The Three Innovative Features of VAT in Brazil's Indirect Tax Reform

In 2025, Brazil approved a tax reform that introduced an innovative value-added tax (VAT) model, which incorporates three important features. First, it adopts a dual VAT model, with the creation of two separate taxes: the Contribution on Goods and Services (CBS), managed by the federal government, and the Tax on Goods and Services (IBS), jointly administered by states and municipalities. Second, it introduces a split payment mechanism, which helps reduce tax evasion. A third innovation is the adoption of a personalized VAT or cashback system, which consists of a partial refund of the VAT to lower-income deciles, aiming to reduce its regressivity. These innovations seek to address long-standing challenges in Brazils tax system, which has been characterized by the complexity of indirect taxes, including fragmented tax bases, cumulative taxation at each stage of the production process, and the difficulty taxpayers face in reporting to three levels of government (federal, state, and municipal), each with different bases and rates. This publication examines each aspect of the reform and offers lessons learned from the Brazilian case that may be applicable to any government considering improvements to the design and implementation of VAT.