Brazil's Adoption of OECD Pillar Two Rules Raises Questions on Timing and Compliance

Brazilian companies are scrambling to prepare for the implementation of new tax legislation under the OECD's pillar two framework, as local tax experts claim they have not been given enough time to organize. According to experts, the legislative process behind Provisional Measure (PM) 1,262/24, which was published on October 3 and takes effect on January 1, 2025, has been atypical, leaving many unprepared.

PM 1,262/24 marks Brazil's adoption of the OECD's pillar two rules, which aim to ensure that multinational corporations with revenues of at least €750 million ($818 million) pay a minimum effective tax rate of 15% in every country where they operate. On the same day, the Brazilian Federal Revenue also published Normative Ruling no. 2,228/2024, outlining the specific regulations governing the PM.

While the new legislation was anticipated, the simultaneous release of the regulation with the PM took some by surprise. Stephanie Makin, an international taxation partner at Machado Associados in São Paulo, told *ITR*, "It’s important to note that the new legislation was already expected." However, she added, “publication of the regulation alongside the PM was surprising because Brazilian tax authorities typically publish draft regulations for public consultation when dealing with complex matters.”

Allan Fallet, partner at Mauger Muniz Advogados in São Paulo, welcomed the adoption of pillar two as a positive development. “We have no doubt that Provisional Measure no. 1,262/2024 represents yet another advance in Brazilian tax rules to ensure the global minimum effective tax rate and prevent tax base erosion, with Brazil's correct alignment with the OECD/G20 guidelines for combating tax avoidance,” Fallet said.

However, Fallet also pointed out that the absence of a bill of law on pillar two resulted in a lack of involvement from Congress and the public on such a complex matter, leaving companies with insufficient time to organize. “Despite relevant advances, there are still questions on the process of adapting Brazilian legislation to the GloBE rules and the universal base taxation regime, which need to be analysed on a case-by-case basis for further consideration,” Fallet added.

He also noted the potentially limited impact of the global minimum tax in Brazil. “According to a survey carried out by the Brazilian tax authorities, in 2022 there were 7.9 million legal entities active in Brazil. There were 8,704 legal entities operating in Brazil with an annual gross revenue exceeding €750 million, and of these, 957 would have tax on profits from effective rates lower than 15%, which would be impacted by minimum taxation,” Fallet said.

The issue of whether Brazil is fully aligning with OECD standards is also up for debate. Luciana Rosanova Galhardo, a partner at Pinheiro Neto Advogados, told *ITR* that Brazil has shown a clear intention to follow OECD guidelines, pointing to recent reforms such as the new transfer pricing rules, changes in the taxation of investment subsidies, and now the adoption of pillar two. “New transfer pricing rules, changes in the taxation of investment subsidies, and now the effective introduction of pillar two rules are examples of this Brazilian policy of aligning with international standards,” she explained.

However, Galhardo also noted that even when Brazil has adopted OECD norms in the past, it has not always fully adhered to the guidelines. “This is the case with withholding tax on services and profits abroad and with clauses in double taxation treaties that diverge from those in the Model Tax Convention on Income and Capital,” she added.

Galhardo further pointed out that while Brazil is a "key partner" of the OECD, it is not yet a full member. As a result, Brazil has not committed to binding implementation of OECD guidelines. “While OECD guidelines provide voluntary principles and standards for business conduct in line with adopted laws and internationally recognised standards, member countries undertake a binding commitment to implement them. This does not automatically override the obligation to observe domestic norms and principles, especially those set out in the Federal Constitution,” Galhardo said.

She emphasized that the new regulations must respect Brazil’s domestic legal principles, warning that any provision violating these norms could be challenged in court.

With the new regulations set to take effect in a few months, in-scope companies and their advisers will need to act quickly to ensure compliance with pillar two.

By fLEXI tEAM