New taxes introduced:
The reform introduces three primary taxes: the IBS, which replaces state tax on the circulation of goods and services (ICMS) and municipal tax on services (ISS); the CBS, which takes over federal employees’ profit participation program / social contribution for social security financing (PIS/Cofins); and the IS, which applies to specific goods and services. These changes aim to simplify Brazil’s historically complex tax system and enhance efficiency in tax collection.
Key features:
One of the major shifts under the reform is that IBS and CBS credits will only be available after the corresponding tax has been paid. This differs from the current system, where credits are often recognized earlier. Additionally, a split payment mechanism will be implemented to combat fraud and tax evasion by ensuring that taxes are withheld at the time of payment. Some industries will retain their special tax regimes, while others, such as the technology and cooperative sectors, will see tailored tax treatments. The reform also introduces reduced rates for essential goods and services, helping to mitigate potential price increases. Importantly, free trade zones such as the Manaus Free Trade Zone will be preserved, maintaining key incentives for businesses operating in these regions. Another critical update is the shift to destination-based taxation for e-commerce and digital services, meaning taxes will be levied where consumers are located rather than where sellers are based.
Presidential vetoes:
Certain provisions in the tax reform were vetoed by the president. For example, exclusions of investment and equity funds from IBS and CBS were rejected. Provisions making purchasers jointly responsible for tax collection were also vetoed, as well as the deferral of taxes on agricultural and aquaculture inputs for certain purchasers without credit rights. Additionally, proposed alternative notification methods in the absence of an Electronic Tax Domicile (DTE) were not approved. Adjustments to the small business tax regime, particularly those affecting Simples Nacional, were also removed.
Transition timeline & implementation
The transition will occur in phases between 2026 and 2033, allowing businesses time to adapt to the new system. Companies must begin preparing by updating their accounting and enterprise resource planning (ERP) systems to ensure compliance. Regulatory oversight will be handled by an IBS Management Committee, which will oversee implementation and rulemaking. Authorities will continue to monitor and refine policies as needed, and Congress will review the vetoes while analyzing Bill 108/24, which establishes the IBS Management Committee.
Challenges & considerations
The transition process will be complex, requiring businesses to overhaul their accounting and compliance systems. Companies must adjust ERP and reporting mechanisms to ensure accurate compliance with the new tax framework. The introduction of the split payment mechanism and credit conditions may also impact liquidity, making cash flow management a key concern. Strategic financial planning will be necessary to mitigate any disruptions.
In addition, the initial adaptation period will likely increase administrative burdens, necessitating extra resources for compliance efforts. Businesses will need to invest in staff training to ensure that employees understand and properly implement the new regulations. Some sectors, such as technology and agribusiness, may lose specific tax incentives, requiring companies to reassess their financial strategies.
For nonresident companies, compliance will also become more complex. US-based and other foreign businesses operating in Brazil must adhere to new tax registration and remittance rules. The reform enforces destination-based taxation, meaning sourcing rules will change. In certain transactions, Brazilian purchasers may be jointly liable for IBS and CBS, making proper documentation essential to avoid compliance risks. To navigate these changes efficiently, companies will need to adopt automated tax compliance solutions.
Implications for businesses
For Brazilian companies, the reform offers simplified compliance by consolidating taxes, but it also requires adjustments to financial planning due to changes in tax rates and calculations. Businesses relying on specific tax incentives must reassess their strategies in response to the new tax framework.
For US-based companies operating in Brazil, the reform brings new compliance obligations. Nonresident businesses must register for and remit IBS and CBS, increasing regulatory responsibilities. Additionally, joint liability risks make proper documentation crucial to mitigating exposure. Companies will need to integrate tax management tools and train their teams to adapt to the new system
Conclusion
Brazil’s indirect tax reform represents a major step toward a streamlined tax system. While businesses will face short-term compliance and cash flow challenges, the long-term benefits include reduced administrative burdens and a more predictable tax environment. Proactive preparation, including system upgrades, staff training, and leveraging tax technology, will be critical for a smooth transition.
