Understanding the Impact of Tax Reform on Small and Medium Enterprises

The proposed tax reform in Brazil is set to significantly affect businesses of all sizes, particularly small and medium enterprises (SMEs). With a full implementation timeline extending to 2033, the reform is currently prompting business leaders to prepare for adjustments during a transitional phase that will last from January to December 2026.

Recent data from a survey by Omie indicates that 65% of SME leaders believe the new tax regulations will directly influence their operations. Among the most notable changes is the consolidation of five existing taxes into two new levies that will form part of a new Value Added Tax (VAT) system.

While the reform will exempt small businesses and individual micro-entrepreneurs from new tax burdens, the overall market conditions may still compel SMEs to adapt. The coexistence of both the old and new tax systems during the transitional period is expected to complicate fiscal management, especially for smaller firms that typically lack the resources to navigate significant structural changes.

As outlined by Felipe Beraldi, an economist with Omie, the transition period will likely heighten management complexities, impacting SMEs that must ensure compliance with both tax structures. Additionally, the new VAT framework will eliminate the ability to accumulate tax credits at each stage of the supply chain. Major corporations will face taxation based on the difference between their sales and expenses, while SMEs within the Simples Nacional tax regime will need to handle VAT collections separately to maintain tax credits.

This shift underscores the importance of strategic planning for business owners. Beraldi emphasizes that effective organization is necessary to navigate these changes and to maintain competitiveness and financial sustainability.

Moreover, the introduction of the VAT comes with additional implications for certain sectors, which will now be subject to a Selective Tax aimed at discouraging consumption of harmful products, such as tobacco and alcohol.

For SMEs operating in B2B environments, the ramifications of the tax reform could be even more pronounced. Many SMEs may lose their competitive edge if they are unable to provide tax credits to their larger clients under the new system. As noted by Liêda Amaral from BSSP Consulting, larger companies often pressure their suppliers, including SMEs, to reduce costs while adhering to tax regulations. Failure to manage the new tax structure effectively could lead to increased costs and reduced profitability for smaller enterprises.

Anderson Trautman Cardoso, a tax expert, highlights that while the simplification of the tax system is a positive development, the ability to claim full tax credits will be crucial under the new regulations. Smaller businesses may need to consider transitioning from the Simples Nacional to a more complex tax regime to take full advantage of the new credit system, although this will come with added administrative burdens.

To prepare for the upcoming changes, SMEs are advised to make gradual adjustments to their fiscal management in 2025. Beraldi suggests that businesses keep a close eye on the final implementation schedule and the evolving tax landscape, as delays in preparation could lead to financial mismanagement and heightened risks of audits from tax authorities.

Here are several recommendations for SMEs to effectively navigate the impending tax reform:

• Prepare Early: Although the reform aims to simplify tax obligations, proactive preparation is essential. Businesses should stay informed about legislative developments and consider voluntary adjustments ahead of the mandatory changes.
• Reassess Pricing Strategies: The new tax framework may necessitate price adjustments for goods and services. Gradual price modifications are recommended to preserve long-term relationships with customers and suppliers.
• Understand New Tax Obligations: Familiarity with the details of the new VAT and Selective Tax is critical to avoid management issues.
• Evaluate Current Tax Regime: Companies may find it beneficial to switch from Simples Nacional to a different tax structure for greater credit accumulation, albeit at the cost of increased complexity.
• Seek Professional Guidance: Collaborating with specialized consultants and investing in technology can facilitate a smoother transition and improve financial management capabilities.

As regulatory changes unfold, SMEs will need to adapt to an increased volume of financial data, necessitating the adoption of efficient management software. Early implementation of such tools will prepare businesses to make informed decisions regarding their tax strategies.