After being discussed for 30 years, the Brazilian Tax Reform was approved in December 2023 by Constitutional Amendment 132/2023. In 2024, complementary laws will be enacted to detail the application of this constitutional amendment.
The aim of the reform is to simplify the Brazilian tax system, improve the business environment and boost economic growth.
To this end, the tax reform envisages replacing five sales taxes (PIS, Cofins and IPI, which are federal taxes, and ICMS and ISS, which are state and municipal taxes, respectively) with a non-cumulative Value Added Tax (VAT), i.e. levied only on what is added at each stage of the production of a good or service, excluding amounts paid at previous stages.
As a result, there will no longer be different ICMS legislation for each state, but a single law. This is a great achievement, given that Brazil has 27 states, each with its own complex legislation. Replacing these 27 taxes with a single law, which also covers the more than 5,000 municipal ISS laws, will greatly simplify life for taxpayers.
The model also puts an end to the so-called “cascading taxes”, considered a historical problem in the Brazilian tax system, as it allows full non-cumulativeness, with tax credits for all taxes paid in the previous stage, without limitations.
The Brazilian VAT will be a “double VAT”, divided into two parts: the Contribution on Goods and Services (CBS), which is a federal competence; and the Tax on Goods and Services (IBS), which is a competence of the states and municipalities. The CBS will replace PIS, COFINS and IPI. The IBS will replace the ICMS and the ISS (Municipal Tax on Services).
With the reform, taxes will no longer be levied at source (place of production) but at destination (place of consumption), a change that aims to end the so-called fiscal war – the granting of tax incentives by municipalities and states to attract business investment.
According to the reform, imported products will have to pay VAT in the same way as items produced in Brazil, while exports and investments will be exempt.
There will be a standard rate and a differentiated rate for sectors such as health. The general rate will be established by a complementary law.
A new selective tax, also known as a “sin tax”, will be introduced as a kind of surcharge on the production, sale or import of goods and services harmful to health or the environment, replacing the IPI. Examples of such products include cigarettes and alcoholic beverages. The selective tax will be a federal competence, with collection shared with the other federal entities. Only after publication of the complementary law will it be known which goods will be taxed by the selective tax.
As for the IBS/CBS rate, there is still no definition of what it will be. According to the latest estimates by the federal authorities, the rate could reach 27.5%. The amendment guarantees that the tax burden will not increase but will remain stable.
The transition period for the unification of taxes will last seven years, between 2026 and 2032. From 2033, the states’ ICMS will be abolished.
According to the proposed schedule, in 2026 there will be a test rate of 0.9% for the CBS (federal VAT) and 0.1% for the IBS (VAT shared between states and municipalities).
In 2027, PIS, Cofins and IPI will cease to exist, and CBS will be fully implemented. The IBS rate will remain at 0.1%.
Between 2029 and 2032, there should be a gradual reduction in the ICMS and ISS rates and a gradual increase in the IBS until the new model is fully implemented in 2033.
Analysts believe that this tax reform, when fully implemented, will bring improvements to the Brazilian economy comparable to the economic stability brought about by the Real Plan in 1994. Brazilians are hopeful about its benefits, but its implementation will also be complex and challenging, as it involves major changes and a whole new system to be studied and applied.
Julia de Menezes Nogueira is a consultant at Pacheco Neto Sanden Teisseire Advogados.
