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Moving forward with the process of adapting Brazilian legislation to the Global Anti-Base Erosion Rules, the government published Provisional Measure No. 1.262/2024, converted into Law No. 15.079 in December 2024, which partially adopted the OECD Pillar 2 rules.
The new rules aim to establish a minimum effective tax rate of 15% for large multinational groups operating in Brazil. The global minimum tax is known as a Qualified Domestic Minimum Top-Up Tax (QDMTT) or simply Top-Up Tax, which, as the name suggests, is a complementary tax. In Brazil, it will be paid as an additional to the CSLL (Social Contribution on Net Profits).
If the multinational group in Brazil assess an effective rate of the Corporate Taxes lower than 15%, considering all the Brazilian entities, an additional CSLL will be levied, corresponding to the OECD Top-Up Tax, until the percentage of 15% is reached.
Such rule applies to the multinational groups that have global annual turnover equal to or greater than € 750 million in at least two of the four fiscal years immediately preceding the one analyzed.
The point is that in Brazil the main factors that reduce the effective tax rate are tax incentives These include regional tax incentives in the SUDAM and SUDENE geographic areas, which will be the focus of this article.
Currently, legal entities with projects for installation, expansion, modernization or diversification in priority sectors of the economy for regional development in the SUDAM and SUDENE geographic areas are entitled to a 75% reduction in IRPJ (Legal Entities’ Corporate Tax) calculated on the basis of the operating profits (“Lucro da Exploração” in Portuguese).
The operating profits are based on the net profits adjusted by excluding amounts that are not directly related to the legal entity’s core business (for example, financial income that exceeds financial expenses and income and losses from equity holdings). This is because the tax incentive aims to relieve precisely the profits resulting from the legal entity’s core business, which promotes the development of the geographic areas of SUDAM and SUDENE [1].
The purpose of the Top-Up Tax is to tax excess profits, which correspond to the so-called GLoBE profit (net profit after adjustments provided for in the Law). On top of this amount, a percentage of the book value of investments in tangible assets and payroll expenses (“substance-based income exclusion”) will be excluded from net income.
The substance-based income exclusion allows, in theory, for revenues from the legal entity’s core business not to be affected by the GLoBE profit. However, the percentages applied to tangible assets and payroll expenses in Annexes VI and VII of Law No. 15,079/2024 represent only a partial exclusion, so that revenues from the legal entity’s core business will too be subject to the Top-Up Tax.
It should be noted, therefore, that there are two rules that were enacted for different purposes: (i) Pillar 2, which aims to tax surplus profits, partially excluding investments focused on the companies’ main activity; and (ii) the SUDAM and SUDENE tax incentive, which aims to reduce the income tax calculated on the profit arising from this main activity.
Let’s see how these rules interrelate: the multinational group that sets up its company in the SUDAM and SUDENE areas needs to prove its investments in geographic areas covered by the incentives. This is done by presenting, among other documents, invoices for the purchase of equipment/machinery needed for the production process (tangible assets).
According to current legislation, the profits derived from the companies located in SUDAM and SUDENE areas will benefit from a reduction in the effective rate of IRPJ. The reduction can be up to 75% of the IRPJ, resulting in an effective IRPJ rate of 7.5% on the basis for calculating the operating profit. The benefit does not apply to the CSLL.
On the other hand, the Top-Up Tax calculation base, corresponding to an additional CSLL, will be the GLoBE profit, which is calculated differently from the operating profits of SUDAM and SUDENE. If the calculation of GloBE profit results in an effective tax rate lower than 15%, the additional CSLL will be levied as a Top-Up Tax in order to reach this 15% minimum rate.
In practice, the government will reduce the IRPJ on one side and tax that same profit on the other.
This problem is not exclusive to the Brazilian legislation. There is a global discussion about the consequences of developing countries adopting Pillar 2, since most of these countries base their tax policies on granting incentives in order to attract foreign investments [2].
In this context, the OECD proposes that countries grant tax benefits through Qualified Refundable Tax Credits. This mechanism legitimizes refundable tax credits paid in cash or offset against other taxes not covered by Pillar 2.
In this model, Refundable Financial Credits are treated as income and do not reduce the basis for calculating income tax and the effective rate of corporate taxes. This is because, by including them in the denominator and not in the numerator of effective rate’s calculation formula, the effective tax rate tends to be higher, thus reducing the additional CSLL to reach the 15% minimum rate.
Specifically with regard to the SUDAM and SUDENE tax benefits, the law stipulates that the government may, from 2026, convert them into a Qualified Refundable Tax Credit. The intention is to bring them into line with the substance requirements adopted in the calculation of the GLoBE profit exclusion.
This change demands attention from the academic community and taxpayers. In recent years, under the pretext of “updating legislation”, the government has repeatedly reduced the financial benefit of tax incentives, including investment grants and interest on equity.
In order to ensure that changes to the SUDAM and SUDENE tax incentive mechanism to adapt to Pillar 2 do not damage taxpayers, the following approach is suggested: the value of the operating profit should be granted as a government credit (which is not taxed) that can be offset against the “CBS” (Contribution on Goods and Services) payable from 2027, or reimbursed in cash, adjusted by the SELIC rate.
This approach reconciles the objectives of the SUDAM and SUDENE tax incentives and the OECD’s own Pillar 2 guidelines with tax incentives for regional development. Furthermore, this approach already has precedents in our legal system, such as the system like the tax credit for green hydrogen established by Law 14.990/2024.
For all these reasons, if the conversion system is implemented in the way described, or in another way that achieves the same result, it can be said that the Pillar 2 rules and the SUDAM and SUDENE tax incentives are not incompatible.
Otherwise, antinomies could be created at the outset of the application of the Pillar 2 rules in Brazil, increasing litigation and, consequently, breaking down the desirable equity between companies located in the country.
[1] SUDAM and SUDENE geographic areas cover the states of North and Northeast of Brazil, which are historically less economically developed.
[2] Kostic, Svetislav V., Pillar 2 and alternatives for attracting (as well as keeping) foreign investments. Disponível em https://kluwertaxblog.com/2024/08/14/pillar-2-and-alternatives-for-attracting-as-well-as-keeping-foreign-investments/
Text originally published on JOTA.
