Brazil’s sweeping overhaul of indirect taxes is taking shape. The country’s new dual VAT structure aims to eliminate long-standing inefficiencies and bring Brazil closer to global standards. For directors, finance teams, and tax specialists, the move from PIS, COFINS, ICMS, and ISS to CBS and IBS marks a new era, with profound effects on the calculation and distribution of profits. 

Uncertainty mixes with optimism—as opportunities emerge, so do new questions about margins, compliance, and what’s next. How should companies anticipate changes in operational costs, input credits, pricing, and net results? In this story, numbers matter. But so do timing, strategy, and expert insight. Read more. 

The path to simplification: from cumulative taxes to the dual VAT model

For decades, the Brazilian indirect tax landscape has been complex. The federal PIS and COFINS, the state-level ICMS, and the municipal ISS have shaped procurement, pricing, and competitive strategy. Each tax carried distinct rules, rates, and deduction approaches. Cumulative taxation—the “tax on tax”—raised costs along supply chains, dampened profitability, and created confusion.

Countless hours and resources have gone to managing compliance, interpreting overlapping regulations, and juggling credits and debits. Businesses have often found themselves confronting double taxation, especially when moving goods or services across states or municipalities. According to FGV EPGE research, this system has cut productivity, shortened production chains, and reduced GDP growth by disincentivizing scale and integration.

Now, Brazil turns a significant page. The tax reform introduces two new non-cumulative VATs: CBS (Contribuição sobre Bens e Serviços) and IBS (Imposto sobre Bens e Serviços): State and municipal VAT, consolidating ICMS and ISS. 

The objective? Simplification, neutrality, and the end of cascading effects. The reform expects to harmonize rates and unify procedures. This means companies will calculate tax credits and debits systematically at each transaction, fattening allowable input credits and, for many, trimming the real tax burden as products move from suppliers to customers.

Companies are moving from cumulative tax paid at each stage, often compounding throughout supply chains, to a system of recoverable input credits and debits mapped against output VAT. The challenge now becomes: how will gross profit and net profit margins adapt? What happens to operational costs, cash flow management, and dividend potential?

The new logic: credits, debits, and non-cumulative tax

Under the prior system, cumulative tax meant input taxes were mostly embedded as costs, raising final prices before profit calculation. The new VAT model frees companies to deduct input VAT paid on purchases from the VAT owed on sales. This non-cumulative principle marks a stark difference:

• Smoother credit chain: Each company in the supply chain claims credit for tax paid on inputs, eliminating double taxation and aligning with international VAT systems.
• Neutrality by sector: The original reform design aims for fewer “favored” or “penalized” sectors. Uniform rates and deduction rules bring clarity. Industries using a mix of goods and services, like technology and manufacturing, may notice the difference most.
• Better transparency and predictability: With unified electronic invoices and compliance systems, reporting becomes clearer for finance teams—changing both how profits are estimated and monitored.

According to research from FGV EPGE, eliminating VAT rate dispersion could raise GDP by 5.9%—with the clearest benefits for businesses taxed cumulatively before reform. Consistent, recoverable input credits help companies with long, complex supply chains “unlock” trapped capital, redistributing value to shareholders and reinvestment strategies.

Impact on cost structure and pricing

Cost structures change subtly, but significantly. Here’s what companies are recalculating:

• Input costs: The capacity to claim input VAT credits means expenses on raw materials, components, and many services qualify for reimbursement or deduction—shrinking taxable profit bases.
• Pricing power: With cumulative tax embedded in fewer places, end-prices could stabilize or even fall—especially for sectors hit hard by cascading effects, like manufacturing and logistics. Pricing strategy now requires new simulations.
• Operational cash flow: Non-cumulative VAT changes the cadence of tax collection and credits. Companies with large inventories or slow stock turnover must analyze timing differences to protect liquidity.
• Reporting and compliance: The requirement to digitally track VAT liabilities and credits shines a light on supply chains, reducing informal transactions but requiring stronger financial controls.

There is also the challenge of legacy contracts. As clarified in FGV IBRE’s bulletin on infrastructure contracts, the dual VAT system redefines project economics and will require many businesses to renegotiate cash-flow and clause assumptions during the transition period.

Transition details: timeline, rules, and government objectives

Change at this scale does not happen overnight. Companies must follow a carefully sequenced transition plan. Between 2026 and 2032, both old and new systems will overlap for certain taxable events. Understanding this phasing is essential for forecast accuracy, cash management, and contract talks.

• 2026: CBS is implemented federally, partially paralleling the outgoing PIS/COFINS.
• 2027: IBS is phased in at state and municipal levels, overlapping with ICMS/ISS for the first year.
• 2029–2032: Full operation and gradual withdrawal of legacy taxes, with credits, debits, and electronic documentation tracking both systems for select periods. Final switching expected by 2033.

The government’s stated goals, as reflected in FGV’s GDP growth evaluations, include sparking investment, fostering competitiveness, and widening the formal economy. For companies, early preparedness and clear scenario mapping are vital.

Industry-by-industry: new profit landscapes

While the general approach to the dual VAT model is uniform, credit rules, deduction mechanisms, and compliance details differ by industry. This is most evident among manufacturing, service, technology, and infrastructure companies.

Manufacturers: supply chain potential unlocked

Brazil’s industrial sector long grappled with “tax on tax,” where inputs were taxed, output was taxed again, and long supply chains became bureaucratic puzzles. With VAT credits flowing through each step, more value can be claimed as input purchases—directly improving gross profits and final margins.

• Longer supply chains favored: With credits always available, even multi-tiered manufacturers avoid the old system’s penalty for extra steps.
• Exporters: Typically zero-rated or fully credited, exporters regain VAT paid on their purchases, lowering effective costs of international sales.
• Pricing impact: Manufacturer and distributor pricing can become more predictable, strengthening supplier negotiations and planning.

Service providers and tech: from exclusion to neutrality

Service industries, including technology and consulting, previously faced many limitations on credit recovery. If a company used both goods and services, credits sometimes vanished, and embedded costs were high. The twin VAT structure aims for neutrality:

• Broadened credit rules: Many services now qualify for input credits, especially if furthering business output.
• New compliance routines: Services must digitalize documentation, reconcile large volumes of client and supplier invoices, and update systems for CBS and IBS requirements.
• Tax burden recalculation: Some digital and cloud-based businesses, depending on their cost/income mix, will see their effective tax rates decrease. Others with fewer eligible credits may not benefit as much.

Detail on how specific company types may see profit swings can be found in resources like summaries of the dual VAT’s sector-by-sector effects.

Infrastructure: contracts and the transition years

Infrastructure firms—spanning construction, utilities, transit, and long-term service concessions—face a unique mix of legacy contract exposures and new cash flow models. According to FGV IBRE bulletins, contract rebalancing clauses and price adjustment indices must now be recalculated for CBS and IBS realities. Even small shifts in tax due or credit eligible can rewrite the business case for major infrastructure projects.

Opportunities and challenges: beyond compliance

The dual VAT reform not only demands new compliance but also brings possibilities for improvement in business models, pricing strategies, and international competitiveness. According to FGV’s award-winning study, even modest streamlining promises a 4.5% GDP lift, with digitalization and transparency benefiting all players who adapt proactively.

Potential challenges in the process are equally real:

• Short-term uncertainty during the phasing period, with companies needing to run dual calculations.
• Adjustment costs, such as IT upgrades, audit reviews, or new staff training.
• Cases where input credits cannot be fully used or refunded, especially early in the transition.
• The need for clear, real-time reporting during a period when tax authorities are changing instruments, compliance codes, and audit routines—often with limited precedents or case law.

Some economists warn that businesses must stay agile and closely monitor regulatory guidance, as amendments and clarifications will emerge in early implementation years. Change brings complexity, but it also creates space to grow.

The dual VAT system changes the way companies in Brazil see their profits. No longer stuck in the maze of cumulative taxes, profit calculations now reward clear recordkeeping, prompt adaptation, and tactical financial planning. As studies such as those by FGV highlight, the new system has power to boost GDP, reward longer supply chains, and finally treat digital and industrial sectors equally. Yet the journey requires vigilance, disciplined financial analysis, and early action.

Partnering with professionals who follow legislative updates and understand complex modeling offers a direct path to margin protection and opportunity capture as the reform rolls out. 

Reach out to CLM Controller for specialized guidance, digital compliance solutions, and advice tailored to your company’s sector and chosen tax regime. Transform uncertainty into stronger, smarter profits in Brazil’s new VAT future. Get in touch. 

Frequently asked questions

What is Brazil’s new dual VAT system?

The dual VAT system in Brazil replaces multiple indirect taxes (PIS, COFINS, ICMS, ISS) with two new non-cumulative value-added taxes: CBS at the federal level and IBS at the state and municipal levels. This structure aims to simplify compliance, create transparent input credits, and level tax rates across sectors. Companies track credits and debits on purchases and sales more systematically than before, following international VAT standards.

How does the tax reform affect profits?

Profits are affected because companies move from embedded, cumulative taxes to a transparent system of recoverable credits and debits. This typically lowers operational costs, reduces double taxation, and may increase net profit margins, particularly for those who previously couldn’t recover input taxes. However, the full effect depends on sector rules, transitional costs, and how quickly companies update systems and pricing. Profit calculations now require close attention to VAT credits and new reporting routines.

When does the tax reform start in Brazil?

The implementation will be gradual: CBS begins nationally in 2026, and IBS follows in 2027 at state and municipal levels. From 2026 to 2032, both old and new systems will overlap for select events, with full transition planned for 2033. Companies need to monitor timelines closely to avoid compliance risks during the changeover period.

Which companies are impacted by the reform?

All companies doing business in Brazil—industrial, service, technology, infrastructure, and more—will be impacted by the new dual VAT structure. Both lucro real and lucro presumido regimes will need to adjust cost calculations, profit simulations, and tax credit documentation. Transition rules, sector specifics, and company size can shape the pace and depth of required changes.

How can I prepare for the new tax rules?

Start by mapping out supply chains, contracts, and current pricing. Simulate post-reform profit and tax calculations, especially for input credits and cash flow impacts. Update IT and accounting systems to handle new compliance demands. Review all documentation routines to ensure input tax credits are claimed correctly. Finally, consider consulting specialists such as CLM Controller to help with scenario modeling and ongoing updates as regulations evolve. Early, clear planning will make transition smoother and help protect profitability.