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Brazil’s proposed tax reform presented in the Senate
Commission set to analyze report on the proposal before Senate votes on it in a plenary session
Subjects
On October 25, 2023, Senator Eduardo Braga (MDB/State of Amazonas) presented his report on a bill for Brazilian tax reform (PEC No. 45/2019) to the Senate’s Constitution, Justice and Citizenship Commission (CCJ).
If approved, this bill will overhaul consumption taxation in the country and change specific aspects of wealth taxation.
The table below provides a comparison between the current system and the system proposed in the report:
| Topic | Current system | After the reform |
| Value Added Tax (VAT) Model | Federal taxes: IPI, PIS and COFINS
State/Federal District taxes: 27 different ICMS rates Municipalities: a large number of different ISS rates. |
Federal taxes: CBS and IS
26 states, the Federal District and more than 5,000 municipalities: a single IBS rate |
| Consumption taxation legislation | Varying legislation for each tax and jurisdiction (federal, state, municipal). | CBS and IBS will be subject to the same taxable events, tax incidence 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 complementary law. Federal, state and municipal IBS tax rates may vary. |
| Calculation Method | ‘Por dentro‘ (cascading) tax incidence in many situations. | ‘Por fora‘ tax incidence – no cascading taxation |
| Tax incidence base | Segmented:
PIS/COFINS: revenue IPI: industrialized products ISS: services ICMS: goods |
Broad base: encompasses transactions involving tangible and intangible goods (and any rights linked to them) or transactions involving services. |
| Credit refunds | Different rules for taxes that permit credits – in many cases, offsetting and refunds are not permitted. It is difficult to turn accumulated tax credit balances into cash. | Complementary law will regulate the form and deadline for refunding IBS and CBS credits.
ICMS credit balances: it will be possible to offset these with IBS credits (upon approval) after 2032. Complementary 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 Complementary 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. |
| Tax rates | 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), in order 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. |
| Steering Committee
|
Does not exist. | 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:
The benefits listed above will be legally subject to a cost-benefit analysis every five years. The report also states that the complementary law for IBS and CBS may introduce exemptions for acquisitions of capital goods. 100% rate reductions are even a possibility. |
| Specific tax regimes | A multitude of specific regimes that vary according to the type of tax, activity, and company, among other factors. | Specific CBS and IBS regimes are only authorized 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. |
| Selective taxation | A feature of ICMS and IPI, although it is applied in complex and non-uniform ways. | A selective tax will be created and levied on goods deemed harmful to health or the environment.
The new selective 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. |
| Taxation of Digital Platforms | No uniform provisions. | Complementary 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. |
| National Staple Food Packages (Cestas Básicas) | Infra-constitutional rules provide for ICMS, PIS and Cofins benefits for staple food packages. | Complementary 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. |
| ICMS Incentives | The Brazilian Finance Policy Council (CONFAZ) has validated certain incentives — these have been validated by Complementary Law No. 160/2017 (maximum term: 2032). Non-validated incentives also exist. | Validated ICMS incentives will continue until 2032.
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. |
| Transition period | N/A | Seven-year transition, occurring as follows:
|
| Cashback programs | 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 – complementary 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 be levied on marine vessels and aircraft. It will also be levied progressively on motor vehicles in line with their pollution potential.
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.
Complementary 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.
Complementary 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 complementary 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. |
| Income tax reform | No set timeframe. | Once the PEC has been enacted, the Executive Branch has 180 days to submit a bill on income tax reform to Congress, and up to 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. | These contributions will continue until 2033, at which point the funds will cease to exist.
The report also provides for prohibiting the creation of new contributions, any increases in current contribution rates and the expansion of the existing incidence bases for these contributions. |
Please click here to view an infographic highlighting the main aspects of the report.
New aspects of the latest proposal
The new proposal has introduced a number of changes to the text that the House of Representatives approved in July, including the following:
- An express provision indicating that the Senate will limit/lock the reference rates of the new taxes in order to ensure the tax burden remains proportional to GDP as the old taxes are phased out. If the tax burden surpasses this limit, these rates will be reduced;
- Changes to the proposed Selective Tax, including a provision for this tax to be levied only once on goods and services, a prohibition on it being levied on electricity and telecommunications services, and removing a prohibition on levying it on goods and services with reduced IBS and CBS rates;
- An express provision has been included determining that a single complementary law will regulate both the IBS and CBS;
- A requirement for Brazil’s Executive Branch to submit the bills to regulate consumption taxation reform to Congress within 240 days of PEC No. 45/2019 being enacted;
- The creation of a new Contribution Tax for Intervention in the Economic Domain (CIDE) to ensure the Manaus Free Trade Zone remains competitive;
- The creation of specific tax regimes for sanitation services, highway concessions and transactions involving the provision of shared infrastructure for telecommunications services;
- The complementary law on the IBS and the CBS could include rules for exempting the acquisition of capital goods, which could be done by reducing the applicable rates by 100%;
- An increase in the value of the Regional Development Fund from 2033 – it will be increased by a further BRL 2 billion a year on top of the initial BRL 40 billion planned, up to a limit of BRL 60 billion in 2043;
- The CBS is to be reduced by 100% for services provided by non-profit science, technology and innovation (STI) organizations.
What comes next
According to information released by the bill’s rapporteur, the proposal will be voted on in the Senate Commission on November 7, 2023, before the Senate votes on it in two plenary rounds between November 7 and 9, 2023.
The bill will be enacted if it is approved in both rounds by a qualified majority (three-fifths of the house – 49 senators), unless significant changes (i.e., beyond the mere wording of the text) are implemented.
If such significant changes do occur, the bill will then be sent back to the House of Representatives. In this scenario, it is possible that only the part of the reforms approved in both houses will be enacted.
Payroll tax exemption
On October 25, 2023, the Senate also approved Bill No. 334/2023 to extend an existing payroll tax exemption for various sectors until 2027. In light of this approval, the bill now only requires presidential assent to be formally enacted.
For further information on Brazilian tax reform, please contact Mattos Filho’s Tax and Government Relations practice areas.
