Tax Law Highlights | Brazilian Tax reform and expectations for its regulation

1. Updates in evidence:

I. Initial considerations: enactment and timeline of the transition.

II. Next steps: regulation.

III. Technical Advisory Program for the Implementation of the Consumption Tax Reform - MF Ordinance No. 34/2024.

IV. Technical Groups.

V. Topics awaiting regulation:

a. Topics awaiting regulation: general rules of IBS and CBS.
b. Topics awaiting regulation: transactions for personal use or consumption.
c. Topics awaiting regulation: criteria for defining the destination.
d. Topics awaiting regulation: criteria for using credit balances.
e. Topics awaiting regulation: offset regime.
f. Topics awaiting regulation: Tax administrative litigation proceedings.

2. Introduction:

The Brazilian Tax Reform on consumption was enacted through Complementary Amendment No. 132/2023, which unified the main taxes on the consumption of goods and services in the form of a Dual VAT and through the creation of a Tax on Goods and Services (IBS) and a Contribution on Goods and Services (CBS). In addition, Complementary Amendment No. 132/2023 provided for the possibility of creating an Excise Tax (IS), which aims to tax the production, extraction, sale or import of goods and services considered harmful to health and the environment.

IBS and CBS will be non-cumulative, with their levy concentrated at destination, and will be subject to the same general rules, which are currently being discussed and drafted for presentation to the National Congress later this semester.

3. Tax landscape:

The Brazilian Tax Reform has been debated for decades, especially in light of the complexity of the current tax system, and specifically with regard to taxation on consumption, its regressiveness, lack of transparency and cumulative effect on the economic chain, among other things. Changing the tax system is also related to the need for a system that develops the country's economic and social growth.

By providing for full non-cumulative taxation of CBS and IBS, through full offset in the economic chain, the Reform aims for fiscal neutrality and the absence of overlapping taxes. This is an important aspect, since a considerable portion of current litigation is related to differences in interpretation of the rules on offsetting ICMS and PIS/COFINS credits.

Furthermore, the levy at destination will possibly put an end to discussions related to the tax controversy and will fully exempt exports.

4. Repercussions and changes:

The changes introduced by the Brazilian Tax Reform will have a direct impact on all sectors of the economy and will be challenging for taxpayers, especially given the seven-year transition period. Several aspects will be discussed this year in the National Congress, such as the general rules for the new taxes, the methodology and procedures for offsetting accumulated credits, rules regarding the differentiated tax regimes, the system for collecting, supervising and distributing tax revenue by the Management Committee and rules relating to the Tax Administrative Proceeding.

It is notable that, as part of the discussions on PEC No. 45/2019 (before the changes consolidated in EC No. 132/2023), the TCU's Working Group on Tax Reform assessed the impact of the reform and concluded that it would increase Brazil's potential GDP, mainly due to an increase in total productivity and an increase in investments.

5. What conclusions can we draw?

Given all of the above, there is a landscape of radical changes for the National Tax System in which essential points still depend on and await regulation.

Considering that the test period for CBS and IBS begins in 2026, these taxes need to be regulated by 2025. Following the same logic, the IS must be regulated by 2026, as it is scheduled to come into force in fiscal year 2027, when the CBS will be fully implemented and the PIS and COFINS will be extinguished, while the IPI will be partially extinguished.

Our Tax team is available to discuss the issue and the main aspects of the regulation that could impact our clients' businesses.