The movement of the president’s government Luiz Inácio Lula da Silva (PT) to institute an additional charge for the Social Contribution on Net Profit (CSLL) for multinationals with activities in Brazil concerns the business class and parliamentarians linked to the business world.
Provisional Measure (MPV) 1262/2024, published in October, has not yet started to be effectively processed in the National Congress. The text seeks to bring Brazil into line with the so-called Global Rules Against Tax Base Erosion (GloBE Rules), part of “Pilar 2 of the Organization for Economic Cooperation and Development (OECD), agreed by 140 countries, to be applied to multinational groups with annual revenues exceeding 750 million euros.
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The government’s idea is to establish the minimum effective taxation of 15% in the process of adapting legislation to international rules, amid efforts to counter the alleged “aggressive tax planning of multinationals”, ensuring the collection of taxes on the respective profits in all jurisdictions in which they operate.
In an interview with InfoMoneyDaniel Loria, program director of the Extraordinary Secretariat for Tax Reform of the Ministry of Finance, argues that the provisional measure introduces the OECD Qualified Domestic Minimum Top-up Tax (QDMTT) in Brazil, and that it represents an agreement in which the country participated about 10 years ago.
“We went through 3 or 4 administrations of presidents of Brazil [discutindo]. This part of ‘Pillar 2’ is mature, several countries began to implement it in their legislation in 2024 and will implement it more intensely in 2025,” he maintains.
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“It is basically a global agreement to allocate taxing power to each country. It’s a great combination [entre os países do mundo] to tax a large multinational group at least 15%. ‘Pillar 2’ talks about how profits are allocated to each country”, explains the director of the Ministry of Finance.
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According to the economic team, the additional charge will be applied to 290 multinational groups that operate in the country, 20 of which are Brazilian. Technicians estimate a positive impact on the collection of R$3.4 billion in 2026 and R$7.3 billion in 2027.
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In the MPV’s explanatory memorandum, government members highlight that the GloBE Rules were designed in such a way that their collection is inevitable and 37 countries have already instituted the instrument. By design, the new tax revenue will arise regardless of the jurisdiction where the undertaxation occurs, as the multinational group will be obliged to pay it in jurisdictions where it operates and that have adopted the new OECD rules.
How the OECD views taxation
Through the Income Inclusion Rule (IIR), a supplementary tax is imposed on an investor, in relation to the undertaxed income of an invested constituent entity.
Under the Undertaxed Payments Rule (UTPR), a deduction is denied or an equivalent adjustment is required to the extent that the undertaxed income of a constituent entity of the business group is not submitted to IIR.
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Through the IIR, the supplementary tax relating to an entity located in a low-tax jurisdiction, that is, subject to an effective rate of less than 15%, will be
allocated between countries based on a top-down approach, subject to a
split-ownership rule in the case of shares below 80%.
In practical terms, using the top-down approach, the complementary tax will be collected and charged to investors located in jurisdictions at the highest level of the corporate chaingenerally the ultimate controlling entity, if the jurisdiction has implemented the IIR. If it has not been implemented, the priority for collection and the mandatory payment “descends” from the top level to the immediately lower level (top-down), reaching the jurisdictions of intermediary investors.
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Through the UTPR, the aforementioned complementary tax will be allocated to the jurisdictions that implemented the rule and where the entities of the multinational group are established. In this case, the amount to be charged to each constituent entity will be calculated using a rule that uses the amount of tangible assets and the number of employees as parameters.
“The first tool is the QDMTT, in which each country creates its domestic tax to reach the profits produced by a certain group in that country. If any country does not do this (apply minimum taxation of 15%)if Brazil does not do this, the second tool comes in, which is what they call IIR. It says that if your country does not have the QDMTT and is taxing below the 15% effective rate, the parent company’s country can reach that profit and tax it at 15% in its country of origin”, explains Loria.
Finally, there is a third and most powerful tool, the Undertaxed Payments Rule (UTPR), in which profits made by a multinational from a jurisdiction without IIR in a country that does not charge QDMTT could be subject to taxation in a third country.
The government’s claim is that, given these changes, if nothing were done, the Brazil could lose taxation to the controlling countries. “We took the first step in implementing ‘Pillar 2’, with QDMTT. We didn’t bring the IIR or the UTPR“, explained Loria. Still, the movement has raised questions.
What worries businesspeople
Business leaders argue that the CSLL additional implements only the “domestic part” of the 15% minimum taxation discussed at the OECD, limiting the impact of legal benefits and deductions. They point out that the measure, however, maintains the Universal Base Taxation (TBU), a topic still being debated by the economic team, at 34%. The result, they claim, is the creation of a competitive disadvantage for Brazilian companies on the international stage.
A comparative table illustrates the scenario. Currently, they say that profit in Brazil is taxed at 10%, and that of Brazilian companies obtained abroad at 34%. In a hypothetical exercise, considering the two values equal, the effective rate would be 22% ─ 7 percentage points more than the global minimum of 15% provided for in the OECD rule.
If changes are implemented, businesspeople see an increase of 5 percentage points in taxation on profits in Brazil, reaching the indicated 15%. In the same hypothetical exercise, considering 34% taxation on profits abroad, the effective rate could jump to 24.5% ─ 9.5 percentage points above the minimum.
“If things go in that direction, we will see Brazilian multinationals changing countries“, criticized a businessman on condition of anonymity. He argues that, so that the OECD “Pillar 2” rules can be implemented without compromising the competitiveness of Brazilian companies, it is “essential” to establish a transition rule which takes the TBU to 15%. This would avoid a disadvantage for national companies in relation to foreign ones.
Critics also allege that more than half of investments in Brazil come from relevant jurisdictions that have not adopted the “Pillar 2” system, such as the United States and China. The fact that Brazil adopts a rule that does not have the support of large players means that the plan only represents an increase in load in the country, but with limited practical effects on a global level.
“If they make this increase [de carga para multinacionais brasileiras] and still charge [imposto sobre a distribuição de] Interest on Equity will be a double blow”, observed the federal deputy, leader of the Parliamentary Entrepreneurship Front (FPE).
“Nobody is saying that they don’t want the government to collect money, that’s not it. In the past, to move the headquarters of a multinational here, it was necessary to move almost one building. Today, just take the executives and send them to Argentina. The headquarters is there, we lost the 15% and were left with nothing”, he continued.
The parliamentarian argues that the OECD pillars also have tax burden mitigation mechanisms, and that they would not have the same compliance by the Brazilian government in relation to Tax on Universal Bases.
One of the main sources of concern for businesspeople is the fact that the deadlines for two tax benefits for multinationals based in the country end in December: 1) presumed credit of 9% for industries with operations abroad; and 2) consolidation of profits and losses between subsidiaries abroad.
Government recognizes that measure has a strong impact
Daniel Loria, from the Ministry of Finance, recognized the strong impacts of current taxation rules on a universal basis for Brazilian companies with international operations and the importance of mitigation instruments.
“What we have been saying in the ministry is that we either extend these attributes or revise these rules at once. We will do something”, he assured.
The extension of benefits, however, was not incorporated into the provisional measure being processed in the National Congress. In theory, the government could work for inclusion during parliamentarians’ discussions or deal with the instrument in another device.
In the first case, the concern of businesspeople is that the assessment of the MPV will only last until next year, given the recent challenges for provisional measures in the Legislative Branch and the congested agenda in both houses just under a month before the beginning of the parliamentary recess.
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