Tax Reform: elected mayors start 2025 with the challenges of the transition

The IBS, which promises to unify taxation on goods and services, appears as an attempt by the federal government to simplify the Brazilian tax system. However, experts warn that this change could have serious consequences, especially for smaller municipalities — which total around 4,800 cities in the country — which often depend on ISS revenues to finance essential services.

The master in Tax Law from USP, Carlos Crosara, lists some of these challenges.

“The first of these will be coexistence with two legal tax regimes — which already increases the complexity of the system even further. During the transition period, the ISS will still be in effect with all its legislation and regulations and the IBS will gradually come into force. And it will also generate a need for investment in technology and infrastructure, to run these two systems.”

IBS non-cumulative

Another point raised by Crosara, which can pose challenges for municipal managers, is the issue of the non-cumulative nature of IBS.

“Non-cumulative means, if you have a tax in a previous transaction, you can take advantage of the tax that you incurred in the previous transaction, to deduct the tax due in the subsequent transaction.”

At this point, for Crosara, it will be necessary to make a major change in taxpayers’ records to be able to use this new non-cumulative system, since neither they nor tax inspectors are accustomed to this new model. “It will be a long period of adaptation until they get used to this new model.”

Impact for cities

The expectation is that the new tax will bring greater equity in taxation, but until this happens, mayors — especially in smaller cities — will have to, in addition to adapting to changes, ensure that the quality of public services is maintained, even in a scenario of fiscal uncertainties.

Ranieri Genari, a lawyer specializing in Tax Law at IBET, believes that the impact on these managers will be great, even more so in the transition period.

“From a planning point of view — both financial and budgetary — this mayor will have a little more difficulty creating this budget composition and understanding how much this small municipality will stop collecting or have an increase in this collection. So he needs to understand that the preliminary study so he can make these decisions will be very important.”

The size of the public sector can also be an important factor in the transition period, but the greater economic dynamism of large cities will also be affected by the reform, as budget advisor Cesar Lima believes.

“Generally, smaller city halls depend more on intergovernmental transfers than on their own revenue. For the larger ones, which have a greater economic movement, this impact will be felt more, even with the “shock absorbers” created for the transition — and there will certainly be losses at first.”

Lima also explains that the compensation fund was created for these losses — National Regional Development Fund (FNDR) — which should act to eliminate any revenue losses resulting from the tax reform.

The transition period provided for by EC 132 will be 7 years, during which time IPI, PIS, Cofins, ICMS and ISS — taxes that Brazilians pay when purchasing a product or service — will be replaced by CBS, IBS and IS.

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