12 Jan Tax Reform: News and the Adoption Schedule for New Taxes
Tax reform
The main change with the Tax Reform will be the extinction of five taxes. Together, they represented almost 38% of revenue in 2021. Three of them are federal: Social Integration Program (PIS), Contribution to Social Security Financing (COFINS) and the Tax on Industrialized Products (IPI), in addition to ICMS and ISS, respectively at the state and municipal level, and the main effect is the unification, from 2033, of these same five taxes into a single charge, which will be divided between the federal (CBS: Contribution on Goods and Services) and state/municipal (IBS) levels. : Tax on Goods and Services).
The promulgation of Constitutional Amendment 132 lays the foundations for a long transition towards full adoption of the new IBS and CBS taxes.
The National Congress must still approve, in the coming years, complementary laws to regulate the changes. And these pending issues generate disagreements about the impact of the reform on the increase or decrease in taxes on consumption. To avoid an increase in the tax burden, a “reference lock” was created so that new taxes can be reduced in 2030 and 2035, if there is an increase in the tax burden in proportion to GDP.
The Finance Minister's estimate is that the final CBS and IBS rate will be around 27.5%. CBS and IBS will be taxes of the Value Added Tax (VAT) type, which puts an end to the “cascading effect”, capable of causing the same tax to be paid several times during the production or marketing process of the same good.
CBS will be fully established from 2027. But in 2026 there will be a test period in which the CBS and IBS rate, combined, will be 1%. IBS will only be definitively implemented in 2033, after a period of six years in which it will coexist with ICMS and ISS, which will be progressively replaced.
In 2033, from the taxpayer's perspective, CBS and IBS will be charged in a single way. From then on, in the first years, the Senate will calculate, through resolution, a reference rate for CBS and two for IBS (one for states and one for municipalities).
The exceptions
CBS and IBS will have the same rules, the same incidences and the same exceptions to the general rate, estimated at 27.5%. For example, the National Basic Food Basket, whose products will be defined later in a complementary law, will be tax-free.
Reductions of 30, 60 and up to 100% in the new tax rates are being studied.
For example, there is an expectation of a reduction of 30% in the rates relating to the provision of services of an intellectual profession, of a scientific, literary or artistic nature.
Reduction of 60% in the sale of the following goods and services: education and health services; medical and accessibility devices for people with disabilities, medicines, public transport services, food intended for human consumption, personal hygiene and cleaning products, agricultural, aquaculture, fishing, forestry and fresh plant extractive products and inputs, artistic productions and goods and services related to sovereignty and national security, information security and cybersecurity
Reduction of 100% for goods referred to in § 1, items III to VI; vegetables, fruits and eggs; services provided by a non-profit Scientific, Technological and Innovation Institution (ICT); passenger cars, in accordance with criteria and requirements established in complementary law, when acquired by people with disabilities and people with autism spectrum disorder, for higher education education services under the terms of the University for All Program, for urban rehabilitation activities in historic areas and critical areas for urban recovery and conversion, among others.
An unprecedented mechanism will also be created in Brazil, called cashback, which will make the Public Authorities return part of the tax paid by low-income families. Cashback will be mandatory for electricity and gas cylinders.
ICMS compensation
The prohibition on states from establishing new exceptions to those already foreseen will simplify the payment of taxes by companies and citizens and combat the so-called “fiscal war”, a strategy used by states to receive private investments by offering tax benefits.
However, the amendment still allows the creation of new tax contributions by states on primary and semi-processed products, such as agricultural products. Some federal entities created these taxes to finance funds intended for investments in infrastructure and housing works, which will be harmed by the tax reform. According to the rules, only states that already have both a similar tax and a fund of this type can create the contribution. The rates cannot be higher than they were on April 30, 2023 and the funds must maintain operating rules as they were on that date. In 2043, the contributions created should be extinguished.
Selective Tax (“Sin Tax”)
From 2027 onwards, the Selective Tax will also be created, which will be levied once on the production, extraction, commercialization or import of products and services that are harmful to health and the environment. Currently, the function is performed by the IPI in relation to products that are harmful to health, such as tobacco.
The selective tax, as a federal tax, was inserted in article 153 of the Constitution, under a new section, VIII, and the goods and services whose production and commercialization are burdened will be defined in a complementary law.
Development Fund
Another way to avoid the tax war will be to tax CBS and IBS only at the place of consumption, and no longer at the place of production and consumption as it is today. To avoid losses in investment capacity in the states, the reform creates the National Regional Development Fund (FNDR). It will also seek to reduce economic and social discrepancies between states.
The FNDR will have contributions from the Union that will be delivered to the states for investments in infrastructure, in activities that generate employment and income, in addition to scientific, technological development and innovation. Entities will have autonomy in spending, but must prioritize projects with environmental preservation actions.
In addition to these funds, the amendment provides for the creation of the Amazonas State Economic Sustainability and Diversification Fund, also with federal contributions, with the aim of promoting the diversification of economic activities in the state. For states in the Western Amazon and Amapá, another sustainable development fund should be created along the same lines.
When does the tax reform come into force?
Changes will occur little by little. The new taxation of goods and services will begin to come into force in 2026 and will only end in 2033. The transition to charging the tax at the destination (place of consumption) will begin in 2029, will take 50 years and will only be completed in 2078.
See the expected dates for the transition:
- 2026: start of collection of CBS and IBS in 2026, with a test rate of 0.9% for CBS and 0.1% for IBS;
- 2027: extinction of PIS/COFINS and increase of CBS to reference rate (to be defined later by the Ministry of Finance);
- 2027: reduction to zero of the IPI rate, except for items produced in the Manaus Free Trade Zone;
- 2029 to 2032: gradual extinction of ICMS and ISS in the following proportion: a) 90% of current rates in 2029; b) 80% in 2030; c) 70% in 2031 and d) 60% in 2032.
- 2033: full validity of the new system and extinction of old taxes and legislation;
- 2029 to 2078: gradual change over 50 years from charging at origin (place of production) to destination (place of consumption).
What are the next steps?
Throughout 2024, Congress will have to vote on complementary laws to regulate tax reform. According to the Minister of Finance, the projects will be sent in the first weeks of 2024.
No Comments