Taxation on software is about to change based on a Brazilian Supreme Court decision session that is under development.
Although not finished, the majority has been settled, and it’s possible to predict that the impacts will be wider than the specific case (which discusses whether software is taxed under ISS (Municipal tax on services), which has rates ranging from 2% to 5%, or ICMS (a VAT-like Brazilian tax) with rates varying from 17% to 25%).
Most likely, there will be no more distinction between different sorts of software from a tax point of view – standard, customized or Software as a Service (SaaS). They will all be considered “services”. Therefore, they will be taxed under ISS and not VAT, which is very good for the consumers and for the industry.
But the ruling will also have impact on federal taxes. The Brazilian IRS currently understands that, for companies that pay taxes based on the estimated regime, standard software is equivalent to a good (and there is a gross presumption of 8%) while customized software and SaaS are considered services (there is a gross presumption of 32%).
Even though the IRS has recently reaffirmed this understanding, with the new Supreme Court ruling, all software operations will be considered services operations, and the percentual will be 32% for all of them. Which is, regarding this specific tax, bad news.
Considering the imminent change, it is crucial for each company to verify and analyze the tax impacts. Despite of being a ruling about a municipal and state taxes dispute, there will be impact on federal taxes too, and companies need to prepare.