Brazil's tax reform aims for a 'VAT-like' system
As part of a major tax reform, a new Brazil Bill aims to create an indirect tax, CBS, akin to a VAT system, to simplify its web of federal tax systems.
Brazil’s government has presented a reform of its federal indirect tax regime with the aim of creating a new, simplified ‘VAT-like’ system.
A July 21 Bill (No. 3,887/2020) presented to Brazil's Congress aims to create a new indirect tax - called CBS, from its Portuguese name ‘Contribuição Social sobre Operações com Bens e Serviços’ (or ‘Social Contribution on Operations with Goods and Services’ in English).
The contents of the Bill are essentially a simplification plan for Brazil’s complex web of indirect, state, and federal tax systems. The CBS would be applied at a flat rate of 12% and replace the maze of varying federal taxes that currently apply.
What is Brazil’s overall ‘VAT’ plan?
This proposal is introduced in parallel to the bill of amendment 45, this bill’s objective is to introduce a single IBS (‘Imposto sobre Bens e Serviços’, or a Goods and Services Tax in English). It is proposed that the IBS will - in time - become Brazil’s de-facto VAT system. Currently, the CBS introduction does not include the ‘State VAT’ (ICMS) and the Municipal Service Tax (ISS). As a consequence, such a proposal will not require a constitutional amendment.
The proposed new CBS tax – effectively a new VAT – also targets digital transactions that are currently out of the scope of Brazil’s various tax systems. It is proposed that digital platforms will be responsible for collecting CBS in these cases. Cross-border sales of digital services would, as a result, be impacted. This approach mirrors that of countries reforming their tax laws across the globe, and follows OECD recommendations regarding the collection of VAT/GST by digital platforms.
Brazil’s new uniform tax on goods and services, CBS, will replace the so-called PIS and Cofins federal consumption taxes. When revealing the plan for the CBS, Brazil’s Economy Minister Paulo Guedes said the new tax will be “simpler, cheaper and more efficient for companies to implement, and be more transparent for consumers.”
On August 5, Minister Guedes told the Temporary Joint Commission on Tax Reform of Brazil’s National Congress that the CBS is configured as a new way of taxing consumption, aligning the country with most modern international VAT models. He added: ““Our first move is in relation to taxes on consumption. The removal of PIS and Cofins eliminates hundreds of regimes that make the Brazilian business environment inhospitable.”
Brazil tax reform: what to watch out for?
This proposal is still at an early stage and if approved will affect foreign suppliers of digital services who will have to register, collect, and remit CBS in Brazil.
These suppliers, while they should not be affected with an obligation to also collect State VAT (ICMS) as it is on tangible products (physical goods), may have to review their obligations under Municipal Service Tax (ISS) that applies on services and intangible products.
This new rule is part of a tax reform project in Brazil that aims to simplify the tax system and attract foreign investment. It may prepare for amendment 45 that will introduce the aforementioned IBS and remove the maze of Federal, State and Municipal taxes. This tax reform process will be interesting to follow regarding what bill will finally be implemented and what the tax system simplification will look like in practice.
Acknowledgement: Thanks to Francisco Moreira, Partner at Bocater, Camargo, Costa e Silva, Rodrigues Advogados, for his help with this article.
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