• Service: Tax, Global Indirect Tax, Global Transfer Pricing Services, Global Compliance Management Services, International Tax
  • Type: Business and industry issue, Regulatory update, Survey report
  • Date: 5/1/2012

Country perspectives on taxing the cloud – Brazil 

Brazilian legislation has not been updated to cover e-commerce, software downloading and other internet-related matters, so there is a lack of guidance in how to deal with cloud computing. In addition, the short history of cloud computing means there are insufficient precedents to guide the taxpayer.

Public cloud

infograohic 1

Given this lack of clarity and guidance over tax legislation, the following interpretations may be superseded by the Brazilian Tax authorities.

Characterization of transaction

In order to assess the tax implications of providing cloud computing services – especially the provision of online software (without a license assignment) and space for data storage – the transaction should be duly characterized for Brazilian tax purposes.

It is therefore essential to define the nature of the business relationship between the local sales agent and the cloud host (assumed as located abroad), as well as the business relationship between the cloud host (assumed as located abroad) and the end user.

Relationship between the local sales agent and the cloud host

Before making any assumptions over the taxation, it is important to consider other factors that are likely to impact the transaction:

  • The local sales agent can be presented either in the form of a subsidiary or an unrelated third party. However, if the sales agent is a cloud host's subsidiary (and therefore a related party), Brazilian transfer pricing rules must also be observed. Furthermore, for Brazilian transfer pricing purposes the concept of a related party comprises not only the corporate context but also the business context. Consequently a case-by-case analysis is recommended before implementing any business structure.
  • Moreover, since Brazilian tax law does not contain a permanent establishment concept and does not provide clear guidance on the potential tax impacts of having foreign entities carrying out business activities in the country, the following situations may potentially generate a taxable presence in Brazil: a de facto branch, a consignment and/or a binding agent. Therefore the specific activities of the company should be analyzed in order to assess eventual risks.
  • The payment by the local sales agent to the cloud host, located abroad, could be deemed an export of services. Thus, the referred payment would be subject to Brazilian corporate income taxes (IRPJ – Imposto de Renda de Pessoa Jurídica and CSLL – Contribuição Social sobre Lucro Líquido) and eventually to service tax (ISS – Imposto sobre Serviço) and taxes on gross revenues (PIS – Programa de Integração Social and COFINS – Contribuição para o Financiamento da Seguridade Social). As a general rule, Brazilian legislation exempts ISS on the export of services, provided that the results of the services are verified abroad. Where the local sales agent is remunerated in Brazil for the provision of service to the cloud host abroad, the revenues associated with the work undertaken will not be subject to PIS and COFINS. Currently there is an exemption for Brazilian financial tax (IOF – Imposto sobre Operações Financeiras) but given that this legislation is ever-changing, there may be a tax cost should the exemption be revoked.

Relationship between the cloud host and the end user

As Brazilian legislation has no formal provisions for cloud computing services, this document assumes that cloud computing involves making a set of shared and customizable computing resources (networks, servers, storage, applications and services) available to a customer. These resources can be configured with minimal preparation, support or interaction with a service provider, and can be made available as a bundle or separately (e.g. software only, hardware only, or both software and hardware combined).

Nevertheless, a detailed study of the nature of the payment is necessary to analyze the tax that will be levied on the relationship between the cloud host and the end user. The wording of the contract between the parties will play a role in defining the taxation of these operations in Brazil.

The provision of cloud computing services could, in principle, be deemed as technical services, non-technical services, rental of equipment and/or license agreement. As mentioned, the Brazilian Tax authorities may make further possible interpretations.

Service fees

Technical and administrative assistance services are subject to withholding income tax (IRRF – Imposto de Renda Retido na Fonte) at 15 percent (25 percent if the service provider is located in a low tax jurisdiction) and contribution for intervention in the economy (CIDE – Contribuições de Intervenção no Domínio Econômico) at 10 percent, while other services are subject to withholding income tax of 25 percent, without CIDE. Note, however, that Brazilian tax legislation does not clearly define technical and administrative assistance services.

As a general rule, import of services is subject to PIS and COFINS at respective rates of 1.65 percent and 7.6 percent, as well as ISS between 2 percent and 5 percent, depending on the municipality and the type of service provided.

In addition, IOF of 0.38 percent is due on the amount to be effectively remitted.

If the fees are to be paid to related parties abroad (under the Brazilian transfer pricing concept of related party, which as mentioned is broader than the simple corporate concept), transfer pricing rules must be observed as well as general tax deductibility requirements, such as documentation, evidence of the work performed and formal agreements. These deductibility rules tend to be stricter when dealing with low tax jurisdictions or privileged tax regimes.

If service fees include remuneration for transfer of technology, there may be specific requirements for remittances abroad and tax deductibility. The agreements must also be registered with the Brazilian Central Bank (BACEN – Banco Central do Brasil) and the National Institute of Industry Property (INPI – Instituto Nacional de Propriedade Intelectual). Some double taxation treaties may classify technical services as royalties and classify grant benefits as tax sparing and matching credit; consequently a case-by-case analysis is recommended.

Rental of equipment

Should the operation be regarded as mere rental of equipment, based on the provision of space for data storage (focusing on the availability of the hardware), the cross-board payment would in principle trigger withholding income tax at 15 percent (25 percent if the service provider is located in a low tax jurisdiction) and IOF at 0.38 percent.

Neither ISS, PIS nor COFINS would, in principle, be due on the rental of movable assets.

License fees

Regarding the software element of cloud computing services, Brazilian legislation states that where the essential consideration for the payment is the granting of the right to use copyright, the transaction could be deemed a royalty payment.

Payments for the right to use software licenses (royalties) are in principle subject to withholding income tax at 15 percent (25 percent if the beneficiary is located in a low tax jurisdiction), CIDE at 10 percent, IOF at 0.38 percent, PIS/COFINS at 9.25 percent and ISS between 2 percent and 5 percent, depending on the municipality.

Recent decisions declared that PIS/COFINS and ISS should not be levied on certain types of royalty payments; however, further analysis on this side is recommended.

Additionally, if the payments for software licenses do not involve the transfer of technology (source code), CIDE would not, in principle, be levied.

Local taxation on the sales agent

The Brazilian sales agent could in principle receive a commission fee for rendering services to the Cloud Host abroad.

In this instance, IRPJ and CSLL would be levied on the taxable income of the sales agent at a combined rate of 34 percent.

Provided this commission fee is paid by a non-resident individual /entity (i.e., there is actual inflow of cash into Brazil), the revenue associated with the work undertaken by the sales agent will not be subject to PIS and COFINS.

Legislation gives an ISS exemption on the export of services when the results of such services are verified abroad. Should the results of the services be verified in Brazil, the tax authorities may challenge the sales agent to pay the ISS at a rate that could range between 2 percent and 5 percent, according to the municipality where it is located. As the concept of result is not clearly defined in the legislation, a case-by-case analysis is necessary.

If the sales agent is a related party, transfer pricing rules must be observed. Transfer pricing rules are also applicable to transactions between an entity or individual taxpayer resident or domiciled in Brazil and any corporate or individual taxpayer, (whether or not related), resident or domiciled in a country with the following regulations: no income taxes; income taxes of 20 percent (listed low tax jurisdictions) or less; restrictions on the exchange of information regarding shareholding structure.

Private cloud

infographic 2

Characterization of transaction

In this scenario, the cloud access is undertaken between related parties. In other words, the cloud host, the server company and the affiliate are part of the same economic group.

It is essential to analyze the business relationship of the affiliate with services providers and with the private cloud access providers.

Again, these matters are not clearly defined and could be open to different interpretations.

Transfer pricing implications

The applicability of transfer pricing provisions must be considered when dealing with the taxation of services between Brazilian Affiliates and service providers, and between Brazilian affiliates and private cloud access providers.

Service transactions are subject to transfer pricing rules in Brazil, although these rules do not provide for specific methods. Brazil is not an OECD member, so the Brazilian transfer pricing rules are different from the OECD standard. Although the names of some methods coincide with those specified in the OECD guidelines (such as the resale price method, cost plus method, or comparable method), their application is unique to Brazil and driven by predetermined profit margins.

Transfer pricing rules are, in principle, applicable to the payment of royalties or fees for technical, scientific, administrative or similar assistance, even though t the agreement is registered with the INPI.

Relationship between private cloud access providers (cloud host and server company) and the affiliate

Regardless of whether this scenario involves private access, it would in principle trigger the same taxation as mentioned under the heading: "Relationship between the cloud host and the end user", in the "Public cloud" scenario.

Since the relationship is undertaken with a related party (the cloud host), transfer pricing rules must be observed.

Service agreements entered into between the affiliate and the third party IT support

The third party information technology (IT) entity will provide support services to the affiliate.

The payment of these services would be likely to trigger the same taxation on technical services described under the heading: "Service fees" in the "Public cloud" scenario. As the entity providing the IT services will be a third party, no transfer pricing rules apply, except when this third party service provider is located in a low tax jurisdiction or privileged tax regime.


Share this

Share this

Follow us

follow us on Twitter
follow us on Linkedin


Fernando Retzler Martins

KPMG in Brazil
Global Business Group

+55 (11) 2183 3284