Brazil's New Tax Reform: A Simplified Dual VAT System

Brazil has recently passed tax reforms under Constitutional Amendment 132, designed to simplify and modernize its intricate tax structure. The centerpiece of this reform is the consolidation of five existing taxes — PIS, Cofins, IPI, ICMS, and ISS — into two new taxes, creating a dual VAT system. The new structure introduces the Goods and Services Tax (IBS), managed by states and municipalities, and the Contribution to Goods and Services (CBS), which is administered at the federal level.

Key Aspects of Brazil's Tax Reform

The reform is set to create a dual VAT system, with CBS at the federal level and IBS for states and municipalities. This approach, initially developed in Europe, is now recognized as a widespread model for Goods and Services Tax (GST) in various countries.

In addition to CBS and IBS, the reform also introduces a federal Selective Tax (IS), which will regulate the consumption of products detrimental to public health or the environment. The CBS and IS will replace taxes such as the Social Integration Program Contribution (PIS), the Social Security Financing Contribution (Cofins), and the Excise Tax on Manufactured Goods (IPI).

On the other hand, the State Tax on Circulation of Goods and Services (ICMS) and the Municipal Service Tax (ISS) will be replaced by IBS. Both CBS and IBS will operate independently but will follow a unified set of regulations.

Main Features of CBS and IBS

1. Broad Tax Base: Both taxes will apply to all transactions involving goods (tangible and intangible), including services, sales, leases, exchanges, and licenses.
2. Destination-Based Taxation: Taxes will be collected based on the consumer's location, benefiting regions with higher consumption.
3. Non-Cumulative Structure: Taxes paid along the supply chain will immediately generate credits, including for the acquisition of fixed capital goods, such as machinery, and goods used in economic activities, such as electricity or telecommunications.
4. Uniform Legislation: CBS and IBS will be governed by identical regulations across the country, simplifying the compliance process.
5. Clearer Rates: Taxes will not be included in their own calculation bases, providing more transparency on rates for citizens.
6. Quick Credit Refunds: Accumulated tax credits will be refunded to taxpayers in a timely manner.
7. Investment Deductions: Investments will be eligible for immediate credit refunds, fostering economic growth.
8. Export Exemptions: Exports will be VAT-free, with refunds on VAT paid on inputs and other goods.
9. Equal Taxation of Imports: Imported goods and services, including digital products, will be taxed at the same rate as domestic items, ensuring fair competition.

Changes to Fiscal Invoices and CFOP

A significant change will involve the replacement of the CFOP (Fiscal Operation and Service Codes) with new CST (Tax Situation Codes), aligned with the new tax framework. Taxpayers and software developers will need to adjust their systems to comply with the updated regulations.

Introduction of the Declaration of Service Provision (DPS)

Another notable feature of the reform is the creation of the Declaration of Service Provision, a new fiscal document to streamline the reporting of services. This document will be crucial for implementing the CBS and IBS taxes and improving transparency and control over service transactions nationwide.

Transition Period

The reform introduces two transition periods: a seven-year period for Brazilian society and a 50-year transition for federal entities. The general transition, starting in 2026 and concluding in 2033, will phase out existing consumption taxes and fully implement the new tax structure.

The transition will take place from 2029 to 2032, with gradual reductions in ICMS and ISS rates as follows:

• 10% in 2029
• 20% in 2030
• 30% in 2031
• 40% in 2032

By 2033, the new tax system will fully replace ICMS, IPI, and ISS.

The reform’s success depends on the approval of PLP 68, which will facilitate the technical adjustments necessary for compliance.

Objectives of the Tax Reform

• Promote Economic Growth: The reform aims to resolve issues with the current tax system, such as tax accumulation, fiscal competition, and inefficiency. Planned changes should reduce business and public sector costs, stimulate economic growth, and generate jobs and income.
• Reduce Inequality: Under the new destination-based tax model, taxes will be levied at the point of consumption, ensuring that revenue is directed to less developed regions, helping to address regional imbalances. Furthermore, a tax refund system will provide relief to lower-income citizens who are currently burdened by higher taxes.
• Simplify the Tax System: The reform aims to streamline tax compliance by creating standardized, non-cumulative rules. This will improve business conditions, promote transparency, and reduce the time and costs associated with tax disputes, ultimately making it easier for businesses to operate and citizens to understand their tax obligations.

Brazil's tax reform promises to simplify its tax system, promote fairness, and foster economic growth, creating a more efficient and transparent tax environment for all.

There’s more you should know about e-invoicing in Brazil – learn more about the new and upcoming regulations.