Brazil: The Multiple Facets of Tax Reform

Approval and features of the Brazilian tax reform

The tax reform proposed in 2023 has been approved and will represent a substantial step forward in the pursuit of a more efficient and simplified tax system. On October 8, 2023, the Federal Senate approved in two rounds the Proposed Constitutional Amendment No. 45/2019 for Tax Reform, with 53 favourable votes and 24 against. As the previously approved text in July 2023 in the Chamber of Deputies underwent changes, a new vote was held in the Chamber of Deputies on December 15, 2023, having been approved in two rounds (371 votes in favour and 121 against in the first round, and 365 votes in favour and 118 against in the second round), culminating in the promulgation of the Tax Reform on December 20, 2023.

Implementation of the Value Added Tax (VAT)

The primary innovation brought by the reform is the introduction of the Value Added Tax (VAT) into the national tax system. This change aims to replace the five main existing consumption taxes with dual VAT, simplifying the intricate tax structure of the country. Federal taxes PIS, Cofins, and IPI will converge into the Contribution on Goods and Services (CBS), administered by the federal government, while state-level ICMS (tax on goods) and municipal ISS (tax related to service provision) will be unified in the format of the Tax on Goods and Services (IBS), with shared management between states and municipalities.

By adopting the VAT model, the reform promotes non-cumulatively throughout the production chain, meaning taxes will only be levied on the value added at each stage of the production process. This model is widely used in most countries due to its simplifying nature, avoiding cascading taxation, streamlining the economy, and attracting investments to production and service sectors.

The VAT rate will still be regulated, but it is estimated to be around 27.5% on the value of products and services, aiming to maintain the country’s current high tax burden. The transition period, crucial for companies and sectors to adapt to changes, is set between 2026 and 2032, with the gradual extinction of main existing taxes.

Other relevant aspects of the reform

In addition to the creation of VAT, the tax reform proposal introduces several significant modifications to the Brazilian fiscal landscape. Among them, the following points stand out:

• Tax exemption for basic food basket products and a 60% reduction in the tax burden for items in the extended basic basket, aiming to alleviate the tax burden on essential products.
• Reimbursement, through a cashback program, of taxes on electricity, gas, sanitation, and food bills for low-income families.
• Creation of a Selective Tax, with higher rates for products harmful to health and the environment.
• Establishment of a ceiling for the tax burden.
• Imposition of taxes on motor vehicles (IPVA) for private jets, yachts, and boats.
• Increased taxation on inheritances.
• Creation of a Regional Development Fund to mitigate revenue losses for states and municipalities, contributing to a more balanced and fair transition.

Prospects for the future

The aforementioned measures have a progressive character, reducing taxes for the less privileged classes while increasing the tax burden on the wealthier. The prospects for the country’s future are optimistic, as these measures are expected to eliminate distortions, stimulate consumption, attract investments, and expand the national economic activity. The effective implementation of the proposed changes, accompanied by effective oversight, is now crucial for the desired benefits to materialise and propel the country towards a fairer, more efficient, and promising tax future.