The Brazilian Federal Supreme Court (STF) has recently ruled for taxpayers in order to dismiss the arbitrary rule of the Municipality of São Paulo, followed by other Municipalities that enacted laws with similar content, which, in order to prevent potential frauds, established a new tax incidence under an accessory obligation: the Register of Service Providers of Other Municipalities (CPOM), under penalty of withholding the Municipal Services Tax (ISS).
According to the rule set out in Federal Supplementary Law 116/2003, ISS is due at the place of domicile of the service provider, except for certain specific services, whose taxation made more sense at the place of service provision.
Certain companies would resort to frauds and establish domicile at Municipalities where ISS applied at lower rates, despite providing services and operating elsewhere, generally locations with higher ISS rates.
In order to prevent such practice, the Municipality of São Paulo established the CPOM, requiring several documents to prove the companies were not shelf companies at their domicile of origin. São Paulo’s example was soon followed by other cities, as was the case of Campinas (State of São Paulo), Sorocaba (State of São Paulo), Curitiba (State of Paraná), Rio de Janeiro (State of Rio de Janeiro), and Fortaleza (State of Ceará), among others.
However, if there was no CPOM registration, the client would automatically of the tax. Hence, the service provider, which was already taxed at the place of domicile, was forced to pay ISS twice, thereby resulting in double taxation, as the same tax was charged twice. Also, additional taxes were charged on taxable events outside the tax jurisdiction of the Municipality of the service provider.
The Brazilian Federal Supreme Court Justices put an end to said rule, following the review of Topic 1020, of General Repercussion, in February 2021, having held valid the Appeal to STF filed by the Union of Data Processing and Computer Services Companies of the State of São Paulo against the Municipality of São Paulo. STF declared unconstitutional the law of the Municipality of São Paulo (Law 13,701/2003, Article 9, caption and Paragraph Two, and set the following thesis, with general repercussion in society:
“The normative rule that sets forth the mandatory registration, before a municipal government authority, of a service provider that is not established in the territory of the Municipality, and the mandatory withholding, by the relevant client, of the Municipal Services Tax (ISS), in the event of nonperformance of accessory obligations, is incompatible with the Federal Constitution”.
Repercussion of the Ruling
The thesis, set with General Repercussion in society (Topic 1020-STF), is effective against everyone, with respect to the agencies of the Judiciary Branch, as it is intended to settle and standardize court precedents. In other words, any cases filed on similar terms will be ruled according to the STF ruling for Topic 1020.
General Repercussion is the means through which STF is able to decrease the number of cases filed in relation to the same topics. In order for such appeals do be admissible, the issues involved must be material from the economic, political, social or legal standpoint, and must exceed the subjective interests of the claim.
Still, as there is no protective overruling on the decision (Article 927, Paragraph Three, of the Brazilian Code of Civil Procedure of 2015), any taxpayers whose ISS was withheld because they had not registered with CPOM may seek the reimbursement of such sums in court. After all, the rule declared unconstitutional cannot produce effects, even during the period in which it was in force.
So what changes with the STF ruling, whereby CPOM was declared unconstitutional?
In practice, the Municipality of São Paulo, defendant in the case, should no longer require taxpayers to register with CPOM, because the rule was declared unconstitutional, for the material nature and application of the matter beyond the interests of the parties to the case, and because STF has already determined how it will rule any future cases.
Practice, however, is far more complex than the legal world.
As a matter of fact, the ruling should apply to any and all rules establishing the CPOM in each municipality that effectively implemented such rules. Certain municipalities, in one way or another, have accepted the STF ruling revoking the local rules, having changed their systems, thereby effectively acknowledging the unconstitutionality of the CPOM requirement.
It is now necessary to monitor the progress made and wait for the systems to be adjusted. The alternative in the Municipalities in which the rule still applies is to take the case to court, as there is such ruling for taxpayers. Should any judge rule otherwise and the tax be withheld, it is necessary to file a motion against the repetition of undue payment, which will nonetheless be favorable for the taxpayer.
By the publication date hereof, Curitiba and Sorocaba had already complied with the STF ruling and revoked such obligations, without requiring the taxpayer’s intervention.
Eliete Maria de Carvalho Cirielli
Tax Planning Manager