Changes to ICMS (VAT) states’ split on B2C inter-state sales in confusion
The Brazilian federal government has gazetted this month a rule change on Imposto sobre Circulação de Mercadorias e Serviços ICMS (a form of VAT) on interstate sales of goods to consumers. However, Law 190/2022 may not be effective until 2023 due to a subsequent challenge being launched.
DIFAL – splitting ICMS between states
Currently, ICMS tax on intra-state goods sales are shared between the state of dispatch and that of arrival. There are 26 states in Brazil, plus the federal district, Brasilia. The state of dispatch will half its charge of ICMS, with the state of arrival allowed to top up to the full rate – this is known as DIFAL (Diferencial de Aliquotas do ICMS) mechanism. It ensures a fair split of consumption tax between the departure and state of consumption/arrival. Where the transaction is with an individual, not registered for ICMS, the destination state loses out as not ICMS charged.
In 2015, Constitutional Amendment 87/2015 attempted to change this and flip the DIFAL to the state of destination. However, this was blocked since there was no federal law to back it up. Congress approved the changes of 190/2022 last month to follow 87/2015, but since it was only gazetted this month, it will now be challenged as unenforceable until 2023.
Confusion between states on new rules
Some states—such as São Paulo and Bahia, for example—revised their laws to institute ICMS measures to reflect the requirements contained in Law No. 190/2022. Other states—such as Rio Grande do Norte and Ceará—only issued cautionary statements about the legislative change. In general, a consensus among the states appears to be that the collection of DIFAL must still take place in 2022.
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