It is well known that the constant increase in the number of Internet users has significantly changed various parts of the economy. Of all of them, one of the most affected is marketing, because the Internet has made it possible for companies' various strategies to be achieved faster and more effectively by directing actions to specific target audiences and, frequently, by monitoring their habits.
However, one of the digital marketing strategies – online advertising – has been the focus of some rather complex disagreements in the tax field. In certain cases, this has led to extremely large infraction notices being issued to companies.
On a global level, online advertising has been the target of some unilateral measures taken by certain countries. The basis for this taxation is the fact that the profits from running advertisements that are obtained by resident companies are normally taxed in the country, while the profits from nonresident companies, obtained in the same way, are not. Due to this, some countries have been taxing the payments made by recipients of advertising services to nonresident providers in order to "equalize" the positions of resident and nonresident providers, thereby treating them the same for tax purposes (at least for the purpose of taxing profits).
One example is India, which is the first country to impose what it calls an equalization levy on nonresidents for running advertisements on the Internet. The equalization levy rate is 6%, charged on the amounts paid to companies abroad by the recipients of the services. Other countries have adopted, or are in the process of adopting, similar measures, although incident on different fields (digital services in general) and using different names to describe the taxes. An example is Italy, which has a web tax of 3% on amounts paid abroad.
Other unilateral measures affect transactions of nonresident companies that do not even receive payments from residents. The basis for these taxes is the fact that, by directing advertising to residents of a given country, the online advertising service providers generate value in that country, even if they do not receive any income from sources located in it. An example of this is an "advertisement tax" created by Hungary that is incident on revenue with online advertising intended for the Hungarian market (for example, advertisements mainly in the local language), regardless of the place of residence of the service providers and advertisers. The service providers are required to pay the tax and they must register with local tax authorities. Additionally, there is a second and subsidiary liability for advertisers resident in Hungary if the nonresident service providers are not registered and the advertisers do not provide identifying information for the service providers to the local authorities.
Multilateral measures are also being discussed to, in the larger context of the digital economy, address the taxation of advertising on the Internet. In this regard, the Organization for Economic Co-operation and Development (OECD), within the Base Erosion and Profit Shifting (BEPS) project, should present its suggestions by the end of 2020. Its interim report on taxation of the digital economy, published in March 2018, did not make any concrete recommendations.
That was not the case with the European Commission, which, in a report published in March 2018, recommended the adoption of an interim tax of 3% of gross revenue obtained by nonresident companies that have a significant digital presence in the member countries of the European Union. Under this proposal, companies that provide digital services (including advertising) would be considered to have a "significant digital presence" if they meet at least one of the following criteria: (a) more than €7 million of annual revenue from a member country over the course of a fiscal year; (b) more than 100,000 users in a member country over the course of a fiscal year; or (c) they sign over 3,000 commercial agreements relating to digital services with business users from a member country. This recommendation is awaiting deliberation by the European Parliament before being put into effect.
In Brazil, there is not yet any tax directed toward online advertising services, or even digital services in general, although payments made abroad for the hiring of services (in general) are already subject to the Withholding Tax (Imposto de Renda Retido na Fonte), or IRRF, at 15% (25% if the service provider is resident in a tax haven) and the Intervention in the Economic Domain Tax (Contribuição de Intervenção no Domínio Econômico), or CIDE, at a rate of 10%. There are also the Social Integration Program Tax (Programa de Integração Social), or PIS, and the Social Security Financing Tax (Contribuição para o Financiamento da Seguridade Social), or COFINS, taxes on the import of services, at a rate of 9.25%, and, depending on the type of service, the municipal Service Tax (Imposto sobre Serviços), or ISS, at rates of between 2% and 5%.
However, online advertising has been subject to heavy state taxation, with the states arguing that the services are subject to the Tax on the Circulation of Merchandise and Services (Imposto sobre Circulação de Mercadorias e Serviços), or ICMS, which is a tax levied on the provision of communication services. The infraction notices issued are generally for large amounts because, in many states, communication services have higher tax rates than the standard ICMS tax rate (25% in São Paulo, for example). Moreover, since online advertising service providers believe they are not subject to the ICMS tax, they do not generally issue tax receipts for this tax, leading auditors to charge heavy fines for failure to issue tax documents (even if the taxpayer issued tax receipts for other taxes, which makes the auditors' position rather questionable). In the case of São Paulo, the fines are 50% of the transaction amount, which, added to the tax rate of 25%, plus interest, leads to the collection of amounts that can exceed the amount of the transaction itself, making it clearly confiscatory in nature.
These levies, however, are of questionable legality since the communication service is a means and not an end and is generally an input for the provision of the online advertising service. Moreover, the position taken by the states has become (even) weaker after the publication of Supplementary Law 157 at the end of 2016, which clearly states that online advertising services are subject to the municipal ISS tax and not the state ICMS tax. In any case, the courts will have to resolve this issue since the states remain intransigent, even after the publication of Supplementary Law 157. Having the issue resolved by the courts will give greater legal security to those who provide and receive these services, who are currently stuck in the middle of a dispute between the states and municipalities.
In summary, it is possible there will be some important new laws (at least at the international level) and court decisions regarding this matter in the near future. This makes it worthwhile to monitor this subject, which will certainly affect the digital marketplace.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.