The complexity and adversity of the Brazilian tax system has generated and continues to generate a high rate of administrative and/or judicial proceedings, while also making it more difficult for foreign companies intending to invest in Brazil to enter the market.
1. Tax Reform:
For many, many years, the proposal for tax reform in Brazil has been under discussion. The Brazilian tax system, broadly speaking, is recognized worldwide as one of the most complex and costly, due to a wide range of regulations, interpretations and requirements for tax compliance. The complexity and adversity of the Brazilian tax system has generated and continues to generate a high rate of administrative and/or judicial proceedings, while also making it more difficult for foreign companies intending to invest in Brazil to enter the market.
With the expectation of simplifying the rules, criteria, disputes and compliance obligations related to consumption taxes, Constitutional Amendment 132/2023 (“CA 132/2023”) was approved on December 20, 2023, establishing the basic framework of the new tax system applicable to consumption taxes, with effect from January 1, 2026, subject to a transition schedule. This reform was named the Consumption Tax Reform.
In order to facilitate the progress and approval process of the tax reform proposal, the Dual VAT (Dual Value Added Tax) was created, resulting from the consolidation of ICMS and ISS into the Tax on Goods and Services (IBS) and the Contribution on Goods and Services (CBS) as a replacement for PIS and COFINS. Additionally, the Selective Tax (IS) was created and the discontinuation of IPI was provided for, except for products manufactured by legal entities located in the Manaus Free Trade Zone.
CA 132/2023 defined the basic structural rule and also introduced new constitutional principles into the Brazilian tax system, namely simplicity, transparency, tax justice, cooperation and environmental protection. On July 10, 2024, Complementary Bill 68 (“PLC 68”), which provides the details and certain regulations of the new tax system, was approved by the Chamber of Deputies and now awaits approval by the Federal Senate.
From January 1, 2026, IBS and CBS will be levied concurrently with ICMS, ISS, PIS, COFINS and IPI until these taxes are fully abolished at the end of 2032.
2. The Impact of the Tax Reform on Organizations:
It is not possible to think that the consumption tax reform will affect only the financial/tax area of an organization. It will impact that area primarily, but not exclusively. Indirect taxes, now referred to as “VAT,” generate impacts across multiple areas of an organization. The contracting of suppliers and the provision of goods and services to clients involves areas such as procurement/supply chain, logistics, legal, treasury, finance, tax, systems and others.
Many processes have interfaces, and a poorly executed step in one area will have repercussions in the tax area and consequently in finance.
To speak of the implementation of a tax reform that substantially alters current rules in pursuit of a new model for the consumption tax system is to say that not only the tax area must carefully assess its impacts, but all other areas of the organization must also evaluate these repercussions.
Assessing the financial impacts of the new tax burden on the business and its accounting implications, discussing and renegotiating contracts, reviewing processes and internal controls, resizing teams and hiring external providers to support strategic analyses are some of the actions that relate to the tax area, but will not necessarily be led by it.
The pre-transition period is crucial for organizations to carefully and comprehensively assess the impact of the tax reform on the business, in a broad and multidisciplinary manner, so that they can make strategic decisions about the actions to be implemented. Leaving the analysis until the last moment can generate significant process and financial impacts.
The consumption tax reform is a reality in Brazil. The transition period will not be easy. It is important that organizations be prepared to navigate this period in a conscious, strategic and integrated manner, in order to avoid major setbacks and operational and financial impacts following the commencement of its implementation.
By Cristiane Pacheco
Tax Advisory Partner – MCS Markup Audit, Advisory and Accounting
SOURCE: LinkedIn
