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By Ed Taylor
Brazil’s two largest cities have taken unilateral steps to resolve a controversy over where to charge the municipal services tax on investment funds.
A 2016 Brazilian law creating major reforms to the tax on investment funds took effect last year and created an immediate dilemma. Previous legislation said that the tax would be charged where the investment fund service was provided. The new law, however, stated that the tax would be charged at the locale where the contractor of the service resided, but didn’t define the “contractor.”
The majority of investment funds are headquartered in the nation’s two main cities, Sao Paulo and Rio de Janeiro. Both saw the new law as a threat to their revenue from the services tax. At the end of December, the two city governments issued ordinances defining the contractor of the service as the funds themselves, meaning the tax will continue to be paid in these cities.
The ordinances took effect Jan. 1, but Brazil’s other cities have taken the position that the contractor of the service is the individual investor, and the purpose of that 2016 act (Complementary Law 157) was to decentralize the tax payments. Brazil has 5,570 cities, each of which has the right to establish its own municipal services tax.
Both ordinances say investment fund administrators such as banks and brokerages are the representatives of the funds, and it is in the cities where they reside that the services tax should be paid. In both cities, the tax was maintained at 2 percent.
Sao Paulo’s finance secretary, Caio Megale, told reporters Jan. 3 that if every investor in a fund had to pay the tax in his or her own city, the new services law wouldn’t be viable. With the new ordinance, Megale said, “we will not lose revenues and we will guarantee the efficiency of the economy,” according to the city government’s press office.
Speaking for the country’s other state capitals, Jeferson Passos, technical director for the Association of State Capital Finance Secretaries, told Bloomberg Tax Jan. 5 that his association backs the position that individual investors are responsible for contracting the services of investment funds, and the tax should be paid where they reside.
“The spirit of Law 157 was in the sense of decentralizing the tax payments for several services such as investment funds, credit cards and health plans,” he said.
Because of these conflicting views, Passos said his association is backing a bill that passed Brazil’s senate last year and is now before the lower house which would establish a new system for the collection of the services tax. He said his association will propose an addition to the bill that would make clear who is responsible for contracting investment funds.
But, according to attorney Diogo Ferraz of the law firm Freitas Leite, the senate bill in its current form does nothing to resolve the dispute over where the tax should be paid, while the ordinances of Sao Paulo and Rio de Janeiro “at least have shown the way for the financial market.”
Following the release of the two ordinances, the Brazilian Financial and Capital Markets Association released a statement supporting the positions taken by the two cities.
While Brazil’s other cities will continue to object to the position of Sao Paulo and Rio de Janeiro, since the majority of investment funds are located in these two cities, “the ordinances are positive because they provide security for most of this market to proceed with its operations,” said attorney Hermano Barbosa of BMA Advogados.
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