Latin America Market Expansion | Brazil’s Tax Reform Officially Enters Implementation Phase: The 2026 Transition Period Has Begun—Are Enterprises Ready?

As one of the most significant tax reforms in Brazil over the past several decades, Brazil’s consumption tax reform (Reforma Tributária) has moved beyond legislative debate and officially entered the implementation phase. For Chinese enterprises already operating in Brazil—or planning to enter the Brazilian market—the key question is no longer “Will the reform happen?” but rather “How should we respond to the operational changes it brings?” Pursuant to Brazil’s 2023 Constitutional Amendment No. 132 and the Complementary Law No. 214/2025—which entered into force in 2025—Brazil will gradually restructure its current indirect tax system, completing the transition between 2026 and 2033. Why is Brazil undertaking tax reform? For years, Brazil has been regarded as having one of the world’s most complex tax systems. Under the current regime, multiple consumption-related taxes are levied separately by different levels of government, including: • PIS • COFINS • IPI • ICMS • ISS These taxes differ significantly in scope, rates, input tax credit mechanisms, and local regulations—forcing enterprises to devote substantial resources to tax management and compliance. The core objective of this reform is to simplify the consumption tax system and establish a more unified value-added tax (VAT) model. Key changes under the new tax regime Transition from “five coexisting taxes” to a “dual VAT system” Per Constitutional Amendment No. 132, Brazil will progressively replace its existing consumption tax structure with new taxes. The new system comprises: 1. CBS (Contribuição sobre Bens e Serviços) Goods and Services Contribution Tax (federal tax) Replaces: • PIS • COFINS Administered by the federal government. 2. IBS (Imposto sobre Bens e Serviços) Goods and Services Tax (shared by states and municipalities) Replaces: • ICMS • ISS IBS will be jointly collected by state and municipal governments, coordinated through a unified administration mechanism. 3. IS (Imposto Seletivo) Selective Tax Levied on specific goods and services deemed harmful to health or the environment. This tax partially assumes the function of the current IPI. Critical timeline: Which milestones must enterprises monitor? According to Vistra’s reform roadmap and official legislative arrangements, Brazil’s tax reform will be implemented in phases. 2024–2025 Regulatory rule-making phase Relevant legal frameworks and detailed implementing rules are being rolled out sequentially. [vistra.com], [planalto.gov.br] 2026 Official launch of the transition test phase CBS and IBS begin operating in parallel with the current tax system. Although existing taxes remain in place for now, enterprises must already begin adapting to the requirements of the new system. 2027 • Gradual phase-out of PIS • Gradual phase-out of COFINS

Institutional Diagnosis of Brazil and 'Fiscal Arithmetic vs. Commodity Dividend'—A Comprehensive, Multi-Dimensional Analysis Based on the Eight-Part Framework (2026)

XI. Policy Recommendations For Brazil (mapped to the Eight-Part Framework, ordered P0–P6) • P0 – Crisis Prevention (Fiscal): Expenditure discipline during election year—adhering to the 2023 Fiscal Framework (arcabouço fiscal) expenditure ceiling (even though the 2026 budget has already exceeded it); launching a credible four-year fiscal plan within the first 100 days of the new administration (targeting primary surpluses of 1% in 2027 → 1.75% in 2028 → 2.5% thereafter, per NetEase/BofA estimates); freezing public-sector hiring and capping welfare spending growth below nominal GDP growth; signaling clearly to markets that “adjustment is inevitable—but what matters is scale and timing,” thereby lowering risk premiums; • P1 – Unlocking Constraints (Structural Reform): Reforming the 90% rigid expenditure laws—expenditure review (indexation adjustments for welfare benefits, civil service compensation system), further pension reform (rigidities persist even after the 2019 reform), and full implementation of tax reform (replacing ICMS with IBS/CBS to unify the system and reduce compliance costs); reversing deindustrialization (“New Industrial Brazil” extending from extractive industries into processing and manufacturing—currently only 7 of 24 manufacturing subsectors show growth); • P2 – Transmission Bottlenecks (η ≈ 0.35): Improving policy transmission—normalizing interest rates (guiding Selic toward 8–9%), reducing logistics costs (infrastructure investment; logistics accounts for ~12% of GDP), and enhancing credit availability (counter-cyclical tools to address rising household default rates amid high interest rates)—macroeconomic stimulus (fiscal) is already excessive; focus must shift to “reducing institutional friction”; • P3 – Trap Prevention (Populist Cycle): Electoral pledge discipline (learning from Dilma’s 2014–2015 experience)—welfare expansion and minimum wage hikes must be anchored to the fiscal framework; enforcing independent fiscal rules (the automatic correction mechanism embedded in the arcabouço); triggering an emergency “populist cycle” contingency plan if the TRI exceeds 0.40 post-election; • P5 – Transformation Management (Λ ≈ 0.57): The post-election “honeymoon window” (first half of 2027) represents the only realistic opportunity for structural reform—preparing a ready-to-deploy reform toolkit (expenditure review / privatization / pension reform) and launching initiatives immediately upon the new administration’s inauguration; positioning green transition as a “positive alternative” for transformation (e.g., zero illegal deforestation by 2030, green bonds, carbon credits, clean energy exports); • P6 – Resonance Management: Toward China—consolidating structural complementarity (soybeans/crude oil/iron ore exports vs. Chinese manufactured goods/new energy imports via long-term contracts); diversifying exports (UAE, India) to reduce overreliance on any single market; Toward the U.S.—negotiating tariff exemptions (countering USTR allegations with deforestation data—2026 deforestation at a decade-low), while maintaining Western Hemisphere cooperation; Toward the EU—implementing the Mercosur-EU Agreement and aligning with EU green standards. Implications for China (Objective Perspective) 1. Sino-Brazilian structural trade serves as a “ballast”: Brazil’s exports to China ($58.3 billion) are over three times its exports to the U.S.; soybeans account for over 70% of Brazil’s exports to China, and crude oil ranks as China’s third-largest supply source—this bilateral complementarity (Brazil exporting commodities, China exporting manufactured goods and new-energy products) is structural (per Aprosoja: not a temporary outcome of third-party conflicts). China should consolidate long-term supply contracts and invest in port and warehousing logistics (already underway since 2018), converting its trade surplus with Brazil ($19.8 billion in Brazil’s favor) into deeper industrial interdependence. 2. Dual nature of soybean supply-chain diversification: While China has diversified (Argentine exports up 30-fold; Russia/Ethiopia as supplementary sources), Brazil’s irreplaceable 180-million-ton annual output ensures it remains the “first basket”—U.S. soybean competitiveness has structurally eroded (tariffs + price disadvantage). China should maintain a “Brazil-first, diversified-supplement” supply architecture. 3. Window for green transition cooperation: Brazil’s 2030 zero-illegal-deforestation target, green bond issuance, and demand for new energy (Chinese EVs account for 88% of Brazil’s new-energy imports) create opportunities for Sino-Brazilian green collaboration (photovoltaics, EVs, batteries, carbon credits) to counter U.S./EU “green barrier” narratives; Amazon carbon credits represent a promising future area of cooperation. 4. Managing continuity amid electoral volatility: The October election (Lula vs. Flávio) may affect policy continuity toward China—Lula maintains friendly ties (discussions on BRICS and Belt and Road alignment), whereas Flávio leans pro-U.S. and favors tax cuts but remains economically dependent on the Chinese market. China should manage both scenarios through an “economic pragmatism” framework, avoiding unilateral bets.

Brazil’s Next Government Must Tackle Gas Costs, Logistics, Tax Complexity – Abiquim

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Brazil's chemical trade group Abiquim urged presidential candidates to prioritize lowering natural gas costs and improving logistics to prevent a projected $138 billion trade deficit by 2035. The agenda targets competitive pricing and increased R&D to boost sector investment.

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