The progression of Indirect Tax Reform in Brazil has sparked considerable debate regarding the newly proposed tax system. With the recent constitutional amendment, Congress is now expediting the finalization of the supplementary law that will delineate the specific tax regulations.
To recap, Brazil’s indirect tax system is undergoing significant changes. Five taxes (ICMS [Tax on Distribution of Goods and Services], ISS [Tax on Services], PIS [Social Integration Program], Cofins [Social Security Financing Contribution], and IPI [Tax on Manufactured Products]) will be abolished and replaced with a Dual VAT and an excise tax, following a transitional period. The draft supplementary law outlines the general aspects of the Dual VAT, including the taxable event, calculation basis, time and place of incidence, and the identification of taxable persons. However, the much-anticipated definition of the rates will be addressed in a separate, specific law.
Moreover, the bill introduces the possibility of implementing a new tax mechanism known as split payment. Under this mechanism, during purchase and sale transactions, the portion related to the Dual VAT will be automatically allocated for tax payment, with the remainder directed to the supplier of the goods or services.
This proposed payment method raises significant concerns among businesses regarding cash flow management. Currently, taxes are remitted through calculations that allow for more strategic financial resource management. In contrast, the new method mandates immediate redirection to the tax authorities.
Additionally, the bill outlines new differentiated tax regimes, which include provisions for reducing rates by 30%, 60%, or 100% of the Dual VAT. These regimes are prompting discussions about the potential increase in taxation on currently exempt products.
For instance, items that are currently part of the “extended” basic food basket and fully exempt from indirect taxation will be subject to only a 60% reduction in Dual VAT under the proposed legislation. This extended food basket comprises goods such as beef, fish, and fish products, which many consider to be essential staples for the Brazilian populace.
These and many other changes proposed by the bill are currently under review by the House of Representatives, which will subsequently forward the text to the Senate. Upon its final approval by both legislative houses, the bill will be sent to the President of the Republic for sanction or veto. The legislative process is expected to be concluded by the end of 2024.
Undoubtedly, the new Brazilian tax system will present new challenges to taxpayers, particularly in adapting to the new rules. However, it is anticipated that the reform will ultimately simplify the current system.