In two separate cases (one against Facebook and one against Google), São Paulo’s tax court ruled that revenues derived from the sale of online ads are not subject to ICMS (Brazil’s value-added tax), on the grounds that advertising is not classified as a form of communication service under the laws of the State of São Paulo.

ICMS stands for Imposto sobre Circulação de Mercadorias e Serviços, which is the main source of revenue for Brazilian States. This tax on circulation of goods and services, according to Treasy.com, is established by the States and the Federal District and focuses on operations related to various segments such as appliances, food, communication services, transportation and many others. Although the rates vary from state to state, most of them use a 17 percent rate of the merchandise price. From the revenue, 25 percent is allocated to the municipalities and 75 percent to the states government [1].

Google and Facebook are the most fiercely growing and top earner companies in the ad business today, earning (globally) $79 billion and $27 billion last year, respectively – as published by Zenith Agency’s in the “Top Thirty Global Media Owners 2016” [2]. Together these two companies account for one-fifth of the total global advertising revenue, as The Guardian published, a number doubling the total from five years ago [3].

Considering the Global Advertising revenue reached over $530 billion in 2016, according to HIS Markit’s report: “Global Advertising Trends,” that Brazil’s advertising expenditure totaled $13 billion dollars, according to Statista.com [4], and that Google and Facebook are the global leaders in the industry, the country will need to establish new laws to get a piece of the pie or negotiate a better deal with these internet giants. Although the ruling only applies to São Paulo’s jurisdiction, it has an enormous impact, since both companies are registered in this state, and, therefore, it will strengthen Google and Facebook’s position, boosting their Ad business at a much faster rate.

Sources

[1] https://www.treasy.com.br/blog/icms-imposto-sobre-circulacao-de-mercadorias-e-servicos

[2] https://www.zenithmedia.com/product/top-thirty-global-media-owners-2016/

[3] https://www.theguardian.com/media/2017/may/02/google-and-facebook-bring-in-one-fifth-of-global-ad-revenue

[4] https://www.statista.com/chart/10416/googles-ad-revenue-in-perspective/