Economy

Brazil plans to create a tax on digital payments and e-commerce

According to Folha de S. Paulo, the 0.2% rate of the new tax would be applied on all payments that generate electronic invoicing

Brazil's Economy Minister Paulo Guedes. Image: Shutterstock
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  • The measure, if adopted, would take advantage of the rapid advancement of digital sales amid the coronavirus pandemic;
  • The government wants to use the new tax to replace taxation on wages;
  • Mexico has recently started charging taxes on digital platforms, even the ones headquartered abroad.

The Brazilian government is planning to create a 0.2% tax on digital payments, which would also be applied to purchases in e-commerce. Folha de S. Paulo broke the news, citing “interlocutors” to the minister of Economy, Paulo Guedes, as its sources.

According to Valdo Cruz, a journalist at GloboNews, the Ministry of Economy finished its proposal for a tax reform and should send it to the federal administration Chief of Staff. Only after an appreciation by the Presidency, the proposal may be sent to Congress. The draft text indeed includes the creation of a tax on electronic payments, says Cruz.

LABS contacted the Ministry of Economy, which has not commented on the news. The measure, if adopted, would take advantage of the rapid advancement of digital sales, which registered double-digit increase amid the coronavirus pandemic.

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According to the news outlet, the tax is perceived by Guedes as a way to replace taxation on wages, as it potentially could raise more than BRL 100 billion ($19 billion) a year. The minister had previously declared the government’s intention to create tax breaks on wages, and a 0.2% rate charged on digital transactions would create the fiscal space needed to relieve from taxes incomes of up to BRL 1,045 ($200) monthly – the federal minimum wage.

Last month, the Brazilian Revenue Service recorded $4.5 billion in sales with an electronic invoice – usually, but not exclusively, used for online transactions – a growth of 15.6% in comparison with May and 10.3% compared to a year earlier.

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The tax would be applied on all e-invoicing, even cash payments involving it would be covered, but it was nicknamed “digital” because e-commerce and digital goods purchases and subscriptions are on the spotlight during the Covid-19 pandemic. Social distancing measures, quarantines and lockdowns have restricted people’s access to physical commerce and boosted online sales.

A tax on payments, not on transactions, as was the old CPMF

According to Folha, Guedes favors the digital tax because he believes it improves the allocation of resources in the economy and reduces price distortions. But political support is scarce, particularly if the new taxation draws comparison to the CPMF, an unpopular tax on financial transactions that lasted from 1997 to 2007 in Brazil.

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The government is said to have a ready response to that parallel, saying the new tax would be applied only on payments and not on all transactions, as CPMF did. It would also say the new tax is modern, due to its digital nature, and difficult to evade.

Guedes also emphasizes that the move would not add a new tax to the already burdensome Brazilian system, only a substitution to levies on wages. 

Mexico also began implementing a digital tax

This part of the official discourse is similar to the one adopted by the Mexican government, which began implementing its own digital taxes this month.

According to a law that took effect in June, these firms must now pay Value-Added Tax (VAT) on all services provided, and Income Tax (ISR) over profits earned from operations within Mexico, even if their offices are located abroad.

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Four business sectors are covered by the new Mexican tax rules: 

  • Media downloading and streaming platforms;
  • Marketplaces for third-party sellers of goods and services, as well as intermediation platforms, including ride-hailing and delivery apps;
  • Online clubs and dating apps;
  • Distance learning.

Over the last few days, big international firms have received their Federal Taxpayer Registry (RFC), as part of new obligations. According to Mexico’s Tax Administration Service (SAT), over a dozen big cross-border digital platforms have already registered to comply with new rules, including Amazon, DiDi, Expedia, Uber, and Netflix.

Various firms have warned that new taxes – a flat VAT rate of 16% and a range of 0.4%-10% in the case of ISR, depending on the service provided – might prove a burden on prices. Indeed, Mexican media outlets have lately reported on restaurants in the country that are seeking alternatives to delivery apps due to the loss of nearly 60% of their profits, as digital platforms started charging more from them. 

According to the Mexican Treasury, the new rules applied to digital firms should not be seen as new taxes or rate hikes, but merely compliance by the new economy. The government expects to collect an extra $200 million this year through the expanded tax-base.