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On July 21 the Brazilian government sent to Congress the first phase of the proposed tax reform. This proposal includes uniting two levies on consumption, called the PIS tax and COFIN, to a 12% value added tax (VAT).

Brazil has one of the world most complex taxation system. According to The World Bank while a typical business spends 234 hours meeting its tax obligations, a Brazilian company faces 1,500 hours. Brazil’s fiscal system is characterized by unclear regulations and constantly changing rules at the federal, state and city levels. Overhauling the tax system will create efficiency for companies and help promote private investment.

According to the Organization for Economic Cooperation and Development (OECD), around 21 percent of Brazil’s government revenue comes from income tax, meanwhile 44 percent was raised by indirect taxes imposed on consumption, with special regulations and reporting requirements for seven types of consumption tax. These figures show the main problem affecting the Brazilian tax environment is the indirect tax system.

The tax reform negotiations should have started late last year but were postponed by a political dispute between the President and Congress. Earlier this year, Brazil’s reform agenda was postponed again when the largest Latin American economy was hit by the COVID-19 pandemic. Efforts to date have also been hampered by strong personal interests, especially at the state and city level.

Complex Indirect Tax System

Although Brazil’s indirect tax system has experienced some changes over the past few years, many types of indirect taxes still coexist. The most relevant consumption tax is explained below.

Table 1. Consumption Tax in Brazil
Tax Tax Jurisdiction method Tax base Tax rate

Social Contributions to Billing (COFINS)


Value added / substitution1

Goods and services

7.6% on value added /

3% of turnover

Contributions to the Social Integration Program (PIS)


Value added / substitution

Goods and services

1.65% in value added /

0.65% in turnover

Excise Tax on manufactured goods (IPI)


Value added

Industrial goods

5% to 15%; more than 300% for certain products

Taxes on Circulation of Goods and Services (ICMS)


Value added

Transportation and communication goods and services

Rate of internal conditions: 17% -20%

Inter-country sales rate: 4%, 7% or 12%

Taxes on Services (ISS)




2% to 5% of gross income

Economic Contribution to Fuel (CIDE-Combustíveis)


One stage

Gasoline and diesel

Different for each type of fuel

Taxes on Financial Operations (IOF)


One stage

Financial and asset operations

0 to 0.38%, increasing to 1.1% since March 2020

Sources: Guilherme Giglio and Marcelo Natale, “Brazil’s long-expected tax reform – goals, challenges and pitfalls,” International Tax Reviews, 30 March 2020,; PWC, “Worldwide Tax Summary,” accessed June 30, 2020,

1 – In Brazil this tax is referred to as Noncumulative and Cumulative.

Tax Reform Proposal

Earlier this month, Paulo Guedes, Brazil’s finance minister, outlined to Congress an initial proposal focused solely on uniting two federal social security levies, the PIS and COFINS, into a 12 percent goods and services tax (IBS). The idea is to combine this proposal with two other bills that have been analyzed in Congress.

Lower house proposals are summarized in Amendment to Bill 45 (PEC 45/2019), which appears to have broad support, establishes the establishment of IBS as a federal tax with a 10-year incremental elimination of the first five taxes described above: PIS, COFINS, taxes on manufactured products (IPI), taxes on the circulation of goods and services (ICMS), and city taxes for services (ISS).

Secondly, the Senate is considering Bill Amendment 110 (PEC 110/2019), which will also create non-cumulative IBS, to replace the seven existing taxes. On top of the lower house proposal, Draft 110 will also abolish taxes on financial operations (IOF) and contributions to fuel (CIDE-Combustive), which will also be replaced by IBS. This proposal sets a shorter transition period of five years, but connects the authority with the state and allows different levels and incentives for certain economic sectors.

The proposed IBS model is similar to European VAT, which means that taxes are only paid at value added at each stage of production. VAT is considered economically efficient, because it facilitates collection, guarantees neutrality, avoids distortions in the supply chain, and free competition.

Additional Reform

On August 15, Brazil’s finance minister plans to send to Congress the remaining items of the tax reform proposal. The final bill aims to reduce taxes on companies and individuals, eliminate payroll taxes, and create levies on dividends and electronic transactions – a 0.2% transaction tax – to compensate for loss of income.


One of the biggest challenges to this reform is dealing with personal, state and especially city interests that do not want to leave their own tax collections. However, a reshuffle of the system by bringing together federal consumption taxes will still create efficiency for companies and help promote private investment.

However, Professor Rita de la Feria, in a public hearing in Congress, recommended bringing it tax reform in one phase because the loss of political capital might prevent the implementation of the following stages of reform in the coming years. In addition, instead of applying different VAT rates for certain goods and services, he proposes the introduction of a single tariff and direct transfer for low income to encourage tax progression. Brazil has already done it technology that also allows real time tax returns and that will make the system fairer. When it simplifies and unifies its tax code, Brazil can also record examples Switzerland which has the best structured consumption tax among OECD countries in our opinion International Tax Competitiveness Index.

Finally, the reintroduction of the financial transaction tax (FTT), abolished in 2007, faces the opposite The president together with other policy makers who do not support the creation of new taxes. FTT has the potential to negative impact capital formation, growth, and economic recovery.

Brazil should focus on simplifying its tax code and making taxes more efficient and neutral by expanding their tax base, reducing tax rates and eliminating unnecessary tax exemptions. This will improve the overall tax code and open the way for economic recovery.

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