Brazil’s House of Representatives approves bill on tax reform

State/Federal District taxes: 27 different state sales tax (“ICMS”) rates.

Municipalities: many different municipal tax on services (“ISS”) rates.

26 states, the Federal District and more than 5,000 municipalities: a single tax on goods and services (“IBS”) rate.

CBS and IBS will be established via the same supplementary law.

Federal, state, and municipal IBS tax rates may vary.

PIS/COFINS: revenue

IPI: industrialized products

ISS: services

ICMS: goods

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.

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.

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:

• An absolute majority of the State and Federal District representatives’ votes, provided they represent at least 60% of the country’s population; and
• An absolute majority of the municipal and Federal District representatives’ votes.

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.

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.

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.

• Purchasers of goods and services from rural producers (individuals or legal entities with annual revenues of less than BRL 3.6 million) or from so-called ‘integrated producers’ who opt not to pay the tax. The Federal Executive Branch and Steering Committee will review this credit each year;
• Individual self-employed transporters who are not considered taxpayers under the terms of supplementary law;
• Waste and other materials destined for recycling, reuse or reverse logistics that stem from individuals, cooperatives or other grassroots organizations;
• Purchasers of used, non-fixed assets from non-taxpaying individuals for the purpose of resale – provided the purchase was taxed and the credit is linked to the asset(s) in question.

These benefits will be legally subject to a cost-benefit analysis every five years.

A fund financed by the federal government will be created as of 2029 to compensate taxpayers for the end of their tax benefits.

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.

• 2026: 0.9% CBS rate and 0.1% IBS rate, offset against PIS/Cofins. Supplementary law may provide that taxpayers who comply with additional IBS and CBS obligations are exempt from paying these taxes.
• 2027: CBS fully implemented and IS  instituted; end of PIS/Cofins. The IPI will be reduced to zero for all products produced outside the ZFM.
• 2027 and 2028: CBS reduced by 0.1%, and state and municipal IBS rates increased by 0.05%;
• 2029 to 2032: IBS rate increased in proportion to reductions in ICMS and ISS rates;
• 2033: New tax system takes full effect as the old one comes to an end.

The bill also establishes IPVA exemptions for tractors and agricultural machines, self-propelling platforms that move on water, among others.

Supplementary law will be required to regulate cases in which donors are domiciled outside Brazil, among other matters.

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.

Furthermore, the government has 90 days to submit bills addressing income tax and payroll tax reform.

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.