The Framework

In April 2024, Brazil’s government proposed a comprehensive tax reform to simplify its complex tax system. Central to this reform is the consolidation of five existing taxes into a dual value-added tax (VAT) structure, comprising the contribution on goods and services (CBS) at the federal level and the tax on goods and services (IBS) managed by states and municipalities. This new system is slated for implementation beginning in 2026. Notably, the reform mandates that nonresident digital service providers register with Brazilian tax authorities, collect the applicable VAT from consumers, and remit these payments directly to the government. The combined VAT rate is expected to be approximately 26.5 percent, with CBS at 8.8 percent and IBS at 17.7 percent.[1]

Implications for U.S. Technology Companies

The shift to a destination-based VAT system imposes significant administrative and financial responsibilities on U.S. technology companies operating in Brazil. These firms must navigate Brazil’s tax registration processes, implement systems for accurate VAT collection, and ensure timely remittance to Brazilian authorities. Non-compliance could lead to penalties and legal challenges, complicating market access and operations for U.S. companies. Additionally, the high combined VAT rate may affect pricing strategies and profit margins, further impacting their competitiveness in the Brazilian market.[2]

How China Benefits

Because Brazil’s new VAT system primarily impacts large foreign digital service providers, U.S. technology companies—many of which dominate the global market—are disproportionately affected. These firms must now absorb higher compliance costs and navigate complex tax obligations, increasing their operational burdens. In contrast, many Chinese companies, which tend to be smaller or operate through local partnerships, face relatively lower tax burdens and fewer administrative hurdles. As U.S. firms struggle with the new regulatory landscape, Chinese companies may gain a relative advantage, expanding their presence in Brazil’s digital market while U.S. firms face higher costs and reduced competitiveness.

Endnotes