- 4 October 2024
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Brazil introduces new rule to establish a minimum CIT effective rate of 15% for certain multinational groups, in line with OECD Pillar 2 rules
On October 4th, 2024, the Brazilian federal government published Provisional Measure no. 1,262/2024 to introduce in the Brazilian tax system a QDMTT (Qualified Domestic Minimum Top-Up Tax), as a mean to ensure a minimum Corporate Income Tax (“CIT”) effective rate of 15%, in line with the Global Anti-Base Erosion Model Rules (“Pillar 2”).
On the same day, the Brazilian IRS (Receita Federal do Brasil) published Normative Ruling no. 2,228/2024 with detail on the rules for computing the QDMTT – which is currently, open to public consultation, meaning that taxpayers and tax experts will be able to submit suggestions for changes to the rule.
Pillar II is a key component of the OECD/G20 BEPS Project aimed at ensuring large multinational enterprises pay a minimum level of tax on the income arising in each of the jurisdictions where they operate.
The QDMTT is a “top up tax” is intended to “top up” insufficient taxation by the host country, insuring the agreed global minimum effective tax rate of 15%. It will be applied to MNE Groups with consolidated annual revenues of more than EUR 750 million in at least two years of the last four years.
So far, Brazil chose to enact only a QMDTT, which was implemented as a CSLL (Contribution on Net Profit) surtax. This is a more conservative approach than the option made by other countries, which was to implement the full package of the GloBE rules, including the IIR (Income Inclusion Rule) and the UTPR (Undertaxed Profits Rule).
From the Brazilian standpoint, the QDMTT has primarily a collecting function. By enacting a QDMTT, Brazil may prevent a top-up tax from being charged by another state in which the MNE group operates, under an IIR or a UTPR, in accordance with the “on/off switches” mechanism of the GloBE rules. The order of application goes QDMTT, then IIR, then UTPR.
The tax rate of the CSLL surplux is the difference between the minimum rate and the ETR (effective tax rate), the ETR being the ratio between adjusted covered taxes (in Brazil, the tax on corporate income – IRPJ and the social contribution on net profit – CSLL) and the GloBE income or loss for the jurisdiction. The calculation of the ETR includes all constituent entities in Brazil (jurisdictional blending).
The calculation basis of the “top up tax” is the “excess profit”, which is defined as the difference between the net GloBe income for the jurisdiction and the “substance-based income exclusions”, a certain amount of income calculated by reference to a fixed return (5%) on tangible assets and payroll expenses.
The nominal CIT tax rate in Brazil usually amounts to 34%. Nevertheless, MNE groups benefiting from income tax incentives or other tax reduction rules in Brazil be required to pay the CSLL surplus, provided that its jurisdictional ETR is calculated bellow 15%. A case-by-case analysis of each rule will be necessary to verify its impact on the calculation of the effective tax rate and GloBE profit, in accordance with the new regulations.
It is important to note that the rules for calculating the net GloBE income and the excess profit subject to taxation in Brazil are not identical to the rules for computing CIT in Brazil. Therefore, MNE groups operating in Brazil may need to develop separate controls and to provide additional information to tax authorities to comply with the new rules.
The new rules are set to be applied from the fiscal year beginning January 1st, 2025, with the first payments being required in September 2026.
Nevertheless, the Provisional Measure no. 1,262/2024 has still to go through the normal legislative process, with a term of 60 days (extendable for more 60 days) to be approved by Congress.
Our tax team is available for any clarifications.
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