Brazil's Tax Reform and its impact on electronic invoicing
Brazil recently enacted tax reform under Constitutional Amendment 132, aimed at simplifying and modernizing its complex tax system. The core of this reform is the consolidation of five existing taxes (PIS, Cofins, IPI, ICMS, and ISS) into two new taxes, forming a dual VAT system. Under this new structure, two primary taxes have been established: the Goods and Services Tax (IBS), which is managed by states and municipalities, and the Contribution on Goods and Services (CBS), administered at the federal level.
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What are the key changes in the Tax Reform?
New Dual VAT – CBS & IBS
Under this reform, Brazil will implement a dual VAT system, comprising the CBS (Contribution on Goods and Services) at the federal level, and the IBS (Goods and Services Tax) for states and municipalities. Initially introduced in Europe, this dual VAT structure is widely recognized in many countries as the GST (Goods and Services Tax).
The reform also introduces a federal Selective Tax (IS) intended to regulate the consumption of products that harm public health or the environment. At the federal level, CBS and IS will replace the Social Integration Program Contribution (PIS), Social Security Financing Contribution (Cofins), and the Excise Tax on Manufactured Goods (IPI).
For states and municipalities, the IBS will replace the ICMS (State Tax on Circulation of Goods and Services) and ISS (Municipal Service Tax). Although the CBS and IBS will be managed independently, they will adhere to unified regulations.
Main Features of CBS and IBS
The Contribution on Goods and Services (CBS) at the federal level and the Goods and Services Tax (IBS) for states and municipalities will have the following key features:
- Broad tax base: CBS and IBS will apply to all transactions involving both tangible and intangible goods, including rights and services, encompassing sales, exchanges, leases, licenses, and more.
- Destination-based taxation: Taxes will be collected at the consumer's location, favoring regions with higher consumption.
- Non-cumulative structure: Taxes paid along the supply chain will immediately generate credits, including payments for the acquisition of fixed capital goods (such as machinery and equipment) and goods for use and consumption in economic activities (such as electricity, administrative materials, and telecommunications services) This aims to reduce the tax burden on investments and exports.
- Uniform legislation: Both IBS and CBS will follow identical regulations nationwide, simplifying compliance.
- Transparent rate application: Taxes will not be included in their own calculation bases or that of other taxes, making rates clearer for citizens.
- Quick credit refunds: Accumulated tax credits will be promptly refunded to taxpayers.
- Investment deductions: Investments will be eligible for immediate credit refunds, encouraging economic growth.
- Export exemptions: Exporters will be refunded VAT paid on inputs and other goods and services acquired, ensuring exports remain tax-free.
- Application to imports: Imported goods and services, including digital goods, will be taxed at the same rate as domestic products, ensuring fair competition.
Impacts on Fiscal Invoices and CFOP
A significant change will be the replacement of CFOP (Fiscal Operation and Service Codes) with the new CST (Tax Situation Codes) classifications, which align with the updated tax framework. This shift will require operational adjustments for taxpayers and software developers, who must update their systems to comply with the new regulations.
Declaration of Service Provision (DPS)
A key feature of the reform is the creation of the Declaration of Service Provision (DPS), a new fiscal document designed to streamline service reporting. The DPS will play a vital role in implementing IBS and CBS, improving control and transparency over service transactions across the country.
Transition Period for the Tax Reform
The reform introduces two transition periods: a general seven-year period impacting Brazilian society, and a 50-year transition specifically for federal entities. The general transition, beginning in 2026 and concluding in 2033, will gradually phase out existing consumption taxes and fully implement the new tax model.
To facilitate this transition, supplementary laws must be enacted during 2024 and 2025 to regulate IBS and CBS, create the IBS Federal Council, establish the Regional Development Fund, and ensure credit refunds for ICMS.
The shift from ICMS and ISS to IBS will take place from 2029 to 2032, with gradual adjustments to IBS rates and reductions in ICMS and ISS rates, according to the following percentages:
- 10% in 2029,
- 20% in 2030,
- 30% in 2031,
- 40% in 2032.
By 2033, ICMS, IPI, and ISS will be fully replaced by the new tax model.
During this transition period, the Federal Senate will set the reference tax rates, which will be automatically adopted by the federal government, states, and municipalities.
Approval of PLP 68 and Critical Factors
The reform's full implementation hinges on the approval of PLP 68, which will support the development of the necessary technical adjustments for compliance.
Goals of the Tax Reform
Promote sustainable economic growth, generating jobs and income: The tax reform will address major flaws in Brazil’s current tax system, including tax accumulation, fiscal competition, and administrative and legal disputes. This will reduce costs and inefficiencies for both businesses and the public sector, boosting the country's economic growth potential.
This will therefore lead to increased employment and higher incomes for citizens. When the economy grows, everyone benefits: businesses, citizens, and governments alike.
Create a fairer tax system to reduce social and regional inequalities: The reform will adopt a destination-based tax model, meaning taxes will be collected in areas of consumption. This change will redistribute revenue to less developed regions and reduce regional disparities.
The reform aims to reduce social inequalities by providing greater relief to lower-income citizens, who currently face a higher tax burden on consumption compared to wealthier individuals. To further this goal, a tax refund (cashback) mechanism will also be introduced.
Simplify the tax system, ensuring transparency and promoting fiscal responsibility: The reform will cut down on the time and money businesses spend on tax compliance and litigation. With standardized, non-cumulative rules, the business environment will improve, encouraging fairer competition and resulting in higher-quality products and services at lower prices.
This simplification will enhance transparency by making the amount of tax paid clear to citizens, empowering them to demand better public services and greater accountability from the government.
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