Brazil's VAT Reform: Ensuring Revenue Neutrality

IMF Working Papers, December 19, 2025

Source details

Authors: Ana Cebreiro Gomez, Christina Kolerus, Guilherme Dal Pizzol, Pablo Moreira, Miguel Pecho
Published: December 19, 2025
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9798229032971.001

Brazil’s landmark VAT reform, approved in December 2023, replaces five overlapping taxes with a dual VAT across three levels of government and aims to simplify and harmonize a widely scattered tax landscape.
The reform law anchors the objective of revenue neutrality, but deep structural changes create uncertainty about expected revenue collection.
The paper estimates consumption tax revenues under the new VAT using an adjusted IMF's RA-GAP framework tailored to Brazil’s specificities and documents sectoral shifts in tax burdens.

Estimation approach: adjusted IMF's RA-GAP framework taking into account Brazil’s specificities.
Scenario analysis: simulation of a wide set of scenarios by modifying key assumptions, including on the compliance gap and informality.
Policy constraints: simulations are guided by legislated decisions on rates and exemptions.

Minimizing the compliance gap will be the most effective way towards ensuring revenue neutrality.
The reform produces sectoral shifts in tax burdens (documented in the paper).
Deep structural changes inherent in the reform generate uncertainty about expected revenue collection.

Full integration of operations is critical to address revenue risks and to unleash the reform’s benefits.
Effective management of the input tax credit mechanism is essential to ensure the system functions and to mitigate revenue risks.
Prioritize measures that reduce the compliance gap and address informality to safeguard revenue neutrality.

Revenue outcomes are sensitive to assumptions about the compliance gap.
Revenue outcomes are sensitive to assumptions about informality.
Legislated decisions on rates and exemptions constrain possible outcomes but do not eliminate uncertainty stemming from behavioral responses and administrative implementation.

Source: IMF Working Paper No. 2025/266 (December 19, 2025).