The gambling regulation process in Brazil is a puzzle with one very difficult piece to fit: Tax Over Service – ISS
Consider article 156 of the Brazilian Constitution to understand. The ISS is a tax whose legislative jurisdiction was exclusively given to Brazilian cities. It establishes that the Federal Government cannot, under any circumstances, dispose of this tax.
In developing gambling regulation - be it a comprehensive model or concentrated in sports lottery - the National Congress and the Federal Government need to create a feasible taxation model, attractive to investment, and including, of course, the right that every city has to create and enforce its own local taxation (ISS), effectively between 2% and 5%.
If regulation itself is not easy, imagine the challenge to devise a tax model that includes federative entities with exclusive jurisdiction and non-subordinated to the central power.
My two cents on this topic is that we should create a tax rate of 18% over GGR (gross gaming revenue) and never use the turnover as the basis of taxation. The GGR structure is not unprecedented in the country, as with health insurance, for example, where the basis of ISS is what the company receives from consumers minus what they pay to hospitals, laboratories, doctors etc.
From this 18%, which is internationally competitive, 3% will be directed to cover the ISS of every city where a player is located, while the remaining 15% would cover national taxation according to what the law prescribes.
Even before industry colleagues warned me of the difficulty of paying a separate tax (ISS) to over 5,000 cities, I was aware that online gambling operators have the technology to record the IP address of every player, which at the end of the day, potentially corresponds to every single city, case by case.
Putting together the available technology and the existing National Fund of Cities at the Federal Level, I predict it is perfectly feasible to pay ISS among other taxes to the Federal Government, which in turn could re-distribute the appropriate amounts of ISS due to cities, according to the reports provided by operators based on players’ IP addresses.
This approach raises power to the federation pact, distributing taxation theoretically to all cities in the country.
The traditional model, where the ISS is due to the city where the company is established, brings some liabilities: a) invitation to fiscal war between cities where the companies are located versus the cities where the players are concentrated (just like we see every day with other activities); b) concentration of wealth in the most advanced cities; and c) uncertainty for the operator, who may be unclear to which city the ISS must be paid for (just like we also see every day with other activities).
I’ve been teaching about ISS for almost 15 years now and this idea sounds reasonable to me, holding up to all the legal challenges and analysis I could make. To me, it looks like a viable project.
As the then-candidate Jair Bolsonaro said during his campaign, we need less Brasília and more Brazil. It could be a productive opportunity to implement this idea.
National Congress, now it is up to you.
* Witoldo Henrich Junior
Witoldo Henrich Junior: Lawyer. Master in Business Administration (IBMEC). Postgraduate in Tax Law. Professor of postgraduate courses at PUC-Rio. Founding partner of Online IPS Brazil, a global payment solution company, and Hendrich Advogados. Former Consultant Member of the National Commission for Access to Justice. Former Chief Advisor to COMLURB's Legal Board. Former Legal Advisor to the National School of Training and Improvement of Magistrates (STJ). Businessman in Brazil, USA and Colombia. He has published articles in the areas of Real Estate, Tax, Criminal Procedure, Tax and Regulatory Proceedings.
Source: GMB
