Brazil has announced Pillar Two legislation that will require large multinational groups to pay a minimum effective tax rate of 15% on income arising in each jurisdiction in which they operate. The rules aim to fulfil Brazil’s commitment to the OECD/G20 Inclusive Framework to combat tax avoidance and ensure equitable taxation of multinational enterprises.
A provisional measure (PM 1,262/2024) released on 3 October 2024 would introduce an OECD-compliant global minimum tax and a Normative Instruction (NI 2,228/2024) released on the same day establishes the mechanisms for calculating GloBE income (or loss), the top-up tax calculation and procedures for the implementation of the rules in the PM. A public consultation is being held on the NI through 10 November.
The PM, which must be approved by the congress within 120 days of the publication date (or it will expire), includes a qualified domestic minimum top-up tax (QDMTT) that will apply as from 1 January 2025, but no income inclusion rule or under-taxed profit rule. The QDMTT will operate as a supplement to the Social Contribution on Profits (CSLL).
The PM and NI provide that the global minimum tax will apply to constituent entities of multinational groups with annual revenue of EUR 750 million or more in the consolidated financial statements of the ultimate parent entity in at least two of the four tax years immediately preceding the current year. The rules are structured so that the additional CSLL will be considered a qualifying QDMTT, ensuring that the effective tax rate on profits does not fall below 15%.
GloBE net profits will be reduced by the substance-based profit exclusion to determine excess profits for purposes of calculating the additional CSLL. The payroll and tangible assets-based exclusion for a constituent entity generally will be equal to 5% of eligible payroll costs of eligible employees performing activities for the multinational group in the jurisdiction concerned, and the carrying amount of eligible tangible assets located in that jurisdiction. Transition relief at a higher percentage will apply between fiscal years 2025 and 2032, giving covered entities time to adapt to the new rules.
The top-up tax will be due by the last business day of the seventh month following the end of the fiscal year. A constituent entity will be required to report all information necessary for calculating the additional CSLL to the Brazilian tax authorities. If the entity fails to submit the information by the deadlines established in a regulatory act, or if information is inaccurate or missing, the constituent entity in Brazil will be subject to the following penalties:
The introduction of the QDMTT evidences a considerable shift in Brazil’s international taxation policy, as well as the country’s commitment to operating under international norms and should be considered in conjunction with other recent changes to the tax system. For example, Brazil has revised its transfer pricing rules so they are in full alignment with the OECD guidelines and has effected a VAT reform after more than 30 years (for prior coverage, see the article in the December 2023 issue of Transfer Pricing News and the article in the July 2024 issue of Indirect Tax News). And Brazil’s efforts do not stop there: new controlled foreign corporation rules and a reform of the corporate income tax system (including a reduction of the nominal tax rate and the taxation of dividend distributions) may be on the horizon. Multinationals operating in Brazil need to adapt to the new tax realities to ensure they are in compliance with all of the new measures.
According to the tax authorities, the Pillar Two rules are fully aligned with the OECD GloBE Rules and commentary and the administrative guidance issued through the end of 2023. The Brazilian authorities estimate there are 8,704 companies with annual revenue above EUR 750 million and out of this total, 290 companies that are part of multinational groups with an effective tax rate below 15%. The tax authorities expect additional revenue of BRL 3.4 billion (about EUR 566.6 million) for FY2026, BRL 7.2 billion (EUR 1.2 billion) for FY 2027 and BRL 7.7 billion (EUR 1.28 billion) for FY 2028 to be collected from the new QDMTT.
Hugo Amano
BDO in Brazil
A provisional measure (PM 1,262/2024) released on 3 October 2024 would introduce an OECD-compliant global minimum tax and a Normative Instruction (NI 2,228/2024) released on the same day establishes the mechanisms for calculating GloBE income (or loss), the top-up tax calculation and procedures for the implementation of the rules in the PM. A public consultation is being held on the NI through 10 November.
The PM, which must be approved by the congress within 120 days of the publication date (or it will expire), includes a qualified domestic minimum top-up tax (QDMTT) that will apply as from 1 January 2025, but no income inclusion rule or under-taxed profit rule. The QDMTT will operate as a supplement to the Social Contribution on Profits (CSLL).
Overview of the New Rules
The PM and NI provide that the global minimum tax will apply to constituent entities of multinational groups with annual revenue of EUR 750 million or more in the consolidated financial statements of the ultimate parent entity in at least two of the four tax years immediately preceding the current year. The rules are structured so that the additional CSLL will be considered a qualifying QDMTT, ensuring that the effective tax rate on profits does not fall below 15%.GloBE net profits will be reduced by the substance-based profit exclusion to determine excess profits for purposes of calculating the additional CSLL. The payroll and tangible assets-based exclusion for a constituent entity generally will be equal to 5% of eligible payroll costs of eligible employees performing activities for the multinational group in the jurisdiction concerned, and the carrying amount of eligible tangible assets located in that jurisdiction. Transition relief at a higher percentage will apply between fiscal years 2025 and 2032, giving covered entities time to adapt to the new rules.
The top-up tax will be due by the last business day of the seventh month following the end of the fiscal year. A constituent entity will be required to report all information necessary for calculating the additional CSLL to the Brazilian tax authorities. If the entity fails to submit the information by the deadlines established in a regulatory act, or if information is inaccurate or missing, the constituent entity in Brazil will be subject to the following penalties:
- 0.2% per calendar month or fraction thereof of the total revenue of the fiscal year to which the obligation refers, if the information is not submitted or is late, limited to the lower of 10% and BRL 10 million; and
- 5%, but not less than BRL 20,000 of an omitted or inaccurate amount.
Comments
Brazil is often cited as having one of the most complicated tax systems in the world and one possible explanation could be the multiple levels of VAT and fragmented legislation (at the federal, state and municipality levels), combined with a high compliance burden on taxpayers.The introduction of the QDMTT evidences a considerable shift in Brazil’s international taxation policy, as well as the country’s commitment to operating under international norms and should be considered in conjunction with other recent changes to the tax system. For example, Brazil has revised its transfer pricing rules so they are in full alignment with the OECD guidelines and has effected a VAT reform after more than 30 years (for prior coverage, see the article in the December 2023 issue of Transfer Pricing News and the article in the July 2024 issue of Indirect Tax News). And Brazil’s efforts do not stop there: new controlled foreign corporation rules and a reform of the corporate income tax system (including a reduction of the nominal tax rate and the taxation of dividend distributions) may be on the horizon. Multinationals operating in Brazil need to adapt to the new tax realities to ensure they are in compliance with all of the new measures.
According to the tax authorities, the Pillar Two rules are fully aligned with the OECD GloBE Rules and commentary and the administrative guidance issued through the end of 2023. The Brazilian authorities estimate there are 8,704 companies with annual revenue above EUR 750 million and out of this total, 290 companies that are part of multinational groups with an effective tax rate below 15%. The tax authorities expect additional revenue of BRL 3.4 billion (about EUR 566.6 million) for FY2026, BRL 7.2 billion (EUR 1.2 billion) for FY 2027 and BRL 7.7 billion (EUR 1.28 billion) for FY 2028 to be collected from the new QDMTT.
Hugo Amano
BDO in Brazil