The countdown to Brazilian tax reform has begun

Edison Fernandes

An old saying goes that “the devil knows more because he’s old than because he’s the devil” (I researched its origin but couldn’t find it for sure: I accept suggestions!). Approximately 20 years ago, tax legislation in Brazil was substantially changed, which led Brazilian companies to adapt. It was about the non-cumulative nature of COFINS [Social security contribution], the implementation of which led to clashes in relation to company information systems (ERP) and even disagreements over spreadsheets between suppliers and customers. The Brazilian tax reform that will begin the transition period in 2026 is likely to bring even more significant changes, therefore requiring greater readaptation from companies.

To mention but three impacts of the tax reform on business management as a whole, I highlight:

(i) price formation
(ii) corporate restructuring of the business
(iii) contractual renegotiation.

Initially, regarding price formation, the non-full cumulative effect (VAT model) will cause a change in the calculation of taxes due over consumption, implying the necessary review of the processes and calculations for determining the sales price of goods, services and rights. In this sense, the quantity and quality of customers influence the magnitude of impacts. In standardized sales for a large volume of customers (for example, retail), as the price tends to be less negotiated, almost all the responsibility for the establishment of the price falls upon the supplier; on the contrary, in contracts with greater negotiation margin (for example, business to business – B2B or between companies), the repercussions of new taxes on the price tend to be negotiated.

Secondly, the tax neutrality sought by the Brazilian tax reform requires the re-study of the corporate structure of companies and groups of companies. By neutrality we must understand the very low influence of taxes in determining how the company operates. Once the tax effect is withdrawn from management decisions, it is possible that companies, which are currently vertically integrated, may find advantages in horizontalization (for example, outsourcing). Furthermore, companies that currently have a structural base on tax incentives, especially ICMS [tax on the circulation of goods and on services] and ISS [municipal services tax], the two Brazilian general taxes on consumption, shall necessarily have to rethink their business form.

Finally, long-term contracts already executed and contracts that will be executed from now on must have clauses referring to the impacts of tax reform. We know for sure that tax management will undergo significant changes and the tax burden
of each company, or even each business (contract) will probably be modified as well. Even with the aforementioned neutrality, some change in the contract and in the execution of business will be felt; however, the lack of knowledge of the effective tax rate does not allow us to fully anticipate these effects. Therefore, with a view to preserving a lasting relationship based on good faith between supplier and client, it is imperative to establish from the outset the rules on how the contract shall be rebalanced due to the impacts of the tax reform.

The clock for tax reform implementation period has been started. The countdown to tax reform transition period is 18 months – that’s right, just a year and a half. And experience has shown that in these cases it is not a good idea to follow a certain Brazilian way of leaving everything to the last minute.