Brazil’s consumption tax reform: what can be expected?

Thursday 17 August 2023

Pâmela Gottardini
Mattos Filho, São Paulo

Alberto Carbonar
Mattos Filho, Brasília


On 6 July 2023, the Brazilian House of Representatives approved the Constitutional Amendment Bill No 45/2019 (Consumption Tax Reform) after two plenary voting rounds. The bill is set to overhaul consumption taxation and reform specific aspects of wealth taxation.

After its approval by the Brazilian House of Representatives, the Consumption Tax Reform will be analysed by the Federal Senate in the coming months. It may be approved by the end of 2023.

This constitutional amendment reflects a dialogue between Brazilian society and the legislative and executive branches that has lasted for more than 30 years. This breakthrough occurred against the backdrop of an evident need – and the build-up of consensus in the country – for the modernisation and simplification of the Brazilian tax system.

This article presents an overview of the Consumption Tax Reform under discussion before the Brazilian Congress, and addresses the main concerns and expectations related to its approval and future execution.

Overview of the Consumption Tax Reform

The Brazilian tax system is extremely complex. It is composed of various overlapping subsystems, for which the competence to legislate is executed at federal, state and municipal levels. Compliance with tax obligations is also challenging due to the numerous legislation enacted every day that creates new rules, or amends or revokes the existing ones. This frequently leads to uncertainty in identifying accurate interpretations and applications of tax legislation. This complexity and bureaucracy increases the cost of doing business in Brazil and leads to a culture of litigation.

The Consumption Tax Reform intends to simplify the consumption tax system by unifying certain taxes, as well as reducing the bureaucracy and the high volume of tax litigation before Brazilian courts. The main proposed changes are as follows.

Creation of new taxes in substitution to certain existing ones

The Consumption Tax Reform foresees the creation of:

  • a dual value-added tax (dual VAT), with a federal contribution on goods and services (CBS) substituting for the federal social contributions (Pis/Cofins);
  • a state and municipal tax on goods and services (IBS) substituting for the state VAT (ICMS) and the service tax (ISS);
  • a selective tax on goods deemed harmful to health or the environment[1] substituting for excise tax (IPI); and
  • a state contribution tax on primary and semi-finished goods, which will finance infrastructure and housing works.

New rules for the charging of dual VAT include:

  • competence to collect: the federative entity where the provision of the good or service will occur will be charged tax (destination principle);
  • a broad tax basis, including tangible and intangible goods, rights and services;
  • the non-cumulative principle, which intends to ascertain full use of tax credits; and
  • the tax rates: even though the text does not expressly indicate the rates applicable to the new taxes, it establishes that a reference rate will be defined by a resolution of the Federal Senate, both for CBS and IBS. Each federative entity may establish its single rate for goods and services by law and consider (or not) the reference rate. Moreover, the IBS rate will be the sum of the municipal and state rates.

Creation of a National Council in substitution to state/municipal existing bodies

This council would be composed of Brazil’s states, municipalities and the Federal District, and would be competent to: legislate on IBS; establish standards for the interpretation and application of legislation; collect taxes; inspect; and conduct litigation procedures.

Prevention of the granting of tax benefits and creation of compensation funds

As a rule, the granting of benefits is not allowed, but exceptions in rates for IBS/CBS are authorised for specific services and products.[2] Due to the impacts related to the restraint of the grant of tax benefits, funds will be created to compensate for the losses.

Finally, the approved text establishes that the transition will take place from 2026 (with the creation of CBS and IBS) and will continue until 2033, which will mark the end of coexistence between the new and the old regime for taxpayers.

The text also establishes that, once the constitutional amendment is enacted, the executive branch has 180 days to submit a bill on income tax reform to Congress. The forecast is that the text will still change before its voting by the Senate, which is expected to occur this year.

What can be expected? Concerns and opportunities

The Consumption Tax Reform intends to change structural principles that will lead to the simplification of the tax system. This will affect the autonomy of the federative entities to legislate and inspect taxes, and the way the companies do business. Once the new tax system is in place, there will be significant changes related to the business environment in view of the tax benefits that could be enjoyed.

Currently, the states and municipalities compete to attract industries and businesses to their regions and jurisdictions through the granting of tax incentives. Consequently, companies plan their business by seeking to apply potential lower tax burdens for their activities.

As the new regime narrows the granting of tax benefits only to specific services and products and the current tax benefits have a deadline for their term, companies will be encouraged to review their business. In addition, states and municipalities will have their competence amended to the definition of the tax rate, and will be unable to grant any benefits to the companies in their territories at their discretion.

To face these challenges, the approved text establishes two different funds:

  • a tax benefit compensation fund (for taxpayers) to compensate companies with ICMS incentives granted under certain conditions for a fixed period;[3] and
  • a regional development fund to compensate for the loss of tax incentives and attract investments in less favoured regions, prioritising environmentally sustainable projects. The federal government will finance the fund, but the states will decide how to apply the funding.

In general terms, the bill presents a possible increase in the tax burden that will affect different economic sectors and certain types of taxpayers. Before the approval of the text by the House of Representatives, a provision was added to the bill to allow the increase or reduction of the IBS rate based on a calculation to be carried out by the Federal Audit Court through an annual review. This calculation will set the rate applicable to taxpayers, taking into consideration any loss of revenue by the states and municipalities, and the special regimes established by the bill.

In addition, a mechanism named ‘cashback’ has been created to return part of the taxes collected on the price of products and services to low-income groups to reduce economic inequality. However, a future supplementary law will still regulate this mechanism, and many issues are still unresolved, such as implementation rules, participation criteria for obtaining refunds, the target public and refund values.

Moreover, even though one of the goals of the simplification of the tax system is reducing tax litigation, we can still expect that the implementation of the new regime may lead to a wave of new litigation. Despite the general contours introduced in the bill, several relevant points of the new model of IBS and CBS were relegated to future supplementary laws, such as:

  • the definition of tax rates;
  • the transactions for personal use and consumption;
  • the concept of service transactions and their content and scope; and
  • the procedures and deadlines for refunding accumulated credits from old and new taxes.

The Consumption Tax Reform seeks to limit the constitutional text regarding some of the central points of the new model. This is understandable, since it should not be expected that the Constitution continues to exhaustively regulate the matter. However, establishing constitutional guidelines and delegating certain structural points is a critical issue since it may adversely affect several taxpayers’ guarantees enshrined in the Brazilian Federal Constitution, such as the right to property, free initiative and certainty. Brazil has a significant culture of tax litigation due to overly restrictive regulations within the Constitution and the disputes related to its interpretation. Therefore, delegation may lead to uncertainty and generate loopholes, resulting in more litigation.

Despite the delegations, the text of the bill presents innovations on the issue of credit balances, allowing their offset and, in certain cases, their transference to third parties or refund with fewer restrictions than the current regime.

Yet, the provision for ICMS credit balances is still unsatisfactorily addressed, since the reimbursement (which will be defined by a supplementary law) allows for excessively long instalments (up to 20 years) and does not establish monetary restatement of balances before 2033, implying financial losses to taxpayers.


All business sectors and industries in Brazil and foreign investors should be fully acquainted with the impact of this bill, should follow its developments closely during the legislative process and should be prepared to adopt appropriate measures due to the potential effects that may arise.

The possibility that certain aspects could lead to controversies or uncertainty in the interpretation and application of legislation, aggravated by the fact that various issues are being delegated to regulation by a supplementary law, could lead to litigation. Thus, claims are expected based on unlawfulness or restraint on constitutional principles and taxpayers’ guaranteed rights.

Currently, it is not possible to estimate the increase of the tax burden or the effects on different economic sectors and types of taxpayers. This situation will only become clearer with the enactment of a future supplementary law that will define, among other topics, the reference rate of the new taxes, the due process of law for its inspection and dispute resolution, and regulation by federal entities. Considering there are many aspects to be regulated, debate will continue to take place, which will hopefully clarify this reform.


[1] Note that this tax will not be charged on services and products with an IBS and CBS reduced rate.

[2] Currently, the following services and products would benefit from (1) a 60 per cent reduction of IBS and CBS: education, health, medical devices, menstrual healthcare products, agricultural products, artistic, cultural, and journalistic services, and goods and services related to national security and cybersecurity; and (2) up to 100 per cent reduction for: medicines and menstrual healthcare products; the University for All Program (Prouni – CBS only); services benefited by the Emergency Program for the Events Sector (Perse – CBS only) until 2027; and urban recovery activities in historic areas or areas deemed critical for urban recovery and urban rehabilitation (IBS and CBS – can be applied as an exemption).

[3] It is expected that the federal government will contribute up to BRL 160bn (approx $30bn) to the fund until 2032.