The tax reform regulations Brazil's lower house approved

Brazil’s lower house has approved key regulations for the tax reform that was passed last year and is aimed at simplifying the system.

The reform will replace taxes like PIS, Cofins, IPI, ICMS and ISS with the federal and state IBS and CBS taxes, equivalent to VAT in other countries.

“In addition to making the system better, more agile, simpler and less bureaucratic, our entire goal has been to achieve lower levels of taxation on a larger base with a lower percentage for all Brazilians,” lower house head Arthur Lira said in a statement.

The lower house limited VAT to 26.5%, and any government that seeks to exceed the limit must send a bill to congress.

“We implemented a ceiling, so that the [VAT] rate always remains at a stable level with predictability for the entire Brazilian population,” said Lira.

The regulations must still be approved by the senate, and the tax regime is expected to be implemented gradually between 2026 and 2033.

"It is possible that the senate will evaluate this regulation in August and the risk that I see is that the senate will worsen the tax reform, inserting more economic sectors into exemption and tax models, modifying the origin of the bill too much," Mário Sérgio Lima, an analyst at Medley Global Advisors, told BNamericas.

While the lower house authorized the selective tax on activities harmful to health and the environment, and which was fiercely opposed by mining companies, it was lowered from 1% proposed originally to 0.25% in response to industry pressure.

Besides, the lower house approved popular aspects, such as tax exemptions for meat and a tax cashback mechanism for low-income families related to utility bills.

MINING 

BNamericas talks to Paulo Honório de Castro Júnior, president of Minas Gerais state tax law association IMDT and head of tax affairs at law firm William Freire Advogados about how the regulations affect mining. 

BNamericas: What is your assessment of the approved text? 

Castro Júnior: There were advances in the approved version, such as the reduction of the maximum selective tax rate from 1% to 0.25%. But there were setbacks, notably the inclusion of coal in the tax, without clarity regarding imported coal. 

The text of [complementary bill] PLP 68 does not define the calculation basis for imports, which suggests that there will be no impact on the imported product. Coal is an important energy input, and thermoelectric plants dispatch in a crisis scenario to guarantee energy security for the country. Brazilian energy will become more expensive with what was approved. 

In addition, the text contains several unconstitutional aspects regarding the selective tax, which existed in the version sent by the government. It includes iron ore, without any assessment of its harmfulness to the environment; allows imposing it on exports; disregards that the calculation basis for extraction must be the value of the raw product extracted; and inserts [mining royalty ] CFEM and [state inspection fee] TFRM into the tax base.

Aside from the selective tax, I am concerned that the approved text makes it possible to levy IBS and CBS on mining investments: the acquisition of mining rights at ANM auctions and the assignment/lease of these rights between private individuals. 

The new taxes will also burden access to mining property, which is also part of the investment. It makes no sense for the text to present rules for investments where the tax doesn't apply, such as the purchase and sale of corporate shares, but allows the taxation of other forms of investment. There will be litigation over this.

BNamericas: Will the mining-related aspects be changed in the senate?

Castro Júnior: I hope so. The senate is a more technical entity, which is concerned with the Brazilian federation. 

Charging a selective tax on minerals, under the approved text, is nothing more than creating additional CFEM rates, to the detriment of states and municipalities, that is, in violation of the federative pact. 

This is because the federal government will receive 50% of this tax, while it only receives 10% from CFEM. If the idea was to increase royalty rates, this should be done clearly, without the artifice of creating a new tax just to attract more revenue to federal coffers.

BNamericas: Could the 0.25% tax apply to all minerals or only iron ore, as had been speculated?

Castro Júnior: The approved text states that the 0.25% ceiling applies to operations with extracted mineral goods, without saying which goods. 

As iron ore and coal were included in the tax hypothesis and both are extracted mineral goods, it is correct that the tax rate ceiling applies to both products, not just to iron ore.