Brazil is embarking on one of the most ambitious tax overhauls in its modern history, seeking to replace a fragmented, unwieldy system with a more coherent, predictable framework. The existing structure, rooted in the 1988 Constitution that followed the end of military rule, expanded taxing powers across federal, state, and municipal levels. The result has been a labyrinth of overlapping levies, frequent disputes, and heavy administrative burdens.

As the economy developed, so too did so-called ‘fiscal wars’, with states offering tax incentives to attract investment, distorting business decisions as companies choose locations and structures based on tax advantages rather than productivity. Over time, layers of exemptions, special regimes, and conflicting rules accumulated, leaving businesses to navigate one of the most complex tax systems in the world.

The reform targets this complexity at its core. Five major consumption taxes will be consolidated into a dual value-added tax system. The three main federal levies will be replaced by the Contribuição sobre Bens e Serviços (“CBS)”, while state and municipal taxes will be merged into the Imposto sobre Bens e Serviços (“IBS”). A separate tax will apply to goods deemed harmful to health or the environment, such as tobacco and alcohol.

The current system’s inefficiencies are well documented. Multiple layers of taxation often result in cascading effects, with taxes applied repeatedly along the production chain. Businesses face high compliance costs, complex filing requirements, and frequent legal uncertainty. Investment decisions are often shaped as much by tax considerations as by economic fundamentals, distorting resource allocation and hindering productivity.

The tax burden also falls unevenly. Brazil relies heavily on consumption taxes, which tend to be regressive. Lower-income households, which spend a greater share of their income on goods and services, bear a disproportionately high effective tax rate.

The system’s complexity has also fuelled a vast volume of litigation. Tax disputes, often centred on how levies are calculated rather than whether they are owed, can take years -sometimes decades – to resolve. The total value of contested claims run into the hundreds of billions of Reais, tying up resources and contributing to one of the world’s largest judicial backlogs.

High-profile cases illustrate the problem. Ambev, one of Latin America’s largest beverage producers, has become a central figure in Brazil’s long-running legal disputes over the tax treatment of goodwill arising from corporate restructurings. The legal cases filed concern whether the goodwill generated during corporate restructuring can be amortised to reduce taxable income. Ambev has argued that the transactions reflected legitimate economic value and complied with the prevailing legislation, whereas Brazil’s tax authorities contended that the structures were primarily tax-driven, designed to artificially create deductible goodwill.  Different legal cases involving Ambev have had mixed outcomes over time, with some decisions being favourable to the company and others not. Parts of these disputes continue in the courts. As a trend, the government has generally won in these goodwill cases, leaving companies in an uncertain position.

Similarly, Petrobras, the parastatal energy giant, has been involved in prolonged disputes over the calculation of taxes on fuel sales. The dispute centres on what should be included in the taxable revenue base. Petrobras has argued that certain transfers and components of fuel pricing do not constitute taxable income, while the authorities contend that they should be included. The cases involve very large financial stakes, given Petrobras’ scale and the size of Brazil’s fuel market. Litigation has been ongoing for years and highlights the complexity of overlapping taxes and the significant economic impact of litigation on key sectors.

Even when courts deliver rulings, uncertainty can persist. The Brazilian Supreme Court, has, at times, limited the retroactive effect of decisions, determining from which date a ruling applies and who may benefit. This can drastically alter the financial impact of a case, turning potential windfalls into more modest gains.

The reform seeks to address these structural flaws by simplifying the tax base, reducing cascading effects, and improving transparency. A transition period has already begun, with full implementation expected by 2033. If successful, the overhaul could lower compliance costs, reduce litigation and improve Brazil’s investment climate.

Changes to income taxation are also under discussion, including measures aimed at easing the burden on low- and middle-income earners while increasing taxes on higher incomes.

For decades, tax reform has been widely acknowledged as essential to unlocking Brazil’s economic potential. The challenge now lies not only in passing new rules, but in ensuring they deliver the clarity and stability that the current system has long lacked.