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Federalism and revenue sharing in Brazil: who collects, who receives and how the tax reform changes it

Last verified: 2026-10-27 · Status: Changing

Brazil has three autonomous levels of government, and the Constitution fixes how tax revenue is shared: the Union hands 50 percent of income tax, IPI and the new selective tax to state and municipal participation funds and regional banks, and each state passes 25 percent of its ICMS to its municipalities. The 2023 tax reform (EC 132) replaces state ICMS and municipal ISS with a single IBS shared by states and municipalities, run by a Comitê Gestor: ICMS and ISS rates fall to nine tenths in 2029 and to six tenths in 2032, and both taxes are abolished in 2033. To ease the shift, revenue is redistributed by a formula from 2029 to 2077, and the Union funds a compensation fund for ICMS incentive holders (R$16 billion in 2026, peaking at R$32 billion in 2028 and 2029) and a regional development fund rising from R$8 billion in 2029 to R$60 billion a year from 2043, in 2023 reais indexed to IPCA.

USD figures use the Banco Central do Brasil PTAX selling rate of R$5.3346 per US dollar for 27 October 2026. The rate moved from R$5.0377 on 23 October to R$5.5007 on 26 October 2026, so conversions are for orientation only.

Key facts

Share of income tax, IPI and selective tax to the State Participation Fund	21.5 %Constituição art. 159, I, a, as of 2023-12-20 · in force
Share of income tax, IPI and selective tax to the Municipal Participation Fund (base, plus three 1% installments)	22.5 %Constituição art. 159, I, b, d, e and f, as of 2023-12-20 · in force
Municipal share of state ICMS	25 %Constituição art. 158, IV, a, as of 1988-10-05 · in force
ICMS and ISS rates cut to 9/10	2029 yearADCT art. 128, I, as of 2023-12-20 · in force
ICMS and ISS abolished	2033 yearADCT art. 129, as of 2023-12-20 · in force
End of IBS revenue redistribution transition	2077 yearADCT art. 131, as of 2023-12-20 · in force
Union contribution to the ICMS benefit compensation fund, 2026 (2023 values)	16000000000 BRLEmenda Constitucional nº 132, art. 12, § 1, II, as of 2023-12-20 · in force
National Regional Development Fund, yearly amount from 2043 (2023 values)	60000000000 BRLEmenda Constitucional nº 132, art. 13, XV, as of 2023-12-20 · in force

The rule

1. The Union delivers 50 percent of the revenue from income tax, IPI and the selective tax (imposto seletivo, art. 153, VIII) as follows: 21.5 percent to the State Participation Fund (FPE); 22.5 percent to the Municipal Participation Fund (FPM), plus three extra 1 percent FPM installments paid in the first ten days of July, September and December; and 3 percent to financing programs for the productive sector of the North, Northeast and Center West through regional financial institutions, half of the Northeast share reserved for the semi arid area. Income tax withheld by states and municipalities on their own payments is excluded from the base because it belongs to them.Constituição Federal de 1988, Art. 159, I, a to f and § 1; art. 157, I; art. 158, I, 1988-10-05 official text · verified 2026-10-27 · changed: EC 132 of 2023 added the selective tax (art. 153, VIII) to the shared base alongside income tax and IPI.

2. The Union also delivers 10 percent of IPI and selective tax revenue to states in proportion to their exports of industrialised products, with no state receiving more than 20 percent of that amount, and 29 percent of the fuel CIDE to states; states pass 25 percent of each to their municipalities.Constituição Federal de 1988, Art. 159, II, III and §§ 2 to 4, 1988-10-05 official text · verified 2026-10-27

3. Municipalities receive 50 percent of the federal rural land tax (ITR) on properties in their territory (100 percent if they opt to collect it), 50 percent of state vehicle tax (IPVA) on vehicles licensed there, and 25 percent of state ICMS. At least 65 percent of the municipal ICMS share is allocated by the value added in each municipality, and up to 35 percent under state law, of which at least 10 points must reward learning outcomes and equity in education. For the 25 percent municipal share of the states' IBS, 80 percent follows population, 10 percent education indicators, 5 percent environmental indicators and 5 percent is split equally.Constituição Federal de 1988, Art. 158, II, III, IV and §§ 1 and 2, 1988-10-05 official text · verified 2026-10-27

4. FPE money is distributed by individual state coefficients. Since 1 January 2016 each state receives the amount it received in the same ten day period of 2015, indexed to IPCA plus 75 percent of the prior year's real GDP growth; any excess is shared by coefficients combining each state's share of population (floored at 0.012 and capped at 0.07) and the inverse of household income per capita, each weighted one half.Lei Complementar nº 62 (as worded by Lei Complementar nº 143 of 2013), Art. 2, II and III, and § 1, I, 1989-12-28 official text · verified 2026-10-27

5. A complementary law creates a tax on goods and services (IBS) shared by states, the Federal District and municipalities. It has a single national law, each entity sets its own rate by specific law, the same rate applies to all goods and services save constitutional exceptions, it is charged as the sum of the state and municipal rates of the destination of the operation, it is non cumulative and it does not apply to exports. The states, Federal District and municipalities exercise IBS administration jointly and only through the IBS Management Committee (Comitê Gestor), a special public entity with technical, administrative, budget and financial independence, which issues a single regulation, collects and distributes the revenue and decides administrative disputes.Constituição Federal de 1988 (arts. 156-A and 156-B added by EC 132), Art. 156-A, caput and § 1, I to VIII; art. 156-B, caput and § 1, 2023-12-20 official text · verified 2026-10-27

6. From 2029 to 2032 the ICMS and ISS rates are set at 9/10 (2029), 8/10 (2030), 7/10 (2031) and 6/10 (2032) of the rates in the respective laws, and ICMS and ISS tax incentives are reduced in the same proportion. ICMS and ISS are abolished from 2033. A Senate resolution sets reference rates for the IBS and CBS so that, from 2029 to 2033, IBS revenue replaces the lost ICMS and ISS revenue.Constituição Federal de 1988, ADCT (added by EC 132), ADCT art. 128, caput and § 1; art. 129; art. 130, II, 2023-12-20 official text · verified 2026-10-27

7. From 2029 to 2077 part of each entity's IBS revenue at reference rates is withheld and redistributed in proportion to each entity's average past ICMS and ISS revenue: 80 percent from 2029 to 2032, 90 percent in 2033, then the 2033 percentage reduced by 1/45 a year from 2034 to 2077. The rest is distributed under destination based criteria. Revenue therefore moves from production states to consumption states gradually over almost 50 years.Constituição Federal de 1988, ADCT (added by EC 132), ADCT art. 131, §§ 1, 2 and 4, 2023-12-20 official text · verified 2026-10-27

8. A Fund to Compensate ICMS Tax Benefits compensates, from 1 January 2029 to 31 December 2032, individuals and companies holding ICMS exemptions, incentives and benefits granted for a fixed term and under conditions, for the reduction caused by the move to IBS. The Union pays into the fund, in 2023 reais indexed to IPCA: R$8 billion in 2025, R$16 billion in 2026, R$24 billion in 2027, R$32 billion in 2028, R$32 billion in 2029, R$24 billion in 2030, R$16 billion in 2031 and R$8 billion in 2032.
Cost to do it: Union contributions total R$160 billion in 2023 values over 2025 to 2032.
Example: 2026 contribution: R$16 billion (2023 values, indexed to IPCA). / About US$3.0 billion at the October 2026 rate, before IPCA indexation.Emenda Constitucional nº 132, Art. 12, caput and §§ 1 and 2, 2023-12-20 official text · verified 2026-10-27

9. A National Regional Development Fund (FNDR) delivers Union money to states and the Federal District for infrastructure studies and works, support for productive activities with high job creation potential (including subsidies) and science, technology and innovation, prioritising environmental sustainability and lower carbon emissions. It is shared 30 percent by population and 70 percent by each state's FPE coefficient, and may not be withheld. Amounts in 2023 reais indexed to IPCA are R$8 billion in 2029, rising by R$8 billion a year to R$40 billion in 2033, then by R$2 billion a year to R$60 billion a year from 2043.
Example: R$60 billion a year from 2043 (2023 values). / About US$11.2 billion a year at the October 2026 rate, before indexation.Constituição Federal de 1988 art. 159-A; Emenda Constitucional nº 132 art. 13, Constituição art. 159-A, caput and §§ 1 to 4; EC 132 art. 13, 2023-12-20 official text · verified 2026-10-27

10. Tax revenue may not be earmarked to any agency, fund or expense, except for the constitutional sharing of arts. 158 and 159, minimum health and education spending, tax administration and credit guarantees allowed by the Constitution. Credit operations between federative entities are prohibited, which is why state debt is owed to the Union under specific refinancing laws.Constituição Federal de 1988; Lei Complementar nº 101, Constituição art. 167, IV; LRF art. 35, 1988-10-05 official text · verified 2026-10-27

Tax collected by	Share	Recipient	Rule
Union: income tax, IPI, selective tax	21.5%	State Participation Fund (FPE)	Art. 159, I, a
Union: income tax, IPI, selective tax	22.5% plus 1% in July, September and December	Municipal Participation Fund (FPM)	Art. 159, I, b, d, e, f
Union: income tax, IPI, selective tax	3%	North, Northeast and Center West regional financing funds	Art. 159, I, c
Union: IPI and selective tax	10%	States, by exports of industrialised goods (25% passed to municipalities)	Art. 159, II and § 3
Union: fuel CIDE	29%	States (25% passed to municipalities)	Art. 159, III and § 4
Union: rural land tax (ITR)	50% (100% if the municipality collects)	Municipality where the land is	Art. 158, II
State: ICMS	25%	Municipalities (at least 65% by value added)	Art. 158, IV, a and § 1
State: vehicle tax (IPVA)	50%	Municipality where the vehicle is licensed	Art. 158, III
State: share of IBS distributed to the state	25%	Municipalities (80% by population)	Art. 158, IV, b and § 2

Who gets what from the main shared taxes (Constituição arts. 157 to 159)

Year	ICMS and ISS rate as share of current law	ICMS benefit compensation fund	Regional development fund (FNDR)
2026	Full	R$16 billion	None
2027	Full	R$24 billion	None
2028	Full	R$32 billion	None
2029	9/10	R$32 billion	R$8 billion
2030	8/10	R$24 billion	R$16 billion
2031	7/10	R$16 billion	R$24 billion
2032	6/10	R$8 billion	R$32 billion
2033	Abolished	None	R$40 billion
2043 onward	Abolished	None	R$60 billion a year

ICMS and ISS phase down and federal transition funds (2023 reais, indexed to IPCA)

Region	GDP, R$ billion	Share of Brazil
Southeast	5,799.5	53.0%
South	1,834.4	16.8%
Northeast	1,513.1	13.8%
Center West	1,159.8	10.6%
North	636.6	5.8%
Brazil	10,943.3	100%

Where the economy sits: GDP by region, 2023 (IBGE regional accounts, table 5938)

Worked example

Income tax collected, federal net. Of each R$100 of federal income tax collected (after income tax withheld by states and municipalities on their own payments), R$21.50 goes to the FPE, R$25.50 to the FPM across the base and the three extra installments, and R$3 to the regional funds: R$50 in total, about US$9.37 (Constituição art. 159, I).
ICMS incentive under the reform. A plant with an ICMS incentive granted for a fixed term under conditions sees its benefit cut in step with the ICMS rate: to 90 percent of its value in 2029 and 60 percent in 2032, and it ends with ICMS in 2033 (ADCT art. 128, § 1; art. 129). The holder may claim compensation for 2029 to 2032 from the federal fund under EC 132 art. 12, which receives R$32 billion in 2029 in 2023 values (about US$6.0 billion).
Municipal stake in your plant. Because at least 65 percent of the municipal ICMS share follows value added in each municipality (art. 158, § 1, I), a large plant can materially raise its host municipality's revenue until 2032; under the IBS the municipal share follows population (art. 158, § 2, I), which changes local incentives to attract industry.

Step by step

1. List every ICMS and ISS incentive you hold, its legal basis, term and conditions; incentives fall with the rates from 2029 (ADCT art. 128).
2. Check whether your ICMS incentives qualify for the federal compensation fund (granted for a fixed term and under conditions, EC 132 art. 12) and keep the documents needed to claim.
3. Model the IBS from the 2026 test rates through 2033 and the move to destination based taxation; see the tax reform timeline page.
4. When negotiating with a state or municipality for incentives, factor in that after 2032 states cannot grant ICMS benefits because ICMS no longer exists; the FNDR (art. 159-A) is the new state tool from 2029.
5. For public contracts with states and municipalities, track FPE and FPM transfers, which drive their cash flow; they depend on federal income tax and IPI collections.

Common traps

Assuming ICMS incentives survive the reform intact. They are cut in the same proportion as the rate from 2029 to 2032 and end in 2033 (ADCT arts. 128 and 129).
Expecting the compensation fund to cover every benefit. It covers ICMS benefits granted for a fixed term and under conditions (EC 132 art. 12), not all incentives.
Reading fund amounts as current reais. EC 132 amounts are 2023 values indexed to IPCA up to the year before payment (EC 132 arts. 12 § 1 and 13).
Ignoring the long transition. IBS revenue sharing moves to destination gradually until 2077 (ADCT art. 131), so state fiscal positions and incentive appetite shift for decades.
Treating states as able to borrow from each other or from their own banks to pay suppliers. Credit operations between federative entities are prohibited (LRF art. 35).

Sources

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