Brazil’s tax system has been characterised by complexity for decades. It’s a quagmire of regional, contradictory systems and plagued by constant, wide-ranging litigation cases.
While there are several reasons why Brazil is an ideal consideration for investment, it’s crucial for international businesses to be aware of these significant tax reforms on the horizon. They will change the entire system — for the better — but require crystal clear guidance for effective navigation in the very near future.
For 30–40 years, understanding the intricacies of Brazil’s tax system has been both crucial and near-impossible for the country's business landscape. It’s divided into three distinct — often overlapping —forms of legislation.
This messy web of tax regulations has naturally created numerous interpretations, asymmetries, conflicts, and deceptive incentives to attract business investment — with several notorious pitfalls.
Unlike neighbouring nations, like Argentina and across Latin America, Brazil's tax system exhibits a ‘cascade effect’ — where taxes are charged on both revenue and capital, origin and destination state of a product, is a terrible deal from a tax perspective. This effectively creates double taxation.
Tax lawyers are presented with a near-impossible task: to absorb daily updates on ever-changing regulations across Brazil's 27 different states and numerous municipalities — new legislation is often introduced without adequate preparation, too. Naturally, errors are made. From a corporate perspective, whether assisted or proceeding without support (legal, accounting, auditors), this creates an environment saturated with and expectant of litigation cases.
The result of all this? Remarkably low productivity. In fact, Brazil currently spends more time navigating compliance, filing returns, and completing forms than any other country on the planet.
The previous attempt, after several others, for this reform process began just after President Bolsonaro's election — but the pandemic, differing proposals with a distinct lack of effective dialogue, and a particularly long, complicated approval process during his presidency caused delays.
The deadline for approval of the reform is now set for the end of 2023. In Brazil, major tax changes must be approved within one calendar year to take effect the following year. The tax reforms still face a complex legislative process before being implemented.
However, the reform is almost certain to go ahead. Further delays could lead to an erosion of political capital, as there’s intense political pressure to be seen as ‘getting the job done’ and moving forward on key manifesto pledges. All states and municipalities will need to adapt to this new system, and previous benefits and incentives will need to change to attract investment under the revised regime.
From a legal perspective, these tax reforms could be in place by 2024 — with a significant transition period to allow businesses and taxpayers to adapt.
While we shift from a complex system to a complex process, the benefits of Brazil’s new tax system, once implemented, will be profound for Brazil — notably in attracting additional international investment. This is a key reason the tax reforms were introduced.
These tax reforms have the potential to usher in broad equality improvements across Brazil, as well as simplicity and productivity for companies based and investing in the country.
When we look at government agendas across the world, a keen focus on economic growth is often detrimental to society, and vice versa. These tax reforms hope to address both economic and social issues in Brazil.
Currently, business location in Brazil is critical due to the varied state-level tax regimes. This reform — the standardisation of complex tax systems — enables companies to make decisions based on strategic objectives, rather than regional tax considerations, creating a level playing field with accessibility across regions.
This provides a chance to better address both economic and social aspects regionally. While some areas may initially pay higher tax rates, increased economic activity across the country should, in theory, generate greater revenue over time. Also, some exceptions will remain to address specific regional needs — the Amazon region's benefits, for example, will continue, while education-related businesses will enjoy lower tax rates.
Clarity in Brazil’s tax system will undoubtedly become more appealing to international businesses and simplifies the advisory process for international law firms. Issues like double taxation will be addressed by adopting a destination-based taxation approach, and it will eliminate many state and municipal taxes, introducing something similar to a single VAT system with a dual model instead (one federal tax + one state / municipal tax, with the same structure).
By removing historical inefficiencies, streamlining the tax system, and retaining some positive benefits (tech and energy sectors will likely retain income tax and import benefits, for example), Brazil expects to be inundated with more international business than ever before.
There’s some risk of litigation expected during the period between approval and application of the reform, due to uncertainties and ambiguities in the new tax framework. With that in mind, we wouldn’t advise international businesses to rush into decisions before the full impact of the reform is understood. Being a comprehensive reform with broad implications, it's better to first consider its effects, then plan accordingly. Guidance, therefore, continues to be vital, and discussions with law firms — like Vieira Rezende — can begin long before the reform takes hold.
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In what will soon become ‘old Brazil’, we believe there are three key things you’ll need to find in your ideal law firm partner to explore new opportunities post-tax reform.
1. Successful track record
While a clear understanding of the tax landscape in Brazil today is crucial, so is a deep set of roots in its past. Longevity of experience allows a law firm to understand the motivations behind changes in tax, both in this reform and any that may come in Brazil’s future.
Vieira Rezende was founded in 1995. Our decades-long dedication to supporting international investment in the Brazilian market is a defining feature of the firm's DNA. We understand the challenges and opportunities faced by international businesses across our country.
2. Breadth of knowledge
By stepping beyond the legal relationship, firms can fully comprehend the motivations and challenges faced by clients on a wider level. This commitment to broadly specialise means a firm could become an unexpected (but welcome) one-stop solution for international clients.
At Vieira Rezende, we’re close to the business of our clients. We offer a varied range of legal services and expertise beyond taxation, making it a comprehensive partner for international businesses exploring any investment opportunities in Brazil.
3. Large scale with close relationships
By focusing not only on Brazil but understanding the international market in which it operates, a law firm can understand the broader implications of Brazilian legislation like tax reforms on its clients — not just within Brazil, but far beyond its borders.
Vieira Rezende have notably small ratios between associates and partners compared to other law firms. This allows for a deeper, more intimate understanding of our clients' motivations, not just legally but as businesses operating in their specific sectors.
Written by Rafael de Moraes Amorim
