August marks the start of penalty enforcement in Brazil

The eight year switch from PIS, COFINS, ICMS and ISS indirect taxes to new federal CBS and states IBS VAT replacements is well underway. Beginning in August 2026, companies that do not include CBS and IBS information in e-invoices may be subject to a 1% penalty on transaction value, even though the reported amounts in 2026 are informational only and do not trigger actual tax collection.

The regulations remain under refinement, with a public consultation open until 31st May 2026, to receive technical contributions from taxpayers.

Timeline

2026 – Pilot phase

• CBS (federal VAT) introduced at 0.9%, and IBS (state/municipal VAT) at 0.1% for testing only.
• From 1st August, penalty regime starts.
• Existing taxes remain in force.
• Businesses can offset CBS/IBS amounts against PIS, COFINS or other federal liabilities.

2027-2028 – Transition

• CBS becomes full operational.
• PIS and COFINS abolished, IPI zeroed except in the Manaus Free Trade Zone (ZFM).
• IBS in testing phase, 0.05% each for state & municipal.

2029-2032

• Progressive increase of IBS, while legacy ICMS and ISS rates decline year by year:
  • 2029: ICMS/ISS cut to 90% of current rates
  • 2030: 80%
  • 2031: 70%
  • 2032: 60%

2033 – Full implementation

• New dual VAT system (CBS & IBS) fully replace all previous taxes.
• ICMS and ISS removed.
• Destination-based VAT regime becomes fully operational.

Tax complexity in transition

During this transition, all the taxes will co-exist meaning this overlap creates operational and system complexity. A major expected pain point is the overload of running two tax models in parallel – a strain on tax and IT teams. Businesses will need to handle new tax codes, updated invoice formats, and constantly evolving regulations, all while still complying with the old rules.

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