Brazil’s transition to the new dual value-added tax (VAT) model, made up of the Contribution on Goods and Services (CBS) and the Tax on Goods and Services (IBS), enters a decisive phase in 2027. More than a gradual replacement of existing taxes, the launch of the new system marks a shift in companies’ economic dynamics, affecting contract structures, cash flow, pricing, and investment decisions. For investors, understanding this transition is becoming an important part of assessing how competitive and predictable Brazil’s business environment is.

According to Rafael Amorim, partner in the Tax & Customs practice, companies will need to adapt gradually, particularly given the period in which the current and new systems will run side by side. “The transition between the two models may increase costs and compliance requirements in the short term, but the expectation is that, over the medium and long term, the new system will bring greater predictability, simplify obligations, and strengthen business competitiveness,” he explains. The transition period thus combines immediate operational challenges with the prospect of structural changes in how companies organize their operations and evaluate investments.

One of the main effects relates to so-called tax neutrality, which aims to ensure that taxes are levied on the value added at each stage of the production chain, without cascading. With CBS and IBS charged on a tax-exclusive basis, the reform changes how taxes are factored into pricing and into the structuring of commercial relationships. The impact is likely to be particularly significant for long-term supply contracts and M&A transactions, where tax assumptions can influence margins, prices, and the very economic valuation of the deals.

This shift is also expected to affect relationships across the production chain. In Amorim’s view, the transition period is already prompting a redesign of pricing clauses and tax pass-through mechanisms. “The market is already moving to redesign pricing and pass-through clauses. Our preventive work aims to keep stronger players in the production chain from improperly withholding tax credits or passing on fictitious cost increases under the pretext of the new rules,” he explains. In this context, reviewing procurement policies and monitoring the supplier base matter not only from a tax standpoint, but also as tools for protecting margins and ensuring financial predictability.

The transition also affects a less visible but equally important dimension for companies: cash flow management. Among the mechanisms drawing attention for 2027 is split payment, a system in which the tax is withheld and remitted to the tax authorities when the transaction is settled. In other words, whereas companies previously received the full amount from the customer and paid the tax later, the timing of cash availability now changes. This can affect working capital, treasury operations, and management systems. “Even though operational bottlenecks and regulatory debates suggest the system may not be 100% implemented in January 2027, companies need to adapt their ERPs and treasury controls now to avoid liquidity crunches,” Amorim cautions.

Another element likely to influence business decisions is the Selective Tax, designed to discourage the consumption of certain goods and services considered harmful to health or the environment. Its implementation adds a new variable to the cost structure and pricing of specific sectors, while the regulations and the definition of its scope may give rise to legal disputes during the early phase of the new system. For investors, the ability to track this regulatory evolution and incorporate its effects into financial projections is likely to be particularly important in the directly affected sectors.

The reform also changes a logic that, for decades, shaped where investments were located in the country: competition among states and municipalities through tax incentives. As taxation gradually shifts to the place of final consumption of the good or service (the destination principle), traditional tax benefits lose some of their power to determine, on their own, where to locate manufacturing plants, distribution centers, and other operations. Investment decisions are therefore likely to give greater weight to structural competitiveness factors.

For Amorim, this change will shift the focus to new attributes. “Investment decisions will move toward real-world variables: the quality of local logistics infrastructure, legal certainty, proximity to ports, and access to clean energy sources,” the partner notes. The Manaus Free Trade Zone remains a notable exception, given the constitutional protection of its competitive advantages. Even so, the continuation of those benefits will need to be assessed alongside the region’s logistical challenges.

In this sense, the tax reform does not eliminate competitiveness differences among Brazil’s regions, but it is likely to change the criteria used to evaluate those differences. As tax incentives move out of the center of the decision, infrastructure, logistics, energy, legal certainty, and operational efficiency gain ground in the competition for capital. For investors, 2027 therefore represents not only the start of a new phase of the tax transition, but also a moment to revisit the assumptions underlying investment decisions and growth strategies in Brazil.

“As tax incentives lose ground, infrastructure, logistics, legal certainty, and operational efficiency carry more weight in investment decisions.”

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