On July 10, 2024, Brazil’s Chamber of Deputies, the lower house of Congress, passed draft legislation (PLP No. 68/2024) that aims to refine the VAT reform approved in December 2023. This reform, which marks a shift in Brazil’s tax system, is set to introduce a dual VAT structure starting in 2026. The transition period is expected to span seven years, during which a federal VAT (CBS) and a state and municipal VAT (IBS) will be gradually implemented. Additionally, a new federal excise tax (IS) will be introduced.
The draft legislation, initially proposed by the Ministry of Finance on April 25, 2024, underwent scrutiny before its approval by the Chamber of Deputies. An internal committee was formed to examine the proposal. This committee engaged in consultations, hosting public hearings with various industry sectors, tax experts, and members of the public to gather diverse perspectives.
Modifications were made to the draft legislation by the internal committee before it was presented to the Chamber of Deputies. These changes primarily focused on reducing tax rates for specific industries, introducing tax benefits, and providing cashback on purchases for lower-income families.
The approved version of the legislation features several key changes from the original proposal by the Ministry of Finance, including:
- Zero-rate VAT on essential food items: Meat, fish, cheese, and table salt will be exempt from VAT.
- Reduced VAT for agricultural inputs: A 60% reduction in VAT will apply to agricultural inputs, which is crucial for the agricultural sector.
- Medicine tax relief: Medicines not subject to the zero-rate will benefit from a 60% VAT reduction.
- Cashback for essential services: Lower-income families will receive a 100% cashback on the federal VAT (CBS) for essential utilities such as electricity, water, and liquefied petroleum gas.
- Lower excise tax on mineral extraction: The maximum rate for the new excise tax on mineral extraction has been set at 0.25%, down from the originally proposed 1%.
- VAT recovery for employee-related expenses: Expenses related to employee health plans, transportation, and meals, when part of collective agreements, will be eligible for VAT recovery.
- VAT reimbursement for tourists: Foreign visitors will be able to claim a VAT refund when leaving the country.
Moreover, the approved legislation caps the maximum VAT rate under the proposed system at 26.5%. If the rate exceeds this threshold due to the inclusion of the recent additions, the Ministry of Finance will be required to submit a new bill to address the discrepancy.
This legislation will now proceed to the Senate, the upper house of Congress, for further analysis and approval. The Senate’s review is expected to take place in the second half of 2024. As the discussion moves forward, tax professionals and industry stakeholders will closely monitor the developments, recognizing the impact this reform may have on Brazil’s tax landscape.
The passage of this draft legislation marks a juncture in Brazil’s tax reform process. While the changes introduced aim to address concerns from various sectors, the implementation of such a VAT system is expected to spark debate. The balance between fostering economic growth, ensuring fairness, and maintaining administrative simplicity remains a challenging task for policymakers.
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