The Brazilian Tax Reform: Potential Impacts to the Financial Sector

The Brazilian tax system, known for its complexity, underwent a major change with the approval of Constitutional Amendment Proposal 45 (PEC 45), which was converted into Constitutional Amendment 132 (EC 132) on 20 December 2023. EC 132 aims to simplify the existing tax framework by consolidating five taxes into two – the CBS (contribuição sobre bens e serviços) and IBS (imposto sobre bens e serviços). However, the changes brought by the new system pose challenges, especially for the financial sector, which has, until now, benefited from special tax regimes given the uniqueness of financial transactions, not properly framed by the goals of the most typical VATs. This paper explores the current Brazilian tax system, EC 132’s changes, and their potential impact on the financial sector, focusing on the levy of VATs on financial transactions. Considering that alternatives for the VAT taxation were discussed, the National Congress, as the party responsible for regulating the new tax regime of financial institutions, still has the responsibility of bringing a balanced approach to the issue, noticing the corresponding complexities of the application of the VAT on margin transactions and the broader economic implications, especially to the cost of credit in Brazil.