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First steps to a Reform on the Taxation of good and services In Brazil
On July 7, 2023, the Brazilian House of Representatives approved the substitute wording of tax reform, the Proposal for Amendment to the Constitution No. 45/19, in two rounds of voting (“PEC 45“). PEC 45 aims to substantially change the current framework for taxation of goods and services in Brazil by eliminating several of the “indirect” taxes (ICMS, IPI, ISS, and PIS/Cofins) and replacing them with three new taxes: the Tax on Goods and Services (“IBS“), the Contribution on Goods and Services (“CBS“), and the Excise Tax (“IS“).
To learn more about tax reform, access our exclusive analysis here regarding the main changes proposed by PEC 45, its legislative process, and potential expected impacts. Additionally, below you can find a Q&A section addressing key questions about the reform and its impact on the country’s business environment.
Which taxes will be affected by the tax reform?
PEC 45 intends to end the collection of several of the “indirect” taxes (ICMS, IPI, ISS and PIS/Cofins), which will be grouped in the form of three new taxes, the Tax on Goods and Services (“IBS”), under the jurisdiction of States, Federal District and Municipalities, and the Contribution on Goods and Services (“CBS”) and the Selective Tax (“IS”), under the jurisdiction of the Federal Union.
There is also provision for the institution of a temporary contribution on certain products applied in infrastructure and housing projects, replacing contributions to state funds existing on March 30, 2023.
PEC 45 does not change the taxation on income, which would be subject to a separate proposal.
What will be the applicable tax rates for IBS, CBS and IS?
PEC 45 does not provide for a standard tax rate. Nor are there maximum and minimum limits, which could be provided for by Complementary Law.
IBS and CBS will have single rates, applicable to all types of goods and services, subject to the exceptions expressly provided for in PEC 45 (e.g. staple basket items, medicines, agricultural products and others). The CBS rate will be provided for by federal law and the IBS rate will be the sum of the rates established by the state and municipality of destination of the operation.
Federal law will establish IS rate limits, which may be set by Presidential Decree.
From when do I start collecting IBS, CBS and IS? Will I ever have to pay the new and replaced taxes at the same time?
The process will follow the transition steps of PEC 45, starting with a 1% combined rate for IBS/CBS in 2027, progressively increasing in replacement of the taxes that will be eliminated, until the transition is completed in 2033 and only the new taxes are collected.
PEC 45 does not provide for transition rules for the IS, which may be collected from 2027 onwards.
What about the tax benefits applicable to my business?
PEC 45 proposes to end all tax benefits applicable to the taxes that will be replaced with a few exceptions (e.g. SIMPLES, Prouni, Perse and Manaus Free Trade Zone). ICMS benefits and special regimes will end on a progressive timeline.
How do I know if I will pay more taxes and how tax reform will affect my business?
There is no single answer to this question and the result will depend on the weighting of several factors, including: (i) current effective rate of the substituted taxes applicable to the company’s activity (e.g. ICMS, ISS, PIS/Cofins and IPI); (ii) loss of special regimes and tax benefits; (iii) if the company’s activity is on the list of activities subject to a special IBS and CBS computation regime; (iv) increase in the creditable expense base compared to current ICMS, PIS/Cofins and IPI regimes and end of cumulative ISS collection; (v) is my product or service creditable by my customer today? Will it become creditable in the new standard after the reform?; (vi) where is the consumer market for my business?
The aggregate of these responses allows one to build a certain approximation of what would be the expected effects of PEC 45 over their business. However, as the tax rates and much of the mechanics for computing the taxes will still be provided for by Complementary Law, the result of any exercise must be considered an “educated guess” of the real impact of the reform.
Are there impacts for wealth planning?
PEC introduced some important rules regarding the Donations and Inheritance tax (“ITCMD”), such as the possibility of setting progressive rates and rules on the collection of the tax on inheritances received from abroad.
Lefosse’s Tax Team closely monitors the changes that impact the Brazilian market. For further clarification on this matter, or others that may be of interest to you, contact our professionals.
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