With the exponential growth of technology, the assets and digital connections have progressively gained more relevance in commercial relations; therefore, digital operations started to represent a significant portion of a country´s financial transactions.
In Brazil, which is not very distinct from other countries, the tax treatment applicable to operations with new technologies generates uncertainties and controversies, due to the fact that new forms of technology are not suitable to concepts previously defined by law, additionally this sort of operations have not yet been faced by tax authorities in a clear way, which creates legal uncertainty for companies operating in the sector.
The Brazilian Federal Revenue (RFB), through the Answer to Advance Tax Ruling Request (“Solução de Consulta”) No. 191/2017 from the General Coordination of Taxation (“COSIT” – Coordenação Geral de Tributação) dealt for the first time with the nature of payments remitted abroad as compensation for Software as a Service (SaaS), a market that has grown remarkably in the recent years.
This particular case refers to the commercial contracts involving authorization of access and use of SaaS, which is acquired from foreign suppliers and then resold to users and customers in Brazil. The requesting company commercializes the SaaS access but the program remains under the management of the foreign company that responds to the SaaS features.
The RFB understood that this case is different from other operational structures that deals with software licensing, since the cross-border payments would correspond to the revenue for the acquisition of the right to use the SaaS, so that the company would not be paying for the “right to commercialize” the SaaS, but in fact acquiring access authorizations to resell them through passwords for remote access to end users in Brazil, so there would not be a traditional sale of software, since what is commercialized is the right of customers to access programs and databases that are stored in undetermined places (cloud). Thus, the user does not effectively acquire the software ownership, but the service provider is responsible for providing maintenance and technical support, consequently the object of commercialization is not properly the software, but the right to access the program hosted in the “cloud”.
In view of this, the RFB understood that this case of SaaS, as described by the requesting company, is characterized as a technical service, as it depends on specialized knowledge in computer science from automated structures with clear technological content, therefore the cross-border payments would be subject to the withholding income tax (IRRF) at a rate of 15% and to the Contribution for Intervention in the Economic Domain (CIDE) at a rate of 10%.
It is important to notice that the Answer to Advance Tax Ruling Request No. 191/2017 concerns to a specific SaaS business model, in which the company is not actually paying for the “right to commercialize” the SaaS for the US company, nor receiving technology transfer, but in fact it is only acquiring access and use authorizations of the SaaS to resell them to users in Brazil.
In addition, it is worth remembering that the RFB has already changed its understating on subjects related to modern technologies, as was the case of the Conflict Resolution Decision (“Solução de Divergência”) No. 18/2017, which reformed the Conflict Resolution Decision No. 27/2008 on cross-border payments involving rights to commercialize software license, coming to understand, unlike before, that such payments are indeed subject to withholding income tax.
*Written by Fabio Capelletti and Vitor Cunha