Brazil’s tax reform: A new era for businesses and the economy

For decades, Brazil’s tax system has been a notorious maze of complexity. Companies operating in the country face one of the most challenging tax environments in the world, with a compliance burden that far exceeds global averages. According to a World Bank study, Brazilian businesses spend an average of 1,501 hours per year fulfilling tax obligations. This is five times the average in the whole Latin America and the Caribbean region and nearly ten times the average of what the World Bank calls OECD high income countries. This intricate system has long been a deterrent for investors, stifling economic growth and generating endless tax disputes. However, a long-awaited tax reform has now been enacted, marking a historic turning point in the modernisation of Brazil’s tax framework.

On January 16, 2025, Brazil officially approved Complementary Law No. 214/2025, bringing a comprehensive overhaul to the existing tax regime. The reform aims to simplify tax compliance, enhance transparency, and promote economic efficiency. The main pillars of this transformation include the replacement of multiple taxes with three new levies:

1. Imposto sobre Bens e Serviços (IBS) – This new value-added tax (VAT) will replace ICMS (State VAT) and ISS (Municipal Services Tax). IBS will be shared among States, Municipalities, and the Federal District, following the destination principle, meaning that tax revenues will go to the place where goods and services are consumed.
2. Contribuição Social sobre Bens e Serviços (CBS) – A federal-level VAT that consolidates PIS, COFINS, and IPI, streamlining the taxation of goods and services at the national level.
3. Imposto Seletivo (IS) – A selective tax on products deemed harmful to public health or the environment, similar to excise taxes in other countries.

The tax reform is designed to address several long-standing inefficiencies in the Brazilian tax system, following key principles such as:

• Neutrality: Reducing economic distortions by taxing all goods and services uniformly, ensuring that businesses compete fairly without tax-induced advantages.
• Transparency: The new taxes will be calculated on an external basis ("tax-exclusive" pricing), making tax costs clearer to consumers and businesses.
• Non-cumulative taxation: Unlike the current system, which often results in cascading taxes, IBS and CBS will allow full crediting of prior-stage tax payments, ensuring that each stage of the supply chain is taxed only on the added value.
• Destination-based taxation: Instead of being taxed at the point of origin, goods and services will be taxed at the place of consumption, aligning Brazil’s system with international standards.

Recognising the complexity of transitioning to an entirely new tax model, the government has set a gradual implementation timeline extending until 2032:

2026: Introduction of IBS and CBS with test rates.
2027: Full replacement of PIS and COFINS by CBS.
2029: Senate will define standard rates for IBS and CBS.
2033: Full replacement of ICMS and ISS by IBS, concluding the transition.

During the transition, the old and new tax systems will coexist, allowing companies and tax authorities time to adjust while minimising economic disruptions.

Key impacts on businesses and consumers

1. Simplification of compliance: One of the biggest advantages of the reform is the significant reduction in tax compliance costs. By consolidating various federal, state, and municipal taxes into a unified structure, businesses will no longer need to navigate thousands of overlapping regulations.
2. Increased predictability and investment appeal: With a clearer and more stable tax structure, Brazil becomes a more attractive destination for foreign investment. The elimination of cascading taxes and a predictable VAT system align the country with the best international practices, fostering a more competitive business environment.
3. Industry-specific adjustments and concerns: Some sectors that currently benefit from tax incentives—such as technology, agribusiness, and manufacturing—may see changes in their tax burden. However, mechanisms like special tax regimes and exemptions for essential goods (e.g., healthcare, food staples) have been incorporated to balance the impact.
4. Introduction of split payment mechanism: A crucial innovation in the reform is the introduction of the split payment system, which ensures automatic tax collection at the point of transaction settlement. This measure is expected to reduce tax evasion and improve government revenue collection efficiency.

While the reform is a major step forward, challenges remain. The effective implementation of IBS and CBS will require coordination among federal, state, and municipal governments. Additionally, businesses will need to invest in technology and training to adapt to the new compliance framework.

Governance of the new system will be overseen by the National IBS Committee and the Federal Revenue Service, ensuring transparency and periodic reviews to address any distortions or unforeseen consequences.

The approval of Complementary Law No. 214/2025 is more than just a reform—it represents a paradigm shift in how taxes are structured and collected in Brazil. The transition may pose challenges, but it also presents opportunities for businesses to modernise, optimise their tax planning, and ultimately thrive in a more predictable and efficient fiscal environment.

For companies operating in Brazil, now is the time to prepare. Investing in compliance strategies, upgrading tax management systems, and seeking expert guidance will be key to navigating the transition smoothly.

At RSM, our team is closely monitoring all regulatory developments and is ready to assist businesses in adapting to the new tax landscape. With proper planning and strategic adjustments, companies can turn this reform into a competitive advantage in the evolving Brazilian market.

Contact us to understand how best to comply with the obligations of this reform.