Amid the ongoing discussions on the need for tax reform, the federal government made a significant move by presenting Complementary Bill or Complementary Constitutional Law Project (“PLP”) 68/2024 on 24, April 2024.

PLP 68/2024 essentially carries forward the concepts established in Constitutional Amendment No. 132/2023. It aims to replace six taxes – PIS, COFINS, IOF-Seguros, IPI, ICMS, and ISS – with a dual VAT that adheres to international standards, comprising the federally administered Contribution on Goods and Services (“CBS”) and the state and municipally governed Tax on Goods and Services (“IBS”).

Additionally, PLP 68/2024 addresses the selective tax (“IS”) – of a regulatory nature and under federal jurisdiction. This tax seeks to deter the consumption of products harmful to public health or the environment.

The PLP is structured into three books outlining the governing principles for each tax component: general rules for IBS and CBS (Book I), general rules for IS (Book II), and other relevant provisions (Book III).

While specific rates are not defined within PLP 68/2024, the federal government projects preliminary estimates. The proposed rates are 8.8% for CBS and 17.7% for IBS, totaling 26.5%. The exact rates for IS will be determined later through Ordinary Laws.

Below is a summary of the main topics addressed in the bill:

BOOK I: IBS & CBS – General Operating Rules

Taxable Event: According to PLP 68/2024, IBS and CBS will apply to both onerous and non-onerous operations involving goods or services, as outlined in the Complementary Law. These operations include the supply of goods or services and can arise from various legal transactions. In simple terms, an operation involving a service is any transaction that does not involve transferring goods.

Tax Base: The bill stipulates that the tax base will be the total value charged by the supplier, including any adjustments, interest, penalties, conditional discounts, transportation costs, taxes (except CBS, IBS, and IPI), public prices, insurance, and fees incurred by the supplier.

Rates: The rates for IBS and CBS will be determined individually by each federative entity (Union, States, and Municipalities) through specific legislation. A uniform rate must apply to all operations involving goods or services. In the absence of a predefined rate, the reference rate set by the Federal Senate will apply. For IBS, the rate for each operation will be the sum of the rates of the destination State and Municipality.

Taxpayers: PLP 68/2024 defines taxpayers of IBS and CBS as suppliers who regularly engage in operations in a volume that characterizes economic activity or in a professional manner, regardless of professional regulations. Any person expressly provided for in other provisions of the bill will also be considered a taxpayer. Taxpayers must register in the relevant IBS and CBS registries.

Non-cumulative Rules: Offsetting tax liabilities using credit compensation is allowed when the taxpayer is the purchaser of goods or services subject to IBS and CBS, except for operations involving personal use or consumption and other situations provided in the legislation.

Provision of Goods and Services for Personal Use and Consumption: The bill states that IBS and CBS will be levied on the supply of goods and services for personal use, such as housing, vehicle expenses, medicare, insurance, food, and communication equipment.

Collection: IBS and CBS can be collected through payment of the outstanding balance for each assessment period, through financial settlement (Split Payment between the buyer and the seller), or by the purchaser if the supplier does not have a compatible payment method for Split Payment.

Reimbursement of Credit Balance: Taxpayers with a credit balance at the end of the assessment period can request full or partial reimbursement. Processing times vary: 60 days for credits related to fixed assets or average monthly accumulation, and 270 days for others. The government then has an additional 15 days to make the reimbursement.

Importation of Goods and Services: In accordance with the destination principle, imports of goods and services will be subject to both IBS and CBS. Conversely, exports will be exempt from these taxes. However, exporters will retain the ability to utilize credits accrued from their acquisition of goods or services.

Furthermore, PLP 68/2024 introduces a new taxable event for transactions carried out by digital platforms, regardless of their domicile. This means that digital platforms are now responsible for collecting and remitting IBS and CBS on all transactions that occur on their platforms.

Customs Regimes: PLP 68/2024 includes provisions related to customs regimes, tax exemptions, and capital goods relief, providing for the suspension of CBS and IBS on various regimes such as special customs transit, special customs deposit, special customs regimes of temporary admission or export, and special customs regimes for processing. This suspension is conditional upon compliance with the regulations established by customs legislation.

Additionally, PLP 68/2024 provides for the suspension of IBS and CBS payments on imports and operations related to regimes such as “Repetro-Sped” (Special Regime for the Export and Import of Goods for Research and Exploitation of Oil and Natural Gas Resources), Export Processing Zones, Drawback, the Tax Regime for Incentives to Modernize and Expand the Port Structure (“Reporto”), and the Special Regime of Incentives for Infrastructure Development (“Reidi”).

Cashback for Low-Income Families: This mechanism directly benefits families with a monthly income of up to half the minimum wage per capita. It integrates into a single salary and refunds 100% of CBS and 20% of IBS for the purchase of gas cylinders; 50% of CBS and 20% of IBS for electricity, water, sewage, and piped gas bills; and 20% of CBS and IBS for other products. Additionally, the regulation establishes refund limits to ensure compatibility between refunded amounts and family income.

National Essential Food Kit and Other Foods: The IBS and CBS guidelines reduce taxes on foods included in the PIS/COFINS National Essential Food Kit. However, exceptions include foods predominantly consumed by the wealthiest (e.g., beef) and healthy foods that promote good eating practices.

PLP 68/2024 categorizes foods into three groups: (i) essential kit with zero rate; (ii) extended kit with reduced rates; and (iii) products not eligible for rate reduction. According to federal government estimates, the essential kit policy in PLP 68/2024 will reduce overall food tax rates from 17.5% to 13.3%.

Differentiated Regimes for IBS and CBS: PLP 68/2024 establishes specific regimes for IBS and CBS, applied uniformly nationwide. Their validity depends on adjustments to reference tax rates or presumed credits. The bill specifies operations eligible for tax rate reductions, including:

• 30% reduction for services provided by administrators, lawyers, accountants, architects, physical education professionals, among others;

• 60% reduction for essential goods and services such as education, healthcare, medicines, foods for human consumption, agricultural and aquaculture products, among others;

• Full exemption or zero-rate reduction for some IBS and CBS rates for public transportation services, menstrual health products, certain medications, and devices for people with disabilities;

• Presumed credit for goods supplied by rural producers and integrated rural producers with annual revenue of less than R$ 3.6 million; independent cargo transporters who are non-taxpayers; waste and other materials intended for recycling, reuse, or reverse logistics acquired from individuals, cooperatives, or other organizations; and movable goods for resale; and

• Differentiated CBS regimes related to “PROUNI” (University for All Program) and automotive regimes until 2032, benefiting from zero CBS rates.

Fuel Taxation: PLP 68/2024 introduces a dedicated chapter on fuel taxation, covering both the single-phase regime and transactions subject to the ad rem rate. A notable addition is the inclusion of natural gas within the scope of fuels subject to this taxation. The bill also addresses financial services, insurance, reinsurance, and healthcare plans, among others.

Transitional Rules: The bill outlines mechanisms for the gradual reduction and eventual elimination of the substituted taxes (ICMS, ISS, PIS, and Cofins). It also provides rules for utilizing credit balances that remain unallocated or unused by the date these taxes are extinguished.

BOOK II – General Rules for the Selective Tax

Selective Tax: This tax targets vehicles, boats, aircraft, tobacco products, alcoholic beverages, sugary drinks, and extracted minerals like iron, oil, and natural gas. PLP 68/2024 clarifies that this tax is not meant for revenue generation but to discourage the consumption of products harmful to health and the environment.

Taxable Event: The Selective Tax is triggered by the first sale of the product, auction purchases, non-commercial transfers of extracted or produced minerals, adding the product to fixed assets, exporting extracted or produced minerals, or the producer’s or manufacturer’s own use of the product.

Exemptions: The Selective Tax does not apply to exports of the specified goods, except minerals. It also does not apply to operations involving electricity and telecommunications, goods and services with a 60% reduction in the standard IBS and CBS rate, and urban, suburban, and metropolitan public passenger transport services.

Tax Base: The tax base for the Selective Tax is determined by the sale and auction price, reference value for non-commercial transfers or consumption, or book value when added to fixed assets. The CBS, IBS, and IS amounts are excluded from the tax base, as well as unconditional discounts.

Rates: The Selective Tax rates are set by ordinary law, with a cap of 1% for extracted minerals, which can be reduced to zero for natural gas used as an industrial input.

Taxpayer: The manufacturer is the taxpayer for the first sale, adding the product to fixed assets, non-commercial transfers, and consumption. The importer is responsible for imported goods. The auction buyer is the taxpayer for auction purchases, while the producer-extractor is the taxpayer for extraction, first sale, consumption, non-commercial transfers, and exports.

BOOK III – General Rules for IBS and CBS on Operations

Manaus Free Trade Zone (“ZFM”) and Free Trade Areas (“ALC”): For imports by incentivized industries for use in ZFM and ALC, IBS and CBS are suspended. This suspension does not cover goods that do not meet the eligibility criteria of ZFM/ALC, nor goods for personal use and consumption unless they are essential for the approved economic project.

Zero Rate Reduction for IBS and CBS: The tax rates are reduced to zero for operations involving nationally manufactured goods destined for a taxpayer located in ZFM or ALC.

Presumed Credit in ZFM and ALC: Regular taxpayers are entitled to a presumed IBS credit for the acquisition of domestically manufactured goods that benefit from the zero IBS rate. The presumed credit rate will be determined based on the region.

Zero Rate Reduction for IPI in 2027: Starting in January 2027, the rates for the Tax on Industrialized Products (IPI) will be reduced to zero for products not effectively manufactured in the Manaus Free Trade Zone (ZFM) in 2023. The executive branch will publish a list of products effectively manufactured in the ZFM, specifying those that will not have their rates reduced and those that will have a zero rate.

Five-Year Evaluation: The Executive Branch and the CBS Management Committee will conduct a five-year evaluation of the efficiency, effectiveness, and impact of social, environmental, and economic development policies. This evaluation will cover the application of IBS and CBS in special customs regimes, export processing zones, the capital goods regime of “Reporto” and “Reidi,” personalized CBS refunds, the National Essential Food Kit, and differentiated and specific IBS and CBS regimes.