Brazil is replacing its fragmented consumption tax system with a dual VAT model. The transition began in 2026 and will be completed in 2033.
Brazil’s Tax Reform introduces significant changes to the taxation of goods and services. The new system replaces several federal, state and municipal taxes with two value-added taxes: IBS and CBS.
The implementation will take place gradually, with the new system becoming fully effective in 2033.
1. Current consumption tax system
Brazil’s current consumption tax system comprises several taxes imposed by different levels of government:
- Federal taxes: PIS, COFINS and IPI.
- State tax: ICMS.
- Municipal tax: ISS.
Each tax is governed by its own rules concerning taxable events, tax bases, input tax credits and ancillary obligations.
This fragmentation makes the Brazilian consumption tax system particularly complex, especially for companies operating across different states and municipalities.
2. The new dual VAT system
The Tax Reform gradually replaces PIS, COFINS, ICMS and ISS with two value-added taxes:
CBS (Contribution on Goods and Services): A federal tax administered by the Brazilian Federal Revenue Service (RFB).
IBS (Tax on Goods and Services): A tax levied by States, Municipalities and the Federal District, administered by the IBS Steering Committee (CGIBS).
The IPI will also be largely eliminated, subject to specific rules concerning products manufactured in the Manaus Free Trade Zone.
Additionally, the Reform introduces a federal Selective Tax (IS), applicable to the production, extraction, sale or import of certain goods and services harmful to health or the environment.
The new IBS and CBS system has the following main characteristics:
- Uniform legislation: Common rules throughout Brazil, except for the tax rates established by each level of government.
- Broad tax base: Taxation of tangible and intangible goods, including rights and services.
- Standard tax rate: A general rate applicable to most transactions, subject to statutory exceptions.
- Destination-based taxation: Taxes are allocated to the jurisdiction where consumption takes place.
- Taxes charged separately: IBS and CBS are calculated on top of the transaction price, rather than being included in it.
- Full non-cumulativity: Businesses may generally recover IBS and CBS incurred on their purchases, subject to the applicable legal requirements.
3. Transition period: 2026 to 2033
The replacement of the existing taxes will occur gradually.
2026: Test phase
The transition began in 2026, with CBS at a rate of 0.9% and IBS at 0.1%, subject to the applicable transitional rules.
2027: Replacement of PIS and COFINS
From January 2027, PIS and COFINS will be eliminated and CBS will become fully effective, at an estimated rate of approximately 9%.
During this period, IBS will remain at 0.1%.
2029–2032: Gradual replacement of ICMS and ISS
Starting in 2029, ICMS and ISS rates will be progressively reduced, while IBS rates will gradually increase.
2033: Full implementation
From January 2033, ICMS and ISS will be fully eliminated, completing the transition to the dual VAT system.
4. Final considerations
Brazil’s Tax Reform will replace a fragmented consumption tax system with a dual VAT model based on uniform legislation, destination-based taxation and broad input tax credits.
The transition will occur in stages, with the replacement of PIS and COFINS in 2027 and the gradual elimination of ICMS and ISS between 2029 and 2033.
Understanding this timeline and the main characteristics of IBS and CBS is the starting point for assessing the Reform’s impact on Brazilian business operations.