Tax reform: what finance teams need to understand to prepare

Before discussing how to prepare for Brazil's tax reform, it helps to revisit a few basic concepts. The change goes beyond a new tax rate or a new tax obligation. It changes how consumption taxes are structured, how tax documents are issued, how credits are managed, how companies deal with suppliers, how cash flow works, and how financial, tax, and accounting systems operate.

The reform is a set of amendments to the Constitution that provides the basis for new laws in the Brazilian tax system. The main reason for the change is how complex the current system is. Anyone who works in finance knows how hard Brazilian taxation is to operate: different regimes, different taxes, old rules, incentives, exceptions, and logic that has become outdated over time.

The proposal aims to simplify this system, but getting there takes preparation. During the transition, companies will have to deal with both old and new rules, new documents, new fields, new taxes, new integrations, and new ways of calculating and filing taxes.

The principles of the tax reform

The reform rests on a few fundamental principles.

The first is simplicity and transparency. The goal is a clearer, simpler, and more efficient structure.

Another principle is cooperation, both between tax authorities and taxpayers and among the different levels of government. The reform depends on coordination between the federal government, states, and municipalities.

There is also environmental protection, which uses taxation to encourage or discourage certain consumption and production behaviors.

The principle of tax fairness shows up in the push for a more even distribution of the tax burden. It aims to reduce distortions where some sectors or players pay very little while others carry more of the weight.

Finally, there is neutrality: the idea that taxation should not interfere with a company's economic decisions. Today, many decisions about location, operations, and structure are shaped by tax incentives. The reform tries to reduce that effect.

Creating the dual VAT

One of the main changes is the creation of a VAT, or value-added tax. Brazil did not invent the VAT from scratch. It already exists in many countries, and those systems were studied as references for the Brazilian proposal.

The purpose of the VAT is to unify and simplify tax collection. In Brazil, it takes a dual form, split into two taxes:

• IBS, the Tax on Goods and Services;
• CBS, the Contribution on Goods and Services.

The IBS falls under state and municipal jurisdiction and replaces ICMS and ISS. It will be managed by a steering committee whose details are still subject to definition and approval. Taxpayers need to pay attention here, because the committee will be made up of representatives and will play a major role in putting the tax into practice.

The CBS falls under federal jurisdiction and replaces PIS and COFINS. It is managed by the Federal Revenue Service (Receita Federal) at the federal level.

The combined rate has not been finalized, but IBS and CBS together are expected to fall somewhere around 26% to 28%. The stated goal is to keep total tax revenue the same, not to increase it. That does not mean everyone will pay what they pay today. Some cases may see increases, especially where significant benefits exist today, while others may be affected differently.

Neutrality and the end of incentive-driven decisions

The principle of neutrality is key to understanding how the VAT works. Taxes should not influence a company's economic decisions.

Today, many service companies look at tax incentives offered by specific municipalities or regions before deciding where to set up their headquarters or operations. In many cases, the tax decision carries more weight than the business decision.

With the reform, this tends to change. Location no longer matters as much for reducing the tax burden, and companies need to focus more on operations, customers, data, systems, and how the supply chain actually works.

What happens to IPI

At first, IPI was going to be abolished. The decision later changed to a zero rate, except for products tied to the Manaus Free Trade Zone. The goal is to preserve the incentives that exist in that region.

Companies whose products pass through the Manaus Free Trade Zone should check whether their products will be affected, keep track of how the rate is defined, and adjust their tax and accounting systems to reflect the change.

The purpose of this change matches the rest of the reform: simplify the system, reduce overlapping consumption taxes, and eliminate distortions in the production chain, while still protecting the Manaus Free Trade Zone.

Selective tax

Alongside IBS, CBS, and the residual IPI, the reform also introduces the IS, or Selective Tax.

Some people call it the "sin tax," because it aims to discourage the consumption or production of goods and services considered harmful to health or the environment.

Key features of the selective tax:

• it falls under federal jurisdiction;
• it is extrafiscal, meaning it aims to influence behavior and not just raise revenue;
• it applies to the production, sale, or import of goods and services considered harmful;
• it has specific rates for each type of product;
• its list of products is set by supplementary law, and some rates are still being defined.

Examples mentioned in the class include cigarettes and other tobacco products, alcoholic beverages, soft drinks and sugary drinks, as well as minerals, oil, and gas. The revenue is also shared among the federal government, states, and municipalities.

Overview of taxes after the reform

Broadly, the new landscape includes:

• IBS, under the jurisdiction of states and municipalities;
• CBS, under federal jurisdiction;
• IS, under federal jurisdiction and selective in nature;
• IPI, kept on a residual basis to preserve specific situations.

In practice, despite the promise of simplification, companies need to understand that the transition will require them to run old and new structures side by side.

Taxable event: what triggers the tax

Another important concept is the taxable event, meaning whatever triggers the tax.

Under the reform, the main taxable event is the supply of goods and services.

Supply includes examples such as:

• transfer of ownership;
• disposal;
• purchase and sale;
• payment in kind;
• assignments;
• licensing;
• leasing of goods;
• loans;
• donations with consideration;
• granting of rights for consideration;
• provision of services in general.

On the other hand, the following are not taxable events:

• employment relationships;
• internal transfers within the same company;
• corporate reorganizations, such as mergers and acquisitions;
• financial income;
• transactions without consideration;
• cooperative acts.

This concept matters because it helps define what generates tax and also what generates tax credits.

Destination-based taxation

Today, taxation often happens at the origin. If a company provides a service from São Paulo, for example, the tax may be paid to the São Paulo city government.

For years, this model fueled a tax war between states and municipalities. Benefits, incentives, and reduced rates made geography a deciding factor in companies' tax strategies.

The reform changes this by taxing at the destination. Companies now need to look at where the customer is or where the product will be delivered.

If a product is sold in one location but delivered in another, the destination determines where the tax is paid. This has major operational impacts:

• service providers will have to manage IBS payments by destination municipality;
• companies that deliver products will also need to track the actual delivery location;
• data management becomes more critical;
• address errors stop being just a registration problem and start creating tax costs;
• invoices may be rejected when the data is incorrect.

During the transition, companies will have to handle origin-based and destination-based taxation at the same time, depending on the tax and the applicable rule.

Tax credits: what changes

Before looking at the new model, it is important to understand the current situation.

Companies that sell products are already used to dealing with ICMS credits, even though the calculation is complex and bureaucratic. Under many regimes, PIS and COFINS do not generate credits for most companies, with exceptions such as the actual profit regime (lucro real) and certain special regimes. IPI also generates credits in some cases. ISS does not generate credits.

In other words, the current situation is mixed: some taxes generate credits and others do not. When they do, the calculation is often difficult.

With the reform, IBS and CBS follow a principle of full non-cumulativeness. The tax applies only to the value added at each stage of the production and distribution chain.

Goods and services actually used in the business generate credits. Examples include:

• electricity;
• third-party services;
• machine maintenance;
• production inputs;
• certain services used in operations.

Items for personal or recreational use do not generate credits. The class mentions examples such as jewelry, works of art, beverages, weapons, recreational goods and services, and use by individuals.

There is one important distinction: if an item is part of the company's own production, it may be treated differently. Alcoholic beverages, for example, do not generate credits when used recreationally, but they can if they are part of the company's business activity.

Another new feature is that durable goods, or fixed assets, now generate full credits. Buying equipment can generate the full credit up front instead of in installments.

How credits will work in practice

In the current model, credits often arise from the tax amount shown on the invoice.

In the new model, a credit only arises once the corresponding debt has actually been settled. In practical terms, if a company buys from a supplier and wants to use that credit, the supplier must have paid the corresponding tax.

This has direct consequences:

• the quality of invoice data becomes essential;
• the tax document becomes the source of truth;
• errors in tax data can block credits;
• choosing suppliers now involves assessing their tax reliability;
• price and quality are no longer the only purchasing criteria;
• companies need to assess whether a supplier generates credits and pays its taxes reliably;
• supplier due diligence needs to go further;
• systems need tighter integration with government systems.

The class's central message is clear: the quality of tax data will become the new core of compliance for the team. A wrong invoice can cost not only the credit, but also trust.

Split payment

Split payment changes how the tax is paid.

Instead of the company receiving the full amount, calculating taxes, and paying them later through ancillary obligations, the tax is separated at the time of payment.

If a sale is paid with a gross amount of R$ 1,000 and the tax share in the example is 20%, R$ 200 goes to the tax authorities and R$ 800 stays with the supplier. The deduction happens at the source.

This gives the government more certainty that taxes will be collected and reduces the risk of tax default. It may also simplify things for suppliers, although companies still need to keep track of their own tax calculations.

For installment payments, the same logic applies to each installment. If the payment is split, the tax share is separated each time an installment is settled.

For cash payments, or in cases where the split payment system does not work, the tax may be paid in other ways. The class also mentions that the buyer may handle the payment on the supplier's behalf, paying the net amount to the supplier and sending the tax share to the authorities.

How split payment affects cash flow

Today, many companies receive the gross amount and pay taxes later. That gives them a few days of available cash between receiving payment and paying the government.

With split payment, that window shrinks. The tax share leaves at the moment of payment, so managing cash flow becomes even more important.

In the class example, a sale with a 27% rate means the supplier receives R$ 730 and the tax authorities receive R$ 270 automatically.

Under the current system, the company would receive R$ 1,000 and pay taxes later. With split payment, it receives the net amount directly. This reduces working capital.

Assisted tax calculation and credit offsetting

Tax calculation also changes.

The tax authorities gain real-time access to transactions. Using information from documents, municipalities, states, and other integrations, they automatically calculate debits and credits.

The company receives a proposed tax calculation. It can accept or dispute it. If it does nothing within the applicable deadline, it is deemed to have accepted the proposal.

This works somewhat like pre-filled tax returns: the government provides a base of information, and the company reviews, adjusts, or accepts it.

Errors in tax documents, credits from unsettled debts, system inconsistencies, and unexplained discrepancies can lead to problems and tax assessments.

Credits are applied in the following order of priority:

1. overdue debts;
2. debts for the current period;
3. future debts;
4. refund, when applicable.

Refunds depend on the case and may follow different timelines.

What happens to Simples Nacional companies

Companies under Simples Nacional, Brazil's simplified tax regime for small businesses, continue paying taxes through the DAS.

Under the standard model, purchases from Simples companies do not generate IBS and CBS credits for the buyer. This may hurt these suppliers' competitiveness.

There is also a new option to choose a regular regime for IBS and CBS outside the DAS. In that case, the company keeps paying the DAS for other taxes but can pay IBS and CBS separately and show them on invoices, generating and passing on credits.

This can make them more competitive, since customers may prefer suppliers that generate credits.

ERPs and other systems will need to correctly identify the regime the company has chosen and reflect it on the tax document.

The transition period

The transition has several phases.

First comes a period of regulation, publication of rules, system development, and company preparation.

Next is a testing phase with reduced rates. Companies must issue documents showing IBS and CBS, still for validation and adjustment purposes.

Then actual implementation begins, with old taxes being phased out in certain areas, full CBS collection, a zero IPI rate where applicable, and the introduction of the selective tax.

After that, ICMS and ISS are gradually reduced while the IBS share gradually increases.

Finally, there is a long phase of revenue adjustments, distribution among the levels of government, and consolidation of the model.

The key point is that for much of this journey, companies will be dealing with everything at once: old rules, new rules, new obligations, old obligations, systems being adapted, and new data models.

How to prepare

Preparation starts with understanding the impact on the business.

Each company needs to analyze its own situation: SaaS, services, manufacturing, retail, products, exports, imports, local operations, nationwide operations. Some businesses will be more affected than others.

It is also important to keep track of rate reductions, specific rules for products and services, changes to the basic food basket, special regimes, and other points still under discussion.

Staying up to date is part of the job. The regulations keep evolving, and companies need to follow new rules, manuals, layouts, and guidance.

Another priority is training the team. This topic is not limited to tax or accounting. Finance, sales, commercial, customer success, procurement, data, and technology teams also need to understand the impacts.

Accounting and tax routines need to be redefined, with old and new deadlines running side by side. Sector-specific impacts should also be assessed.

Suppliers

Suppliers become a specific area of attention.

Companies need to assess:

• the supplier's tax regime;
• whether it falls under the actual profit regime (lucro real), the presumed profit regime (lucro presumido), or Simples Nacional;
• whether it will choose a regime that allows it to generate credits;
• whether it is reliable from a tax standpoint;
• whether its contracts need to be reviewed.

Even though split payment reduces some of the risk, there may be situations where the system does not work as expected or where the company still depends on the supplier. That is why supplier compliance remains important.

Reviewing contracts is another way to mitigate tax risks and protect credit generation.

Since there will be less room for tax planning based on rates, optimizing credits becomes an important area.

Finance, margins, and pricing

Finance teams need to model their margins.

Many margins may change. If the company does not recalculate, does not review prices, and does not understand the impact on the business, it may end up with thin margins or more serious problems.

Customer contracts also need to be reviewed, especially in B2B businesses. Companies should talk to customers, understand the impacts, and work closely with sales, commercial, and customer success teams.

The reform is not just a tax matter. If a company adjusts its prices responsibly and a competitor does not because it has not understood the change, the sales team needs to be able to explain the difference. Otherwise, it may look like the competitor is simply cheaper, when in fact it may be absorbing an unsustainable margin.

Tax documents

Tax documents will change.

Invoices will need to include new taxes, new fields, and standardized layouts. Today, especially for service invoices, each municipality may have its own format. The trend is toward more standardized data, although some municipalities will keep their own issuing systems.

Companies need to check whether their municipality has joined the national issuing system or kept its own. They also need to keep track of new fields, codes, and layouts.

The class recommends testing every use case:

• exports;
• imports;
• services;
• products;
• different municipalities;
• different issuing scenarios.

If the company uses an integrated ERP, it needs to confirm that the system is already updated, that the configuration is correct, and that testing has been done.

Lack of preparation can lead to rejected invoices, little time to fix them, and a direct impact on operations.

Financial systems, ERPs, and accounting systems

ERPs will be heavily affected.

Companies will need to:

• set up new taxes;
• reconfigure existing taxes;
• change rates throughout the transition;
• review calculation automations;
• configure multiple scenarios;
• ensure flexibility for future changes.

The recommendation is to talk to the ERP vendor, understand its roadmap, test scenarios, and make sure operations are ready to issue, calculate, and integrate correctly.

Accounting systems also need to adapt to:

• new taxes;
• credit management;
• traceability;
• destination-based taxation;
• new reports;
• new ancillary obligations.

Part of this adaptation depends on government systems and integrations that are still evolving. Even so, companies need to keep track, test, and prepare.

Three final points

At the end of the class, Catarina highlights three points:

1. Run an in-depth assessment to understand where the reform affects your operations.
2. Automate your processes, especially since the transition will be complex and will require flexibility.
3. Stay up to date with rules, systems, layouts, regulations, and how they affect your specific situation.

The tax reform is more than a tax change. It calls for better data, more integrated systems, more automated processes, and a finance team that works more closely with tax, accounting, technology, procurement, and sales.

To explore every point with Catarina's full explanation, watch the full class on tax reform.