Brazil Considers Extending IPI to Avoid a R$3.82 Billion Tax Shortfall in January 2027

Brazil’s Finance Ministry is considering a constitutional amendment to temporarily extend the federal industrial products tax, known as the IPI, on items such as tobacco, alcoholic beverages, soft drinks and some vehicles, as Brasília tries to avoid a revenue gap at the start of 2027 caused by delays in the new Selective Tax that is supposed to replace it.

Folha de S.Paulo reported that the government is studying sending the proposal to Congress after the second round of elections. The immediate goal is to prevent a shortfall of nearly R$4 billion in January 2027 because the Selective Tax, sometimes described in Brazil as a “sin tax,” will not be ready in time to begin collection on Jan. 1.

According to the report, the issue was discussed at a meeting in Brasília on Tuesday attended by Finance Ministry officials, including Executive Secretary Dario Durigan, representatives of Brazil’s Federal Revenue Service, the National Confederation of Industry and companies affected by the new levy. The ministry later said it had met, at the request of the industry group, with sectors that will be affected by the Selective Tax in order to hear their concerns and map out possible next steps.

“The government’s intention is to guarantee predictability and legal certainty for 2027,” the ministry said in a statement cited by the newspaper. It added that discussion of the Selective Tax in Congress, as well as details of any proposal, would take place “at the appropriate time.”

The timing problem comes from Brazil’s 90-day rule for the start of tax collection. The provisional measure needed to define the Selective Tax’s rates and detailed rules had to be published by Oct. 2 for the tax to take effect in January. The government postponed that step until after the elections. As a result, the new tax can only begin to be collected in February, leaving a one-month hole in revenue if the IPI is not extended.

The estimated loss is R$3.82 billion, equal to 9% of the revenue the government expects from the Selective Tax in 2027. Officials are trying to avoid that gap without changing the broader tax reform calendar more than necessary.

The IPI is scheduled to end in January 2027 under Brazil’s tax overhaul, except for products similar to those made in the Manaus Free Trade Zone when they are produced outside the region or imported, such as cellphones and motorcycles. Congress has already defined which products will move from the IPI to the Selective Tax, but lawmakers left the tax rates and collection rules for later regulation.

Under the reform, the Selective Tax will replace the IPI for tobacco, alcoholic drinks, sugary beverages and vehicles classified as polluting. Unlike the current IPI, which is fixed according to the type of product, the new tax may also vary based on potential harm. In the case of alcoholic beverages, for example, that could mean different treatment depending on alcohol content. That makes the transition especially important for beer, wine and spirits producers and importers, whose costs, pricing and production planning could be affected by the final design of the tax and by any temporary extension of the current one.

Companies from the beer, wine, spirits and soft drinks industries were among those present at the Brasília meeting, along with cigarette makers, aircraft manufacturers and representatives of the mining and oil sectors. All of those sectors will be affected by the Selective Tax in some form. The only public response reported after the meeting came from Sindicerv, Brazil’s national beer industry group, which said it recognized the Finance Ministry’s effort to build an agreement with different sectors under the coordination of the National Confederation of Industry. The group said it supports the reform’s principles and is now waiting for the government to send a proposal with Selective Tax rates that match commitments made in negotiations.

At the meeting, government officials also reaffirmed a promise that Selective Tax rates will be calibrated so that the overall tax burden remains in line with what companies currently pay under the IPI. For mineral goods covered by the new tax, including iron ore, oil, coal and gas, the government reportedly committed to a zero Selective Tax rate in the first year.

Affected industries are still assessing the operational impact of extending the IPI before taking a formal position, according to the report. One alternative for the government would be to raise Selective Tax rates later in 2027 to recover the lost revenue from January. But that option carries risks. Companies could accelerate production in January to take advantage of a lower tax burden before the higher rates take effect, reducing the expected revenue gain in later months.

The possible constitutional amendment has also triggered concern among tax lawyers and businesses that reopening the text of the reform, even for a narrow adjustment tied to the IPI, could encourage Congress to revisit other parts of the package. That would run against the current government’s effort to preserve the timetable of the overhaul.

Tax reform has become an issue in Brazil’s election campaign. Folha reported that candidate Flávio Bolsonaro has promised to delay or review parts of the new system if elected, although his economic advisers have not publicly detailed what changes they would pursue. President Luiz Inácio Lula da Silva’s government has defended keeping the January transition on track, highlighting other parts of the reform, including tax cashback for low-income families registered in social programs and a tax exemption for Brazil’s basic food basket under the new system.

The transition involves more than the IPI and the Selective Tax. In January, Brazil is also due to eliminate PIS, Cofins and the IOF tax on insurance, replacing them with the new federal contribution on goods and services, known as the CBS. Any delay in that part of the transition would also require constitutional changes. The CBS rate is expected to be known later this month after calculations by the federal audit court, known as the TCU, using tax authority data. The Senate is expected to ratify the rate by December. If it does not, the rate defined by the court will take effect. In that case, the Constitution does not require a 90-day waiting period before collection begins.

The delay matters for Brazil’s public finances because roughly one-third of the revenue managed by the Federal Revenue Service comes from taxes that are being changed by the reform. According to the government’s 2027 budget proposal, Brasília needs to collect revenue equivalent to about 5% of gross domestic product from those taxes to keep the overall tax burden at the 2012-2021 average, as required by the reform’s mechanism meant to prevent a tax increase. That equals R$725 billion.

The same budget proposal projects R$636.8 billion in CBS revenue, or 4.3% of GDP, to be collected from February through December. For January, it estimates about R$46 billion, or 0.3% of GDP, from the taxes that will be extinguished but still apply to taxable events from 2026. It also projects R$41.9 billion in Selective Tax revenue, or 0.3% of GDP, an amount that would cover a little more than 40% of the revenue now raised by the IPI.