Understanding Brazil's Sales Tax Reform.

Sales Tax Reform: Modernization, Simplification, and Alignment with Best International Practices

The Sales Tax Reform, currently undergoing implementation in Brazil, represents a profound transformation of the indirect tax system. It seeks to simplify, modernize, and align the Brazilian model with the best international practices, promoting greater economic efficiency, legal certainty, and competitiveness.

1. Objectives of the Sales Tax Reform

Simplification: Unification of various taxes (PIS, Cofins, IPI, ICMS, and ISS) into two main taxes:
- IBS (Imposto sobre Bens e Serviços) — Tax on Goods and Services, with shared jurisdiction between states and municipalities.
- CBS (Contribuição sobre Bens e Serviços) — Contribution on Goods and Services, under federal jurisdiction.
Neutrality: Reduction of economic distortions by eliminating cumulative taxation (cascading effects).
Transparency: Greater clarity for consumers and businesses regarding the taxes levied.
Legal Certainty: Reduction of tax litigation through clearer and more consolidated rules.

2. Alignment with Best International Practices

The reform adopts the principles recommended by the Organisation for Economic Co-operation and Development (OECD) and other international bodies:

VAT (Value Added Tax) Model: Broad-based, non-cumulative, and with full financial tax credits, covering all sectors of the economy.
Destination Principle with Uniform Rates: Taxation occurs at the place of consumption, promoting fiscal fairness between states and municipalities.
Broad Base: Reduces room for distortions, sector-specific benefits, and complexity in tax management.
Zero-Rating of Exports: Eliminates the tax residue on exports, aligning with international trade rules.

3. Tax Administration 3.0 and the New Era of Auditing

The implementation of the Tax Reform is also an opportunity for Brazil to advance in the modernization of fiscal processes, adhering to the "Tax Administration 3.0" concept, which is based on:

Total Digitalization: Replacing declarations and ancillary obligations with digital systems that capture information in real-time.
Collaborative Compliance: The relationship between tax authorities and taxpayers becomes more transparent and cooperative, encouraging voluntary compliance.
Data Integration: Efficient data sharing among the Federal Union, states, and municipalities, reducing redundancies and increasing efficiency.
Predictive and Preventive Auditing: Preventive application of the ability to identify risks and prevent fraud.
Process Automation: Significant reduction in the cost of compliance for both companies and the public administration.

4. Challenges and Prospects

Complex Transition: The transition period requires adaptation from both taxpayers and tax authorities.
Technological Capacity: Need for investments in technological infrastructure and personnel training.

5. Conclusion.

The Sales Tax Reform represents a historic advancement for Brazil, aligning the tax system with the best international practices and preparing the country for the era of Tax Administration 3.0. With a simpler, more transparent, and efficient model, the expectation is for a more favorable business environment, with reduced costs, greater legal certainty, and stimulation of sustainable economic growth.

What Changes?

Taxes that will be created:

CBS: Contribution on Goods and Services (Federal);
IBS: Tax on Goods and Services (State and Municipal); and
IS: Selective Tax (Federal)

Taxes that will be abolished:

PIS/PASEP: Contribution for the Social Integration Program and Public Servant Asset Formation Program (Federal);
Cofins: Contribution for the Financing of Social Security (Federal);
ICMS: Tax on Circulation of Goods and Services (State); and
ISSQN: Tax on Services of Any Nature (Municipal).

Selective Tax (IS):

Created to discourage the consumption of goods and services harmful to health or the environment. It applies to the production, extraction, sale, or import of items defined by law. It will come into effect starting in 2027.

Tax on Industrialized Products (IPI):

Starting in 2027, its rate will be reduced to zero for almost all products; it will be maintained only to preserve the competitiveness of the Manaus Free Trade Zone (ZFM).

Transition

2026:

Test year for CBS and IBS;
The amount collected from CBS (0.9%) and IBS (0.1%) will be offset against the amount due for PIS and COFINS in the same settlement period;
The collection of this "test rate" for CBS and IBS in 2026 will be exempt for taxpayers who comply with the ancillary obligations, according to the legislation.

2027 and 2028:

Collection of the CBS, which will be reduced by 0.1 (one-tenth) percentage point - CBS: 99.9%

Extinction of PIS and COFINS;
Reduction of IPI rates to zero on all products, except those that are also industrialized in the Manaus Free Trade Zone (ZFM);
Institution of the Selective Tax (IS): Created to discourage the consumption of goods and services harmful to health or the environment. It applies to the production, extraction, sale, or import of items defined by law.
Gradual collection of the IBS with reference rates.

2029 to 2032:

The IBS will be collected at rates fixed by law;
The rates for ICMS and ISS will be progressively reduced;
During this period, taxpayers will pay both sets of taxes (IBS, ICMS, and ISS), according to a calculation methodology provided by law.

From 2033 onwards:

Extinction of ICMS and ISS;
Full implementation of the IBS.

And what about companies on the "Simples Nacional" regime?

The Simples Nacional (a simplified tax regime) will be maintained. The main change is that adhering to the new tax system (IBS and CBS) will be optional for companies in this regime. They can choose the path that is most advantageous for their business.

Remain fully on Simples Nacional: The company will continue to pay its taxes in a unified manner via the DAS payment slip. The calculation will be adjusted to include IBS and CBS, replacing the old taxes (ICMS, ISS, PIS, Cofins). This is the simplest option with less bureaucracy, but it will not generate full IBS and CBS credit for its buyers. The credit the buyer can appropriate will be limited to the amount actually collected by the company in the DAS.
Opt to pay IBS and CBS under the general regime: The company may choose to pay IBS and CBS "outside" of the Simples, following the same debit and credit rules as companies under the Presumed Profit (Lucro Presumido) or Actual Profit (Lucro Real) regimes. The other federal taxes (IRPJ, CSLL, etc.) would continue to be paid via the unified Simples slip.

The main advantage of opting for the general regime for IBS and CBS is the ability to generate full tax credits for your clients. This can be a significant competitive differentiator, especially for distributors/wholesalers that are on the Simples regime.

During the test period in 2026, Simples Nacional companies are exempt from participating in the phase of reporting the IBS and CBS test rates (0.1% and 0.9%, respectively).

Our Commitment to the Transition

We at Metria Contabil are prepared to assist your company during this transition period. We have the best tools and market expertise to ensure this change is as smooth as possible.