Taxation of ISPs in Brazil by ICMS and ISS Denis Borges Barbosa April 14, 1999. a) On the taxation of ISP services by the Brazilian State tax ICMS b) On the prognosis of a retroactive assessment of ICMS on ISPs c) On the taxation of ISPs by ISS City tax 2) My conclusions – For the reasons below indicated, my conclusions are: a) ICMS is not due on ISP activities, but is likely that the State authorities would be requesting for its payment from June 1998 on; b) ISS is due on designated ISP activities. 3) On the facts of the case - ISP activities comprise a number of different services, among which the following must be mentioned: a) a) Internet Connection Services rendered to all users, as defined in Ministry of Communications Norm 4/95, item 4.1i[i], to wit: i) Use of the equipment needed to implement the routing, storing and directing of information, and of the further software and hardware required for the ISP to implement the Internet protocols and manage the service; ii) The employment of routines for connection (passwords, addresses and domains) iii) Use of software by ISP, as e-mail, remote contact, FTP, access to data banks, etc. iv) Use of data and information by ISP; v) Use of other hardware by ISP b) Special services related to dedicated services; c) Web hosting and other domain services; d) Technical support and assistance, including on-site installation services; e) Site design and related services; f) Advertising services rendered on behalf of third parties as displaying of banners, etc. g) Other assorted services. 4) As far as we are aware: a) No ICMS taxation is being imposed on ISP activity ii[ii]. b) Many providers are paying ISS to the various Cities, but some have been refusing to do so. c) We are not aware of any court cases concerning the issue. 5) General Considerations - Business activities in Brazil are subject to a three tiered tax incidence, including the Federal, State and City levels. The relevant taxes for our analysis are the following: a) ICMS or State Value added tax on Telecommunication and Transport services iii[iii]. merchandises, Electricity, b) b ISS - Service Tax, due on the services listed in Federal Law and City Law, specifically excluding Electricity, Telecommunication and Transport services iv[iv] . 2) The whole tax system is designed in the Federal Constitution. A specific National Law must also be in force to fix the tax basis and the tax payer of each abstract tax, or non retributive charge (imposto), as well as to precise the competing tax jurisdictions among the Union, States and Municipalities, 3) The General National Tax Law is the National Tax Code. However, other laws do act as National Laws as for instance, the National ISS Law v[v] and the National ICMS Law vi[vi]. 4) The basic fact under analysis - The basic fact concerning the issue under analysis is that ISP activity is a service, and both taxes concern to services. Therefore, our main task is to clarify whether any of those taxes is to be imposed on ISP services, and if so, which one. 5) ICMS is restricted to just some servicesvii[vii], including communication services; the Constitution says that the only tax that may be imposed on domestic operations concerning telecommunications is ICMS. 6) Therefore, if ICMS is actually to be imposed on ICPs, it is because it is a telecommunication service; and then, ISS can not be also imposed. 7) The ICMS tax - State VAT is imposed on various taxable events; this tax is basically imposed on physical merchandise, but also on the like taxable events related to Transport, Telecommunication and Electricity services. 8) ICMS is provided for in the Federal Constitution and in the specific National Law. However, many of its provisions, especially those of a procedural or exceptive nature, are provided by Interstate Tax Conventions viii[viii]. The Joint State Authorities meeting under the Federal coordination in the CONFAZ committee agree on such Conventions ix[ix]. In addition to that, each State has its own body of law, which is supposed to conform to the National Standards and Interstate Conventions. 9) As a value added tax, it is calculated in each operation taking into account the like tax already paid in regard to the same service or its inputs as result of prior operations of like nature. Therefore, the value of the tax previously paid in the various phases of the circulation of the service is offset to the value newly due, and just the difference is actually brought to the Government’s vaults. 10) Tax rates related to Telecommunication services do vary extensively from state to state. Minas Gerais current rate is 25%, whereas Rio de Janeiro current rate is 35% (up to June 30, 1999) x[x]. 11) The Telecommunication services - The 1988 Constitution itself does not clarify what are the telecommunication services upon which the ICMS is due xi[xi]. 12) The National ICMS Law defines communication services as: “the generation, the sending, the reception, the transmittal, the retransmittal, the repetition and the amplification of communication of any kind “ xii[xii]. 13) I understand that this statutory definition is not clear enough to effectively bring ISP services within the scope of ICMS. The wording seems to indicate that the taxable service is actually the conventional telecommunication services, and not the value added ones xiii[xiii]. Some authors precise, however that the National ICMS Law means that it is not only the communication itself but on the provision of “conditions under which the communication may occur”xiv[xiv]. 14) However, on June 1998, the Joint State Tax Authorities (CONFAZ) apparently decided to clarify such provision. Interstate ICMS Convention 69/98 included as within the taxable events of such tax (among other events), "the use of supplementary services and additional facilities that optimize or render easier the communication process, whatever the denomination they may take" xv[xv] 15) However the obvious target of that Convention was the newly privatized Telecommunication Companies, the quoted clause encompasses a much broader range of activities as compared to the standard of the National Law. If this provision were held to be valid, I understand that there would be a clear risk that ISP activities would be included within ICMS taxable events xvi[xvi]. 16) It must be noted that the ensuing Interstate Convention no. 74/98 decided that Convention 69/98 would only be applicable to events following the latter's inception. This new Convention was however rejected by the State of Pernambuco, and therefore rendered inapplicable xvii[xvii]. Convention 69/98 was therefore, at least in theory, applicable on a retroactive basis. 17) My understanding, however, is that a) Convention 68/98 is not constitutional; b) If Convention 69/98 were constitutional, it could only be applicable on a prospective basis, even though considering the rejection of Convention 74/98; and specifically c) Convention 68/98 (and, furthermore, art. 2, III of the ICMS National Law) can not be applicable to any ISP services and, particularly, to those services classified as Internet Connection Services by Ministry of Communications Norm 4/95. 18) My contention as to the constitutional grounds is based on the following: or Convention 69/98 creates a new taxable event beyond the one specified in ICMS National Law, art. 1st; or it just interpret or clarify such provision of the National Law. 19) Convention 69/98 could not create a new taxable event, as only National Laws could do so xviii[xviii]. Under the 1988 Constitution, Interstate Conventions could only act in lieu of National Laws before a formal National Law was issued xix[xix]. The courts have been indeed stating - for the time being - that the Convention is unconstitutional on such grounds xx[xx]. 20) On one hand, even if it were possible to create a new taxable event by a Convention, however, this creation could be only applicable to future events xxi[xxi]. 21) I understand that there is significant arguments to the sense that Convention 69/98 could not be applicable on a retroactive basis: a) On one hand, even if Convention 69/98 was just clarifying the scope of the ICMS National Law, it could only be applicable on a prospective basis. xxii[xxii] National Tax Code states that a change in the understanding of the Tax Administration (once a understanding has effectively been stated on a decision or the answer to a consultation) can only be applicable on future events xxiii[xxiii]. b) I think that it must be arguable that, by not previously stating in a Interstate Convention that “supplementary services and additional facilities” are included in the definition of “telecommunication services”, the Tax Administration had a understanding that they were not so. This understanding may be however subject to diverging views in the judiciary. c) Thus, the rejection of Convention 74/98 would have not necessarily as effect the retroactivity of Convention 69/98. 22) The same considerations would be extended to any other eventual provision of law or other legislation specifically intended to submit to ICMS taxation the ISP activities. Retroactivity is not to be expected either as a new provision or as a new standard of application of an existing provision. 23) However, as I stated, I understand that Convention 68/98 (and, furthermore, art. 2nd, III of the ICMS National Law) can not be applicable to ISP services. My understanding is that ISP is not a telecommunication service. This belief is supported by the specific legislation Telecommunication Services xxiv[xxiv]. that in Brazil governs Internet 24) The applicable Internet Telecommunication rule is Ministry of Communications Norm 4/95xxv[xxv]. It states that : a) "Internet Connection Service" (SCI) is a generic name that designates an Additional Value service that allows Users and Information Service Providers to have Internet Access. b) "Internet Service Connection Provider " (PSCI): entity that renders the Internet Connection Service. 25) The most relevant aspect of this Norm is that it defines the ISP activity as a " Additional Value service". The importance of this definition is that the General Telecommunication Lawxxvi[xxvi] so states: Article 61. Value added service is the activity that adds to the distinct and separate telecommunications service that supports it, new features related to the access, storage, presentation, handling or recovery of information. Paragraph one. Value added service is not a telecommunications service, and the provider thereof is classified as user of the telecommunication service providing support thereto, with the rights and obligations inherent to this conditionxxvii[xxvii]. Paragraph two. Access to the utilization of telecommunications service networks for rendering value added services is assured to interested parties, for which the Agency shall regulate the conditions as well as organize the relationship between same and the telecommunications service providersxxviii[xxviii]. 26) Does that statement of the General Telecommunication Law governs the tax consequences of the classification of a service as a telecommunication service? The question is very relevant because the National Tax Code states in art. 109 that the general principles of private law do not dictate the tax consequences issuing therefromxxix[xxix]. 27) However, the Code itself states also that once a definition from a non-tax law is adopted by the Constitution to define or circumscribe tax jurisdiction xxx[xxx], this definition can not be changed by the tax laws. The definition of communication or telecommunication is utilized by the Constitution to design the jurisdiction of the States as to the taxation of services and therefore can not be changed in its nature by the tax laws. 28) Furthermore, Telecommunication services are regulated services, to be granted exclusively by Federal concession under art. 21, XI of the Constitution xxxi[xxxi]. Internet services are not regulated services as they are not deemed xxxii[xxxii] telecommunication services . Incidentally, the Supreme Court has decided that the former Federal Monopoly of telecommunication only to transmittal of telecommunication signals xxxiv[xxxiv]. xxxiii[xxxiii] was restricted 29) In summary as to the issue of taxation by ICMS of telecommunication services: a) ICMS State tax is only imposed on telecommunication services. b) The Constitution and the National ICMS Law do not state clearly that Internet services are not telecommunication services. c) Some States have expressed their intention of taxing ISP services even though to our information no ISP have been paying ICMS. d) Interstate Convention 69/98, in force since June 29, 1998, broadened the National ICMS Law definition to include "the use of supplementary services and additional facilities that optimize or render easier the communication process, whatever the denomination they may take". This provision, if it were valid, could be held to include Internet services and introduce a risk that the States take it as applicable on a retroactive basis. e) My understanding is that Convention 69/98 is not to be deemed applicable on a retroactive basis: i) Under the Constitution, the Convention can not create a new tax event; ii) Under the Constitution, new tax laws are not to be retroactive; iii) Even if it were to be deemed a simple clarification of the text of the National Law, (and therefore not new) its effects under National Tax Code art. 146 would be probably held to be prospective. f) The above analysis is restricted to the legal issues at stake and just takes in to consideration the most probable final result of the dispute with the States in the court system. g) On a practical stand, it must be then considered that: i) The States, by August 1998, have decided not to apply Convention 69/98 retroactively, and just Pernambuco backed off. ii) However, the States are under very stringent financial conditions, and may be impelled to resort to every means to obtain revenues. iii) If taxation were to be eventually required on ISP activities, it would cover most probably the period since June 1998, when the Convention 69/98 entered into force xxxv[xxxv]. h) Furthermore, my understanding is that ICMS is not to be applicable at all to the designated ISP activities listed in Ministry of Communications Norm 4/95: i) The Constitutional provision designing the scope of the ICMS on telecommunication services is a jurisdictional standard as it indicates which services the States may tax, not to be taxed by the Cities; ii) Jurisdictional provisions of the Constitution may assimilate the definitions of the non-tax laws, and such definitions must be followed by the tax laws; iii) The General Telecommunication Law (as before its edition, the Minimum Telecommunication Law) says that Additional Value Services are not telecommunication services; iv) Uniform Federal practice and the Ministry of Communications Norm 4/95 univocally state that designated ISP services are Additional Value Services; v) Telecommunication services are under the Constitution regulated services, and the ISP designated activities were never deemed to be regulated services. 30) Again, the tax authorities would most probably disregard those legal considerations, although they are very relevant for a tax dispute brought into the courts. If an imposition is asserted, my estimate is that it would be (more probably than not) withheld by an injunction in a writ of mandamus, on the grounds of the definition of Internet Services as a Valued Added ones. 31) Therefore, my advice is that you should be prepared for the States imposing ICMS tax on IPS activities. However, if it were to be applicable on a retroactive basis, it would most probably be imposed from June 1998 on. 32) The ISS Tax - The Service Tax is imposed at the City Level. This tax is imposed on the gross values received as result of services rendered. This is not a value-added tax: except for very limited exceptions, there is no deduction from the tax basis for prior services rendered for the Company by third parties or for materials or other items used in the service. 33) When assessing the possibility to have a service taxed by ISS, the first question to answer is: are the services of the Company included in the taxable list? 34) The National ISS Law states the services listed, and the City Law also lists such services. As a rule, all City Laws add to the national list a general clause including "other services otherwise unlisted". Nevertheless, the courts have massively held that whenever the City list is not in conformity to the National List, there is an unconstitutional excess of taxation xxxvi[xxxvi]. 35) Thus, it is possible, albeit not probable, that a service, not taxable by ICMS, is also not taxable by ISS. 36) The tax rate may vary from service to service and from City to City, but as a general standard municipalities limit most of the services to a 5% level. 37) ISP services - As I noticed at the first page of this Memorandum, the ISP activities comprise a large scope of different services, including the Additional Value Services indicated in Norm 4/95. Some of them may be eventually argued to be Telecommunication Services, whereas other (as for instance, Web designing) most probably would not be so, notwithstanding the very broad wording of Convention 69/98. 38) Therefore, even in case ICMS taxation is held to be due on some ISP services, other would probably not be considered so. ISS taxation of at least a portion of ISP activities is a very clear possibility xxxvii[xxxvii]. 39) The National List and possibly all local lists do not include ISP activities as taxable events as such. As we stated, the local lists although used as a basis for taxation by the Cities, are only considered constitutional if they are in conformity with the National list; I shall return to this aspect below. Therefore, our first task is to classify (if possible) the various individual services within the National list. 40) The possible items that could relate to ISP activities are: a) Data processing (items 24 and 22) – this is a very generic item, where many services related to computer activities may be included. b) Broadcasting of texts, images and other publicity material, through any means whatsoever, except by newspapers, periodicals, radio and television. (item 86) c) Lease of chattels (item 79) d) Technical assistance (item 21) e) Installation of equipment when same is provided by the user of the services (item 74) 41) The reasons for my choice of such items in the list are the following: a) Data processing services is a very broad item, and its scope has been questioned before the various administrations and the courts. My understanding is that is a reasonable classification at least some for those Additional Value Services mentioned in Ministry of Communications Norm 4/95. The ISPs themselves seem to be in agreement with that idea as they describe their services as “timesharing of machines, added to consulting and software usage”xxxviii[xxxviii]. b) If the service is considered in its effects, and not in the means it provides to users, it seems also reasonable to define it as “Broadcasting of texts, images and other publicity material”. This is particularly relevant for two specific activities: i) Access to Internet WWW or other image, sound and text-based facilities. ii) Actual display of publicity by means of banners or other similar means. In this case, the user of the service is the advertised entity xxxix[xxxix]. c) Leasing of space for web hosting seems to be an adequate classification under item 79 of the list. The Administrative Case Law has already settled in some Cities that licensing of Intellectual Property is leasing of chattels xl[xl], and therefore the idea that the paid use of immaterial chattels may be taxed. If use of address space were also a separate service, it would be possibly so classified. d) Both the on line support and the eventual other service provided to the users could be classified as technical assistance or, sometimes, consulting (in this case, item 22). e) In case that dedicated services or other clients require the actual installation of equipment or software, this service, if specified and onerous, and effected in equipment not supplied by the ISP is also to be classified as taxable under ISS. 42) Those considerations are intended to show why, to my understanding, the City Tax Authorities have reasonable chances of effectively classify some or most of the services as statutory tax events. 43) On the other hand, as already stated, some ISPs are not paying ISS, and compliance with the pertinent City Laws may result in significant competitive imbalance. Actually, the argument that the list does not provide for a specific ISP item may be compelling and the decision of not paying ISS is not entirely groundless. 44) However, to my understanding, the classification of ISP activities as above indicated is not to be taken as creation of a new taxable event by analogy xli[xli]. Much to the contrary, it follows adequately the trend adopted by the courts to accept as reasonable inclusions within the list of new services that are akin with the prior ones, without really exceeding the restrictive nature of the statutory schedule. 45) My recommendation in this context therefore is: a) ISS is to be paid on the designated services; b) In case competitivity or other factors advise the non-payment, adequate court or administrative procedures shall be followed to prevent tax auditors to impose penalties and request forcible payment of such tax. 46) We call your attention that, on concluding that ISS should be paid on ISP services, a series of other problems are raised, as for instance: a) Taxation of services at the location where POPs are situated; this specific problem shall be analyzed in the context of each City Law, what may be specially complex in cases where the ISP keep a number of different POPs, some of them licensed as branches. b) In cases where different tax rates are applicable to each specific service, which procedures must be followed to obtain the most adequate tax savings? c) In cases where targets have been refusing to pay ISS, which decision must be taken as to the continuance of the respective court or administrative actions? NORMA 004/95 USO DE MEIOS DA REDE PÚBLICA DE TELECOMUNICAÇÕES PARA ACESSO À INTERNET 1. OBJETIVO Esta Norma tem com objetivo regular o uso ode meios da Rede Pública de Telecomunicações para o provimento e utilização de Serviços de Conexão à Internet. 2. CAMPO DE APLICAÇÃO Esta Norma se aplica: a. às Entidades Exploradoras de Serviços Públicos de Telecomunicações (EESPT) no provimento de meios da Rede Pública de Telecomunicações a Provedores e Usuários de Serviços de Conexão à Internet; b. aos Provedores e Usuários de Serviços de Conexão à Internet na utilização dos meios da Rede Pública de Telecomunicações 3. DEFINIÇÕES Para fins desta Norma são adotadas as definições contidas no Regulamento Geral para execução da Lei no. 4.117, aprovado pelo Decreto no. 52.026, de 20 de maio de 1963, alterado pelo Decreto no. 97.057, de 10 de novembro de 1988, e ainda as seguintes: a. Internet: nome genérico que designa o conjunto de redes, os meios de transmissão e comutação, roteadores, equipamentos e protocolos necessários à comunicação entre computadores, bem como o "software" e os dados contidos nestes computadores; b. Serviço de Valor Adicionado: serviço que acrescenta a uma rede preexistente de um serviço de telecomunicações, meios ou recursos que criam novas utilidades específicas, ou novas atividades produtivas, relacionadas com o acesso, armazenamento, movimentação e recuperação de informações; c. Serviço de Conexão à Internet (SCI): nome genérico que designa Serviço de Valor Adicionado que possibilita o acesso à Internet a Usuários e Provedores de Serviços de Informações; d. Provedor de Serviço de Conexão à Internet (PSCI): entidade que presta o Serviço de Conexão à Internet; e. Provedor de Serviço de Informações: entidade que possui informações de interesse e as dispõem na Internet, por intermédio do Serviço de Conexão à Internet; f. Usuário de Serviço de Informações: Usuário que utiliza, por intermédio do Serviço de Conexão à Internet, as informações dispostas pelos Provedores de Serviço de Informações; g. Usuário de Serviço de Conexão à Internet: nome genérico que designa Usuários e Provedores de Serviços de Informações que utilizam o Serviço de Conexão à Internet; h. Ponto de Conexão à Internet: ponto através do qual o SCI se conecta à Internet; i. Coordenador Internet: nome genérico que designa os órgãos responsáveis pela padronização, normatização, administração, controle, atribuição de endereços, gerência de domínios e outras atividades correlatas, no tocante à Internet; 4. SERVIÇO DE CONEXÃO À INTERNET 4.1. Para efeito desta Norma, considera-se que o Serviço de Conexão à Internet constitui-se: a. dos equipamentos necessários aos processos de roteamento, armazenamento e encaminhamento de informações, e dos "software" e "hardware" necessários para o provedor implementar os protocolos da Internet e gerenciar e administrar o serviço; b. das rotinas para administração de conexões à Internet (senhas, endereços e domínios Internet); c. dos "softwares" dispostos pelo PSCI: aplicativos tais como - correio eletrônico, acesso a computadores remotos, transferência de arquivos, acesso a banco de dados, acesso a diretórios, e outros correlatos -, mecanismos de controle e segurança, e outros; d. dos arquivos de dados, cadastros e outras informações dispostas pelo PSCI; e. do "hardware" necessário para o provedor ofertar, manter, gerenciar e administrar os "softwares" e os arquivos especificados nas letras "b","c" e "d" deste subitem; f. outros "hardwares" e "softwares" específicos, utilizados pelo PSCI. 5. USO DE MEIOS DA REDE PÚBLICA DE TELECOMUNICAÇÕES POR PROVEDORES E USUÁRIOS DE SERVIÇOS DE CONEXÃO À INTERNET 5.1. O uso de meios da Rede Pública de Telecomunicações, para o provimento e utilização de Serviços de Conexão à Internet, far-se-á por intermédio dos Serviços de Telecomunicações prestados pelas Entidades Exploradoras de Serviços Públicos de Telecomunicações. 5.2. O Provedor de Serviço de Conexão à Internet pode, para constituir o seu serviço, utilizar a seu critério e escolha, quaisquer dos Serviços de Telecomunicações prestados pelas EESPT. 5.3. Os meios da Rede Pública de Telecomunicações serão providos a todos os PSCIs que os solicitarem, sem exclusividade, em qualquer ponto do território nacional, observadas as condições técnicas e operacionais pertinentes e, também, poderão ser utilizados para: a. conectar SCIs à Internet, no exterior; b. interconectar SCIs de diferentes provedores. 5.4. As Entidades Exploradoras de Serviços Públicos de Telecomunicações não discriminarão os diversos PSCIs quando do provimento de meios da Rede Pública de Telecomunicações para a prestação dos Serviços de Conexão à Internet. Os prazos, padrões de qualidade e atendimento e, os valores praticados serão os regularmente fixados na prestação do Serviço de Telecomunicações utilizado. 5.5. É facultado ao Usuário de Serviço de Conexão à Internet o acesso ao SCI por quaisquer meios da Rede Pública de Telecomunicações à sua disposição. 6. RELACIONAMENTO ENTRE AS ENTIDADES EXPLORADORAS DE SERVIÇOS PÚBLICOS DE TELECOMUNICAÇÕES E OS PSCIs 6.1. No relacionamento entre as Entidades Exploradoras de Serviços Públicos de Telecomunicações e os Provedores de Serviços de Conexão à Internet, não se constituem responsabilidades das EESPT: a. definir a abrangência, a disposição geográfica e física, o dimensionamento e demais características técnicas e funcionais do Serviço de Conexão à Internet a ser provido; b. especificar e compor os itens de "hardware" e "software" a serem utilizados pelos PSCIs na prestação do Serviço de Conexão à Internet; c. definir as facilidades e as características do Serviço de Conexão à Internet a serem ofertadas pelos PSCIs; d. providenciar junto aos Coordenadores Internet a regularização dos assuntos referentes ao provimento de Serviços de Conexão à Internet; e. definir os Pontos de Conexão entre os PSCIs, no Brasil ou no exterior, bem como as características funcionais de tais conexões. 7. ENTIDADE EXPLORADORA DE SERVIÇOS PÚBLICOS DE TELECOMUNICAÇÕES COMO PROVEDORA DE SERVIÇO DE CONEXÃO À INTERNET 7.1. A EESPT, ao fixar os valores a serem praticados para o seu SCI, deve considerar na composição dos custos de prestação do serviço, relativamente ao uso dos meios da Rede Pública de Telecomunicações, os mesmos valores por ela praticados no provimento de meios a outros PSCIs. i[i] . This Norm remains applicable to the Internet Service, as it can be seen from item 3.2.b of Norm 4/97, which provides for other Additional Value Services. ii[ii] José Wilson Ferreira Sobrinho, at www.seprorj.org.br/legis1.htm, informs that the State of Paraná has issued a tax ruling (Consulta 168/96) on request of a taxpayer, stating that ICMS is due on ISP activities. The Newsletter Rio Informática, year IV, July 1997, p 5 also informs that the Employers' Union of the Data Processing Companies of the State of Rio de Janeiro filed a consultation with the tax authorities of that state on the ICMS taxation of ISP services. As far as we were informed, this consultation was not answered to this date. According to the legal opinion by Evandro Raul dos Santos in www.internetsul.com.br/comunicados/parecer, the State of Rio Grande do Sul stated that Internet Services are to be taxable by ICMS under art. 3rd of the State Law 8.820/89, as modified by Law 10.908/96. On telephone contacts with the Brazilian Association of Internet Providers (ABRANET, www.abranet.org.br, that is a different association than the National Association of Internet Providers, ANPI, www.anpi.org.br), Price Waterhouse Coopers was informed that no associate company is paying ICMS for their services. However, this Association is very worried about the possibility of ICMS taxation of ISP services. See http://www.cg.org.br/reunioes/atas/1996/a10-12-96.html. iii[iii] Provided for art. 155, I, b, of the Federal Constitution of October 4, 1988 (CF/88). iv[iv] Provided for art. 156, III, of CF/88 v[v] Decreto – Lei 406/68, as modified by Lei Complementar n. 56/87. vi[vi] Lei Complementar 87/96. vii[vii] Constitution: Art. 155 - Compete aos Estados e ao Distrito Federal instituir impostos sobre (...): II sobre prestações de serviços (...) de comunicação, ainda que as operações e as prestações se iniciem no exterior; (..)§ 3º - À exceção dos impostos de que tratam o inciso II, do caput deste artigo e o art. 153, I e II, nenhum outro tributo poderá incidir sobre operações relativas a (..) serviços de telecomunicações(...). viii[viii] For many years, the system lacked a National Law; its basic provisions were supplied by a special Interstate Convention, nr. 66/88, under a Temporary Provision of the 1988 Constitution. Convention 66/88 was revoked by Complementary Law 87/96, which is the ICMS National Law. ix[ix] CONFAZ was created by Complementary Law nr. 24/75 to allow the Union to manage the ICMS taxation jointly with the various State tax authorities. x[x] State Law 3.082/98 xi[xi] The Constitution does not define what is a communication service for the purposes of art. 155 (ICMS) but by reference the § 3rd of the same article equates “communication” and “ telecommunication” services. Telecommunication is also mentioned in Constitution art. 5th, XII, art. 21, X and XI, art. 22, IV and V, and art. 48, XII. According to Hugo de Brito Machado, Aspectos Fundamentais do ICMS, Ed. Malheiros, p. 37, those provisions from the Constitution itself are the basic tools for establishing what telecommunication is. They may be used to find that under the Constitution, telecommunication and radio broadcasting or postal services are distinct services. However, as we shall see, a more precise concept of telecommunication is necessary to distinguish between the pertinent services and the other services under the taxing jurisdiction of Municipalities. This more refined concept must be given primarily by the nontax legislation, specially the laws pertaining to the telecommunication sector, for instance the General Telecommunication Law. xii[xii] Lei Complementar 87/96, ART.2 - O imposto incide sobre: (...) III - prestações onerosas de serviços de comunicação, por qualquer meio, inclusive a geração, a emissão, a recepção, a transmissão, a retransmissão, a repetição e a ampliação de comunicação de qualquer natureza; xiii[xiii] The General Law on Telecommunication, which is a subsequent law as to the National ICMS Law, provides for a like definition: Telecommunication services is the ensemble of activities that allows for the offer of telecommunication. Telecommunication is the transmittal, the sending or the reception by cable, radio electricity, optical means or any other electro-magnectic process of signs, characters, signals, writings, images, sounds or information of any kind. The original is so worded: Art. 60. Serviço de telecomunicações é o conjunto de atividades que possibilita a oferta de telecomunicação. § 1° Telecomunicação é a transmissão, emissão ou recepção, por fio, radioeletricidade, meios ópticos ou qualquer outro processo eletromagnético, de símbolos, caracteres, sinais, escritos, imagens, sons ou informações de qualquer natureza. xiv[xiv] Roque Carazza, ICMS 1996, Malheiros, p. 70-71. xv[xv] Before that, Convention 2/96 also listed some specific telecommunication-related services and taxable events under ICMS, but did not refer to additional facilities or supplementary services in general The full text in Portuguese of the Convention 69/98 is the following: O MINISTRO DE ESTADO DA FAZENDA E OS SECRETÁRIOS DE FAZENDA, FINANÇAS OU TRIBUTAÇÃO DOS ESTADOS E DO DISTRITO FEDERAL, na 90ª reunião ordinária do Conselho Nacional de Política Fazendária, realizada em Campos de Jordão, SP, no dia 19 de junho de 1998, tendo em vista o disposto no artigo 199 do Código tributário Nacional (lei 5172, de 25-10-1966), e no artigo 13, § 1º, inciso II, alínea “a”, da lei complementar 87 de 13 de setembro de 1996; Considerando a necessidade de uniformizar os procedimentos tributários nas prestações de serviços de comunicação e de esclarecer o contribuinte, para que corretamente possa cumprir suas obrigações tributárias, resolvem celebrar o seguinte CONVÊNIO: Cláusula primeira – Os signatários firmam entendimento no sentido que se incluam na base de cálculo de ICMS incidente sobre prestações de serviços de comunicação os valores cobrados a título de acesso, adesão, ativação, habilitação, disponibilidade, assinatura e utilização dos serviços suplementares e facilidades adicionais que otimizem ou agilizem o processo de comunicação, independentemente da denominação que lhes seja dada. (...). . xvi[xvi] This understanding is shared by significant industry associations, as the INTERNETSUL, the Internet Providers Association of the State o Rio Grande do Sul, according to legal opinion by Evandro Raul dos Santos in www.internetsul.com.br/comunicados/parecer. See also legal opinion in www.tdkom.com.br/allaymer/icms.htm by Allaymer Bonesso. xvii[xvii] Ato Declaratório 51 COTEPE/ICMS, dated of August 10, 1998, published at August 12, 1998. xviii[xviii] Even so, under the Constitutional tax design. The taxable event and the definition of taxpayer stated in the national law must have been also enforced in the specific federal, State or Municipal Law. xix[xix] Constitution, Interim Section (ADCT) art. 34,III, § 8. xx[xx] See the decision of the 11th Court of Government Cases of the District of the City of São Paulo, published at IOB1/99 p. 18. Decisions from the 12 th (Docket 1.527/98, writ of Mandamus) and 7 th (Docket nr. 1450/98, writ of Mandamus) Courts of the same District also found unconstitutional the Convention for the reasons stated. I did not find any appellate court decision on the matter. According to the Constitution, tax laws are necessarily prospective: “Art. 150 - Sem prejuízo de outras garantias asseguradas ao contribuinte, é vedado à União, aos Estados, ao Distrito Federal e aos Municípios (...) III - cobrar tributos: a) em relação a fatos geradores ocorridos antes do início da vigência da lei que os houver instituído ou aumentado; xxi[xxi] xxii[xxii] As CONFAZ and the State tax authorities are well aware that a Convention can not create a new taxable event, they had to assume that the 69/98 Convention was only clarifying, thus only declaring, the prior laws. Under the general principles of the Brazilian Law, a declaration may have retroactive effect. However, article 146 of the National Tax Code, which shall be analyzed below, stands as a very special provision, in face of the general principles of law applicable to the declaratory effect: it was designed to protect tax payers from changes, however warranted by the prior law, in the tax authority procedures or understandings. xxiii[xxiii] ART.146 - A modificação introduzida, de ofício ou em conseqüência de decisão administrativa ou judicial, nos critérios jurídicos adotados pela autoridade administrativa no exercício do lançamento somente pode ser efetivada, em relação a um mesmo sujeito passivo, quanto a fato gerador ocorrido posteriormente à sua introdução. See Rubens Gomes de Souza, Compêndio de Legislação Tributária, Edições Financeiras, 4a, Ed, 1964, p. 83 and Aliomar Baleeiro, Direito Tributário Brasileiro, Forense, 2a. Ed., p. 451. The Supreme Court has decided on such basis on the RE nr. 96.671-SP and RE 100.481-O, this last decision specifically on ICMS. xxiv[xxiv] This understanding is supported also by Edgar Pitta de Almeida, A Tributação dos Serviços de Acesso à Internet, Dialética 14, p. 7, as well as by Evandro Raul dos Santos, and Allaymer Bonesso (see above). xxv[xxv] Full text (in Portuguese) is attached. The definition of Additional Value Services was already provided by Decree 177/91, art. 3rd, XXXIV. xxvi[xxvi] Law nr. 9.472/97. Law 9.295/96, the so-called Minimum Telecommunication Law, also states the same in its art. 10, sole paragraph. Therefore, it is clear since 1996 that Internet is not a telecommunication service. However, it must be brought into mind that since 1989 the providers of Electronic Data Interchange (EDI) are being treated as non regulated providers. In the “Exposição de Motivos” , or ministerial explanation of the Bill that eventually was transformed in the General Telecommunication Law, it can be read the following: “Não convém que a lei estabeleça definições. Isso cabe à doutrina. Mas, às vezes, a lei deve fazê-lo. É o que ocorre no caso. O Projeto de Lei em pauta inicia o Livro III definindo serviço de telecomunicações, telecomunicação e estação de telecomunicações (art. 57). Propicia, por um lado, excluir de sua regulação serviços que não estejam tipificados como tal, como ocorre com serviços de valor adicionado (art. 58) - mantendo conceito estabelecido pela Lei n.° 9.295/96 - e, por outro, restringe o alcance de suas normas às atividades que não estejam confinadas aos limites de uma mesma edificação, propriedade móvel ou imóvel. É importante ressaltar o conceito de serviço de telecomunicações, não explícito na legislação até o momento, que, de certa forma, vincula sua definição à existência do seu consumidor, ao determinar, no art. 57, que "serviço de telecomunicações é o conjunto de atividades que possibilita a oferta de telecomunicação". Isso porque só faz sentido haver oferta de um serviço se houver quem o consuma, isto é, alguém para quem o conjunto das atividades oferecidas (no caso, um serviço) adiciona valor a algo. xxvii[xxvii] xxviii[xxviii] Art. 61. Serviço de valor adicionado é a atividade que acrescenta, a um serviço de telecomunicações que lhe dá suporte e com o qual não se confunde, novas utilidades relacionadas ao acesso, armazenamento, apresentação, movimentação ou recuperação de informações. § 1º Serviço de valor adicionado não constitui serviço de telecomunicações, classificando-se seu provedor como usuário do serviço de telecomunicações que lhe dá suporte, com os direitos e deveres inerentes a essa condição. § 2° É assegurado aos interessados o uso das redes de serviços de telecomunicações para prestação de serviços de valor adicionado, cabendo à Agência, para assegurar esse direito, regular os condicionamentos, assim como o relacionamento entre aqueles e as prestadoras de serviço de telecomunicações.. xxix[xxix] ART.109 - Os princípios gerais de direito privado utilizam-se para pesquisa da definição, do conteúdo e do alcance de seus institutos, conceitos e formas, mas não para definição dos respectivos efeitos tributários. xxx[xxx] ART.110 - A lei tributária não pode alterar a definição, o conteúdo e o alcance de institutos, conceitos e formas de direito privado, utilizados, expressa ou implicitamente, pela Constituição Federal, pelas Constituições dos Estados, ou pelas Leis Orgânicas do Distrito Federal ou dos Municípios, para definir ou limitar competências tributárias. See RTJ 156/666-694 for a Supreme Court decision on such issue. xxxi[xxxi] As modified by the eighth Amendment: Art. 21 - Compete à União: (...) XI - explorar, diretamente ou mediante autorização, concessão ou permissão, os serviços de telecomunicações, nos termos da lei, que disporá sobre a organização dos serviços, a criação de um órgão regulador e outros aspectos institucionais; In the official site of the Ministry of Communications, it can be read the following: “Existe alguma norma específica do MC que regule a atuação provedores de acesso a Internet? Se positivo como posso obtê-la? O Serviço de Acesso à INTERNET é considerado no Brasil Serviço de Valor Adicionado e portanto não é regulado pelo Ministério das Comunicações. Não é necessária nenhuma outorga para xxxii[xxxii] presta-lo. Documentos sobre o assunto podem ser obtidos no site do Comitê Gestor da INTERNET no Brasil em http://www.cg.org.br” xxxiii[xxxiii] After the decision, the eighth Amendment reduced Federal powers as to telecommunication services only to be concession-granting authority. xxxiv[xxxiv] AGRSS 535-SP, Rel. Octavio Galloti decided on June 4, 1993. xxxv[xxxv] Some newspaper articles and notes from ABRANET have indicated that States would be contemplating retroactive imposition since 1993. xxxvi[xxxvi] The leading case is the Supreme Court case of RE 87.628-RS, decided on Oct. 11, 1977, rel. Cunha Peixoto; “The list of the aforesaid law is restrictive, and in order that the tax is due, it is required that the activity is expressly included in the list. However, in many items the list itself states that the services mentioned are only example. Furthermore, in some State court decisions, it can be found a slightly more flexible approach as for instance the decision of the Rio de Janeiro Court of Appeals in Ap.Civ. 6..7/90, decided in June 6, 1990: Although it is restrictive, in the list of services (...) each one of its items allows for interpretation extensive or by analogy for the various activities that it includes, what is not to be confounded with analogy”: The last remark is due to the fact that under art. 108 of the National Tax Code, analogy can not be used to create new taxes. This understanding is backed by the case law of the Superior Court of Justice, see RESP 6705/SP ; (90/0010866-7): DJ 25/02/1991 PG:01463. xxxvii[xxxvii] A very important issue at this point is the possible taxation of ISP activities by both States and Cities. The issue should be then settled on court, possibly by the deposit of the higher amount to be consigned to the winning party, if any (or only the due balance, in case o ISS). xxxviii[xxxviii] Official note by the Employers' Union of the Data Processing Companies of the State of Rio de Janeiro on http://www.seprorj.org.br/icm.htm: “O provedor de acesso faz apenas "timesharing", blocagem de hora-máquina particionada entre vários usuários, acompanhados de software e consultoria técnica, um serviço de valor agregado, trafegando sobre o sistema de comunicação monopolizado e alcançado na tributação em todas as suas etapas. xxxix[xxxix] Tax authorities are particularly interested in the new advertising market for ISP, and have been moving into the direction of actually impose taxation on this specific service. xl[xl] See City of Rio de Janeiro Taxpayers’ Council Decision Ac. 2.945, decided on June 27, 1991. xli[xli] ART.108 - Na ausência de disposição expressa, a autoridade competente para aplicar a legislação tributária utilizará sucessivamente, na ordem indicada (...) § 1º O emprego da analogia não poderá resultar na exigência de tributo não previsto em lei.