Tax Reform in Brazil: Key Changes and Their Impact on Electronic Invoicing

Brazil passed a sweeping tax reform through Constitutional Amendment No. 132 to simplify and modernize its complex tax system. The reform replaces five existing taxes (PIS, Cofins, IPI, ICMS, and ISS) with two new ones under a Dual VAT model: the federal Contribution on Goods and Services (CBS) and the state/municipal Goods and Services Tax (IBS).

Overview of Brazil’s Tax System

Brazil has one of the most complex tax systems in the world, structured across three levels federal, state, and municipal and governed by specific regulations in 26 states and over 5,000 municipalities. This legislative diversity imposes a significant administrative and tax burden on businesses, particularly in inter-state and inter-municipal operations. The fiscal bureaucracy forces companies to allocate substantial resources to compliance, thereby impacting their competitiveness and operational efficiency.

The reform aims to make the system simpler, fairer, and more transparent, reduce bureaucracy, and enhance transparency in tax processes. It's a crucial step toward correcting structural imbalances and fostering economic growth.

What Does the Tax Reform Entail?

With the reform, Brazil will adopt a Dual VAT model, introducing two new taxes: the CBS (Contribution on Goods and Services), at the federal level, and the IBS (Goods and Services Tax), managed by states and municipalities. This system, similar to the GST model used in many countries, aims to simplify tax payments and enhance fiscal transparency. A third tax will also be introduced: the Selective Tax (IS), which will have federal reach and apply to products deemed harmful to health or the environment.

Under this structure, the CBS and IS will replace the Contribution to the Social Integration Program (PIS), the Contribution for the Financing of Social Security (Cofins), and the Tax on Industrialized Products (IPI) at the federal level. Meanwhile, the IBS will replace the ICMS (Tax on the Circulation of Goods and Services, including Interstate and Intermunicipal Transport and Communications) and the ISS (Tax on Services of Any Kind) at the state and municipal levels. Although each tax will be managed independently, all will operate under a common set of rules to ensure coherence within the new system.

Features of the New Dual VAT: CBS and IBS

The new Dual VAT system in Brazil consists of two taxes: the CBS (federal) and the IBS (state and municipal). Both share a set of features designed to simplify tax compliance and promote a more transparent and competitive economy:

• Broad application base: Both taxes will apply to all transactions involving tangible goods, intangible assets, rights, and services, including sales, rentals, licenses, leasing, or service provision.
• Destination-based taxation: The tax is collected in the region where the good or service is consumed, benefiting states and municipalities with higher consumption.
• Immediate tax credit: Any tax paid along the production chain will generate an automatic credit, including for investments and operating expenses such as energy, services, or inputs. This eliminates tax accumulation and lowers costs.
• Unified rules: CBS and IBS will follow common legislation nationwide, simplifying their application and oversight.
• Transparent rates: Each tax will be calculated separately, without being included in its own base or that of the other, enhancing clarity around taxed amounts.
• Fast credit reimbursement: Accumulated tax credits will be returned to taxpayers quickly and efficiently.
• Investment incentive: Investments will allow for immediate recovery of tax credits, encouraging economic development.
• Tax-free exports: Exports will be exempt from taxes, with VAT refunded throughout the entire production chain.
• Equal taxation for imports: Imported goods and services, including digital ones, will be subject to the same rules as domestic products, ensuring fair competition.

Tax Reform Transition Period

The implementation of the new tax system will be gradual, allowing businesses to adapt their fiscal and technological processes without disrupting daily operations. The regulation will be structured through various complementary laws and resolutions that will guide the pace of the transition over the coming years:

• 2025: Publication of complementary laws regulating CBS and IBS, and the beginning of legal and institutional adjustments.
• 2026: Approval of complementary laws targeting special regimes and specific sectors.
• 2027: Start of CBS (Contribution on Goods and Services) collection.
• 2029: Start of the phased collection of IBS (Goods and Services Tax).
• 2033: Complete elimination of current taxes—ICMS, ISS, PIS, Cofins, and IPI—and full consolidation of the new Dual VAT system.

The reform outlines two transition phases. The first will affect the public and take place from 2026 to 2033, during which the old and new taxes will coexist. The second, specific to government entities, will span more years and will be virtually unnoticeable to most taxpayers.

Latest Technical Notes Published: Recent Changes

In the context of tax reform, the Brazilian government has started publishing a series of Technical Notes (NTs) introducing critical adjustments to electronic fiscal documents. These updates aim to align systems with the new requirements and ensure proper validation of tax information:

• NT 2025.001 v.1.03 (CT-e, CT-eOS, and GTV-e): Introduces new fields and validation rules in the layouts of these electronic transportation documents, aligning them with the tax reform.
• NT 2025.001 v.1.03 (NFCom): Details structural and technical validation changes for the Communication Fiscal Invoice (NFCom) to comply with the new taxes.
• NT 2025.001 v.1.01 (MDFe): Updates the layout of the Electronic Fiscal Document Manifest (MDFe), incorporating validation rules compatible with the reformed model.
• Joint NT 2025.001: Establishes guidelines for adopting the new alphanumeric CNPJ, which will directly affect all issuers of electronic fiscal documents.
• NT 2025.002 v.1.01 (NF-e and NFC-e): Makes adjustments to the layouts of the Fiscal Invoice (NF-e) and Consumer Fiscal Invoice (NFC-e), adding fields and rules that meet the new tax reform requirements.

New Alphanumeric CNPJ in Brazil

Another significant change driven by fiscal modernization is the introduction of the alphanumeric CNPJ, a transformation in the tax identification registry for legal entities in Brazil. This change was announced in Technical Note No. 49/2024, developed by the Federal Revenue Service in collaboration with COCAD (General Coordination of Registration and Tax Benefit Management) and SUARA (Subsecretariat of Collection and Services), and regulated through Normative Instruction No. 2.229/2024.

Although the new CNPJ will retain its current length of 14 characters, its internal structure will differ:

• First 8 characters: Alphanumeric, representing the root of the number.
• Next 4 characters: Also alphanumeric, indicating the order of the registered establishment.
• Last 2 digits: Will remain numeric, serving as check digits.

Currently, the CNPJ is validated using a calculation called module 11, which defines the last two digits. This method will continue to be used in the new format but will be adapted to accept letters. The numeric values of uppercase letters will be derived using the ASCII table, allowing correct validation of alphanumeric characters. This new format will apply exclusively to new CNPJ registrations starting in July 2026. Existing CNPJs will not be changed and will remain valid.

Impact on Businesses and Electronic Invoicing

The tax reform in Brazil marks a profound shift for the business sector. Beyond changing how taxes are calculated, it introduces a new framework requiring companies to restructure internal processes, especially in the areas of technology and tax compliance.

One of the main challenges will be adapting to the Dual VAT system (CBS and IBS), which will require businesses to revise their accounting and tax flows to incorporate new rates, rules, and obligations. This shift will directly impact electronic invoicing systems, which must be updated to align with the new technical structures and validation criteria defined by the tax authority.

Key Impacts on Businesses 

• Operational restructuring: Companies will need to review and adjust internal processes to comply with the new tax model.
• Management system updates: ERPs, accounting, and tax systems will need modifications to accommodate new rules and tax calculations.
• Changes in electronic tax documents: Invoices will need to include new fields and technical structures related to CBS and IBS.
• Altered invoice issuance and reception: Electronic processes will need to be updated to comply with new validation rules and technical standards.
• Tax code revisions: The codes used in commercial operations will require updates.
• Restrictions on tax incentives: Sectors currently enjoying fiscal benefits may face limitations under the new regime.
• Stronger tax oversight: The introduction of new tax categories will enable more precise and automated monitoring by tax authorities.

How to Prepare for Brazil's Tax Reform

While the tax reform presents significant challenges, it also offers new opportunities. Simplifying the tax system can reduce operational costs by decreasing the need for multiple declarations and redundant processes. Additionally, eliminating cascading taxes and increasing transparency creates a more favorable environment for businesses.

To adapt, companies must revise their internal systems and processes. The transition may be complex, but partnering with a specialized technology provider can make the difference between a smooth implementation and an unnecessary operational burden.

EDICOM serves as a strategic partner in this journey. Their platform for electronic invoicing and tax compliance enables businesses to automate the generation and transmission of fiscal documents, easily adapt to the CBS and IBS system requirements, and stay updated with regulatory changes thus reducing risks and simplifying tax management.

Preparing in advance, implementing a robust technological solution, and relying on tax compliance experts is the best way to successfully navigate this transformation.