The Brazilian consumption tax reform has moved the country towards a modern VAT approach by replacing its complex indirect taxes with a contribution on goods and services (CBS) and a tax on goods and services (IBS), to be levied on transactions involving goods, services, and rights, whether domestic or imported.
One of the main focuses of the tax reform was to implement a simplified, neutral, and transparent indirect tax system. This is because the current consumption tax system has proved to be inefficient for business, resulting in cumulative taxation (due to difficulties in recovering credits) and an unclear tax burden, particularly because of differing tax treatment, residual taxes along the supply chain, and grossed-up calculations that include one tax in another’s taxable base.
Among the controversies around the current indirect tax system, the taxable base has been a major focus of disputes. This is especially the case because tax laws demand the inclusion of taxes in the taxable amount, thus increasing it and masking the actual tax burden of the transaction.
Judicial precedents and the inclusion of taxes
As an example of the above, the state VAT (ICMS), which has the transaction value as its taxable base, was the subject of a long-lasting dispute as to whether it comprised its own taxable base. The matter was broadly debated, and in 1999 the Federal Supreme Court (STF) decided in Extraordinary Appeal 212.209 that the inclusion of the ICMS in its own taxable base is constitutional. The Federal Constitution was amended in 2001 to expressly provide for such inclusion.
The social contributions on revenues (PIS and COFINS), which have the company’s gross revenue as their taxable base, have also been the subject of several disputes regarding the inclusion of other taxes in the gross revenue for taxation purposes. This is because taxpayers deem that the taxes levied on the supply of goods and services – such as the ICMS, the municipal service tax (ISS), and PIS and COFINS themselves – although received as part of the sales price, should be passed on to the government and therefore do not represent earnings of the legal entity.
In this regard, in 2017 the STF deemed unconstitutional the inclusion of the ICMS in the PIS and COFINS taxable base, upholding the taxpayers’ arguments. This decision sparked several other disputes, especially about the inclusion of the ISS and the amount of the contributions themselves, which are still pending decisions.
The new CBS and IBS framework
Aiming to reduce complexities and make the new taxes transparent and neutral, the taxable base of CBS and IBS is the net sales price. Furthermore, Constitutional Amendment 132/2023 provided that:
CBS and IBS will not be included in their own taxable bases, nor in the taxable bases of PIS, COFINS, or the new selective tax; and
The federal excise tax (IPI), PIS, COFINS, and ICMS will not be included in the CBS or IBS taxable base.
Challenges during the transition phase
It should be noted that the tax reform is subject to a gradual implementation, and the current and new indirect tax systems will coexist until 2033. Considering this, since IPI will still be applicable to some products and ICMS and ISS will only be phased out by 2033, controversies have arisen regarding the inclusion of CBS and IBS in their taxable bases.
The main point of controversy is that, during the parliamentary discussion that led to the enactment of Constitutional Amendment 132/2023, provisions were added to determine that CBS and IBS would not comprise the taxable base of IPI, ICMS, and ISS. However, in the end, the provisions were not maintained, and now controversies are arising on the matter.
Machado believes that the non-inclusion of CBS and IBS in the taxable base of the current taxes is a necessary measure to ensure tax neutrality. Although the transition is lengthy (up to 2033), this approach would allow both systems to run in parallel without affecting each other.
Also, the tax reform has been designed to maintain overall tax revenue. Although some reallocation of the tax burden may occur – with currently undertaxed supplies facing higher rates and overtaxed supplies facing lower rates, in a way that all supplies of goods and services are taxed equally (exceptions apply) – the reform is not intended to increase overall tax collection. However, states and municipal authorities have argued that, aside from the lack of rules disallowing said inclusion, during the transition phase it is necessary to include CBS and IBS in the ICMS and ISS taxable bases to maintain the tax collection, as the current taxes will gradually reduce by 10% between 2029 and 2032.
Proposed legislative solutions and outlook
To address the above matter, Bill of Law 16/2025 has been proposed, amending the law to establish that CBS and IBS will not be included in the taxable bases of IPI, ICMS, and ISS. However, the bill is yet to be analysed.
Although the tax reform was designed to change the current paradigm of consumption taxation, old controversies over taxable bases have resurfaced with the new taxes. If Bill of Law 16/2025 does not progress, further controversies are expected to arise from 2027.
