Brazil’s tax reform:  Key changes for business models, structures, and compliance

A significant tax reform to streamline and simplify federal, state, and local tax laws was recently passed by the Brazilian government and congress after decades of deliberation. Only indirect taxes (e.g. VAT) are covered by the new law, which was approved by the president in January 2025. Income tax changes are being discussed separately and are not covered by the current legislation. Long-standing inefficiencies and complexities that have historically reduced economic competitiveness and increased administrative burdens have been addressed by this new system.

Understanding the impact

Most businesses in Brazil will need to make major adjustments to their business models, structures, processes, systems, costs, pricing, and interactions with both customers and vendors due to the extensive and profound changes to the tax law. Local businesses will need to put procedures and systems in place to guarantee compliance with both tax regimes at the same time because the reform will phase out the current system concurrently with the introduction of the new system from 2026–2032. As a result, it will probably take longer than a year to fully execute these changes.

The new tax framework

By imposing taxes where goods and services are consumed, the reform shifts Brazil toward a destination-based tax system. The foundation of this updated system is a single, wide tax base with centralised electronic reporting and full input credit recovery.

The new framework consists of a dual value-added tax (VAT) system consolidating five major taxes into:

• Federal VAT (Contribuição sobre Bens e Serviços or “CBS”); 
• State and municipal VAT (Imposto sobre Bens e Serviços or “IBS”); and
• Selective federal excise tax on specific products deemed harmful, such as tobacco and alcohol (Imposto Seletivo or “IS”).

Transition roadmap for 2026–2033

Businesses must adhere to both tax systems during the transition, necessitating strategic, departmental coordination and dual reporting procedures.

Implementation will proceed in phased stages:

• 2026: Trial period with symbolic 0.9% CBS and 0.1% IBS rates;
• 2026–2032: Coexistence of old and new tax systems; and
• By 2033: Full phase-out of existing taxes (PIS, COFINS, IPI, ICMS, ISS).

Strategic implications for businesses

Corporate structures, working capital, and cash flow will all be impacted by the reform. Businesses will have to review their supply chains, tax credit monetisation plans, M&A strategies, and legal entity frameworks. System updates are essential, especially for platforms used for tax compliance and enterprise resource planning (ERP). Opportunities exist for firms to redesign business processes for greater operational efficiency rather than pure tax optimisation.

Operational impact

Collaboration across all functional areas will be critical for a successful implementation plan, including: 

Tax and finance: Dual compliance obligations, credit recovery, cash flow planning, changes in costs and margins, and review of financial plans.

Legal: Contract renegotiations, litigation strategies, and corporate structure.

Human resources: Review of benefits, costs of outsourced labour, and potential workforce restructuring.

Sales and pricing: Redefinition of pricing, sales practices, and business-to-business (B2B) contracts.

Logistics and supply chains: Optimisation under new destination-based taxation.

Systems and IT: ERP and compliance tool enhancements to manage parallel obligations.

Sector-specific challenges and opportunities

Manufacturing, retail, e-commerce, and logistics are just a few of the industries that have to deal with sector-specific issues. Businesses in fiscal incentive zones (except Manaus) will have to re-evaluate their business plans. Increased transparency and compliance requirements may lead to the formalisation of currently informal sectors, creating new avenues for investment and market expansion.

Do not delay

Companies should begin working on their implementation plans as soon as possible. Because of the need to design, plan, and execute complex changes for transition and implementation, companies that delay could incur higher costs and greater risks as they face a narrowing timeframe for the implementation deadlines. 

It is critical that investors and multinational corporations operating in Brazil, along with their tax, accounting, and legal counsel, comprehend the ramifications of this comprehensive reform. Companies that implement the required changes early will have smoother, more cost-effective transitions and strategic advantages.

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David Schoenberger is a global finance leader with expertise in transforming PE-backed, publicly traded, and privately owned companies in the US, Latin America, and Europe. He is skilled in scaling operations, optimising cash flow, and building high-performance teams. He has driven growth through proactive collaboration with management teams, implementing KPIs, and streamlining processes.