Brazil has formally requested that the Organisation for Economic Co-operation and Development (OECD) recognize that the country can benefit from the side-by-side system. Officials from the Federal Revenue Service expect to receive a response by mid-year.
The information regarding the request made to the OECD was confirmed by the head of the International Relations Office of the Federal Revenue Service, João Paulo Martins da Silva, on March 23. During his participation in the V International Congress of Tax Law of the Institute for the Application of Taxes (IAT), Silva also stated that plans to implement a Brazilian Income Inclusion Rule (IIR) are currently off the table.
“"We understood that it [side-by-side] is quite advantageous for Brazilian companies, and that's why we can say that Brazil was the first country after the United States to apply to be side-by-side," said the member of the tax authority.
The side-by-side approach was created in January to allow for the coexistence of the United States' minimum taxation methodology and the one outlined by the OECD through Pillar 2.
The safe harbor side-by-side – currently available only to the US – stipulates that companies in jurisdictions with certain tax characteristics will not be subject to two of the "arms" of Pillar 2: IIR and the Undertaxed Profits Rule (UTPR). However, the Qualified Domestic minimum top-up tax (QDMTT) is still applicable.
The QDMTT – implemented by Brazil as an additional Social Contribution on Net Profit (CSLL) – allows countries to collect a supplement from multinational companies with taxation below 15%. The IIR, in turn, allows a country to collect the tax differential if it identifies that a company was taxed at less than 15% in its jurisdiction of origin. The UTPR is similar, but allows the collection of the additional tax even if the operation involves other jurisdictions.
According to the OECD text, companies belonging to business groups whose ultimate parent companies are located in jurisdictions that, among other elements, have an effective corporate tax rate of at least 20% will not be subject to IIR and UTPR. Furthermore, the jurisdiction must have a QDMTT or similar tax that ensures there is no taxation lower than 15%.
As previously reported by JOTA, since January, when the safe harbor was announced, experts have pointed out that the new system could benefit Brazilian companies with subsidiaries outside the country. Furthermore, they indicated that Brazil would be one of the only countries besides the United States to meet all the requirements imposed by the OECD to take advantage of the side-by-side system.
For lawyer Simone Dias Musa, a partner in the tax area at Trench Rossi Watanabe, acceptance by the OECD would be great news. “[Adherence to the safe harbor side-by-side] would give Brazilian multinational companies some breathing room, in the sense that they would not be subject to the UTPR [Unintelligible Tax Regime] globally. It is also an advantage for [foreign] companies established here in Brazil, because the foreign parent company that has a subsidiary here would have the assurance that other countries would not collect the top-up tax on those subsidiaries,” she says.
The tax expert also points out that the system results in relief from a compliance standpoint. "It simplifies all ancillary obligations related to Pillar 2 for Brazilian multinationals. Because they are not effectively subject to a minimum tax, except for the QDMTT itself, which is under Brazilian law," she stated.
According to lawyer Gabriel Bez Batti, partner at Brigagão Duque Estrada Advogados, "Brazil has everything it needs to enter" the safe harbor. "The Brazilian UBT [Universal Basis Taxation] regime is much more comprehensive than the American regime, which was included side-by-side. It applies to all subsidiaries abroad, regardless of whether the jurisdiction is a tax haven or not, and whether the income is an asset or a liability," he pointed out.
Changes in legislation
According to the head of the International Relations Office of the Federal Revenue Service, it is not yet clear whether the OECD will request changes to Brazilian legislation to adapt to the side-by-side model. For now, however, Silva says that changes to the Brazilian TBU model are becoming less likely.
“In the short term, there will certainly be no changes to the TBU, and an IIR will not be created,” he said. Silva further added that “if you have a tax system that is certified to allow the country to operate side-by-side, making changes to what has been assessed [by the OECD] will imply a reassessment.”.
The need to update the TBU rules is outlined in the legislation that established the additional CSLL tax rate (Law 15.079/2024). The law stipulates that the Executive Branch should submit a proposal on this topic to the Legislative Branch in the first half of 2025. The objective was to adapt the Brazilian system to the introduction of an IIR (Income Tax Return).
Batti, however, believes that Brazil could take advantage of the side-by-side model and change its TBU (Tax on Business Units) regime. Furthermore, maintaining the current rules would be negative. “If entering the side-by-side model is a prerequisite for the Revenue Service to later say that this rule is already qualified by the OECD and that this would be a reason not to change the TBU legislation to a CFC (Controlled Foreign Companies) model, that would be bad. The Brazilian TBU rule is bad and harms Brazilian investments made abroad because every Brazilian subsidiary pays 34%, which can reach 45% in the case of banks. This affects competitiveness. How will a Brazilian subsidiary compete with a company in Europe, which is generally taxed at 20%, 25%?”, he asks.
Source: www.jota.pro