Brazil’s National Congress Approves Proposed Tax Reform on Consumption

On December 15, 2023, in a vote held in the House of Representatives, the National Congress definitively approved Constitutional Amendment Proposal (“PEC”) No. 45/2019, which proposes a broad reform in taxation on consumption in Brazil.

In a plenary session on November 08, 2023, the Federal Senate approved its version of the text of PEC No. 45, introducing certain changes to the original text, as explained in our Client Alert of November 10, 2023. In turn, when reviewing again the tax reform PEC, the House of Representatives made several adjustments to the changes proposed by the Senate, as highlighted below:

• Removal of the 100% reduction in the rate on the acquisition of medicines and medical devices by non-profit social assistance entities;
• Removal of the Extended Basic Basket, which would include products with a tax rate reduced by 60% and mandatory cashback;
• Exclusion of specific regimes for the sectors listed below:
  • sanitation and highway concession services;
  • air transport services;
  • operations involving the provision of the shared structure of telecommunications services;
  • goods and services that advance the circular economy;
  • operations with microgeneration and distributed minigeneration of electric energy; and
  • in relation to the fuels and lubricants sector, exclusion of the device that would link the setting of uniform rates to Federal Senate resolutions.
• Maintenance of the Tax on Industrialized Goods (IPI) as a competitive advantage mechanism for the Manaus Free Trade Zone, to the detriment of charging the Contribution for Intervention in the Economic Domain (CIDE);
• Exclusion of the provision that brought a list of sectors prevented from taking advantage of the Manaus Free Zone incentives (e.g. weapons and ammunition, tobacco, alcoholic beverages);
• Exclusion of the provisions that dealt with the need for a hearing and approval by the Federal Senate for the president of the IBS Management Committee;
• Exclusion of the provision that dealt with the competence of external control of the Management Committee of legislative assemblies and chambers, with the assistance of the audit courts;
• Exclusion of the award mechanism for federative entities with greater collection efficiency, linked to the transition factor;
• Removal of the provision that would limit the remuneration of federal employees to employees of the tax administrations of the states, Federal District (DF) and municipalities; and
• Changes to the provisions that dealt with publicity and study in the publication of infra-legal tax rules and the need to demonstrate the economic-financial impact on bills that require or increase taxes.

The text is now expected to move for enactment in 2023, while discussions should intensify during 2024 with the need to issue Complementary Laws that will give deeper contours to the new system.

Demarest’s Tax team is available to provide any additional clarifications that may be necessary on the matter.