The long expected Brazilian tax reform – objectives, challenges and pitfalls
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The long expected Brazilian tax reform – objectives, challenges and pitfalls

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After years of contemplation, Brazil looks set to overhaul its complex tax system starting in 2020. Guilherme Giglio and Marcelo Natale of Deloitte Brazil discuss what the long journey to efficiency may entail.

The Brazilian government and the Congress began 2020 by reiterating that reforming the tax system is one of the main priorities and that the initial objective is to consolidate the different propositions into a single project, which would follow the legislative process within the House of Representatives and the Senate.

Objectives of the tax reform

The reform is considered crucial by taxpayers and investors, not only because of the existing tax burden, but as a result of the complexity and risks associated with the number of taxes, rules, regimes, reports and particularities imposed by the Brazilian tax system.

According to the Brazilian Internal Revenue Service's (IRS) reports, approximately 20% of the Brazilian government revenues derive from income taxes, whilst almost 50% are raised by indirect taxes imposed on consumption, each of them with specific regulations and reporting requirements. Such numbers show the major problem affecting the Brazilian tax environment is, conclusively, the indirect tax system.

As a federal country under the civil law system, Brazil has historically set up a complex structure for indirect taxation, with constitutional authorisation for the union, states and municipalities to create taxes and social contributions. Therefore, grounded on rules and limitations imposed by the Federal Constitution, legislation of the three referred levels of jurisdiction introduce taxes that are levied on imports, manufacturing, the circulation of goods and provision of services.

Among the various types of indirect taxes provided by the Brazilian system, the most relevant are:

  • PIS/COFINS: Federal social contributions levied on revenues;

  • IPI: Federal excise tax levied on manufacturers and importers;

  • ICMS: State VAT levied on the circulation of goods and on provision of communication and transportation services (interstate and inter-municipal); and

  • ISS: Municipal tax on services.

It is worth mentioning that the compliance associated with all these taxes represents a huge burden to taxpayers, since it comprises of electronic invoicing, a number of tax returns, specific controls and high penalties. The World Bank's Doing Business 2019 report estimates that companies operating in Brazil spend approximately 2,000 hours per year only with procedures relating to the payment of taxes, while the average time spent by the 190 countries included in the analysis was just 206 hours. Bureaucracy associated with tax compliance costs about 1.5% of taxpayers' revenues in the country, according to the Brazilian Institute of Tax Law (IBDT), despite the constant risk of challenges.

Based on the context in reference, the main proposals requiring constitutional amendment (PECs) under way in Congress include the replacement of mentioned federal, state and municipal taxes by a new tax levied on goods and services, including rights – the IBS. The proposed IBS model is similar to the European VAT, meaning that that the burden falls only on the value added on each stage of production and circulation of goods and services.

Proposals under discussion

The Bill of Amendment 45 (PEC 45/2019), which is in progress in the House of Representatives, establishes the creation of IBS as a federal tax with a 10-year gradual abolition of IPI, PIS, COFINS, ICMS and ISS. Tax collection will consider the destination of the goods or services and one single reference tax rate would apply for any type of good, service or supply. Besides that, the bill in question also intends to establish a federal selective tax, levied over goods and services that trigger negative externalities, whose consumption is intended to be reduced, such as cigarettes and alcoholic beverages.

By its turn, the Senate is analysing the Bill of Amendment 110 (PEC 110/2019). The main differences between this proposal and the Bill Amendment 45 refer to:

  • The extinction of IOF (federal tax on financial operations) and CIDE-Combustíveis (contribution for intervention in the economic domain levied on fuel), which, in this case, would also be replaced by IBS;

  • Competence attributed to states;

  • A shorter transition period, corresponding to five years; and

  • Flexibility to introduce different rates and incentives for certain types of supply and the economic sector.

Recently, the Ministry of Economy established a working group to study the bills and present improvement proposals. One of the ideas debated is the possibility of 'slicing' the reform with the creation, initially, of a federal VAT to replace PIS, COFINS and CIDE-Combustíveis, offering states and municipalities the option of adhering to the proposal through the implementation of a dual-VAT. After all, the reform would introduce changes to the IPI, income tax, payroll and other rules.

As previously mentioned, in all projects, the central goal is to simplify the Brazilian tax system, especially in regard to indirect taxes. According to a report published in 2017 by the OECD, more than 165 countries have adopted a VAT model. Briefly, these are taxes considered economically efficient, once they facilitate collection, guarantee neutrality, avoid distortions in the supply chain and guarantee free competition. This is also the foundation of the IBS's principles and concepts.

Challenges for inclusion of states and municipalities

In Brazil, the implementation of the IBS faces an unprecedented complexity because it involves the main sources of revenue from states and municipalities. This barrier stems from the Federal Constitution itself that, due to the federative structure, has authorised states and municipalities to create taxes on the circulation of goods and the provision of services.

Indeed, it is possible to conclude that the autonomy given to those federated entities establishes the existence of their own management and revenue collection mechanisms. However, despite the fact that the Brazilian legal and tax system determines that the general rules for the institution of each type of tax are defined in federal legislation, the introduction and detailed regulation concerns the internal legislation of the 26 states, the federal district and the 5,570 Brazilian municipalities. It is precisely at this point that the greatest challenges encountered by taxpayers operating in the country lie.

The ICMS tax rates, calculation basis, tax regimes and payment rules depend, among other factors, on the origin, destination and nature of the operation, the type of goods, the characteristics of the acquirer and the existence of agreements between the states involved. There is no consensus among scholars, jurisprudence and tax authorities regarding the extension of the concept of 'communication' for purposes of characterising the taxable event. The ICMS-ST or tax substitution – a regime that concentrates taxation at the manufacturing level and anticipates the collection of the tax levied upon the whole supply chain – added an exceptional complication to certain sectors, while increasing the states' revenues and facilitated the inspection of ICMS collection.

Within the municipalities, the ISS rules also vary depending on the location of the service provider or its respective borrower. There is no certainty regarding the incidence of the tax on certain transactions, such as the exploitation of copyrights, software licensing, data transferring through streaming, apps and other sorts of operations not foreseen at the time of the Federal Constitution promulgation in 1988. Some of the services mentioned are in a grey area between the ISS and the ICMS, increasing disputes between municipalities, states and taxpayers.

On one hand, there is consensus that the inhospitable environment referred to above demands urgent reforms. On the other hand, it is essential to highlight that states and municipalities keep the smallest part of the total revenue collected in taxes in Brazil – approximately 30% and 7%, respectively – when they are responsible for most of the essential rights guaranteed to citizens, such as education, health, public security and basic sanitation.

Therefore, for a successful reform involving ICMS and ISS, it is essential to ensure there are effective mechanisms for maintaining and controlling tax collection, preserving states and municipalities' autonomy. Another order of priority could represent risks to the federative structure and bring legal uncertainty to the environment that is intended to be reformed.

Income tax reform: A parallel reform?

Although not formally included in PEC 45 or PEC 110, there are ongoing discussions among the Brazilian tax authorities (Receita Federal do Brasil) and the private sector regarding a relevant tax reform focused on corporate taxes (income tax and social contribution on profits).

Indeed, besides the fact that it was not yet published as a formal bill or provisional measure, the presentations, panels and discussions indicate a serious intention from Receita Federal to propose a reform focused on the following aspects:

  • Reducing the corporate tax rate from a combined rate of 34% (25% income tax plus 9% social contribution) to an expected 21% (OECD average corporate tax rate);

  • A substantial increase of the calculation basis as a consequence of a supposed 'simplification' and disconnection of the current account and tax figures and concepts;

  • Revocation of interest on net equity – INE (Juros Sobre Capital Próprio), a hybrid deduction available for corporations; and

  • The introduction of taxation on dividends, in principle at 15%.

As one may suspect, behind the simplification speech, there is a concern on how numbers will play around at the end of the day. Indeed, the enlargement of the calculation basis may eventually more than off-set the effect of rate reduction, resulting in an effective increase of the income tax to be paid. Moreover, taxpayers are concerned with the vague propositions related to the changes on calculation basis because the existing system establishes a better interconnection between accounting and income tax calculation and changing this paradigm may increase complexity instead of simplifying it. Indeed, both ECD (accounting return) and ECF (tax return) were designed in a way that authorities can tie tax add-backs with accounting entries, for example. It was a long journey over the years to achieve this point and any proposition aiming to disconnect accounting and tax calculation will most likely reduce transparency and increase the need for reconciliations for taxpayers.

Brazil and the OECD: A long novel with domestic and international complications

Although this subject deserves a full article to explore the many dimensions involved, we should keep in mind that this aspect is an important framework for the ongoing discussions about tax reform in Brazil. As a matter of fact, a new tax system should be reasonably convergent with global trends and OECD guidelines in several tax areas. For instance, in the income tax field, the reduction of the corporate rate seems to be inspired in this general objective of alignment with the OECD, as well as the discussions related to transfer pricing rules, which are more consistent with the generally accepted OECD guidelines.

In comparison to the old Brazilian authorities' paradigm to create a unique Brazilian transfer pricing model, it seems that discussions between Brazil and the OECD finally indicate that a convergence procedure is necessary. Although there is no formal bill at this point with concrete propositions, discussions at several panels and seminars with both the OECD and Brazilian representatives indicate that there is an advance commitment to implement these changes in the near future.

The accession process of Brazil at the OECD has developed slowly over the years, sometimes with more resistance from Brazil's side and at other times, from certain other OECD members. At this point (March 2020), it is reasonable to affirm that the Brazilian executive branch is committed to speed-up the process and has demonstrated multiple efforts to review procedures, and expand the country's participation in several OECD committees. On the international side, the US government has extended support to Brazil's accession, indicating a priority over other candidates like Argentina, Peru and Romania.

Both processes (tax reform and OECD accession) are moving forward in parallel, and will most likely ensure that the objective of implementing a modern and competitive tax system is finally achieved.


As suspected, the number of variables on the table is significant. There are also non-obvious interactions and side effects among the different changes being discussed, increasing the complexity because one change may indirectly affect the other. The significant weight of indirect taxes also represent a deduction for income tax and changing the indirect tax system will resonate in the corporate tax side.

The challenge for taxpayers is to move from words to numbers and try to model the impact of so many different variables. Some of the obvious (and very relevant) questions in place are:

  • What is the final effect of all these changes in terms of total tax to be collected?

  • What will the effective income tax rate look like?

  • What will happen with the tax incentives currently available?

  • What are the impacts in terms of pricing the products?

  • How will multiple players in the supply chain deal with so many changes?

  • How will competitors play in this new environment?

  • What are the challenges to put in place in terms of tax software, accounting books, etc.?

Besides all these pitfalls, there is a general perception that there are enough potential benefits to overcome the existing system. As always, good planning, focus and adequate resources will be critical and will create a competitive advantage over other competitors who are less prepared.

Marcelo Natale



Deloitte Brazil

Tel: +55 11 5186 1003

Marcelo Natale is a partner in Deloitte Brazil, where he leads the cross border tax national practice, including on international tax and transfer pricing matters. He also leads the business model optimisation practice of Deloitte member firms in Latin America. He is an economist and lawyer, with a specialisation in finance and economic planning.

He has over 29 years of professional experience, 18 of those years as partner, serving multiple business sectors, including the manufacturing, consumer products, services, technology, and IP industries. Between July 2009 and July 2012, he led Deloitte US's Brazilian desk in New York.

He is a regular speaker at international tax seminars and a professor of tax planning for LLM programmes in Brazil.

Guilherme Giglio



Deloitte Brazil

Tel: +55 11 5186 1921

Guilherme Giglio is a partner at Deloitte in Sao Paulo with over 15 years of experience in tax advisory matters. He joined Deloitte Brazil in 2006 and the UK tax team in 2009. When, temporarily based in London, he advised European companies with investments and operations in Brazil. He is primarily focused on indirect taxation, but also supports international tax and multidisciplinary projects, being a member of the tax and supply chain group. He is often a speaker in tax seminars and training programmes in Brazil and abroad and is a professor on university executive courses. He has published various technical articles and has authored text books on legal matter.

He graduated in law and specialised in tax at Insper São Paulo (LLM), with extension in international tax at Geneva University. He is a member of the Brazilian Bar Association and served as a judge at the Administrative Tax Court of the São Paulo State for six years.

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