Unveiling the Brazil Tax Reform journey

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’s 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.  

Brazil tax reform: enhancing transparency

The measure, passed in December 2023, sets up a more transparent tax system that simplifies an outdated collection process for the production and sale of goods and the provisioning of services.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 the Brazil tax reform promises long-term clarity, in the near term it will likely bring additional challenges. There will be a phase-in period between 7-10 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 Brazil VAT system, described as “Dual VAT,” replaces five taxes with three. New allocations include a federal noncumulative tax of goods and services (CBS) and a separate tax on state and municipal goods and services (IBS). There’s 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, beverages or cars with inefficient exhaust systems.

Other changes in consumption taxation aim to redirect and redistribute revenue allocations, by reducing the sectoral, social and geographic inequalities. By streamlining tax rules, the aim of the Brazil 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 has also a provision to create a fund for sustainable development for the States of the Western Amazon and Amapá State.

The transition to the new Brazil VAT will come 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 taxes take effect, but existing taxes will stay in place and gradually phase out, so taxpayers will need to handle two different regimes and two different sets of rules.

From 2029 to 2032, IMCS and ISS taxes drop in stages before they’re formally extinguished in 2033, opening the door for a new system with new implementations.  

Specific challenges professionals will face

With the Brazil tax reform rolling out, professionals and systems will need to be updated regularly as changes get implemented. Taxpayers will need to navigate all the challenges that can come from two different tax regimes, separate control of credits, different inspections, impacts of the double regime to 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.  

The Brazil tax reform has been debated for years, dating back to a major initiative conducted in 1995. Three decades later, reform is here. Companies, lawyers and tax advisors 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.