Brazilian states and municipalities disagree with the tax reform's simplification premises and plan to resume 'tax on tax' charges during the transition period. This could spark national litigation, undermining the reform's goal of reducing judicial disputes. The country already leads the world in tax litigation.
Brazil's tax reform promised to cut litigation, which raises business costs and investor uncertainty. The country has the world's highest number of tax disputes, many involving non-cumulativity, where company expenses are not deducted from taxes owed to federal, state, or municipal authorities.
A classic case is the 'Century Thesis,' challenging tax on tax. In simple terms, tax authorities calculated duties on the full sale or service value, including the tax itself, known as 'inside charging.' The reform established broad non-cumulativity for tax credits and 'outside' calculation, excluding the tax amount from the base.
However, states and municipalities reject this simplification. During the 2027-2032 transition, state ICMS and municipal ISS will drop 10% annually, while the new Goods and Services Tax (IBS) rolls out at the same rate. States plan to levy ICMS on operation values plus IBS, broadening the tax base.
The Federal District confirmed this in a consultation ruling. Pernambuco advances further, applying ICMS on new taxes from 2026, a test year where new duties are only reported on fiscal documents, not collected. This pattern is likely to spread, echoed by municipalities, creating nationwide tax disputes.
Taxpayers have grounds to litigate: 'tax on tax' charging is deemed perverse, opposing the reform's intent and extending judicial battles for years.