In Brazil and Colombia, Top-Up Tax Is One Path to Pillar Two

Brazil and Colombia face a dilemma under the OECD’s Pillar Two: Either accept that large multinationals will pay taxes on local profits to other countries that have implemented Pillar Two, or introduce domestic minimum top-up taxes, which could affect tax incentives, increase compliance costs, and discourage investment.

Due to different measures adopted by each Latin American jurisdiction, multinationals must monitor developments in local legislation and have the proper structure to mitigate Pillar Two compliance issues (including fines). Also, it’s essential to understand how taxes due in each jurisdiction should be paid and treated by parent companies and relevant subsidiaries.

In October, Brazil published a provisional measure, MP 1262/24, to introduce a 15% minimum tax under the Inclusive Framework on Base Erosion and Profit Shifting. To align with Pillar Two, the measure applies to multinational groups with annual revenue of 750 million euros ($791 million) or more in at least two of the four immediately preceding tax years.

The new tax, designed to be a qualifying domestic minimum top-up tax, is a surcharge of the already existing social contribution on net profit, or CSLL. The measure will take effect on Jan. 1, if the National Congress approves and converts it into law within the legal deadline.

MP 1,262/24 clarifies that the Brazilian legislation will absorb future changes to the Organization for Economic Cooperation and Development’s model rules on Pillar Two to guarantee that the new CSLL is a qualified domestic minimum pop-up tax. The OECD guidelines will effectively be a source of interpretation to calculate the new tax, which may help in case of omissions and translation issues.

But the terms used in the legislation and the structures for calculating and paying the CSLL surcharge in general aren’t common to Brazilian tax professionals, taxpayers, judges, or the tax authorities themselves. This, plus the fast-approaching Jan. 1 date, could lead to controversial interpretations and disputes.

For instance, the legislation provides for the conversion of specific tax incentives designed to develop certain areas into financial credits classifiable as qualified refundable tax credits. It’s silent on the possibility of converting other relevant incentives such as technological research and development, amortization of goodwill on acquisitions, and interest on equity.

A Brazilian tax incentive that isn’t a qualified refundable tax credit could reduce an entity’s effective tax rate in Brazil—in some cases to less than 15%—and generate additional CSLL payable under the new legislation. The tax authorities announced that the negative impacts of the CSLL surcharge on certain tax incentives could be reduced by the exclusion based on the substance of the entities’ operations in the country.

Multinationals must carefully analyze all tax incentives granted to Brazilian taxpayers to determine if the minimum 15% corporate income tax is still achieved locally or if the CSLL surcharge will be due. If the latter, multinationals in the country should review the pros and cons of such tax benefits vis à vis the additional CSLL burden.

In-scope entities could also face compliance costs due to the Brazilian QDMTT, requiring investments in technology and specialized staff for the calculations and reporting. Depending on the corporate structure and the domicile of the parent and related companies, it may be a necessary cost even if Brazil hadn’t issued Pillar Two-related legislation.

This is because foreign jurisdictions could implement a surcharge tax related to Brazil through the income inclusion rule and the undertaxed profits rule. This adds to the compliance costs of the 2023/2024 indirect tax reform, among other changes in the tax legislation.

In contrast, Colombia hasn’t adopted Pillar Two rules or shown intent to do so in the short term. But the Colombian government has acknowledged concerns regarding the unfair taxation of corporations whose effective local tax rates are significantly lower than the nominal rate, currently at 35%. This was highlighted when the government approved the tax reform that introduced the minimum income tax rate starting from fiscal year 2023.

The MTR of 15% applies to all resident corporations regardless of size. Although it is inspired by Pillar Two, it isn’t intended to be a QDMTT. It is calculated by dividing the adjusted tax by the adjusted profit. The adjusted tax includes the corporate income tax and certain tax credits; the adjusted profit includes book profits before taxes, plus permanent differences that increase net income, minus non-taxable income and net operating losses.

While the MTR aims to ensure equitable taxation, it has several flaws, such as failing to consider the deferred tax and taxing items of income that shouldn’t be taxed—including unrealized income arising from foreign exchange recognition and asset valuations.

Brazil and Colombia are implementing a 15% minimum domestic top-up tax to mitigate the risk that additional taxes related to local income are added and taxed abroad.

Their different approaches will affect multinational groups under Pillar Two and determine if the ultimate parent entity (or other related parties) will be able to collect a top-up tax outside the source of income jurisdiction. The Brazilian government has already mentioned that it intends to implement an income inclusion rule together with a reform of Brazil’s controlled foreign corporation rules.

It’s unclear how other countries in the region will respond to this new global tax environment. Argentina’s Deputy Marcelo Casaretto proposed a bill similar to Colombia in 2023. Chile and Mexico announced their intention to implement Pillar Two, while Peru and Venezuela have been silent.

We expect that Latin American jurisdictions will adopt the Pillar Two rules, or at least implement rules inspired by Pillar Two, to establish a minimum effective tax rate of 15% and accordingly, to mitigate exportation of tax revenue.

It’s important that multinational groups, including the Latin American ones, are aware of the Pillar Two developments in each country in the region and organize their business to pay taxes in compliance with Pillar Two principles to mitigate the risk of double taxation.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Clarissa Giannetti Machado is partner at Trench Rossi Watanabe and head of its tax practice group in Brazil.

Ciro Meza Martinez is partner at Baker McKenzie and head of its tax practice group in Bogotá.

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