Brazil's congress to begin voting on tax reform regulations this week

Brazil's congress intends to begin voting on the regulations for the tax reform approved in late 2023 on July 10, amid fears and criticism from various sectors regarding the threat of tax hikes.

The broad guidelines for the reform, the main objective of which was to simplify Brazil's convoluted tax system, were passed by congress at the end of last year.

This year, a special working group in the lower house has been discussing and approving the specific regulations to implement the tax amendments in each sector of the economy. Lawmakers will now vote on all the points established by the working group in a full session, as well as in the senate. 

Once approved, the new system is expected to be implemented gradually beginning in 2026 with the changes completed by 2033.

As the congressional process advances, multiple lobby groups are stepping up their criticism of the reform in an effort to secure some last-minute changes that can reduce the risk of tax increases in their sectors.

One of the main aspects of the reform involves replacing taxes like PIS, Cofins, IPI, ICMS, and ISS with the federal and state IBS and CBS taxes, which are equivalent to VAT in other countries.

According to the government and congressional leaders, the aim of the reform is not to raise taxes, which are expected to remain at a general average of 26.5%. However, various sectors are still concerned about the possibility of higher duties, particularly the infrastructure, sanitation and mining industries, among others.

"Although the reform is generally positive as it simplifies the tax system, there are sectors that will probably see higher taxes, such as infrastructure, particularly the highway segment. The still unclear aspects of the tax regulations and the impacts on each sector partly explain the fact that we only had a small number of participants competing for contracts in recent tenders," Frederico Turolla, founding partner of infrastructure-focused consultancy Pezco Economics, told BNamericas. 

Players in the water and sanitation sector are also worried about tax hikes.

“Throughout the process of approving the tax reform, it was promised that it would bring neutrality, that is, no increases or decreases in taxes, but what we're seeing in practice is the opposite,” Roberto Correa Barbuti, CEO of Iguá Saneamento, said during a recent special event on the sector's concerns about the legislative changes.

"We see risks of tax increases and levies in the sector that could lead to an increase in consumer prices in the long term," Barbuti, who is also chairman of water concessionaires' association Abcon, said in response to a question from BNamericas.

Water companies currently have to collect the 9.25% PIS and Cofins federal taxes, but are exempt from paying the ICMS state tax and ISS municipal tax. However, under the regulations now being debated, states and city halls could be allowed to impose these duties, thus increasing the tax burden for water utilities.

MINING

One of the sectors most sensitive to the impacts of the tax reform is mining. 

Brazilian mining association Ibram recently held a series of meetings in congress criticizing the effects of the reform in the iron ore segment, which is Brazil's biggest mining product and a key export.

Ibram raised concerns about the adverse effects of some of the proposed regulations, such as allowing a selective tax on activities that have detrimental health impacts. That could result in a 1% tax on the mining and oil and gas industries, as well as the tobacco and alcohol sectors. 

"The impact of the selective tax on iron ore would bring disastrous consequences for Brazil's trade balance, national competitiveness and economic sustainability," Ibram’s institutional relations director Rinaldo Mancin said during the hearing.

"The selective tax has an inherent conflict, as its application should be aimed at consumption. However, in the case of the mining sector, the tax is imposed on extraction, considering the market value of the final ore, which does not reflect its original cost. This creates an imbalance in terms of tax fairness, penalizing a sector that is vital to the economy," he added. 

OIL AND GAS 

According to Brazil's oil and gas institute (IBP), which represents companies operating in the sector, if imposed on this sector, the selective tax will result in an additional tax burden of around 7 billion reais (US$1.3bn) for the industry.

ICT 

The proposed regulation of the new tax system has also generated concern in the ICT industry.

The sector saw most of its complaints about the changes ignored in the government-issued document that details the new collection rules following the approved unification of taxes.  

One of the industry's main grievances regarding the text is the inclusion of financial expenses in the calculation of the IBS and CBS tax rates. The IBS will absorb three existing federal taxes, while the CBS will combine one state and one municipal tax.