Analysis: Global minimum tax on multinationals would have little impact in Brazil

RIO DE JANEIRO, BRAZIL – Faced with a potential agreement among developed countries for the establishment of a global minimum tax for multinationals, tax attorneys say that Brazil should neither be benefited nor impacted by the measure.

With a varied array of taxes at its disposal, the country would be shielded from companies in the digital economy seeking to pay less taxes, according to them.

Debated for years, measures to address the alleged sub-taxation problem of the so-called big techs have become urgent, with the fiscal pressure on countries in the fight against the coronavirus pandemic.

A report by the European Commission shows that the profits of these companies are taxed at 9.5% on average, while traditional businesses pay 23.2%.

Negotiations in the G7 are progressing toward a global minimum tax rate of at least 15%. As a result, countries where these companies are headquartered could tax what was not collected in tax havens or low-tax countries, such as Ireland, which levies a rate of 12.5%.

Under this model, the United States could charge an additional 2.5% on profits earned in Ireland by a U.S. multinational.

According to international taxation specialists, digital companies pay at least 5 taxes in Brazil: IR-Fonte (withholding income tax), at a rate of up to 25%; 10% for Cide (taxation on remittances abroad); PIS/Cofins (based on the turnover of companies) at 9.25%; 2% to 5% for ISS (municipal service tax) and IOF (tax on financial operations) at a rate of 0.38%.

“The Brazilian tax scenario encourages digital companies to settle in Brazil, rather than operating remotely,” says attorney Victor Polizelli. “This is what happened to Amazon, Facebook and Google, which created subsidiaries in Brazil, pay taxes locally and benefit from the absence of taxation on dividends.”

According to tax specialist Heleno Torres, the debate on minimum tax is not as important for Brazil as it is for developed countries. This is because, unlike what occurs abroad, Brazil taxes principally corporate income.

“PIS and Cofins are the best taxes to solve this problem. Everything that a company does that has revenues, Brazil will tax, whether it is a service, a good, or an industrial activity. We tax digital services adequately,” he says.

In addition, Brazil would not lose revenue with the institution of a minimum tax. This is because it is considered a country of high corporate income taxation. For attorney Ana Claudia Utumi, partner at Utumi Attorneys, attention should be focused on the fact that foreign countries usually analyze withholding income tax in isolation, ignoring the fact that Brazil has other taxes on digital services.

According to Victor Polizelli, the institution of the global minimum tax and the proposal of U.S. President Joe Biden to increase the internal American taxation on profits between 25% and 28% will force Brazil to rethink the plan to reduce the rate of corporate income tax and CSLL (social contribution on profits), currently at 34%. The plan to reduce the rate would be intended to offset the potential approval of taxation on dividends. There are bills in this direction in Congress.

“The Brazilian reform movement of the IRPJ (corporate income tax) runs the risk of becoming outdated or going against the flow, because it had been inspired by Donald Trump’s measure, which lowered the American corporate income tax from 25% to 21%,” says the tax specialist, partner at KLA Attorneys.

Furthermore, the benefits for Brazil should be modest with the Organization for Economic Cooperation and Development (OECD) proposal that foresees a kind of distribution of the right to tax based on the contribution of each country’s market in the creation of the company’s profit. This would also be a measure to solve the sub-taxation problem of digital services.

Attorneys see potential benefits for Brazil, which could tax a greater share of profits, particularly in a context of growing digital services in the post-pandemic period.

But they are skeptical about the implementation of this tax structure, as it is complex and involves concepts that they consider vague, such as “place of value creation.” “It is extremely complex and difficult to do,” says attorney Eduardo Fleury, partner at FCR Law.

Tax specialist Ana Claudia Utumi agrees. She also says that the fact that Brazil is participating in the debates at the international level does not mean that it will easily implement the agreed measures.

“I don’t see it as something Brazil will implement in the short or medium term,” she says, noting that the country has not signed the Multilateral Agreement on the Interpretation of Tax Treaties, drawn up at the OECD to prevent double taxation.

Source: Valor