Brazil’s Tax Reform: What It Means for International Companies Entering the Market

Brazil has long been known for having one of the most complex tax systems in the world. For international companies looking to enter and operate in the country, tax has traditionally been one of the main operational challenges. That is now changing.

Brazil’s tax reform, approved in 2023 and being implemented gradually through to 2033, represents one of the most significant structural shifts in how business will be conducted in the country.

For companies in the mining, energy, and industrial technology sectors, this is not just a tax update. It is something that will directly impact how you structure, price, and operate in Brazil.

A Move Towards a VAT-Based System

At the core of the reform is the replacement of Brazil’s current indirect tax system with a more streamlined model. The new system introduces:

• CBS (Federal VAT)
• IBS (State and Municipal VAT)

These will gradually replace multiple existing taxes, including PIS, COFINS, ICMS, ISS, and IPI (industrialized products tax). IPI is a federal excise tax in Brazil that is levied on the manufacturing or importation of industrialized goods. This means companies in sectors such as mining, energy, and industrial technology that have historically been impacted by IPI will now be subject to the CBS/IBS system, which offers a more predictable and streamlined approach to indirect taxation.

From a practical perspective, this brings Brazil closer to international tax standards and should reduce some of the structural inefficiencies that companies currently face. However, there are key transitional aspects that companies must understand.

The Transition Period: Where Complexity Increases

One of the most important aspects of the reform is the timeline. The transition begins in 2026 and runs through to 2033. During this period, companies will need to operate under both the current system and the new VAT model at the same time, creating a dual taxation regime. This transitional phase is critical for businesses looking to enter Brazil in the near future.

This creates a challenging environment where:

• Tax calculations become more complex in the short term
• Systems need to handle parallel regimes, meaning both old taxes (PIS/COFINS, ICMS, etc.) and the new CBS/IBS need to be processed simultaneously
• Mistakes in pricing or structuring can have real financial impact

To make matters more complex, tax rates under the new system will vary by product and service category, though the system aims to unify rates in the long run. Understanding these nuances will be essential for both pricing and compliance during the transition.

A Shift to Destination-Based Taxation

Another key change is how taxes are allocated. Under the new system, taxes will be applied based on where goods or services are consumed, rather than where they are produced. This has direct implications for:

• Pricing strategies — especially for companies that sell products or services across multiple regions in Brazil
• Distribution models — how goods and services move within the country
• Contract structuring — how to define “place of supply” for tax purposes

For companies supplying services or equipment across different regions in Brazil, this shift will impact how contracts are structured and how taxes are calculated, especially for those operating in multiple states or municipalities with varying tax rates.

Who Benefits and Who Needs to Adjust

Industrial and export-focused companies will benefit from a simplified tax system, allowing them to claim tax credits more easily and avoid multiple taxes stacking on top of each other. This will be particularly helpful for companies in mining, energy, and industrial technology, where running efficiently is key.

On the other hand, service-based companies might face higher taxes, especially those that were previously operating under more favorable tax conditions. Technology and service companies working with big industrial clients will need to adjust their pricing and margins to account for these changes.

The transition period will require companies to rethink more than just their tax systems. They’ll need to reassess their entire operations. While the dual tax systems might cause some difficulties at first, in the long term, the new structure will provide much-needed clarity and make Brazil’s tax system more aligned with international standards.The Real Impact: Operations, Not Just Tax

The Real Impact: Operations, Not Just Tax

While the reform is being presented as a tax simplification, the real challenge for companies lies in adapting their operations to these changes.

Companies will need to:

• Update invoicing and ERP systems to handle the new tax calculations and parallel regimes
• Review contracts and tax clauses to align with new destination-based taxation rules
• Reassess pricing structures to accommodate the dual tax regimes and adjust for regional tax variations
• Evaluate supply chain and corporate structures to ensure compliance with the new tax allocation system
• Manage cash flow more carefully, particularly around tax credits, which will be key to avoiding liquidity issues during the transition

One particularly important aspect of the reform is its potential impact on cross-border transactions. International companies with operations in Brazil will need to understand how VAT applies to imports and exports, and how credits are structured to avoid being taxed twice or losing credits on purchases.

This is where we typically see the biggest challenges. Not in understanding the law, but in implementing it in a way that works on the ground. Companies will need to work closely with local advisors and ensure their systems and structures can handle the complexity of this dual-phase transition.

Conclusion: What This Means for Companies Entering Brazil

For international companies, particularly those in mining technology, engineering, and industrial services, the key takeaway is clear: Brazil’s tax reform presents both challenges and opportunities. In the short term, the country’s tax system will become more complex as businesses navigate both the existing tax structure and the new VAT-based model. However, in the medium to long term, Brazil will become more predictable and aligned with global standards, making it an increasingly attractive destination for foreign investment.

To succeed during this transition, companies must adopt a proactive approach. Updating systems, reviewing contracts, and preparing teams for the changes ahead will put them in a stronger position as the new system stabilizes. While the reform is a step in the right direction, it is not without its complexities. Companies must look beyond legal compliance and consider how tax will impact their overall business models.

For those looking to establish, operate, and scale in Brazil, now is the time to build the right structure from the start. By taking advantage of VAT credits, aligning contracts with destination-based taxation, and preparing for the transitional period, companies can ensure they are well-equipped to navigate this major reform and capitalize on the long-term benefits.

Ax Legal helps industrial technology, engineering, and service companies to navigate the legal and commercial aspects of operating their business in Latin America. With deep knowledge of the industrial and natural resource sectors, we provide actionable and practical advice to help streamline our clients’ entries into Latin America, improve how they operate in the region, and to protect their interests.

Over the years, our team of legal and commercial advisors have developed a track record of working with companies of all sizes from Australia, Canada, the U.S., and Europe. The one common factor that connects our clients is that they are leaders in their field, providing innovative technologies and services to the industrial sectors.

To better understand how we can support you in the Region, please contact Cody Mcfarlane at cmm@ax.legal