TAX REFORM IN BRAZIL: A REVOLUTION FOR ECONOMIC GROWTH AND SOCIAL JUSTICE
Tax Reform in Brazil, led by the Extraordinary Secretariat for Tax Reform of the Ministry of Finance, is seen as one of the most significant structural reforms in the country's history. There is a consensus that the current Brazilian tax system, especially the one that affects consumption, is "the worst in the world" due to its excessive complexity, lack of transparency, jurisdictional conflicts, high litigation, regional and social inequalities, and deterioration of the business environment, resulting in economic growth below Brazil's potential.
The three main objectives of the reform are: to promote sustainable economic growth, generating employment and income; to make the tax system fairer, reducing inequalities; and to reduce the complexity of taxation, ensuring transparency and greater fiscal citizenship. The implementation occurs in phases, with the first phase focused on consumption taxation, the second on income and payroll taxation, and adjustments to wealth taxation throughout the process.
The main change in consumption taxation is the replacement of five taxes – PIS, Cofins, and IPI (federal), and ICMS (state) and ISS (municipal) – with an international standard Dual VAT, composed of the Contribution on Goods and Services (CBS), federal, and the Tax on Goods and Services (IBS), subnational.
The CBS and IBS will have the same triggering events, tax bases, non-incidence hypotheses, taxpayers, immunities, specific/favored regimes, and non-cumulative and credit rules, defined in a single supplementary law, adopting characteristics such as destination-based taxation, full non-cumulativeness, and exemption of investments and exports. Furthermore, a federal Selective Tax will be created to discourage the consumption of products harmful to health and the environment.
The reform seeks to maintain the total tax burden on consumption, with taxpayers paying what they already pay, but in a simplified and transparent manner. A standard tax rate will be adopted as a general rule, with specific and favorable regimes for certain goods and services, such as agribusiness, healthcare, and education. To make the system fairer, a National Basic Food Basket will be created with a zero tax rate and a cashback mechanism (refund) of part of the tax for low-income consumers. The Manaus Free Trade Zone will be preserved, and the situation of companies under the SIMPLES tax regime will be improved.
The system also strengthens the Federative Pact, guaranteeing the autonomy of entities in setting IBS tax rates and ending the fiscal war. A technical IBS Federative Council, managed by states and municipalities, will be responsible for collection and distribution. All existing constitutional ties and distributions will be maintained, and the return of credit balances of current taxes will be ensured.
Regarding assets, the reform includes improvements to the IPVA (Vehicle Property Tax), which will have its tax base expanded to include air and water vehicles (except agricultural and transportation vehicles), allowing for progressiveness based on value and environmental impact. The IPTU (Property Tax) calculation base will be periodically updated by decree, and the ITCMD (Tax on Transfers of Property by Death and Donations) will have its rates progressive and its legislation improved for cases involving foreign assets and extrajudicial inventories. Additional GDP growth of 12% or more is projected over 15 years, representing an additional R$1.2 trillion in GDP at 2022 prices. The reform will also increase the purchasing power of all Brazilians, especially the poorest, and significantly reduce regional inequalities between municipalities.
