On 3 October 2024, the Brazilian Government published Provisional Measure (PM) No. 1.262 and Normative Instruction (NI) No. 2.228 to introduce the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Pillar Two rules in Brazil. The PM aims to follow the Global Anti-Base Erosion Model (GloBE) Rules, including a Qualified Domestic Minimum Top-up Tax (QDMTT). The PM does not mention the Income Inclusion Rules (IIR) or Undertaxed Payments Rule (UTPR).

A Provisional Measure is a type of Decree, signed and published by the President, with immediate effect and the power of law. It needs to be approved by the Congress within 60 calendar days from publication (although extendable by another 60 calendar days) to be enacted as law.

The introduction of the Pillar Two rules in Brazil is a long-awaited development, following several statements from the Brazilian Government indicating that the new rules would present an opportunity to increase tax revenue collection and prevent other jurisdictions from taxing profits that arise in Brazil.

Detailed discussion

The PM introduces a QDMTT that is in line with the OECD-agreed approach. In Brazil, the QDMTT will be known as a surplus to the Social Contribution on Profit (Additional CSLL). This tax will apply to Brazilian members of multinational enterprises, as from January 2025. The Additional CSLL will apply to a "qualifying entity," defined as an entity located in Brazil that is part of a multinational group that has revenues exceeding €750m in at least two of the previous four fiscal years. Other key aspects of the PM are detailed below.

Safe harbors

The PM provides an election to apply a transitional safe harbor based on the country-by-country reporting (CbCR) rules for fiscal years commencing on or before 31 December 2026 and ending on or before 30 June 2028.

Filing and reporting

Entities in Brazil subject to the Additional CSLL will be obligated to submit comprehensive data pertinent to the calculation of this tax. The submission must align with forthcoming guidelines, which the tax authorities are expected to release.

Nevertheless, the NI introduces stringent penalties for entities that fail to meet their reporting obligations. Under the regulation, entities that either delay their reporting or submit reports with inaccuracies, errors or omissions will face substantial fines.

Other measures

Payment schedule for the Additional CSLL: The deadline for the Additional CSLL is the seventh month subsequent to the end of the fiscal year.

Tax incentives: The PM raises the possibility of enabling the Brazilian government to partially or fully convert Corporate Income Tax incentives associated with the Free Trade Zone (Lucro da Exploração) into a Qualified Refundable Tax Credit for Pillar Two purposes, as from 2026.

Abolishment of sub-taxation regime: Additionally, the PM has revoked the provision in Law number 12,973/14 that created the concept of under-taxation ("subtributação" in Portuguese). This concept was used within the context of Brazil's worldwide taxation regime and dealt with entities that were subject to taxation below a 20% rate.

Tax havens and privileged tax regimes: The PM provides that the current list of jurisdictions that are considered tax havens or privileged tax regimes (generally those that do not subject income to a tax higher than 17%) may be revisited. The government may exclude from the list jurisdictions that make "significant investments that contribute to Brazil's national development" — no further details were given, however.

Next steps

The PM will now embark on its legislative journey for enactment into law. It must be approved by Congress within a 60-day period, which can be extended once. If either chamber suggests changes, the PM will circulate back for reconsideration. The PM maintains its legal force during this period, provided it is ratified within the constitutional timeframe. Failure to approve within this window results in the expiration of the PM. Upon final approval by both chambers without further amendments, the PM will be forwarded for the President's sanction and promulgation, thus formalizing it as law.

Stakeholders should stay informed on the PM's progress to understand its definitive impact on tax compliance and strategy.

Implications

Multinational groups with presence in Brazil should evaluate the potential impact of the Pillar Two legislation on their structures. Some relevant actions to consider include:

• Mapping the existing structure to identify constituent entities that could be subject to the Brazilian Pillar Two rules
• Evaluating whether the relevant entities would qualify for the CbCR transitional safe harbor
• Calculating the potential top-up tax exposure in Brazil
• Determining the need for restructuring to mitigate adverse impacts from the application of the Pillar Two rules in Brazil
• Preparing for additional compliance and reporting obligations that may arise from the new rules