The government has been proactive in managing the transition to implementation of the new tax rules and already has started to announce relevant standards, such as complementary legislation and instructions.
Brazil’s indirect tax reform is extensive, making structural changes to the taxation of goods and services; consolidating several taxes into a dual VAT, comprised of a state and municipal level goods and services tax (IBS) and a federal goods and services contribution tax (CBS); and simplifying the calculation base. The following five taxes (which are merged into the dual VAT) will be repealed: the federal contributions for social integration and social security financing (PIS/COFINS, respectively); the federal tax on manufactured products (IPI); the state VAT (ICMS); and the municipal service tax (ISS). The three levels of government—federal, state and municipal—will be able to set their own VAT rates under the new rules. These rates have not yet been announced, although it is predicted that they will be around 27.5% to 29%.
The reform will be phased in over a seven-year period from 2026 through 2033, which will allow the government and taxpayers time to adapt to the new system.
Government action in preparation for the new rules
As noted above, the government has announced complementary legislation and instructions, as well as the establishment of technical committees.
The Complementary Law Project No. 68/2024, presented on 24 April 2024 and currently being discussed by the Chamber of Deputies, will create a general framework for the indirect tax reform and contains some clarifying definitions and details for the rules. The legislation defines terms such as taxpayer, taxable event, place of supply, collection of the IBS/CBS, refunds, tax treatment of imports of goods and services, including rules governing the use of digital platforms and the circumstances in which they would be required to collect IBS and CBS (regardless of whether the platform is resident in Brazil).
Additionally, a Normative Instruction published on 18 June 2024 requires taxpayers that benefit from federal incentives, immunity or waivers of tax, etc. relating to the taxes that are to be phased out under the reform to submit a report (Declaration of Incentives, Waivers, Benefits and Immunities of a Tax Nature (DIRBI)) in which they declare the relevant benefits. Although the DIRBI will have to be filed monthly by the 20th day of the second month following the relevant calculation period, taxpayers must submit a report by 20 July 2024 for tax benefits received during the five-month period January to May 2024. Affected benefits include:
The government has also proposed rules for the payment of taxes. Financial institutions would participate in the payment of VAT by using the “split payment” method, a payment arrangement based on an electronic instrument that will link information among transactions, tax documents, and IBC and CBS values.
BDO insights
The historic indirect tax reform aims to modernize the Brazilian system, address the tax competition issues, eliminate tax distortion, mitigate the burdens on businesses and strengthen tax administration, and the government is actively preparing for implementation.
Companies doing business in Brazil—both Brazilian and foreign companies—should be preparing as well by ensuring that they fully understand the new rules, monitoring new regulations and/or guidance issued by the Brazilian government, reviewing their internal systems and software and updating or replacing technologies as needed, taking into account the fact that they will be operating under two regimes as the new taxes are phased in starting in 2026, and adopting procedures for monetizing federal and state tax credits in anticipation of the transition to the new rules.
Edilson Muniz da Silva
Queli Morais
BDO in Brazil