Small Businesses in Brazil May Lose Competitiveness

Although the Tax Reform does not significantly change the operation of the Simples Nacional system, companies opting for this regime may lose competitiveness compared to those entering the new tax regime created, the Goods and Services Tax (IBS) and the Contribution on Goods and Services (CBS).

According to Sérgio Martes, a partner and specialist in taxation for small and medium-sized enterprises at ContabilidadeSMART, this may occur because the reform will make the tax credit system even more relevant for companies. The Dual Value-Added Tax (VAT) created by the reform consists of IBS and CBS, with a high rate of 27.97%, making credit recovery essential for calculating payable taxes. Since VAT is non-cumulative—applying at each stage of the production chain but allowing previously collected amounts to be deducted—credits help avoid cascading taxation.

However, companies under Simples Nacional will generate fewer credits than others because they benefit from reduced rates—meaning buyers of their products and services can only claim credits for the taxes effectively paid by the Simples company.

Effects of the Tax Reform on Simples Nacional Companies

Sérgio Martes suggests that in this new scenario, some companies may choose to leave Simples Nacional and pay more taxes just to generate higher credits for their clients, helping them stay competitive in a market where tax credits will be essential for cost reduction. "Ultimately, this will affect consumers, as the increased tax burden will be passed on to the final price."

The expert emphasizes the need for businesses to analyze their supply chain, mapping out their entitled tax credits to estimate the reform’s impact on final pricing. “Companies must review contracts, adjust agreed prices, and determine the best way to manage operations for optimal credit utilization.”

Impact on Simples Nacional Companies

Under the current system, small and micro businesses under Simples Nacional do not benefit from tax credits for covered taxes such as PIS, COFINS, ICMS, and IPI. Meanwhile, companies outside Simples Nacional can claim credits for taxes paid on purchases from Simples companies, with some limitations.

For ICMS, crediting is allowed for resale or manufacturing purposes but limited to the actual tax paid by the Simples supplier. For PIS and COFINS, non-cumulative taxpayers can deduct credits on purchases from Simples Nacional companies, with some exceptions. However, IPI credits are not allowed for purchases from Simples Nacional companies.

How the Tax Reform Affects the System

The tax reform does not fundamentally alter how this system operates. Similar to the current model, the proposed legislation (PLP 68/2024) restricts credit utilization by stating that companies under Simples Nacional that do not opt for regular IBS and CBS registration cannot claim tax credits from earlier production chain stages.

Although PLP 68/2024 does not drastically change the existing credit-taking dynamics for Simples Nacional companies, the tax reform could still put small businesses at a disadvantage. The new Dual VAT (IBS + CBS) replaces ICMS, ISS, PIS, and COFINS with a broad-based, non-cumulative tax.

Because VAT applies broadly to goods, services, digital transactions, and imports, and carries a high 27.97% rate, claiming tax credits becomes crucial for cost management. Companies outside Simples Nacional will have more tax credits to offset their liabilities, making them more attractive business partners.

The Competitive Disadvantage for Simples Nacional Companies

At first glance, Simples Nacional companies will continue paying taxes based on progressive rates tied to annual gross revenue, similar to the current system. However, their clients will only be able to claim credits for the reduced taxes paid under Simples Nacional, which may be insufficient compared to credits generated by businesses under IBS and CBS.

As a result, companies remaining in Simples Nacional could become less competitive than their peers in the regular IBS/CBS regime, where tax credit accumulation will be crucial.

Challenges and Business Decisions

Switching to the regular IBS/CBS regime adds complexity to small business operations, which Simples Nacional was designed to simplify. However, with tax credits playing a central role in cost reduction, some companies may feel pressured to leave Simples Nacional and pay higher taxes to generate more credits for their clients. This shift could ultimately lead to higher consumer prices.

Businesses relying on Simples Nacional suppliers may also need to reassess their partnerships, as companies offering more tax credits could become preferred vendors.

Given the importance of tax credits in the new system, companies must thoroughly evaluate their supply chain and determine their eligible credits to assess the reform’s impact on pricing. They may need to renegotiate contracts, adjust pricing strategies, and optimize operations for tax efficiency.

Ultimately, the reform could push businesses toward larger suppliers—including foreign companies—over Simples Nacional firms, potentially disadvantaging small and micro-enterprises.