Brazilian Tax Reform Approved in Lower House of Congress

July 14, 20230

In a significant development for Brazil’s tax landscape, on July 6 of 2023, part of the proposed tax reform successfully gained approval in the lower house of Congress, marking a crucial milestone in its implementation. The reform aims to simplify the complex tax system and bring it in line with international standards. 

 

A Long-Awaited Reform 

 

Years of deliberation and discussions have led to the current tax reform proposal, introduced as PEC 45/2019. The proposal aims to consolidate Brazil’s value-added tax (VAT) system and introduce two new taxes: the Contribution over Goods and Services (CBS) and the Tax on Goods and Services (IBS). The bill is expected to proceed to the Senate, where it will be voted for approval, alterations or dismissal. If approved, it is expected an eight-year transition period for the PEC 45/2019 to be implemented, from 2026 to 2032. 

 

Streamlining the VAT System 

 

The focal point of the tax reform is the consolidation of Brazil’s VAT system into a “dual VAT” structure, streamlining the current complex framework that consists of five different indirect tax regimes. The CBS will replace the Tax on Industrialized Products (IPI), the Social Integration Program (PIS), and the Contribution for the Financing of Social Security (Cofins). Similarly, the IBS will replace the Tax on the Circulation of Goods and Services (ICMS) and the Tax on Services (ISS). The transition to the new system will take place over a period of several years, gradually adjusting rates and their application in the supply chain. 

 

Eliminating Competition and Overlap 

 

One of the notable changes brought about by the dual VAT regime is the elimination of competition between states and municipalities to attract businesses by offering lower tax rates. With a unified rate agreed upon, businesses will no longer have the incentive to relocate based on tax advantages. Moreover, the new system will put an end to the accumulation of VAT at various stages within the supply chains in Brazil, reducing complexity and increasing efficiency. 

 

Impact on Organizations Operating in Brazil 

 

The approved tax reform in Brazil will have a profound impact on organizations operating within the country. Here are some key considerations for businesses: 

  • Simplified Compliance: The consolidation of the VAT system and the introduction of two new taxes aim to simplify tax compliance for businesses. With fewer taxes to navigate and streamlined processes, organizations can expect reduced administrative burdens and improved efficiency in tax reporting. 
  • Increased Tax Transparency: The shift towards a destination-based taxation system enhances tax transparency as the responsibility for paying consumption-related taxes moves to the consumer. This change can provide greater visibility into the tax liabilities associated with sales and services, allowing organizations to make informed business decisions. 
  • Potential Tax Adjustments: While the proposed tax reform strives to maintain continuity in the overall tax burden, organizations should be prepared for potential adjustments in tax rates during the transition period. It is crucial for businesses to closely monitor any rate changes and factor them into their financial planning and pricing strategies. 
  • Digital Economy Impact: The reform’s focus on the digital economy has implications for organizations providing digital services within Brazil. Shifting the responsibility for tax payment to the consumer and eliminating the distinction between goods and services may lead to increased taxation in this sector. Businesses operating in the digital space should assess the potential impact on their pricing models and evaluate their compliance obligations under the new framework. 
  • Sector-Specific Considerations: The reform introduces exemptions and different tax rules for specific sectors, such as those with short supply chains, industries affecting inflation, and healthcare and education sectors. Organizations operating in these sectors should carefully review the reform’s provisions to understand the implications and opportunities available to them. 
  • Competitive Landscape: The elimination of competition between states and municipalities to attract businesses through tax incentives may reshape the competitive landscape. Organizations should reassess their location strategies and evaluate factors beyond tax advantages when making investment decisions. 
  • Transition Period Planning: As the reform is implemented over several years, organizations need to plan for a smooth transition. This involves aligning internal systems and processes to accommodate the changes in tax calculations, ensuring compliance with new regulations, and training employees to understand and adapt to the new tax framework. 

 

Brazil’s approval of the tax reform in the lower house of Congress marks a significant step towards simplifying the country’s complex tax system and aligning it with international standards. The consolidation of the VAT system, elimination of competition and overlap, and considerations for the digital economy and environmental sustainability all contribute to a more streamlined and efficient tax framework. As the reform progresses to the Senate, it holds the potential to reshape Brazil’s tax landscape and pave the way for increased economic growth and stability. 

 

It is crucial for organizations to stay updated on further developments, potential amendments, and guidelines issued by tax authorities to ensure full compliance with the reformed tax system. By proactively addressing the impact of the tax reform, businesses can navigate the changes effectively and leverage opportunities for growth in the evolving Brazilian tax landscape.

 

Author: Caroline Colucci Alves, Junior Associate at TPA Global

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