All material subject to strictly enforced copyright laws. © 2022 ITR is part of the Euromoney Institutional Investor PLC group.

Brazil aims to reform complex tax system

Sponsored by pinheirologo.png
rio-de-janeiro-630 x 570

Ana Carolina Carpinetti and Luiz Roberto Peroba Barbosa of Pinheiro Neto evaluate the proposed reforms to tax in Brazil and evaluate concerns raised by digital economy companies.

The Brazilian tax system is globally known for its enormous complexity. Not only is the tax burden very high, but there are five different indirect taxes: ICMS (state tax), ISS (municipal tax), IPI (tax on industrialised goods), PIS (employees’ profit participation programme) and COFINS (federal taxes). This leads to innumerous ancillary obligations not to mention conflicts of jurisdiction between the federal government, states and municipalities on the tax levied on a great number of activities.

The intricacy of the tax system is one of the key hurdles for foreign capital attraction and economic growth. There have been several attempts during the last years to improve the Brazilian tax system, but they have all been unsuccessful. It is very hard to obtain consensus with so many parties and interests involved: federal government, states, municipalities and taxpayers. Furthermore, the reform requires a constitutional amendment, to which a supermajority vote (3/5 of congress) would apply. 

Nevertheless, the new administration, which took office in January 2019, has undertaken to approve several reforms to reduce public spending, bureaucracy and facilitate doing business in the country, and one of them is tax reform.

Different bills are being discussed but they all have one point in common: the simplification and combination of all current taxes imposed on consumption into one single tax.

The bill that is currently in the most advanced stage was originally conceived by a team of very influential Brazilian tax experts and has now been presented to congress as the Constitutional Amendment Bill No. 45/2019 (the bill).

According to this bill, consumption taxes would be replaced with one single tax on consumption of goods and services (IBS), following the international standards of VAT tax.

IBS tax would be originally set at a uniform reference rate for each federative entity, to be applied indistinctly to all transactions involving tangible or intangible assets. The final tax burden is expected to reach the initial rate of 25% after a 10-year term of transition.

Combined with the single flat rate applicable to all businesses, another significant improvement to the tax system brought by this proposal is the implementation of the taxation where the consumer is located, pursuant to which IBS shall be a destination-based tax. This measure will put an end to the so-called "tax war" between states that use unauthorised subsidies to attract investment, a huge problem in Brazil, finally levelling the playing field among taxpayers and states.

Two concerns related to the tax reform are being voiced by digital economy companies. The first one is that they would have to cope with a significant tax hike if the 25% is confirmed. In return, the reform seeks to increase security for investors and provide transparency to consumers, who will actually bear the tax burden. As a result, despite the rise in tax burden following implementation of IBS tax, companies are expected to benefit from simplification of the system, the possibility of fully using the credits arising from the tax paid in the previous stages, considerable reduction in the number of ancillary obligations and associated costs, and reduction in uncertainty and in litigation alike.

Another worry relates to the criteria and mechanisms for identifying the jurisdiction of consumption. Implementing the destination principle with respect to services and intangibles is difficult, because they cannot be subject to border controls in the same way as goods and the rules should ensure that clarity and certainty are provided for both business and tax administrations and that compliance is kept as simple as possible with minimal costs involved.

Ana Carolina Carpinetti and Luiz Roberto Peroba Barbosa 

This article was written by Ana Carolina Carpinetti (acarpinetti@pn.com.br) and Luiz Roberto Peroba Barbosa (lperoba@pn.com.br) of Pinheiro Neto.



More from across our site

This week European Commission officials consider legal loopholes to secure minimum corporate taxation, while Cisco and Microsoft shareholders call for tax transparency.
The fast-food company’s tax settlement with French authorities strengthens the need for businesses to review their TP arrangements and documentation.
The full ALP model will be adopted through a new TP regime, which is set to boost the country’s investments and tax certainty.
Tax professionals have called on the UK government to reconsider its online sales tax as it would affect the economy at the worst time.
Tax professionals have called on companies to act urgently to meet e-invoicing compliance targets as the EU plans to ramp up digitisation.
In the wake of India’s ambitious 25-year plan for economic growth, ITR has partnered with leading tax commentators to discuss what the future will look like for India and for the rest of the world.
But experts cast doubt on HMRC's data and believe COVID-19 would have increased the revenue shortfall.
EY’s plan to separate its auditing and consulting businesses might lessen scrutiny from global regulators, but the brand identity could suffer, say sources.
Multinationals are asking world leaders to put a scale on carbon pricing to tackle climate change at the 48th G7 summit in Germany, from June 26 to 28.
The state secretary told the French press that the country continues to oppose pillar two’s global minimum tax rate following an Ecofin meeting last week.
We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree