Among the many innovations in the Tax Reform under consideration in the National Congress, one that stands out is the new tax collection method known as Split Payment. This payment method divides the tax amounts from the total transaction value at the moment of financial settlement.

According to PLP 68/2024, currently under review in the Federal Senate, the amounts owed for the Goods and Services Tax (IBS) and the Social Contribution on Goods and Services (CBS) may be collected through Split Payment. Legislators have designed different ways to operationalize this collection method, as follows:

• Automatic Split Payment: In this mode, the financial institution responsible for the transaction would handle the collection of IBS and CBS, with the amounts calculated considering potential tax credits the taxpayer might have. This calculation would be made possible through the payment system provider’s access to a platform to be created by the Federal Revenue and the future IBS Management Committee. This aims to uphold the principle of non-cumulativity. It is important to note that while payment service providers are expected to transfer the tax amounts to the treasury, they will not be held liable for the tax collection, leaving this responsibility to the IBS and CBS taxpayers;
• Simplified Split Payment: This would apply to transactions where the purchaser is not a taxpayer of either IBS or CBS, such as companies under the SIMPLES Nacional regime. The tax amounts to be segregated and collected, also by the payment service provider, would be calculated based on a pre-established percentage set by the IBS Management Committee for IBS and the Federal Revenue for CBS;
• Analog Split Payment: For cash transactions, where collection may be a shared responsibility between the supplier and the buyer, the supplier would monitor the payment’s completion. This mode still requires further details, as it differs from the original proposal focused on electronic payments.

Although designed by legislators, the implementation of this payment method, as outlined in the Bill, depends on several actions, both from the tax authorities and financial institutions. Enthusiasts of the method, including the Executive Branch, argue that Split Payment will be an effective tool against tax evasion and a key strategy to ensure the intended revenue in the years following the implementation of the Tax Reform.

On the other hand, critics point to the main challenges for implementing Split Payment in Brazil, such as increased operational costs for companies, potential cash flow impacts, and greater bureaucracy for financial institutions due to the system’s complexity.

In terms of international experience, other countries have adopted Split Payment, such as Bulgaria, which implemented this tax collection model. One of Bulgaria’s goals was to combat so-called “carousel fraud,” characterized by operations between real and fictitious companies generating fake VAT credits to offset the tax owed by their taxpayers. These operations, being spread across several countries, hindered audits and made it difficult to control VAT payments, occasionally contributing to revenue shortfalls.

In Bulgaria’s case, the use of Split Payment proved insufficient, as it did not successfully combat fraud as initially intended. Moreover, Bulgarian authorities found functional complexities in VAT calculation, leading to the cessation of this mechanism.

In contrast, Poland had a positive experience with Split Payment in electronic transactions, which, similar to Brazil’s proposal, assigned financial institutions the responsibility of segregating the amounts to be transferred to the seller and the portion allocated to VAT. In that country, carousel fraud was partially reduced, becoming less common in transactions since the amounts were segregated at the point of purchase, ensuring VAT transfer and consequently increasing tax revenue.

Additionally, this system proved attractive to Polish companies, encouraging high adoption, as authorities implemented exemptions from joint liability for VAT and established a 25-day refund process for VAT overpayments when taxpayer credits were deducted.

Given the global impact of Split Payment, while it may represent progress, it is clear that the method poses challenges for its implementation and may not be as effective in achieving the tax authorities’ goals, such as reducing tax evasion. However, it was noted that when the method is adapted to local realities and measures are implemented to positively impact taxpayers’ cash flows, such as the swift refund of VAT credit balances, companies tend to adopt it more readily.

The issue is still under consideration and may undergo further changes until the final Split Payment model is defined and potentially implemented. For this reason, the Marins Bertoldi Tax Law team will continue to closely monitor all related developments and remains available to address any questions within each business’s reality.

By Gabriela Marugal Munhoz Rodrigues e Vinícius Encinas Paz