Next week, the House of Deputies of the Brazilian National Congress may vote a potentially historic tax reform, revamping a tax system that has been in place since the 1960s and has increased in complexity, inefficiency, and compliance cost over the years. The reform has been debated for nearly three decades and is widely perceived as key to increase Brazil’s competitiveness by making the tax system simpler, more transparent, and less burdensome for businesses.
By adopting a full-fledged, value-added tax approach, the reform will likely result in a decreased tax burden for companies with longer supply chains, such as manufacturers, while potentially increasing the current tax burden for companies with a shorter supply chain, such as those in the agribusiness and services sectors.
The proposal encompasses two main areas: a complete reform of the taxation of consumption and a partial reform of property taxes. Other aspects of the tax system, in particular taxing of income, payroll, and financial transactions, are not included in the proposal.
Consumption Taxes Changes
In the area of consumption, the reform will merge five federal, state, and municipal taxes into a so-called “dual” value-added tax (VAT), charged both at the national and subnational levels.
At the national level, the VAT will be called Contribution on Goods and Services (CBS) and will be the result of the following three existing taxes, merged:
- Federal tax on manufactured goods (IPI);
- Federal contribution for the financing of Social Security (COFINS); and
- Federal contribution for the financing of the private sector Social Integration Program (PIS).
At the subnational level, the VAT will be called Tax on Goods and Services (IBS) and will be the result of the following two existing taxes, merged:
- State tax on the movement of goods and services (ICMS); and
- Municipal tax on services (ISS).