EY
Avenida Presidente Juscelino Kubitschek
1909, Torre Norte, 6º ao 10º andar
Itaim Bibi Sao Paulo 04543-011
Indirect tax contacts
Waine Peron
Paula Pitão
Marcelo P. Frateschi
Bruna Felizardo
Cesar Finotti
Igor Cavalcanti
Raffaela R. Vilela
Tatiane Redondo
+55 (11) 2573-3559
waine.peron@br.ey.com
+55 (11) 2573-3474
paula.pitao@br.ey.com
+55 (11) 2573-3482
marcelo.p.frateschi@br.ey.com
+55 (11) 2573-3043
bruna.felizardo@br.ey.com
+55 (11) 2573-6465
cesar.finotti@br.ey.com
+55 (11) 3443-4991
igor.calvancanti@br.ey.com
+55 (11) 3913-0879
raffaela.vilela@br.ey.com
+55 (11) 2573-5494
tatiane.redondo@br.ey.com
In 2023, Congress and Senate passed a bill regarding tax reform in Brazil that intends to revoke PIS/COFINS, ICMS, ISS and IPI and create the following new taxes:
• CBS (contribution on goods and services) that would replace PIS/COFINS.
• IBS (tax on goods and services) that would replace ICMS and ISS.
• Imposto Seletivo (selective tax) to replace IPI that should levy on operations with goods that are considered as a threat to the environment and to human health. However, it is still not known which criteria is going to be used to trigger such a tax.
• Contribuição Estadual (state contributions) would be charged on the operations of primary goods/semi processed.
Due to the approval, the Chambers (Lower and Upper houses) have started discussing the rules to implement such taxes. There is still a long way to go regarding the tax reform in Brazil, but it represents a significant overhaul of the country’s tax system, aimed at simplifying and modernizing the current framework. The reform will see the termination of several existing taxes, including the PIS (program of social integration), COFINS (contribution for the financing of social security), IPI (tax on industrialized products), ICMS (tax on circulation of goods and services), and ISS (service tax). These taxes will be replaced by two new taxes: the IBS (goods and services tax) and the CBS (contribution on goods and services). The implementation of these new taxes is scheduled to begin in 2026, with a transition period to ensure a smooth changeover (that will last eight years).
The combined rate for the new IBS and CBS taxes is proposed to be 26.5%, although this rate is still pending confirmation by the Upper house. The final regulations and detailed implementation guidelines for these taxes are also yet to be established. The aim of these new taxes is to create a more streamlined and efficient tax system, reducing the complexity and administrative burden currently faced by businesses operating in Brazil. The IBS will be a state and municipal-level tax, while the CBS will be a federal tax, both designed to be noncumulative and to replace the multiple existing taxes.
In addition to simplifying the current tax system, the proposal would generate a wide range of changes in markets and relative product prices, considering that the taxes currently applicable affect the price of products and services and business investment allocation between Brazilian states (e.g., in Brazil, manufacturing plants and distribution centers are usually located in states that grant ICMS incentives, rather than in states where the consumers are located).
One of the critical aspects of the tax reform is the termination of various tax incentives that have been available under the current system. The reform seeks to eliminate most of these incentives to create a more equitable tax environment. It is important to note that very few items and operations will likely still be granted reductions or exemptions under the new system. These exceptions will be clearly defined in the forthcoming regulations, ensuring that the new tax regime is as transparent and straightforward as possible.
The termination of tax incentives is expected to have a significant impact on various sectors, particularly those that have heavily relied on these benefits. Businesses will need to reassess their tax strategies and operations to adapt to the new tax landscape. The Brazilian government aims to use this reform to foster a more competitive and fair market, ultimately benefiting the economy. As the regulations and rates are finalized, it will be crucial for businesses to stay informed and prepared for the upcoming changes. The tax reform in Brazil also includes the implementation of the IS (selective tax). The IS is designed to be a federal tax applied to specific goods and services that are considered harmful for the environment or health, such as tobacco, alcoholic beverages and sugar beverages. This tax aims to discourage the consumption of these products while generating additional revenue for the government. The IS will be levied separately from the IBS and CBS, and its rates and regulations are expected to be detailed in the forthcoming legislative guidelines. The introduction of the IS complements the broader objectives of the tax reform by targeting specific consumption behaviors and aligning with public health and social policies. Businesses dealing in goods and services subject to the IS will need to account for this additional tax in their pricing and compliance strategies, further emphasizing the need for comprehensive preparation and adaptation to the new tax environment in Brazil.
It is anticipated that several bills will be necessary to fully implement the new rules and ensure a smooth transition. The first bill, which outlines the foundational aspects of the IBS and CBS, has already been voted on and approved by the Lower house. It is currently under review by the Upper house (Senate), where numerous amendments are being proposed and debated. The extensive discussions and required modifications mean that the timeline for full approval remains uncertain. Businesses and stakeholders are closely monitoring the legislative process, as the finalization of these regulations will be crucial for understanding the complete impact of the tax reform and preparing for its implementation.
A. At a glance
Names of the taxes
Local names
State value-added tax (ICMS)
Federal value-added tax (IPI)
Municipal service tax (ISS)
Federal social contributions (PIS-PASEP/COFINS)
Imposto sobre circulação de mercadorias e serviços (ICMS)
Imposto sobre produtos industrializados (IPI)
Imposto sobre serviços (ISS)
Contribuição para os programas de integração social e de formação do patrimônio público (PIS-PASEP)
Contribuição para o financiamento da seguridade social (COFINS)
Date introduced ICMS 1989 IPI 1964 ISS 1968
PIS-PASEP 1970 COFINS 1991
Trading bloc membership MERCOSUR
Administered by
Brazilian Ministry of Finance (IPI, PIS and COFINS) (http://www.fazenda.gov.br)
Internal Revenue Service (IPI, PIS and COFINS) (http://www.receita.fazenda.gov.br)
Exclusion of ICMS from the PIS and COFINS calculation basis. For a long time, the national courts have discussed the exclusion of ICMS from the PIS and COFINS calculation bases levied on local transactions. On 15 March 2017, the Brazilian Federal Supreme Court (STF) ruled that the inclusion of ICMS in the social contributions (PIS and COFINS) tax bases is unconstitutional. On 13 May 2021, the Supreme Court (STF) decided that the rule should apply from the publication of the decision (ex nunc), except for the taxable persons who had previously filed a lawsuit or administrative request on the matter. Currently all taxable persons subject to the PIS/COFINS and to ICMS can exclude the amount of the ICMS from the PIS and COFINS calculation bases.
Federal VAT. The federal VAT (IPI) is charged by Brazil’s federal government on national and imported goods. IPI applies to the following taxable events:
• The shipment of goods from an industrial establishment (or deemed as industrial by the law) in Brazil
• The customs clearance of goods
The IPI law provides for several tax incentives if the shipment of goods is related to an export, a sale to a trading company or to plant expansion plans. IPI tax incentives include the exemption of operations and the granting of tax credits.
Municipal service tax. The municipal service tax (ISS) is a form of sales tax payable to municipalities in Brazil. It applies to the supply of any service that is not otherwise taxable by the state authorities (ICMS). The general list of taxable services is outlined in federal law (complementary law).
A foreign company providing services fully provided outside Brazil for the benefit of a Brazilian recipient may be subject to ISS (withheld by the Brazilian entity) even if a nonresident pays for the services.
ISS is a single-stage tax with no right of recovery for ISS previously paid. Consequently, regardless of status, the recipient of a service subject to ISS bears the tax paid as a cost.
In general, ISS is due to the municipality where the service provider is located. One of the exceptions applies to construction services. ISS is levied on construction services in the city where the construction takes place.
Federal social contributions. PIS-PASEP and COFINS are social contributions based on turnover, which are levied on companies’ gross revenue, monthly. Exports are not subject to PIS-PASEP and COFINS.
Import operations (of goods and services) are also subject to PIS-PASEP and COFINS.
PIS-PASEP and COFINS rates may vary depending on the company’s activity and on the revenue received.
Effective use and enjoyment. To avoid instances of non-taxation or double taxation, jurisdictions can apply “use and enjoyment” rules that allow a service that is “used and enjoyed” in the jurisdiction to be taxed or prevent a service that is “used and enjoyed” outside the jurisdiction from being taxed. If a service is taxed in the jurisdiction under the “use and enjoyment” provisions, a non-established supplier of the service may be required to register for VAT in every jurisdiction where it has customers that are not taxable persons. In Brazil, no services are subject to the “use and enjoyment” provisions.
Transfer of a going concern. Normally the sale of the assets of a VAT-registered or VAT-registrable business will be subject to VAT at the appropriate rate. However, a transfer of a business as a going concern (TOGC) may be outside the scope of the tax under certain conditions. A TOGC is the sale of a business or part of a business capable of separate operation, including assets. Where
Reduced rates generally apply to items of basic necessity, such as food.
The rate of ICMS that applies to imported goods is the same rate that applies to supplies of goods made within the state, except that the tax base for imported goods includes any IPI and import duty payable at import, PIS and COFINS and every other custom cost that was charged to the buyer. ICMS does not apply to exported goods.
The ICMS rate on a supply of goods or services made to an ICMS taxable person resident in a different state from the state where the supplier is resident depends on where the customer is located.
• A rate of 7% generally applies to supplies of locally produced goods (with low content of imported inputs) made to taxable persons resident in states located in the northern, northeastern and central eastern regions of Brazil and in the state of Espírito Santo.
• A rate of 12% generally applies to supplies of domestic goods (with low content of imported inputs) made to taxable persons located in the states in the southern and southeastern regions of Brazil (except in the state of Espírito Santo).
• A rate of 4% generally applies to supplies of imported goods or locally produced goods with high content of imported inputs made to taxable persons located in all other states.
If the supply is made to a customer located in another state who is not an ICMS taxable person (including digital economy), the supply is taxed at the same rate as transactions made within the customer’s state (i.e., the internal rate) and VAT is to be assessed and collected in two portions, as follows:
• To the state where the seller is located in the amount equivalent to the interstate rate that would apply in a supply to a regular taxable person.
• To the state where the customer is located in the amount equivalent to the difference between the customer’s state internal rate and the interstate rate.
Some items, such as horticultural products and certain medicines, are exempt from ICMS.
IPI. IPI rates vary from a zero-rate (0%) to 300%. The rate of IPI depends on the classification of the goods under the IPI Tariff Table. The table contains many different classification codes. The IPI Tariff Table uses the same tariff classification system as the Brazilian External Tariff Code (TEC or BTEC).
The rate of IPI varies depending on how essential the product is. For example, the zero rate of IPI applies to essential products such as rice and wheat flour, a low rate of IPI (8%) applies to certain products, such as pipes, and the highest rate of IPI (300%) applies to “superfluous” or luxury products. Some goods are exempt from IPI. In other cases, essential products may benefit from a reduced tax base (which reduces the effective rate of tax) or a deferral or suspension of the tax due.
ISS. The rate of ISS varies among Brazil’s 5,564 municipalities. The ISS law sets the maximum rate at 5% and Federal Constitution brings the minimum rate, which is 2%. The rates also depend on the type of service and the municipality where it is provided.
PIS-PASEP and COFINS. The PIS-PASEP rate is 0.65% for taxable persons taxed under the deemed corporate income tax method of calculation or under the cumulative system and 1.65% for taxable persons taxed under the annual actual income tax method or under the noncumulative system (without credit entitlement and with credit entitlement, respectively). On imports the PISPASEP rate is 2.1% for goods and 1.65% when importing services.
The COFINS rate is 3% for taxable persons taxed under the deemed corporate income tax method of calculation or under the cumulative system and 7.6% for taxable persons taxed under the annual actual income tax method or under the noncumulative system. On imports, the rate of COFINS is 9.65% for goods and 7.6% when importing services.
Capital goods. For PIS/COFINS, capital goods that allow the recovery of credits are machinery, equipment, tolls and building constructions. Commonly, the credits are booked at once – at the time of purchase, calculated over the value of the capital good (for building construction the company must take advantage of the credit for a 24-month period).
For ICMS purposes, the company is allowed to recover the amount related to machinery, equipment and tools only if related to the assembly of the goods. (Must take advantage of the credit for a 48-month period). There are no capital goods for IPI.
Refunds. If the amount of input tax recoverable exceeds the amount of output tax payable, the excess is generally not refunded. However, the excess may be used to offset tax payments in the following months or may be transferred in certain cases to a third party (transference is only allowed to the ICMS). IPI and PIS/COFINS credits are not eligible for transferring.
Pre-registration costs. Input tax incurred on preregistration costs in Brazil is not recoverable. A company must be properly registered as a taxable person to acquire assets and stock or inventory. Therefore, any such acquisitions will generate tax credits (when applicable), which will be recorded in the tax books and will be offset against the debts raised on the outbound supply of the goods/services. Before a company has the status of a taxable person, it should not be able to acquire assets or inventory.
Bad debts. Output tax accounted for on supplies that do not get paid by the recipient (i.e., bad debts) cannot be recovered in Brazil.
Noneconomic activities. Input tax incurred in relation to noneconomic activities is not recoverable in Brazil.
G. Recovery of VAT by non-established businesses
Input tax incurred by non-established businesses that are not registered for VAT in Brazil is not recoverable.
H. Invoicing
VAT invoices. An ICMS, IPI or ISS taxable person must generally provide a VAT invoice for all taxable supplies made, including exports. A VAT invoice is necessary to support a claim for input tax deduction for ICMS and IPI. Companies must specify on invoices and receipts the taxes charged that are part of the total amount of the product sale price. Companies must list the amount of municipal, state and federal taxes levied for each product described on the invoice or receipt. Also, such information may be displayed in plain view at the invoices issued. Companies that fail to comply with this requirement will be subject to penalties, such as monetary fines or the suspension or revocation of the license to operate.
Credit notes. A credit note (i.e., input invoice) must contain the same information as a VAT invoice, but it is not valid in all situations. The credit note must reflect a genuine mistake, an overcharge or an agreed reduction in the value of the original supply. A credit note must be issued within one month after the mistake or overcharge is discovered. The credit note should also refer to the number and date of the original VAT invoice.
Electronic invoicing. Electronic invoicing is mandatory in Brazil for all taxable persons.
Scope of electronic invoicing. For B2B, B2C and business-to-government (B2G) supplies, electronic invoicing is mandatory for all taxable persons in Brazil. There is no threshold beyond which taxable persons are required to adopt electronic invoicing in Brazil. Businesses selling goods or rendering services in Brazil must issue each invoice electronically. Note that general information must be provided in the invoice, such as vendor address and telephone number, invoice number and series, nature of operation, invoice date and taxable person registry number.
only the Simples Nacional tax regime (see above), which is applicable depending on the company’s revenue.
Supplementary filings. No supplementary filings are required in Brazil.
Correcting errors in previous returns. Since all ancillary obligations are submitted online, a taxable person may correct any errors/misunderstandings in its reports. This can be done voluntarily or by tax authorities’ demand. Usually there is no need to formally notify the tax administration that a correction has been made.
Digital tax administration. Most of Brazil’s ancillary obligations are filed digitally. Taxable persons are obliged to file the following before the tax authority:
• Digital invoicing (real time)
• EFD contribuições (for PIS and COFINS)
• EFD fiscal (for ICMS and IPI)
Digital invoices are issued in real time and automatically sent to tax administration. However, EFD Contribuições and EFD Fiscal are sent monthly. They are all electronic obligations that must follow a very specific and strict layout set out by tax authorities.
With these files in hands, the authorities can perform their verifications and identify any potential gaps/issues in the reports. Usually, the amount of collectable taxes is analyzed by a standard deviation method by the tax administration. However, that being said, if a significant reduction of taxes is identified on a taxable person’s report, the tax authority will evaluate and ask for more information before validating.
J. Penalties
Penalties for late registration. The penalty for late registration in Brazil varies according to each local legislation. For the federal tax ID, there is no direct penalty for obtaining the late registration, but indirectly for not sending the necessary information that would have to be send once the tax ID should have been opened.
Penalties for late payment and filings. ICMS. A fine of 1% calculated over the total amount of the operations is due when a late filing occurs and 20% (maximum) of the uncollected amount.
IPI. The penalty for the late payment is 20% maximum of the uncollected amount and 1% of total revenue when the filing is delivered after it’s due.
ISS. ISS penalties may vary depending on the municipality and on the type of irregularity. In the São Paulo municipality, the fine varies from limited to 20% if paid before questioned by the tax authorities and is 50% to 100% of the ISS due after a verification is open.
PIS-PASEP and COFINS. The penalty for the late payment is 20% maximum of the uncollected amount and 1% of total revenue when the filing is delivered after it’s due. The penalty for an error uncorrected is a fine of at least 75% of the tax due. However, it may be reduced to 20% when voluntarily disclosed by the taxable person.
Penalties for errors. ICMS. The penalty for errors in Brazil varies according to each local legislation. For instance, in the São Paulo municipality, fines are 50% and 100% of the value of the transaction, dependent on the error.
IPI. The penalty for an error is a fine of 75% of the tax due.
ISS. ISS penalties may vary depending on the municipality and on the type of irregularity. For instance, in São Paulo municipality, fines range from 10% to 100% of the ISS due.
PIS-PASEP and COFINS. The penalty for an error uncorrected is a fine of 75% of the tax due. If the error is corrected voluntarily, no penalty applies.