Following Constitutional Amendment 132/2023, Brazil launched a tax reform that will extinguish four taxes – State Value-Added Tax on Goods and Services (ICMS), Municipal Service Tax (ISS), Social Integration Program contribution (PIS), and Contribution for the Financing of Social Security (COFINS). They will be replaced by the Contribution on Goods and Services (CBS) and the Tax on Goods and Services (IBS).

The restructuring will reshape Brazil’s tax architecture – beyond rate changes – and will materially affect M&A in the coming years. The main impacts fall into two categories:

• company valuation and
• tax due diligence.

Because the overhaul is structural, CBS and IBS will change operating profitability, cost composition, and pricing. Those shifts will, in turn, influence target valuation.

In addition, consolidation of the tax system will bring a progressive phase-out of tax benefits. Companies that now rely on special regimes or targeted incentives may see meaningful changes in their effective tax burden. In this context, it is essential to revisit cash-flow projections and pricing methods to prevent valuation distortions.

This analysis will set the scope and priorities for future tax due diligence, as tax due diligence in this context has become more complex and consequential; it now goes beyond identifying existing exposures. Buyers should assess how the transition to the new tax model may affect the target, including interpretive divergences under the new legislation, use of accumulated tax credits, and the potential sunset of special tax regimes.

In that light, companies holding tax credits under the current system may become attractive acquisition targets, particularly if those balances can be used under the new framework. Conversely, companies facing a higher effective tax burden may lose competitiveness and therefore move early with restructuring or consolidation strategies.

The tax reform will have material, structural effects on M&A activity in Brazil, requiring careful reassessment of valuation, operating profitability, and tax risk. Adapting to the new fiscal landscape will be essential to support sound strategic decisions and improve deal certainty in the new regulatory environment.

Glossary:

Constitutional Amendment 132/2023: amendment to Brazil’s Constitution that launched the current tax reform and authorized the replacement of multiple consumption taxes.

State Value-Added Tax on Goods and Services (ICMS): state-level consumption tax on the circulation of goods and certain services; one of the taxes being replaced.

Municipal Service Tax (ISS): city-level tax on services; one of the taxes being replaced.

Social Integration Program contribution (PIS): federal levy on gross revenue to fund social programs; one of the taxes being replaced.

Contribution for the Financing of Social Security (COFINS): federal levy on gross revenue to fund social security; one of the taxes being replaced.

Contribution on Goods and Services (CBS): new federal value-added tax that will replace PIS/COFINS at the federal level.

Tax on Goods and Services (IBS): new destination-based value-added tax that will replace ICMS and ISS at the state and municipal levels.