Brazilian Senate approves tax reform bill
New tax framework will now return to House of Representatives for further review
On November 8, 2023, Brazil’s Senate approved Constitutional Amendment Bill (PEC) No. 45/2019 after two rounds of voting. If approved by the House of Representatives once again, the bill will introduce a new tax framework for the country, overhauling consumption taxation and amending specific aspects of wealth taxation.
The table below provides a comparison between Brazil’s existing tax system and the one proposed in the version of PEC No. 45/2019 approved in the Senate:
|After the reform
|Value Added Tax (VAT) Model
|Federal taxes: tax on industrialized products (“IPI”) and social contributions to finance social security (“PIS and COFINS”).
State/Federal District taxes: 27 different state sales tax (“ICMS”) rates
Municipalities: many different municipal tax on services (“ISS”) rates.
|Federal taxes: social contribution on goods and services (“CBS”) and excise tax (“IS”)26 states, the Federal District and more than 5,000 municipalities: a single tax on goods and services (“IBS”) rate
|Consumption taxation legislation
for each tax and jurisdiction (federal, state, municipal).
|CBS and IBS will be subject to the same taxable events, tax calculation bases, non-incidence events, and taxable persons; specific, exceptional, or favored taxation regimes; and non-cumulative and crediting rules.
CBS and IBS will be established via the same supplementary law.
Supplementary law may provide for integrated administrative litigation for IBS and CBS, as well as integrated solutions for managing and collecting both taxes.
Federal, state, and municipal IBS tax rates may vary.
|‘Por dentro’ (cascading) tax incidence in many situations.
|‘Por fora’ tax calculation basis – no cascading taxation
|Tax incidence base
|Broad tax base: encompasses transactions involving tangible and intangible goods (and any rights linked to them) or transactions involving services.
|Different rules for taxes that permit credits – in many cases, offsetting and refunds are not allowed. It is difficult to convert accumulated tax credit balances into cash.
|Supplementary law will regulate the form and deadline for tax refund of IBS and CBS credits.
ICMS credit balances: it will be possible to offset these with IBS credits (upon approval) after 2032. Supplementary law may establish more uses for these balances, such as transferring them to third parties. After 2033, balances will be updated in line with the consumer price index (“IPCA”).
Credits linked to fixed assets may be compensated via IBS according to a 1/48 per month appropriation system (established by Supplementary Law No. 87/1996).
IPI and PIS/COFINS balances: it will be possible to compensate these with CBS and IBS credits after the latter have been created.
|Varying rates depending on the type of tax, jurisdiction (federal, state, municipal), product or service, sector, type of activity and other factors.
|Different IBS and CBS rates apply to specific goods and services listed in the Brazilian Constitution.
There is a provision that expressly gives the Senate power to set reference rates for IBS and CBS for each level (state and municipal), to ensure tax collection remains stable during and after the transition period.Furthermore, there are provisions for reducing the CBS and IBS reference rates if they surpass a collection threshold (teto de referência de arrecadação). This threshold is determined by measuring the extinct taxes’ average participation level in Brazil’s GDP between 2012 and 2021.As the report states, this would serve to avoid the creation of IBS and CBS increasing the tax burden relative to GDP.Studies conducted by the Ministry of Finance suggest a tax rate of approximately 27.5%.
|Taxation is managed separately by each Brazilian state and municipality, with no coordination.
|Made up of Brazil’s states, municipalities and the Federal District;
Powers: issuing infra-legal rules on IBS; standardizing how tax legislation is interpreted and applied; collecting taxes, refunding tax credits and distributing the proceeds of collected taxes; and conducting administrative litigation.
A general assembly featuring all states, municipalities and the Federal District will be established within the Steering Committee as its highest decision-making and budgetary body.
The presidency of the committee will alternate between representatives of the states and representatives of the municipalities. Committee presidents are only appointed after receiving approval from an absolute majority of the Brazilian Senate.
Quorum required for approval:
|Reduced tax rates
|Possible in many situations, which can vary according to the tax, entity, sector, and beneficiary, among other factors.
|Incentives are limited to specific situations, including:
60% IBS and CBS reductions authorized for: medical devices and accessibility devices for people with disabilities; medicines (including enteral or parenteral nutrition, and special compositions and nutritional formulas for people with inborn errors of metabolism); basic menstrual healthcare products; urban, semi-urban, metropolitan, intercity or interstate road and railway transport services (full exemptions may be provided for in supplementary law); food intended for human consumption (including natural juice without added sugar); in natura agricultural, fishing, forestry and plant extract products; agricultural inputs; hygiene and cleaning products typically consumed by low-income households; local artistic, cultural, journalistic and audiovisual productions; and goods and services related to national security, Brazil’s sovereignty, information security and cybersecurity; and goods/services that promote the circular economy and sustainable use of natural resources.
Supplementary law authorized to provide for 100% CBS and IBS reductions for: medicines (including enteral or parenteral nutrition, and special compositions and nutritional formulas for people with inborn errors of metabolism); basic menstrual healthcare products; fruit, vegetables and eggs; purchases of medicine and medical devices by the public sector, autonomous entities, public foundations, and non-profit social assistance entities referred to in Article 150, item VI, ‘C’ of the Brazilian Constitution; automobiles purchased by people with disabilities or autism spectrum disorder, and automobiles purchased for use as taxis; higher education services under the terms of the ‘University for All Program’ (Prouni – CBS only), and services provided by non-profit Innovation, Science and Technology institutions (ICTs); and urban recovery activities in historic areas or areas deemed critical for urban recovery and rehabilitation.
|Specific tax regimes
|A multitude of specific regimes that vary according to the type of tax, activity, and company, among other factors.
|Supplementary legislation will provide for specific CBS and IBS regimes for fuels and lubricants, financial services, real estate transactions, healthcare plans and lotteries, government procurements, cooperative societies (opt-in regime), hotel services, amusement/theme parks, restaurants and regional aviation services, transactions conducted due to international treaties or conventions, sanitation and highway concession services, interstate and intercity road/rail/water public transport services, and transactions involving the provision of shared telecommunications infrastructure; and distributed micro-generation and mini-generation of electric power – including the Electric Energy Compensation System (SCEE).
|A feature of ICMS and IPI, although it is applied in complex and non-uniform ways.
|A excise tax (“IS”) will be created and levied on goods deemed harmful to health or the environment (as per supplementary law).
The new excise tax will not be levied on electricity and telecommunications-related transactions. It will only be charged once for each product or service and will not form part of its own calculation base. Rather, it will form part of the ISS, ICMS, IBS and CBS calculation base.
Exclusive IBS and CBS rates may be set for certain essential goods and services. Levying IS on goods and services subject to reduced IBS and CBS rates will be prohibited.
|Taxation of Digital Platforms
|No uniform provisions.
|Supplementary law may subject entities involved in carrying out or paying a transaction to taxation, even if resident or domiciled outside Brazil. This includes digital platforms.
|Tax Benefit Compensation Fund
|Does not exist.
|This fund will be created to compensate legal entities between 2029 and 2032 that enjoy incentives granted under certain conditions for a fixed period. The federal government will contribute up to BRL 160 billion to the fund.
|Regional Development Fund (FDR)
|There are some specific policies connected to regional development.
|The fund will be prepared to compensate for the loss of tax incentives to attract investments in less favored regions, prioritizing environmentally sustainable projects.
The fund will be financed by the Federal Government, but the states will decide how to apply the funding.
|Presumed Tax Credits
|No specific constitutional restriction exists regarding the creation of more situations for presuming PIS or Cofins credits. States provide for presumed ICMS credits according to their legislation.
|Authorization to grant presumed IBS and CBS credits to:
These benefits will be legally subject to a cost-benefit analysis every five years. Such analysis must also examine how IBS and CBS legislation impacts equality between men and women.
|National Staple Food Packages (Cestas Básicas)
|Infra-constitutional rules provide for ICMS, PIS and Cofins benefits for staple food packages.
|Supplementary law will define the types of staple food packages exempt from CBS and IBS.
There will also be a more expanded version of the staple food package (cesta básica estendida), which will be subject to CBS and IBS at reduced rates.
|The Brazilian Finance Policy Council (CONFAZ) has validated certain incentives – these have been validated by Supplementary Law No. 160/2017 (maximum term: 2032). Non-validated incentives also exist.
|Validated ICMS incentives will continue until 2032, though they will be reduced in proportion to the reductions in ICMS during the transition period.
A fund financed by the federal government will be created as of 2029 to compensate taxpayers for the end of their tax benefits.
|Manaus Free-Trade Zone (ZFM)
|The ZFM is to remain in effect until 2073, with various incentives beyond unified taxes.
|Mechanisms will be established to uphold the ZFM’s competitive advantage.
There are provisions for creating a new Contribution Tax for Intervention in the Economic Domain (CIDE) that would be charged on the import, production or sale of incentivized goods in the ZFM (which guarantees favorable tax treatment for transactions)
An economic sustainability and diversification fund will be created for the northern Brazilian state of Amazonas via federal government funding, ensuring favorable treatment for operations in the region.
In the ZFM, tax benefits are restricted on weapons and ammunition, tobacco, alcoholic beverages, passenger cars, perfumes, toiletries, and cosmetics, unless intended for consumption within the ZFM itself or produced using local raw animal or plant materials.
|Simples Nacional tax regime
|Simples Nacional: an exclusive tax regime for micro and small companies with a unified tax collection system. Among other benefits, it simplifies tax declarations. Tax credits are not generated from purchasing goods and services from companies that opt for this regime.
|The Simples Nacional will continue, incorporating IBS and CBS into the taxes paid via this regime. Tax credits will be generated from purchasing goods and services from companies that opt for this regime.
|Seven-year transition, occurring as follows:
If the new CIDE for the ZFM (see above) is not created by 2027, the IPI will be reduced to zero for all products produced outside the ZFM (rather than being extinguished entirely).
|Though few in number, there are cash refund programs for low-income households, such as ‘Devolve-ICMS’ in the state of Rio Grande do Sul.
|Although the mechanism would be used to combat regional, income, racial, and gender inequality, neither the eligible groups nor the method for executing the program has been clearly defined.
However, a refund has been determined in the case of electricity consumption by low-income consumers – supplementary law may establish that this refund is granted at the time the consumer is charged.
|Vehicle Registration Tax (IPVA)
|Levied on land-based motor vehicles.
|IPVA will also be levied on marine vessels and aircraft, with progressive tax rates depending on the type of vehicle, its value, and its impact on the environment.
The bill also establishes IPVA exemptions for tractors and agricultural machines, self-propelling platforms that move on water, among others.
|Tax on Inheritance and Donations (ITCMD)
|No provision for progressive taxation.
Supplementary law will be required to regulate cases in which donors are domiciled outside Brazil, among other matters.
|Progressive taxation – expands the tax base for inheritance.
In the case of inheritances, the state in which the deceased was domiciled will have formal jurisdiction over the deceased’s movable assets, titles, and credits.
Supplementary law will establish exemptions for donations to non-profit institutions working with public and social causes, including charitable organizations linked to religious organizations and science and technology institutes.
Provisional rules have been created for each state to collect the tax until a supplementary law is enacted that provides for situations where donors are domiciled abroad (among others). These provisional rules only apply to successions that commence prior to the date the PEC is enacted.
|Property Tax (IPTU)
|Brazil’s Constitution contains no express provisions for municipal administrations to update the IPTU calculation base.
|The tax base may be adjusted by the municipal governments in accordance with municipal law
|Tax on Financial Transactions (IOF)
|Levied on insurance transactions.
|IOF will no longer be levied on insurance transactions as of 2027.
|Income and payroll tax reform
|No set timeframe.
|Once PEC No. 45/2019 has been enacted, the Brazilian government has 90 days to submit a bill addressing income tax reform and another addressing payroll tax reform.
|Regulation of consumption tax reform
|No set timeframe.
|Once PEC No. 45/2019 has been enacted, the Brazilian government has 240 days to submit bills to regulate consumption tax reform.
|State-level contribution taxes on primary and semi-finished goods
|Producers of these goods must make contributions to specific funds in order to take advantage of exceptional tax regimes.
|Brazilian states that levy taxes on raw and semi-finished products subject to state sales tax (ICMS) benefits are permitted to replace these with similar taxes that are not linked to ICMS, which may remain in effect until 2043.
However, the creation of such taxes would be prohibited if they were not instituted to replace existing taxes, increase the rates of current ones, or expand the existing tax base.
Please click here to see an infographic covering the key aspects of the bill approved in the Senate.
Key changes to the version approved by the Senate Constitution, Justice, and Citizenship Committee (CCJ)
The Senate-approved version of PEC No. 45/2019 introduces a series of further changes, among which include:
- The rates for IBS and CBS applied to fuels will vary depending on the product (previously, this was merely a possibility).
- A 60% reduction in IBS and CBS on goods and services that promote the circular economy and the sustainable use of natural resources, as well as for event productions.
- A specific IBS and CBS regime has been introduced for distributed electric energy micro-generation and mini-generation – including the Electric Energy Compensation System (SCEE). It will also be possible to levy these taxes based on the amounts billed or received.
- Given the proposed changes to state legislation, there is a provision for taxpayers subject to special regimes to be contemplated in the Tax Benefit Compensation Fund if they opt to change from such regimes between May 31, 2023, and the date the PEC is enacted.
What comes next
Now that the bill has been approved in the Senate, it will be sent back to the House of Representatives for further consideration.
Should a qualified majority of the House (three-fifths, or 308 representatives) approve the bill after two rounds of voting, the approved sections of the text will be officially enacted as constitutional amendments.