Starting this year, the Brazilian electricity sector will begin to experience a structural change: the transition to the new tax system. Although the initial period will be marked by operational adjustments and the adoption of new tax documents, the impacts go beyond compliance and reach the business model of the entire electricity chain.
For distributed generation (DG), in particular, the reform raises a red flag. The possibility of more restricted tax breaks, limited to self-production projects up to 1 MW, tends to alter the economic attractiveness of models such as shared generation and multiple consumer units, especially for individuals.
Tax Reform, which has been discussed for decades, aims to simplify tax collection in Brazil. The new taxation system will consist of the following taxes:
- PIS/Cofins will be replaced by CBS (Contribution on Goods and Services), which will be levied on transactions involving material and immaterial goods and services, and is the responsibility of the Union.
- ICMS/ISS will be replaced by IBS (Tax on Goods and Services), which will also apply to transactions involving material and immaterial goods and services, but will be managed by states and municipalities.
- IPI will be replaced by IS, a Selective Tax under the jurisdiction of the Union, which will be levied on the extraction, production, import and sale of goods and services that are harmful to health and the environment.
The transition period for the Tax Reform will begin in 2026 and will conclude in 2033. In 2027, PIS/Cofins will be phased out, and between 2029 and 2033, the collection of ICMS and ISS will end.
In an interview, Ricardo Ferreira da Costa, Senior Manager of Indirect Taxes at Ernst & YoungThis analysis examines the main pillars of the reform, the risks and opportunities during the transition, and how energy agents should prepare to navigate the new tax environment.
What are the main pillars of the tax reform that will transition starting in 2026, and what structural impacts will they have on the electricity sector in Brazil?
I like to say that 2026 will be a year of "rolled-up sleeves," as taxpayers will have a series of adaptations to make for the change that will come from 2027 onwards. However, from a practical standpoint, for the beginning of the year, only the new Electronic Tax Document model needs to be adopted, as well as understanding for which operations the new Tax Document (Invoice) should already be adopted.
Will the reform tend to increase or decrease competitiveness throughout the energy generation, transmission, distribution, and commercialization chain? Are there any links that are more exposed during the transition?
There is no single answer to this question. What we can say is that many operations that previously did not generate tax credits will now do so, reducing operational costs. In addition, when the tax reform was approved, it was established that energy operations will only be taxed when destined for the end user. Thus, it is necessary to assess the particularities of each taxpayer, but the reform significantly reduces residual taxes.
From a tax perspective, is there a risk of loss of competitiveness for free consumers and energy traders?
Free consumers can even benefit. Currently, there are many who cannot recover credit when purchasing energy (either because they opt for Presumed Profit, or because their activity is not compatible with credit recovery).
Energy traders will continue to be taxed when selling to end consumers, but an important change is that their energy purchases will no longer allow for credits – due to the concentrated incidence of IBS and CBS on sales to end users of energy.
How might the reform affect the economic viability of self-production, distributed generation, and the competitiveness of renewable energy sources?
The reform guarantees the full recoverability of taxes. Thus, in the case of self-production, any eventual collection of taxes on consumption (IBS and CBS) will allow for credit and therefore have a neutral effect.
For distributed generation (DG), the legislation only allows for tax exemption for self-producing plants with up to 1 MW (under the terms of the current ICMS agreement 16/15), unlike what is practiced by some states, especially in the Southeast region.
Therefore, this point tends to generate a negative impact, especially for individual users of multiple units and shared generation – given the impersonal nature of the credit and the tax incidence of IBs and CBS.
What operational, legal, and financial risks does the period of coexistence between the current system and the new tax model bring to the agents of the electricity sector?
Without a doubt. But there are also numerous opportunities. It's crucial to examine the scenario and understand the impact the reform has on each department of the company and how it alters its strategic planning, adjusting the sails to navigate the new waters.
In the long term, is the reform likely to make the electricity sector more economically efficient and more aligned with market signals?
It's difficult to answer objectively. However, the reform will ensure that there are no negative tax residues in the cost of energy, enhancing competitiveness. From a business perspective, does the reform increase or decrease tax predictability, and what is the expected impact on the tax compliance costs for energy companies?
The trend is for compliance costs to be reduced. For several reasons: firstly, the legislation for IBS and CBS is the same, bringing uniformity of treatment and of the taxable event; secondly, everything will allow tax credits – except for personal use goods, reducing litigation regarding credits.
The third reason is the trend towards the elimination of currently known ancillary obligations, and the fourth reason is that the RFB (Brazilian Federal Revenue Service) has developed a program through which it will perform "assisted calculation" for the taxpayer, so that, based on the invoices issued by the taxpayer and those billed to them, it will be possible to project the tax payable. Thus, it is likely that there will be less room for questioning and fewer hours needed to meet tax requirements.
Are capital-intensive projects more sensitive to changes in the tax credit model? Is there a risk of investment delays?
From the energy sector's point of view, I believe that investment – capex – will not be negatively impacted. On the contrary. As mentioned, credit will be readily available. Furthermore, REIDI (Special Regime for Infrastructure Development) is maintained and even strengthened by its application to both CBS (Contribution on Goods and Services) and IBS (Integrated System for Tax Benefits).
Therefore, it is possible to say that there will be no tax residue in the CAPEX phase, which may even unlock other investments that were previously unfeasible due to the tax burden. During the transition, the electricity sector may face a temporary increase in costs, whether in the acquisition of equipment or in the contracting of services such as EPC, O&M, and engineering?
The cost increase will depend on the supply chain. However, it's safe to say that if there is one, it won't be directly due to taxation. In other words, given that taxes will be fully recoverable, I don't foresee a direct cost increase (although there might be in some specific cases).
Considering risks and opportunities, what would be the main recommendation for executives in the electricity sector regarding tax reform? Should the transition be viewed more as a threat or as an opportunity?
My first suggestion is to view the reform not just as a tax reform, but as a business reform in itself. It is very broad and changes much more than just the form and taxes to be paid. There is much to be evaluated and adjusted during the transition period. The way business is done today, models that were definitive, processes that have been structured for a long time – everything must be revisited.
No crystal-clear premise of the current model remains intact and needs to be observed and reanalyzed. This, perhaps, is the biggest task for those who want to be ready for the "new world." Roll up your sleeves and understand the impact on each variable of your business and how to adapt. This will be fundamental to facing the reform as an opportunity or as a threat. It is how much I know, prepare myself, and adjust my course that will determine the success of the new journey.
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