Overview: Why Is Brazil Changing So Much?

Over the past few years, the complexity of the Brazilian tax system has been a major challenge for local companies and, especially, for foreign investors. The Brazilian government, aware that a less bureaucratic and more transparent structure is essential to attract businesses, decided to move forward with a long-awaited reform. In addition, the advancement of international accounting standards and the growing focus on sustainability have influenced the adoption of new regulations, such as IFRS 18 and OCPC 10.

These measures come in a package aimed at aligning Brazil with global best practices, offering more security to investors and reducing that famous “headache” caused by numerous ancillary obligations and a lack of tax predictability.

Tax Reform: Simplification and Transparency

What’s Changing with the Reform?

On January 16, 2025, President Luiz Inácio Lula da Silva sanctioned the law regulating the first phase of the tax reform on consumption. The big turnaround is the replacement of five existing taxes — PIS, Cofins, IPI, ICMS, and ISS — by two new ones:

• Contribuição sobre Bens e Serviços (CBS): a federal tax consolidating PIS, Cofins, and IPI.
• Imposto sobre Bens e Serviços (IBS): a state and municipal tax replacing ICMS and ISS.

When Will It Come into Effect?

Implementation of these two taxes is scheduled to begin in January 2026, with a gradual transition lasting until 2033. In other words, the reform won’t happen overnight; there’s a specific timeline for companies and public agencies to adapt. Even so, foreign investors must pay close attention because switching from one model to another may require significant accounting and tax adjustments.

Rate and Global Comparisons

According to InfoMoney, the standard rate for the future Value-Added Tax (VAT) should be around 28%. This percentage would be among the highest in the world, raising questions about its impact on domestic consumption and the competitiveness of Brazilian companies in the global market. On the other hand, the promise of less bureaucracy and more transparency could offset the high tax burden, especially if tax collection becomes simpler and more predictable.

The Reform’s Impact on Foreign Investors

Less Bureaucracy, More Clarity

If you’re considering investing in Brazil, the simplification of the tax system is, at first glance, good news. Fewer taxes to manage means fewer hours spent with accountants and lawyers, as well as greater clarity when preparing financial projections. Having a single federal tax and a single state/municipal tax can provide more security when assessing operational costs and return on investment.

Adaptation Period and Risks

However, transitioning to the new model brings some risks. During this period, companies — especially multinationals — may need to maintain parallel accounting systems, as part of their activities will still be taxed under the old model and part under the new one. This increases complexity in the short term and requires strategic planning.

For those investing, it’s essential to monitor complementary regulations that should emerge in the coming months and years. After all, the law sanctioned by the government establishes general guidelines, but the specifics may appear in decrees, normative instructions, and other legal acts.

New Accounting Standards: IFRS 18 and OCPC 10

In addition to the tax reform, Brazil is also updating its accounting framework to keep up with international trends. This isn’t new, but each year we see closer alignment with the standards of the International Accounting Standards Board (IASB).

Presentation of Financial Statements and Disclosures

Published on April 9, 2024, IFRS 18 replaces IAS 1 (CPC 26 (R1)) and brings specific rules for:

• Presenting specific categories and subtotals in the income statement.
• Disclosing MPMs (Management-Defined Performance Measures) in the notes.

Its effective date is January 1, 2027, with retrospective application, but companies can choose early adoption. According to KPMG, which closely followed this process, the idea is to provide more clarity and comparability for financial statements, making it easier for investors dealing with balance sheets of companies from different countries.

Why Does This Matter to Foreign Investors?

IFRS 18 follows a path of transparency and international standardization. For those outside the country, this means easier reading of financial reports, which tend to become more similar to the global norm. There will be fewer “translations” of local accounting practices and greater confidence in the numbers presented — always good for prospective investors.

OCPC 10: Decarbonization Credits

Another novelty is OCPC 10, a technical guideline from the Federal Accounting Council (Conselho Federal de Contabilidade, CFC) addressing carbon credits, also referred to as “Decarbonization Credits.” Brazil has huge potential for generating these credits, whether through clean energy projects, forest conservation, or other sustainable mechanisms.

OCPC 10 defines:

• How to recognize these credits on the balance sheet.
• How to measure them (value assessment).
• How to disclose them in financial statements.

Effects for the Conscious Investor

If you’re a foreign investor who considers ESG (Environmental, Social, and Governance) criteria, this change is crucial. There will now be a clear standard on how Brazilian companies must report their carbon assets (and liabilities, when applicable). This offers more reliability when evaluating a company’s real commitment to sustainability and, at the same time, opens up opportunities for projects that generate these credits in a commercial way.

Read more: How to open a sports Betting Company in Brazil

Opportunities and Challenges

Opportunities

• Fiscal Transparency: A simpler and clearer system attracts foreign interest by making cost-benefit calculations easier.
• Sustainability on the Rise: With OCPC 10, Brazilian companies can stand out in the global market by transparently recording their carbon assets.
• Access to International Financing: Accounting standards aligned with IFRS make it easier to seek credit and investment abroad, as international banks and funds see fewer risks.

Challenges

• High Rate: A VAT rate around 28% may alarm investors looking for markets with a lower tax burden.
• Transition Period: Until 2033, old and new rules will coexist, causing confusion and adding adaptation costs.
• Details’ Complexity: Even though simplification is promised, the devil is in the details. Additional regulations may create new obligations and procedures that we don’t fully know yet.

Practical Recommendations for Foreign Investors

1. Follow Complementary Legislation: Keep an eye on decrees, normative instructions, and Confaz resolutions (in the case of state taxes). The way the tax reform will be practically applied still depends on a lot of regulation.
2. Consider Specialist Advice: Local accountants and tax lawyers understand the nuances of Brazilian legislation and can anticipate problems, saving time and money.
3. Adopt ESG Practices: With the new guidance on carbon credits (OCPC 10), having a well-defined sustainability strategy can not only improve your image but also bring financial benefits.
4. Assess Early Adoption of IFRS 18: If it makes sense for your business, opting to follow the new accounting standard right away can make it easier to attract investors and compare with other international companies.
5. Plan for the Transition: Create a migration plan to CBS and IBS. Evaluate the impact on internal processes, product and service pricing, and cash flow.

Conclusion: Keep an Eye on the Transformations

Brazil is going through a transformative phase that directly impacts anyone planning to invest — or already investing — in the country. The tax reform aims to eliminate the hyper-complexity of consumption taxes, while the new IFRS 18 and OCPC 10 standards reinforce transparency and alignment with global standards. Over the long term, these measures should make Brazil a more attractive and secure destination for foreign capital.

However, the implementation phase will inevitably bring challenges, especially regarding the management of parallel systems and the adaptation of internal processes. The potential 28% VAT rate might be seen as a concern, but simplification and predictability could counterbalance it. From an accounting standpoint, adopting international standards makes it easier and more reliable for external investors to analyze balance sheets, and focusing on sustainability with OCPC 10 is an important step for those who invest with ESG criteria in mind.

Final message: If you’re a foreign investor, don’t be afraid to dive into the Brazilian market. Do your homework, seek partnerships, and stay alert to updates in laws and regulations. Brazil can offer great opportunities, especially in technology, sustainability, and infrastructure. With the tax reform and new accounting standards, the path promises to be less winding — though it will still require patience and strategic planning to achieve good results.

About CLM Controller accouting: We are an accounting firm committed to guiding our clients toward the best solutions in Brazil’s tax and accounting landscape. We provide specialized consulting for foreign businesses looking to invest in Brazil safely and sustainably. Want to know more? Get in touch and discover how we can help your company navigate the ongoing tax and accounting transformations!