Brazilian consumption taxes are highly complex. Different levels of government have the authority to levy taxes on consumption, leading to the coexistence of multiple taxes, each governed by distinct rules. This complexity creates numerous challenges, such as tax competition between states and conflicts of jurisdiction among different tiers of government.

Despite doubts about the possibility of tax reform in Brazil, the long-awaited simplification of the tax system has finally been enacted after nearly four decades of discussions and several unsuccessful attempts.

Current Brazilian consumption tax system

The Brazilian Federal Constitution of 1988 granted the authority to levy consumption taxes to all levels of government — federal, state, and municipal. As a result, Brazil operates with multiple layers of taxation, with various taxes existing concurrently. This constitutional framework delineates the division of taxation responsibilities regarding goods and services.

Brazilian tax reform

On 20 December 2023, Brazil approved the long-awaited reform, replacing the existing consumption taxes with a dual VAT system comprising a subnational VAT (imposto sobre bens e serviços, IBS) and a federal VAT (contribuição sobre bens e serviços, CBS). Both federal and subnational VAT will share key features, such as the taxable transaction and base, and will operate on a non-cumulative basis following the destination principle.

Implications for foreign remote sellers

Foreign remote sellers currently have no tax compliance obligations in Brazil. Unlike many other countries, Brazil has not implemented special regulations mandating remote sellers to collect Brazilian consumption taxes on digital services provided to Brazilian customers.

Although the proposed reform does not explicitly outline rules for foreign sellers of digital services, some initial insights can be drawn based on its overarching principles. Under the Brazilian dual VAT system, taxable transactions will include both domestic and import transactions involving tangible goods, intangible goods, and services. The destination principle will apply to both cross-border transactions and domestic ones, but the criteria for determining the customer’s location will be specified in the complementary law. As a result, services provided by foreign sellers will be subject to taxation in Brazil. However, the specific tax collection mechanism Brazil will adopt has yet to be determined. If tax collection obligations are imposed on foreign sellers, they will face significant challenges in determining the customer’s location and the applicable tax rate, which may vary from one municipality to another.

Concluding remarks

The Brazilian tax reform aims to address long-standing issues of tax competition and jurisdictional conflicts among different levels of government. Once fully implemented, it is expected to simplify taxation and enhance tax administration and compliance. The new system will align more closely with international tax principles and will also encompass digital services provided by remote sellers to Brazilian customers. However, clarity is still needed regarding the application of tax collection responsibilities. Furthermore, the tax reform is anticipated to stimulate foreign investments in Brazil. Many companies interested in investing in the country currently hesitate due to the complexity of the tax system. However, the cost reductions resulting from the reform may lead to increased interest in establishing a local presence in Brazil.

By Aleksandra Bal via Forbes

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