Brazil: Proposal to replace PIS and COFINS with new federal VAT

The Brazilian government presented to Congress a draft bill (Bill No. 3,887/2020) that would aim to unify certain federal taxes under a federal value added tax (VAT) regime.

The proposed VAT (Contribuição Social sobre Operações com Bens e Serviços—CBS) or “contribution on goods and services” would replace the existing PIS and COFINS* system of social security contributions charged on gross revenues.

This bill is one step of a broader tax reform effort being proposed by Brazil’s federal government—reform that could be implemented in a phased process.

_{*PIS (programa de integração social) refers to an employees’ profit participation program and COFINS (contribuição para o financiamento da seguridade social) refers to a social contribution program for social security financing.}

Summary

PIS and COFINS are frequently a source of dispute between the tax administration and taxpayers especially concerning the discussion on which inputs can be recoverable (i.e., which inputs generate PIS/COFINS credits), and the exclusion of ICMS (state-level VAT) and ISS (municipal service tax) from the PIS/COFINS calculation basis.

The government’s plan is to replace PIS/COFINS with a VAT that would be imposed at a single tax rate of 12%. With few exceptions (for instance, oil and gas or tabaco), there would no longer be the existing situation of taxpayers being subject to PIS/COFINS under different regimes (a cumulative regime) or other tax rates.

The CBS regime would have a broad scope and would be levied not only on the sale of goods and services, but also on the import of goods and services, royalty payments, and transactions involving intangible assets. By allowing a tax credit over the total amount of CBS shown on invoices related to the acquisition of goods and services from legal entities and/or on the import of goods and services, it is expected that current disputes involving PIS and COFINS credits would be cease to exist.

The new CBS also would aim at taxing digital transactions that currently fall out of the scope of taxation. The digital platforms will be responsible for collecting CBS.

It is also expected that CBS would simplify some time-consuming ancillary obligations of Brazilian companies. The government claims that the proposal is not intended to increase the existing tax burden, but there are those who believe that the proposed changes would impose a higher burden for certain sectors (including service company, real estate, construction, and infrastructure sectors). Also, certain transactions that are currently not subject to PIS/COFINS-Imports (e.g. cross-border payment of royalties) would be subject to CBS.

It is proposed that CBS will be effective within six months of the approval of the proposed bill of law.

What’s next?

The timeline for approval remains uncertain; however, the bill has been granted priority status which means the legislative process will be expedited. The proposal will be discussed in Congress, and there is the possibility of amendments and changes may be expected. It is possible that the bill could be approved by the lower house within 2020.

Other tax reform proposals

The federal government also announced the plans for the next phases of the tax reform that would be expected to include income tax reform measures, adjustments to the excise tax (IPI), a reduction of social security taxes due on payroll, and the introduction of a new levy on digital payments.

There are other tax reform bills (Constitutional amendment bills – “PECs” 45 and 110) under discussion in the Congress. These represent more broad and substantial reforms to the indirect/consumption taxes in Brazil, since it also covers state and municipal taxes (state VAT or ICMS and the municipal service tax or ISS) and other federal taxes.

Source – KPMG