Brazil's VAT Reform: Ensuring Revenue Neutrality

Ana Cebreiro Gomez, Christina Kolerus, Guilherme Dal Pizzol, Pablo Moreira and Miguel Pecho

No 2025/266, IMF Working Papers from International Monetary Fund

Abstract: Brazil’s landmark VAT reform, approved in December 2023, will profoundly alter the way consumption taxes are raised across three levels of government. The dual VAT will replace five overlapping taxes, address major inefficiencies of the current system, and simplify and harmonize a widely scattered tax landscape. While the objective of revenue neutrality is anchored in the reform law, deep structural changes will generate uncertainty about the expected revenue collection. This paper estimates consumption tax revenues under the new VAT based on an adjusted IMF's RA-GAP framework taking into account Brazil’s specificities and documents sectoral shifts in tax burdens. We simulate a wide set of scenarios, modifying key assumptions including on the compliance gap and informality, while being guided by legislated decisions on rates and exemptions. Our findings indicate that minimizing the compliance gap will be the most effective way towards ensuring revenue neutrality. To address revenue risks and unleash the reform’s benefits, full integration of operations and effective management of the input tax credit mechanism are critical.

Keywords: Tax policy; VAT; RA-GAP model; tax compliance; informality; VAT reform; IMF working papers; way consumption tax; ensuring revenue neutrality; VAT compliance; revenue risk; Global; Western Hemisphere (search for similar items in EconPapers)
Pages: 42
Date: 2025-12-19
New Economics Papers: this item is included in nep-acc, nep-inv and nep-iue
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