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Brazil ICMS tax substitution changes proposal

  • VAT
  • 29 April 2014 | Richard Asquith

Brazil ICMS tax substitution changes proposal

The Brazilian government is looking at extending the tax substitution scheme on Brazilian ICMS (VAT) to include small and medium sized enterprises. This comes as Brazil slips into recessions, and its indirect tax regime remains amongst the most complex in the world.

ICMS changes

Tax substitution is a process used by the Brazilian states to help them simplify the calculation and collection of Imposto sobre Circulação de Mercadorias e Serviços (ICMS). Instead of charging and collecting ICMS throughout the production chain, States instead make an assessment of the value added tax by product and industry sector, and charge that instead. Typically under the value added margin technique, the tax office will estimate the final selling margin and assess that. The final seller of the product can eventually reclaim the differences

Brazilian States over estimate tax substitution

Many states have been rapidly extending the net of sectors (currently over 40) that they include in tax substitution regime, and it now accounts for over 30% of states’ revenues. However, there are frequent complaints that tax offices overestimate the final resale value leading to excessive tax bills and long administrative delays in seeking refunds.

The new proposed changes would force states to collect the estimate tax substitution from small and medium sized enterprises (SME). The states are against this as they believe the marginal increase in tax revenues would be more than offset by the increased administrative costs of having to deal with hundreds of thousands of SMEs.


VP Global Indirect Tax
Richard Asquith
VP Global Indirect Tax Richard Asquith
Richard Asquith is VP Global Indirect Tax at Avalara, helping businesses understand their compliance obligations as they grow globally. He is part of the European leadership team which this year won International Tax Review's Tax Technology Firm of the Year. Richard qualified as an accountant with KPMG in the UK, and went on to work in Hungary, Russia and France with EY.