Doing Business in Brazil: Navigating the 2026 Tax Reform & the New Dual VAT Framework

The Tax Reform has brought profound changes to consumption taxation in Brazil, aiming to simplify the system, increase transparency, and promote greater economic neutrality. Among the most relevant impacts—based on Constitutional Amendment No. 132/2023 and Supplementary Law (LC) No. 214/2025, with a focus on the general rules entering into force (test phase) in 2026—are the following:

1. New Tax Structure (Dual VAT)

The system replaces five legacy taxes with three new ones:

• IBS (Imposto sobre Bens e Serviços – Tax on Goods and Services): Replaces ICMS and ISS. It falls under shared jurisdiction (States and Municipalities).

• CBS (Contribuição sobre Bens e Serviços – Contribution on Goods and Services): Replaces PIS, Cofins, and IOF-Insurance. It falls under Federal jurisdiction.

• IS (Imposto Seletivo – Selective Tax): Replaces IPI and is levied on goods deemed harmful to health or the environment (e.g., cigarettes, alcoholic beverages, polluting vehicles).

2. The Year 2026: Test Phase

• Effectiveness: The year 2026 serves as an adaptation and system testing period.

• Test Rates: A rate of 0.9% for CBS and 0.1% for IBS will be charged.

• Offsetting: Amounts paid as IBS/CBS during this phase can be offset against PIS/Cofins due.

3. Key Structural Changes

• Destination Principle: The tax becomes due at the location of consumption (destination) rather than the origin (production), benefiting the localities where consumers are based.

• “Tax-Exclusive” Calculation (No “Gross-up”): The “tax on tax” effect is eliminated. The IBS and CBS do not comprise their own calculation base (unlike the current ICMS/PIS/Cofins), nor do they compose the cost of the good.

• Broad Non-Cumulativity: The system allows for broad crediting on acquisitions but conditions the usage of the tax credit on the actual payment of the tax by the supplier (to prevent fraud).

• Split Payment: A technological mechanism that automates the collection of the new taxes (IBS and CBS) at the exact moment of the financial transaction.

4. Future Timeline

• CBS enters into full force in 2027 (extinguishing PIS/Cofins).

• IBS will undergo a gradual rate transition between 2029 and 2032, with the new model in full effect by 2033.

About Split Payment

Instead of the seller receiving the full sales amount and paying the tax only the following month (as was previously done), the banking system “splits” the payment instantly:

• Seller’s Portion: The net value of the sale is deposited into the company’s account.

• Government’s Portion: The value corresponding to the taxes (IBS and CBS) goes directly to the public coffers.

Main Characteristics

• Credit Guarantee: The buyer is only entitled to the tax credit if the tax is effectively collected. Split Payment ensures this automatically, providing security for the purchaser.

• End of Default: It eliminates the issue of “declaring but not paying,” as tax funds never transit through the selling company’s account.

• Cash Flow: Companies lose the “working capital” benefit they previously held by retaining the tax for 30 or 40 days before paying the government. The cash flow impact is immediate.

Split Payment Modalities To avoid penalizing companies that hold accumulated credits (and would not need to pay the full tax), there are different methods for applying the deduction:

• Smart Split: The system consults the Federal Revenue (Receita Federal) database in real-time. If the seller has available tax credits, the bank deducts only the difference or potentially nothing at all. This is the ideal model, as it respects non-cumulativity instantly.

• Simplified Split: Used mainly in retail (B2C sales). An estimated rate (fixed percentage) is applied to the sale to ensure minimum collection, with adjustments made subsequently during the monthly reconciliation.

• Manual Split: This will be an exception, used only for operations that do not pass through the electronic banking system (such as cash payments).

In summary: It is a technological “lock” that ensures the tax reaches the government instantly, reducing tax evasion and eliminating the bureaucracy of issuing separate payment slips (guias).