🇧🇷 Tax Reform: OECD report

Hey, I’m Douglas, Editor-in-Chief of the Brazilian Tax Reform Portal 🇧🇷.

1) OECD Releases Report on Brazilian Tax Reform: A Historic Shift

Brazil has enacted a sweeping constitutional reform to modernize its consumption tax regime, replacing five complex taxes with a unified dual Value Added Tax (VAT).

The OECD report, written by Jens Mathias Arnold, Piet Battiau, Falilou Fall, and Karoline Spies, highlights the magnitude of this change, stating that this historic reform seeks to modernize and fundamentally simplify the myriad of consumption taxes levied across the three levels of Brazil’s federal state.

The Problem: Fragmentation and Distortion

The previous system, split across Federal, State, and Municipal levels, suffered from three critical flaws:

• High Costs: Fragmented rules across 27 States and 5,570 Municipalities resulted in enormous compliance burdens and substantial litigation for businesses. The report confirms that “Brazil’s consumption tax regime generates among the highest levels of compliance costs globally, and tax litigation in Brazil is substantial.”

• Origin-Based Flaw: Taxes levied based on the origin of production fueled "fiscal wars" between states, distorting investment and resource allocation. The OECD notes that the largely origin-based nature of these taxes “has, unsurprisingly, led to their use as a tool for tax competition (‘fiscal war’) among States and Municipalities.”

• Cascading Taxes: The cumulative design meant businesses could not fully recover input taxes, causing a "tax-on-tax" effect that raised the cost of domestic production and hurt competitiveness. This flaw is severe: “The poor and outdated design of the existing regime and its growing complexity and fragmentation were found to have a significant adverse impact on productivity, investment and competitiveness and thus to severely stifle Brazilian economic growth.”

The Solution: A Modern Dual VAT

The reform introduces a system designed for simplicity, neutrality, and efficiency, governed by common, uniform rules nationwide.

Key Pillars of the New System:

• VAT Neutrality: Both the CBS and IBS will be fully non-cumulative, granting businesses the right to recover tax on their inputs. This eliminates the cascading effect, making the tax a true levy on final consumption. The report calls the non-cumulative nature a core principle of the reform to address the distortions caused by the existing regime.

• Destination Principle: The tax will now be collected at the point of destination (where the consumer is located), ending tax competition and ensuring neutrality in inter-state trade. The OECD praises this shift, noting that it “will thus operate the destination principle as the standard for determining the place of taxation, both for inter-State and inter-Municipal transactions and for international trade.”

• Uniform Tax Base: A single, broad definition of goods and services applies to both CBS and IBS, drastically simplifying compliance. This alignment is critical: “The CBS and IBS will be levied on a common broad tax base that encompasses all transactions involving tangible and intangible goods, including associated rights, as well as services, both locally supplied and imported.”

Targeted Equity:

To offset the regressivity of VAT, a cashback system will be introduced to refund the CBS/IBS paid by low-income households on essential goods. This regime “holds great potential as a more targeted and efficient approach than reduced rates or exemptions to compensate low-income households.”

A Unique Governance Model: The IBS Steering Committee

A core challenge was reconciling uniformity with sub-federal autonomy. The solution is the IBS Steering Committee, an independent body composed of State and Municipal representatives.

The Committee’s creation was a “unique solution to safeguard the States’ and Municipalities’ authority to administer and collect their respective shares of the dual VAT, including on inter-State and inter-Municipal transactions.”

• Centralized Administration: The Committee acts as a single point of contact for the IBS, centralizing collection and administering input-tax credits and refunds. “The IBS Steering Committee will thus not only install the necessary level of confidence in the proper and fair operation of the sub-federal IBS across all levels of federal government. It will also lead to greater efficiency and consistency in IBS application and administration while significantly enhancing IBS compliance for businesses.”

• Transparent Revenue Sharing: It manages the distribution of IBS revenues to the States and Municipalities of destination, ensuring transparency and adherence to the destination principle.

The Road Ahead: Transition Timeline

The full transition is a gradual, multi-year process designed to minimize economic shock. The OECD highlights the rationale: “Given the depth and the breadth of Brazil’s consumption tax reform, a phased approach has been adopted for the gradual transition towards the new regime over a considerable period of time.”

• 2026: Test phase begins with minimal rates for both CBS (0.9%) and IBS (0.1%).

• 2027-2028: CBS is fully introduced; IPI, PIS, and COFINS are largely abolished.

• 2029-2032: Gradual rate increases for IBS coincide with concurrent, gradual reductions of the old ICMS and ISS.

• 2033: The new system is fully implemented, and ICMS/ISS are abolished.

• 50-Year Transition (2029–2077): A long-term revenue distribution mechanism is in place to smooth the financial impact on States and Municipalities during the shift from origin- to destination-based taxation.

Click here to read the full OECD report.

🇧🇷🔍 Brazil is changing. Are you watching closely?

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