Procedural Challenges of the Dual VAT: Why a Procedural Reform Is Urgent

This page is a translation of the original Portuguese text, provided for convenience. It deals with Brazilian law. If there is any discrepancy, the Portuguese version prevails. Read the original in Portuguese

Brazil’s new dual VAT, in which the Tax on Goods and Services and the Contribution on Goods and Services share the same tax base, has exposed a serious gap. The Tax Reform regulated substantive law but left tax litigation in court without rules of its own, creating a real risk of conflicting decisions between the federal and state courts.

A dual substantive design that procedure has not yet matched

Constitutional Amendment 132/2023 and Complementary Law 214/2025 built a consumption tax with two administrative faces. On one side is the Contribution on Goods and Services, which belongs to the Union and is managed by the Receita Federal (Brazil’s federal revenue service). On the other is the Tax on Goods and Services, which is shared among the states, the Federal District, and the municipalities and is administered by the Management Committee of the IBS (Tax on Goods and Services).

In substance, the two taxes work as mirror images, with a unified tax base, fully equivalent non-cumulativity rules, and broad credit rights. The taxable event is so economically unified that people speak of a “dual VAT” precisely because, in practice, the taxpayer calculates a single amount and divides it according to each level of government’s rates.

The problem is that this substantive unity has no procedural counterpart. For now, each tax follows the traditional jurisdictional rule tied to the government entity that collects it. That places the CBS (Contribution on Goods and Services) in the federal courts and the IBS in the state courts.

LC 214/2025’s silence on tax litigation in court

Complementary Law 214/2025 devoted long chapters to the administrative tax procedure for the IBS and the CBS. It even created joint bodies to reduce interpretive disagreements between the tax authorities. Administrative disputes therefore received their own institutional design, with integrated judging chambers and mechanisms to standardize rulings.

Once a dispute leaves the administrative sphere, however, a vacuum appears. There is no express rule on territorial and functional jurisdiction for a writ of mandamus (mandado de segurança), a declaratory action, an annulment action, or a refund of overpaid taxes involving both the IBS and the CBS. Nor is there any rule on duplicate pending suits (litispendência), mandatory consolidation of related cases, or the binding effect of a decision issued by one court system on the tax charged in the other.

In practice, a taxpayer who wants to challenge a dispute over credits, tax classification, or the tax base must file two lawsuits. One is filed in the federal courts against the Union, concerning the CBS. The other is filed in the state courts against the IBS Management Committee. Although the legal argument is identical, the two cases proceed in parallel, before different judges and on unsynchronized timelines.

This scenario undermines legal certainty and cancels out the gain in rationality that the substantive reform promised to deliver. The national uniformity of the dual VAT is weakened by a procedural architecture inherited from the previous regime, which was designed for stand-alone taxes.

On one side is the Contribution on Goods and Services, which belongs to the Union and is managed by the Receita Federal.

Concrete risks and the urgency of a procedural reform

The first risk is diametrically opposed decisions. Imagine a writ of mandamus in which a federal court recognizes a broad right to CBS credits on a given transaction, while a state court denies the same credit for the IBS. The taxpayer, formally victorious on half of the claim, sees its tax burden reduced in part but lives with permanent uncertainty about the other part.

The second risk is the multiplication of identical legal arguments in different courts, with duplicated litigation costs, longer timelines, and an overload on the higher courts. The Superior Court of Justice (STJ) will receive special appeals on the IBS coming from the state courts. Meanwhile, the same issue, in its CBS form, will be the subject of federal appeals, with no automatic mechanism for joint treatment.

The third risk concerns how effective refunds of overpaid taxes will be. If a charge is declared unconstitutional or unlawful, the taxpayer will have to enforce two judgments against different government entities, each with its own rules for court-ordered payments (precatórios) and offsets. This operational complexity can hollow out the financial benefit won at the merits stage.

Given this picture, specialized legal scholars have been calling for a procedural reform, meaning a complementary reform of procedural law that would create specific rules for court litigation over the dual VAT. The proposals include a single venue for actions involving both taxes, mandatory joinder of the Union and the Management Committee as defendants, automatic effect of a decision issued in one court system on the tax decided in the other, and a mechanism for joint treatment of repetitive appeals.

Without this legislative step, the start of the transition period in 2026 will arrive with an incomplete procedural architecture. The tax reform, which was sold as a simplification, may paradoxically produce more fragmented litigation than the previous system.

Frequently Asked Questions

Why do the IBS and the CBS require separate lawsuits?

Because the IBS belongs to the states, the Federal District, and the municipalities and is managed by the Management Committee, while the CBS belongs to the Union and is administered by the Receita Federal. Jurisdiction follows the collecting entity, which sends the CBS to the federal courts and the IBS to the state courts. Because LC 214/2025 did not create a specific procedural rule to handle the two taxes together, taxpayers are forced to file two parallel lawsuits over the same economic event.

What does “procedural reform” mean in the context of the dual VAT?

A procedural reform changes the rules of procedure, in contrast with a substantive reform, which changes the underlying law. For the dual VAT, the substantive reform has already been carried out by Amendment 132/2023 and LC 214/2025. The pending procedural reform would be the enactment of a complementary or ordinary law defining jurisdiction, venue, joinder of parties, and the effects of final judgments (coisa julgada, similar to res judicata) for court litigation over the IBS and the CBS, avoiding duplicate cases and conflicting decisions.

What procedural solutions have been proposed for dual VAT litigation?

The most widely discussed proposals include creating a single venue for actions involving the IBS and the CBS, with mandatory joinder of the Union and the Management Committee as defendants, and a binding effect for a decision issued in one court system on the portion of the tax decided in the other. Another idea is a mechanism for simultaneous treatment of repetitive appeals in the Superior Court of Justice and the Supreme Federal Court (STF), so that identical legal arguments are decided together. Without some of these measures, the start of full collection of the dual VAT is likely to multiply fragmented lawsuits.

As informações deste artigo são de caráter informativo e não substituem consulta jurídica individualizada. Cada caso possui particularidades que exigem análise específica.