The impact of Pillar 2 on the Good Law

Rules are based on the application of a global minimum tax burden of 15% for multinational groups with annual revenues from €750 million 

*By Aristotle Moreira Filho

Since October 2021, the OECD and the G20 have been working on designing an international reference framework (GloBE) that aims to ensure minimum levels of taxation for multinational groups operating in the globalized and digitalized economy. Its most impactful product is the global minimum tax, which forms Pillar 2 of the project, to which Brazil has just joined through Provisional Measure No. 1,262/2024.

By aiming for a minimum effective tax burden of 15%, the regime calls for a review of tax incentives worldwide, aiming to maintain the effectiveness of these instruments in a scenario of limited tax expenditures. The Lei do Bem (Good Law), which has been lagging behind its international equivalents for some years, finds new impetus for its reform in GloBE, as the broad implementation of Pillar 2 in capital-exporting countries requires Brazil to be agile and rational in restructuring tax incentives that operate via a reduction in companies' taxable profits, given the imminent loss of effectiveness of our tax incentive mechanism for R&D.

Pillar 2 rules are based on the application of a global minimum tax burden of 15% for multinational groups with annual revenues of €750 million or more. The percentage is calculated in each country in which the group operates, so that, once income taxation of less than 15% is determined by a subsidiary or branch in a given country, the country where the parent company is headquartered will apply a supplementary tax equivalent to the difference between the effective tax burden and the minimum tax burden.

The regime also allows the country where the income is generated to apply the supplementary tax, then called Qualified Minimum Domestic Complementary Tax (QMDT), which would prevent the collection of the Complementary Tax by the country where the controlling company is headquartered and thus the transfer of the tax base abroad.

Whenever the enjoyment of tax incentives leads to an effective tax burden of less than 15%, there will therefore be a risk that the application of the Supplementary Tax will nullify the effects of the incentive granted.

The restrictive effects of GloBE do not mean, however, that tax incentives can no longer be used as instruments of public policy, including industrial and innovation. An analysis of the rules of Pillar 2 indicates that their impact depends on the design of the incentive regime, with relevant aspects such as: (i) the profile of the user of the incentive, especially the size and nature (tangible or intangible) of the activity developed; (ii) the basis for calculation and the possibility of cumulation with other incentives; (iii) the way in which the incentive is accounted for and its impact on income tax. This is precisely where the vulnerabilities, the points of attention and the potential for optimizing the incentive of the Lei do Bem in this post-Pillar 2 scenario lie.

One of the criticisms of the Lei do Bem is the fact that its use is restricted to large companies. This attribute, which arises from the requirement to opt for real profit, makes the regime vulnerable to the impact of Pillar 2, given that a large part of the users of the Lei do Bem are large multinational groups, both Brazilian and foreign.

Pillar 2 rules contain a mechanism that deducts from the Supplementary Tax base the volume of substantial economic activity developed by the company, in the form of payroll and tangible assets. This means that, while the requirement for R&D spending protects the Good Law from the Pillar 2 mechanism to some extent, segments of the digital economy, whose investment is focused on intangibles, will be particularly affected by the new rules.

The calculation basis for the Lei do Bem is formed by the absolute volume of R&D expenditures, without a ceiling or requirement for an increase. The benefit of the Lei do Bem can be combined with other tax incentive regimes existing in the country, such as incentives for regional development, such as Sudam and Sudene, and sectoral regimes, such as the automotive and information technology sectors. These are factors that, capable of excluding 100% from income taxation, increase the impact of Pillar 2 and require monitoring by companies.

Finally, one of the points that makes the Lei do Bem particularly vulnerable to Pillar 2 rules is its accounting below the profit line, reducing the volume of income taxation and thus the effective tax burden to be subject to the minimum percentage of 15%. Replacing the additional IRPJ and CSLL deduction regime with a financial credit regime subject to reimbursement in cash would allow the economic benefit to be maintained for the company without a direct impact on taxable profit and, therefore, on the effective tax burden. The refundable financial credit, accounted for as a government subsidy above the profit line, under CPC 07/IAS 20, in addition to mitigating the impact of Pillar 2, optimizes the liquidity of the Lei do Bem benefit, which becomes fruitful even when the company records a loss, a change long demanded by the S, T & I sector.

Estimates from the Brazilian Federal Revenue Service indicate that there are approximately 3,000 multinational companies operating in Brazil that fit the profile of groups subject to Pillar 2 rules, of which approximately 80 are Brazilian-owned groups. It is certain that a significant portion of these companies are users of the benefits of the Lei do Bem and will be affected by the new international rules.

Brazil has already begun implementing Pillar 2 in its domestic legislation, including through the application of the Qualified Domestic Minimum Complementary Tax, established as an additional CSLL route by Provisional Measure No. 1,262/2024. This initiative, while it can mitigate the transfer of the tax base abroad, does not remedy the loss of effectiveness of the incentive of the Lei do Bem, remembering that the reform projects of Law No. 11,196/2005 that are being processed in the National Congress do not address, in the form in which they are written, the challenges posed by the Pillar 2 regime, as set out herein.

The risk for Brazil arises from the fact that countries such as Germany, Canada, South Korea, France, Italy, Japan and the United Kingdom have already implemented Pillar 2 and will begin applying the regime in 2024, with an impact on the Brazilian operations of multinational groups headquartered in these countries, as well as on the international operations of Brazilian groups with holding companies established in these countries. In the same vein, many countries have already adapted their tax incentive regimes for innovation to the rules of Pillar 2, ensuring the attractiveness and effectiveness of their policies in this new legal and institutional framework. Brazilian inertia will cost our competitiveness and the relinquishment of a scarce tax base to competing countries on the international scene.

*Aristóteles Moreira Filho is a lawyer and researcher at Think Tank ABES. He holds a PhD in Law from USP. He is the author of the book “Innovation Law: Taxation, Technology and Development”, published by Quartier Latin (2023).

Notice: The opinion presented in this article is the responsibility of its author and not of ABES - Brazilian Association of Software Companies

Article originally published on the IT Forum website https://itforum.com.br/colunas/impacto-pilar-2-lei-do-bem/