SMALL BIG 4

Brazil's tax reform marks a fundamental turning point for ERP systems, requiring immediate and significant system adjustments.

Organizations will have to modify their tax engines to accommodate CBS and IBS, which are set to replace several layered taxes. The introduction of real-time tax compliance, destination-based taxation, and split payment mechanisms will require seamless automation and integration with government platforms.

Companies must evaluate their existing systems, transition to compatible versions, and revise their core data models. Tax reporting processes will also need to be overhauled to align with the new legal framework and deadlines.

Delayed action could lead to compliance failures, financial sanctions, and operational disruptions. For multinational entities, the complexity is even greater due to multiple tax registrations and regional disparities.

"This reform is not merely about taxation—it is a catalyst for digital transformation. Taking proactive steps now is essential to maintain operational stability and realize long-term efficiencies."

Brazil's forthcoming tax overhaul will introduce a split payment model that has become a key source of concern for companies — mainly because of its anticipated effects on cash flow.

Under the new system, taxes will be routed directly to the government at the point of payment, potentially creating significant liquidity constraints. This represents a fundamental change from the current framework, where businesses generally have 45 to 50 days to settle their tax obligations.

With split payment, tax-related funds will bypass company accounts entirely, reducing available working capital. While acknowledging these risks, the Ministry of Finance has pointed to mitigating elements.

Additionally, although the system mandates automatic remittance, the specific payment deadlines will be defined through future regulation, providing some leeway. The ministry also emphasizes that the new approach is expected to curb tax evasion and reduce fraud.

In turn, this improved compliance could bring down the reference VAT rate by up to three percentage points — helping to counterbalance the initial liquidity challenges and enhance long-term cash flow management.

In response to Brazil's consumption tax reform, companies are increasingly turning to legal counsel to revise existing contracts.

Now that the initial uncertainty around the reform has begun to settle, demand is rising for guidance on pricing models and the scope for contractual modifications. As businesses analyze the new tax rates, reassess credit mechanisms, and consider the elimination of existing tax benefits, they must evaluate whether their costs are set to rise or fall.

This will be essential to renegotiate supplier contracts and update pricing strategies accordingly. It's critical for companies to grasp the full implications of the reform and incorporate them promptly into both sales and procurement contracts.

Some companies began evaluating the reform's cost implications as early as 2023 and 2024. Others aren't even aware that this needs to be on their radar.

The reform enters a pilot phase next year and will be implemented gradually from 2027. The federal-level Contribution on Goods and Services (CBS) — replacing PIS and Cofins — will be introduced first, along with a new selective tax. Then, starting in 2029, the ICMS (state) and ISS (municipal) will be phased out and replaced by the Tax on Goods and Services (IBS). The transition is expected to conclude by 2033, when the new system becomes fully operational.

One other significant topic is factoring in tax credits — set to become far more widespread under the new model — when adjusting contracts. Many goods and services that previously didn't generate credit will now do so. Each company must assess the net result of these credits, which may include both savings and new costs.

Brazil's recent effort to revise the Imposto sobre Operações Financeiras (IOF) has evolved into a clear example of institutional disarray.

At the heart of the controversy is an astonishing breakdown in coordination between the federal government and the Central Bank — the authority in charge of monetary policy and financial oversight. Incredibly, the Central Bank was not even notified in advance of the reform.

The government's plan aimed to raise R$20.5 billion in 2025 and R$41 billion in 2026, as part of its strategy to eliminate the primary deficit and move toward a budget surplus.

The executive branch contested the congressional action before the Supreme Court of Justice (STF). Alexandre de Moraes issued a temporary suspension of both the decree and its repeal, and scheduled a mediation session for July 15 to address the constitutional standoff.

Facing political pressure and widespread criticism, the government has now signaled a retreat, suggesting that the IOF measures could be deferred or completely redesigned.

"This incident exposes deep institutional flaws and raises serious concerns about how key fiscal policies are being developed — without adequate consultation, evaluation, or stakeholder input."

As Brazil prepares for broader tax overhauls, the IOF episode serves as a stark reminder: hasty reforms lacking coordination can easily backfire, no matter how well-intentioned they may be.

On 22nd of August 2025, BPC Partners will be in PANAMA CITY to meet potential clients and investors into the Brazilian market.

And on 25th of August 2025, BPC Partners will be in SÃO FRANCISCO / PALO ALTO. Take this opportunity to book a meeting with one senior partner of BPC Partners.

These roadshow visits represent our commitment to providing personalized, face-to-face consultations with companies and investors looking to navigate Brazil's complex business environment. Our senior partners will be available for one-on-one meetings to discuss your specific needs and challenges.