Tax reform: learn how VAT works – 07/04/2023 – Market

The tax reform proposes that Brazil adopt new taxes on consumption that follow the IVA (Value Added Tax) model, currently used in more than 170 countries, following the best international examples.

In this system, each company effectively collects only the tax referring to the value it added to the product or service. All taxes paid on the purchase of inputs from the seller, including expenses with energy, telephony, marketing and transportation, become credits.

In the example below, each of the three companies —rural producer, industry and commerce— bills BRL 100 with the operation and effectively collects BRL 10, for a hypothetical rate of 10%.

In the end, the product is sold for BRL 300 plus BRL 30 of taxes paid to the tax authorities. In a cumulative system (without credit), the charge would exceed R$ 60, also borne by the consumer.

How is credit returned?

The credit can be returned later or in real time —as in the example above—, depending on the tax system. The reform provides for a maximum period of 60 days for later return, but also leaves open the possibility of making compensation in real time, the so-called “split payment”, a service that automatically divides receivables between those involved in a transaction.

How exports work

In the case of an export, there is no taxation in the final stage (sale abroad), and the company is entitled to credit for everything collected along the chain.

VAT for Simple Nacional

In Brazil, VAT membership will be optional for Simples Nacional companies. They can choose to collect the new taxes separately, taking advantage of input credits, or keep the current system for all taxes. In both cases, the tax paid on the acquisition of the smaller company’s product or service becomes a credit for its corporate client.

Does Brazil already have VAT?

Brazil already has taxes in the VAT format, such as ICMS and PIS/Cofins, which will be extinguished with the reform, but not everything that is taxed is currently entitled to credit, which generates cumulativeness. There is also a plethora of different legislation and rules across sectors and regions. Furthermore, the tax is not calculated “on the outside”, which can transform a 25% rate into more than 30%.

The new reform IVAs

The reform creates two IVAs: a federal contribution (CBS) and a state/province tax (IBS) on goods and services. The sum of the rates for both is estimated at 25%, with some products and services having a 50% reduction (12.5%, in this case) and others being exempt.

How it works in Europe and the US

In Europe, the adoption of VAT was necessary to allow the economic integration of the continent. The tax is also present in most of Latin America. India, Canada, Australia and New Zealand are other examples.

The United States is the only major economy that does not have this type of tax. The country has a “sale tax” charged by regional governments only in the last stage of the chain, the sale to the consumer. In practice, the effect is the same as VAT in terms of non-cumulativeness, but the risk of evasion is greater.