Brazil’s tax reform: why businesses should act now

The Brazilian consumption tax system is undergoing a monumental transformation, started in December 2023 by the Constitutional Amendment 132/2023. The reform introduces a dual VAT system, replacing Brazil’s complex framework of federal, state and municipal taxes. The changes aim to simplify taxation, enhance transparency, promote fiscal justice and drive investments in Brazil.

Importance of acting quickly

The transition to the new tax system is imminent. By 2026, companies will need to comply with both tax regimes during the seven-year transition period. While the proposed Complementary Law PLP 68/24 is yet to be approved, the Federal Constitution provides a clear timeline, leaving about 14 months for businesses to prepare. Key details, such as tax rates, should be sanctioned by the Brazilian Republic President and published within 60 days. However, experts urge companies to act now, as updating ERP systems and tax solutions takes time.

Major impacts of the reform include:

• Structural changes in taxation: Taxation shifts from origin to destination, altering the tax burden. Services will now be taxed at the same levels as goods, which is a major change for many industries.
• Technology and operational adjustments: ERP enhancements or new solutions, such as Vertex O Series, are essential for managing dual tax systems and ensuring compliance. Automated updates will be critical to keep pace with frequent rate changes and logic updates.
• Logistics, contract and strategic planning: Businesses must reevaluate their supply chains, pricing strategies and contract terms to align with the new regime.
• Workforce challenges: The reform introduces a surge in demand for skilled tax and technology professionals. Companies risk resource shortages without early planning.

Adapting to the reform early offers key advantages:

• Compliance: Ensuring readiness for simultaneous tax systems during the transition.
• Competitiveness: Leveraging new technologies to simulate pricing strategies and minimise operational risks.
• Strategic positioning: Proactively adjusting to prevent potential disruptions and maintain market edge.

Looking ahead

The Brazilian tax reform represents an unprecedented opportunity to streamline taxation and drive economic growth. However, the path to compliance is complex, demanding proactive planning, robust technology and a strategic approach. Businesses that act quickly will be better positioned to navigate this transformative period successfully. For further insights, review my previous blog on this topic.