In the Brazilian tax system, state revenue is collected through taxation, the purpose of which is to finance the expenses of the public administration. This process is central and indispensable to the functioning of the state. The financial resources derived from revenue collection, that is, from the collection of taxes, give the government financial capacity and enable the financing of public activities.<\/p>\n\n\n\n
Given the relevance and centrality of taxation to the functioning of the State, it is extremely important that the entire process be provided for by law, to guarantee the correct collection of taxes and ensure the rights of taxpayers.<\/p>\n\n\n\n
Despite efforts to regulate and improve the national tax system, the reality is different. Today, Brazilians face a complex tax system that often requires hiring entire teams and consultants to help understand the legislation and tax procedures.<\/p>\n\n\n\n
In this extremely complex scenario, the tax reform, approved in December 2023, emerges as the main measure to solve the problem. In this article, JOTA explains how the Brazilian tax system works, focusing on the new rules and basic concepts about the types of taxes.<\/p>\n\n\n\n
Taxation: why the government charges taxes and how it affects the taxpayer.<\/strong><\/p>\n\n\n\n The state is not a generator of income; it is a collector. The overwhelming majority of its wealth comes from the collection of taxes, levied on different activities and sources of income of its population.<\/p>\n\n\n\n Regardless of their nature, virtually all services or products are taxed. For example, on the electricity bill, there is a charge for: Tax on the Circulation of Goods and Services (ICMS); Contribution to the Social Integration Program (PIS); and Contribution to Social Security Financing (Cofins).<\/p>\n\n\n\n The legitimacy of this charge is justified by the purpose of the taxation process, which can be mainly divided into:<\/p>\n\n\n\n In 2024, according to data released by the Brazilian National Treasury, the country's tax burden represented 33.21% of the Gross Domestic Product (GDP). This places Brazil among the world's highest tax-collecting nations and the nation with the highest tax burden in Latin America, according to the period analyzed.<\/p>\n\n\n\n Despite the high tax burdens, the population does not always benefit adequately from the investment of tax revenue. This is what a study by the Brazilian Institute of Planning and Taxation (IBPT) indicates, which evaluated the Index of Return to Social Welfare (IRBES) in 2023. Among the 30 countries analyzed with the highest tax burdens in the world, Brazil is the one that registers the least return for society.<\/p>\n\n\n\n Concept and types of taxes<\/strong><\/p>\n\n\n\n According to Article 3 of the National Tax Code (CTN), the concept of tax is: "Tax is any compulsory pecuniary payment, in currency or whose value can be expressed in currency, that does not constitute a sanction for an illicit act, established by law and collected through fully bound administrative activity."\u201c<\/p>\n\n\n\n Bianca Xavier, a professor of Tax Law at FGV-Rio, explains the elements of the concept of tax as defined by the Brazilian Tax Code (CTN):<\/p>\n\n\n\n Starting from the general concept, both the Federal Constitution and the Tax Code establish the types of taxes that can be created, their peculiarities, and purposes:<\/p>\n\n\n\n Type of tax: Taxes<\/p>\n\n\n\n Legal basis (Brazilian Federal Constitution of 1988): Articles 145, 153, 155, 156, 156-O and 154<\/p>\n\n\n\n Concept and examples: It is a tax due without the State providing a specific activity or service to the taxpayer; it relates to an event or activity associated with the taxpayer. Ex: Income Tax (IRPF), ICMS and Service Tax (ISS).<\/p>\n\n\n\n Type of tax: Fees<\/p>\n\n\n\n Legal basis (Brazilian Federal Constitution of 1988): Article 145<\/p>\n\n\n\n Concept and examples: They are directly related to state services or activities. They are due when the taxpayer uses (or has the potential to use) specific public services or as a result of the exercise of police power (inspection and surveillance). Ex: garbage collection fee and sanitary inspection fee.<\/p>\n\n\n\n Type of tax: Improvement Contributions<\/p>\n\n\n\n Legal basis (Brazilian Federal Constitution of 1988): Article 145<\/p>\n\n\n\n Concept and examples: These taxes are due on the increase in value of a property as a result of public works carried out by the State. The purpose is for the benefited property owners to contribute to the cost of the work. Ex: increase in value due to the construction of a subway or viaduct.<\/p>\n\n\n\n Type of tax: Compulsory Loans<\/p>\n\n\n\n Legal basis (Brazilian Federal Constitution of 1988): Article 148<\/p>\n\n\n\n Concept and examples: These are taxes levied, exceptionally and temporarily, for the State to meet extraordinary expenses (war, public calamity) or urgent public investment. The taxpayer is obliged to "lend" resources, with a guarantee of future repayment. Ex: loans collected during economic crises.<\/p>\n\n\n\n Type of tax: Special Contributions<\/p>\n\n\n\n Legal basis (Brazilian Federal Constitution of 1988): Articles 149 and 195<\/p>\n\n\n\n Concept and examples: Created to finance state activities or specific sectors. They are divided into: Social Contributions (pensions, PIS\/COFINS), CIDE (economic regulation) and Contributions of interest to professional or economic categories (OAB\/CRM annual fees).<\/p>\n\n\n\n Taxes, fees, and contributions: the different ways of collecting taxes in Brazil.<\/strong><\/p>\n\n\n\n Among the taxes presented, the main ones are taxes, contributions, and fees. They are present in people's daily lives, even though they often go unnoticed.<\/p>\n\n\n\n Common examples include: the Service Tax (ISS) charged on ride-hailing services and streaming service subscriptions; the deductions for Withholding Income Tax (IRRF) and Social Security Contributions (INSS) shown on paychecks; the tax on interest from bank loans (Tax on Financial Operations \u2013 IOF); and the fees charged for issuing passports and Civil Registry documents, among many others.<\/p>\n\n\n\n However, these methods differ in terms of the justification for the charge and the destination of the revenue.<\/p>\n\n\n\n FGV-Rio's Tax Law professor, Bianca Xavier, explains: \u201cTaxes are levied based on an action by the taxpayer, and the collected amount has no specific purpose. In the case of fees, the charge is made for an act of the State, whether it be a specific public service or the exercise of police power, and the collected amount must be used to cover the costs of this state action. Special contributions, like taxes, are usually related to an action by the taxpayer, but they differ in terms of their specific purpose.\u201d<\/p>\n\n\n\n These distinctions can be observed in practice. For example, although Corporate Income Tax (IRPJ) and Social Contribution on Net Profit (CSLL) share the same taxable event\u2014the net profit of legal entities\u2014they have distinct destinations. While the IRPJ collected can be invested in any area of public activity, the CSLL revenue must necessarily be invested in Social Security (including retirement, social assistance, and public health), as provided for in Article 1 of Law 7,689.<\/p>\n\n\n\n Another example is the Garbage Collection Fee. Unlike taxes and contributions, it is earmarked to cover the costs of waste collection, transportation, treatment, and final disposal. It is only payable by property owners located in areas where the service is available.<\/p>\n\n\n\n Direct and indirect taxes: the transfer of the burden.<\/strong><\/p>\n\n\n\n Furthermore, taxes can also be classified as direct or indirect.<\/p>\n\n\n\n Indirect taxes are those levied on products and services, as stipulated in article 166 of the Brazilian Tax Code (CTN), and which must be included in the price and passed on to the next party in the consumption chain. This is the case with ICMS, ISS, IPI, PIS, and Cofins.<\/p>\n\n\n\n Professor Bianca clarifies that, in the case of indirect taxes, "the law mandates that I pass the cost on to the product price." She adds, "It is legally required that the end consumer bear the financial burden. But the company is the one that collects the tax."\u201c<\/p>\n\n\n\n Those taxes that do not apply to events in the consumption chain and for which there is no legal provision mandating the direct transfer of the tax to the next person in the chain are direct taxes. This is the case for those that apply to:<\/p>\n\n\n\n Consumption, income, and wealth: who pays the most tax in Brazil?<\/strong><\/p>\n\n\n\n The Brazilian tax system focuses on three bases of incidence: consumption, income, and wealth. These are taxable events with distinct legal natures that represent the main means of state revenue collection. These different forms of taxation impact taxpayers in diverse areas, potentially affecting business performance and the economy as a whole.<\/p>\n\n\n\n Consumption taxation<\/p>\n\n\n\n Consumption taxation has a significant influence on inflation and the economy in general, as it affects products and services of all kinds, such as food and freight (taxed by ICMS) and the hiring of freelance professionals (taxed by ISS). Carlos Pinto, director of the Brazilian Institute of Planning and Taxation (IBPT), explains that this type of tax "includes federal, state, and municipal taxes, which are generally embedded in the price paid by the consumer" and, therefore, is borne by the last link in the consumption chain.<\/p>\n\n\n\n Income taxation<\/p>\n\n\n\n Income taxation applies to earnings and profits received by companies and individuals during the period established by the Federal Revenue Service. To exemplify the taxes levied on income, Carlos Pinto mentions: \u201cThe Individual Income Tax (IRPF) follows a progressive table, meaning that those who earn less pay less or are even exempt, while higher income brackets face higher rates, which can reach around 27.5% in the maximum tax bracket. For companies, the Corporate Income Tax (IRPJ) typically has a base rate of 15%, with an additional 10% on quarterly profits exceeding a certain value. There are differentiated regimes such as presumed profit and actual profit, which vary according to the size and sector of the company.\u201d<\/p>\n\n\n\n Property taxation<\/p>\n\n\n\n Regarding property taxation, it "encompasses taxes related to the ownership or transfer of assets," states the director of IBPT. As practical examples of this format, he mentions the Urban Property Tax (IPTU) levied on the ownership of urban properties, as well as the Tax on Motor Vehicle Ownership (IPVA), levied on the ownership of vehicles.<\/p>\n\n\n\n Social justice and inequality in the tax system<\/p>\n\n\n\n In this context, it is important to analyze the three main tax bases from the perspective of social justice. According to Lucas Bevilacqua, a professor of Tax Law at the Brazilian Institute of Capital Markets (Ibmec), consumption taxation is predominant in the Brazilian tax system, exacerbating social inequalities by applying taxes regressively: "those who can afford less, pay more!".<\/p>\n\n\n\n He exemplifies his understanding using the ICMS tax levied on basic food items: "Since rice is part of the diet of both wealthier and poorer families, with the same ICMS tax rate, the tax burden is more onerous for poorer families, that is, those with less ability to pay."\u201c<\/p>\n\n\n\n Regarding inequalities, the Ibmec expert states that the effects of taxes on social inequalities vary according to the tax base. According to him, taxation on consumption tends to accentuate social inequalities, but the opposite is observed in the collection of taxes on income and wealth. If they are levied progressively, based on income value, as is the case with personal income tax, "they can reduce inequalities because they collect a higher percentage from those with greater contributory capacity."\u201d<\/p>\n\n\n\n Regarding property taxes, such as IPTU (property tax), IPVA (vehicle tax), and ITCMD (inheritance and gift tax), "they also help combat the excessive accumulation of wealth, especially when applied with higher rates for large fortunes and higher-value properties," concludes Carlos Pinto.<\/p>\n\n\n\n How does the Brazilian tax system work?<\/strong><\/p>\n\n\n\n The set of rules that regulate the taxation process in Brazil is called the National Tax System. This group of legal instruments is organized hierarchically and is responsible for establishing the procedures for the creation, collection, assessment, and allocation of taxes in their respective areas of competence.<\/p>\n\n\n\n Normative hierarchy of the tax system<\/p>\n\n\n\n The Federal Constitution is the supreme law of the Brazilian legal system. It contains the basic rules, premises, and guiding principles of the tax system. Tax matters are primarily addressed in Chapter I ("On the National Tax System") of Title VI ("On Taxation and the Budget"), in addition to other scattered provisions.<\/p>\n\n\n\n In the hierarchical scale of the tax legal system, below the Constitution, are the National Tax Code (CTN) and complementary laws, responsible for establishing taxes and regulating general rules. Following this, ordinary laws provide specific rules for each type of tax, and decrees further detail the specifics of each one. Each legal instrument deals with the regulations that fall within its scope, within the limits and rules established by higher-level legal instruments.<\/p>\n\n\n\n Division of powers in the Federation<\/p>\n\n\n\n The tax system stems from the federal system. The constitutional text divided the power to tax and legislate on taxes among the Union, States, Municipalities, and the Federal District, according to the following rule:<\/p>\n\n\n\n The Federal District can assume both state and municipal powers.<\/p>\n\n\n\n The complexity of consumption taxation.<\/p>\n\n\n\n Lucas Bevilacqua, a professor of Tax Law at IBMEC-DF, draws attention to the fragmentation of the organization of competencies among the entities of the federation, especially in relation to consumption taxes. According to him, this fragmented base is one of the major bottlenecks of the current tax system.<\/p>\n\n\n\n This occurs because different entities can tax consumption, according to the nature of the item. The professor explains: \u201cThe Federal Government collects the IPI (Tax on Industrialized Products) and contributions to PIS\/Cofins (Social Integration Program\/Contribution to Social Security Financing); the states, the ICMS (Tax on Circulation of Goods and Services); and the municipalities, the ISS (Tax on Services).\u201d This fragmentation can generate conflicts about which tax is due, as occurred in the taxation of software, where the collection of ISS or ICMS was debated, he adds.<\/p>\n\n\n\n Furthermore, the professor also cites other factors that make the Brazilian tax system more complex, such as the existence of different tax regimes for the same taxes (e.g., cumulative, non-cumulative, and single-phase PIS\/Cofins regimes). Another factor is the system for crediting taxes paid in previous stages, which is subject to different rules and exceptions, depending on the product or service being taxed.<\/p>\n\n\n\n The degree of difficulty becomes even more evident when compared to the systems adopted by other countries. Professor Bevilacqua presents the example of European countries, which adopt the Value Added Tax (VAT). "This system allows the tax paid in previous stages to be offset against the tax due in subsequent stages." He also comments on the case of the United States, which "taxes consumption through Sales Tax, levied only on the final sale to the consumer. It is very simple to apply, but it also has its problems, especially with regard to tax evasion."\u201c<\/p>\n\n\n\n No system is perfect and all have their flaws; however, in the professor's view, Brazil has the most complex consumption tax system in the world.<\/p>\n\n\n\n Complex, expensive, and unequal: the main challenges of taxation in Brazil.<\/strong><\/p>\n\n\n\n The context presented shows that navigating the world of taxes is no easy task. Taxpayers live in the dark, trying to decipher the law, the positions of tax authorities and courts, in the almost impossible mission of being certain about which tax and how much they should pay.<\/p>\n\n\n\n The bottlenecks of the Brazilian tax system<\/p>\n\n\n\n Among the main difficulties of the current tax system, as already mentioned, the highlights are:<\/p>\n\n\n\n Impacts of tax accumulation and tax wars<\/p>\n\n\n\n The CEO of the Brazilian Institute of Planning and Taxation (IBPT), Jo\u00e3o Eloi Olenike, also adds the difficulties of the cumulative regime to the scenario of tax burdens.<\/p>\n\n\n\n He explains that the cumulative tax regime does not allow for the obtaining of tax credits arising from transactions made prior to the sale, generating a cascading incidence of taxes at all stages of the economic chain. For Jo\u00e3o Eloi, "cumulativeness is extremely damaging to taxpayers, who, in the vast majority of cases, bear the final cost of all these transactions when acquiring goods and services as end consumers."\u201c<\/p>\n\n\n\n The IBPT specialist also mentions the impacts stemming from tax wars. Competition between states or municipalities to attract companies, investments, and job creation through tax incentives often clashes with the interests of other public entities and results in legal conflicts, fostering legal uncertainty. \u201cIn short, tax wars are a short-term strategy that distorts the allocation of resources and perpetuates inequalities, despite offering occasional gains. The optimistic view of regional growth is overshadowed by increasing fiscal and legal costs,\u201d concludes Olenike.<\/p>\n\n\n\n The cost of doing business in Brazil and the tax burden.<\/p>\n\n\n\n All these obstacles create a complex system that translates into high costs and legal uncertainty for taxpayers. Regarding the high amount paid in taxes, Olenike states that "for the size of Brazil, the tax burden is not excessively high, but it is among the 15 countries with the highest taxation as a percentage of GDP, comparable to some rich countries and on a larger scale than Japan, Ireland, Canada, and the United States." He emphasizes that the problem lies in the application of the collected resources, which today is reflected in the lack of return in the quality of life and basic services for the Brazilian population.<\/p>\n\n\n\n In addition to the burden of the tax burden itself, calculating taxes in Brazil often requires hiring entire teams and consultants to assist in the analysis and interpretation of the laws.<\/p>\n\n\n\n In 2021, the Doing Business Subnational Brazil report, released by the World Bank, shows that Brazilian companies spend up to 1,501 hours complying with their tax obligations.<\/p>\n\n\n\n The study, which considers the time required for preparing, declaring, and paying taxes, reveals Brazil's disadvantage in the business environment compared to other Latin American and Caribbean countries, which take 20% of that time to fulfill their obligations. For countries in the Organisation for Economic Co-operation and Development (OECD), the average time required is only 159 hours.<\/p>\n\n\n\n It is important to highlight that this count does not include the hiring of legal services from tax lawyers, who are often called upon to challenge improper charges or claim violated rights. This chain reaction generates an ever-increasing number of cases in tax litigation, overburdening the Judiciary with discussions about the interpretation, alteration, and application of tax rules.<\/p>\n\n\n\n Mobilizing the public machinery to resolve tax disputes represents yet another expense for the State, which, in turn, is borne by money paid by taxpayers.<\/p>\n\n\n\n The list of difficulties is extensive, and this creates a significant disadvantage for Brazil, which sees many foreign investors fleeing to other markets due to the complexity of the Brazilian tax system.<\/p>\n\n\n\n Tax reform: what changes in the lives of companies and taxpayers<\/strong><\/p>\n\n\n\n Aiming to improve the shortcomings of the current tax system, the National Congress approved Constitutional Amendment (EC) 132\/2023, which intends to modify the taxation system, especially taxes levied on consumption.<\/p>\n\n\n\n The central idea is to simplify the taxation process by reducing the number of taxes, regimes, and legislation, modernizing payment and oversight methods, and aligning the system with international best practices, adopting, above all, the principles recommended by the Organisation for Economic Co-operation and Development (OECD).<\/p>\n\n\n\n The new Dual VAT (CBS and IBS)<\/p>\n\n\n\n Lucas Bevilacqua, a professor of Tax Law at Ibmec-DF, clarifies the changes foreseen by the new rule: \u201cA kind of Dual VAT has been created. A VAT divided in two. One part, consisting of the Contribution on Goods and Services (CBS), under the jurisdiction of the Federal Government, will replace PIS\/COFINS. The other, consisting of the Tax on Goods and Services (IBS), under the jurisdiction of the States and Municipalities, will replace ICMS and ISS.\u201d<\/p>\n\n\n\n The new tax system also aims to reduce the tax burden on the consumption chain in favor of social tax justice. To this end, Constitutional Amendment 132\/2023 proposes that the credit be broad and guarantee economic neutrality. Furthermore, taxation will now be levied at the destination, putting an end to the tax war, reinforces Professor Lucas.<\/p>\n\n\n\n In this sense, Thais Veiga, coordinator of the LL.M. in Tax Law at Insper, argues that "the VAT model is much more efficient than Brazil's old taxation system. VAT is a broad-based tax with multi-stage incidence, which covers all consumer transactions with less administrative effort by the tax authorities.".<\/p>\n\n\n\n Changes in wealth and selective taxation<\/p>\n\n\n\n The Insper coordinator points out that the approved tax reform is not limited to consumption taxes, and also includes some changes to property taxes. For example, "the collection of IPVA (Vehicle Property Tax) on aircraft and vessels and the possibility for municipalities to update IPTU (Urban Property Tax) by decree," confirms Veiga.<\/p>\n\n\n\n Andressa Gomes, coordinator of the Tax Management course at FIPECAFI, believes that the changes represent a commercial advantage, which will make the Brazilian business environment more competitive and modernize collection mechanisms such as split payment.<\/p>\n\n\n\n The tax reform also creates the so-called Selective Tax (IS), nicknamed the Sin Tax. This tax will apply to goods and services considered harmful to health and the environment, and will be levied progressively according to the harmfulness of these products. It will apply to cigarettes, alcoholic beverages, and combustion engine cars, for example, and will come into effect in 2027.<\/p>\n\n\n\n Regulations and next steps (Transition 2026-2033)<\/p>\n\n\n\n In January of this year, the General Law regulating the IBS, CBS, and IS was approved: Complementary Law 214\/2025. Chapter III, Section V \u2013 Transitional Provisions, outlines the provisions for the transition process to the new tax system, which will occur gradually, beginning in 2026 and ending in 2033.<\/p>\n\n\n\n The coordinator of the Foundation Institute for Accounting, Actuarial and Financial Research (Fipecafi), Andressa Gomes, highlighted Bill 108\/2024, currently under consideration in Congress, which deals with the establishment of the IBS Management Committee (CG-IBS). In other words, the discussion revolves around how the administrative process for resolving disputes related to the IBS will be defined, how the collected funds will be distributed among states and municipalities, and other rules of the new tax.<\/p>\n\n\n\n Finally, it is worth remembering that there are still other Bills under debate in Congress that aim to reform other areas of the current tax system. This is the case with Bills 2337\/2021, 307\/2021 and 1087\/2025, which intend to make changes to income taxation, especially regarding the collection of Income Tax on dividends.<\/p>\n\n\n\n The Brazilian tax landscape and the path to reform.<\/strong><\/p>\n\n\n\n Taxation in Brazil is an urgent, complex, and central issue in the lives of Brazilians. Below is a summary of the essential points addressed by JOTA that define the Brazilian tax system, its bottlenecks, and the need for transformation:<\/p>\n\n\n\n 1. Definition and Types of Taxes: Taxation is the way in which the State raises funds to finance the public administration. The crucial difference between the collection methods is: Taxes (levied on events related to the taxpayer and without a specific purpose), Fees (linked to specific public services or the Police Power), and Contributions (with a defined purpose, such as Social Security).<\/p>\n\n\n\n 2. Structure and Challenges: The legal and hierarchical structure of the National Tax System, governed by the Federal Constitution and the National Tax Code (CTN), and the division of powers between the Union, States, and Municipalities. It was found that the current model is marked by chronic problems: the high tax burden (especially the regressive tax on consumption), the cumulative effect that burdens the production chain, and the extreme legal complexity, which results in legal uncertainty and overburdens the judiciary. It was also observed that the model heavily impacts consumption, to the detriment of income and wealth, exacerbating social inequalities.<\/p>\n\n\n\n 3. Tax Reform Perspectives: Constitutional Amendment 132\/2023 emerges as the answer to these challenges. The main structural change is the replacement of the plurality of consumption taxes that exist today with a Dual VAT (CBS and IBS). Furthermore, the reform foresees the introduction of a Selective Tax (IS) to discourage the consumption of goods and services harmful to health, and the transition to destination-based taxation, aiming to end the fiscal war and achieve greater social tax justice. With the approval of Complementary Law 214\/2025 and the transition schedule until 2033, Brazil begins the path to modernizing its tax collection mechanism and improving its business environment.<\/p>\n\n\n\n Despite the progress, it is clear that the discussion about the country's fiscal future is only just beginning, with bills on income taxation still under debate in Congress.<\/p>\n\n\n\n\n
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