The Senate on Wednesday approved a major tax reform bill in a two-round vote, a key step toward simplifying Brazil’s tax code.
The reform, which is sponsored by the Luiz Inácio Lula da Silva administration, will now return to the House, where it will require another two-round vote and a 60 percent majority.
House Speaker Arthur Lira told journalists yesterday that the tax reform “must” be approved by the end of the year. The House could potentially split the text to vote quickly on only what both houses agree on, leaving the Senate’s changes for later debate.
The tax reform will radically change Brazil’s consumption tax system by consolidating five multi-tiered taxes into two VAT-like levies: one at the federal level (CBS) and one for states and municipalities (IBS). Currently, the state-level ICMS tax on goods and services is by far the most important source of revenue for state governments.
Moreover, the bill will change Brazil’s tax system from an origin-based sales tax to a destination-based sales tax, meaning that taxes will be collected where the buyer is located or where the product is headed rather than where the business is headquartered.
As is, the tax reform will severely limit the ability of state governments to offer tax incentives to specific economic sectors. According to the proposal, tax breaks will move from fiscal policies to budgetary policies — that is, a tax incentive for a given economic sector in a state must be defined in the state budget with a specific amount, rather than being enacted through a tax cut.
Most of the changes in the reform will be implemented gradually over a period of seven years (2026 to 2033). Revenue-sharing rules for state governments will observe a 50-year transition period until the sales tax becomes fully destination-based.
Senator Eduardo Braga, the tax reform’s rapporteur in the upper house, added several exceptions to the rules to accommodate various lobbies. For example, the bill provides for different tax rates for items in the basic basket of food necessities, with two different regimes. Cleaning and personal hygiene products will be entitled to lower tax rates. White-collar workers such as lawyers, dentists, and physicians will also be charged lower taxes.
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