After nearly four decades of discussions and various failed attempts, Brazil has finally enacted a long-awaited tax reform to simplify its complex consumption tax system. The Brazilian Federal Constitution of 1988 granted different levels of government — federal, state, and municipal — the authority to levy various consumption taxes. The existing system consists of multiple taxes, each with its own distinct rules and operating concurrently. Challenges such as tax competition between states and conflicts of jurisdiction have plagued Brazil’s tax system for years, making tax administration and compliance arduous and costly. Disputes often arise between municipalities and states regarding the classification of goods or services, exacerbating economic distortions.
The reform, approved on 20 December 2023, replaces the existing taxes with a dual VAT system comprising a subnational VAT (IBS) and a federal VAT (CBS). Both federal and subnational VAT will share key features, such as the taxable transaction and base, and operate on a non-cumulative basis following the destination principle. Each level of government will have the authority to set its own VAT rates, with estimates suggesting a general rate of approximately 27%. The transition period for full implementation of the dual VAT will span from 2026 to 2033, with CBS starting at 0.9% in 2026 and IBS at 0.1%, gradually increasing until full phase-in.
The reform designates the Federal Revenue Agency to administer the federal VAT and establishes a separate entity — the IBS Federative Council — to oversee the subnational VAT. Composed of representatives from states and municipalities, the council will centralize the collection, administration, and regulation of IBS, streamlining processes and reducing tax-related uncertainties. The new system aims to align more closely with international tax principles, and implications for foreign remote sellers may include obligations to collect Brazilian consumption taxes on digital services provided to Brazilian customers.
Although the Brazilian dual VAT system draws inspiration from models in Canada and India, it differs significantly and aims to strike a balance between centralized tax administration and subnational autonomy. The reform is expected to stimulate foreign investments in Brazil by reducing the complexities of the tax system and making it more attractive for companies interested in establishing a local presence. However, there is still a need for clarity on tax collection responsibilities for foreign sellers. Once fully implemented, the reform is poised to simplify taxation, enhance tax administration and compliance, and align Brazil’s tax system more closely with international standards.
