On January 16, 2025, Brazil’s President enacted Supplementary Law (LC) No. 214/2025, which regulates the Brazilian Tax Reform instituted by Constitutional Amendment No. 132/2023.
The new law establishes a dual VAT system, composed of the Contribution on Goods and Services (CBS) at federal level, and the Tax on Goods and Services (IBS) at state and municipal level. Additionally, the law addresses the Selective Tax (IS), also under federal jurisdiction, with extra-fiscal purposes.
Key Points of the new legislation:
1. Dual VAT System:
The reform establishes a dual VAT system, consisting of CBS at the federal level and IBS at the state and municipal level on a broad incidence replacing multiple existing taxes such as ICMS (State VAT), ISS (Municipal Service Tax), PIS, and Cofins (social contributions)
2. CBS/IBS
• Broad Incidence:
CBS and IBS will be levied on onerous operations with goods and services. The new legislation defines goods as movable or immovable, material or immaterial goods, including rights. The new taxes will also apply to certain non-onerous transactions expressly provided for in the Supplementary Law, such as giveaways.
• Non-Incidence:
CBS and IBS will not be levied on certain transactions such as transfers between establishments of the same owner, interest on equity (JCP) and dividends.
• Tax Rate:
The Brazilian Senate will establish reference tax rates for CBS and IBS. However, States and Municipalities can either adopt the IBS reference rates or establish their own rates with certain criteria. If reference rates exceed 26.5% the Executive Branch, after consulting the IBS Management Committee, must submit a Supplementary Law to the Legislative Branch proposing measures to reduce the rate to a level equal to or below 26.5%.
• Reduced Tax Rates
The legislation provides tax reduction ranging from 30% to 100% reduction for certain scenarios, such as provision of services of an intellectual profession (30%), health and education services and certain medical and accessibility devices for people with disabilities (100%).
• Tax credits
The taxpayer may claim IBS and CBS credits on the acquisition of taxed goods and services, upon proof of the actual payment of the taxes, when their extinguishment occurs. In comparison to the current system, the new systems tend to have a broader application of non-cumulative principles.
• CBS/IBS Positive Credit Balance
Taxpayers who have IBS and CBS credit balances at the end of the assessment period must request a full or partial refund. If the refund period established by Supplementary Law No. 214/2025 (general rule – 180 days) is not met, the credit balance will be refunded to the taxpayer within 15 days, with interest.
• Destination
As a rule, CBS and IBS taxation will be destination-based, a change that will have profound impacts on the Brazilian tax scenario which is primarily origin based. Companies shall need to reassess and reevaluate their supply chain models.
• Taxpayer
Among other scenarios, shall be considered as a CBS/IBS taxpayer, the supplier who carries out operations in the development of an economic activity and the importer.
• Split Payment
The new tax system is based on electronic split payments in which electronic payment service providers and payment system operators shall receive information about the transaction and IBS and CBS amounts in order to direct the amounts to the relevant authorities.
• Specific and favored regimes
Certain segments will be subject to specific regimes, such as fuels, financial services, real estate and health services or favored regimes, such as special customs regimes (temporary admission, drawback, among others) and Manaus Free Trade Zone (ZFM)
3. Selective Tax (IS):
To combat the consumption of products and services that pose risks to health and the environment, a new federal excise tax, the Selective Tax, has been implemented. This tax will be applied at a single stage of the production chain, affecting production, extraction, marketing or imports of certain goods such as motor vehicles; ships and aircraft; tobacco products; alcoholic beverages, sugary drinks; mineral extraction; lottery games, including fantasy sports.
• Taxpayer
Manufacturer, importer, auction winner, extractive producer, service provider.
• Credits:
Any type of use of tax credits for the Selective Tax from previous transactions or the generation of credits for subsequent transactions has been prohibited.
• Rate:
Rates will be set by specific laws.
2. Tax on Industrialized Products (IPI):
The rates will be reduced to zero on January 1, 2027 (exception: products subject to a rate equal to or higher than lower than 6.5% in force on December 31, 2023, and that have been manufactured in the Manaus Free Trade Zone (ZFM) in 2024; or whose technical-economic project was approved by the Superintendence of the Manaus Free Trade Zone (Suframa) between January 1, 2022, and January 16, 2025.)
3. ICMS benefits:
ICMS benefits already granted by the states would be guaranteed until 2032, with a gradual reduction as ICMS is phased out between 2029 and 2032. Individuals or legal entities holding onerous ICMS benefits granted until May 31, 2023, that comply with certain requirements, will be compensated through resources from the Fiscal or Financial-Fiscal Benefits Compensation Fund, in accordance with certain criteria and limits.
4. Positive tax credits balance of current taxes
ICMS: Positive ICMS tax credits balance in 2032 will be used to offset IBS or paid back to taxpayers if offsetting is not possible, in 240 monthly installments (except credits related to fixed assets which shall comply with the regular 1/48 installments). Future Supplementary Law will detail the system.
PIS/Cofins: Credits accumulated until the end of 2026 will be used to offset CBS.
5. Cashback:
Low-income families will have a tax refund system (cashback), with minimum percentages on the tax paid on consumption for services such as electricity, water, etc.
The Brazilian Congress is analyzing Supplementary Bill 108/24 which establishes the IBS Management Committee and regulates the tax administrative procedure.
Next step:
The Brazilian Congress is analyzing Supplementary Bill 108/24 which establishes the IBS Management Committee and regulates the tax administrative procedure.
Transition Period
• 2026: Introduction of test rates for CBS (0.9%) and IBS (0.1%). However, the amount will be waived if the taxpayer complies with ancillary obligations (2026 only).
• 2027: CBS is fully implemented and replaces PIS/Cofins, IPI tax rates are reduced to zero (exception applies) and the Selective Tax enter into force.
• 2029-2032: Gradual reduction of ICMS (including benefits) and ISS, with IBS increasing proportionally. • 2033: Full implementation of the dual VAT system is expected to be completed
Conclusion
The Brazilian Tax Reform will significantly redesign the tax system in order to simplify and make it more comprehensive, however the changes will have considerable ramifications for supply chain models, service providers and other economic activities.
Rolim Goulart Cardoso’s Taxteam is available for further clarification and to assist you in discussing the topic.
