The House of Representatives has recently approved a Bill that aims to simplify the existing tax system by replacing several consumption taxes with a dual VAT regime. The bill is yet to be considered by the Senate.
On July 7, 2023, the House of Representatives approved a bill known as PEC No. 45-A, which aims to simplify the existing Brazilian consumption tax framework.
The bill’s main goal is to replace five existing consumption taxes with a dual value-added tax framework, as follows:
- At the federal level, IPI (tax on manufactured products) and PIS and COFINS (social contributions on gross revenue) will be replaced with CBS (Brazilian Contribution on Goods, Services, Rights, and Intangibles); and
- At the state and municipal levels, ICMS (State VAT) and ISS (municipal service tax) will be replaced with IBS (Tax on Goods, Services, Rights, and Intangibles).
Both CBS and IBS are value-added taxes and will share the same calculation basis and triggering event. In principle, this means that both CBS and IBS will be governed by the same set of rules, thus reducing potential controversies.
The applicable rates for CBS and IBS have not been defined yet; however, their combined rate is expected to range from 25% to 28%.
The new framework is likely to increase the tax burden on certain economic sectors, especially services providers who are currently subject to service taxes at a maximum rate of 5%.
Furthermore, PEC No. 45-A introduces the Excise Tax (i), which will be levied on the production, commercialization, or importation of goods and services that are harmful to health or the environment.
The bill establishes a transition period from January 2026 to December 2032 for the complete elimination of ICMS, IPI, PIS/COFINS, and ISS.
During the transition period, taxes from both regimes will coexist while the former taxes are gradually reduced each year.
The Federal Government will establish a fund to reimburse any losses incurred by taxpayers benefiting from special tax regimes granted until 2032. Starting in 2033, only a few special tax regimes are expected to be maintained.
The bill is anticipated to be analyzed by the Federal Senate still in the 2nd semester of 2023. If the Senate modifies the current wording, approved by the House of Representatives, the new bill must be reconsidered by the House of Representatives before being forwarded for presidential sanction.
