Understanding the Impacts of Brazil's New Tax Reform
The recent tax reform in Brazil aims to simplify the country's tax system while preserving current levels of revenue and tax burden. Recently sanctioned by President Luiz Inácio Lula da Silva, this comprehensive reform will replace five existing taxes with two new ones, introduce a 'Sin Tax,' and establish a cashback system among other mechanisms.
The implementation of these changes will occur gradually, starting in 2026 and culminating in 2033 when the various taxes will be unified. In the initial phase, set for 2026, the new taxes--the Contribution on Goods and Services (CBS) and the Goods and Services Tax (IBS)--will be tested on a national scale, although they will not be collected during this trial period. Companies will be required to indicate on their invoices the amounts that would correspond to the new taxes.
By 2027, the Selective Tax (Imposto Seletivo), commonly referred to as the 'Sin Tax,' will come into effect. With this, the federal CBS will be applied, and several current taxes including PIS, Cofins, the Financial Operations Tax (IOF), and certain exemptions on Industrial Products Tax (IPI) will be eliminated, with the exception of products manufactured in the Manaus Free Trade Zone. The transition period will extend until 2033, when the CBS and IBS will be fully operational.
The CBS will replace PIS, Cofins, and IPI, while the IBS will take the place of ICMS and ISS. The full rate for the CBS is expected to be activated in 2027, while the IBS rate will be established in 2029. The general tax rate is anticipated to be around 28%, with a safeguard measure limiting the average rate to 26.5%. To ensure that the tax burden does not exceed the planned limits, the government will propose complementary legislation to review fiscal benefits.
The 'Sin Tax' will specifically target products deemed harmful to health or the environment, aiming to discourage their consumption. This tax will replace part of the revenue collected from the IPI. The items subjected to this new tax include various vehicles, tobacco products, alcoholic beverages, sugary drinks, and certain mineral products.
Basic food items will be exempt from the CBS and IBS, with a list of 26 exempted goods including staple foods such as bread and infant formulas. Additionally, low-income families registered in government social programs will benefit from a cashback system, allowing them to recover some of the taxes paid on essential utilities and services.
Pharmaceuticals will also see significant changes, with a 60% reduction in tax rates for registered medications. A specific list of 383 medicines will receive complete exemption from both CBS and IBS taxes, providing relief to public health entities as well.
The reform also introduces a new classification for small business owners, termed 'nanoentrepreneurs,' who will be exempt from the new taxes if their annual income does not exceed R$ 40,500. This is aimed at fostering entrepreneurship among small-scale operators, including app-based delivery drivers.
However, the reform is not without its controversies, as the government has issued 17 vetoes on technical and constitutional grounds, affecting provisions related to tax exemptions for investment funds and the liability of buyers for tax payments.
As Brazil prepares for these significant changes, stakeholders across various sectors are closely monitoring the developments, with expectations that the new tax system will position the country favorably in the global economic landscape.
