Brazil Publishes Provisional Measure Introducing Additional CSLL to Adapt to OECD GloBE Rules

On October 3, 2024, Provisional Measure (PM) No. 1,262/2024 was enacted, introducing an addition to the Social Contribution on Net Income (the “Additional CSLL”), in order to adapt to the Organisation for Economic Co-operation and Development’s Global Anti-Base Erosion (GloBE) Rules under Pillar 2. These rules aim to elevate the effective tax rate on corporate income of large Multinational Enterprise (MNE) Groups to a minimum of 15% in each jurisdiction.

According to the federal government's announcement, PM No. 1,262/2024 is structured to ensure that the Additional CSLL qualifies as a Qualified Domestic Minimum Top-Up Tax (QDMTT).

On the same date, the Brazilian Federal Revenue Office (RFB) published Normative Instruction (NI) No. 2,228/2024, which regulates the Additional CSLL, and which is currently open to public consultation until November 10, 2024.

Below, our tax team highlights a few key aspects of the new Additional CSLL.

• Scope: The Additional CSLL targets the Constituent Entities of an MNE Group that has annual revenue of EUR 750 million or more in the consolidated financial statements in at least two of the four fiscal years immediately preceding the year under analysis.
• Alignment with OECD GloBE Rules: PM No. 1,262/2024 tasks the RFB with the regulation of several aspects of the Additional CSLL. However, it expressly establishes that:

• Reference documents include: the GloBE Model Rules, the Commentary to the GloBE Model Rules, Administrative Guidelines, and any other rules, guidelines, procedures, and subsequent updates approved by the OECD Inclusive Framework for the coordinated implementation of effective minimum taxation.
• The regulations must be periodically updated to ensure alignment with the reference documents, and their provisions must be established in a manner that meets the requirements for the qualification of the Additional CSLL as a QDMTT.

• General Steps for Calculating the Additional CSLL:

Step 1: Determine the GloBE Income or Loss¹ and the Adjusted Covered Taxes² for each Constituent Entity. 

(1) GloBE Income or Loss: the starting point is the net profit or loss determined for the Constituent Entity in its individual financial statements according to the applicable Brazilian  accounting standards. Subsequently, specific adjustments listed in Annex I of PM No. 1,262/2024 and NI RFB No. 2,228/2024 must be implemented.

(2) Adjusted Covered Taxes: the starting point is the current tax expense recognized for accounting purposes relating to the following taxes:

(i) Taxes recorded in the financial statements of the Constituent Entity with respect to its income or profits, or its share of the income or profits of a Constituent Entity in which it owns an ownership interest;

(ii) Taxes levied in lieu of a tax on corporate income or profits; and

(iii) Taxes levied by reference to retained earnings and corporate equity, including taxes on multiple components based on income, profit and equity.

Note that there are specific exceptions to the items above (as, for instance, the exclusion of the Additional CSLL itself).

In addition, subsequently, specific adjustments provided for in Annex II of PM No. 1,262/2024 and NI RFB No. 2,228/2024 must be implemented, particularly those regarding the reduction of current tax expense amounts related to income or profits excluded from the calculation of GloBE Income or Loss.

Step 2: Determine the Effective Tax Rate assessed for the Brazilian jurisdiction, considering the Adjusted Covered Taxes and the GloBE Income or Losses of all Constituent Entities of the MNE Group located in Brazil, as follows:

Step 3: Determine the Additional CSLL Percentage of Brazilian jurisdiction, which corresponds to the positive difference between the minimum rate of 15% and the Effective Tax Rate, as determined in Step 2.

Step 4: Calculate the Excess Profit, which corresponds to the positive value of the difference between Net GloBE Income and the Substance-based Income Exclusion.³

(3) The Substance-based Income Exclusion corresponds to the sum of the following exclusions:

(a) [9.6% - 5%] of certain payroll costs of employees that perform activities for the MNE Group in the jurisdiction, which are considered eligible and not expressly excluded; and

(b) [7.6% - 5%] of the carrying value of eligible tangible assets located in the jurisdiction.

The transition period begins in 2025 with exclusions of 9.6% and 7.6%, both of which will be gradually reduced to 5% in 2033.

Such factors are considered for each Constituent Entity, except for Constituent Entities classified as Investment Entities.

Step 5:  Calculation of the Additional CSLL for the Brazilian jurisdiction, determined for the fiscal year according to the following formula:

(4) The Adjustment of the Additional CSLL may result from (i) the recalculation of the Effective Tax Rate and the Additional CSLL of a prior fiscal year, or (ii) when a Net GloBE Loss is determined in the jurisdiction, while the Adjusted Covered Taxes are negative and less than 15% of the GloBE Loss, pursuant to articles 15 and 28 of PM No. 1.262/2024.

Step 6: Allocate the Additional CSLL for the jurisdiction (Step 5) among the Constituent Entities in the jurisdiction that have determined Excess Profits, proportionally according to certain allocation criteria.

Alternatively, at the discretion of the MNE Group, the Additional CSLL for the jurisdiction may be allocated to a single Constituent Entity designated as the taxpayer and liable party. In this case, the other Constituent Entities will be jointly liable for the Additional CSLL.

• Payment of the Additional CSLL: The Additional CSLL allocated in Step 6 must be paid by the respective Constituent Entities/Entity by the last business day of the seventh month following the end of the fiscal year, even if they are not taxpayers of the CSLL under Law No. 7,689/1988.

• Tax incentives related to the areas of activity of the Amazon Development Authority (SUDAM) and the Northeast Development Authority (SUDENE): Starting in 2026, PM No. 1,262/2024 authorizes the Executive Branch to convert—in whole or in part, and without prejudice to the beneficiary—the tax incentives referred to in Articles 1 and 3 of PM No. 2,199-14/2001, by introducing the substance-based requirements adopted in the calculation of the Substance-based Income Exclusion, into a financial credit classified as a Qualified Refundable Tax Credit.

• GloBE Safe Harbors: NI RFB n. 2,228/2024 establishes some simplifying rules that can be adopted if the Constituent Entities located in Brazil are considered eligible and that may allow the Additional CSLL for the jurisdiction to be considered zero in a given fiscal year (e.g., Transitional Country-by-Country Report Safe Harbor; Permanent Safe Harbor based on the excess profit, low relevance jurisdiction or effective tax rate tests; and Permanent Safe Harbor for non-material Constituent Entities).

The provisions regarding the Additional CSLL set forth in PM No. 1,262/2024 shall take effect on January 1, 2025, if its enactment into law is approved by the National Congress.

PM No. 1,262/2024 must be enacted into law by the National Congress within a period of 60 days, which may be extended once for an equal period (totaling 120 days), counted from the date of publication, and suspended during recess periods, or it will no longer have any legal effects.