KPMG report: Impact of Brazil's indirect tax reform proposal on nonresidents

The Brazilian government on 24 April 2024 presented to Congress the regulations to introduce the new dual value added tax (VAT) regime under the tax reform bill. Read TaxNewsFlash

As a reminder, under the tax reform bill, Brazil would enact the following harmonized (federal and state) taxes:

• A tax on goods and services (imposto sobre bens e serviços—IBS) that would replace the state VAT (imposto sobre circulação de mercadorias e serviços—ICMS) and the municipal tax on services (imposto sobre serviços de qualquer natureza—ISS)
• The contribution on goods and services (contribuição sobre bens e serviços—CBS) that would replace the federal PIS/COFINS contributions

The Brazilian indirect tax reform, in line with the OECD International VAT Guidelines, supports destination-based taxation and adopts key value added tax (VAT) principles for the digital economy. Consequently, nonresidents conducting activities in Brazil would face an indirect tax compliance obligation for the first time, as the existing indirect taxes do not impose such a liability.

New indirect tax liability for nonresident sellers

Under the current proposal, this new obligation would be extensive. Any nonresident conducting taxable transactions sourced to Brazil would need to register for, collect, and remit the new taxes. The general sourcing rule would be the domicile of the recipient, defined as the person receiving goods or services and could be someone else than the buyer. The recipient's domicile would be the address listed in the registers for both individuals and businesses, with specific considerations for each. For recipients not regularly registered, the domicile would be determined by at least two non-contradictory criteria such as the declared address, commercially relevant information, payment method register, or IP address. Given the broad application of the destination principle and the focus on the recipient address, nonresident providers could be liable for IBS/CBS for most transactions performed with a Brazilian recipient, even when the buyer is not established in Brazil.

This obligation seems to apply to both business-to-consumer (B2C) and business-to-business (B2B) transactions, as the law does not include any general self-assessment requirement for businesses. However, the proposal also states that the buyer would be jointly liable for the payment of IBS/CBS on the acquisition of immaterial goods, including rights, and services from a nonresident seller. This could indicate that, at least in B2B transactions, the Brazilian purchaser may, under certain circumstances, be responsible for compliance with the IBS/CBS. Regarding imports of tangible property, the proposal would place the primary import IBS/CBS liability on the importer of record, not the nonresident seller.

New indirect tax liability for digital platforms

The draft would introduce a new IBS/CBS liability on transactions conducted through digital platforms, whether Brazilian or nonresident, for the following transactions:

• Sales made by nonresident sellers that are not registered for IBS/CBS. Nonresidents selling exclusively through a digital platform would not be required to register for IBS/CBS in Brazil due to these platform rules
• Sales made by Brazilian sellers that are not registered for the IBS/CBS or transactions that are not recorded through an electronic invoice (e-invoice)

A digital platform would be defined as an entity that acts as an intermediary between sellers and buyers for transactions carried out in an automated or electronic manner and controls one or more of the following key elements:

• Collection
• Payment
• Setting of terms and conditions
• Delivery

However, an entity only performing one of the following activities would not qualify as a digital platform as long as they do not handle service expenses on sales made:

• Providing internet access
• Processing payments
• Advertising
• Searching for or comparing suppliers

The platform rules in the proposal do not seem to be limited to any specific transactions facilitated by digital platforms. Therefore, unlike in many other jurisdictions where the VAT platform liability is limited to the facilitation of digital services and certain sales of goods, digital platform operators would be liable for all in-scope transactions provided the sellers meet the above qualifications. 

KPMG observation

The Brazilian indirect tax reform will significantly transform the Brazilian tax landscape. While the biggest impact will naturally fall on domestic businesses, nonresidents may need to carefully monitor the adoption of the indirect tax reform. Businesses that until now had no tax obligations in Brazil could, under the current proposal, for the first time be liable for Brazilian indirect taxes, which could result in additional complexities (e.g., compliance with e-invoicing requirements). Changes to the current version are likely. The bill is currently under review by the Brazilian parliament, and a final version could be approved within 2024. The constitutional amendment adopted last year to implement the IBS/CBS regimes states that the new indirect tax regime will commence in 2026.

Lastly, as the rules outlined in the current proposal are sometimes quite broad, further details are expected in implementing regulations, which should also further clarify the IBS/CBS obligations of nonresidents. For instance, the current proposal does not provide much clarity on the registration mechanism for nonresidents, the application of the joint and several liability for transactions performed by nonresidents, or the obligation for nonresidents to issue e-invoices.

Paula Smith | ppsmith@kpmg.com

Atila Vaccaro Pidoni Mota | atilamota@kpmg.com

Philippe Stephanny | philippestephanny@kpmg.com

Chinedu Nwachukwu | chinedunwachukwu@kpmg.com