax reform proposals, claiming they impose a heavy burden on services. They support a reform that would lighten the load on payroll and introduce a tax on financial transactions in the molds of the CPMF. In an interview with newspaper <a href="https://valor.globo.com/brasil/noticia/2020/02/26/iva-e-moderno-e-nao-eleva-carga-defende-appy.ghtml"><em>Valor</em></a>, economist Bernard Appy defended the bill, saying the VAT is a modern tax. “The issue on the digital economy is on income, especially between countries,” he said.</p> <p><strong>At stake. </strong>In a digital economy, services such as music and audio streaming and digital marketing are among the most promising activities, with growth that could generate billions in taxes for Brazil. In comparison, the Spanish government expects to collect EUR 1.2 billion per year with its “Google Tax”— which is how Pedro Sánchez’s administration&#8217;s<a href="https://valor.globo.com/mundo/noticia/2020/02/18/governo-da-espanha-deve-aprovar-criacao-de-imposto-sobre-servicos-digitais.ghtml"> proposed tax on digital advertising</a>, online intermediation, and data selling has been baptized.&nbsp;</p> <hr class="wp-block-separator"/> <h2>How tech made it into Brazil&#8217;s big Carnival parades</h2> <p>In this year&#8217;s Carnival parades, São Paulo samba school Rosas de Ouro decided to celebrate industry 4.0, with its procession entitled &#8220;Modern Times.&#8221; The school paraded with floats representing technologies such as the Internet of Things, augmented reality, robotics, and even 5G to the audience, finishing in 7th spot in the overall rankings.&nbsp;&nbsp;</p> <figure class="wp-block-image"><img loading="lazy" width="800" height="533" src="https://brazilian.report/wp-content/uploads/2020/02/Rosas-de-Ouro-float-Modern-Times.jpg" alt="Rosas de Ouro float Modern Times" class="wp-image-32181" srcset="https://brazilian.report/wp-content/uploads/2020/02/Rosas-de-Ouro-float-Modern-Times.jpg 800w, https://brazilian.report/wp-content/uploads/2020/02/Rosas-de-Ouro-float-Modern-Times-300x200.jpg 300w, https://brazilian.report/wp-content/uploads/2020/02/Rosas-de-Ouro-float-Modern-Times-768x512.jpg 768w, https://brazilian.report/wp-content/uploads/2020/02/Rosas-de-Ouro-float-Modern-Times-610x406.jpg 610w" sizes="(max-width: 800px) 100vw, 800px" /><figcaption>Rosas de Ouro float: &#8220;Modern Times&#8221;</figcaption></figure> <p><strong>What’s new?</strong> Rosas de Ouro incorporated <a href="https://g1.globo.com/sp/sao-paulo/carnaval/2020/noticia/2020/02/23/rosas-de-ouro-fecha-desfiles-de-sp-com-enredo-sobre-tecnologia-fantasias-com-chip-e-carro-virtual.ghtml">augmented reality technology</a> into the parade: the audience was able to download an app and see a sixth AR float parading behind the others, as well as an AR samba dancer in a breakthrough immersive experience. However, it’s not the first time cutting edge technologies have been used in Brazil&#8217;s Carnival. In 2015, Rio de Janeiro samba school Portela used drones as part of its parade and mechanics such as animated floats are quite common.</p> <p><strong>Why is it important?</strong> The theme was created in partnership with universities and companies such as Mercedes Benz, and represents a way to bring the Brazilian people closer to the technological universe by way of popular culture. </p> <p>In an interview to website <em>Startupi</em>, Ari Costa, a professor at Mauá Institute of Technology, explained that the idea came after 50 professors and business leaders wrote a book about the impacts of the fourth industrial revolution in Brazil, but it had little impact. “We thought that we could be more successful if we passed the message in an event deeply rooted in the Brazilian culture; there is nothing better than Carnival for that,” he said.</p> <hr class="wp-block-separator"/> <h2>Home of Carnival: stock exchanges “fight” over Brazil&#8217;s listed companies</h2> <p>Carnival was also on the lips of Brazil’s financial Twitter bubble this week, after two New York Stock Exchange (NYSE) <a href="https://twitter.com/NYSE/status/1231352860601921537">tweets</a> reignited an old rivalry in the tech sector. With a picture of its facade illuminated in green and yellow, the company said: “Brazil is the home of Carnival. NYSE is the home of Brazilian companies”. It took B3, São Paulo’s Stock Exchange, <a href="https://twitter.com/B3_Oficial/status/1232043040967143424">two days to reply</a>, saying that “on the Brazilian stock exchange, Brazilian companies don&#8217;t only shine at Carnival.”</p> <p><strong>Competition. </strong>Brazil’s most famous tech companies, as fintech PagSeguro and edtech Arco Educação chose to be listed in New York due to higher valuations and availability of specialized tech investors, even though B3 has been trying to retain them. The newest—and harshest—blow for B3 was XP, Inc.&#8217;s listing at Nasdaq last December, considered the Brazilian “IPO of the decade.” For some market participants, besides the better conditions of the American market, XP’s relation with B3 also weighed on the decision.&nbsp;</p> <p><strong>Competition 2.</strong> XP introduced the facilitation system for retail investors in Brazil, matching orders between its own customers before closing deals on the stock exchange. This generated savings for clients and earnings for the brokerage firm, but reduced the stock exchange’s profits, according to financial website <a href="https://braziljournal.com/a-inovacao-que-rendeu-uma-multa-a-xp">Brazil Journal</a>. B3’s supervision board considered it to be detrimental to clients and fined XP and its CEO, Guilherme Benchimol,&nbsp; BRL 10 million months before their IPO. The stock exchange <a href="https://valor.globo.com/financas/noticia/2019/08/19/bsm-multa-xp-por-preterir-ordens-de-cliente.ghtml">has now regulated the tool</a>, as long as it happens inside of B3’s framework.&nbsp;&nbsp;</p> <p><strong>Why it matters. </strong>B3 works as a monopoly in Brazil and customers have long complained about <a href="https://www.infomoney.com.br/minhas-financas/nova-tarifa-sobre-proventos-da-b3-5-respostas-para-entender-a-cobranca/">high fees</a>. As of December, American Trading Services (ATS)—a company that has been willing to assemble a new stock exchange in Brazil for years—reached an agreement with B3 and will be able to use the local company data and systems for variable income, which is also groundbreaking for other endeavors. Though it is not clear when Brazil may have another stock exchange, it is clear that B3 has to step up its game.</p> <hr class="wp-block-separator"/> <h2>Take note</h2> <ul><li>The State University of Campinas (Unicamp) <a href="http://www.saopaulo.sp.gov.br/ultimas-noticias/unicamp-firma-acordo-de-mobilidade-academica-com-universidade-da-noruega/">has signed a partnership</a> with Norway’s Nord University, allowing the mobility of professors and students of both institutions. The Department of Scientific and Technological Policies of Unicamp’s Geosciences Institute will send a student and a professor to Nord’s Business School. The selection process is currently open and the chosen student will be able to take part in projects such as WASP, which creates ship technologies propelled by the wind, for 5 months.&nbsp;&nbsp;&nbsp;</li><li>Brazil’s first unicorn, digital bank Nubank released its 2019 data, boasting an average of 40,000 new clients per day. The fintech tripled its customer base to 19.7 million clients and doubled revenue to BRL 2.1 billion, but still had losses of BRL 313 million. The company said in a <a href="https://blog.nubank.com.br/balanco-nubank-2019/">blog post</a> that the loss is part of its decision to invest heavily to accelerate growth.</li><li>Brazilian industrial group Randon launched a new venture capital fund, Randon Ventures, to invest in technology for logistics, the financial sector, insurance and mobility of things as a way to expand the company’s portfolio. The first round of investments aims to apply BRL 3 million and accelerate up to 12 startups, <a href="https://www.randon.com.br/pt/noticias/empresas-randon-lan%C3%A7am-empresa-para-investimentos-em-startups/">according to the company</a>. The first of them, TruckHelp, is a startup that provides services for truckers and logistic companies, connecting them to mechanics.&nbsp;</li><li>A judge from São Paulo decided that Facebook should not pay compensation to the family of a woman that was beaten to death in the coastal city of Guarujá in 2014 after her neighbors spread lies on social media about her being involved in witchcraft and kidnapping children. The assault itself was recorded and posted on the platform. The decision considered Facebook should not act as “a police of its own users,&#8221; based on an article of the Civil Rights Framework of the Internet that says companies are not to be held responsible for content posted by users.

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Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Before joining The Brazilian Report, she worked as an editor for Trading News, the information division from the TradersClub investor community.

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