The reform replaces the previous system (based on multiple federal, state and municipal taxes with heterogeneous rules and fiscal accumulation) with a more homogeneous, non-cumulative and technically harmonized scheme.

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Architecture of the new system

The central axis is the introduction of a dual structure VAT, composed of two coordinated taxes that are applied on the same transactions (goods and services), but correspond to different levels of government and come into effect progressively.

1. CBS – Contribution on Goods and Services (federal level)

The CBS constitutes the federal VAT.

• What it applies to: the sale of goods, the rendering of services and other taxable transactions carried out in Brazil.
• What it replaces: federal excise taxes (PIS, COFINS and IPI).
• How it works: it is non-cumulative, with full right to deduct input tax paid in previous stages.
• Where collected: at the place of final consumption (destination principle).
• When it is applied: after the initial adaptation phase, it becomes the main federal excise tax.

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2. IBS – Imposto sobre Bens e Serviços (subnational level)

IBS is the subnational component of VAT.

• To what it applies: to the same transactions taxed by the CBS (goods and services), including transactions between different states or municipalities.
• What it replaces: state and municipal excise taxes (ICMS and ISS).
• How it works: shares tax base, accrual and credit system with the CBS, eliminating cascading taxation.
• Where it is collected: in the territory where final consumption takes place, with automatic distribution of the collection among states and municipalities.
• When it is applied: it is introduced gradually, progressively replacing ICMS and ISS until the system is fully consolidated.

In practice, CBS and IBS are applied together in the same transaction, are itemized in the invoice and form a single VAT system.

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3. Selective Tax (IS)

The Selective Tax is an additional and separate tax from the dual VAT.

• To what it applies: only to certain goods and services legally defined by their negative externalities (health, environmental or other).
• What it replaces or complements: it rationalizes the logic of existing excise taxes, without being integrated into VAT.
• How it works: it is not non-cumulative and does not generate credit rights like VAT.
• When it applies: it is required only when the transaction affects goods or services expressly included in its scope, regardless of the CBS and the IBS.

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Implementation schedule

The VAT reform will be implemented progressively between 2026 and 2033.

• 2026: adaptation and operational testing phase, aimed at adapting the invoicing and accounting systems.

• 2027: effective entry into force of the federal VAT(CBS) and Selective Tax (IS).

• 2029-2032: progressive replacement of state and municipal taxes with subnational VAT(IBS).

• 2033: complete implementation of the new system and definitive disappearance of the indirect taxes replaced.

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Implications for companies

The VAT reform will have cross-cutting impacts on the operations and taxation of companies operating in Brazil.

• Increased operational requirements in the short term: adaptation of invoicing and accounting systems to manage the coexistence and subsequent substitution of taxes.
• Changes in effective taxation: the progressive elimination of cascading taxation and the application of the destination principle may modify costs, margins and price structures.
• Review of contracts and commercial models: it will be necessary to review clauses related to indirect taxes and, in some cases, to rethink distribution and logistics schemes.