A word from the President - Abel - Abel

Leia em Portugues

Tax Reform: A Watershed Moment for the Brazilian Economy

Osmar Roncolato Pinho*

Approved in December 2023, after 30 years of intense debate, the Tax Reform marks a watershed moment that will make Brazil more modern and competitive, with positive effects on economic growth. The Tax Reform aims to simplify the taxation of goods and services, aligning Brazil with over 170 countries that have adopted a Value-Added Tax (VAT), including Canada, Australia, European Union members, emerging economies like India, and Latin American nations such as Mexico, Colombia, Chile, and Argentina.

One of the most significant legacies of the new tax framework is the Brazilian VAT, which will be dual, divided into two parts: the Contribution on Goods and Services (CBS), under federal jurisdiction, and the Tax on Goods and Services (IBS), under the jurisdiction of states, the federal district, and municipalities. These taxes will be levied at two levels starting in 2033 and will replace five existing taxes: ICMS (Tax on the Circulation of Goods and Services), ISS (Service Tax), IPI (Tax on Industrialized Products), PIS (Social Integration Program), and COFINS (Contribution to Social Security).

Simplifying the tax system is undoubtedly one of the main benefits of the Tax Reform, as it makes the business and legal environment more predictable, encourages direct investment and contributes to Gross Domestic Product (GDP) growth. According to an estimate by the International Monetary Fund (IMF), the Tax Reform is expected to increase GDP by 6% to 11% during the transition period from 2026 to 2033. The country is also likely to benefit from the anticipated reduction in tax disputes, which currently represent 75% of GDP.

Tax collection will no longer be done at the source but will apply only at the destination (place of consumption), which will prevent cascading taxes (cumulativity) and put an end to the so-called “fiscal war”—tax incentives offered by cities and states to attract business investments—thereby reducing the “Brazil cost.”

The large number of taxes and levies in the country, with different legislation and rates across the 27 states, has caused significant legal uncertainty and structural distortions over the past decades.

The leasing sector was one of those affected by this tax asymmetry, facing a long legal battle over the location of a municipal tax, the ISS, which hindered the growth of its activities. In May 2024, the Present Value of the Portfolio recorded a balance of R$16.3 billion, far from the values achieved in 2009, the sector’s peak. Among the leased goods are machinery and equipment, which account for 46.57% of the total portfolio, followed by aircraft at 32.24%, IT equipment at 11.25%, and other types of goods at 9.94%.

The complementary bill that regulates the implementation of the Tax Reform, currently under discussion in the National Congress, provides for a specific regime for financial services, covering financial intermediation, leasing, insurance, capitalization, and similar activities, with rules specifically tailored to each activity’s dynamics.

At the time this article was written, the critical point of debate surrounding the regulation of the Tax Reform concerned the VAT rate to be paid by Brazilian taxpayers. Brazil is expected to have one of the highest VAT rates in the world if the current design is maintained. The high number of exceptions and special regimes is likely to result in an increased rate for some sectors to compensate for overall revenue. The expectation is that the Dual VAT rate will hover around 26.5%.

Even if the final version of the Tax Reform regulation sets a VAT rate higher than that practiced in countries like those in the OECD, which averages around 19.2%, and the European Union, where the standard rate is 21%, Brazil will still have a much more modern and advanced tax model than the current one.

Regardless of the VAT rate, the new tax structure is expected to help accelerate economic growth, expand credit availability, and increase the competitiveness of Brazilian companies.

*Osmar Roncolato Pinho is President of the Abel Brazilian Association of Leasing Companies