**Tax Reform History and Current Situation in Brazil**

The tax policy reform in Brazil has mainly revolved around discussions regarding the policy of "tax exemption for imported goods under $50."

This policy's inception dates back to 2005 when the Brazilian government, aiming to incentivize the digital economy, initially implemented a tax-exempt policy for goods under $100. However, Brazil being a federal system, the federal government holds autonomy in levying taxes on import circulation. This policy faced resistance from many states, and only some regions under the postal system managed to implement it.

It wasn't until a consumer rights lawsuit emerged that this policy saw a turning point. A consumer purchased a product online for under $50, which was then subjected to taxation by customs, sparking dissatisfaction. The consumer initiated a lawsuit against the government, which initially lost in the states of São Paulo and Rio de Janeiro but finally won in the capital of Paraná, Curitiba. Due to the incomplete laws at the time, this lawsuit became a local jurisprudence precedent, meaning similar cases within Curitiba's jurisdiction were granted tax exemptions. Based on this legal principle and the federal tax bureau's encouragement of online transactions, the government introduced the policy of "tax exemption for imported packages under $50."

However, in practice, this policy has always come with special conditions, especially in the past four years, with many unique restrictions in terms of amount, region, delivery network, etc.

Additionally, the introduction of this policy had an important backdrop. At that time, the Brazilian postal service was consistently in deficit. During Luiz Inácio Lula da Silva's presidency, the postal service was marginalized, with annual losses of billions of reais. When Jair Bolsonaro assumed office, he aimed to privatize some state-owned enterprises, including the postal service. The Brazilian postal service, being the largest state-owned enterprise in Brazil with the most employees, faced resistance from postal workers, leading to strikes and system paralysis. Consequently, the postal service became a challenging aspect of Bolsonaro's state-owned enterprise privatization policy.

In this context, bilateral agreements emerged. Previously, Brazil's postal services operated under multilateral agreements, making it challenging for logistics to keep up with e-commerce development. Transitioning from multilateral to bilateral agreements enabled further commercial clearance of business items. Mentioning Brazil's tax reform also necessitates discussing bilateral agreements. In 2019, Anjun Logistics proposed to the Brazilian government to open bilateral agreements. Subsequently, through bilateral agreements and utilizing Brazilian postal clearance inbound networks, the model of commercial package clearance via postal clearance was gradually introduced. The continuous growth of cross-border e-commerce packages following this new inbound clearance model led to dissatisfaction among local retailers towards cross-border e-commerce, sparking annual discussions about tax reform every March for the following three years.

The local demand for tax reform in Brazil is multifaceted, primarily due to the perceived unfairness of this policy to local retailers.

Before the implementation of bilateral agreements, the volume of cross-border e-commerce logistics in Brazil under the postal multilateral agreement framework was not substantial. Before the opening of bilateral agreements, the daily volume of small package special line channels was about 170,000 pieces. However, during peak periods now, the daily volume has reached 840,000 pieces, an increase of three to four times. Such rapid growth in e-commerce volume has led to resistance from local offline retailers, who perceive the tax exemption policy for imported goods under $50 as unfair.

Chinese exports to overseas countries can enjoy export tax refunds, with the refund rate being relatively high, reaching 17%. However, upon entering Brazil, local taxes such as ICMS tax (equivalent to VAT in China) need to be levied on exported products. ICMS is a state tax, meaning that the tax rate may vary by state, often ranging from 17% to 25%. To encourage the e-commerce economy, the government eventually unified it to a preferential tax rate of 17%.

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**Essence of the PRC Tax Reform**

The unfairness of this policy lies in the fact that the 17% ICMS tax is levied on all goods in Brazil, not just cross-border e-commerce goods. Both overseas B2B imports and local goods are subject to this tax, meaning it applies to all scenarios in Brazil. Local products and cross-border imports are taxed at the same rate. Additionally, with China's export tax refunds and Brazil's tax exemption policies, cross-border e-commerce products have a significant price advantage, diminishing the competitiveness of local retailers.

Considering the demands of local retailers, the Brazilian government has been in a long-standing dilemma regarding whether to cancel the tax exemption for imported products under $50. On June 25, 2023, Brazil introduced the first version of the "Compliance Taxation Plan (PRC)" bill, followed by the specific implementation bill on July 21, and officially implemented on August 1. The main content of the policy is that all incoming parcels are subject to a 17% import circulation tax (ICMS tax). However, parcels with a selling price below $50 can continue to be exempt from 60% of the comprehensive import tax. Parcels with a selling price above $50 are subject to an additional 60% comprehensive import tax, resulting in an actual tax payment of 92% of the selling price due to the post-tax stacking.

The implementation of the new policy from announcement to enforcement was very short, catching tax authorities, customs, ports, and logistics e-commerce platforms off guard. Consequently, the Federal Revenue Service proposed a transition period of about two months to allow all parties to take action in August and September. Additionally, the tax rate was increased during this transition period. In June, the import tax rate was 10%, rising to 20% in July, and reaching 30% to 40% in August. Currently, Brazil is still in the transition period.

The essence of the PRC tax reform lies not only in compliance taxation but also in compliance declaration and regulation of e-commerce platforms. This is mainly reflected in two aspects.

Firstly, it aims to eliminate underreporting. Previously, due to the disconnect between Brazil's sales platforms, payment platforms, and logistics platforms, customs found it difficult to verify whether the platform purchase price and sales price were consistent. To join the PRC, platforms must provide detailed access to domain names, URLs, local companies in Brazil, payment data, and payment companies during the application process. Additionally, all cross-border payment companies in Brazil now must register with the Federal Revenue Service for data sharing. Thus, the PRC enables the detection of underreporting.

Secondly, it aims to detect prohibited and irregular goods. During PRC customs clearance, various special terms are involved. By cross-referencing platform sales and declared products, customs can easily identify prohibited or irregular goods.

This policy also adds more than 60 points for improvement, all aimed at one goal: ensuring that declarations are compliant, legal, and truthful.

To achieve this goal, platforms applying for the PRC must meet three conditions.

The first condition is that the application must be made by the platform or an independent website. The main applicants for the PRC in Brazil are e-commerce platforms, but independent sites can also apply. However, there are currently no approved cases of independent sites, but approvals for independent sites should gradually be granted in the future.

The second condition is that the platform must have a local company or a Brazilian legal person as an agent. As a tax policy for cross-border goods, the Federal Revenue Service cannot tax overseas companies. Therefore, to ensure tax compliance and independence, cross-border platforms applying for the PRC must have a local company or a Brazilian legal person as an agent.

The third condition is that the platform must have a logistics provider for integration. The Brazilian government stipulates that the final delivery can only be through postal clearance and commercial clearance, both of which require an international express import license, import clearance license, and express license. Since some platforms are overseas and cannot directly cooperate with the post office, platforms do not directly contract with the postal service. Instead, qualified logistics companies first contract with the postal service, announce the agreement, and then cooperate with the platform, forming a hierarchical acceptance. Currently, there are more than 70 logistics companies with international express import licenses in Brazil, and around 30 in São Paulo.

After joining the PRC, how should taxes be paid?

In addition to value-added tax and import tax, incoming parcels also incur customs duties, resulting in a very high overall tax rate. After joining the PRC, parcels only accept a prepayment tax before shipment and formal tax deduction after customs clearance confirmation.

The sender needs to sign an agreement with the post office and obtain an account. Since the post office has not established a third-party user system, this account is supervised by the Brazilian Federal Revenue Service. Before shipping, the sender must first declare customs clearance and prepay taxes to the post office. Since the tax bureau does not yet have an independent taxation system at the transaction level, e-commerce platforms currently prepay taxes directly on the platform.