Brazil’s comprehensive tax reform introduces a dual Value-Added Tax system.  It aims to simplify the complex consumption tax structure by replacing five major taxes – ICMS (the state/ICMS tax on goods & services), ISS (municipal services tax), IPI, PIS, and COFINS – with two new broad-based levies: a federal-level Contribution on Goods and Services (CBS) and a state/municipal-level Tax on Goods and Services (IBS). 

As these new taxes ramp up and old ones phase out during a transitional period from 2026 through 2032, a key question has arisen: Should the new CBS and IBS be included in the tax base for calculating the existing ICMS? This debate involves core tax policy considerations of fiscal federalism and tax cascading, and it carries significant implications for both taxpayers and state revenues.

Legal Background

Under current law, ICMS is calculated on its own basis of calculation – meaning its base is the total value of a transaction, including any additional amounts or charges passed on to the buyer. 

In practice, other indirect taxes that form part of the price are included in the ICMS base unless explicitly excluded by law. However, Constitutional Amendment 132/2023, while establishing the new CBS and IBS, did not explicitly clarify whether these new levies should be part of the ICMS (and ISS) base during the transition. (The amendment only explicitly excluded IBS/CBS from some taxes like the new selective excise tax (IS) and from PIS/COFINS.) 

This silence in the constitutional and initial complementary legislation (e.g., LC 214/2025, which implemented CBS and IBS) led to uncertainty and debate over potential “tax-on-tax” cascading and revenue impacts during the overlap period of old and new taxes.

The Case For and Against Including IBS & CBS in the ICMS Base

The federal government and many state authorities have signaled that IBS and CBS should be counted within the ICMS tax base during the transition. 

Arguments for Excluding IBS & CBS from the ICMS Base: On the other side, many tax practitioners and some policymakers argue that including the new taxes in the ICMS base effectively results in cumulative taxation (a “tax-on-tax”) that contradicts the reform’s aim of eliminating cascading taxes and simplifying the system. 

Critics argue that including IBS and CBS in the ICMS tax base would increase costs for businesses and consumers and undermine the reform’s efficiency and fairness. They also warn that the absence of clear rules in EC 132/2023 and LC 214/2025 creates legal uncertainty and may fuel disputes with state tax authorities. To address this, Bill of Law 16/2025 was introduced to explicitly exclude IBS and CBS from the ICMS (as well as ISS and IPI) tax bases, aiming to prevent double taxation, limit undue tax burdens, and reduce litigation during the transition.

State-by-State Divergence During the Transition

In 2026, IBS and CBS, still in the testing phase and without a meaningful economic impact, are not included in the ICMS tax base, according to guidance issued by several states. 

From 2027 onward, however, some States, such as São Paulo, Santa Catarina, and Pernambuco, have indicated that once these taxes are effectively charged, they will be treated as part of the transaction value and included in the ICMS base. On the other hand, the Legislative Assembly of the State of Paraná presented a law to ensure that the IBS and CBS are not included in the ICMS tax basis.

Conclusion

The debate over whether to include IBS and CBS in the ICMS tax base exposes a significant gap in Brazil’s tax reform, which continues to generate legal uncertainty during the transition period. While inclusion is defended to preserve revenue neutrality and the federal balance, exclusion is advocated to avoid tax cascading and undue increases in the tax burden. 

In this context, clear legislative or judicial guidance is essential to ensure legal certainty, coherence of the new tax system, and stability in the relationship between taxpayers and federative entities.