Tax Law Highlights - Impact of the Tax Reform on Administrative and Judicial Litigation: Jurisdiction and Related Issues

ADMINISTRATIVE LITIGATION

• Introduction: Tax Reform and the Possible Increase in Litigation;
• Operation of IBS tax inspection
• Structure of the IBS Management Committee
• Aspects of CBS and Changes to the Administrative Council for Tax Appeals (CARF)

JUDICIAL LITIGATION

• Impacts of the Dual VAT Model;
• New (possible) judicial actions before the Superior Court of Justice (STJ);
• Main points of the STJ report; and
• Possible solutions.

The Tax Reform, established by Constitutional Amendment No. 132/2023 and regulated by Supplementary Law No. 214/2025, brings major changes to the consumption tax system in Brazil by extinguishing the PIS, COFINS, ICMS, and ISS taxes and creating three new ones: Contribution on Goods and Services (CBS), Tax on Goods and Services (IBS), and Selective Tax (IS).

Although the central promise of the reform is the simplification of the tax system and the reduction of litigation, the Brazilian experience and the analysis of the new tax model indicate that tax litigation actually tends to intensify in the short and medium term.

The coexistence of old and new systems during the long transition period, the plurality of interpretations, different administrative procedures for the tax inspection and trial of the twin taxes, the absence of specialized courts for IBS and CBS, and the possible requirement to form a joinder of defendants with all federative entities in anti-tax enforcement judicial actions involving IBS and CBS are factors that may increase procedural complexity and legal uncertainty, contrary to the discourse of simplification.

Tax Scenario, Repercussions, and Changes

The new consumption tax system, in addition to expanding the scope of taxation on almost all transactions carried out by taxpayers (including transactions that were not previously subject to ICMS and ISS, such as property leasing), has brought significant changes to the structure of tax inspection, collection, and legislative competence, directly impacting administrative and judicial litigation related to consumption taxation.

IBS and CBS are broad-based twin taxes, with CBS under the jurisdiction of the Federal Government and IBS under shared jurisdiction among States, the Federal District, and Municipalities, which must act in an integrated manner through the newly established IBS Management Committee (CG-IBS).

With the Tax Reform: (i) the Brazilian Federal Revenue Service will be responsible for the tax inspection, tax assessment and trial of CBS (and IS) cases before CARF. In parallel, (ii) IBS will be inspected and assessed at the destination by all States, Municipalities, and the Federal District, and any conflicts will be judged by the CG-IBS. In this respect, there is an imminent risk of conflicting decisions already at the administrative level, which may eventually be resolved by the Committee for the Harmonization of Tax Administrations, as provided for in Supplementary Bill No. 108/2024, in the event of divergent understandings between the Superior Chamber of the CG-IBS and CARF.

In the judicial sphere, if a Specialized Court is not created to judge cases involving the new taxes, there will also be a risk of conflicting decisions between the Federal and State Courts or, eventually, all judicial actions may be concentrated in the Federal Court if the Federal Government and the federative entities act as co-defendants, due to the jurisdiction rule set forth in Article 109, item I, of the Federal Constitution.

Furthermore, since the taxes are owed to the federative entity of the destination of the good or service, there will be multiple competent parties to inspect, assess, file tax foreclosure actions, and act as interested parties in anti-tax enforcement judicial actions. Ultimately, it is possible that the same taxable event could lead to the filing of three different Tax Foreclosure Actions by the Federal Union, State, and Municipality.

The scenario worsens for the lawsuits filed by the taxpayer. Some possible questions: will it be necessary to include all interested federative entities as defendants? Will the IBS Management Committee have standing to act on behalf of States and Municipalities?

Despite the transitional rules beginning next year, these issues have not yet been resolved, causing uncertainty about how administrative and judicial litigation procedures will be conducted in light of the Tax Reform on consumption.

Conclusion

The Tax Reform represents a milestone in the transformation of the consumption tax system in Brazil, with the stated aim of simplification and reduction of litigation. However, analysis of the new model reveals that, at least in the short and medium term, litigation tends to increase due to the coexistence of old and new systems, the plurality of interpretations, the multiplicity of tax inspection and adjudicating entities, and the absence of clear mechanisms to avoid conflicting decisions.

The new scenario requires taxpayers and legal professionals to pay close attention and adapt to the new structures in both administrative and judicial spheres. Significant uncertainties remain regarding jurisdiction, the procedural standing of entities, and the operationalization of both administrative and judicial litigation.

In this context, it is essential to closely monitor legislative changes, especially Supplementary Bill No. 108/2024 (currently in the Brazil Senate), which will define the future of litigation under the new consumption tax system, as well as the decisions to be made by the relevant bodies.

The Tax team at Tauil & Chequer Advogados associated with Mayer Brown remains available for further clarification and to assist in understanding and addressing the challenges brought by the Tax Reform.