Brazilian Tax Reform – Is This Time for Real?

The Brazilian tax system is largely considered one of the most cumbersome and complex systems in the world.  While there have been rumors of reforming the system over the years it appears the latest effort may have some momentum.  On July 21^st, Paulo Guedes, Brazilian Minister of Economy, presented a draft bill (Bill No. 3,8877/220) encompassing the unification of federal taxes by creating a federal VAT, known as “Social Contribution on Goods and Services – CBS.  CBS will effectively eliminate both PIS and COFINS, which are Social Security Contribution assessed on gross revenues.  The proposed bill will be discussed and voted on by both legislative houses and if approved will be effective within six months of approval.

This bill is the first, in a phased approach to introducing wider tax reforms.  Other bill under consideration by the federal government include income tax reform, adjustments to the Excise Tax (IPI), reduction of social security taxes due on payroll and introduction of a new tax on digital payments. 

This article will take a brief look at CBS. 

What is CBS?

CBS is levied on imports and local sales of both goods and services, while export transactions would be exempt.  The bill proposes to treat the assignment and licensing of rights, including intangibles, as falling within the definition of imported services, thus subject to CBS.  As opposed to PIS and COFINS, which applies to non-operating revenue, CBS will only apply to revenues from operations.

It is intended to simplify tax on consumption and eliminate the different taxes and special tax regimes for various sectors of the economy, while promoting tax equity and savings to taxpayers.  The biggest benefit may be a reduction in the time companies spend on tax compliance and reduce never ending legal discussions currently taking place regarding the PIS/COFINS system.

Under the proposed bill, some notable special tax regimes will remain in place, including SIMPLES NACIONAL (for micro and small businesses), the Manaus Free Trade Zone exemption, and the exemption for basic food items.

What Is the CBS Tax Rate?

The Brazilian tax rate under the Tax Reform Bill will increase to 12% from the current regular tax rates for PIS and COFINS of 9.25%.  The calculation of the tax base is computed as follows: Gross Revenues excluding amount of ICMS (State VAT), ISS (Municipal Tax) and unconditional discounts.  The gross-up calculation would no longer be available.

Are Tax Credits Available in Calculating CBS?

In calculating CBS taxpayers will be allowed credits, comparable to the noncumulative system of PIS and COFINS, however without the restrictions currently applicable in the PIS/COFINS law.  Under the proposed methodology of calculating CBS, each part of the supply chain may consider credits over the amount paid by the supplier and detailed on an invoice, thus CBS effectively applies to the value added to a product or service provided by the taxpayer.

Other credits such as depreciation and rent expense, among other expense items are not permitted.  Any depreciation of assets placed in service prior to CBS coming into force will be allowed.

The Tax Reform Bill will permit taxpayers to accumulate credits during the quarter in an effort to compensate them with other federal taxes at the end of the quarter.  The five year Statute of Limitations would remain in effect and the value of the credits will not be subject to monetary restatement.

Credits made available by product purchases from companies subject to SIMPLES NACIONAL and from the Manaus Free Trade Zone will be available for use.  However, some products subject to a single level of taxation would not be creditable.  Items such as fuel, natural gas and cigarettes would be required to follow specific CBS calculation methods.

Relief for Tax Professionals?

In what can only be considered good news for tax professionals, the bill aims to significantly reduce the complexity currently involved in preparing tax returns.

What is the Impact on Digital Platforms?

Those digital platforms, acting as intermediaries will be responsible for the collection of CBS levied on the transactions completed through them in the event the seller does not issue an electronic invoice.

The impact will be felt by both digital platforms located abroad and the importer of the goods and services performed by individuals into Brazil.  The parties to the import transaction will be responsible for the payment of CBS.  In addition, the owner of the digital platform will need to register with the Brazilian federal tax administration to fulfill the related tax obligations.

Closing Thoughts

is this effort of tax reform in Brazil real?  The answer will become clearer over the next couple of months.  For U.S. companies with operations in Brazil, it is prudent to closely monitor these developments and plan accordingly.