First Phase of the Tax Reform Project

The government presented the first phase of its Tax Reform project, proposing that the contributions to PIS/Cofins be replaced by the Contribution on Goods and Services (CBS), as a federal value-added tax. There is the possibility of convergence toward the immediate creation of the Tax on Goods and Services (“IBS”), which, in addition to PIS/Cofins, would also unify the ICMS and the ISS, and the IPI would be transformed into a “Selective Tax.”

Tax Reform project – phase 1

Taxpayers and responsible parties:

(i) private-law legal entities and those treated as such under the Corporate Income Tax (IRPJ) legislation; and (ii) the importer of goods and the contracting party, the recipient or the acquirer in the importation of services. Digital platforms: the following will be required to collect the CBS (i) legal entities that do not record their operations through the issuance of an electronic tax document and act as intermediaries between suppliers and acquirers in non-presential sales of goods and services, including in commercialization carried out through electronic means (there are exceptions); and (ii) legal entities domiciled abroad that intermediate the importation of the provision of services by a natural person.

Calculation basis:

(i) gross revenue earned in each operation of the sale of goods and services included in the activity or main object of the legal entity, less the taxes levied thereon (ICMS and ISS, as applicable), the unconditional discounts, and the CBS itself, instituting the so-called “external calculation”; and (ii) the customs value of imported goods, including intangibles, and the value prior to the withholding of taxes in the importation of services, encompassing the assignment and licensing of rights. The following are not included in the calculation basis: revenues from the export of goods and services abroad.

Rate:

12% in general, with exceptions.

Taxation regime:

general non-cumulativity, whereby the taxpayer may take credit for the CBS: (i) itemized in the tax document for the acquisition of goods and services within the Country; and (ii) collected on the importation thereof. Certain goods and services will be subjected to a single-phase regime and others will allow for presumed credits. It is prohibited to take credits on goods and services linked to revenues not subject to the levy or exempt from the CBS (e.g., basic food-basket products), except in the permitted cases (e.g., export, the Manaus Free Trade Zone, or Free Trade Areas). Monthly assessment and collection. Accumulated CBS credit balances: where utilization within the quarter is not possible, a refund in cash or offsetting against the taxpayer’s own debts of taxes administered by the Brazilian Federal Revenue Service (RFB) may be requested.

PIS and COFINS credit balances (including presumed credits):

may be offset against the CBS or other taxes administered by the RFB, in accordance with the offsetting rules upon the entry into force of the CBS.

Special Regimes and Exemptions:

substantially reduced, with the single-phase regime remaining on certain goods; the Manaus Free Trade Zone and Free Trade Areas; presumed credits (e.g., for in natura products and self-employed carriers) and exemptions, such as on basic food-basket products.

Financial institutions and similar entities: taxed at a rate of 5.8% on the gross revenue earned monthly, without the right to take credits on the acquisition of goods and services.

What is to come

Phase 2 – Changes to the IPI, reducing its scope so as to make it a “selective tax” levied on certain products, such as cigarettes and beverages.

Phase 3 – Modifications to the income tax: (i) Individual Income Tax (IRPF) with an increase in the exemption bracket and greater progressivity; and (ii) Corporate Income Tax (IRPJ) with a reduction of the rate and the taxation of the distribution of profits and dividends.

Phase 4 – Payroll relief. There is discussion of the eventual offsetting of the reduction in revenue collection through the institution of a tax on payments (yet to be determined whether it is in fact similar to the former “CPMF”) or a digital tax.

Reflections

With the advancement of the discussions and the implementation of the changes related to the CBS, or eventually the “IBS,” we will have a profound alteration in the manner of “consumption taxation” in our Country. We understand that this new taxation system and its respective rate should affect, in different ways, the national value chains for the production and commercialization of the goods and/or services of your business.

In each sector or for each product, the ability to fully transfer the economic burden of the CBS, or of the “IBS,” into the final price to the consumer, a natural person, is uncertain, since the new distribution proposed for this tax burden may also impact the demand for said goods and/or services.

The effective final tax impact of the CBS, or of the “IBS,” on the value chains of the business sectors will depend on various factors such as, for example, the weight of the payroll in the composition of the respective cost of goods and services, the taxation regime of the legal entity (e.g., cumulative or non- cumulative), the business model adopted (e.g., segregation or integration of activities, sales in a chain of B2B companies or to the final consumer B2C), transfer pricing, application of single-phase regimes, exemptions, among others. Special attention should also be given to the effects arising from phases 2, 3, and 4 of the reform, to be proposed by the Executive Branch.

The interpretation of the future effectiveness of certain provisions of the bill that proposes the CBS entails controversies, which will possibly be resolved in the process that is beginning in the Legislative Branch. It seems fundamental to us that the representativeness of all business segments in the discussion of the proposal contribute to its improvement, as a bill.

We hope that the Executive and Legislative Branches advance rapidly in the said discussions, enabling the start of a swift implementation of the awaited Brazilian tax reform, one that does not further raise the current tax burden and brings, above all, simplification and rationality to the National Tax System, contributing positively to the business environment of the Country.