The Main Changes of the Tax Reform
The Tax Reform was approved on July 6 through PEC 45/2019 and is now under review by the Federal Senate. The proposal approved by the Chamber of Deputies brought a roadmap of legal adaptations to be implemented with the aim of simplifying the current tax system in force.
The main measure is the creation of a tax VAT (Value Added Tax), in a dual, which will replace the current five main federal, state, and municipal taxes:
CBS (Contribuição sobre Bens e Serviços, Contribution on Goods and Services): It will replace the federal taxes PIS, COFINS, and IPI
IBS (Imposto sobre Bens e Serviços, Tax on Goods and Services): it will replace ICMS (state-level) and ISS (municipal-level)
The rate that will define both taxes still depends on a Complementary Law, but in general terms, taxation will follow the premises below:
- The simplification of the tax process across the supply chain, eliminating cascading effects and reducing complexity throughout the entire process by unifying rates, thereby eliminating the numerous differentiated tax rates currently applied to each product depending on its origin, destination, composition, etc.;
- Around 40 points of the Reform will depend on Complementary Law, to be defined and drafted after the approval of the PEC;
- Preliminary analyses suggest that the VAT rate could reach 28% in order to maintain current revenue levels;
- The preliminary text provides that taxation will work with three rates: a standard rate, a reduced rate, and a zero rate, depending on the segment and type of product;
- The transition between the new taxes and the current ones will be carried out in stages, beginning in 2026. There will be a transition period during which the current taxation will coexist with the new taxation, until 2033, when full implementation of the new tax model is reached and the existing tax rules cease to apply.
Creation of Compensation Funds:
Tax Benefits Compensation Fund:
The fund will compensate for tax benefits already granted, which will remain guaranteed until 2032.
Regional Development Fund (FDR)
Created to reduce regional inequalities and stimulate productive and infrastructure activities, as well as scientific and technological development across Brazilian regions.
Creation of a Federative Council:
There will be the creation of a Federative Council for the management of taxes, composed of the 26 States plus the Federal District, as well as 26 representatives of municipalities.
But How Could the Reform Impact My Company?
Sectors Benefiting from a Reduced Rate:
- Transportation: urban collective public transport services;
- Education;
- Agribusiness: agricultural, fishing, forestry, and vegetable extractive products in natura, as well as agricultural inputs, food intended for human consumption, and personal hygiene products;
- Pharmaceutical industry: medicines, medical devices, and healthcare services; some medicines may be subject to a zero rate, such as medicines intended for the treatment of cancer, for example;
- Arts and culture: artistic and cultural activities.
Sectors Facing a Higher Tax Burden - Selective Tax (IS):
- Cigarettes;
- Alcoholic beverages; and
- Other products considered “nocivos à saúde” (harmful to health) will face increases in taxation across the entire process: importation, production, and distribution, impacting final consumer prices.
Special Taxation:
- Fuels and Lubricants: rates will be uniform and charged in a single phase, and there will be the possibility of granting tax credits;
- Financial Services, real estate, healthcare, and others will have differentiated rates, with the possibility of taxation based on revenue or turnover;
- Taxes on inheritances, real estate, and motor vehicles will require complementary laws to be enacted; however, they are expected to be progressive according to the value of the assets and should also cover aerial and maritime vehicles.
The tax reform will not change the current rules for:
- The Zona Franca de Manaus (Manaus Free Trade Zone); and
- The Simples Nacional;
ITCMD - Causa Mortis Transfer and Donation:
The rates currently applicable to ITCMD (Causa Mortis Transfer and Donation Tax) may increase by more than 100% following the implementation of the Tax Reform. The tax is expected to be progressive, imposing higher percentages on higher-value properties and causing significant impacts on companies, rural agribusiness areas, domestic corporations, and other properties in future succession proceedings, inheritances, and donations. Currently, in São Paulo, for example, the applicable rate is 4% and may reach 8% for properties valued above R$ 1,733,160.00.
General Conclusions and Analyses:
The main objective of the reform, which seeks the simplification of complex taxes, responsible for cascading taxes and differentiated rates by product, segment, material composition, origin, and final presentation, which generated enormous complexity and a very significant volume of tax litigation, seems to have been addressed through the creation of the CBS and IBS taxes.
This is the moment to analyze all tax opportunities and tax planning strategies, including tax credits left unclaimed in recent years. The legislative shift may provide unique and significant opportunities for companies, with extremely positive impacts on business. There will be a significant window of opportunity opening now, one that has an expiration date. This window is expected to narrow as the new rules begin to take effect.
Another important area that will be impacted by the reform is business succession, the costs related to inheritances and assets, given the very clear signal from the government that there will be a significant increase in ITCMD (Causa Mortis Transfer and Donation Tax). The rate currently in effect in the State of São Paulo is 4% (ranging from 2% to 8% depending on the Brazilian state) and is expected to undergo significant changes, with a projected rate of 8% for properties valued above R$ 1,733,160.00. Many companies are turning to Apter to find out the best way to protect their assets and act proactively to avoid significant losses following the implementation of a new ITCMD rate. The following will be directly affected: small and mid-sized domestic companies, family corporations and there will also be a significant impact on farmers and landowners and managers in the agribusiness sector, with the possibility of very high taxation following the implementation of the new ITCMD rates at the time of conducting an inventory of large tracts of land for purposes of inheritance or asset division.
A Apter is analyzing all information regarding the tax reform and will remain vigilant in alerting its clients about the obligations, opportunities, and impacts of the various topics addressed in the reform text, as well as any amendments arising from the Federal Senate's review of the texts and definitions encompassed in PEC 45/2019.
You can count on Apter to be by your side throughout the entire process of transition, through full implementation and its outcomes for the entire Brazilian production chain.
Want to know how your company may be impacted and how to navigate the Tax Reform transition?
Click here: Tax
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