Brazil is on the brink of significant tax reforms, particularly in the areas of indirect taxation and transfer pricing (TP). These changes are expected to simplify the current complex tax system and align Brazil’s TP regulations with international standards. Businesses operating in Brazil must prepare for these reforms to ensure compliance and optimize their tax strategies.
Indirect Tax Reform
Legacy VAT Rules
The current Value-Added Tax (VAT) system in Brazil is highly complex, involving multiple federal, state, and municipal taxes. This complexity is exacerbated by the existence of thousands of tax regulations and the need for businesses to comply with various tax authorities.
New VAT System
The new VAT system aims to consolidate several existing taxes into a more streamlined structure. Key components include:
- CBS (Goods and Services Contribution): A federal turnover tax.
- IBS (Goods and Services Tax): A state/municipal VAT.
- IS (Selective Tax): A federal excise tax on specific goods and services.
Main Characteristics of CBS and IBS
- Broad Base and Single Rate: A single tax rate with few exceptions.
- Tax Collection at Destination: Taxes will be collected at the destination, reducing inter-state tax disputes.
- Full Input Credit: Businesses can recover VAT paid on purchases.
- Sunset for ICMS Tax Incentives: Gradual reduction of ICMS incentives, with a complete phase-out by 2032.
Transitional Period
The transition to the new VAT system will begin in January 2026, with a phased approach to implementing the new taxes and reducing the old ones.
Rates
The Ministry of Finance estimated that the average rate under the new VAT system will be 26.5%, with 8.8% for CBS (Goods and Services Contribution) and 17.7% for IBS (Goods and Services Tax). It is important to note that these figures are estimates and subject to change.
How to Get Ready
Businesses should:
- Analyze the New Tax Burden: Model the impact of the new tax system on their operations.
- Review Supply Chain Networks: Assess the location of suppliers and customers to optimize logistics and costs.
- Update Tax Processes and Systems: Ensure that tax returns, processes, and systems are ready for the new requirements.
- Utilize VAT Credits: Accelerate the use of accumulated credits during the transitional period.
- Consider Tax Incentives: Evaluate the impact of the sunset of tax incentives and explore opportunities in the Manaus Free Trade Zone.
Source Deloitte
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