Brazil's Tax Reform:
What Every Business Needs to Know
Brazil is in the middle of the most significant overhaul of its tax system in decades. Five major consumption taxes are being replaced with a dual VAT system over a seven-year transition. The clock has started.
Get in TouchBrazil is replacing five complex consumption taxes with a single dual VAT, and the transition is already underway.
Constitutional Amendment 132/2023 launched the most comprehensive reform of Brazil's tax system in 35 years. The reform replaces five existing consumption taxes (PIS, COFINS, IPI, ICMS and ISS) with a streamlined dual VAT system, and is underpinned by two major pieces of legislation: Complementary Law 214/2025 and Complementary Law 227/2026.
The goal is to eliminate the cascading tax burden and the notorious complexity of Brazil's current system, reduce economic distortions, and create a more predictable and uniform compliance environment for businesses operating across multiple states.
The transition period runs from 2026 to 2032, with full operation of the new system expected in 2033. During the transition, old and new taxes will coexist, meaning companies will need to comply with both systems simultaneously for several years. This is one of the most significant compliance challenges the reform creates for businesses.
The reform also introduces a new Selective Tax on goods and services considered harmful to health or the environment, new rules on international data transfers and digital services, and a cashback mechanism for low-income households. For the background on Brazil's current tax system, see our overview at LawsofBrazil.
The five taxes being replaced
PIS / COFINS
Federal social contributions levied on gross revenues. Notoriously complex, with different rates and credit systems depending on the profit method adopted by the company (actual vs deemed profit). Rate: 3.65% (deemed profit) or 9.25% (actual profit) with credits.
IPI
Federal tax on industrialised products, levied on manufacturing and imports. Rates vary widely by product category (0–30%+) and are set by a detailed tariff table. Has historically been used as an industrial policy tool.
Federal excise → Selective Tax
IPI will be substantially phased out and replaced by the new Selective Tax (Imposto Seletivo), which applies specifically to goods and services deemed harmful to health or the environment, such as tobacco, alcoholic beverages, weapons, vehicles and certain fuels.
ICMS
State-level VAT on goods, interstate transport and communications. Rates vary by state (typically 12–25%) and by product. One of the most complex taxes in the system, it is a major source of litigation between companies and state governments, and a key driver of the so-called "fiscal war" between states.
ISS
Municipal tax on services. Rates set by each municipality (2–5%). Applies to a wide range of services, including professional services, digital services, software, financial services and transport. The fragmentation across thousands of municipalities creates enormous compliance complexity.
The cascading problem
Under the current system, taxes are levied on taxes: each successive tax is calculated on a base that already includes prior taxes. For certain imported goods, the effective total tax burden can exceed 100% of the CIF value. The reform aims to end this cascading effect by introducing a full credit system.
Dual VAT: CBS + IBS + Selective Tax
The reform introduces three new taxes to replace the five above. Together, the combined CBS + IBS rate is expected to converge at approximately 26.5–28%, though final supplementary legislation on rates is still being published.
CBS
Contribuição sobre Bens e Serviços, a federal consumption tax equivalent to a VAT. Replaces PIS and COFINS. Fully operational from 2027. Includes a credit system to eliminate cascading.
IBS
Imposto sobre Bens e Serviços, a state and municipal VAT, shared between states, the Federal District and municipalities. Managed by the new CGIBS committee. Gradually replaces ICMS and ISS from 2029 to 2032.
IS
Imposto Seletivo (Selective Tax), levied on goods and services harmful to health or the environment: tobacco, alcoholic beverages, weapons, certain vehicles, fuels and others. Partially replaces IPI.
Year by year: what changes and when
Complementary Law 214/2025 (January) and Complementary Law 227/2026 (January 2026) establish the full legal framework for CBS, IBS and the Selective Tax. The CGIBS (IBS Management Committee) is formally created.
CBS at 0.9% and IBS at 0.1% appear on electronic invoices. These amounts can be offset against existing PIS/COFINS liabilities, with no additional cash burden for most businesses. A penalty-free window applies for the first three months after detailed regulations are published. After that window closes (expected mid-2026), errors in CBS/IBS invoice fields attract fines and loss of credits. All existing taxes (PIS, COFINS, IPI, ICMS, ISS) remain fully in force.
PIS and COFINS are terminated. CBS begins full collection. IPI is largely phased out (with limited exceptions for goods competing with products manufactured in the Manaus Free Trade Zone). IBS remains at 0.1% transitional rate.
IBS begins gradual collection at increasing rates. ICMS and ISS are progressively reduced each year from 2029 through 2032. Companies must manage compliance with both the new IBS and the declining legacy state/municipal taxes simultaneously.
Each year, IBS rates increase as ICMS and ISS rates fall proportionally. Companies will need to operate two parallel tax compliance systems during this entire period. This is the most operationally complex phase of the reform for businesses.
ICMS and ISS are fully eliminated. IBS reaches its full rate. CBS + IBS together form Brazil's new dual VAT system. The reform is complete.
What the reform means in practice
E-invoicing updates are mandatory now
Brazil's electronic invoice (NF-e, NFC-e and NFS-e) formats have been updated to include new CBS and IBS fields. From 1 January 2026, these fields must be completed on every invoice. After the initial testing window closes (expected mid-2026), incorrect or missing CBS/IBS data will result in fines, loss of credits and potential disruption to the movement of goods.
Foreign digital suppliers are now in scope
For the first time, non-resident digital service providers (SaaS, streaming, platforms, e-commerce) must register for CBS/IBS and collect tax on Brazilian sales. If neither the supplier nor the platform registers, financial institutions may be required to withhold the tax. Foreign companies supplying digital services to Brazil should review their registration obligations immediately.
Contracts and pricing will need review
The shift from origin-based to destination-based taxation changes where tax liability arises. Existing contracts that reference specific taxes (ICMS, ISS, PIS, COFINS) will need to be reviewed and potentially renegotiated. Pricing models, especially for goods sold across state lines or services delivered remotely, may need structural adjustment.
Credit system changes how costs are calculated
The new CBS and IBS both operate with a full input credit system, meaning tax paid on inputs can be offset against tax collected on outputs. This is a significant improvement over the current system, where credits are restricted and often cascade. However, it requires companies to track and claim credits correctly from the outset to avoid cash-flow losses.
ICMS credits need to be mapped now
Companies that hold accumulated ICMS credits (common in export-heavy businesses) need to map and document these balances carefully. Complementary Law 227/2026 provides mechanisms to offset or transfer ICMS credits and to use ICMS-ST amounts in inventory as at 31 December 2032. Acting early is essential to preserve the value of these credits.
Special regimes for certain sectors
Complementary Law 227/2026 includes sector-specific provisions for real estate, financial services, energy, digital platforms, hospitality and small businesses (Simples Nacional). Companies in these sectors should obtain specific advice, as the standard CBS/IBS rules may not apply to them in the same way.
Six actions every company should take in 2026
Update your e-invoicing system
Ensure your NF-e, NFC-e and NFS-e templates include the new CBS and IBS fields and are correctly parameterised. This is not optional. Errors attract fines once the testing window closes.
Review your product and service classification
Correct classification determines your CBS/IBS rates, available credits and eligibility for reduced rates. Incorrect classification can block downstream buyers from claiming credits.
Map your ICMS credit balances
Identify and document all accumulated ICMS credits. Plan how to use, transfer or recover these before the 2033 deadline. Unused credits may be lost.
Review contracts that reference legacy taxes
Contracts referencing ICMS, ISS, PIS or COFINS may need updating to reflect the new tax structure. Pricing provisions may need adjustment as the transition unfolds.
Register for CBS/IBS if you supply digital services from abroad
Non-resident digital service providers must register for CBS/IBS. Failure to do so may result in financial institutions withholding the tax from payments.
Train your finance and tax teams
The Federal Revenue Service has made clear that 2026 is the final rehearsal. Finance, billing and tax teams need to understand the new logic before the penalty-free window closes.
Tax expertise for foreign companies in Brazil
D&Q Lawyers advises foreign companies on all aspects of Brazilian tax law, including the ongoing consumption tax reform. Our team monitors developments in the CBS/IBS framework as regulations are published and assists clients in understanding how the changes affect their specific operations, contracts and compliance obligations.
For a broader overview of Brazil's existing tax system and how it applies to foreign businesses, see our resource at LawsofBrazil.
Meet the Full TeamQuestions about Brazil's tax reform?
We advise foreign and domestic companies on how the CBS/IBS transition affects their operations, contracts and compliance obligations. Initial enquiries are always welcome.
This page is a summary for informational purposes only and does not constitute legal or tax advice. Details of the reform continue to be published. Please consult us for advice on your specific situation.
