Tax Challenges in the Digital Economy
The digitalization of the economy is an unquestionable reality, originated from the technological development verified in the recent years. In Brazil, this reality poses challenges to the application of the tax law, especially considering that the local tax system is based on a rigid Federal Constitution, promulgated in 1988, a time when the digital economy was unthinkable. Moreover, the terms “digital” and “internet” do not even appear in the constitutional text, in any of its parts. Thus, it is possible to see that, the Brazilian tax system is based on an “analogical” Constitution.
The innovative environment of the digital economy has contributed to the development of new business models and consumer relations, boosted by the digital revolution, which has changed the ways and means used in the production, circulation and use of what the economic activity makes available to meet consumer demands, with the prevalence of intangible assets as major components of the value of the businesses.
Examples of new business models and consumer relations include cloud computing, digital media platforms, shared economy platforms, e-commerce, streaming of audio and video content over the Internet, marketplaces, startups, fintechs and others.
These changes cause difficulties with the qualification of these models and relations for the purpose of defining the taxes levied on the digital economy. This is because, as mentioned, the current Brazilian constitutional tax system has been shaped based on the “traditional” economy, with the prevalence of distinct tax bases for the taxation of goods and services. Such changes also lead to conflicts of jurisdiction between taxing entities, especially between States and Municipalities.
Specifically regarding the use of technology in the new business models, there is also the issue of defining whether it represents a simple tool for the development of the business (“means activity”) or if it is the object of the business itself (“core activity”). The tax implications in these situations are different.
It is expected that the Tax Reform on consumption, already approved and currently in the implementation phase in Brazil, and scheduled to take effect in 2027, will simplify the complex Brazilian tax system, particularly regarding business models within the digital economy. The reform will unify the Social Security Financing Contribution (“COFINS”) and the Social Integration Program (“PIS”), and most notably, replace the Tax on the Circulation of Goods (“ICMS”) and the Municipal Tax on Services (“ISS”) with a single tax: the Tax on Goods and Services (“IBS”).
With the Tax Reform, the ICMS and ISS will be replaced by a unified tax, the Tax on Goods and Services (“IBS”), which will broadly apply to all acts of consumption. As such, it is expected that legal controversies regarding the legal nature of business models associated with new technologies will be eliminated, and that, as a general rule, all such operations will be subject to the IBS.
The following sections will present certain aspects of the current Brazilian tax treatment applicable to specific business models that have emerged within the digital economy, as well as an initial overview of the expected landscape with the implementation of the consumption-based Tax Reform. The purpose of this publication is to provide general considerations on the topic for informational purposes. It should be noted that this is a complex subject, and as such, this publication does not intend to provide an exhaustive analysis.
1. Taxation on software
1.1. Basic tax regimes
General information related to the tax regimes to which taxpayers may be subject to in Brazil can be found on items 11.1 to 11.21 of the publication “Doing Business in Brazil” from Swisscam Brasil1.
Some peculiarities of the regimes applicable to legal entities operating with the software licensing activity are presented below.
a. Corporate income tax (“IRPJ”) and Social contribution on net profit (“CSLL”) – presumed profit method on transactions with software
Corporate income tax (“IRPJ”) and Social contribution on net profit (“CSLL”) are federal taxes levied on the profits of legal entities. IRPJ is levied at the rate of 15% and, on the cases in which the tax base exceeds R$ 240.000,00 annually, a surtax of 10% is also applied. CSLL is levied at the rate of 9%, except in the case of financial institutions, which are subject to specific rates.
As mentioned on items 11.3 and 11.4 of Swisscam Brazil’s “Doing Business in Brazil” publication, the calculation basis of IRPJ and CSLL may be determined by the actual profit method (i.e. net profit adjusted by additions and exclusions provided for in the legislation) or presumed profit method (i.e. application of a variable percentage according to the activity and applicable on the gross revenue earned by the legal entity), according to the method chosen by the taxpayer.
Under the presumed profit method, the legal entity’s profit is defined by applying a fictitious percentage, fixed by law and variable according to the activity developed by the legal entity, on its gross revenue.
The percentage applicable in the case of activities of sale of goods is 8% for IRPJ purposes and 12% for CSLL purposes.
In the case of rendering of services in general, the applicable percentage on gross revenue is 32%.
Specifically in relation to software licensing activities, as per recent Answers to Advance Tax Ruling Requests from the Brazilian Federal Revenue Service (RFB)2, the percentage of 32% applies to:
- licensing of standard software (not custom developed);
- licensing of standard, adaptable and customizable software, even if the adaptation and customization represent mere adjustments to the software;
- licensing of software developed by order for the client; and
- provision of technical support services in general related to the licensed software.
b. Social Contributions on Revenues (“PIS” and COFINS”) – cumulative system on operations with software
As mentioned on item 11.8 of Swisscam Brazil’s “Doing Business in Brazil” publication, the Contribution for the Financing of Social Security (“COFINS”) and the Social Integration Program (“PIS”) are levied on the revenues received by the Brazilian legal entities, with the exception of few cases.
As a rule, entities that are subject to the actual profit method are subject to the non-cumulative system of the contributions3.
According to this system, the taxpayer can calculate credits from the contributions, based on certain costs and expenses stablished by Law. The contributions are levied at the rate of 7.6% (COFINS) and 1.65% (PIS).
In contrast, legal entities opting for the presumed profit method are subject to the cumulative system of contributions4. Under this system, it is not possible to calculate credits from the contributions, which are levied at the rate of 3% (COFINS) and 0.65% (PIS).
It should be noted that some legal entities and some types of revenues are compulsorily subject to the cumulative system of the contributions, regardless of the profit method adopted.
That is the case of revenues earned by IT services companies, arising from software development activities and their licensing or assignment of the rights to use, as well as analysis, programming, installation, configuration, consulting, technical support and maintenance or updating of software5.
Such obligation does not extend to the commercialization, licensing or assignment of the rights to use imported software6, even if provided without physical support7. In this case, the non-cumulative regime of the contributions applies if the company elects the actual profit tax regime. According to the understanding of RFB, imported software is that which is produced by a legal entity located outside of Brazil. Thus, revenues from these activities are subject to the non-cumulative regime of contributions if the company is subject to the actual profit taxation system8.
1 Available at: https://swisscam.com.br/en/publicacao/doing-business-in-brazil/11-tributos/11-1-a-11-21-tributos-em-geral-impostos-taxas-e-contribuicoes/
2 Answer to Advance Tax Ruling Request COSIT n. 19/2024, Answer to Advance Tax Ruling Request COSIT n. 36/2023.
3 Stablished by Law n. 10,637/02 and n. 10,833/03.
4 Stablished by Law n. 9,718/98.
5 Pursuant to item XXV, article 10 of Law n. 10,833/03.
6 Pursuant to paragraph 2, article 10 of Law n. 10,833/03.
7 Decision n. 3201-009.359 from the Administrative Council of Tax Appeals, judged on October 27, 2021.
8 Answer to Advance Tax Ruling Request COSIT n. 218/2024.
1.2. Taxation on software – conflict between ISS and ICMS
With regard to the tax assessment on software licensing transactions, in recent years the matter has been the subject of much discussion among state and municipal tax authorities and taxpayers over which tax should be levied on the transaction, i.e., whether the tax on services of any nature (ISS) or the tax on circulation of goods (ICMS).
In Brazil, the legal nature of the software and its corresponding tax incidence are the subject of discussions between taxpayers and tax authorities, as well as conflicts of jurisdiction between States and Municipalities.
The concept of software is complex, involving, in principle: (i) the intangible content, which involves the source code and functionality of the software; and; (ii) the corpus mechanicum, in other words, the physical medium on which the intangible content of the software is found.
The discussion about the competence to tax such transactions arises from the complexity in defining the legal nature of the economic exploitation of software: whether it corresponds to a circulation of goods, taxable by the States by means of the Tax on the Circulation of Goods and Services (“ICMS”); to a rendering of services, taxable by the Municipalities by means of Services Tax (“ISS”); or to an activity different from both, not taxable by either ICMS or ISS.
With the technological evolution, software is becoming less and less available by means of physical support, which gave it the tangible aspect of a good, and increasingly by means of electronic data transfer or remote access (download or streaming).
In this context, we verify the emergence of the Software as a Service (SaaS), corresponding to an integrated solution of software, server and data processing. Its provision is not related to the purchase of licenses or to a download, but to its access and use through the Internet. In general, the provision of the use of SaaS is remunerated by means of monthly or annual fees.
In February 2021, the Federal Supreme Court (STF) ended the jurisdiction conflict between states and municipalities by analyzing the merit of two direct actions of unconstitutionality filed for the declaration of impossibility of ICMS assessment on software use license: ADI n. 1.945/MT and ADI n. 5.659/MG.
The disputed state legislation intended to levy the ICMS tax on transactions involving off-the-shelf software, even if made available through electronic data transfer via download.
The arguments supporting the unconstitutionality of the ICMS assessment on software licensing focused on the inexistence of circulation of goods due to the lack of transfer of copyright ownership, and that software would not be a merchandise, as it is an intangible asset.
In addition, it was sustained that after the enactment of Supplementary Law n. 116/2003, which defined the licensing of the use of software as a service in item 1.05, the distinction between standard (off-the-shelf) software and custom-made software would no longer be relevant, since, in any event, there is a software licensing transaction.
As a result, the STF consolidated the understanding that ISS should be levied on licensing of software, since it constitutes a provision of services of any nature.
2. Online advertising
The tax levy on advertising activities has been object of doctrinal and jurisprudential questioning for years, especially with respect to its legal nature.
The activity was established on item 17.07 of the list of services annexed to the Supplementary Law 116/03 (“promotion of texts, drawings and other advertising and publicity materials, by any means”), but the item was vetoed at the time of the issue of the Law.
Still, some Municipalities, such as São Paulo9, tried to tax the activity by framing it in other items of the list of services, such as “advertising and publicity, including sales promotion, planning of campaigns or advertising systems, elaboration of drawings, texts and other publicity materials” (item 17.06).
In general, it is discussed whether the activity has the nature of:
- supply of communication services taxable by ICMS, within the jurisdiction of the States;
- supply of services taxable by ISS, withing the jurisdiction of the Municipalities; or
- rental/assignment of online advertising space, activity not subject to any of the taxes, since it is considered as rental of a movable asset. The non-levy of ISS on the rental of movable assets was recognized by the STF, which issued Binding Precedent 31 on the following terms: “It is unconstitutional to levy the Municipal Services Tax – ISS on the rental of movable assets”. The Court later recognized that the same understanding applies to the rental/cession of advertising space, even considering it as an assignment of rights10.
With the issue of Supplementary Law n. 157/2016, which included on the list of services the subitem 17.25 – Insertion of texts, drawings and other advertising and publicity materials, in any means – the Municipalities now have legal grounds to charge ISS on the activity.This legislative change has particularly affected the online media sector.
On 9 March 2022, the Federal Supreme Court (STF) judged Direct Unconstitutionality Action n. 6.034, whereby it ruled that ISS, and not ICMS, is levied on “insertion of advertising” services.
Nevertheless, there are grounds to judicially question the levy of ISS on the activity, especially if we consider the activity as a rental/assignment of online advertising space.
It should be noted that advertising carried out in newspapers, magazines, radio and open TV, is not taxed, due to the exemption provided for on article 150, VI, d, of the Federal Constitution.
9 Normative Opinion SF n. 1/2016.
10 AI 854553, judged in 2012.
3. Provision of video, audio, text content, by means of streaming
With the emergence of the online streaming of audio and video business model, in 2016, the ISS legislation was changed to include the activity on the list of taxable services, in its subitem 1.09: Provision, without definitive assignment, of audio, video, image and text content over the Internet, respecting the exemption of books, newspapers and periodicals.
4. Cross-border technology transactions
The taxes levied on some international operations involving transactions with services and rights on the digital economy field will be presented below.
4.1. Import of technical services, technical and administrative assistance
Remittances for the payment of import of technical services, technical and administrative assistance are subject to the taxes presented below. For more details regarding the taxes, refer to the Swisscam Brazil’s “Doing Business in Brazil” publication.
- Withholding income tax (WHT): Levied at the general rate of 15%, except if the income is earned by a legal entity located on a tax haven; in this case the applicable rate is 25% (not the case of Switzerland). On income from individuals and legal entities resident or domiciled in Switzerland the WHT is limited to 10%, due to the application of the double tax treaty between Brazil and Switzerland, which entered into force on January 1st, 202211. The treaty provides for the possibility to deduct the withholding tax paid in Brazil from the tax due in Switzerland. As a rule, WHT is a burden of the beneficiary of the income and is deducted from the amount to be paid. Thus, in a remittance of R$ 100.00, WHT will be due at the amount of R$ 10.00 and the beneficiary will receive R$ 90.00. The payer and the beneficiary can establish that the burden of the tax is to be transferred to the payer, in which case the income is considered to be net and a gross up must be done. Considerations regarding the application of double tax treaties can be found on item 11.22 of the the Swisscam Brazil’s “Doing Business in Brazil” publication.
- Contribution for Intervention in Economic Domain (CIDE): Levied at the rate of 10%. CIDE is considered to be a cost of the importer of the services and it is not a recoverable tax12.
- PIS/COFINS-Import: Levied at the rate of 7.6% (COFINS) and 1.65% (PIS). If the taxpayer is subject to the non-cumulative system of the contributions, credits can be calculated from the contributions paid on imports, as long as some legal requirements are met.
- Tax on Financial Transactions (IOF): Levied at the rate of 3.5% on the amount effectively remitted abroad for the payment of services13.
- Service Tax (ISS-Import): Levied at rates that vary from 2% to 5%, depending on the Municipality where the importer is located and the type of service that is provided.
For the purposes of the levy of the taxes, the following is considered:
- Technical service: the execution of a service that depends on technical specialized knowledge or that involves administrative assistance or consulting services, performed by independent professionals or employees or that derive from automated structures with clear technological content; and14
- Technical assistance: the permanent assistance rendered by the provider of a process or secret formula, by means of technicians, drawings, studies, instructions sent to Brazil and other similar services, which make effective the use of the process or formula provided15.
Given the wide definition of “technical service” stablished by the RFB, in general, most part of the imported services are considered to be technical.
The development of software on demand is included on the definition.
11 Enacted by Decree n. 10,714, from 8 June 2021.
12 The constitutionality of the contribution is object of a lawsuit in the Federal Supreme Court (STF), pending judgement.
13 The IOF (Tax on Financial Transactions) is a tax of an extrafiscal nature and is therefore subject to more frequent rate changes. It is recommended that the applicable rate be verified at the time the transaction is carried out.
14 Article 17, II, a, Normative Instruction RFB n. 1.455/14.
15 Article 17, II, b, Normative Instruction n. 1.455/14.
4.2. Remittances for the payment of licenses to use off-the-shelf software
Supported by the decision from the Federal Supreme Court (STF) that considered the licensing of off-the-shelf software to be a provision of services, the RFB has updated its understanding in the sense that international remittances for the payment of licenses to use such software are subject to the following taxes16:
- Withholding income tax (WHT): Levied at the general rate of 15%, except if the income is earned by a legal entity located on a tax haven; in this case the applicable rate is 25% (not the case of Switzerland). On income from individuals and legal entities resident or domiciled in Switzerland the WHT is limited to 10%, due to the application of the double tax treaty between Brazil and Switzerland, which entered into force on January 1st, 202217. The treaty provides for the possibility to deduct the withholding tax paid in Brazil from the tax due in Switzerland.
- PIS/COFINS-Import: Levied at the rate of 7.6% (COFINS) and 1.65% (PIS). If the taxpayer is subject to the non-cumulative system of the contributions, credits can be calculated from the contributions paid on imports, as long as some legal requirements are met.
- Tax on Financial Transactions (IOF): Levied at the rate of 3.5% on the amount effectively remitted abroad for the payment of licenses18.
- Service Tax (ISS-Import): The levy to the tax on the licensing of rights to use software can be judicially questioned since it is not an effective provision of services. However, the tax is charged by the Municipal tax authorities19. The applicable rates vary from 2% to 5%, depending on the Municipality where the licensee is located.
With regard to the CIDE contribution, the RFB presented the consolidated understanding that the contribution is not levied on licensing of software, except when it involves the transfer of the corresponding technology. This understanding is based on the express provision in paragraph 1-A, article 2 of Law 10,168/2000, which deals with the contribution.
There are arguments to question the position presented by the RFB, considering the different legal natures attributed by the RFB for the purpose of defining the levy of WHT and PIS/COFINS-Import, as well as the decision from the STF.
16 Answer to Advance Tax Ruling Request COSIT n. 107/2023.
17 Enacted by Decree n. 10,714, from 8 June 2021.
17Pursuant to subitem 1.05 of the list annexed to the Supplementary Law n. 116/03: licensing or assignment of rights to use software.
18 The IOF (Tax on Financial Transactions) is a tax of an extrafiscal nature and is therefore subject to more frequent rate changes. It is recommended that the applicable rate be verified at the time the transaction is carried out.
19 Pursuant to subitem 1.05 of the list annexed to the Supplementary Law n. 116/03: licensing or assignment of rights to use software.
4.3. Remittances for the payment of rights to use Software as a Service (SaaS)
According to the understanding of the RFB20, international remittances to pay for Software as a Service (SaaS) are taxed in the same way as the import of technical services. Such understanding can be questioned, considering that the provision of a SaaS is not necessarily a provision of a service.
4.4. Remittances for the payment of royalties for the rights to commercialize SaaS
Royalties consist of revenue arising from the use, fruition and exploitation of rights, such as rights to commercialize software, rights to use technological platforms, right to use trademarks and patents, among others.
The international remittances for payment of royalties for the right to commercialize SaaS and software in general, are subject to the taxes below. The tax treatment is in line with the understanding recently presented by the RFB regarding the federal taxation of royalties owed for the right to commercialize SaaS21.
Note that the remuneration by means of royalties is a viable alternative for entities that intend to provide SaaS on the Brazilian Market, subject to a lower tax burden when compared to the direct import of licenses to use SaaS22.
- Withholding income tax (WHT): Levied at the general rate of 15%, except if the income is earned by a legal entity located on a tax haven; in this case the applicable rate is 25% (not the case of Switzerland). On income from individuals and legal entities resident or domiciled in Switzerland the WHT is limited to 10%, due to the application of the double tax treaty between Brazil and Switzerland, which entered into force on January 1st, 202223. The treaty provides for the possibility to deduct the withholding tax paid in Brazil from the tax due in Switzerland.
- Contribution for Intervention in Economic Domain (CIDE): The contribution is not levied on the remuneration from the license to commercialize software, except if it involves the transfer of the corresponding technology, in which case the tax is levied at the rate of 10%.
- Tax on Financial Transactions (IOF): Levied at the rate of 3.5% on the amount effectively remitted abroad for the payment of royalties24.
- Service Tax (ISS-Import): The levy of the tax on the licensing of rights to use software can be judicially questioned since it is not an effective provision of services. However, the tax is charged by the Municipal tax authorities25. The applicable rates vary from 2% to 5%, depending on the Municipality where the licensee is located.
20 Answer to Advance Tax Ruling Request COSIT n. 191/2017.
21 Answer to Advance Tax Ruling Request COSIT n. 177/2024.
22 Technical services taxation, as per the understanding of RFB.
23 Enacted by Decree n. 10,714, from 8 June 2021.
24 The IOF (Tax on Financial Transactions) is a tax of an extrafiscal nature and is therefore subject to more frequent rate changes. It is recommended that the applicable rate be verified at the time the transaction is carried out.
25 Pursuant to subitem 1.05 of the list annexed to the Supplementary Law n. 116/03: licensing or assignment of rights to use software.
4.5. Remittances for the payment of online advertising space
The acquisition and sale of online media is a business model that has consolidated with the growth of the digital economy. A lot of the suppliers of online advertising space do not have Brazilian subsidiaries, which make the international remittances to pay for the space needed.
As mentioned, the provision of online advertising space can be considered as a rental/assignment of a movable good and, thus, not a provision of services. Therefore, the remittances for the payment of the spaces are subject to the following taxes:
- Withholding income tax (WHT): Levied at the general rate of 15%, except if the income is earned by a legal entity located on a tax haven; in this case the applicable rate is 25% (not the case of Switzerland). On income from individuals and legal entities resident or domiciled in Switzerland the WHT is limited to 10%, due to the application of the double tax treaty between Brazil and Switzerland, which entered into force on January 1st, 202226. The treaty provides for the possibility to deduct the withholding tax paid in Brazil from the tax due in Switzerland.
- Tax on Financial Transactions (IOF): Levied at the rate of 3.5% on the amount effectively remitted abroad for the payment of the space27.
It is important to formalize the relation between the seller and the buyer of the space by means of a specific rental agreement so that the corresponding tax treatment can be applied and to support that it is not an import of services.
26 Enacted by Decree n. 10,714, from 8 June 2021.
27 The IOF (Tax on Financial Transactions) is a tax of an extrafiscal nature and is therefore subject to more frequent rate changes. It is recommended that the applicable rate be verified at the time the transaction is carried out.
4.6. Remittances for the payment of datacenter
According to the RFB’s understanding, international remittances for the provision of data center infrastructure (storage and processing of data for remote access) are considered, for tax purposes, remuneration for the provision of technical services and not remuneration arising from a rental of movable good. Therefore, they are taxed in the same way as the import of technical services.
5. Key Impacts and Challenges of the Consumption-Based Tax Reform on the Digital Economy
The Consumption-Based Tax Reform was approved through Constitutional Amendment No. 132 of December 20, 2023, and is regulated by Supplementary Law No. 214 of January 16, 2025. The main change introduced by the reform is the creation of a dual VAT system, composed of the Contribution on Goods and Services (“CBS”), which replaces the PIS and COFINS contributions, and the Tax on Goods and Services (“IBS”), which replaces the ICMS and ISS.
The CBS will fall under federal jurisdiction and, like PIS and COFINS, will continue to be collected by the Federal Union and administered by the Brazilian Federal Revenue Service (Receita Federal do Brasil). The IBS, in turn, will be under shared jurisdiction between the States and Municipalities and will be managed by a Governing Committee composed of representatives from both levels of government, a body that, as of now, is still pending formal establishment.
The replacement of the current taxes (ISS, ICMS, PIS, and COFINS) by the CBS and IBS will substantially alter the logic of incidence and collection applicable to transactions involving digital goods and services.
Under the previous regime, jurisdictional conflicts among different levels of government, particularly regarding the taxation of software licensing, SaaS, online advertising, and content streaming, generated significant legal uncertainty.
These conflicts largely stemmed from the difficulty of fitting digital transactions into traditional tax frameworks, which relied on artificial distinctions between goods and services, tangible and intangible assets, and physical media versus electronic transmission.
The new tax framework aims to mitigate these issues by adopting a broad and uniform tax base that will be common to both the CBS and the IBS.
According to the new constitutional provisions, the IBS and CBS will apply to transactions involving tangible and intangible goods, including rights, as well as to the provision of services, regardless of their designation or the manner in which they are made available. This includes, therefore, software licensing, access to technology platforms, and the assignment of rights to use algorithms, databases, and related digital assets.
In other words, under the Tax Reform, the tax base for the new levies will encompass all provisions of services, supplies of goods, and transfers of rights. On the one hand, this is expected to reduce jurisdictional conflicts and disputes over tax incidence. On the other hand, certain digital economy activities that have thus far not been taxed due to the absence of specific provisions in tax legislation will now become taxable.
The IBS and CBS rates will be established by specific legislation enacted by each federative entity and, as a general rule, will apply uniformly to all transactions involving goods or services. The digital sector, which is predominantly service-oriented, will thus be subject to a standard rate, which may result in a higher tax burden for some companies.
Conversely, this increase may be offset by the simplification of the system and the elimination of cumulative taxation, particularly through the provision of broad credit rights. This is expected to reduce the final cost to consumers, avoid market distortions, promote greater competitiveness, and create opportunities for small businesses to grow.
The full non-cumulative model established by the reform will allow taxpayers to claim credits on all inputs acquired throughout the economic chain, including intangible goods and digital services. This is expected to reduce the cascading tax effect, which is currently common in transactions involving technology and intellectual property.
This change promotes greater tax neutrality and supports the development of more complex production chains, particularly in innovation-driven sectors where expenditures on software licenses, APIs, cloud servers, and digital advertising are significant.
For a few specific sectors, special regimes will apply, potentially involving reduced rates and differentiated tax bases, such as in the case of financial services.
Another highly relevant point concerns the identification of the taxpayer. The new constitutional text expressly allows for the joint and several liability of service recipients and digital platforms, including marketplaces, applications, and other electronic intermediaries, as well as card operators and payment institutions, for the collection of consumption taxes on the transactions they intermediate.
As a result, this provision may lead to the imposition of tax liability on technology companies acting as facilitators of economic transactions, even if they are not the direct suppliers of the taxable goods or services.
In addition, the reform introduces a “split payment” mechanism, under which taxes are automatically separated at the time of payment. This will substantially alter companies’ cash flow dynamics.
These changes will impose additional challenges on digital platforms, which will need to adapt their tax compliance systems and financial settlement processes to meet the requirements of the “split payment” model and potential joint and several liability for the assessment and collection of the CBS and IBS.
Finally, the reform adopts the destination principle as the criterion for revenue allocation, meaning that tax revenue will be concentrated in the jurisdiction where the actual consumption occurs. For the digital sector, this implies that tax will be collected at the location where the user accesses or uses the digital service, rather than at the location of the company’s headquarters or the supplier of the goods or services.
This shift is particularly relevant for digital businesses, whose operations tend to be geographically decentralized and whose customer base is highly dispersed across multiple jurisdictions.
The change in the place of taxation to the destination is expected to reduce tax competition among jurisdictions, ensuring greater fairness between companies operating in different regions. At the same time, it will require businesses to adjust their operations and systems to accurately track and report the place of consumption. This reform also benefits consumers, who will be subject to a more equitable tax burden aligned with their location of consumption.
Accordingly, beyond the potential impact on their tax burden, digital businesses will face challenges primarily related to compliance with new tax obligations and the implementation of the destination-based taxation principle. Nonetheless, the Consumption-Based Tax Reform is expected to bring greater uniformity and simplification to the tax system, fostering a fairer environment that is better suited to current economic realities and more conducive to investment in Brazil’s digital sector.
In 2026, a test phase of the VAT system will be launched, with full implementation beginning in 2027. In that year, PIS and COFINS will be abolished. By 2032, ICMS and ISS will also be phased out. Until then, a gradual transition will occur, meaning that the current and new tax regimes will coexist between 2026 and 2032.
Authors: Marcelo Coimbra, Julia Lima
Fleury, Coimbra & Rhomberg Advogados
Rua do Rocio, 350 – 10º andar – Vila Olímpia
BR-04552-000 São Paulo – SP
Tel (11) 3294 1600