Navigating the Top-Up Tax: Brazil and Colombia’s Approach to OECD Pillar Two

Brazil and Colombia are responding to the OECD’s Pillar Two framework by exploring domestic minimum top-up taxes to ensure fair taxation for multinationals. Brazil proposed a 15% minimum tax via MP 1262/24, while Colombia implemented a minimum income tax rate of 15%, albeit not a QDMTT. These approaches highlight the importance of compliance and strategic tax planning for multinationals in these countries.

Brazil and Colombia are grappling with the implications of the OECD’s Pillar Two tax framework, which introduces the concept of minimum top-up taxes aimed at large multinational corporations. These countries face a decision: either accept that multinationals will pay taxes on local profits to countries that have already implemented Pillar Two or introduce their own domestic minimum taxes. The latter option carries the risk of elevating compliance costs, diminishing tax incentives, and potentially deterring foreign investment.

In October, Brazil introduced a provisional measure, MP 1262/24, proposing a 15% minimum tax designed to comply with the Inclusive Framework on Base Erosion and Profit Shifting, targeting multinational groups earning over 750 million euros ($791 million) in two of the past four tax years. This new tax will serve as a surcharge on the existing social contribution on net profit (CSLL) and is set to become effective on January 1, pending congressional approval.

Furthermore, MP 1,262/24 plans to synchronize Brazilian tax regulations with future OECD updates to ensure that the CSLL surcharge qualifies as a legitimate domestic minimum top-up tax. However, the legal terminology and calculation methods within the legislation may lead to confusion among Brazilian tax professionals, contributing to potential disputes as the implementation date approaches.

Conversely, while Colombia has yet to adopt Pillar Two rules, it has recognized the necessity for equitable taxation to prevent corporations with substantially lower effective rates than the nominal 35% tax rate from gaining an unfair advantage. The Colombian government recently approved a minimum income tax rate (MTR) of 15%, which is calculated differently from a QDMTT, including specific adjustments for tax credits and net income calculations.

As both countries attempt to balance fiscal policy with compliance requirements, the varied tax approaches may significantly affect multinational companies operating under Pillar Two. Brazil’s forthcoming reforms, including an income inclusion rule linked to its controlled foreign corporation regulations, add an additional layer of complexity. Additionally, other Latin American nations appear poised to follow suit with similar minimum tax regulations to maintain competitiveness and tax fairness among cross-border entities.

The OECD’s Pillar Two framework is designed to ensure that large multinational companies pay a minimum level of tax on income generated worldwide, helping to curb tax avoidance and ensuring tax equity. In Latin America, Brazil and Colombia are at the forefront of this change, undertaking strategies to align their domestic tax codes with this global standard. Brazil is advancing with a specific proposal, while Colombia acknowledges the need for reform without explicitly committing to Pillar Two rules immediately. The issue highlights the need for multinationals operating in these jurisdictions to navigate this complex and evolving tax landscape.

The introduction of minimum top-up taxes in Brazil and Colombia represents a significant shift in tax policy aimed at ensuring that multinational corporations contribute fairly to local economies. As Brazil seeks to implement a structured 15% CSLL surcharge in accordance with international standards, while Colombia explores equitable taxation, both jurisdictions underscore the importance of compliance and the potential impact on investment. Multinational entities must remain vigilant and strategically assess their tax positions in light of these developments to mitigate risks of double taxation and ensure adherence to evolving tax regulations.

Original Source: news.bloomberglaw.com