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Brazil approves landmark VAT reform to simplify tax – and could create world’s highest VAT rate

A major overhaul of Brazil’s taxation system has been approved by the country’s Senate in a move that will see five existing taxes replaced with two new indirect taxes and a significant simplification of its tax code.

In an historic vote last Wednesday (8th November), the Senate voted by 53 to 24 in favour of implementing the wide-ranging proposal from Luiz Inacio Lula da Silva’s government. However, it must still be ratified by the House in a further vote in which it will require a 60% majority in order to be enshrined in law.

What is included in the reform proposal?

The VAT PEC 45/2019 Bill includes the introduction of two new value added taxes, one at a federal level and the other for states and municipalities.

The new taxes will be:

  1. CBS (Contribuicao sobre Bens s Servicos)

This is a federal tax on consumption and will replace the existing PIS and COFINS taxes.

  1. IBS (Imposto sobre Bens e Servicos)

This tax on goods and services will be applied at state and municipal levels. It will replace the current ICMS and ISS levies.

Currently, ICMS is by far the most important and sizeable source of revenue for state governments; it is complemented by several additional duties and rates vary between Brazil’s 26 states, but in some the taxes combine to form an effective overall  rate of more than 30%.

What does this mean for businesses?

For decades, Brazil has been a notoriously difficult country for tax professionals to accurately determine, calculate and remit taxes in – unless supported by a best-in-class automated solution.

The immense complexity and enormous depth of regulations that have come to define Brazilian tax will be eliminated under the proposed legislation.

Once the reforms are enacted, the current origin-based methods of taxation will be eradicated and replaced by destination-based models, allowing Brazil to follow the global standard and operate in line with approximately 170 other countries that already utilise VAT.

Following a destination-based approach will mean that taxes must be collected where the buyer is located or where the product is shipped to – as opposed to where the business in question is headquartered.

And the new VAT rate will be…

In short, nobody knows for sure – yet!

Reports in July this year indicated the Institute of Applied Economic Research believed a standard rate of 28% could be implemented across the country.

In August, it was reported that the Chamber of Deputies had suggested the minimum VAT rate under the new system will be 25.45%, although it could be as high as 27%.

However, the Senate has now published a series of additional exemptions that may result in the final rate being set at a figure of or close to 27.5%, according to a Finance Ministry estimate.

This would mean Brazil has the highest standard VAT rate of any major global economy – a record currently set by Hungary and its standard rate of 27%.

With personal income taxes relatively low in Brazil, such figures would emphasise the country’s reliance on indirect taxes for revenue generation.

While a headline rate in excess of 25% would be high in comparison with many other nations, it could effectively be a tax cut for businesses currently faced with a combined rate of over 30% in some states when all five existing taxes are applied.

Will there be any discounts?

A small number of goods and services will be permitted for a discounted rate. These include:

  • Exempt: Public transport.
  • Zero-rate: Eggs, fruit, vegetables and medical supplies.
  • Reduced rate: Only 40% of the standard rate will be applied to education, medical services, some public transport and health.
  • Special rules: Financial services, hotels and restaurants.

When will the reforms take place?

The VAT reform plan will be introduced in a phased approach from 2026, with completion set for 2033. It’s expected to follow this schedule:

2026: CBS and IBS will be introduced at initial rates of 0.9% and 0.1% respectively. These rates will gradually increase.

2027: By the end of the year, PIS, COFINS and IPI (other than products from the Manaus Free Trade Zone) will be removed.

2029: ICMS and ISS will be significantly reduced while CBS and IBS rates continue to rise.

2033: Full implementation of the new VAT regime is expected.

What happens next?

As the Senate passed a number of modifications to the proposal, it must be passed back to the lower house for approval once more.

Following the latest developments, Finance Minister Fernando Haddad praised the decision to approve the proposal and said the reform could still be enacted this year.

To discover how we can help your business comply with Brazilian VAT now and in the future as the reforms take effect, contact us today.