-
Brazil will phase out PIS, Cofins, ICMS, and ISS taxes, replacing them with federal CBS and state IBS VAT taxes from 2026 to 2033, aiming for a simplified and modernized tax system aligned with international VAT standards.
-
The reform introduces two main taxes: CBS (8.8%) on goods and services at the federal level, and IBS (17.7%) at state and municipal levels, with a combined VAT rate around 28%, replacing multiple complex indirect taxes.
-
A pilot program starting in 2025 involves over 400 large taxpayers to test the new tax administration, preparing for the full implementation beginning in 2026 with gradual tax rate increases and transitions.
-
Key transition milestones include initial low CBS and IBS rates in 2026, termination of PIS, Cofins, and IPI by 2027, and gradual ICMS and ISS reductions through 2029, with full transition expected by 2033.
-
Certain supplies will receive reduced VAT rates (40% of standard), zero-rating (e.g., eggs, fruits, medicines), or exemptions (e.g., public transport), while special regimes apply to fuels, financial services, and hospitality sectors.
-
The reform shifts taxation from origin to destination basis, aligning Brazil with global VAT norms, and allows businesses to deduct input taxes, reducing cascading taxes and improving economic efficiency.
-
Compensation funds totaling over 200 billion reais annually will support states during the transition to offset revenue losses and political resistance, addressing one of the major obstacles to reform.
-
Current indirect tax system complexity involves federal, state, and municipal layers with conflicting tax bases and rates, creating disputes and complicating tax administration and business compliance.
-
Legal and political barriers remain significant due to states’ and municipalities’ constitutional rights to tax revenues, making consensus difficult without constitutional amendments or governance frameworks.
-
Despite challenges, Brazilian businesses generally support simplification, while service sectors fear higher taxes and may seek delays or exemptions; a governance model similar to India’s GST Council may help resolve disputes.
Source: vatcalc.com
