The recently approved tax reform represents a significant milestone in Brazil’s fiscal landscape, introducing key guidelines of simplification, transparency, and efficiency in consumption taxation. Its primary goal is to reduce the complexity of the current system by consolidating taxes and promoting greater economic neutrality.

Key Changes

1. Implementation of the Dual VAT (IVA Dual)
The new framework replaces several existing taxes: PIS, Cofins, and IPI (which will be reduced to zero, except for products manufactured in the Free Trade Zone of Manaus) will be consolidated into the Contribution on Goods and Services (CBS), while ICMS and ISS will merge into the Tax on Goods and Services (IBS).
Additionally, the reform introduces the Selective Tax (IS), levied on goods and services deemed harmful to health or the environment, serving an extrafiscal purpose.

Core Tax Principles

The reform is based on three fundamental principles:

• Neutrality – Taxes should minimally interfere with consumption or economic decisions, enabling efficient allocation of resources.

• Full Non-Cumulativity – Allows effective tax credits, reducing distortions across the production chain. Taxes will be non-cumulative, permitting taxpayers to offset amounts owed with those paid on all previous operations involving goods (material or immaterial) or services, with limited exceptions (e.g., personal use and consumption).

• Destination-Based Taxation – Taxes are collected where final consumption occurs, ensuring fairer revenue distribution among states and municipalities.

Impacts and Benefits

The new structure simplifies tax legislation, reducing the diversity of levies and fostering greater transparency in tax collection.
The split payment mechanism—collection at the time of financial settlement—has the potential to reduce credit accumulation and combat tax evasion.
Other expected measures include cashback programs for low-income populations and reduced rates for essential goods such as basic food items.

Challenges and Considerations

Despite the benefits, several challenges may arise:

• Service Sector Tax Burden – The combined IBS and CBS rate could reach 26.5%, significantly impacting service providers.

• Taxation of Non-Revenue Transactions – Leasing, transfers, swaps, licensing, and similar operations may face higher tax burdens, requiring business model adjustments.

• Business Adaptation – Companies must implement new fiscal processes, review tax planning, and upgrade systems to comply with the new rules.

• Regulation and Compliance – Details on enforcement and ancillary obligations remain pending, adding uncertainty to the transition period.

Opportunities and Strategic Planning

For businesses, careful planning is essential. Key steps include:

• Mapping Tax Credits – Identifying opportunities to leverage accumulated credits.

• Internal Process Review – Assessing impacts on production chains and pricing strategies.

• System and Documentation Updates – Adjusting tax parameters and technology to meet new requirements.

• Monitoring Complementary Regulations – Staying informed on forthcoming legal definitions to ensure compliance.

Conclusion

Brazil’s 2025 tax reform marks a major step toward a simpler and more transparent tax system, while posing significant implementation challenges and potential sectoral impacts.
Adopting proactive strategies—such as detailed planning, continuous monitoring of regulations, and efficient tax management—will help businesses mitigate risks and capitalize on opportunities within the new fiscal reality.