Your Contracts May No Longer Be Fit for Purpose

The new model modifies essential elements of contractual structure:

• Progressive variation of tax rates during the transition, which may alter margins and render fixed-price contracts unfeasible.
• Expansion of the tax base and changes in the credit system, generating asymmetries between the parties.
• Automatic tax segregation (split payment), which changes the financial logic of payments and cash flow.

These changes produce effects that go beyond tax calculation: they affect economic projections, risk allocation, and the balance of obligations assumed by the parties.

Based on the technical analysis of the supplementary legislation, the following key points of attention stand out:

1. Price Formation
   Contracts that stipulate “tax-included prices” or net amounts assume a tax structure that will no longer exist. As tax collection will now be itemized and segregated, such clauses may become unenforceable or generate losses for one of the parties.
2. Gross-Up Clauses
   Where the contracting party guarantees the contractor a fixed net amount, absorbing the entire tax burden, the mechanism becomes problematic: split payment prevents the traditional dynamics, and rate variations may generate disproportionate or unforeseen burdens.
3. Price Adjustment and Review
   Common indices (IPCA, IGPM, etc.) do not reflect this tax change. As a result, contracts may become more burdensome or excessively advantageous, creating distortions that require renegotiation or formal review.
4. Tax Responsibility
   Generic wording such as “each party shall bear its own taxes” is insufficient under the new scenario. It is necessary to clarify who bears tax burden variations, impacts of reclassification, and operational discrepancies.
5. Transparency and Tax Calculation
   The complexity of IBS/CBS increases the risk of calculation errors. Contracts without mechanisms for audit, verification, and documentation become fertile ground for disputes.
6. Hybrid Contracts (goods + services)
   Because IBS and CBS will have rates that may vary according to the type of transaction, the lack of clear segregation may result in incorrect taxation, credit disallowances, and conflicts between the parties.

Continuous Supply Contracts

They suffer cumulative impact throughout the transition years. Without a tax adjustment mechanism, small variations may generate significant margin loss.

Fixed-Price Contracts

These are among the most vulnerable. Rate variations may render the contract economically unfeasible for the supplier or excessively burdensome for the contracting party.

Public-Private Partnerships and Concessions

The reform profoundly alters the economic-financial balance. Although there is a right to rebalancing, demonstrating the tax impact will require detailed documentation and a technically consistent approach.

International Contracts

It is necessary to review hardship clauses and pacta sunt servanda, as well as analyze whether tax changes may be considered extraordinary events for renegotiation purposes.

The new system directly alters the financial logic of contractual payments. Since the supplier will not receive the amount corresponding to the tax, contracts that depend on receiving the full price may suffer distortions.

Additional ancillary obligations also arise, such as verifying segregated amounts and handling potential discrepancies.

With a focus on legal certainty and preserving contract viability, we recommend the following measures:

1. Immediate audit of all existing contracts, with special attention to long-term agreements.
2. Mapping of sensitive clauses, identifying risks of excessive burden or contractual imbalance.
3. Review of clauses on price formation, tax responsibility, transparency, and review mechanisms.
4. Operational adaptation to split payment, especially in sectors with high transaction volume.
5. Structured documentation of tax impacts, essential for renegotiations and potential rebalancing requests.
6. Adoption of internal contractual governance policies, aligning legal, tax, and financial teams with the changes.

The reform does not require only tax adjustments: it alters contractual logic at multiple levels. Companies that proactively review their contractual instruments will be better protected against economic loss, litigation, and instability during the transition through 2033.

Vistra Brazil remains fully available to assist its clients in conducting contract audits, mapping risks, developing renegotiation strategies, and supporting their company through all stages of adaptation to the new tax regime.

Sincerely,

Vistra Brazil Team