Tax Reform on consumption in Brazil 

On December 21, 2023, Constitutional Amendment n. 132 was published, which amends the tax system on consumption in Brazil. 

The main change consists of replacing the taxes currently levied on consumption (PIS/COFINS/IPI/ICMS/ISS) with a Dual Value Added Tax (VAT) levied on goods and services and a Selective Tax (IS).

Main features of VAT Dual: 

  • Federal taxes (PIS, COFINS and IPI) will be aggregated into the Contribution on Goods and Services (CBS). The State and municipal taxes (ICMS and ISS) will be unified into the Goods and Services Tax (IBS). 
  • Broad incidence, full non-cumulativity “outward” incidence, destination principle and export exemption will not be subject to tax incentives (except in the cases provided for in the Federal Constitution). 
  • Applicability to CBS and IBS of the same rules in relation to taxable events, tax base, non-taxable events, taxpayers, immunities, specific and distinguished regimes. 

Selective Tax 

  • Its objective is to discourage the consumption of goods and services considered harmful to health or the environment, exempting exports. 

Cash back 

  • Possibility of implementing a cashback system to return IBS and CBS to individuals, aiming to reduce income inequalities. 

Special Tax Regimes 

Manaus Free Zone 

  • Maintenance of the Manaus Free Trade Zone for the term set out in the Constitution and Free Trade Areas existing on 05/31/2023. 
  • Instruments will be created to maintain the region’s competitiveness. 

 
Simples Nacional (SN) 

  • Maintenance of the Simples Nacional regime, aimed at micro, small and medium-sized companies. 

Particularities regarding ICMS 

Validated ICMS Benefits 

  • The ICMS benefits already granted by states will be maintained until 2032, with a proportional reduction from 2029. 
  • Prohibition of extending ICMS tax incentives beyond 2032. 
  • The Tax or Financial-Fiscal Benefits Compensation Fund will contain possible losses of states with the tax reform. 

 
Credit balances 

  • ICMS credit balances existing at the end of 2032 may be used by taxpayers, as long as they are admitted by the current legislation and have been homologated by the States. 

Transition to the new model 

  • The transition period for the new model will be 8 years, as follows: 
  • 2026 – collection of IBS at a rate of 0.1% and CBS at a rate of 0.9%. 
  • 2027 – CBS will be charged in full, eliminating PIS and COFINS and reducing IPI rates to zero (except ZFM). 
  • 2029 to 2032 – Proportional increase in IBS and gradual extinction of ICMS and ISS, in the following proportion: 
  • 90% of rates in 2029; 
  • 80% in 2023; 
  • 70% in 2031; 
  • 60% in 2032. 
  • From 2033 – Total extinction of the current system, with the new consumption tax system coming into force in Brazil. 

 
Taxation of Income and Assets 

  • The Tax Reform also changes the rules for other taxes levied on income and assets: 

Drummond Advisors is available to assist in the assessment of potential impacts arising from the consumption tax reform in Brazil. 

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