Brazilian Corporate Tax Departments Accelerate Preparations for Sweeping 2025 Reform

Brazil's Landmark Tax Reform Takes Shape

Corporate tax departments across Brazil are actively gearing up for the profound operational and strategic shifts necessitated by the country's planned tax reform, with a strong emphasis on system upgrades and advanced digital tax management tools. The reform, largely codified by Complementary Law No. 214/2025, sanctioned on January 16, 2025, aims to simplify one of the world's most complex tax systems, reduce compliance burdens, and foster a more attractive investment environment.

For decades, businesses in Brazil have contended with a fragmented tax landscape, spending an average of 1,501 hours annually on tax compliance, significantly higher than global averages. The new legislation seeks to streamline this by replacing multiple existing indirect taxes with a dual Value-Added Tax (VAT) model.

Key Changes and Gradual Implementation

The core of the indirect tax reform involves the consolidation of five existing taxes—PIS, COFINS, IPI, ICMS, and ISS—into three new levies:

• Imposto sobre Bens e Serviços (IBS): A new value-added tax that will replace the state-level ICMS and municipal-level ISS.
• Contribuição Social sobre Bens e Serviços (CBS): A federal-level VAT designed to consolidate PIS, COFINS, and IPI (for non-Free Trade Zones).
• Imposto Seletivo (IS): An excise tax applied to goods deemed harmful to public health or the environment, such as tobacco and alcohol.

The transition to this new system is structured as a gradual process, commencing in 2026 and extending until 2033. In 2025, the focus is on the publication of complementary laws regulating IBS and CBS, alongside initial legal and institutional adjustments. The year 2026 will see the introduction of IBS and CBS with test rates of 0.1% and 0.9%, respectively, marking the beginning of a period where both the old and new tax systems will coexist. Full replacement of PIS and COFINS by CBS is slated for 2027, with the phased collection of IBS beginning in 2029.

Challenges and Strategic Priorities for Businesses

The transition period, during which companies must operate under both the legacy and new tax regimes, presents significant challenges. This 'dual reporting' obligation will require substantial effort in terms of calculations, filings, and system configurations. Businesses are compelled to undertake comprehensive operational restructuring, reviewing internal processes, supply chains, and pricing strategies to adapt to the new framework.

In response, corporate tax departments are prioritizing several key areas:

• Technology Upgrades: Investing in and refining Enterprise Resource Planning (ERP) systems and other tax management solutions is paramount to accommodate new rules, rates, and electronic tax documentation formats.
• Digital Tax Management Tools: The reform emphasizes digital compliance, with new rules and layouts for e-invoicing, making advanced digital tools essential for accurate data capture and transmission.
• Strategic Planning: Early integration of the reform into overall business strategies is crucial to mitigate disruption and identify opportunities.
• Workforce Training: Developing talent and providing comprehensive training for tax professionals is vital to navigate the complexities of the evolving tax landscape.

Beyond indirect taxes, President Luiz Inácio Lula da Silva's administration also introduced a proposed income tax reform on March 18, 2025. This separate initiative aims to adjust individual income tax brackets and proposes a 10% withholding tax on dividends for resident individuals (exceeding BRL 50,000) and non-residents.

Outlook for a Modernized Tax System

While the immediate future involves a complex transition, the long-term goal of Brazil's tax reform is to establish a more transparent, efficient, and predictable fiscal environment. Companies that proactively invest in compliance strategies, system modernization, and expert guidance are expected to be better positioned to navigate this transformative period and capitalize on the benefits of a streamlined tax system.