On December 20, 2023, the final text of the Brazilian tax reform was approved by Brazil's National Congress. Thus, the final text is fixed and does not require other procedures for its promulgation. However, Complementary Laws are still necessary to regulate the new changes brought by the recently approved text, which will still be presented before the National Congress.
As the main change, the tax reform establishes the “Dual VAT”, which will replace existing taxes in Brazil. Under federal responsibility, the new CBS (Contribution on Good and Services) will replace the existing IPI, PIS and COFINS. As for states and municipalities, they will be allocated the IBS (Tax on Goods and Services), which will take the place of ICMS and ISS.
Also, the Brazilian Tax Reform fixes another new tax, the IS (Selective Tax), which will levy on goods and services that are prejudicial to the health and have a negative impact on the environments. Such tax will only be applied to the production, sale, or importation of such goods, and will not be imposed to exports.
We must highlight that the specific CBS, IBS and IS rates have not yet been established and must be consistent with the new regulatory standards (Complimentary Laws) that will still be forwarded to the Brazilian National Congress.
In addition, it is important to reinforce that such changes will be applied during a transition period from 2026 to 2033. while the current tax system will not be abrupt extinct. The discussions should intensify during 2024 with the need to issue the Complementary Laws.
With the text finally approved, Brazil's tax reform is now a certainty.
On December 20, 2023, the Brazilian Senate has approved the Provisional Measure (MP) #1.185/2023, which establishes a new system for federal tax incentives related to subsidies for state investment granted by the states to companies. Such MP revokes, starting from 1st January 2024, the existing legal provisions related to (i) the exclusion of investment subsidies from the IRPJ and CSLL tax bases, and (ii) the non-taxation of PIS and COFINS levied over these subsidies. The MP also imposes a new tax credit related to the investment subsidies granted by the Federal, States, Federal District and Municipalities governments.
As defined in the MP, investment subsidies are incentives granted for the implementation or expansion of enterprises, and such legislation contain specific and restrictive concepts for the terms “implementation” and “expansion”, being implementation the establishment of an enterprise for the development of activity to be operated by a legal entity not domiciled in the location geographic location of the federative entity that grants the subsidy, and expansion the increase of capacity, modernization or diversification of production of goods or services of the economic enterprise, including the establishment of another unit by the legal entity domiciled in the geographic location of the federative entity that awards the grant.
Currently, subsidies offered through ICMS (Tax on Circulation of Goods and Services) credits are not considered in the calculation basis for the payment of two federal taxes: Corporate Income Tax (IRPJ) and Social Contribution on Net Profit (CSLL).
According to the MP, from 2024, in place of the above-mentioned subsidy, the companies will have a tax credit that can be used to reduce other taxes or be reimbursed in cash. But this will only apply to subsidies for investments and not to funding subsidies, which are those related to the companies’ daily operational expenses.
To benefit from the new Tax Credit, it is necessary a prior authorization of the legal entity before the RFB. The company may be eligible if the following requirements are met:
i. legal entity must be a beneficiary of investment subsidy granted by an entity federative.
ii. act granting the subsidy prior to the date of implementation or expansion of economic enterprise.
iii. granting act of the subsidy that expressly establishes the conditions and tradeoffs to be observed by the legal entity, related to the implementation or expansion of the enterprise.
The provisional measure also establishes changes over the past tax debts (what is usually called “stock”). In this case, there is a provision for a special tax transaction, in which the taxpayer will be able to pay his debt in two ways:
i. Payment in cash, with a reduction of 80%, through up to 12 monthly installments; or
ii. Payment in cash of at least 5% of the value of the consolidated debt, without reductions, in up to 5 successive monthly installments, with the possibility of paying any remaining balance in up to 60 installments, with a reduction of 50% of the remaining amount, or paid in up to 84 installments, with a 35% reduction.
