Brazil’s indirect tax regime is widely known as the world’s most complex. According to a World Bank report, Brazilian companies spend more than 1,500 hours per year on tax administration. Five different types of taxes, spread across federal, state and municipal levels, create a compliance maze that trips up even the most tax-savvy compliance team.
Starting in 2026, Brazil is launching an ambitious tax reform scheme that will simplify their current system by 2033. For SaaS and other digital businesses selling into Brazil, understanding these changes will make for a smooth transition when selling into Latin America’s largest market.
Brazil’s Indirect Tax System Today
Brazil’s current indirect tax landscape allows governments at the federal, state, and municipal levels to levy taxes. Unfortunately, this patchwork of taxes has resulted in overlapping jurisdictions and conflicting rules, that has even the most experienced tax expert shaking their heads.
At the federal level, companies are responsible for Program of Social Integration (PIS) and Contribution for the Financing of Social Security (COFINS) taxes on their gross revenues, plus Imposto sobre Produtos Industrializados/Tax on Industrial Products (IPI) on manufactured goods.
Meanwhile, states impose Imposto sobre Circulação de Mercadorias e Serviços/Tax on the Circulation of Goods and Services (ICMS), and municipalities levy Imposto Sobre Serviços de Qualquer Natureza/Tax on Services of Any Kind (ISS).
Long story short, in Brazil a single transaction can trigger multiple tax obligations. Take the fact that Brazil has 27 states and more than 5,500 municipalities, each with their own tax rates, rules, and filing requirements, and the administrative burden only multiplies.
Further, digital services are facing a double taxation issue, where software transactions blur the line between goods (ICMS) and services (ISS). Different states classify cloud services differently, and municipalities argue over which location deserves the ISS revenue: where the seller operates or where the buyer sits. These uncertainties drove businesses and Brazilian government entities alike to push for comprehensive reform.
Brazil Tax Reform in Brief
Brazil’s tax reform, starting in 2026 and aiming for a full transition by 2033, will simplify these administrative burdens for businesses. A new dual VAT system with just two taxes will replace the five different taxes currently in place.
The new system will also allow businesses to recover input VAT. Under the old system, this wasn’t always possible and businesses often found themselves paying into the system without receiving their tax credits due.
Destination-based tax sourcing will also ensure that taxes are levied where consumption happens. In the past, sourcing rules varied between states, causing unnecessary confusion about what tax rate to levy and what jurisdiction to pay.
A selective excise tax, the Imposto Seletivo, will target products deemed harmful to health or the environment, such as alcohol, tobacco and carbon-intensive goods.
Key Changes in the Upcoming Reform
Dual VAT – CBS & IBS
A new tax, the Contribuição sobre Bens e Serviços (CBS) will replace the federal PIS and COFINS taxes at an expected rate of 8.8%. Unlike the current tax, this tax will apply uniformly across all tangible and intangible goods and services, eliminating the risk of choosing the wrong tax class.
The second part of the new dual tax system, the Imposto sobre Bens e Serviços (IBS), will consolidate state ICMS, municipal ISS, and most federal IPI into a single expected 17.7% tax rate.
These rates are estimated, as during 2026 the revenue levels will be monitored and the final rate will be determined to maintain the existing tax burden.
Together, these two new dual taxes create an expected combined rate of 26.5%, which will place Brazil’s VAT among the world’s highest. However, businesses will now be able to receive input VAT credits, meaning that the burden of VAT falls not on them but on the final consumer. Further, because tax sourcing will now be destination-based, tax funds will flow to the coffers of the state or locality where consumption takes place and not, as in some cases now, where the business or factory is located.
Selective Tax (IS)
The Imposto Seletivo is levied on goods or services considered harmful to health or the environment. This excise tax is applied to things like tobacco, alcohol, sugary beverages, and carbon-intensive activities. Sellers of these goods also can’t apply for input tax credits. This tax replaces parts of the current IPI.
Special Regimes & Incentives
The new tax scheme also aims to provide relief to families. For example, low-income families will be able to get cashback after paying taxes on essentials like electricity, water, and cooking gas.
Other necessities like healthcare, education, and public transit will receive 60% rate reductions. Food staples will be zero rated across the board, ending a patchwork of different taxes across the country, states, and individual localities.
Regions like the Manaus Free Trade Zone also receive tax breaks. The reform will update how they receive breaks, giving them subsidies or reduced rates rather than straight tax exemptions.
What US & Non-Resident Companies Need to Know
Businesses who deal with Brazil today may have realized that tax enforcement is sporadic. The upcoming reforms also aim to help international businesses comply with a more standardized tax system.
SaaS & Digital Services
Starting in 2027, nonresident digital services providers, such as SaaS companies, will be required to register for and collect both CBS and IBS on all sales into the country, regardless of transaction size or customer type.
The requirement applies to both B2C and B2B transactions, meaning that a SaaS company selling a software subscription to someone in São Paulo must charge the combined VAT rate of 26.5%. Tax charged will be destination-based, meaning state tax collected will be remitted to the buyer’s jurisdiction.
Registration in Brazil for nonresident businesses may require appointing a fiscal representative on the ground in the country, obtaining a tax ID, and using Brazil’s electronic invoicing system (still to be implemented). Companies must issue a Nota Fiscal de Serviço Eletrônica (NFS-e) for every transaction, which reports transactions to authorities in real-time. Businesses could be required to file and remit tax to Brazil once per month.
Physical Goods
Importing physical goods into Brazil will also become more standardized. While before, imports were subject to a patchwork of different taxes, now they’ll be subject to CBS and IBS just like digital goods. Further, businesses can now be assured of being able to recover any input VAT paid in.
Timeline & Transition Period
2026 - Educational Rates Begin
Educational, or “test rates” will be introduced starting 1 January 2026. All invoices must show a test rate of 0.9% CBS and 0.1% IBS on every invoice, though these amounts should not actually be collected. This new system is meant to give businesses time to learn about the new scheme, update their invoicing practices, and train consumers to expect the new taxes.
2027 - CBS Fully Applies
CBS tax collection begins on 1 January 2027. At the same time, PIS and COFINS tax will be abolished. The CBS rate will likely be 8.8%.
This is also the date that nonresident digital service providers must start collecting tax on transactions into Brazil, though registration is required beforehand. Businesses of all kinds can also start claiming CBS tax credits at this time.
Note that the IBS tax does not start yet at this time, though invoices should still include that 0.1% test rate.
2029-2032 - IBS Phase-In
IBS will phase in over four years. Starting 1 January 2029 the current ICMS and ISS rates drop 10% and IBS rises 10%. Over the next three years, the old taxes continue to drop 10% while the new tax rises 10%. For example, by 2031, halfway through the transition, businesses will be required to handle 70% of the existing legacy taxes (ICMS and ISS) rates and 30% IBS rates. By 2033, ICMS and ISS will be phased out and only IBS will be charged.
This gradual approach prevents revenue shocks for states and municipalities while giving businesses time to adapt. However, it creates complexity as companies must track multiple rates, manage credits across both systems, and reconcile differences between old and new rules.
Last but not least, most IPI obligations end in 2029, except for products subject to the new selective tax (IS) and products with similar production at the Manaus Free Trade Zone.
2033 – Full Implementation
By 2033, only the new tax system will be in place. This means businesses will now deal with CBS, IBS and IS, and no longer deal with the legacy taxes COFINS, ICMS, ISS, PIS, and IPI.
For the first time, Brazil will have a true national VAT system rather than a patchwork of taxes spanning states and localities.
Key Differences vs. the Old Regime
The change to destination-based tax sourcing fundamentally changes how tax is distributed between state and localities. Before, states that produced goods or services collected a relevant part of the tax revenue. With the reform, all tax revenue will be collected from and remitted to the states and localities where products and services are consumed. This will change the distribution of tax revenue at its core.
Unlike the old system, businesses will also now be able to claim input credits. In the past, businesses could only claim credits on some tax paid out, and figuring out which credits could be claimed was difficult and varied from jurisdiction to jurisdiction. With Brazilian tax reform, all business purchases will now be subject to recoverable credits, making Brazil a more financially amenable place to do business.
On that note, Brazil’s tax reform standardizes the tax base for digital sellers. Software companies no longer have to navigate a patchwork of jurisdictions with differing rules, risking double taxation or not collecting when they should. Though it should be noted that cities and states will follow a rate ceiling that could be reduced by local governments, digital sellers will now face consistent tax treatment for their products nationwide.
Impact on Businesses & Tax Planning
Domestic Companies
Brazilian businesses will face compliance challenges during the years the new system goes into effect. Starting in 2026 they’ll need to begin implementing the new system on a testing basis, and from there will need to gradually change how they collect taxes from customers as the old system changes over to the new. Businesses that operate across different states and localities will need to adjust their billing and tax collection systems for every jurisdiction.
While Brazil’s tax reform will ultimately help domestic businesses by simplifying tax collection and allowing for input tax credits, there are likely to be growing pains as the new system takes off.
Non-Residents
Non-resident businesses will soon face expanded tax obligations in Brazil. However, the tradeoff is a clearer system with simpler rules. Long story short, businesses who sell into Brazil will be required to register for and collect VAT, even if only selling software or digital products.
B2B businesses will be able to claim input credits or shift the tax burden to their Brazilian business buyers by applying the reverse charge mechanism. However, B2C sellers will need to carefully consider pricing strategy when breaking into Brazil due to the country’s relatively high combined VAT rates.
Further, some non-resident businesses formerly embraced strategies of doing business in more tax-friendly Brazilian states. With the new reform, these tax avoidance strategies will no longer be viable.
Competitiveness & Economic Growth
Brazil’s tax reform is aimed to attract growth and encourage businesses to expand into the country, as well as to raise the purchasing power of Brazilians. Currently, Brazil is seen as a difficult market to enter due to confusing indirect taxes and the time and human capital it takes to properly comply. These reforms will place Brazil on a level playing field with the rest of the world and make the country’s population of 212 million a more attractive target for foreign business ventures.
Preparing for the Reform
Update Systems
ERPs and billing systems will need to be updated to include the new taxes. Fortunately, Brazil is allowing a full transition year of “test rates” where businesses can update their systems without penalties.
Note that Brazil is requiring businesses doing business there to integrate with their electronic invoicing infrastructure. Starting preparations early will allow for testing and prevent mistakes once the first new taxes come online in 2027.
Train Teams
Though the process will take place over multiple years, tax or finance teams will still need training on Brazil’s new tax system, the steps of the transition, and what each new year will bring when it comes to indirect taxes in Brazil.
Teams must also learn about the new input credit system so they can be sure to take advantage of this new and uniform benefit as soon as possible after implementation.
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Leverage Automation
Manual tax management was already a burden in Brazil, and will become even more complex during the tax reform transition. That’s why it’s advised to leverage automation to handle changing rates, reporting, filing, and claiming input credits.
Modern tax automation solutions like Sphere can take the necessary step of integrating with Brazil’s tax system and automatically updating taxes collected and their rates as the transition progresses.
Monitor Legislative Updates
While Brazil’s tax reform is now law, administrative processes and rules are still being nailed down. Monitor complementary laws and sector-specific rules for your industry, and be ready to pivot or update your system as new regulations emerge.
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Effective Transition Planning Will Pay Off Beyond 2033
Brazil’s tax reform will transform an overly-complex indirect tax system into a modern, streamlined and business-friendly VAT system. However, the tiered transition period may be bumpy. It’s vital to understand the reforms, update your billing system and ERP, take advantage of input VAT credits, and ensure you’re keeping up with industry-specific rules and requirements.
Brazil’s tax reform promises long-term benefits, with businesses that take advantage of Brazil’s new friendly climate will have access to the largest market in Latin America, with 212 million potential customers.
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