Impacts of Tax Reform on the Services Sector

With the introduction of the Consumption Tax Reform, which alters the tax framework and, by 2033, abolishes (i) the Services Tax (ISS); (ii) the Tax on the Circulation of Goods (ICMS); (iii) reduces the application of the Tax on Industrialised Products (IPI) to the Manaus Free Trade Zone and, from 2027, abolishes (iv) the Contribution for Social Financing (COFINS) and (v) the Contribution to the Social Integration Programme (PIS), the outlook for the services sector will be significantly affected.

##What changes for the Services Sector?##

First and foremost, the introduction of the Tax on Goods and Services (IBS) and the Contribution on Goods and Services (CBS) has immediate implications, extending to activities that were previously not considered services.*

A classic example is leasing, whether of furniture or property. Previously, and with the backing of the Superior Court of Justice, leasing was understood as an obligation to deliver rather than an obligation to perform, which led to the conclusion that leasing is not the provision of a service, which implies an obligation to perform. However, as the scope of activities subject to IBS and CBS is much broader, activities that were not previously considered services are now deemed to be so, since the IBS and CBS tax transactions involving goods and services for consideration.

Nevertheless, the rates applied to the services sector for ISS purposes ranged from 2 per cent to 5 per cent, which, when added to PIS and COFINS—which, under the Presumed Profit regime, had a rate of 3.65 per cent and under the Actual Profit regime had a rate of 9.25 per cent— resulted in a tax burden on consumer transactions that ranged from 5.65 per cent to 8.65 per cent under the Presumed Profit regime, and from 11.25 per cent to 14.25 per cent, which WILL JUMP to 27.91 per cent, according to estimates by the IBS Management Committee.

The impact is enormous and will be felt in taxpayers’ pockets, both by businesses – which will have to adapt to the new reality by adjusting prices, contracts, business operations, the supply chain and everything else – and by the end consumer, who will see the prices of the services they purchase rise dramatically.

##How to adapt and what are the alternatives?##

It comes as no surprise to anyone that this is a year of adapting to this new reality.

###Legal Review of Services###

The legislation provides for reduced tax rates of 30 per cent, 60 per cent and zero per cent (a 100 per cent reduction).

As such, it is extremely important that business owners analyse their operations and assess whether it is legally possible to classify their activities, or part thereof, as falling under categories eligible for tax rate reductions, so as to minimise the impact of the Tax Reform.

This work is essential for the health of the business.

###Supply Chain Analysis – IBS and CBS credits will be the key currency###

Another key issue will be analysing the supply chain and understanding the new rules for claiming IBS and CBS credits. A great deal has changed, and anyone who fails to keep up to date is leaving profit on the table and will start incurring losses without even realising it.

###Review of PIS/COFINS Credits###

Until 31 December 2026, it will be possible to calculate PIS and COFINS credits which will be offset against CBS liabilities. It is essential that business owners understand that a review of PIS and COFINS credits has never made more sense, and is even mandatory to ensure a healthy cash flow in 2027.

In 2027, the CBS comes into force with an estimated rate of 9.21 per cent. Credits arising from CBS transactions will only be calculated once payment of the tax by the supplier has been verified, resulting in a cash deficit.

The dynamics change: Previously, under PIS/COFINS, the credit was applied monthly, based on the invoice; under IBS/CBS, the credit is only possible after the tax has been paid. This impacts cash flow!

###Understanding the Changes with Tax and Legal Advice###

Tax reform is not a subject for amateurs. It is not enough simply to understand the current system; one must have an understanding of how the tax landscape worked before the reform in order to identify the bottlenecks that will arise and, above all, what alternatives are available to mitigate the tax burden.

Therefore, having a specialised team with experience and practical expertise in tax matters is what sets a good consultancy apart.