Contract Review for Brazil’s Tax Reform: A Business Analysis Beyond Tax Clauses

With the next phase of the reform approaching in January 2027, companies have limited time to assess how the new rules will affect their contractual arrangements, margins and operations.

Brazil’s tax reform has prompted companies to review their financial and tax systems and processes. Contract reviews deserve the same attention: beyond translating the new rules into contractual provisions, companies need to assess whether their business structures remain appropriate under the new tax model.

In the post-election landscape, with the government having reaffirmed the timetable, time is tight. In January 2027, the Contribution on Goods and Services (CBS) will replace PIS and Cofins. Companies have just over two months to identify the implications, develop solutions and negotiate the necessary adjustments with customers and suppliers.

Contracts formalise the relationships underpinning business operations and must therefore accurately reflect day-to-day transactions, supported by consistent documentation. In an increasingly integrated and dynamic system, discrepancies between what is agreed, what is performed and what is recorded may trigger scrutiny from the tax authorities, jeopardise tax credits and result in significant losses.

The analysis should cover pricing, payments, responsibilities and operational structures. Identifying which entity enters into the contract, purchases, uses and invoices each supply can directly affect business results.

Although the transition runs until 2033, its effects require decisions now. In addition to the federal change in 2027, the Tax on Goods and Services (IBS) will gradually replace ICMS and ISS between 2029 and 2032. Contracts signed or renewed now may span several stages of this process and should allow for adjustments at each phase of the transition, without disrupting performance, upsetting the economic and financial balance of the agreement, triggering unnecessary price revisions or creating friction between the parties.

Pricing and margins: assessing the economic impact of the change

Clauses that include all taxes in the price, or allocate the full effects of tax changes to one party, need to be reassessed in light of the commercial terms and the nature of each arrangement. The analysis should consider the taxes being replaced, new tax charges, available credits and the actual effects on operating costs. A change in the tax rate alone is insufficient to demonstrate the impact on margins or justify a particular percentage adjustment to the price.

For private contracts, the reform does not, in itself, provide blanket authorisation to pass on increases or revise prices. The appropriate approach depends on the contractual provisions, the allocation of risk and the demonstrated effects, subject to the legal requirements for any revision.

To preserve the balance of the agreement and the parties’ original intentions, it is advisable to establish objective criteria for any adjustment: required documentation, calculation methodology, treatment of cost increases and reductions, review periods and procedures for resolving disagreements. This mechanism should be coordinated with periodic price adjustments to avoid counting the same economic effect twice.

These decisions require modelling and negotiation. The later discussions begin, the less time there will be to develop a commercial solution that preserves the relationship between the parties.

Destination-based taxation: accuracy and consistency in operations

Destination-based taxation requires the correct identification of the place of supply, particularly for determining IBS. The statutory criteria vary according to the goods or services concerned and may take into account the place of delivery, the place of performance or the purchaser’s domicile, among other factors. The customer’s head office address should therefore not be used indiscriminately when analysing a transaction, assessing the impact of the new tax rules on the contract or issuing invoices.

This information must be accurate and consistent across contracts, proposals, service orders, purchase orders, master data and tax documents. Transactions involving multiple establishments or centralised contracting require particular attention to the specific rules and to documentation of the arrangements actually used.

Contracts should specify who provides each item of information, deadlines for updates, verification and correction procedures, and the consequences of errors or omissions. Liability for losses should reflect the source of the failure and each party’s duties, without altering the statutory rules determining who is liable for the tax to the tax authorities.

Tax credits: assessing the supply chain and business structure

Entitlement to IBS and CBS credits depends on statutory requirements involving tax documentation and, as a general rule, settlement of the tax liability arising from the transaction, subject to exceptions and implementation rules.

This calls for a review of obligations relating to the issuance and correction of documents, information sharing and cooperation. Indemnity clauses must distinguish between failures attributable to the supplier and restrictions on credits resulting from the tax regime or the contracting party’s own use of the purchase. Broadly worded guarantees may transfer risks beyond a party’s control.

The analysis should also cover the business structure: which entity enters into the contract, purchases, uses and invoices each supply. Direct contracting or contracting through intermediaries, centralised purchasing, subcontracting and intragroup transactions may need to be reassessed to enable the use of legally available credits and reduce inefficiencies.

This assessment should compare the net cost of the alternatives, taking into account tax regimes, credits that can actually be used and operating costs. A supplier offering a lower nominal price may represent a higher net cost for the purchaser. Equally, the option generating the most credits may not be the most advantageous.

These decisions affect procurement, pricing and the organisation of the supply chain. Any changes must have an economic rationale and be reflected in actual performance, contracts and tax documentation.

Payments: effects on cash flow and contract performance

Under the split payment mechanism, payment system participants separate and remit IBS and CBS when payments are settled. Its gradual implementation requires companies to monitor the payment instruments available and adapt contractual and operational processes accordingly.

Payment by the purchaser (RAD, its Portuguese acronym) allows a purchaser subject to the regular tax regime to remit the taxes arising from the transaction when the payment instrument used does not support split payment, subject to the applicable legal and operational conditions.

These mechanisms may provide greater control over tax remittance, but they also have financial implications and create reconciliation requirements. For suppliers, the separation of tax amounts may temporarily reduce available funds and affect working capital. For purchasers, RAD requires controls to ensure that taxes are remitted correctly and that the payment is linked to the relevant transaction.

Contracts should govern the use of RAD where permitted, communication between the parties, the amounts involved, supporting evidence and the correction of inconsistencies. They should also provide that documented tax remittances count towards payment of the contract price, so that, together with the balance paid to the supplier, they fully discharge the amount due and prevent duplicate collection. Simply deducting an amount without actually remitting the tax does not constitute RAD.

Payment terms, advances, instalments and variable remuneration need to be aligned with these procedures. The review therefore extends to payment conditions and the company’s financial planning.

Scope and operations: the contract must reflect the business

For contracts combining services, technology, licensing, intermediation or purchases from third parties, companies must check whether each activity and its remuneration are adequately described. Amounts treated as reimbursements or pass-through payments should also be examined according to their nature and the legal, documentary and financial arrangements underlying the transaction.

Simply changing terminology or artificially separating amounts does not secure the intended tax treatment. The contract must faithfully reflect a genuine and legally sound structure, supporting actual operations and the tax documents associated with the transactions carried out.

This assessment may reveal a need to review contracting arrangements, the involvement of intermediaries or the composition of deliverables and prices. Contract drafting should reflect business decisions supported by a joint assessment of their legal, tax and operational effects.

Priorities and governance: organising adjustments within the time available

The work should begin by mapping contracts and classifying their exposure. Duration, value, margin, operational significance, reliance on tax credits and difficulty of renegotiation can help determine priorities.

Long-term contracts, particularly those with fixed prices or automatic renewal provisions, warrant special attention and may require more complex clauses addressing the various stages of the reform’s transition. Short-term agreements may also require immediate action where performance extends into 2027. The duration of each arrangement must be assessed alongside the effects of the reform’s next phase.

The adjustments should cover standard contract templates, commercial proposals, purchase orders and negotiation guidance. Internal guidelines setting out recommended clauses, acceptable alternatives and approval levels can support consistent decisions and more efficient negotiations with customers and suppliers. A playbook, for example, can become an invaluable resource for business and procurement teams, supporting negotiations and renegotiations with customers and suppliers.

The time required extends beyond drafting amendments. It includes gathering information, modelling impacts, approving changes, negotiating and adapting processes. As January 2027 approaches, coordination between legal, tax, finance, procurement, sales and technology teams is essential to align business structures, data quality and contract performance.

Contract review is part of a strategy to preserve margins, secure tax credits and maintain business continuity. Its scope extends beyond tax clauses because it concerns how a company structures and conducts its business. For operations that will be affected as early as 2027, the time available to turn this analysis into decisions is increasingly limited.

BVA is closely monitoring these developments and is available to assist with reviewing contracts to address the changes introduced by Brazil’s tax reform.