What changes are being introduced to Brazil's tax system starting in 2026?

Beginning in 2026, Brazil will implement a "Dual VAT" system, replacing five existing taxes: the federal contributions for social integration (PIS) and social security financing (COFINS), the federal tax on manufactured products (IPI), the state VAT (ICMS), and the municipal service tax (ISS). These will be consolidated into two new consumption taxes: the Contribution on Goods and Services (CBS) with a federal rate of 8.8% and the Tax on Goods and Services (IBS) with a state and local rate of 17.7%. This reform aims to simplify the tax structure and enhance compliance.

How will the new tax system affect non-resident digital service providers?

Non-resident digital service providers will be required to collect and remit the new CBS and IBS taxes on their supplies to Brazil. This obligation applies to both business-to-business (B2B) and business-to-consumer (B2C) transactions, encompassing services such as online advertising, streaming of games, music, apps, films, e-books, e-journals, software, and internet services.

What responsibilities will digital platforms have under the new tax regime?

Digital platforms, whether Brazilian or non-resident, will be liable for CBS and IBS in situations where sales are made by non-resident sellers not registered for IBS and CBS or by Brazilian sellers not registered for IBS and CBS or when transactions are not recorded through an electronic invoice. A digital platform is defined as an entity that facilitates transactions between sellers and buyers through automated or electronic methods, managing aspects such as collection, payment, setting terms and conditions, and delivery.

What is the expected combined tax rate under the new system?

The combined rate of the new CBS and IBS taxes is anticipated to be approximately 26.5%, with CBS at 8.8% and IBS at 17.7%. This consolidated rate aims to streamline tax obligations and reduce the complexity of the previous multi-tax system.

How should non-resident digital service providers prepare for these changes?

Non-resident digital service providers should monitor the adoption of the reform package and prepare for the upcoming changes by registering for CBS and IBS to ensure compliance with Brazilian tax authorities. They should also implement systems for tax collection and remittance by updating billing systems to accommodate the new tax rates and ensure accurate tax collection. Additionally, they must stay informed about e-invoicing requirements to adapt to Brazil's electronic invoicing mandates and ensure all transactions are properly documented. Proactive preparation will help mitigate compliance risks and ensure a smooth transition to the new tax system.

What are the broader implications of Brazil's tax reform for the digital economy?

Brazil's tax reform reflects a global trend of governments updating tax policies to capture revenue from the digital economy. By imposing VAT obligations on digital services, Brazil aims to level the playing field between domestic and foreign providers, ensuring fair competition and appropriate tax contributions from all market participants.

Brazil: New Indirect Taxes on Digital Service Providers from 2026

In July 2023, Brazil’s Chamber of Deputies approved a historic tax reform to overhaul the country's complex indirect tax system. Following this approval, Constitutional Amendment No. 132/2023 was published in December 2023. Since then, various stakeholders have been actively involved, organizing events to discuss the practical effects of the reform.

The reform, set to simplify the current system, will eliminate the complexities of multiple layers of taxes imposed at various government levels, often resulting in overlaps. Key changes include consolidating several taxes into a "Dual VAT" system, introducing new levies, and modifying existing ones.

On July 11, 2024, tax reform took another significant step forward with the approval of the Chamber of Deputies on Complementary Bill (PLP) 68/2024, which included several modifications to the original bill. The reform will be phased in over seven years from 2026 through 2033, allowing the government and taxpayers time to adapt to the new system.

Impact of Tax Reform on Digital Service Providers

From 2026, Brazil will replace the current tax system, which includes five taxes: the federal contributions for social integration (PIS) and social security financing (COFINS, the federal tax on manufactured products (IPI), the state VAT (ICMS), and the municipal service tax (ISS).

Instead of these five taxes, as part of the Dual VAT system, two new consumption taxes similar to VAT will be introduced:

Federal consumption tax - Contribuição sobre Bens e Serviços – Contribution on Goods and Services (CBS) 8.8% rate,
State and local taxes - Imposto sobre Bens e Serviços – Tax on Goods and Services (IBS) at 17.7% rate.

Under the agreed implementation, non-resident digital service providers will collect and remit new indirect taxes on their supplies to Brazil. Under current legislation, this requirement applies to both B2B and B2C transactions., and is expected to apply to various electronic services such as advertising, streaming of games, music, apps, films, e-books, e-journals, software, and internet services.

Digital platforms, whether Brazilian or non-resident, will be liable for CBS and IBS for transactions:

Sales made by nonresident sellers that are not registered for IBS and CBS,
Sales made by Brazilian sellers that are not registered for the IBS and CBS or transactions that are not recorded through an electronic invoice (e-invoice)

A digital platform is an entity that facilitates transactions between sellers and buyers through automated or electronic methods while managing key aspects such as collection, payment, setting terms and conditions, and delivery.

Conclusion

The indirect tax reform that the Brazilian government is determined to implement will significantly transform the Brazilian tax landscape. Although Brazilian businesses will be impacted the most, foreign digital service providers will have to monitor the adoption of the reform package and prepare for the upcoming changes.

Source: Bill PL 7/2023, Complementary Bill PLP 68/24, Constitutional Amendment No. 132/2023, Chamber of Deputies