Tax Reform in Brazil: Main Changes Explained

After a long debate, the Chamber of Deputies prepared a report with guidelines for the Tax Reform and released a new version of the Constitutional Amendment Proposal (PEC) 45. The objective of this version is to concentrate the process of approving the reform in the Chamber of Deputies and addresses several changes from the original text. These amendments include proposals that have already been incorporated into PEC 110 by the Federal Senate, in addition to responses to the main concerns raised by the Working Group in the Chamber.

Next, we will explain the main differences between the current consumption taxation system and the Value Added Tax (VAT), which is outlined by the substitute text of PEC 45.

See the most relevant changes below:

Current System vs. New Tax System: Simplification and Benefits

In the current tax system, we deal with five main taxes: PIS, COFINS, ICMS, ISS and IPI. However, this multiplicity of taxes brings with it a series of challenges. There are more than 100 possible rates, and each federative entity - Union, states and municipalities - has its own rules for these taxes. This makes the calculation of taxes complex and costly.

This fragmentation creates a series of challenges for taxpayers, as it is necessary to understand and comply with different rules for each tax in each location. This variety of laws and regulations can increase bureaucracy and make it difficult to comply with tax obligations.

Simplification of Tax Calculation

The assessment of taxes is currently highly complex, making it a challenge for companies. There are several ways to define the value of the tax to be paid, such as using the "gross-up" method in the case of ICMS. In addition, there are rules that determine the collection of the tax at the place of destination of the operations, as well as a variety of guides and ancillary obligations to be fulfilled.

Cumulativeness and Tax residues

The cumulative nature of taxes and limitations on credit generate distortions and tax residues, which make it difficult to accurately define the tax burden. The existence of several tax benefits also contributes to the so-called "tax war" between federal entities, in addition to creating accumulation of credits and difficulties in reimbursement.

Simplifying Tax Benefits: More Equity and Less "Tax War"

Currently, there are several tax benefits that are granted broadly or individually, generating what is known as a "tax war" between federal entities. In addition, these benefits are used to implement social policies through tax exemptions.

Simplification of Credits and Tax Reimbursement: More Agility and Less Bureaucracy

In the current tax system, tax offsetting is allowed, but with some limitations. This means that credits accumulated by taxpayers cannot always be used to deduct the amount owed in other taxes. In some cases, special regimes are needed to solve the accumulation of credits.

In addition, the reimbursement process for these credits is often time-consuming and bureaucratic, especially in federal entities. This can cause difficulties for companies that need the return of these amounts to invest or maintain their activities.

Simplification of the Tax Burden: Less Distortions and More Clarity

In the current tax system, we face a series of challenges that make it difficult to precisely define the tax burden. Distortions, tax residues, the "gross-up" method and different tax treatments among taxpayers, goods and services contribute to this complexity.

New Tax System

In the proposed new system, there will be only two main taxes: the Tax on Goods and Services (IBS) and the Contribution on Goods and Services (CBS). Each of these taxes will be regulated by a single complementary law, simplifying the system. The federative entities will only be free to define their standard rates, within the limits established by the complementary law.

In terms of rates, three possibilities will be established:

A standard rate,
A rate reduced by 50% and,
A zero rate.
The calculation base will be the same for both taxes, following the destination principle. This means that taxation will focus on the place of consumption, facilitating the calculation and eliminating cumulativeness.

Tax Simplification and the Destination Principle: More Ease and Transparency

The tax reform aims to simplify the system, bringing more practicality and clarity to taxpayers. One of the measures is the unification of the tax calculation base, which will be done in a more transparent way, performing the calculation "from the outside". This means that the tax amount will be added to the final price, making it easier to understand and comply with tax obligations.

Non-cumulativeness will be widely adopted, with 

differentiated gimes only for specific goods and services. The tax credit will be broad, except for personal use purchases, which should significantly reduce tax residues.

Essentiality and Tax Cashback: More Justice and Incentives

The tax reform aims to eliminate most tax benefits, except those related to the Manaus Free Trade Zone (ZFM), Simples Nacional, public contracts and certain essential goods and services, such as basic food basket, health and education. This measure seeks to bring more equity and justice to the system, avoiding indiscriminate tax privileges.

The reform provides for the creation of the National Fund for Regional Development (FNDR) to offset losses resulting from the end of the so-called "fiscal war" between the states. This fund aims to ensure the fair distribution of resources and promote regional development in a more balanced way.

An interesting novelty is the possibility of tax cashback for the poorest. This means that part of the taxes paid by people with lower incomes can be returned to them. This measure aims to promote income redistribution and provide financial relief to those who need it most.

Transparency and Legal Security: More Clarity on Paid Taxes

To ensure transparency and legal certainty, the new system proposes a simplified calculation method, uniformity of rates and the elimination of tax benefits. This will allow taxpayers to clearly identify the amount of taxes paid.

The tax administration process will be conducted by the Federative Council, ensuring reimbursement in an agile and efficient manner.

The tax reform aims to bring greater transparency and legal certainty to taxpayers. This will be achieved through the proposed calculation method, the absence of indiscriminate tax benefits and the uniformity of rates.

With the proposed calculation method, it will be easier to understand how taxes are calculated and applied to products and services. This will help taxpayers identify the true amount of taxes paid, providing greater clarity and transparency in the tax system.

Eliminating indiscriminate tax benefits will bring more equality and fairness to all taxpayers. This means that tax privileges will not be granted without clear and objective criteria, avoiding distortions and ensuring a more balanced competition environment.

The uniformity of rates will also contribute to transparency. With standardized rates, it will be easier for taxpayers to understand and predict the taxes they need to pay. This will reduce uncertainty and provide greater legal certainty in meeting tax obligations.

The tax reform aims to simplify the system, reduce cumulativeness, eliminate indiscriminate tax benefits and ensure greater transparency. These changes are expected to make life easier for taxpayers and boost the country's economic development.

Transition Period and Compensation of Accrued Credits: What to expect?

During an eight-year transition period, the current taxes will be phased out, while the Goods and Services Contribution (CBS) and the Goods and Services Tax (IBS) will be implemented and adjusted. This transition aims to ensure a smooth and gradual change in the tax system.

The creation of a Compensation Fund for Tax or Financial-Tax Benefits is foreseen. This fund aims to enable the compensation of accumulated current tax credits. He will be responsible for managing and allocating the resources necessary to carry out these trade-offs.

After the transition period, the remaining current tax credit balances will be updated by the IPCA (National Index of Broad Consumer Prices) and may be offset against the IBS in monthly installments of up to 240 months. This means that taxpayers will be able to use these accumulated credits over time, at a pace that is more suited to their financial needs.

It is important to highlight that the specific rules for these offsets, transfers to third parties or restitution of credit balances will be defined by means of a supplementary law. This law will establish the procedures and criteria for using these accumulated credits in a fair and efficient manner.

Were you curious to know how the transition between the systems will work and how the accumulated credits will be compensated? Do not waste time! Talk to one of our specialists, you will find all the necessary information about this transition period and the rules for using accumulated credits.