Brazil embraces international fiscal alignment with deployment of a top-up tax

Provisional Measure 1262/24 (PM 1262) and Normative Instruction 2228/24 (NI 2228) represent significant milestones in Brazil's effort to align its fiscal policy with international standards, particularly regarding the OECD's pillar two. These legal instruments solidify the country’s commitment to implementing rules aimed at promoting a more equitable taxation among jurisdictions.

Pillar two is part of the OECD’s BEPS initiative and its core goal is to ensure that large multinational groups are subject to a global minimum tax rate of 15% on their income. Thus, according to the new Brazilian rule, if the effective tax rate in the jurisdiction of the country where the controlled company is located does not reach this minimum of 15%, the difference will be charged to the controlled company through a top-up tax.

Pillar two’s Global Anti-Base Erosion Model Rules thus seek to reduce tax avoidance practices, by means of which companies shift profits to countries with low or no taxation, without substantial economic activity occurring in those locations.

Published at the beginning of October 2024, PM 1262/24 formally adopts the pillar two rules in Brazil and mandates that multinational corporations with consolidated annual revenues of at least €750 million will have their local controlled companies subject to a minimum tax rate of 15% on their profits, the so-called qualified domestic minimum top-up tax. If a company’s effective tax burden, considering all taxes levied on income, is lower than this rate, an additional payment will be required under the social contribution on net income (CSLL), as outlined in the provisional measure.

A significant aspect of PM 1262/24 is the attempt to safeguard certain tax incentives, such as interest on equity (juros sobre capital próprio, or JCP) and those granted to companies operating in special economic zones, such as Sudam (the Superintendency for the Development of the Amazon) and Sudene (the Superintendency for the Development of the Northeast). These tax benefits, in some cases, can reduce the effective tax rate to levels close to, or even below, the 15% minimum required by pillar two.

PM 1262/24 also provides for the possibility of converting tax benefits into financial credits from 2026, as detailed in Article 36 of the measure. This mechanism was designed to allow companies to continue enjoying tax benefits without compromising the need for a 15% minimum tax.

In addition to PM 1262/24, the Brazilian Federal Revenue issued NI 2228/24 to regulate the new global minimum taxation. This normative instruction details how companies’ effective tax rate should be calculated and the conditions for the additional CSLL payment.

NI 2228/24 also acknowledges that JCP, a unique feature of Brazilian legislation, can be used to reduce the tax base and thus approach the 15% threshold. However, there is uncertainty about whether other countries will recognise JCP as a legitimate mechanism for reducing taxes, which may result in the need for additional payments in other jurisdictions.

In sum, PM 1262/24 and NI 2228/24 work together as a small step to ensure that Brazil effectively implements the OECD's pillar two rules. While the provisional measure establishes the basic structure of the minimum taxation and defines the affected taxpayers, NI 2228/24 provides the operational details necessary for the application and enforcement of these rules. Together, these legal measures aim to prevent multinational corporations from exploiting tax loopholes to reduce their tax liabilities to levels below what is considered fair internationally.

Additionally, by allowing the continued use of tax benefits in a manner that does not compromise the minimum taxation, PM 1262/24 and NI 2228/24 demonstrate the Brazilian government's effort to balance the need for alignment with international standards and the maintenance of policies that promote regional development and business competitiveness.

While this task division between formal law and administrative legislation can be considered a smart strategy to ensure greater flexibility in potential future changes, it may also leave room for judicial complaints based on violations of the principle of legality and due process of law.

The issuance of PM 1262/24 and NI 2228/24 can be considered another step towards aligning Brazil’s fiscal policy with international standards (as with new transfer pricing legislation and the double taxation agreement signed with the United Kingdom, both in 2024). By adopting the OECD’s pillar two, the country is demonstrating a significant effort to tackle tax evasion and ensure fairer taxation of multinational companies.

This legislation is already in force. However, in the case of the provisional measure, there is a deadline of up to 120 days for the text to be approved by the House of Representatives and the Senate. If that does not occur, the measure simply loses its legal status. The normative instruction may also undergo changes, as the Federal Revenue Service has already announced that it will soon offer an opportunity for taxpayers to submit their suggestions.