Brazil approves consumption tax reform
Júlio Oliveira and Gabriel Caldiron Rezende of Machado Associados summarise the tax reform bill approved by the Brazilian Congress and believe it represents a leap towards a modern and international VAT standard, although some caution is necessary
As discussed in a previous article in ITR, the consumption tax reform set forth by Proposal for Amendment of the Brazilian Federal Constitution 45/2019 (PEC 45/19) sparked a debate in 2023. In July, the House of Deputies approved PEC 45/19, with substantial changes.
During the second half of 2023, the debate moved on at the Senate, and on November 13, the proposal was approved, with some changes to the proposal previously approved by the House of Deputies.
Due to the alterations in the proposal provided by the Federal Senate, the Brazilian Federal Constitution determined that the changes should be re-evaluated by the House of Deputies, and thus a new round of debates arose.
On December 15, the long-awaited consumption tax reform was approved by the House of Deputies, with 371 favourable votes (against 121 unfavourable votes and three absences), concluding the legislative procedures with the final approval of PEC 45/19.
Summary of the changes under PEC 45/19
The main changes provided for by PEC 45/19 are:
Unification of the state and municipal taxes of goods and services, substituting the state VAT (ICMS) and municipal service tax (ISS) for a goods and services tax (IBS) shared between states and municipalities;
Substitution of the social contributions on revenues (PIS and COFINS) and social contributions on the importation of goods and services (PIS-Import and COFINS-Import) for a contribution on goods and services (CBS), taxed by the federal government; and
Substitution of the federal excise tax (IPI) for a sin tax on goods and services (the Selective Tax) considered harmful for health and the environment, to be taxed by the federal government.
Although much of what was already approved by the House of Deputies in July remained, some improvements made by the Federal Senate were not approved in the final bill. Among the scratched-out improvements can be highlighted:
A prohibition on issuing tax rules without widely publicising studies and opinions that contain an assessment of the economic-financial impact;
The extra-fiscal purpose of the Selective Tax;
Non-inclusion of the IBS in the IPI, ICMS, and ISS taxable basis;
A differentiated IBS and CBS regime for sanitation, highway concessions, air transport, transactions involving shared telecommunications structure, goods and services that promote the circular economy, and transactions with distributed mini-generation of electricity; and
A reduced rate of 100% for the acquisition of medications by the public administration.
The new tax system will be implemented gradually between 2025 and 2032.
Final thoughts on the Brazilian consumption tax reform
Even though the final wording of PEC 45/19 might not be the most wished-for consumption tax reform, it is most definitely a major improvement for the Brazilian tax system, and a leap towards a modern and international VAT standard.
The next steps of the consumption tax reform, especially the debate around the new taxes’ laws, must be closely followed, to help to avoid implementations that result in controversies and flaws.