Brazil VAT Reform: IMF Insights on Revenue Neutrality

January 1, 2026

Featured Partners

Brazil's VAT reform drew attention not only of taxable persons and industry as a whole, but also of many international organizations. In November this year, the OECD published the White Paper “The reform of Brazil's consumption tax system”, which examines Brazil's long-standing structural problems in its consumption tax system, analyzes the challenges, and outlines viable policy solutions.

Recently, the IMF has also published its Working Paper “Brazil’s VAT Reform: Ensuring Revenue Neutrality”, which analyzes Brazil's major VAT overhaul, focusing on achieving revenue neutrality despite complex reforms by minimizing compliance gaps, managing input tax credits, and reducing informality.

Key Takeaways From the Working Paper

In its Working Paper, the IMF noted that dual VAT in Brazil is designed to replace five overlapping taxes, tackling significant inefficiencies and creating a simpler, more harmonized tax system. More specifically, the reform rooted in the December 2023 constitutional amendment and followed by Complementary Law 214, is set for implementation in 2026.

The IMF further added that, even though the reform law aims for revenue neutrality, the structural changes introduce uncertainty about actual tax collections. The IMF confirmed that Brazil’s current consumption tax system is among the highest and most complex globally, with varied rates across products and regions and fiscal competition between states and municipalities.

Using an adjusted IMF RA-GAP framework tailored to Brazil, the Working Paper estimates consumption tax revenues under the new VAT and examines how tax burdens may shift across sectors. Moreover, the IMF simulated various scenarios, altering assumptions about compliance gaps and informality, while respecting legislated rates and exemptions.

Notably, the analyses show that minimizing the compliance gap is essential to achieving revenue neutrality, and that fully integrating operations and effectively managing the input tax credit system are crucial to mitigate revenue risks and realize the reform’s potential benefits.

Conclusion

The IMF determined that the reform of Brazil's consumption tax system, with the implementation of a new Dual VAT system, will, in addition to many benefits, trigger significant structural changes that carry potential risks for revenue generation. Nonetheless, the revenue estimates and simulations presented in the Working Paper are based on current data and do not incorporate growth effects or behavioral responses, which could be significant.

Therefore, future analysis with a new set of data will be needed to provide more comprehensive revenue projections and deeper insight into the broader economic implications of this landmark reform.

Source: IMF, VATabout

What is the focus of the IMF Working Paper on Brazil’s VAT reform?

The IMF Working Paper focuses on Brazil’s major VAT overhaul and analyzes how revenue neutrality can be achieved despite structural changes, compliance gaps, and high levels of informality in the current system.

What taxes will Brazil’s new dual VAT system replace?

Brazil’s dual VAT system is designed to replace five overlapping consumption taxes, aiming to reduce inefficiencies and create a simpler and more harmonized tax framework.

When is Brazil’s VAT reform expected to be implemented?

The VAT reform is rooted in a constitutional amendment from December 2023 and further developed through Complementary Law 214, with implementation scheduled for 2026.

Why is revenue neutrality uncertain under Brazil’s VAT reform?

Although the reform aims for revenue neutrality, uncertainty arises from structural changes, varied compliance levels, informality, and the complexity of managing input tax credits across sectors.

How does the IMF assess revenue outcomes under the new VAT system?

The IMF uses an adjusted RA-GAP framework tailored to Brazil to estimate consumption tax revenues, simulate different compliance and informality scenarios, and assess potential shifts in tax burdens.

What are the main risks and limitations identified in the IMF analysis?

The IMF notes that revenue estimates do not account for growth effects or behavioral changes, meaning future data and analysis will be needed to fully understand the broader economic impact of Brazil’s VAT reform.

VAT Compliance and Reporting

VAT

Retail

E-Commerce

Digital