Brazil’s tax system has long been ranked among the most complicated and least efficient in the world. This frustrates citizens, domestic and foreign corporations, investors, and tax authorities alike, with multiple layers of taxation governed by overlapping and often conflicting sets of rules. But now that is changing. After 30 years of innumerous attempts, Brazil’s government is embarking on what is arguably the most ambitious tax transformation in the country’s history.
The measure, passed in December 2023, sets up a more transparent tax system that simplifies an outdated collection process for the production and sale of goods and the provisioning of services. Removing complexity from tax terms, conditions, and rules alone could significantly improve Brazil’s business environment, increase productivity, and boost investments in the country.
But while Brazil’s tax reform promises long-term clarity, in the near term it will likely bring additional challenges. There will be a phase-in period of between seven and 10 years that will force companies and tax preparers to learn a new set of rules and comply with two different, and sometimes contradictory, systems.
The new system, described as ‘dual VAT’, replaces five taxes with three. New allocations include a federal non-cumulative tax of goods and services (contribuição sobre bens e serviços, or CBS) and a separate tax on state and municipal goods and services (imposto sobre bens e serviços, or IBS). There is also a third selective tax, which combines elements of an excise tax and so-called sin taxes on products deemed harmful to health or the environment, such as alcohol, tobacco, and cars with inefficient exhaust systems.
Other changes in consumption taxation aim to redirect and redistribute revenue allocations, by reducing sectoral, social, and geographic inequalities. By streamlining tax rules, the aim of the tax reform is to eliminate competitive imbalances where resource-rich states ‘steal’ companies by offering long-term incentives. Taxes will be charged at the customer location, rather than the current model that taxes at the supplier location (origin). Significant IBS reductions for certain goods and services are designed to stoke investments in industry sectors ranging from financial services to theme parks, to regional transportation systems. The new plan also has a provision to create a fund for sustainable development for the states of the western Amazon and Amapá State.
The transition to the new system will take place in stages. 2025 will see back-end processes and new legislation setting the stage for the new era. Then, in 2026, things get interesting. The new CBS and IBS take effect, but existing taxes will stay in place and gradually be phased out, so taxpayers will need to handle two regimes and two sets of rules. From 2029 to 2032, the tax on the circulation of goods and services (imposto sobre circulaçao de mercadorias e serviços, or ICMS) and the municipal service tax (imposto sobre serviços, or ISS) are dropped in stages, before they are formally extinguished in 2033, opening the door for a new system, with new implementations.
Specific challenges professionals will face
Professionals and systems will need to be updated regularly as changes are implemented. Taxpayers will need to navigate all the challenges that can result from two different tax regimes, separate control of credits, different inspections, and the impacts of the double regime on existing and new case law.
Tax calculations will require adaptations to accommodate new impositions, rates, and rules. But tax calculations are just the beginning of the journey. Tax preparers need to stay current and ensure that returns are produced correctly while rules are changing from year to year. E-invoice amendments must be made to accommodate new fields, and compliance reports must be adjusted.
The process will need to be reviewed and revised to provide accurate returns to the tax authorities and invoice correctly. Otherwise, companies will face risks, such as fines, penalties, potential audits, and even prosecutions.
Tax reform in Brazil has been debated for years, dating back to a major initiative conducted in 1995. Three decades later, reform is here. Companies, lawyers, and tax advisers will need to prepare for this paradigm shift. Society is now better prepared and equipped to manage such changes, with technology playing a role in bringing clarity to a tax system that has long been entangled in bureaucracy.
