Brazil’s New Indirect Tax System Creates More Chance for Errors

Multinational companies and their tax advisers should familiarize themselves with Brazil’s new indirect tax reform—which introduces two new taxes on goods and services and redefines the place of supply—to avoid applying inappropriate criteria and being subject to tax assessments.

The general regulation of the Brazilian tax reform on indirect taxes was published in January and introduced a tax on goods and services, called IBS, and a contribution on goods and services, called CBS. These new taxes will replace the current indirect taxes starting Jan. 1, 2026. The new and old system will coexist until 2033.

This reform establishes a dual value-added tax system, where IBS is the subnational tax system collected by the state and municipality of the destination, while CBS is the federal tax system collected by the federal government.

In addition to creating two new taxes, the indirect tax reform redefines how the place of supply is determined for indirect tax purposes, which helps determines the correct IBS rate. The CBS rate will be uniform across the territory, while the IBS rate may vary.

The destination principle isn’t relevant right now for Brazilian indirect taxes because the rule is to consider the origin of the transaction. For example, the general rule for determining the place of incidence of the service tax in Brazil is the location of the service provider’s establishment, with some exceptions depending on the type of service provided.

A similar rule applies to the tax on the circulation of goods, as the tax is collected by the state of origin of the transaction—except when the transaction is destined for the final customer, in which case part of the circulation of goods is due to the state of destination.

The definition of the rules for determining the place of supply is crucial to maintaining neutrality—one of the pillars of the proposed reform—as it won’t impact consumption decisions or business model structuring. This makes the tax system fairer and more balanced.

To be closer to their consumers, firms should consider restructuring business models in Brazil that would benefit from tax benefits granted by origin states. This is because the destination of the transaction, regardless of its origin, will always determine the tax burden on transactions.

Although various countries in the EU already use this concept, the application of the destination principle will be new for Brazil and may bring some controversies.

Complementary Law 214/2025 establishes 10 different rules for defining the place of supply, which vary depending on the type of transaction and specific characteristics. These can include whether the transaction involves the supply of goods or services, whether the recipient is an individual, or whether the service is provided physically or remotely.

This may lead to discussions and conflicts that didn’t exist before because these criteria weren’t used in the past in Brazil.

Among the rules for defining the place of supply, the legislation establishes a “subsidiary” rule, which defines this place as the principal domicile of the purchaser or recipient. To determine the purchaser’s principal domicile, consider other criteria such as the address indicated in the recipient’s registration.

If there is no registration, use other combined criteria, such as the declared address and internet protocol address. If it isn’t possible to combine at least two criteria, consider the address declared by the recipient to the supplier.

The change of criteria, plus the existence of different rules for defining the place of supply, may lead to varying interpretations between taxpayers and tax authorities. This could lead to differences in taxes due on transactions, considering that states and municipalities may apply different rates to transactions based on the rate established by the Federal Senate.

Taxpayers should watch out for the additional details on the matter to avoid conflicts and potential contingencies in the years to come.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Adriana Stamato is a tax partner and Daniela Seabra is a tax associate at Trench Rossi Watanabe in São Paulo, Brazil.

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