President Lula approves new tax system in Brazil

By Ana Cláudia Leocádio – From Cenarium

BRASÍLIA (DF) – President Luiz Inácio Lula da Silva (PT) approved, on Thursday afternoon, January 16, the Complementary Law 214/2024, which regulates the Tax Reform, with vetoes to three provisions related to tax incentives for the Manaus Free Trade Zone (ZFM), particularly regarding the presumed credit for products. The measure also affected the Free Trade Areas (ALCs).

The law establishes the Goods and Services Tax (IBS), the Social Contribution on Goods and Services (CBS), and the Selective Tax (IS), creates the IBS Management Committee, and amends tax legislation.

In total, 15 veto blocks were applied to the 544 articles of the Complementary Bill 68 (PLP 68/2023), which was approved by Congress in December 2024. The law will be published in the Official Gazette and the vetoes will be analyzed by the National Congress in a new voting after the recess.

According to the Secretary of Tax Reform, Bernard Appy, the president’s vetoes were technical in nature. Given the small number of vetoes, it can be said that the essence of the regulatory project was preserved, respecting the decisions of the Legislative Branch.

Regarding the provisions affecting the incentives approved for the Amazonas model, the secretary explained that the vetoes were necessary because, if approved as drafted by Congress, they would create new benefits for the ZFM and ALCs. Creating new exemptions contradicts Constitutional Amendment 132/2023, which allows only the maintenance of tax incentives for the Manaus Free Trade Zone, not the creation of new ones.

Appy explained that the vetoes to paragraphs § 5º of Articles 444 and 462, which have identical wording, were applied because, during the Senate’s final vote, a 50% presumed credit for imported products in the ZFM and ALCs was inserted. If these products were sold outside these areas, they would have to pay the presumed credit and other legal charges. As drafted, the law could lead to the interpretation that importers would be entitled to credit twice for the same transaction. “It was purely a technical veto”, said the secretary.

The president also vetoed § 1º, item II, of Article 454 of the Complementary Law. Appy clarified that this veto was due to the provision creating additional benefits for ZFM products by guaranteeing a presumed 6% CBS credit for industrialized products already exempt from the IPI tax as of December 31, 2023.

The tax exemptions for oil refining in the ZFM, which had sparked much speculation since the reform was approved, were maintained. According to Appy, vetoing this provision could lead to a broader interpretation than what was initially intended in the law.

The new law replaces five taxes with three: the State-level Services Circulation Tax (ICMS) with the IBS, while PIS, Cofins, and IPI will be replaced by the CBS, and the IS will tax goods harmful to health and the environment.

The IBS and CBS will form a dual Value-Added Tax (VAT), already adopted by over 170 countries, and will be gradually implemented from 2027 to 2033.

Secretary Bernard Appy emphasized that the reform’s implementation is a slow process but will significantly impact the country’s growth. “Over 10 to 15 years, we’re talking about an income increase of more than 10%, in addition to GDP growth for all Brazilians due to this reform. It’s also a fairer system than the current one because it reduces the tax burden on the poor and increases it on the wealthy, contrary to the current scenario”, he stated during the ceremony.

A 40-Year Wait

President Lula celebrated the approval of this reform, which the country had awaited for 40 years. He recalled that in 2007, during his second term, he submitted a tax reform proposal to Congress that did not move forward.

“Doing what we’ve done in a democratic regime, in a Congress where my party only has 70 deputies and nine senators… Doing this with a free press, free unions and businessmen able to say whatever they want demonstrates that democracy is the best form of governance on planet Earth”, Lula declared.

Finance Minister Fernando Haddad noted that Brazil’s tax system ranks 184th out of 190 countries. “Only six countries have a worse tax system than Brazil. This is an obstacle to Brazilian development”, the minister said, highlighting the significance of this new model for Brazil’s long-term future.

The reform’s reporters in the Senate, Senator Eduardo Braga (MDB-AM), and the Chamber of Deputies, Deputy Reginaldo Lopes (PT-MG), emphasized National Congress’s crucial role in approving this reform in record time. The text was voted on in the Chamber in July and finalized in the Senate in December.

Braga thanked the support for maintaining the ZFM’s comparative advantages. “If not for this definition of maintaining the advantages of the Manaus Free Trade Zone and the Free Trade Areas in Roraima, Amapá, Acre, and Rondônia, much of that population would be destined for hunger and misery. Or worse, handed over to drug trafficking and criminal factions. Your Honor says no to this scenario and says yes to a dignified future and full citizenship for those people”, said the senator.

Key Changes in the Reform:

• Cashback: Partial tax refund for the poorest on utility bills, such as electricity, water, sewage, gas, and telephony.
• Reduced taxes for real estate and a national basic basket exempt from taxes.
• Creation of differentiated regimes, with reduced IBS and CBS rates, for intellectual professionals, health and education services, personal hygiene products for low-income populations, services related to national security, cybersecurity, agroforestry products, and artistic and cultural productions.

Provisions benefiting the ZFM:

• Minimum 6.5% IPI rate for non-national products produced in the ZFM.
• PIS/Cofins (future CBS) exemption for retail in Manaus, also applicable to Free Trade Areas (ALCs).
• Removal of the two-thirds reduction in the calculation of credit stimulus for sales of incentivized industries within the national territory.
• Extension of the 100% presumed credit calculation for all products previously eligible under Amazonas’ ICMS (future IBS) legislation.
• Extension of presumed credit usage from six months to five years.

Traslated from Portuguese by Gustô Alves