Zweig’s dream: reforming Brazil for the future

In his last years of life, when Stefan Zweig published Brazil: Land of the Future, a feeling became so embedded in the Brazilian subconscious that paradoxically explains both national joy and melancholy: that prosperity is always just around the corner. Of course, today we are mature enough to recognize that Zweig’s book, although insightful, was like a love letter written by someone dazzled, always ready to turn a blind eye to problems.

This does not mean we have stopped waiting for our promised land. Comprehensive reforms in Brazil are often presented by political leaders as our ultimate ticket to the future. In practice, the future is usually postponed to the next reform, but the quest for a utopian Brazil has undeniably led to political actions that have realigned the country economically and made us more open to foreign investment. I had the honor of contributing to Brazil’s first major step in this direction when, in 2019, we passed the Economic Freedom Act, which fostered the opening of new businesses as never before since the turn of the millennium.

There is no doubt, however, that the most significant and controversial reform has come recently, with Constitutional Amendment No. 132/2023, known as the Tax Reform. Like any major reform, its impacts are still subject to debate, but it was marked by an attempt to simplify the previous tax system: by instituting the dual IVA (dual value-added tax), composed of the IBS (property and services tax) and the CBS (property and services contribution), it replaced a series of old taxes. It also created the IS (selective tax), an extrafiscal tax aimed at regulating the consumption of certain goods and services deemed harmful to health or the environment, rather than merely generating revenue.

It is the IS that we need to clarify to the public. Its regulation came this year, through Complementary Law No. 214/2025, which defined its applicability to products and activities with negative externalities, e.g.: alcoholic beverages, sugary drinks, tobacco products, high-polluting vehicles, gambling, mineral resource extraction etc. The IS is a federal tax, levied once on the good or service, with no credit offsets allowed. The calculation base will vary depending on the type of transaction and may be: sale value, book value, or a reference value set by regulation, and it will not include amounts owed for IBS, CBS, or the IS itself.

The taxpayers of the IS are producers, importers, and traders of goods and services subject to taxation. The tax is due at the following times: (1) first commercialization of the good; (2) auction acquisition; (3) non-onerous transfer of extracted or produced mineral goods; (4) incorporation of the good into the manufacturer’s fixed assets; (5) export of extracted mineral goods; (6) consumption of the good by the producer or manufacturer; or (7) service provision or payment, whichever occurs first.

In this context, it is important to highlight that the Executive Branch vetoed the provision of Complementary Law No. 214/2025 that excluded IS from being levied on the export of mineral goods. The technical justification was that the exemption would violate Article 153, Paragraph 6, Item VII, of the Constitution, which requires taxation on mineral extraction regardless of whether the destination is domestic or international. At the time of writing this article, the decision on whether to uphold or overturn the veto is still pending before Congress. If upheld, IS will apply to mineral extraction even when destined for export. If overturned, exports of these goods will be exempt, with taxation limited to domestic operations. This latter scenario may make exports more attractive for oil and natural gas producers, potentially reducing the supply of raw materials for domestic refineries, which today face logistical obstacles and reliance on imports.

IS rates will be defined by ordinary federal law and may vary depending on the nature of the good or service. For mineral extraction, for instance, the rate will be capped at 0.25%. For alcoholic beverages, the law may set differentiated rates by product category, applying progressive rates according to alcohol content. In the automotive sector, rates will be scaled based on environmental criteria related to pollutant emissions, encouraging the acquisition of electric and hybrid vehicles and promoting a more sustainable transportation matrix.

As can be seen, the creation of the IS is an innovation in the Brazilian tax system, aligning with international practices for taxing harmful products. However, its implementation requires taxpayers to exercise extra care regarding compliance with new ancillary obligations, the correct classification of taxable goods and services, and the assessment of tax risks arising from potential interpretative divergences, especially in sectors with high regulatory complexity such as fuels and mining.

Despite its narrower scope compared to the IBS and CBS, the economic effects of the IS may be significant, particularly in price formation and the competitiveness of companies subject to progressive rates based on environmental or health criteria. Companies in sectors sensitive to this tax should incorporate the potential tax impacts on their margins, market positioning, and investment decisions into their tax and strategic planning.

That said, although it is a tax with specific reach, the IS has structural influence on the production chains subject to its incidence. Proper understanding and monitoring will be essential for taxpayers to adapt to the new tax model, mitigate risks, and seize opportunities within the regulatory logic ushered in by the Tax Reform.

As can be seen, the IS is just one part of the broader reforms Brazil is currently undertaking; and the oil & gas sector still faces many challenges to ensure the sustainable development of Brazil’s private refining industry. A parallel issue, also of great impact, is the revision of the reference price calculation methodology for oil, set monthly by ANP (the Brazilian National Agency of Petroleum, Natural Gas, and Biofuels), which serves as the calculation base for the collection of royalties and profit-sharing for the Union, States, and Municipalities.

Currently, the reference price lags behind actual market prices for oil, resulting in (1) lower royalty and profit-sharing revenues for the state; (2) loss of IRPJ (corporate income tax) and CSLL (social contribution on net income) revenue; (3) incentives for exports that hinder domestic access to Brazilian oil, delaying the development of private refining. As show by 2023 data, Brazilian federal entities forgo approximately USD 2.5 billion annually due to this regulatory distortion in oil reference pricing. Therefore, it is expected that, very soon, the government will deliver, as part of the reform wave, a revision of ANP’s calculation methodology

Finally, it is clear that, starting with the business environment reform between 2019 and 2022, Brazil is—despite ongoing electoral disputes—moving toward a scenario of tax simplification and regulatory improvement. In this reformist environment, specialized legal counsel remains essential for any foreign player, especially at a time when Brazil is once again attracting investors. And indeed, while we are still somewhat far from Zweig’s idealized land, I am convinced that the Austrian was right to bet on Brazil as a global example of industrial development and sustainability.

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