Brazil’s House of Representative approves bill on tax reform
Learn about the main aspects of the country’s new tax framework, which now awaits presidential assent
On December 15, 2023, Brazil’s House of Representatives approved Constitutional Amendment Bill (PEC) No. 45/2019 after two rounds of voting. The bill is set to introduce a new framework for consumption taxation in Brazil, and amends specific aspects of wealth taxation.
With this latest approval, PEC No. 45/2019 now only requires an official proclamation by the Boards of the House of Representatives and the Federal Senate in a solemn session of the National Congress to officially become effective. This session will take place on December 20, 2023.
The table below provides a comparison between Brazil’s existing tax system and the one proposed in the latest version of PEC No. 45/2019:
|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
|Varying 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.
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
IPI: industrialized products
|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 refunds 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 or other federal taxes, or even cash refunds.
|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.
|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.
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: education services; health services; medical devices and accessibility devices for people with disabilities; medicines; 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); hygiene and cleaning products typically consumed by low-income households; in natura agricultural, fishing, forestry and plant extract products; agricultural inputs; local artistic, cultural, journalistic and audiovisual productions; and goods and services related to national security, Brazil’s sovereignty, information security and cybersecurity.
Supplementary law authorized to provide for 100% CBS and IBS reductions for: medical devices and accessibility devices for people with disabilities; basic menstrual healthcare products and medicines; fruit, vegetables and eggs; 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); automobiles purchased by people with disabilities or autism spectrum disorder, and automobiles purchased for use as taxis; and urban recovery activities in historic areas or areas deemed critical for urban recovery and rehabilitation (this may be instituted as an exemption).
30% IBS and CBS reductions authorized for: services linked to intellectual professions and services of a scientific, literary, or artistic nature (provided they are supervised by a professional council).
The benefits listed above will be legally subject to a cost-benefit analysis every five years.
The report also states that the supplementary 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 authorized for fuels and lubricants, financial services, real estate transactions, healthcare plans and lotteries, cooperative societies (opt-in regime), hotel services, amusement/theme parks, bars and restaurants and tourism/travel agencies, sporting activities conducted by Football Corporations (Sociedade Anônima do Futebol), regional aviation activities, transactions conducted due to international treaties or conventions, sanitation and highway concession services, and interstate and intercity road/rail/water public transport services.
|A feature of ICMS and IPI, although it is applied in complex and non-uniform ways.
|An excise tax (“IS”) will be created and levied on goods deemed harmful to health or the environment.
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.
|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 established as a way of reducing regional and social inequality.
The fund will be financed by the Federal Government, but the states will decide how to apply the funding.
Resources in the fund will prioritize environmentally sustainable projects and carbon emission reduction projects.
|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.
|Supplementary law will define the types of staple food packages exempt from CBS and IBS.
|The Brazilian Finance Policy Council (CONFAZ) has deemed lawful certain incentives – these have been recognized by Supplementary Law No. 160/2017 (maximum term: 2032). Unlawful incentives also exist.
|ICMS incentives deemed lawful 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 an economic sustainability and diversification fund for the states of Amazonas and Amapá via federal government funding, ensuring favorable treatment for transactions in the region.
The IPI tax will be used to favor transactions conducted within the ZFM. Reduction of IPI rates to zero, except for products that benefit from manufacturing incentives in the ZFM.
|Simples Nacional tax regime
|Simples Nacional: an exclusive tax regime which offers simplified and reduced taxation for small businesses. 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 remain in force but will include IBS and CBS as part of the taxes collected through this system. Companies that buy goods and services from Simples Nacional taxpayers will be able to claim tax credits based on these transactions.
|A seven-year transition, occurring as follows:
|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.
|The program aims to reduce inequality across regions, incomes, races, and genders by using a mechanism that is not yet specified (neither the eligible groups nor the executing method). The only clear detail is that low-income consumers who use electricity and liquefied petroleum gas can get a refund for their consumption – 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.
|Income/payroll tax reform and the regulation of consumption tax reform
|No set timeframe.
|Once PEC No. 45/2019 has been enacted, the Brazilian government has 180 days to submit all bills to regulate consumption tax reform.
Furthermore, the government has 90 days to submit bills addressing income tax and payroll tax reform.
|State-level contribution taxes on primary and semi-finished goods
|Producers of these goods must make contributions to specific funds 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 (compared to the Senate-approved text)
The House of Representatives’ version of the bill removed certain provisions from the Senate-approved version of the text, which are highlighted below:
- A 100% IBS and CBS reduction for purchases of medicines and medical devices by non-profit social welfare organizations is no longer contemplated in the bill.
- Removal of so-called Extended National Staple Food Packages (Cesta Básica Estendida), which would have been subject to 60% reductions in IBS and CBS rates. However, a list of goods included in standard Staple Food Packages (Cestas Básicas) subject to a 100% IBS and CBS reduction was upheld;
- Various sectors and services were removed from a list contemplating specific tax regimes. Importantly, this list no longer includes sanitation services and highway concessions; air transport services; transactions involving shared infrastructure for telecommunications services; goods and services that promote the circular economy; and transactions involving the distribution of micro-generated and mini-generated electricity;
- The Senate has retained the power to set IBS and CBS rates for fuels. The report linked to the bill also indicates that the issue should be assessed by law;
- A proposal to create a contribution tax (Cide-ZFM) that would have been levied on goods and services in the Manaus Free Trade Zone has been removed. Instead, IPI will be used to provide incentives for the region and uphold the ZFM’s competitive advantage;
- A provision that would have authorized tax incentives in the Manaus Free Trade Zone that applied to almost all goods (firearms, ammunition and tobacco were among the exceptions) has been annulled;
- A provision was removed that expressly prohibited the Brazilian Government, states and municipalities from issuing infra-legal tax rules without first widely publicizing the studies and opinions such rules are based on;
- The text no longer requires the government at any level (Federal Union, States, and Municipalities) to publish research and opinions to support their tax regulations.
- Tax incentives for Brazil’s Northeast and Midwest regions regarding electric and hybrid vehicle parts have been removed; and
- A provision authorizing the excise tax to be levied on firearms and ammunition has been removed.