In Brazil, the tax system is highly complex because it
comprises too many taxes, mainly concentrated on consumption.
Moreover, there are several taxing entities and different tax
regimes – depending on the taxpayer’s
profile, products, activities, etc. – that, aside from
the tax burden, result in an excessive cost for taxpayers to
comply with many ancillary obligations.
Brazil has 27 states and more than 5,500 municipalities with
different laws on taxation, such as state value-added tax
(ICMS) and municipal service tax (ISS), as well as a federal
government with its own tax competence.
In practice, taxpayers face many difficulties to determine
which tax should be levied on certain transactions, to whom it
should be paid, as well as managing the harmful tax competition
between taxing entities. As an example of these difficulties,
we highlight (among several other matters) the following
- Competition between states to charge the ICMS levied on
imports, when there are two or more establishments located in
different states involved;
- Competition between states regarding the granting of ICMS
tax benefits to attract investments, and between
municipalities for ISS tax benefits;
- Competition between municipalities to charge the ISS when
the service provider is in a different municipality from
where the service is carried out; and
- Competition between states and municipalities regarding
the determination of the legal nature of transactions, i.e.
if a service subject to the ISS or a supply of goods is
subject to the ICMS. In many cases, the federal government
may also have a different approach towards the same
transaction, leading to different tax consequences.
In addition to the difficulties of understanding and
complying with numerous taxes obligations, the tax law is open
to a broad interpretation, leading to many conflicts between
taxpayers and tax authorities, resulting in an insecure and
Because of that, there are calls for a deep and broad tax
reform. This subject has been debated for a number of years and
has now come to the fore because of the ongoing presidential
election. Brazil will have the second round of its presidential
election on October 28, which will be disputed between Fernando
Haddad and Jair Bolsonaro. Although the tax reform is not the
main topic in their government plans, it is a matter being
demanded by taxpayers.
To this effect, a proposal to amend the Brazilian Federal
Constitution, drafted by congressman Luiz Carlos Hauly, aims to
promote extensive changes to the Brazilian tax system. The
proposal is being analysed by the Brazilian Congress and has
been broadly discussed by politicians and society.
The tax reform proposals
According to the proposal, the federal excise tax (IPI),
federal tax on financial transactions (IOF), federal social
contributions on revenues (PIS and COFINS), Federal
contribution for funding basic education, federal contribution
on fuels (CIDE-Fuels), ICMS and ISS, would be substituted by
one single federal VAT, the IBS. This consolidated tax would be
levied on transactions with goods and services, which will be a
non-cumulative tax with a broad tax credits system.
The idea is to guarantee one uniform tax collection system
for almost all goods and services offered, with reduced
taxation for food, medication, public transportation and fixed
assets; the granting of tax benefits would be prohibited for
any other product or service.
To this effect, the IBS would be subject to a single
regulation, centralised tax collection, and oversight by the
states and the federal district.
Also, Hauly intends to create a selective tax (IS) for goods
that need greater taxation to discourage their consumption.
Goods like energy, fuels, telecommunication services,
cigarettes, alcoholic beverages, and automotive vehicles,
including land, water and air vehicles, would have their
consumption discouraged by this federal tax. Its collection
would be shared between the Brazilian states.
The corporate income tax (IRPJ) would incorporate the social
contribution on net profits (CSLL), which would probably cause
its rates to increase.
The donation and inheritance tax (ITCMD), currently a state
tax, would become federal. The intention is to make it more
expressive, as in the OECD member countries.
Besides, it is intended to strengthen the automotive
vehicles property tax (IPVA), which would be levied on the
property of vessels and airplanes, in addition to the ground
vehicles already taxed. Its tax collection would be transferred
to the municipalities.
To carry out the reform, Hauly intends to guarantee that no
state will lose tax collection in the first few years after the
changes are implemented, and in the sharing of the tax revenues
between the government entities.
Thus, a gradual transition rule of 15 years for the new tax
system has also been proposed. In the first five years after
the reform, each state would keep the collection to the same
levels of past years to prevent losses with the new model. The
tax collection of the IRPJ, IBS, IS, IPVA, and ITCMD would be
shared between the federal district, states and municipalities
according to the average collection of the past three years
with the current taxes.
The changes described above are the main propositions
drafted by congressman Hauly, which have been broadly debated
to be improved. Meanwhile, the federal entities, especially the
states and municipalities, are resistant to these changes due
to the concern of reducing their tax collection and control
over taxation, jeopardising their autonomy and
Nevertheless, one conclusion is unanimous regarding the
Brazilian tax system: a broad tax reform is needed.
Gabriel Caldiron Rezende (firstname.lastname@example.org)
and Natália Maziero de Oliveira (email@example.com)
are members of Machado Associados’ Indirect Tax