Brazil tax reform is a very important issue for entrepreneurs and investors in Brazil and around the world.
After a long wait, the reform has finally being approved by the Câmara de deputados (Chamber of deputies).
And why is it so important?
Today, if you ask a Brazilian citizen how much they pay in taxes, they won’t know the answer. Even the tax coupon for a purchase gives an approximate amount, not the total.
The Brazilian tax system is complicated both for those who produce and for those who consume.
There are countless taxes, fees and levies, which is why even experts find it difficult to define the full tax burden of some sectors, due to the complex calculations that need to be made.
In the end, nobody knows for sure how much they are paying.
We’ll now explain a little about this tax chaos and how the tax reform aims to simplify it all.
The current Brazilian tax system in Brazil
Taxes are an important source of government revenue. From them, the government finances important public services.
The problem is that tax rules need to be clear and efficient – and in Brazil it doesn’t happen.
The more complex and inefficient the tax system, the more time it takes to keep up with the revenue, the more difficult and costly it is for companies to operate, the more distortions that hinder the performance of the economy and the higher the cost for all operations to take place.
The tax burden on income and consumption today represents approximately 33% of GDP – one of the highest rates in the world.
And it goes on: The World Bank calculates that companies in Brazil spend an average of 1,500 hours calculating and paying taxes. This is the worst time among the 190 countries analyzed. The second-placed country in the same ranking spends 1,000 hours.
In addition, according to the Brazilian Institute of Planning and Taxation (IBPT), it is estimated that companies spend more than 180 billion reais a year on tax bureaucracy.
In addition, there are approximately 5,000 tax rules that must be observed in order for companies to maintain their regularity – and failure to comply with them leaves the company exposed to penalties.
All this complexity hinders foreign investment in the country.
Moreover, according to Ernst&Young, the tax costs of investment in Brazil is about 6%, compared to 1,7% for Australia and 0.4% in the UK*.
That’s why it’s so important to discuss this issue and work to bring more transparency, clarity and fiscal security to Brazilians and foreign investors in the country.
*Source: CNI + Ernest Young
The current tax burden
To show what the Brazilian tax burden is like today, let’s consider the five main taxes: those levied on goods, services and imported goods.
In addition to these, there are a multitude of other taxes, such as Income Tax, IPVA, IPTU, but we’ll focus on the group mentioned to understand how the changes will take place from now on.
Today there are three federal taxes, one state tax and one municipal tax.
The federal taxes are IPI (Tax on Industrialized Products), PIS (Social Integration Program), COFINS (Contribution to the Social Integration Program).
| Taxes | Rules | Impact | |
| Federal Taxes | IPI
PIS COFINS
|
There are specific rules by the federal government | IPI – is levied on products manufactured by industry: stoves, refrigerators, cell phones, etc., as well as imported products.
PIS – levied on company turnover COFINS – levied on the purchase of a good or service; or on a company turnover. |
| State tax | ICMS | There are 27 state regulations | It applies to the sales of goods |
| Municipal tax | ISS | There are 5,570 municipal regulations | It applies to all services |
What are the salient features of the Brazilian tax system in comparison to other countries?
While Brazil has a very high consumption tax burden and a complex system for calculating and collecting taxes, other major world economies have a much simpler system.
In Brazil, the set of tax rules has a specific name: “Custo Brasil”.
Custo Brasil takes into account:
- A complex and onerous tax system, with a wide variety of rates;
- Excessive bureaucracy, with many procedures and documents required to do business;
- Poor infrastructure, which hinders transportation, energy and communication and increases export costs;
- High labor charges, with high hiring and firing costs;
- Economic instability that creates uncertainty for foreign investors.
This is the pinnacle of Brazilian complexity. An expensive, complex and often demotivating system for entrepreneurs.
The complexity is such that it has generated cases that have caught the attention of large companies:
The McDonald’s case
McDonald’s has always sold a well-known ice cream cone. The tax rate paid on this item is 38.79%.
In Brazil, products have a nomenclature when they are declared to the tax authorities. As a result, ice cream ceased to be ice cream and became a “milk drink”.
This simple change brought taxes down to 11.78%. Today McDonald’s claims to sell “frozen dessert” instead of “ice cream”.
Chocolate with cookies
The famous Brazilian chocolate “Sonho de Valsa” is no longer considered chocolate, but wafer.
The company changed the packaging and nomenclature and as a result stopped paying 5% tax and became exempt.
The Crocs case
Crocs shoes are known all over the world. In Brazil, a shipment of this product was held up at the port of Santos because the tax auditor considered that the classification of the product was wrong.
Crocs used to be considered “waterproof shoes”, but this time they were classified as “rubber sandals”.
The company was even fined, but managed to have the infraction canceled.
These are just a few cases that can illustrate such complexity.
How is the tax system outside Brazil?
In France, the USA or the UK, for example, there is no “list of taxes”. Most of these countries account for VAT – Value Added Tax.
It is levied only once on the product or service, and the taxpayer knows exactly what they are paying and why. This is the exact opposite of what is applied in Brazil.
It’s possible to say that Brazil is trying to create a system that somehow resembles the VAT. Let’s take a closer look at it now.
What is the Brazil Tax Reform?
Tax reform will simplify the Brazilian tax system, reducing compliance costs for companies and making Brazil more competitive.
The idea is not to reduce taxes, but to redistribute rates, so the system becomes simpler to collect.
Today, the poorest people consume more goods than services. Goods have higher taxes than services, and the idea is that the rates for both will be equivalent, meaning that the service sector will have to pay a little more tax after the reform.
Basically, the main taxes on goods and services will be replaced by the IBS and the CBS, as shown in the table below.
| Before | After |
| ISS
ICMS |
IBS (Tax on Goods and Services) |
| PIS, COFINS, IPI | CBS (Contribution on Goods and Services) |
IBS
The IBS is a tax that will unify the ICMS, ISS and IPI. It will be levied at the final stage of the circulation of goods and services, i.e. when the product or service is delivered to the final consumer.
The basis for calculating IBS will be the total value of the transaction, including ICMS and ISS. The IBS rate will be defined by complementary law.
CBS
CBS is a tax that will unify PIS, Cofins and IPI. It will be levied at the intermediate stages of the movement of goods and services, i.e. between the producer or service provider and the trader or final consumer.
The basis for calculating CBS will be the value of the transaction, excluding ICMS and ISS. The CBS rate will be set by complementary law.
Difference between IBS and CBS
The main difference between IBS and CBS is the time of collection. IBS is levied at the final stage of the circulation of goods and services, while CBS is levied at intermediate stages.
Another difference is the calculation basis. The IBS calculation basis includes ICMS and ISS, while the CBS calculation basis excludes ICMS and ISS.
The table below summarizes the main characteristics of the two new taxes:
| Features | IBS | CBS |
| Type | Tax | Tax |
| Object | Goods and Services | Goods and Service |
| Time of collection | Final | Intermediate |
| Calculation Basis | Total value of the transaction | Transaction value, excluding ICMS and ISS |
| Rate | To be defined | To be defined |
The Brazilian tax reform objectives
For decades, Brazil has been discussing how to change the consumption tax system. There are several objectives that the reform aims to achieve:
- Simplification of the Brazilian tax system, making life easier for taxpayers and reducing compliance costs for companies;
- Transparency, as it ends the accumulation of taxes along the production and sales chain, and also makes the whole system clearer and more understandable;
- Modernization of the tax system: the reform introduces new concepts that promise to make the system more efficient and fair.
As far as the economy is concerned, tax reform should bring the following benefits:
- Increased competitiveness through simplification and modernization, reducing companies’ production costs and making them more competitive
- Reduced inequality by benefiting low-income workers
- Economic growth, generating jobs and income for the population.
What are the other main points of the approved 2023 Brazil tax reform?
In addition to the unification of taxes on goods and services, there are other points that are important and should be mentioned:
Selective tax
Products and services that harm health or the environment will be subject to a surcharge. Many of these are already highly taxed, which is why selective taxation is considered a controversial measure.
The products that could be surcharged are: alcoholic beverages, tobacco, weapons and ammunition, fossil fuels, agrochemicals, ultra-processed foods.
Zero rate or reduced rate
In order to reduce the cost of living for low-income families and encourage the consumption of essential goods and services, some sectors and products will have a zero or reduced IBS rate:
- Products from the basic food basket;
- Health services, including hospital, outpatient and diagnostic services;
- Education services, from early childhood education to professional education;
- Urban public transportation;
- Basic sanitation, including water collection, treatment and distribution;
- Electricity consumed by low-income families.
IPVA
IPVA is the tax on motor vehicles. Its collection will undergo some changes.
The main change is that IPVA will now be levied on water and air vehicles, such as jets, helicopters and jet skis.
Currently, IPVA is only levied on land vehicles.
The IPVA could also be progressive, depending on the environmental impact of the vehicle. In other words, vehicles that pollute more will pay more tax.
IPTU
The collection of IPTU (Property tax) under the tax reform will be maintained, but with some changes.
The main change is that the IPTU can be updated by decree of the municipal executive, based on general criteria laid down in municipal law. This means that the mayor will be able to increase or decrease the tax without needing the approval of the City Council.
Another change is that the IPTU may be progressive, depending on the value of the property. This means that more expensive properties will pay more tax.
It is possible that the IPTU collection rules will change before the reform comes into force, as it is still being implemented.
Inheritance Tax
The collection of Inheritance Tax (ITCMD) will be maintained after the tax reform, but with some changes.
The main change is that ITCMD will now be compulsorily progressive, depending on the value of the inheritance or donation. This means that heirs or grantees who receive assets or rights of greater value will pay more tax.
Another change is that ITCMD may be levied on donations and inheritances of goods and rights located abroad. Currently, ITCMD is only levied on assets and rights located in Brazil.
It has not yet been decided what the maximum ITCMD rate will be after the tax reform. However, it is likely that the maximum rate of 8%, as provided for in the Federal Constitution, will be maintained.
The new tax reform in Brazil brings more points of attention. In this article, we’ll cover the most important points for most taxpayers.
If you would like to know more about any specific subject, just contact an Europartner expert.
Some innovations proposed by the tax reform in Brazil
Credit Refunds
The tax reform’s refund system provides for the return of part of the taxes paid on essential goods and services to low-income families. The aim of the cashback is to reduce income inequalities and encourage the consumption of essential goods and services.
The refund will be calculated on the total amount of taxes paid on essential goods and services, including ICMS, ISS and IPI. The rate will be defined by complementary law.
It will be paid monthly to low-income families registered in the Federal Government’s Single Registry of Social Programs (CadÚnico). Payment will be made by crediting a current account or debit card.
The cashback system is still being implemented, so there may be changes to the operating rules before the reform comes into force.
There are still many doubts about the cashback system, such as:
- Which goods and services will be considered essential?
- What will the cashback rate be?
- How will the system be monitored to prevent fraud?
These problems should be clarified by the federal government in the coming months.
How should the transition be made?
The transition from the old taxes to the new ones will take place in two stages:
The first stage, which will last seven years, from 2026 to 2033, will focus on taxpayers. During this period, the new taxes, the Tax on Goods and Services (IBS) and the Contribution on Goods and Services (CBS), will be created with reduced rates. The old taxes, IPI, PIS, Cofins, ICMS and ISS, will continue to be levied until they are abolished.
The second stage, will focus on sharing the new taxes between the Union, states and municipalities. During this period, the IBS rate will be gradually increased until it reaches full value. The CBS rate will also be gradually increased, but will remain lower than the IBS rate. The government hasn’t presented a specific calendar for it yet.
The transition period is expected to bring many doubts and impacts for some sectors of the economy. These impacts will have to be monitored by the federal government in order to mitigate or attenuate them.
Next steps towards completion
The Brazilian tax reform was firstly approved in the Senate, then in December 2023 it was approved by the Chamber of Deputies.
The approved sections of the text will be officially enacted as constitutional amendments.
It is important to mention that this reform requires the commitment of all stakeholders involved, including the federal government, the states, and the municipalities. It is important that all of these stakeholders are willing to work together to ensure that the reform is a success.
If these challenges are overcome, the tax reform can bring significant benefits to Brazil. It can simplify the tax system, making it fairer and more efficient. This can encourage investment, create jobs, and increase economic growth.
What are the benefits for foreign entrepreneurs?
The changes proposed by the Tax Reform will benefit both Brazilian entrepreneurs and foreigners looking to invest in Brazil.
Firstly, Brazil is moving closer to the OECD guidelines by carrying out the reform. This is important because it will put the country in the international showcase of competitive countries in which to do business.
Simplifying the tax burden is a very important point, as it will be an important step towards reducing bureaucracy in the Brazilian economy and should encourage foreign investment.
According to the Europartner expert:
“It’s a time of optimism for Brazil, with growth expected in the economy, which will make Brazil a better environment for business. In addition, the costs of tax bureaucracy, which are expected to be lower over the years, can be redirected to the Marketing and Sales areas, thus increasing companies’ profits.”
Marcilon Farias de Lima Junior
Europartner Tax Manager
How can Europartner help your company invest in Brazil?
In order to encourage investment, create jobs, and increase economic growth, this is an opportune time to do business in Brazil.
The ideal way to start would be counting on a specialized consultancy, to clarify all the important points your company will be legally and financially involved in the Brazilian economy.
To save time and effort, Europartner is the consultancy that can help you directly, while you work on the core focus of your business.
Europartner is an accounting and legal consultancy that has been operating in Brazil for around 20 years, helping companies to invest in the country.
From legal representation to hiring employees via Employer of Record, Europartner’s team is always up to date and ready to answer your questions.
For further information on tax reform in Brazil, please contact Europartner’s team of experts.
