BRAZILIAN TAX REFORM: Complementary Bill of Law No. 68/2024

On April 24, 2024, the Executive Branch introduced Complementary Bill of Law No. 68/2024 ("PLP 68" or the “Bill”), which creates the Tax and the Contribution on Goods and Services ("IBS" and "CBS") as well as the Selective Tax ("IS"). The Bill was developed within the scope of the Technical Advisory Program for the Implementation of the Consumption Tax Reform (PAT-RTC), which is composed of hundreds of specialists from the federal government, states, and municipalities.

This Bill meets the rule in article 18 of Constitutional Amendment No. 132/2023 that requires that the Executive Branch present all bills to regulate the Tax Reform to the National Congress within 180 days after the enactment of the Constitutional Amendment.

PLP 68 is divided into three books covering, in summary, the following subjects: (i) general rules of IBS and CBS (Book I), (ii) general rules of IS (Book II), (iii) provisions on IPI offset (Book III), (iv) a five-year evaluation of aspects of the project that do not correspond to general rules for the levy of taxes (Book III), and (v) the Manaus Free Trade Zone and the Free Trade Areas (Book III).

Below, we provide a summary of what we consider the Bill’s most important points (from Book I and Book II). The proposed text still needs to be analyzed by the National Congress, which also has to analyze other related bills. Please note that the summary below does not refer to a valid text of law.

• IBS and CBS General Rules

a.1) Concepts:

Book I, when providing for the general rules of IBS and CBS, defines (articles 1 to 3):

• "Good" as a material or immaterial good, including a right;
• "Supply" as the delivery or availability of tangible goods, or the institution, transfer, assignment, licensing, or availability of intangible goods, including rights; and the provision of services.
• "Supplier" as the person residing or domiciled in the country or abroad who performs the supply service as a legal entity, or entity without legal personality (including a consortium, condominium and investment fund) and the individual.
• "Purchaser" as the person obliged to provide the payment or counterpayment for the supply of goods or services, and, in the case of payment on account and order or on behalf of third parties, the purchaser becomes the person who, on whose behalf or in whose name, the obligation to pay for the supply of the good or service arises.
• "Recipient" means the person to whom the goods or services are provided (whether or not the purchaser).

a.2) Tax triggering event:

The Bill, by introducing the elements of the tax triggering events of CBS and IBS (articles 4 to 7), includes an exemplifying list of legal acts and transactions that have as their object the supply of goods and services. In addition, it defines as a service transaction any transaction that is not classified as a transaction with goods. Thus, any supply that does not have as its object a tangible or intangible good, including rights, will be considered as a service transaction.

Within this list of examples of legal acts and transactions are:

• Disposal, including purchase, sale, exchange, permutation, accord, and satisfaction;
• Lease;
• Licensing, concession, and assignment;
• Loan;
• Onerous donation;
• Onerous institution of rights in rem;
• Lease, including commercial lease; and
• Provision of services.

In addition, the legislation sets forth that IBS and CBS are levied in other transactions, too, among which we highlight:

• Transfer of assets between establishments belonging to the same taxpayer;
• Transfer of equity participation;
• Transfer of assets as a result of mergers and spin-offs and payment and capital contribution and return;
• Financial income;
• Stock market transactions;
• Receipt of dividends and other results from equity participation.

IBS and CBS are not levied on exports of goods and services abroad (articles 8 and 9), and the taxable event is considered to have occurred (article 10):

• In transactions with goods or services: at the time of supply or payment, whichever occurs first;
• In continuous or fractional transactions: at the time of each supply or service, even partial, or of each payment, whichever occurs first;
• In transactions with treated water, sanitation, piped gas, communication and electricity services: at the time when payment becomes due. This also applies to the generation, transmission, distribution, commercialization and supply to the final consumer and to transactions of continuous or fractional execution when it is not possible to identify the moment of delivery or the availability of the good at the end of the service provision.

The Bill defines what must be considered as the "place of transaction" (article 11) for each of the taxable event scenarios, an extensive list to be analyzed on a case-by-case basis.

a.3) Calculation basis:

Regarding the calculation basis (articles 12 and 13), the Bill establishes that it will be the full value of the transaction, which includes any increase resulting from the adjustment of the value, discounts granted under condition, taxes and public prices, and other amounts charged or received as part of the value. It also determines exclusions from the calculation basis, such as the amounts of the IBS and CBS themselves; the IPI; and, in the transition period, ISS, ICMS, PIS and COFINS.

a.4) Rates:

The IBS and CBS tax rates (articles 14 to 20), which are one of the major points of interest for taxpayers, will be set individually by each entity (federal government, states and municipalities) by means of a specific law, and the same rate must be adopted for all transactions with goods or services. In the absence of a previously defined rate, the reference rate to be established by the Federal Senate will be applied.

For the IBS, the rate levied on each transaction will correspond to the sum of the state of destination of the transaction rate and the municipality of destination of the transaction rate (article 11).

a.5) Contributors:

The PLP 68 defines as IBS and CBS taxpayers (articles 21 to 26) the supplier that carries out transactions (i) in the development of an economic activity, (ii) in a habitual manner or in a volume that characterizes economic activity, or (iii) in a professional manner, even if the profession is not regulated. It also considers taxpayers those who, even if they do not meet these requirements, are expressly provided for in other situations addressed in the Bill. The taxpayer is required to register with IBS and CBS.

a.6) Non-cumulativeness:

Both CBS and IBS are non-cumulative taxes, and the taxpayer can accrue credits of these taxes when payments are made of the amounts of IBS and CBS levied on transactions in which they are purchasers of goods or services (articles 28 to 37). In this way, the payment of IBS and CBS (article 27) can also be made by offsetting with IBS and CBS credits accrued by the taxpayer.

Another relevant point clarified by PLP 68 is the definition of personal use and consumption for the purposes of prohibiting the accrual of credits (article 29): the acquisition of jewelry, precious stones and metals; works of art and antiques of historical or archaeological value; alcoholic beverages; tobacco products; weapons and munition; and recreational, sports and aesthetic goods and services, except when they are necessary for the taxpayer to carry out transactions.

a.7) Supply of goods and services for personal use and consumption to individuals:

The Bill establishes the levy and taxation by IBS and CBS of the supply of goods and services for personal use and consumption to individuals (article 38), such as the provision of housing and its expenses, the provision of a vehicle and its expenses, health insurance, any other type of insurance, food and beverages, communication equipment, etc.

a.8) Collection:

The payment of IBS and CBS (articles 48 to 52) can be made through:

• Payment of the amount of the outstanding balance for each calculation period;
• Financial liquidation, the so-called “Split Payment”; or
• By the purchaser, if the payment by the supplier is made using a payment instrument that does not allow separation and collection under the terms of the Split Payment.

a.9) Possibility of reimbursement of credit balance:

IBS and CBS taxpayers who accrue a positive tax credit at the end of the calculation period may request full or partial reimbursement (articles 53 and 54). For tax credits related to the acquisition of assets incorporated into the taxpayer's fixed assets or accumulated up to the average monthly amount of the taxpayer's accumulation, the deadline for reimbursement is 60 days. In addition, the IBS Management Committee and the Brazilian Federal Revenue may authorize even faster reimbursement for eligible taxpayers under compliance programs.

a.10) Imports:

Regarding IBS and CBS levied on imports and exports, the Bill reaffirms what has already been established in Constitutional Amendment No. 132/2023, which adopts the destination principle, so that imports of goods or services from abroad will be taxed (articles 57 to 77).

CBS and IBS are due on the importation of intangible goods and services, which are considered:

• Importation of services: A service provided by a resident or an entity domiciled abroad as long as it is executed in the country, or executed abroad for consumption in the country, or related to goods or real estate located in the country; or a service related to good that is sent abroad for refurbishment (or any type of service) and returned to the country after its conclusion;
• Importation of intangible goods (including rights): A supply made by a resident or an entity domiciled abroad to a resident or domiciled in the country or for consumption in the country.

The calculation basis is the value of the transaction, according to the general rule of article 12 for CBS and IBS, and applies the same tax rates levied for local transactions.

On the other hand, the taxable event for the importation of material goods is the entry of the goods and merchandise of foreign origin into the national territory. The taxable event is considered to have occurred in the release of goods submitted to dispatch for consumption or in the release of goods subject to the special customs regime of temporary admission for economic use, among other regimes.

The place of import of the material goods corresponds to their place of delivery, including for international shipments, the main domicile of the purchaser who will store the goods or, if the goods were lost, the place where the loss was reported.

The calculation basis for of IBS and CBS on the import of material goods is the customs value added to the Import Tax; Excise Tax; Sicomex Fee; AFRMM; CIDE; anti-dumping duties; countervailing duties; safeguard measures; and any other taxes, fees or contributions levied on import of material goods until its release.

The tax rates on the import of material goods are the same as those levied on local transactions. The taxpayer is the importer, the one who promotes the entry of the good into the country, and the payment must be made until the delivery of the goods for dispatch for consumption.

a.11) Exports:

The exports of goods and services are immune from IBS and CBS (article 78); however, exporters can accrue and use the credits related to transactions in which they are the purchaser of goods or services.

The Bill establishes immunity from IBS and CBS on fictitious export of tangible goods (without leaving Brazilian territory - article 80), when the exported goods are, among other:

• Fully incorporated into goods that are temporarily in the country, owned by a foreign owner, including under a temporary admission regime;
• Delivered in the country to be incorporated into a vessel or platform under construction or conversion contracted by a company based abroad, or into its modules, for subsequent use in the exploration, development and production of oil, natural gas and other fluid hydrocarbons; or
• Intended exclusively for the exploration, development, and production of oil, natural gas and other fluid hydrocarbons, when sold to a company based abroad.

a.12) Customs procedures:

Regarding customs regimes (articles 83 to 99), as well as taxes regimes and exemption for capital goods, the Bill provides the suspension of the levy of CBS and IBS on the following regimes: (i) special customs regime for customs transit, in any of its modalities; (ii) special customs regime for storage; (iii) special customs regime for temporary admission in the country or temporary departure from the country; (iv) and special customs regime for processing, in all four cases, subject to the regulation established by customs legislation.

PLP 68 also provides for the suspension of payment of IBS and CBS on certain imports and transactions subject to (i) Repetro-Sped, (ii) Export Processing Zones, (iii) Drawback, (iv) the Tax Regime for Incentives to Modernize and Expand the Port Structure (Reporto), and (v) the Special Incentive Regime for Infrastructure Development (Reidi).

a.13) Specific differentiated regimes:

PLP 68/2024 also regulates the IBS and CBS for specific differentiated regimes (articles 115 to 304), providing their uniform application throughout the country and their conditional validity on adjustments being made to the reference tax rates or the granting of presumed credits, in order to rebalance the collection on the federal spheres. It also defines the transactions that should be subject to tax rate reductions:

• 30% reduction for services provided by administrators, lawyers, accountants, architects, and physical education professionals, among others;
• 60% reduction for goods and services such as education services, health services, medicines, food intended for human consumption, and agricultural and aquaculture products and inputs, among others.
• Reductions for other goods and services, which are listed in annexes.

Some IBS and CBS rates are reduced to zero, such as the provision of public transport services, menstrual health care products, some medicines, and devices for people with disabilities.

Within the list of differentiated regimes, there is a specific chapter on the taxation of fuels under the single-phased regime and subject to the ad rem rate. An innovation was the inclusion of natural gas in the list of fuels subject to this tax regime. There is also an entire chapter covering financial services, insurance and reinsurance and health care plans, among other topics.

a.14) Transition rules:

Articles 330 to 392 set forth the rules for the transition to IBS and CBS, establishing mechanisms for the reduction of, until the complete extinction of, the taxes that are being replaced by them (ICMS, ISS, PIS, COFINS) and establishing rules for the use of the balance of unappropriated or unused credits until the date of extinction of these taxes.

• General rules on the Excise Tax (IS):

b.1) Subjected goods:

According to the bill (articles 393 to 396) the IS will be levied on a single-phase basis on the production, extraction, sale, or import of goods harmful to health or the environment. These goods are as follows: (i) vehicles; (ii) ships and aircraft; (iii) smoking products; (iv) alcoholic drinks; (v) sugary drinks; and (vi) extracted minerals.

b.2) Credits:

It is forbidden to use tax credits from previous transactions or to generate credits for subsequent transactions.

b.3) Tax triggering event:

The tax triggering event for the IS (article 397) is (i) the first sale of the asset; (ii) the public auctioning of the asset; (iii) the non-costly transfer of the mineral extracted or produced; (iv) the incorporation of the good into fixed assets; (v) the export of the extracted or produced mineral; or (vi) the consumption of the good by the producer-extractor or manufacturer.

b.4) Non-incidence:

The IS is not levied (article 398) on (i) exports abroad of the goods listed above in b.1, with the exception of mineral; (ii) transactions with electricity and telecommunications; (iii) transactions with goods and services with a 60% reduction in the standard rate of the IBS and CBS; and (iv) urban, semi-urban, and metropolitan public passenger transport services.

b.5) Calculation basis:

The IS calculation basis (articles 399 to 403) is:

• The sale value in the sale;
• The auction value;
• The reference value in the non-costly transaction or consumption of the good; or
• The book value of the good incorporated into fixed assets.

The calculation basis does not include the amount of CBS and IBS and the IS itself levied on the operation, as well as unconditional discounts.

b.6) Rates:

The IS tax rates (articles 404 and 407) will be established by ordinary law, with a limit of 1% for transactions with extracted mineral, and reduced to zero for natural gas used as an input in an industrial process.

b.7) Taxpayer:

The IS taxpayer, according to the bill (articles 408 and 409), is:

• The manufacturer when the goods are first commercialized, incorporated into fixed assets, handed over in an unencumbered transaction, and consumed
• The importer when goods of foreign origin enter the national territory
• The auctioneer
• The extractivist producer who carries out the extraction in the first commercialization, in the consumption, in the non-costly transaction, or in the export of the good.