In this post on the Tax Litigation blog, you will read about:
- The inclusion of IBS/CBS in the calculation base of ICMS, ISS and IPI
- Legislative and political changes and uncertainties
- Judicialization of the matter
As mentioned in our most recent blog article, the Tax Reform, although intended to create a simpler and more efficient system, has been surrounded by significant uncertainty. The Tax on Goods and Services (IBS) and the Contribution on Goods and Services (CBS) have not yet begun to be levied, but there are already doubts about the financial impact these new taxes will have on the taxes currently in force.
This is another article written jointly with Matheus Barreto, whom you have already seen here in other posts.
It is the second article in the Tax Reform Judicial Theses Series and addresses the exclusion or inclusion of IBS/CBS in the calculation base of taxes currently in force in the Brazilian tax system (ICMS, ISS and IPI).
Legislative background and uncertainties
As mentioned in previous texts, the Tax Reform began to be incorporated into the Brazilian tax system through Constitutional Amendment No. 132/2023 (EC 132/23). This amendment added and modified provisions of the Federal Constitution to regulate the authority of governmental entities to institute IBS and CBS, as well as to provide for the extinction/gradual reduction of ICMS, ISS, IPI, PIS and COFINS.
CBS collection begins in 2026, with a test rate of 0.9%, and becomes fully effective in 2027, replacing PIS and COFINS. IBS will also begin to apply in 2026, with a symbolic rate of 0.1%, and will be gradually implemented until 2032, replacing ICMS and ISS. In other words, until 2033 there will be simultaneous collection of both new and old taxes (ICMS, ISS and IPI until 2032; and PIS/COFINS during 2026).
While still under consideration in the National Congress, the text of the then Proposed Constitutional Amendment (PEC) No. 45/2019—later converted into EC 132/2023—provided that IBS and CBS would not be included in the calculation bases of ICMS and ISS.
However, this provision was removed from the final text of the Amendment as enacted, leading many taxpayers to question whether there was a legislative intent to include IBS and CBS in the calculation bases of those taxes, potentially resulting in a substantial increase in the tax burden.
In this context, on February 6, 2025, Complementary Bill No. 16/2025 (PLP 16/2025) was introduced, expressly providing for the exclusion of IBS and CBS from the calculation bases of ICMS, ISS and IPI.
The bill, however, has not yet been voted on by Congress, and with only two months remaining before the start of the test-rate period for the new taxes, there are still uncertainties regarding the inclusion of the new taxes in the calculation bases of the old ones.
Taxpayers’ expectations and the tax authorities’ position
Given the concern caused by doubts surrounding the inclusion of IBS/CBS in the calculation bases of the “old” taxes, representative entities of various economic sectors and key market players began seeking certainty through consultations—albeit informal—with other taxpayers and public authorities.
Considering the historically revenue-driven stance of the Brazilian tax authorities, the expectation is that the relevant entities will assess taxpayers who do not include the new taxes in the calculation bases of the old ones.
In this regard, throughout the year, authorities have taken positions in favor of including IBS/CBS in the calculation bases of the old taxes. This was the case with representatives of the National Committee of State Secretaries of Finance, Revenue or Taxation (COMSEFAZ)¹ and the National Front of Mayors (FNP)², arguing that excluding the new taxes would result in significant revenue losses for these entities.
The concern gained even greater prominence recently when the Extraordinary Secretary for Tax Reform, Bernard Appy, stated in an interview that IBS and CBS should be included in the calculation bases of ICMS and ISS during the transition period, as a way to comply with the Principle of Tax Neutrality, a cornerstone of the tax reform.
According to the Secretary, the inclusion of the new taxes in the calculation bases of the old ones would be necessary to avoid a loss of revenue resulting from the extinction of ICMS, ISS, IPI, PIS and COFINS. The argument is that, since these taxes currently apply on top of one another (with the exception of PIS/COFINS over ICMS and, in the future, ISS), their gradual extinction would reduce the taxable amount itself, negatively affecting overall revenue.
The thesis and judicialization
Given the scenario of extreme legal uncertainty—especially due to Congress’s failure to define the matter—taxpayers face the risk of future tax assessments if they do not include the new taxes in the calculation bases of the old ones.
Despite the explanation provided by the Secretary, we understand that while inclusion in the calculation base may make some economic sense, it is legally questionable.
The potential arguments supporting this thesis include:
1 – Violation of the taxable bases of the old taxes, since the calculation base of ICMS and IPI is the transaction value, while the ISS base is the price of the service. IBS/CBS, on the other hand, are guided by neutrality and are calculated outside the price of goods and services; therefore, they do not constitute transaction value or price, breaking the logic of value-added taxation.
This argument aligns with the Brazilian Supreme Federal Court’s decision in the well-known “Thesis of the Century,” in which the Court held that ICMS should not be included in the calculation base of PIS/COFINS, as the tax does not constitute revenue for taxpayers and therefore cannot be part of the contributions’ tax base.
The split payment mechanism also reinforces this argument. Although it will only become mandatory in 2033, tests of split payment will occur during the transition, automatically segregating taxes at the time of financial settlement of transactions—meaning the new taxes will not even pass through companies’ accounts.
2 – Violation of tax neutrality, by creating a cascading effect that artificially increases the final price, distorts the tax burden and affects economic decisions, contrary to the purpose of the reform, which is to reduce complexity and tax distortions.
3 – Violation of the principle of legal certainty, which guarantees taxpayers stability in legal relationships and protection of vested rights. As shown, changing the calculation base is unwarranted and even contradicts the Supreme Federal Court’s understanding in a similar situation, thereby undermining legal certainty.
4 – If the rationale for inclusion in the calculation base is economic, the issue should be addressed through other compensation mechanisms or revenue distribution adjustments provided for in the Reform, rather than through an artificial increase of the old taxes.
Thus, although legislative changes are still possible, the current uncertainty and the Brazilian government’s revenue expectations point to a potential new variant of the “thesis of the century,” proving that even when trying to simplify, Brazil struggles to be simple.
