The tax reform in Brazil: Main characteristics and potential impacts on the Brazilian economy



  • An important stage of the process aiming at establishing a legislation that will simplify consumption taxation in Brazil was recently fulfilled.
  • Reducing the complexity of the Brazilian tax system should bring benefits to economic activity in the country and foster the inflow of foreign investments.
  • However, once approved the impacts of the reform should only be felt in the longer term, as changes will occur gradually and their effects tend to be smaller in the short term.
  • There is also uncertainty about some important aspects of the reform and concerns about the impact of exceptions granted to specific segments.


The recently approved tax reform in the Chamber of Deputies is a proposed constitutional amendment that modifies consumption taxation. The reform aims to replace five current taxes with two new taxes. The objective is to simplify the tax system, reduce distortions and enhance transparency. The proposal also suggests the creation of two funds, one dedicated to promoting regional development and the other focused on compensating for the fiscal benefits that will be abolished after the reform takes effect.

The tax reform has been a highly relevant topic in economic policy in Brazil due to the fact that experts consider the current tax system to be highly complex because it is: 1) largely cumulative (resulting in the penalisation of sectors with longer production chains, such as many manufactured products), 2) highly influenced by origin-based taxation (resulting in the burdening of investments and exports and encouraging the so-called fiscal war between states) and 3) based on multiple rates (resulting in lower transparency for consumers and increased litigation).

The reform currently under discussion in Brazil aims to address these issues by adopting non-cumulative taxation, destination-based taxation and the establishment of three rates: standard, reduced and zero.


On 7 July, the Chamber of Deputies approved, in two rounds, the first phase of the tax reform, which overhauls consumption taxation. The Constitutional Amendment Proposal will now proceed to the Senate, which may make changes to its entire content. In the Senate, the reform text needs to be approved in two rounds by at least three-fifths of the legislators. The Senate vote is expected to take place during the second half of the year. If significant changes are made to the text, the Constitutional Amendment Proposal will return for voting by the Chamber of Deputies. This is expected to happen and final approval of the proposal should occur in December.

The tax reform is highly relevant because the complexity and lack of transparency of the current tax system represent obstacles for businesses and make Brazil less competitive. Experts consider Brazil's tax collection system to be one of the most complex in the world, with too many rules, numerous exceptions and high compliance costs. For companies, paying taxes in Brazil often requires dozens of tax lawyers. As a result, a significant amount of resources is wasted in the Brazilian economy due to inefficiency.

Recent studies indicate that Brazil has nearly 30,000 existing tax norms, resulting in an average of more than 4,000 norms for each sector of the economy. A notable consequence of the distortions in the current tax system is the high level of litigation.

The proposed constitutional amendment, if definitively approved by Congress, will simplify consumption taxes and represents the first stage of the tax reform. The legislation under discussion at the moment envisages that 180 days after the current changes to the law are promulgated, Congress will also need to reformulate other aspects of the tax system, such as income tax and taxes on dividends, which currently remain unchanged.

The main change in this first phase of the reform will be the elimination of five taxes. Three of them are federal and two are subnational. These taxes will be replaced by a dual value-added tax (VAT), consisting of the Contribution on Goods and Services (Contribuição sobre Bens e Serviços, or CBS) and the Tax on Goods and Services (Imposto sobre Bens e Serviços, or IBS). The federal government sets the CBS rate, while states and municipalities define the IBS rate.

So far, three types of rates have been defined: a standard rate (full value), a reduced rate and a zero rate. The last two rates will be applied to highly important products, such as certain medicines and educational services.

Another tax that will be created is the Selective Tax, an additional tax that will be applied on goods and services that cause harm to the health or the environment. According to the latest version of the text of the reform, this additional tax will be charged on top of the IBS on products such as cigarettes, alcoholic beverages and sugary foods.

The taxes will be charged at the destination, as a percentage added to the final value of the good, and no longer at the origin (location of production) as in the current system. At present, in Brazil a product or service is taxed multiple times throughout the production-distribution chain. As a consequence, the current tax collection system in Brazil does not allow for a precise calculation of how much tax is levied on each product or service. Often, the value that appears on receipts is an estimate.

Cumulativeness is also pointed out as detrimental to Brazilian exports because exporting companies cannot offset part or all of the taxes paid throughout the production chain. As a result, products made in Brazil are often more expensive and less competitive in the international market.

The proposal also includes the implementation of a cashback of part of the tax paid by low-income individuals. Details about who will be eligible to receive the cashback and the specific rules for this refund will be defined in a complementary law.

The reform proposes two transitions for the new tax system. The transition from the old taxes to the new ones begins in 2026 and ends in 2032. The transition from origin-based to destination-based taxation will take place gradually over 50 years (2029 to 2078).

The goal of the reform being discussed is not altering the Brazilian tax burden. Therefore, after the reform, Brazilian taxpayers will pay approximately the same amount in taxes as they do today, and the government would continue to collect similar amounts. The economic gain for Brazil would result from the increased efficiency of the system.

One of the main points of the reform that is not currently being discussed is the value of the tax rates. Initially, Congress is working to approve a reform to the Brazilian Constitution that changes the structure of the tax system.

After approval of the reform, it will be necessary to pass a complementary law that provides details about the new taxes. Only after defining the various aspects related to the complementary law will it be possible to determine the standard rate that will be charged. The initial estimate was that the rate in Brazil would be 25% (a level similar to that adopted in developed countries). However, an expansion of the list of goods and services that will have a reduced or zero rate may result in an even higher standard rate.


The tax reform has been on the agenda of the Brazilian government for decades. The discussion on the subject presents significant difficulties due to the high diversity of interests involved. For example, mayors of large cities are concerned about losing revenue, while governors seek compensation for the loss of political power and decision-making autonomy to grant tax incentives. Additionally, certain sectors of the economy fear losing fiscal benefits.

In terms of the impact of the reform on sectoral gross domestic product (GDP), it is estimated that the extractive industry, manufacturing and the energy, water and gas sectors will have the greatest positive impacts, while segments of the service sector may have smaller expected impacts (such as trade and information and communication) and even negative ones in some cases (such as transportation and accommodation and food services).

Regarding the impact of groups seeking to influence the outcome of the reform, there is concern among experts about the risk that lobbying efforts may compromise the quality of the legislation to be approved. The concession of privileges to certain sectors (e.g. the classification under reduced tax rates or the creation of special regimes) may weaken the principles of neutrality and generality of the dual VAT and result in a high tax rate for sectors not covered by benefits.


The current reform prevents states from defining different rates, which should put an end to the so-called fiscal war, the name given to disputes between states in Brazil to attract investments through the granting of tax incentives. With the tax reform, future changes in tax rates will have to be approved by the Federal Council for Tax on Goods and Services (Conselho Federativo do Imposto sobre Bens e Serviços), which will be formed by representatives of states and municipalities.

To offset the changes that will follow the end of the fiscal war, the government will create the Regional Development Fund (Fundo de Desenvolvimento Regional) with the objective of financing development projects in less developed states. The Fund should receive R$ 40 billion (approximately € 8 billion at the current exchange rate) a year from 2033 onwards. In addition, the proposed tax reform establishes the creation of a fund to pay until 2032 the tax exemptions that were granted by states within the scope of the so-called fiscal war.


After several years of discussion on the need for a tax reform in Brazil, an important step was recently approved in the country towards a legislation aimed at simplifying and rationalising consumption taxation. The proposed reform in general adopts best tax practices and is built on the pillars of a quasi-unified value-added tax, non-cumulativeness and destination-based taxation.

It is believed that the changes proposed by the reform will lead to greater stability and homogeneity in the tax system, increased economic competitiveness and greater attractiveness for investments in Brazil. The reform is expected to boost economic activity and job creation and reduce litigation. Productivity gains are also anticipated due to the reduced complexity to be encountered by companies in calculating and paying taxes. Studies conducted so far converge in indicating that the potential growth of the Brazilian economy should rise.

Regarding foreign investments, the Brazilian government argues that the reform should result in increased flows to Brazil, as many companies interested in investing in the country give up their plans due to the high complexity of the current tax system. In many cases, foreign companies prefer to produce abroad and access the Brazilian market through exports. With the cost reduction resulting from the tax reform, there may be a greater interest in establishing production units in Brazil.

As a consequence of the liberalisation of resources associated with the high complexity and high litigation of the current Brazilian tax system, it is expected that there will be a decrease in prices in more competitive markets and an increase in profit margins for companies operating in more concentrated ones.

However, the impacts of the reform will only be felt in the longer term, as the changes will occur gradually and their effects tend to be less pronounced in the short term. Additionally, the adoption of the dual VAT may result in the maintenance of a certain level of complexity, reducing productivity gains.

Although the proposed tax reform has been overall positively received by experts in the field, uncertainty surrounding some important aspects of the reform and doubts about how long it will take to regulate all changes result in concern about the effectiveness of text that will be approved. Moreover, experts point out that the exceptions being introduced undermine the quality of the proposed reform.

In summary, the tax reform presently under discussion in the Brazilian Congress aims to simplify the country's current complex tax system, which has long been a significant obstacle to business activity and investment by domestic and foreign companies. Understanding the reform and its possible consequences, as well as monitoring its next stages for approval, is essential so that companies can be prepared for the new tax environment in Brazil.

Finally, it is worth mentioning that the topic is highly complex and technical, and the analysis presented in this text does not cover all elements of the proposed reform. The main characteristics of the reform under discussion have been presented here, and in general terms how the changes in the system should affect Finnish companies doing or intending to do business with Brazil.

Text: ​Rafael Murgi, Co​​ordinator, Commercial Affairs, Consulate of Finland, São Paulo​


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