Brazil Starts Replacing Five Consumption Taxes with a Dual VAT System in 2026 Pilot

Policy · Brazil

Brazil has moved from discussing tax reform to living through one. The new dual VAT system is now a standing reference for every company, investor and household navigating one of the world’s most complex consumption tax overhauls.

Constitutional anchor for the overhaul

Brazil anchored its new tax system in Constitutional Amendment No. 132 of 2023, known in Portuguese as Emenda Constitucional 132/2023.

The amendment created a dual value-added tax model on goods and services, replacing five existing consumption taxes.

It also introduced the Selective Tax, called Imposto Seletivo or IS, on items harmful to health or the environment.

A cashback mechanism for low-income households became an explicit part of the constitutional design.

This was not a technical adjustment but a repurposing of how Brazil taxes consumption at federal, state and municipal levels.

The statutes that turn the amendment into law

Complementary Law No. 214 of 2025, or Lei Complementar 214/2025, was published on January 16, 2025.

It institutes the IBS, the CBS and the Selective Tax while setting rules for taxable events, credits, regimes and cashback.

The same law creates the IBS Management Committee, called Comitê Gestor do IBS, to administer the tax shared by states, the Federal District and municipalities.

Complementary Law No. 227, signed on 13 January 2026, completes the regulation. It creates the IBS Management Committee, sets its administrative and revenue-sharing rules, and amends LC 214/2025.

One deadline has already slipped. Split payment, the mechanism that settles tax at the moment of payment, will not start with CBS in January 2027, and the revenue service is now indicating 2028.

The Selective Tax begins on 1 January 2027 across seven groups, from vehicles and tobacco to sugar-sweetened drinks and mineral goods. Its rates have not been set.

Congress continues to examine a second complementary bill, PLP 108/2024, focused on governance and the Selective Tax.

Five old taxes meet two new ones

Under the pre-reform system, Brazil relied on PIS and Cofins, two federal turnover contributions, plus IPI, a federal excise on manufactured goods.

The old model also included ICMS, a state VAT-like tax on the circulation of goods and certain services, and ISS, a municipal service tax.

The new CBS, short for Contribuição sobre Bens e Serviços, replaces PIS and Cofins at the federal level.

The new IBS, short for Imposto sobre Bens e Serviços, replaces ICMS and ISS and is jointly administered by states and municipalities.

IPI is being reduced toward zero, with an exception for the Manaus Free Trade Zone, where it remains to preserve local incentives.

The 2026 pilot phase and its mechanics

The pilot phase began on January 1, 2026, with CBS set at 0.9% and IBS at 0.1%, producing a combined test rate of 1%.

During 2026, the new taxes are charged concurrently with the existing five taxes.

Taxpayers can deduct the pilot CBS and IBS amounts from what they owe for PIS, Cofins and ICMS.

The net result is zero additional tax burden on each transaction during the test year.

The 2026 pilot is deliberately operational rather than fiscal, designed to calibrate invoicing systems and collect revenue data.

What changes in 2027

From January 2027, CBS takes full effect at an indicative operational rate of around 8.8%.

PIS and Cofins are extinguished at that point, and IPI is reduced to zero except for the Manaus Free Trade Zone.

The Selective Tax begins to apply to specified goods and services, with tobacco, alcohol and sugary drinks among the target categories.

IBS remains in a low-rate testing phase while the phase-out of ICMS and ISS begins.

This split means 2027 delivers the first real burden shift, particularly at the federal level.

The road from 2029 to full regime in 2033

By 2029, ICMS and ISS enter a more pronounced gradual reduction.

IBS rates increase toward their target trajectory within the transition framework.

The IBS cashback mechanism also begins in January 2029.

Under EC 132/2023 and LC 214/2025, the transition is completed in 2033.

At that point, ICMS and ISS are fully extinguished and the dual VAT operates at a combined reference rate currently estimated at 27.91%.

The trajectory of rates

The pilot rates of CBS at 0.9% and IBS at 0.1% are fully offset against the old taxes, and payment is waived entirely for companies that meet the reporting obligations. It is a compliance rehearsal at no net cost, not a new 1% charge.

Post-test indicative rates are provisional, subject to confirmation by the Federal Senate and the IBS Management Committee.

Sources report an indicative CBS rate around 8.8% and an indicative IBS rate around 17.7%.

The current estimate of 27.91% would make Brazil’s dual VAT among the highest VAT-type combined rates in the world. It is also 1.41 points above the statutory cap, which obliges the government to send corrective measures to Congress.

Final rates depend on 2026 and 2027 pilot phase revenue data and formal Senate resolution.

The cashback and selective-tax design

The cashback is not a separate welfare programme but a mechanism embedded in the VAT architecture.

It is designed to return part of the tax paid by low-income households, with the IBS portion starting in January 2029.

Cashback is fully implemented for both CBS and IBS once the regime matures.

The Selective Tax, or Imposto Seletivo, applies to goods and services considered harmful to health or the environment.

The design combines a broad-based VAT with higher targeted charges on specific products, rather than relying solely on the general rate.

What changes for companies

Companies must adapt invoicing and accounting systems to handle CBS and IBS during the 2026 pilot year.

Though the test phase adds no net burden, the operational demands are real for compliance teams.

From 2027, businesses lose PIS and Cofins and begin paying CBS at full operational rates.

The gradual phase-out of ICMS and ISS through 2033 means state and municipal tax obligations shift toward the shared IBS framework.

Firms operating in the Manaus Free Trade Zone keep certain IPI benefits, making location-specific planning a continuing part of tax strategy.

What changes for consumers

The 2026 pilot was structured to avoid any net increase in tax on each transaction.

Once full rates arrive, the final retail price of many goods and services will reflect the new CBS and IBS incidence.

The cashback mechanism is intended to protect low-income households by returning part of the tax paid.

Selective taxation on tobacco, alcohol and sugary drinks may increase prices for those specific products.

The consumer impact depends on how businesses pass through credits and whether cashback reaches households promptly.

International standing of the Brazilian model

Brazil’s post-transition combined rate, currently estimated at 27.91%, would exceed most VAT rates applied by OECD member countries.

The dual structure, with CBS at the federal level and IBS at the subnational level, is unusual among large economies.

Most countries operate a single national VAT, while Brazil must coordinate states, the Federal District and municipalities.

The 2026 pilot phase mirrors the cautious approach used in countries that test invoicing systems before fiscal start dates.

Brazil’s cashback mechanism also places it among a smaller group of countries that rebate consumption tax directly to low-income households.

This article was produced by The Rio Times’ automated newsroom system. How we use AI · Report an error

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