One of the most prominent topics in Brazilian media and of utmost importance to the business scenario in Brazil is the reform of indirect taxes, which has sparked numerous discussions. The proposed measures have both supporters and opponents taking up their stances.
The text of Constitutional Amendment Proposal (PEC) No. 45 was submitted in 2019 and has since undergone a lengthy journey to reach the version of the text that has already been approved by the House of Representatives and is currently under consideration by the Federal Senate. If approved by the Senate, any changes will be sent back for review by the House of Representatives and the proposal will be enacted. The intention is for the entire legislative process to be concluded in 2023.
Essentially, PEC 45/19 currently seeks to unify five Brazilian taxes:
- PIS and Cofins, two social contributions levied on the companies’ gross revenue;
- IPI, a type of excise tax on industrialized products;
- ICMS, a state-level VAT (Value Added Tax);
- ISS, a municipal tax imposed cumulatively on services.
Through a Dual VAT system composed of a tax (tax on goods and services – IBS, levied by municipalities and states) and a social contribution (contribution on goods and services – CBS, levied by the federal government), which will be levied on goods and services in a general manner, plus a selective tax (levy) on goods and services harmful to health and the environment, as defined by law and included in the IBS and CBS tax base.
Key features of this Dual VAT include:
- Uniformity: A single tax rate for all goods and services, except for specified reductions;
- Broad Base: The tax will uniformly affect operations involving goods, services, as well as transactions involving intangible assets and the exploitation of rights;
- Destination-Based: Taxes will be due based on the location of consumption rather than production;
- Non-Cumulative Taxation: Credit for all acquisitions, except for personal consumption as defined by law;
- Non-Cascading Calculation: CBS and IBS not included in their own tax base.
Regarding exceptions to the standard tax rate, it has been widely reported, including by federal government agencies, that the greater the number of exceptions, the higher the standard tax rate will be. This is because one of the objectives of this reform is to simplify the tax system while maintaining revenue. Therefore, the more exceptions we have, the smaller the tax base for the Dual VAT, and consequently, the higher the standard tax rate must be to maintain current public tax revenue levels.
So far, some of the main items benefiting from a 60% reduction in the tax rate include: education, health, public transportation, medications, personal hygiene products, food, medical devices, agricultural products, and agricultural inputs. There is also a list of 100% reduction, including medications, food and essential items (to be defined by law), and college education (only CBS).
Certainly, there will still be changes to these lists until the end of the Senate’s deliberations. However, according to some studies, it can be asserted that the Brazilian Dual VAT rate will fall between 25% and 29%, with mention of tax rates above 30%, which could make Brazil the country with the highest VAT rate when compared to OECD countries, whose member states mostly have rates between 19% and 24%, with a simple average of approximately 19%.
Despite all these changes, PEC 45/2019 sets forth a term of 8 years until full transition to the new indirect tax system. The rules include some partial changes as of 2026, extinguishing PIS/Cofins in 2027 and IPI, ICMS and ISS at the end of 2032.
FIUS will continue to monitor the progress of PEC 45/2019’s legislative process and will continue our series of articles on the Brazilian Tax Reform.