The tax reform under discussion in Brazil has sent shivers down the spine of governors, who fear that the restructuring of the country’s consumption tax system will deprive them of much-needed revenue. While Congress is still discussing the reform, some states have moved to substantially hike the rates of the ICMS state-level tax on goods and services.
These changes are part of a strategic effort to raise the tax collection baseline for calculating the forthcoming VAT-like system, a cornerstone of the tax reform. The new system will use revenue data from 2024 to 2029 as a reference for the distribution of unified IVA tax.
Several levies, such as IPI (on manufactured goods), ISS (services), ICMS (goods and services), and PIS and Cofins (social security contributions), will be merged into two VAT-like taxes, called CBS (federal) and IBS (local).
The move is far from trivial, as the ICMS tax on goods and services accounts for 85 percent of state revenues. For this reason, several governors initially resisted the tax reform for fear of losing money.
Eleven of Brazil’s 27 states have raised their ICMS taxes, with a 12th in the process of doing so. Another 13 states made the same move earlier this year.
The hikes consider a study by Comsefaz — a council of state finance secretaries — on the ideal rate for states to recover revenue levels similar to those prior to 2022, when the federal government imposed lower taxes on fuels, utilities, and telecommunications.
As The Brazilian Report explained last week, deliberations on the tax reform have hit a snag in the Senate. States and trade organizations from multiple sectors are lobbying hard for special conditions in the new system — and experts fear senators could cave to these pressures and water down the reform that the House passed in July.
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