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VAT reform imminent in Brazil: What to expect for tax and e-invoicing

A series of recent developments in Brazil have revealed the outline of a major reform of its VAT regime and digital requirements for businesses trading in the country.

In July, the Brazilian Chamber of Deputies approved a proposed constitutional amendment that would see a new dual VAT system launched.

Last week, a key update to a suggested statute relating to e-invoicing was published, revealing a number of changes that will lead Brazil to a unified system for issuing tax documents.

Here we take a look at both proposals and how they could combine to trigger one of the most significant reforms of any country’s indirect tax system of recent decades.

1) VAT rates overhaul

Brazil is renowned for one of the most complex VAT systems in the world. But, after almost 30 years, the country is reportedly set to moves towards a simplified setup.

Initial approval has been granted for a new dual VAT approach and an additional selective tax, which would replace the current multi-level system featuring federal, state and municipal taxes.

The new system will be achieved by:

  • Combining the state VAT (also known as ICMS) and the service tax (ISS) into one new tax on goods and services, to be known as IBS. This tax would be administered by the states and municipalities.
  • Merging the contributions from the state on gross revenues into a single contribution on goods and services, to be known as CBS. This will be administered by the federal government.

If final approval is granted by the Senate, the new IBS and CBS taxes will come into effect and will be subject to the same VAT rules currently in place.

However, the new taxes will be wider-reaching and cover more goods and services, such as goods sold to overseas consumers via online marketplaces.

While it remains to be seen what figure the standard rates would be set at, some concessions have already been confirmed. These include a 60% reduction of the standard rate of IBS and CBS for education, public transport, certain medical implements, agricultural products and several other goods.

There will also be a 100% reduction of the standard rates of some basic medications, specific sector tax incentives and medical devices related to disabilities.

Brazil’s journey towards a new, simpler dual VAT system is expected to take place over a period of seven years. The anticipated schedule is:

2026: CBS rate of 0.9% and IBS rate of 0.1% introduced.

2027: Some existing taxes (such as PIS and COFINS) to be removed.

2029: Phased reduction of ICMS and ISS begins.

2033: Full implementation of the new VAT system.

As well as the introduction of the dual VAT system, a selective tax (IS) will be introduced. Exports will be exempt from IS, but non-essential goods manufactured in Brazil or those considered to be damaging to the environment will be subject to the tax.

2) Updates to e-invoicing 

The Brazilian government recently published Complementary Law No.199, establishing the National Statute for the Simplification of Additional Tax Obligations.

As part of this planned reform of tax, the way e-invoicing works in the country is set to be transformed.

One of the key features of the statute is the unification of rules for issuing e-invoices. As it stands, Brazil has more than 1,000 e-invoice formats in use; leading to significant inefficiencies for businesses across the nation.

The proposed statute will bring together federal, state and municipal authorities to:

  • Unify the way electronic tax documents are issued.
  • Simplify tax payments by consolidating collection documents.
  • Centralise tax records.
  • Use e-invoicing data to calculate taxes and generate pre-filled tax returns.

The government will carry out an evaluation of all existing e-invoicing systems, legislation and tax platforms before standardising legislation to help it achieve its objectives. The statute aims to deliver:

  • Cost benefits for taxpayers.
  • Modernisation of systems.
  • Increased compliance from taxpayers.

The Federal Executive Branch must now implement certain measures to allow it to carry out the e-invoicing directives detailed within the statute. This will kickstart the move towards national unification of e-invoicing processes and away from the current, complex system.

What does this mean for businesses in Brazil?

If your business trades in or with Brazil, you’ll be affected by any reform of its VAT system and new e-invoicing measures once introduced.

To ensure seamless compliance with updated VAT rates, rules, regulations or even entirely new systems, we recommend automating tax determination and application from source to system; allowing your team to enjoy the peace of mind that comes from knowing your VAT calculations and payments can be completed with 100% accuracy and almost zero human inputs.

If you are concerned about e-invoicing, we believe prioritising master data is the key. After all, if you put garbage into your ERP or other systems, you can expect garbage to come out. Cleansing master data will empower your business to generate complete and compliant e-invoices.

For more information on how we can help, contact our team of tax technologists today.