Brazil - Indirect tax reform: “A work in progress”

Brazil’s Chamber of Deputies approved an historic tax reform on 6/7 July 2023 that would introduce significant and welcome changes to the constellation of indirect tax rules in the country. The measures would restructure and simplify the indirect tax system, which currently is highly complex due to the multiple tiers of taxes that are levied at various levels of the government and that sometimes overlap. The reform would consolidate several taxes into a “dual VAT” system, introduce new levies and modify existing ones. The broad changes are expected to boost the competitiveness of Brazil, eliminate the “tax wars” between the states, and ease tax and administrative burdens on businesses. If enacted, the changes would be phased in starting in 2026, with some of the existing taxes abolished starting in 2027.

Highlights of the proposed changes

Dual VAT system

There are five main taxes under the current system: four on manufacturing and/or consumption (IPI, ICMS, PIS and COFINS) and three on services (ISS, PIS and COFINS) that are levied and collected at various levels of the government. It is proposed to consolidate these federal, state and municipal taxes into a “dual VAT” regime that would be levied at the federal and combined state/municipal levels.

The new federal level VAT, the “Contribution on Goods and Services” (CBS), would incorporate the existing IPI (federal tax on manufactured goods), COFINS (federal contribution to finance social security) and PIS (federal contribution by employers to finance employee savings initiatives). The CBS would be levied on the supply of tangible and intangible assets, rights and services, with the tax base and rate to be set out in a Complementary Law. There is speculation that the rate would be 25% to 30% combined with the state/municipal VAT tax rate.

Brazil has 27 states and 5,000 municipalities. The state/municipal-level VAT, the “Tax on Goods and Services” (IBS), would consolidate the existing ICMS (state tax on the movement of goods and services) and ISS (municipal tax on services). The IBS would be levied on the supply of tangible and intangible assets, rights or services, as well as imports of tangible and intangible assets, rights and services. Specific rules would apply to certain sectors (including the oil and gas, biofuel, financial services, health, restaurant, entertainment, aviation and hotel sectors). Each state and municipality would set the applicable tax rate, although the Federal Senate would set a “reference rate.”

The IBS VAT system would be based on the destination principle, so that a supply of goods or services would be taxed at the place where the goods or services are consumed rather than where they were produced or supplied. As regards the tax rate reductions and special treatments available under the current ICMS regime, while in principle these would have to be retained under the IBS regime, the details are currently unclear, as is the extent to which these benefits would have to be modified.

Other taxes

  • A new federal tax, the “Selective Tax” would be imposed on goods and services that are deemed to have a negative impact on health and the environment. The tax would be included in the tax base for purposes of the CBS and IBS. Neither the tax rate nor the list of products and services that would fall within the scope of the Selective Tax have been announced. Ten percent of the tax collected by the federal government would be allocated to the states and federal district and 25% of that portion would be allocated to the municipalities.
  • States and municipalities would be permitted to establish a new state/municipal-level tax, the “Contribution on Primary and Semi-Finished Products, which would be levied on a temporary basis through 31 December 2043.
  • Several existing taxes would be maintained but with adjustments, including:
    • Urban Land and Building Tax (IPTU): The calculation base for this municipality-level tax could be adjusted by the Executive Branch based on specified criteria.
    • Causa Mortis Transfer and Donation Tax (ITCMD): The rate of the ITCMD, a state-level tax, would be progressive.
    • Motor Vehicle Tax (IPVA): The tax rates under the state-level IPVA would differ depending on the type of vehicle, use of the vehicle and the impact on the environment. Fifty percent of the IPVA collected by the states would be allocated to the municipal districts.


The current indirect tax rules have been in place since the 1960s and there have been multiple attempts over the years to reform the rules, so the recent approval of the bill by the Chamber of Deputies should represent a positive step forward.

The proposals are substantial and would reshape the indirect tax landscape in Brazil. It should be noted that a recurrent theme throughout the legislative text is the need for a Complementary Law to fill in the details of the new rules. However, until such a law is enacted, taxpayers will be faced with uncertainties about an increased tax burden, how the tax base would be calculated and the applicable rates, as well as compliance obligations.

It is also clear that if the indirect tax reform is enacted, there will be a period of time where both the new rules (i.e., CBS, IBS, Selective Tax and Contributions on Primary and Semi-Finished Products) and the old rules (i.e., ICMS, ISS, IPI, PIS/COFINS, ITCMD, IPVA and IPTU) would operate simultaneously, which will further complicate the issue. In any event, affected businesses will need to fully understand the contours of the new regimes and adapt their internal systems to take account of the measures.

The bill will now move to the Federal Senate for its consideration. If the Senate revises the bill, it will return to the House of Representatives for new discussion, then be sent back to the Senate and after a final vote, sent to the president for his signature.

Queli Morais
BDO in Brazil

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