Brazil will lose revenue if it does not adopt global minimum tax, says Undersecretary of Revenue – 11/18/2023 – Market

The Federal Revenue is discussing the implementation of an effective minimum tax of 15% on the profits of multinationals operating in Brazil.

The objective is to align the country with the agreement signed by around 140 economies and which has the support of the OECD (Organization for Economic Cooperation and Development).

In an interview with Sheetthe Undersecretary of Taxation and Litigation of the Revenue, Claudia Pimentel, states that the body is already working on a proposal to institute the minimum charge, but its presentation depends on technical discussions and a political decision by Minister Fernando Haddad (Finance) and the president Luiz Inácio Lula da Silva (PT).

The OECD projects an additional revenue of US$200 billion annually from collecting the minimum tax on a global scale. Countries will be able to apply it whenever the taxes actually paid by a multinational or its subsidiaries on profits fall below the 15% proportion.

Although companies in Brazil currently pay a nominal tax rate of 34%, adding IRPJ and CSLL, the existence of tax benefits can mean that the effective tax rate is below 15%.

The ICMS subsidies themselves, which Haddad proposes to tax to increase federal revenue, contribute to reducing the effective rate on companies’ profits and open gaps for other countries to take over the taxation.

“We stop collecting in Brazil, giving the possibility for this difference to be collected in the countries that implemented it”, warns the undersecretary.

“Recognizing that these companies, at the end of the day, are going to be taxed in some country, so why give up that tax and not do it [o recolhimento] here in Brazil?”

How is the discussion about the global minimum tax in Brazil?
Due to new technologies and the digitalization of the economy, large companies are able to operate in other countries without a physical presence, making it difficult or damaging to tax the portion of profit earned in these jurisdictions.

Discussions arise within the OECD in this context. Some members argued that the problem came from the possibility of [a empresa] use low-tax countries to locate and operate in other jurisdictions.

Others understood that, because it was able to operate in the economy of a given country without a physical presence, it should be recognized that the market would have the right to a portion of this profit.

How did you decide to resolve it? Try to deal with both situations. So, they created Pillar 2, this effective global minimum taxation of 15%. And there is Pillar 1, the possibility of recognizing that the country is entitled to a portion of the excess profits of large multinationals.

In the current context, it is as if there is a shift in profit.
There may also be “since I can work remotely, why not work in a country that has more favorable taxation [paraísos fiscais]?”.

Pillar 2 attempts to address this by bringing the global minimum taxation to 15%. It is an effective rate. How is this calculation done? It takes the accounting profit of this entity, with some adjustments, and checks the tax actually collected. If it is below 15%, there would be taxation on the difference.

Let’s take an example, an entity in Brazil that has an effective taxation of 12%, but it has a holding company, a controlling company or companies within the group located in other countries that have implemented Pillar 2.

If Brazil does not tax this difference from 12% to 15%, these countries will be able to capture this. And, starting in 2024, many are implementing it. European countries, South Korea, Japan and many others. And even if the country does not adopt it, it has mechanisms to capture this difference by other entities in the group [como subsidiárias].

Does this mean that, if Brazil doesn’t review its taxation structure, it will start losing money?
Exactly. We stop collecting in Brazil, giving the possibility for this difference to be collected in the countries that implemented it.

How will the IRS close this loophole?
One way would be to institute a global minimum tax of 15%. You check multinational entities that are here, with headquarters here or abroad, that have effective taxation below 15%.

Brazil itself would already tax. Recognizing that these companies, at the end of the day, are going to be taxed in some country, so why give up that tax and not do it [o recolhimento] here in Brazil?

Will the government institute this tax?
The Federal Revenue has a group studying and developing legislation, for when there is a political decision from the minister, the president.

Some mention that Brazil’s tax rate [de impostos sobre o lucro] It’s already 34%, so there would be little difference, but we know that’s not true. We have several tax benefits or possibilities for deducting the tax base.

The discussion of the investment subsidy itself [do ICMS] ends up reducing the companies’ tax base, and may have an effective tax rate below 15%. This will end up being captured in other countries.

Do we already know how many multinationals fall into this situation and how much will be raised?
No, we are still carrying out the study.

Would multinationals with many Income Tax benefits be potentially affected?
Yes, especially when these incentives are to reduce the tax base. It has some benefits that don’t affect you as much as when it’s temporary. Or when an Income Tax tax credit is granted, which can be offset against other taxes or refundable within four years. In this case, Pillar 2 recognizes this as taxation. It won’t have an impact.

In relation to tax incentives that are effectively a deduction from the base, they affect you because you will collect less tax, and when compared with accounting profit, you end up with a lower effective taxation.

Therefore, if you want to maintain a benefit, but the effective rate may be lower, the ideal would be to migrate to the tax credit format. He was preserved [do imposto mínimo global] for having the quality of greater control and transparency. It is much easier to track and control when it is going to that company than when you simply allow a deduction.

Will Brazil have to review its tax incentive structure?
Exactly. You’ll have to review it. If not, you may be giving an incentive that is actually being taxed in another country. It’s not just Brazil. It is recommended that all countries do this. Brazil has to do its homework.

Can the tax be proposed by provisional measure or bill?
Yes, an instrument with the force of law is needed. So it could be a bill or a provisional measure.

In order not to lose money in 2024, would there have to be a political decision this year?
Yes. And, of course, it depends on how Congress proceeds. But it is still under study. We are also in the context of other reforms, everything is together.

Should Brazil only be able to implement it from 2025?
It would give more comfort. Because there would be a question of precedence [antecedência anual para aprovação de mudanças no IR].

We already see a heated debate on the taxation of grants. Do you expect resistance to the global minimum tax?
It is difficult to make this assessment. In a scenario where there are many countries moving in this direction, this can be a facilitator. Because, at the end of the day, you’re either going to pay here, or you’re going to pay abroad. This tax will not stop being collected. It will just stop being collected here. And we have to recognize that Brazil needs these resources.

If Congress approves the taxation of grants, will it reduce the difference to the effective rate of 15%?
Yes. If you do not have the benefit, the tendency is that the effective rate will be higher [do que é hoje]. But we recognize that tax benefits are necessary in some areas. If you want to encourage investment, expansion, employment, it’s valid.

What has to be evaluated is the best way, so as not to have this impact of the company not having the benefit, because it is failing to pay here, but it is paying [o imposto mínimo] out there. If you provide an incentive with a reduction in the IRPJ calculation base, there may be this difference.

If the minimum tax is implemented, will there be a lot of litigation?
I don’t think so. We are building legislation in the safest way possible. And, if it generates litigation and doesn’t collect it here, it will probably collect it there [em outro país]. [O custo judicial] It will only add up.

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Claudia Pimentel, 59
She has a degree in mechanical engineering and law, and a master’s degree in tax law. She has been a tax auditor at the Federal Revenue of Brazil since 1997. She has held different technical coordination positions within the agency. She is Undersecretary of Taxation and Litigation at the Federal Revenue Service and represents Brazil in forums linked to the Beps project, against the erosion of the tax base and transfer of profits, within the scope of the OECD.