Deloitte – LATAM regional indirect tax interview (i)

1. What is the most significant change to your region/jurisdiction’s tax legislation or regulations in the past 12 months?

Brazil is taking a significant step towards simplifying its indirect tax system by proposing to replace its current multi-level (federal, state, and municipal) VAT system with a simpler new system with a dual VAT approach and an additional selective tax.

The proposed system would create a dual VAT system by:

• Combining the ICMS (state VAT) and the ISS (service tax) into a single tax on goods and services called IBS, managed by the states and municipalities;

• Combining the PIS and COFINS (federal contributions on gross revenue) into a contribution on goods and services called CBS, managed by the federal government; and

• Replacing the IPI (excise tax) with a selective tax called IS, due on items harmful to health and/or environment, managed by the federal government.

2. What has been the most significant impact of that change?

The tax reform will span a seven-year transition phase, which will create a hybrid system between the current system and the new system. The coexistence of the two systems is expected to increase tax compliance for taxpayers.

3. How do you anticipate that change impacting your work and the market moving forward?

The tax reform will require an evaluation of the effects of the new rules on tax compliance management, tax return filings, computation accuracy, monitoring and monetising input tax credits, and managing tax risks and potential penalties for non-compliance that may be applied in assessments by the Brazilian tax authorities.

4. How has this changed the way you offer tax advice?

Companies will require tax advice to anticipate the effects of tax reform while they continue to operate under the current system. For example, certain tax incentives will be cancelled after the seven-year transition period.

5. What potential other legislative/regulatory changes are on the horizon that you think will have a big impact on your region/jurisdiction?

Brazilian indirect tax filing and tax invoices will change due to tax reform and the resulting regulations.

6. What are the potential outcomes that might occur if those changes are implemented?

To comply with the new system and the current system concurrently, companies will be required to invest in updating their ERP systems and local tax engines to meet new requirements imposed by the new Brazilian indirect tax filing and tax invoices.

7. Do you think that change will have a positive effect on both your practice and the wider regional/jurisdictional market?

Indirect taxes are considered one of the most complex areas in the Brazilian tax environment. Once the new system is fully implemented and the transition phase is concluded, businesses operating in Brazil will benefit from reduced costs to run the tax function. The change is also expected to attract new businesses to Brazil.

8. Are there any regulatory/legislative changes you believe should be implemented in your region/jurisdiction?

The proposed new system should be adjusted to encompass the current and future tax systems to avoid increasing compliance costs.

9. How do you believe those changes would help improve the tax landscape in your market?

The simplification of the tax structure in Brazil can lead to better compliance, less administrative burden for businesses, and fewer opportunities for tax evasion. It can provide businesses with a clearer long-term planning horizon, encouraging investment and strategic decision-making focused on the new tax landscape.

10. How are issues surrounding the taxation of the digital economy affecting your work?

Most of the time, the digital economy operates across borders, and current tax rules may not effectively capture the revenue generated by digital transactions.

Due to the uncertainty about how these activities should be taxed, we have been advising companies on how to structure their digital operations and services.

11. How would you describe the tax authorities’ approach in your region/jurisdiction?

The Brazilian tax authorities are currently pressed to increase revenue collection, resulting in tax litigation. A change in the tax system is viewed as a positive means of simplifying rules and reducing litigation.

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E: molourenco@deloitte.com

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