Brazil’s tax reform will implement significant changes
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Brazil’s tax reform will implement significant changes

Brazil city 320 x 215

Although the Brazilian tax system is complex and costly, there is a light at the end of the tunnel with ongoing debates to overhaul the tax system and the presidential elections.

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 conflicts:

  • 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 litigious scenario.

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 independence.

Nevertheless, one conclusion is unanimous regarding the Brazilian tax system: a broad tax reform is needed.

Gabriel Caldiron Rezende ( and Natália Maziero de Oliveira ( are members of Machado Associados’ Indirect Tax team

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