This week, President Lula signed into law a significant tax reform designed to streamline Brazil’s complex tax system. The newly enacted IBS/CBS Complementary Law will replace four existing federal and state taxes with two newer, more standardized taxes aligned with international VAT practices.
A New Tax Structure with Higher Rates
Under this reform, the consolidated tax rate has been set at 28%, as confirmed by the Ministry of Finance. This is a slight increase from the 27.5% draft approved by Congress earlier.
The two main indirect taxes replacing previous levies starting in 2026 are:
- CBS (Contribuição sobre Bens e Serviços) at 8.8% – a federal consumption tax that will take over from PIS and Cofins.
- IBS (Imposto sobre Bens e Serviços) at 17.7% – a state and municipal tax that will replace ICMS and ISS.
While the initial consolidated rate is set at 28%, it may be adjusted in the future as details around exemptions are clarified. Additionally, a new excise tax called the Selectiva (Imposto Seletivo) will replace the existing federal IPI tax, targeting goods and services considered harmful to public health and the environment.
Key Changes and Business Impact
This reform marks a significant shift from an origin basis of taxation to a destination basis, aligning with global norms. It allows businesses to deduct taxes on their inputs, effectively reducing the cascading effect of taxes that has historically hampered Brazil’s internal economy.
Timeline for the Transition
The dual VAT system will be phased in over seven years, with the following milestones:
- 2026: Implementation begins with CBS set at 0.9% and IBS at 0.1%.
- 2027: PIS, COFINS, and IPI will be eliminated.
- 2029: Gradual reduction of ICMS and ISS rates will commence.
- 2033: Targeted final rate of approximately 28%.
Certain essential goods and services will benefit from discounts or exemptions:
- Reduced Rates (40% off): Public transport, artistic activities, education, and healthcare.
- Zero-rated: Essential food items like eggs, fruits, vegetables, and specific medicines.
- Exempt: Public transportation services.
To ease the potential challenges of this reform, state compensation funds have been proposed, aiming to allocate 40 billion reais annually for state development and 160 billion reais to accommodate existing tax benefits.
Additional Reforms and Digital Taxation
The reform also includes provisions for Brazilian VAT on digital services and updates to the e-invoicing system, reflecting the government’s commitment to digital transformation within the tax framework.
Conclusion: A Revolutionary Change for Brazil
The IBS/CBS tax reform represents a landmark shift towards a more simplified and efficient tax system in Brazil, encouraging economic growth and easing the burdens on businesses. As Brazil navigates this transition, the focus will be on maintaining stability while modernizing its tax infrastructure to meet international standards.
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