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What you need to know about the TAX REFORM IN BRAZIL

Posted 2021-03-24

If you’re willing to lead a new business in Brazil, you’ve might have heard of the Tax reform. 

The Brazilian Tax Reform, according to the Minister of Economy Paulo Guedes, does not aim to increase the burden of taxes and tributes currently paid .

As explained by the minister this change aims to to rearrange what is paid today, in order to stimulate economic activity and generate more efficiency in the collection system.

What changes will the Tax Reform bring for both legal entities and individuals? 

It is about these, and other issues related to the topic, that we will talk about in this new article.

The objectives of the Brazilian Tax reform

One of the goals of the Tax Reform proposals is to make the tax system more transparent and to simplify the collection process.

This change should also reduce the bureaucracy of these charges and stimulate the economy. 

With simpler taxes, there will be an incentive for consumption and investments, both internal and external.

Along this path, the expectation is that the Tax Reform will also contribute to the generation of new businesses, directly impacting employment rates .

From a business point of view, it is a way to facilitate the fulfillment of tax obligations, leading entrepreneurs to spend less time understanding the taxes they need to pay.

What are the main points of the tax reform?

One of the reasons for discussing Tax Reform is that there are two PECs (Constitutional Amendment Proposal) on the subject to be judged: PEC 45/2019 from the Chamber of Deputies and PEC 110/2019 from the Federal Senate.

Both aim to simplify the current tax and levy collection model on the production and sale of goods and on the provision of services, impacting municipal, state and federal tax obligations.

In addition, the two PECs also suggest the extinction of several taxes, unifying them in two new ones: in the IBS (Tax on Goods and Services) and in the Selective Tax.

See below, the proposal of each PEC of the Tax Reform for these suggested taxes.

IBS

The IBS, Tax on Goods and Services, follows the model of Value Added Tax (VAT) charged by most developed countries.

In both PECs, the impact of the IBS is on all goods and services, including leasing of goods and exploitation of goods and rights (tangible and intangible).

It is worth mentioning that, in the current regulations, these operations are not subject to ICMS (Tax on the Circulation of Goods and Services Rendered) nor ISS (Service Tax).

However, the similarities of the PECs stop at these points. 

PEC 45/2019 in relation to IBS

For this PEC, the Tax on Goods and Services is a federal tax to be instituted by a complementary law.

The IBS in the PEC of the Chamber of Deputies unifies and replaces 5 taxes : 

  • PIS, Social Integration Program; 
  • Cofins, Contribution for Social Security Financing;
  • IPI, Tax on Industrialized Products;
  • ICMS, Tax on Circulation of Goods and Provision of Services
  • ISS, Service Tax.

Regarding the determination of the rate of this new form of taxation, the proposal is that it happens as follows:

  • each federative entity (that is, municipality, state or federation) fixes a portion of the total IBS rate through an ordinary law;
  • these, in turn, will be a kind of “sub-rates” and will form the single rate to be applied on all goods and services;
  • thus, the so-called “reference rate” is created, which will be applied on the basis of calculation of the Tax on Goods and Services, replacing the collection of the aforementioned taxes.

This way, there will be the same rate for goods and services that are destined for a specific municipality or state . However, taxation will not be the same for all locations, since each federative entity will be able to set its own rate.

The collection portion of each municipality, state, or even the Union, is also defined by the sub-rates.

They are also the ones that will give the destination of the IBS of PEC 45/2019 of each participant. For this purpose, percentage points, called “singular rates”, will be set. 

The sum of these represents the amount to be allocated to resources for health, unemployment insurance, BNDES (National Bank for Economic and Social Development), etc.

PEC 110/2019 in relation to IBS

The IBS provided for in the Senate PEC is seen as a state tax, to be instituted by the National Congress.

The proposal provides for the unification and replacement of 9 taxes:

  • IPI, Tax on Industrialized Products;
  • IOF, Tax on Financial Operations;
  • PIS, Social Integration Program; 
  • Pasep, Program for the Formation of the Civil Servant’s Heritage;
  • Cofins, Contribution for Social Security Financing;
  • CIDE-Combustíveis, contribution levied on the import of fuel commercialization;
  • Education Salary, social contribution to finance public education programs and projects;
  • ICMS, Tax on Circulation of Goods and Provision of Services
  • ISS, Service Tax.

The rate to be charged referring to the PEC 110/2019 IBS will be fixed by means of a complementary law, defining a standard rate .

However, there is the possibility of setting different rates for certain goods and services. That is, it may differ according to what is being taxed, however, its application is uniform throughout Brazil.

Regarding the granting of tax incentives, this PEC provides benefits for the operations of:

  • food, including those for animal consumption; 
  • medicines; 
  • collective public transport of urban and urban passengers; 
  • property, plant and equipment; 
  • sanitation; 
  • professional, child, elementary, middle and higher education.

The sharing of the collection of the IBS in the Senate PEC determines the division between municipalities, states and federation, according to percentages foreseen for each federative entity in the Constitution on the gross revenue of the new tax.

As for the destination, this is defined based on the application of the percentages defined on the collection as to the delivery of direct resources, aimed at constitutional funds, unemployment insurance, health, among others.

Selective Tax

The Selective Tax is a specific tax on some goods and services, and is similar to excise taxes, that is, a special consumption tax.

PEC 45/2019 in relation to Selective Tax

The idea of ​​the Selective Tax in the PEC of the Tax Reform of the Chamber of Deputies is to discourage the consumption of certain products and services, such as cigarettes and alcoholic beverages.

It is an extrafiscal tax and, although the objective is to discourage certain consumption, there is no definite list over which products and/or services it will be charged on.

For this definition, an ordinary law or provisional instituting measure will be created.

PEC 110/2019 in relation to Selective Tax

In the Senate PEC, the Selective Tax is seen as a collection tax . Your charge will cover:

  • operations with oil and oil products;
  • fuels and lubricants of any origin;
  • natural gas;
  • cigarettes and other tobacco products;
  • electricity;
  • telecommunications services (referred to in Article 21, XI, of the Federal Constitution);
  • alcoholic and non-alcoholic drinks;
  • new motor vehicles (land, water and air).

You’re planning to start a new business in Brazil and need advice to optimize the launching and management of your activity? Feel free to contact our team of experts on the brazilian labour market.

Author's post: Europartner Accounting

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