OECD Paper Highlights Brazil’s Groundbreaking Dual VAT Reform as a Model for Fairer, Simpler Taxation

Brazil is poised to become a pioneer in global tax reform with the introduction of a unique value-added tax (VAT) system that promises to create a more competitive and investor-friendly economy, according to a new working paper published by the OECD Economics Department.

The paper, titled “The reform of Brazil’s consumption tax system,” was released on Monday, November 10, and authored by OECD policy experts Jens Mathias Arnold, Piet Battiau, Falilou Fall and Karoline Spies. While OECD working papers do not represent the organisation’s official position, they reflect the perspectives of the authors and are intended to stimulate discussion on key policy issues.

Implementation of Brazil’s new VAT framework is set to begin in 2026, replacing the five main consumption taxes currently applied at federal and sub-federal levels. The reform introduces a dual VAT structure that will operate under common and uniform rules: a federal VAT known as the Contribuição sobre Bens e Serviços (CBS), and a state and municipal VAT called the Imposto sobre Bens e Serviços (IBS).

“This unique reform carries great promise for a more competitive and investor-friendly economic environment in Brazil and for fairer and more transparent taxation of consumption,” the paper stated.

However, the authors also acknowledged that implementing such an ambitious overhaul will present considerable challenges. According to the report, one of the main difficulties will be reconciling the need for consistency with the practical requirements of compliance and administration. This includes applying the VAT to economic activity that crosses sub-federal boundaries and ensuring that authorities at all levels of government can use VAT as an autonomous revenue source while addressing their specific socio-economic circumstances.

Despite these challenges, the OECD paper noted that Brazil’s VAT reform has been successful in achieving a key objective: ensuring consistency of tax bases across federal and sub-federal VAT regimes. The CBS and IBS will both be governed by a single, uniform legislation that applies nationwide.

“This has the potential to significantly reduce the complexity of the current fragmented system and to remove many of the distortions associated with it,” the report said.

It further clarified that neither the federal government nor the states and municipalities will have the power to alter or adopt a different tax base. The paper emphasized that uniform determination of the tax base is crucial for the effective operation of any dual VAT system, drawing comparisons with similar models in Canada and India.

Canada and India, the report pointed out, have shown that “the successful introduction and operation of a federal VAT in a complex national context is possible.” Both countries, it said, share taxing authority between federal and sub-federal levels and have “successfully implemented a dual VAT model that applies at federal and sub-federal levels.”

The OECD paper acknowledged that the Canadian and Indian systems have “undoubtedly” served as sources of inspiration for Brazil’s reform. Nonetheless, it stressed that Brazil’s approach contains “unique and innovative features” that set it apart.

In Brazil, unlike in Canada and India, both states and municipalities have jurisdiction to introduce consumption taxes. “During the reform process, the needs of three different levels have to be reconciled rather than two,” the paper observed.

Furthermore, the authors highlighted that Brazil is expected to become a “pioneer” among countries introducing new VAT systems by taxing spread-based financial services under both the CBS and IBS. This includes services related to the raising, transferring, intermediation, management, or administration of financial resources.

Additionally, the scope of the new VAT system will extend to the taxation of real property transactions, including both the sale and rental of residential properties.

Through these measures, the OECD working paper suggested, Brazil’s dual VAT reform not only modernizes its tax framework but also positions the country as an innovator in fair, efficient, and transparent consumption taxation.

By fLEXI tEAM