In an effort to reconcile its tax system with the OECD’s Global Anti-Base Erosion (GloBE) regulations, Brazil has issued on October 3, 2024, Provisional Measure 1,226 and Normative Instruction RFB No. 2,228. These legislative and administrative measures introduce an additional Social Contribution on Net Income (CSLL) to ensure a minimum effective tax rate of 15% for multinational enterprises. This move is part of Brazil’s commitment to the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS), aiming to combat tax avoidance and ensure fair taxation of multinational corporations.
Although the Provisional Measure must still undergo both houses of Congress to be approved, it is expected that such process will run rather smoothly given Brazil’s alignment with international tax standards.
Qualified Domestic Minimum Top-up Tax
The Qualified Domestic Minimum Top-up Tax (QDMTT) is a fundamental component of these provisions. The purpose of such levy is to guarantee that multinational enterprises (MNEs) operating in Brazil are subject to a minimum level of taxation, thereby reducing the incentive for profit shifting to low-tax jurisdictions. The QDMTT functions as an additional CSLL, ensuring that the effective tax rate on profits does not fall below 15%.
The QDMTT is not merely a fiscal tool, but a strategic initiative to align Brazil with global tax standards. Brazil reinforces its dedication to equitable tax practices and transparency by adopting such measures, thereby establishing itself as a proactive participant in the international tax arena whilst showing its commitment to fostering economic fairness and reducing aggressive tax planning.
Applicability
The QDMTT is applicable to constituent entities of multinational enterprises (MNEs) that have generated annual consolidated revenues of at least €750 million in at least two of the four fiscal years preceding the current fiscal year. This threshold is consistent with the OECD’s GloBE regulations, which are designed to target large multinational enterprises that are most susceptible to profit shifting and base erosion. The revenues considered include net sales from goods, services, and other ordinary activities, as well as net gains from investments and extraordinary or non-recurring gains.
This applicability criterion ensures that the QDMTT targets only the largest multinational players, those with the resources and structures to engage in complex tax planning strategies. By focusing on these entities, Brazil aims to address the root of tax base erosion while minimizing the burden on smaller businesses that may not have the same capacity for profit shifting.
Transitional Rules and Safe Harbors
To facilitate the implementation of the QDMTT, the provisional measure and normative instruction outline several transitional rules and safe harbors. These include:
- Transitional Exclusion Percentages: The measures establish a gradual reduction in the exclusion percentages for payroll and tangible asset-based exclusions, commencing with greater percentages in 2025 (for example, 9.6% for payroll and 7.6% for tangible assets) and gradually reducing them to 5% by 2032. This phased approach enables businesses to progressively adapt to the new tax regime, allowing them the requisite time to restructure their operations and financial reporting in accordance with the new standards.
- Safe Harbors: To alleviate the administrative burden during the transition period, certain entities, including minority-owned entities, stateless entities, joint ventures, and investment entities, are provided with simplified compliance options. These safe harbors are designed to provide relief and reduce complexity for qualifying entities, ensuring that the transition to the new tax framework is as smooth as possible.
- Transitory simplifying rules under the GloBE framework: These regulations permit specific multinationals to treat the Additional CSLL as zero for a fiscal year if entities satisfy specific criteria based on their Country-by-Country Reporting (CbCR). These criteria encompass a minimum effective tax rate of 16% for 2025 and 17% for 2026, as well as a total revenue below €10 million and a profit or loss below €1 million. The regulations are applicable to fiscal years commencing on or before December 31, 2026, and concluding on or before June 30, 2028. A multinational group is prohibited from applying the rule in future years if it fails to do so when eligible.
The transitional rules and safe harbors are critical components of the QDMTT’s implementation strategy. They demonstrate the Brazilian government’s recognition of the challenges associated with significant tax reform and its commitment to supporting businesses through this transition.
Specific Provisions
- Conversion of Tax Incentives: Starting in 2026, the Executive Branch is authorized to convert, wholly or partially, tax incentives granted to taxpayers in the Amazonian Free Trade Zone into a financial credit classified as a Qualified Refundable Tax Credit. This conversion will incorporate substance requirements used in the calculation of the Substance-Based Income Exclusion. By doing so, Brazil seeks to ensure that these stabilized tax incentives to the development of underdeveloped regions of the country are aligned with the new rules.
- Revoking of the Undertaxed Regimes: The law contains provisions revoking the concept of the so call undertaxed regimes (“regime de subtributação”). Such concept was used in the context of CFC rules application in Brazil (no further detail on this at this stage). Moreover, the law allows the exceptional exclusion of a country or dependency from being classified as having a favorable tax regime or privileged fiscal regime if it significantly contributes to national development through substantial investments in Brazil. The federal Executive Branch will regulate these provisions, including the criteria and periodicity for qualifying investments. This amendment reflects Brazil’s strategic approach to attract foreign investment while maintaining strong tax oversight.
Next Steps for Taxpayers
Taxpayers subject to these new rules should take the following steps to ensure compliance:
- Financial Reporting Review and Adjustment: Aiming at ensuring an accurate calculation of GloBE income and adjusted covered taxes in accordance with the new requirements, MNEs must evaluate their current financial reporting systems. This may entail the modification of accounting practices and systems to comply with the new standards. Companies should consider investing in advanced tax compliance software and training for their finance teams to adapt to these changes effectively.
- Group Structure Assessment: In order to identify any potential impacts of the QDMTT and to contemplate restructuring, if necessary, companies should assess their group structures and intercompany transactions. This assessment will assist in comprehending the tax implications and optimizing the group’s tax position.
- Engage with Tax Authorities: It is advisable for MNEs to engage with the Brazilian tax authorities to gain clarity on specific provisions and ensure alignment with the OECD’s guidelines. On this topic, it is important to highlight that the Brazilian Federal Revenue Service has launched a public consultation on the recently issued Normative Instruction No. 2,228/2024. The consultation period runs from October 4 to November 10, 2024. Participants, including companies and academics, are invited to submit their feedback, particularly on whether the instruction meets the criteria for a Qualified Domestic Minimum Top-up Tax (QDMTT) and to suggest improvements.
In a Nutshell
The implementation of the QDMTT in Brazil represents a substantial change in the nation’s international taxation strategy, which is consistent with global initiatives to mitigate taxation base erosion. By implementing these measures, Brazil intends to establish a more equitable tax environment and guarantee that multinational enterprises pay their reasonable share of taxes. MNEs operating in Brazil must proactively adjust to the new landscape to ensure compliance and optimize their tax positions as these rules take effect.
The implementation of Pillar 2 is not solely about compliance; it is indicative of a more extensive dedication to international cooperation and fiscal responsibility. This action is a significant stride toward Brazil’s assimilation into the global economic framework, which will further solidify its reputation as a transparent and equitable jurisdiction for multinational business operations. Businesses must remain vigilant and adaptable as they navigate this new terrain, ensuring that they satisfy their tax obligations in a rapidly evolving regulatory environment while leveraging the opportunities brought about by these changes.
