Brazil & Southern Cone - January 2025

It took the Brazilian congress a full year since the approval of an historic tax reform before passing the first of several necessary regulations. At stake was nothing less than the monumental task of deciding what industries are to be taxed at what rates, which can become a question of survival for a business.

There was hardly an industry group that wasn’t involved in intense lobbying in Brasília over the past year to impress on legislators the importance of one activity or another. There were countless iterations of the new regulations, including one that saw guns as harmless, and therefore tax exempt, but essential medicines as potentially harmful and therefore taxable. In the end, the chamber of deputies cut back on many of the tributary distortions granted in the senate, although many granting unfair benefits remained.

The tax reform, as approved by constitutional amendment in December 2023, aims to simplify Brazil’s byzantine tax system, streamlining five levies into two value-added taxes (VATs): the contribution on goods and services (CBS), levied at a federal level, and the tax on goods and services (IBS), levied by states and municipalities.

The supplementary bill PLP 68/24 approved on 17 December deals with the rules and regulations for the CBS and IBS taxes, including the classification of goods and services into various tax brackets. A second bylaw, PLP 108/24, is to regulate the transition period and the operation of the IBS management committee, which is made up of representatives from state, municipal, and federal authorities to collect, oversee, and distribute the new IBS tax.

New tax rules

In the final version of the new bylaws, deputies reintroduced a selective tax (IS) on soft drinks, rejecting a senate proposal to exempt them. The so-called ‘imposto do pecado’, or sin tax, is applied to goods deemed unhealthy or environmentally harmful. This will include alcoholic beverages, cigarettes, and polluting vehicles. Salmon and tuna fish will also be subject to the sin tax, but not beef – in other words, sushi will get more expensive while churrasco stays cheap!

Other changes introduced by the chamber of deputies included removing cookies, crackers, and mineral water from the basket of basic foods that enjoy a tax reduction; removing basic sanitation, such as wastewater treatment, from the preferential tax bracket (deputies argued that there already existed a tax benefit on water bills through a cashback mechanism granted to low-income earners); and re-establishing an 8.5% tax rate on SAFs, football clubs that are run as companies under a 2021 law. Senators had proposed a 5% rate. The chamber of deputies stuck to its original plan for a full tax exemption on a list of 383 essential drugs.

Other peculiarities include tax exemptions for certain professions such as accountants, economists, and business managers, and a ‘tax-free’ shopping plan for foreign tourists, who will be exempt from paying CBS and IBS. A cashback mechanism will give low-income earners an automatic refund of at least 20% on the CBS and IBS; that raises the question of how abuse will be prevented if, for example, a qualifying person buys a car for a consumer who doesn’t qualify.

Meanwhile accounting departments throughout the country are beginning to fret. If they are to have enough time to implement the first stages of the tax reform by January 2026, when the first invoices for IBS and CBS must be issued, legislators must vote on all the remaining laws and regulations – to establish how the system actually operates – early this year.

Manaus Zona Franca

The approved version of the bylaw extends benefits of the tax-free zone of Manaus to the Refinaria da Amazônia (Ream), the only oil refinery in the northern part of the country. The proposal was hashed out by two senators from the region to help prevent the refinery from shutting down. But the industry lobby, the Instituto Brasileiro de Petróleo e Gás (IBP), argues the move will create market distortions and called on President Luiz Inácio Lula da Silva to veto that part of the bill.