Brazil’s consumption tax revolution: understanding the new VAT regime

After decades of discussions around the Brazilian consumption tax system, a deep and innovative tax reform was approved in December 2023 and enacted by Supplementary Law 214/2025 on January 16 2025.

One of the main goals of the consumption tax reform was to simplify the taxation, which was distributed between the federal, state, and municipal levels, each one with its own taxes on different economic facts (revenues, supply of goods, provision of services, etc.), with numerous rules and different approaches towards transactions. This led to complexities, uncertainties, and countless disputes.

In view of this – but considering the specificities of the Brazilian federative form, divided into independent levels of government (federal, state, and municipal) – a dual VAT system has been implemented, as follows:

• 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; and

• 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.

Although CBS and IBS are separate taxes, they have a single legal treatment, sharing rules, tax-triggering events, taxable base, taxpayers and liable persons, differentiated treatment, rate reduction, etc. The main difference between these taxes is the government level entitled to the tax revenue, as CBS will be fully collected by the federal government and IBS will be shared between the state and municipal governments (each one will have a portion of the IBS rate); hence, both taxes will be jointly levied but calculated and collected in parallel.

CBS and IBS are levied on transactions with goods, services, and rights, both local and imports, with an exemption on exports, and a uniform tax rate on all transactions, composed of the sum of the rates determined by the state and municipality of the transaction destination.

It is hoped that this broad tax-triggering event will eliminate several controversies on the levying of tax, as different transactions might previously have been subject to different taxes (and taxing entities), and different tax rates, which leads to disputes and uncertainties.

Both are fully non-cumulative taxes, and, thus, all taxed acquisitions will entitle the purchaser to the right to book CBS and IBS credits to offset the taxes levied on its transactions, except for goods and services for individual use and consumption. Also, non-used tax credits (for example, due to exports of insufficient tax debts) may be reimbursed in cash, as a rule, in 180 days.

This is one of the most important aspects of the consumption tax reform, as the previous consumption tax systems had several systemic impairments of credits; for example, due to:

• Legal limitations (e.g., for ICMS, credits on fixed assets had to be booked in 48 monthly instalments, with no monetary update);

• Different taxes on different transactions without credits between them (services subject to ISS, which is cumulative, and goods to ICMS, without ISS credits over the acquired services); and

• Several tax authorities’ interpretation of the laws, which resulted in credits limitation.

It is now possible to say that Brazil has an actual VAT, as the right to book CBS and IBS credits is extremely broad, and lengthy litigations on tax credits will hopefully be a thing of the past.

As a rule, CBS and IBS taxpayers will be the supplier or the importer. It should be noted that if a foreign supplier carries out activities in Brazil, it must register as a CBS and an IBS taxpayer.

Also, with regard to the importation of services and intangibles, the foreign supplier is jointly liable with the importer for the payment of CBS and IBS, and thus it must be registered in Brazil. In terms of the importation of goods, the foreign supplier will only be jointly liable on simplified international supplies (usual postal or courier).

Finally, although it is intended that the consumption of all goods and services be equally taxed by CBS and IBS, Supplementary Law 214/2025 provides for differentiated tax regimes for certain activities, and reduced rates for some goods and services.

With regard to the differentiated tax regimes – which may comprise different rules for taxable events, tax rates, the taxable base, credit regimes, etc. – the following should be highlighted:

• Transactions involving fuels;

• Financial services;

• Healthcare plans;

• Transactions involving real estate; and

• Bars, restaurants, and hotels.

As for the reduced rates, the reductions to the following are highlighted:

• Zero – vegetables, fruit, eggs, drugs, and medical devices;

• 30% – professional services, such as accountants, lawyers, economists, and architects; and

• 60% – education and health services, certain personal hygiene and cleaning products, and agricultural inputs.

Considering the substantial changes under the consumption tax reform, businesses should carry out a thorough evaluation of the tax impacts, considering their supplies and acquisitions, revisiting their relationship and agreements with suppliers and clients, and their supply chain, as the dynamics of the consumption taxation have been revolutionised.