Brazil 12% VAT on goods and services proposal

Brazil has launched a proposal (Bill No. 3,887/2020, National Congress) to implement VAT at 12% on goods and services. This would be net of any ICMS and ISS tax (see below). This would replace the complex PIS and CONFINS federal taxes, currently at 9.25%.

Following this first tax reforms phase, IPI would be replaced and reformed. Next, income taxes would be reformed with a new tax on dividends.

The new tax, Contribuição sobre Bens e Serviços 'CBS', will be simpler and easier for businesses to implement and consumers to understand. It will be imposed on imports and domestic sales of goods and services. This would include intangiables imports - so B2C digital services by non-resident providers. Exports will be exempted. There would be the right to deduct CBS incurred by taxpayers. Any credits - excess CBS incurred in a reporting period - would be refunded or offset against other federal taxes.

Financial Services would be subject to Brazilian CBS, and there would be no right to deduct - so retaining its current cumulative effect. Financial services would be subject to a reduced rate of 5.8%. Other supplies, including alcohol, cigarettes, diesel and gas, would also have varying rates.

Businesses would be able to deduct CBS on purchases as with other VAT regimes.

For foreign marketplace platforms, they would be responsible for the CBS on B2C sales, and may have to register in Brazil for this. This would apply to goods and digital services.

The Economics Ministry has said it would come into effect six months after approval by lawmakers.

It would replace the following taxes:

• COFINS, Contribuição Social para o Financiamento da Seguridade Social – the federal tax contribution to the Social Security Financing paid on company revenues. The rate can be up to 7.6% on monthly revenue depending on the activities of the company.
• PIS, Programa de Integração Social, at a rate 1.65% with COFINS together comprise the social contributions levy applicable to transactions.

Two Brazil VAT bills

This new CBS proposal be analyzed alongside the state and local VAT proposals already underway in Congress to create a “unified” package. The two existing Brazilian VAT implementation proposals are:

Senate PEC 110/2019: consolidating existing federal and state taxes into a two VAT levies: a federal VAT on goods and services (Imposto sobre Operações com Bens e Serviços, IBS); and a local state tax on a limited range of goods and services (Imposto Seletivo). This proposal includes a 15-year implementation period. 

Chamber of Deputies PEC 45/2019: a single VAT, IBS, on goods and services at a single rate. This would include a complex shifting of tax collections between states and the federal bodies. OFINS and IBS will be reduced to 2% for two years. In the following 8 years, the other taxes will all be gradually reduced to a single rate for the full launch of IBS.

Other Brazilian consumption taxes

The proposal would not affect local consumption taxes for the time being. These include:

• ICMS, Imposto sobre Operações Relativas à Circulação de Mercadorias e Serviços de Transporte Interestadual e Intermunicipal e de Comunicações – the tax which applies to the movement of goods, transportation, communication services and other general supplies of goods. The current tax level is between 7% and 25%.
• ISS, Imposto sobre Serviços – the municipal tax on the provision of services. The rate ranges to up to 5%.
• IPI, Imposto sobre Produtos Industrializados – the federal tax on manufactured goods. The rate can be up to 300%.