Established by Complementary Law No. 116/03, the Municipal Services Tax (ISSQN) is a Brazilian tax levied on the provision of services, as the name itself suggests.
Whenever a company provides a service—such as consulting, repair, or any other service activity—it is obligated to pay this tax to the local municipality. The amount of ISSQN can vary from city to city and depends on the type of service and the location of its provision, making it an important source of revenue for municipalities.
It is not uncommon for Brazilian municipalities to overstep their jurisdiction and demand ISSQN from taxpayers for the provision of certain services, forcing companies to resort to the judiciary to challenge such charges.
For this reason, on August 8, 2023, the 2nd Panel of the Superior Court of Justice (STJ) examined a case involving a taxpayer, recognizing the imposition of ISS on clinical research services performed in Brazil but contracted by a foreign company.
The dispute in Special Appeal No. 2075903/SP reached the STJ after an appeal by the Municipality of São Paulo in a lawsuit filed by a Brazilian pharmaceutical research company seeking recognition of the non-incidence of ISSQN on the performance of specific services such as examination, research, collection, and provision of data and information contracted by a foreign company.
In this particular case, the services provided were crucial for the continuation of clinical research on pharmaceutical products abroad. The collected data were sent abroad for the contracting party to proceed with the development of its medications.
Due to the provision of these services, a question arose: would sending this data abroad constitute the export of services? If the answer were positive, there would be no imposition of ISSQN, as Article 2, item II of Complementary Law 116/03 indicates that the tax does not apply to the export of services abroad.
However, if the answer were negative, the tax would be legitimate and supported by the sole paragraph of Article 2, which states that services developed in Brazil, with results verified here, are not exempt, even if payment is made by a resident abroad.
Faced with this controversy, the taxpayer litigated, and the São Paulo Court of Justice ruled that ISSQN did not apply because the service’s results could not be verified in the country. According to the court, the nature of the exported service prevents the production of results in Brazil, which will only be verified at the headquarters of the foreign company contracting the service. Since there is no result produced in Brazilian territory, the municipality could not levy the tax.
The difficulties surrounding the issue are significant: how to determine if the results of services provided by a company established in the country are verified in Brazil or only abroad? The lack of legal delimitation of the concept of “result” allows for divergent interpretations between taxpayers and tax authorities.
Municipalities insist that the mere execution of services on national territory would be sufficient to negate exportation, as these services would have materialized in Brazil and, consequently, should be subject to ISSQN. Meanwhile, service providers argue that, in addition to service execution in Brazil, the actual utility—the enjoyment of the service by the service recipient—would be necessary on national territory, thus exempting the service from ISSQN according to Article 2 of Complementary Law 116/03.
In this specific case, the municipality’s position prevailed, as per the STJ’s understanding, applying the view of Minister Francisco Falcão that “The service recipient was hired for the performance of specific services, and the results of the services that were fully developed in Brazil relate to the service itself, with no mention of completion of the contracted services abroad.”
With this decision, one conclusion is reached: there are numerous challenges faced by Brazilian taxpayers due to the legal uncertainty surrounding the issue, especially considering that the imposition of ISSQN on services provided by Brazilian companies is a significant factor in pricing activities offered to foreign companies.
The lack of predictability in the taxation of services provided harms national companies competing with foreign ones, as service providers in Brazil are likely to adopt the STJ’s interpretation to include ISSQN in the pricing of their services.