RIO DE JANEIRO, BRAZIL – Brazil could raise US$1 (R$ 5.03) billion in additional tax revenue per year by imposing the minimum global tax rate of 15% on Brazilian multinationals, under a proposed tax deal that may be given the go-ahead by the G-20 in Venice (Italy) in July. The estimate is from the European Observatory on Taxation, based in Paris and financed by the European Union.
The minimum global tax rate will be applied on the profits companies earn outside their home countries. Governments will still be able to levy an income tax on companies’ domestic income, at whatever percentage they wish.
However, should a multinational continue to divert part of its profits to tax havens with little or no taxation, its home country will be allowed to levy the difference until it reaches the 15% minimum.
Mona Barake, one of the authors of the European Observatory on Taxation study, says she considered data published by the Organization for Economic Cooperation and Development (OECD).
According to the organization, there were 85 Brazilian multinationals that reported foreign operations to Brazilian tax authorities in 2016. Their different subsidiaries chose where to record profits: 34 chose the Cayman Islands; 18 the British Virgin Islands; 23 Luxembourg; 18 the Netherlands; and 8 the Bahamas, where taxation is negligible. Some chose countries with more standard rates, such as Argentina, Chile, Colombia, and the United States.
The United Nations Agency for Trade and Development (UNCTAD) shows that in 2018 two Brazilian companies were on the list of the top 100 emerging-market multinationals: mining giant Vale, in 21st position, and meatpacker JBS, in 59th.
Of US$88 billion of Vale’s assets, US$33.2 billion were located overseas; of US$36.7 billion in sales, US$33.5 billion were foreign source.
In turn, 67.7% of JBS’s operations were transnational. Of its 230,000 employees, 180,000 were located outside Brazil.
According to the OECD, Brazil’s stock of Foreign Direct Investments (FDI) in other countries reached US$277.4 billion in 2020. In turn, the FDI stock in Brazil stood at US$608 billion.
In this scenario, the future global tax agreement will both provide the Treasury with room to collect the difference between the tax that a Brazilian subsidiary abroad pays in a tax haven (for example, 2%) and the global minimum rate of 15%, and it may result in a reduction in tax optimization by multinationals.
Multinationals established in Brazil transfer billion-dollar yearly profits to tax havens, and thereby the tax loss for Brazil is also significant. The figures vary, according to published studies.
The tax agreement has been passed by the G-7, the largest industrialized economies, and the levying of a global minimum tax rate of “at least 15%” was regarded as positive by many specialists, but also as insufficient. However, this is only part of the story. There will still be many negotiations in the G-20 and, eventually, involving all 139 member countries.
“The G-7 has finally decided to push the international tax system forward into the 21st century, but only enough to shamelessly benefit itself, leaving the rest of the world behind,” says Alex Cobham, executive director of Tax Justice Network, an NGO focused on tax issues.
“The G-7 finance ministers suggest following the OECD proposals that would ensure that the G-7 itself gets the lion’s share of any new tax revenues, which will in any case be limited by their lack of ambition,” he adds.
“If the G-7 goes ahead with a 15% minimum tax rate under the deeply uneven OECD approach, they will leave just over US$100 billion for other countries, while keeping US$170 billion for themselves.”
The implementation of the OECD’s global minimum tax “is extremely unfair, as it provides the first opportunity to collect profits for the headquarters country,” says Cobham. “That’s why the G-7 would get more than 60% of the additional revenues, because they are headquarters for most large multinationals. Our proposal, the METR, would share that revenue equally between countries, according to where the multinational has its actual sales and employment activity, and that’s what countries like Brazil should demand at the G20, at the very least.”
A source monitoring the negotiations confirms that if France were to apply the minimum 15% rate, and French multinationals pay zero on what they earn in Brazil, because they transfer everything to Bermuda, “then yes, France can collect the 15%.”
However, the source insists, “Brazil can equally apply 15% to Brazilian multinationals that make money in Mexico, Argentina or Europe and move their dollars to tax havens in search of a zero tax rate.”
According to Cobham, countries in the G-20 may feel completely marginalized, “but they can take back power by openly challenging this situation, pushing for a higher rate and insisting on a balanced distribution of the recovered tax.”
Another part of the agreement would set taxation on the 100 largest multinationals with a different distribution of collected revenue. As they know they will be required to pay minimum tax in any case, multinationals may well leave more profits in important market countries like Brazil, because it will be cheaper to do so than to spend time on tax optimization that may not work. Therefore, Brazil could have a higher tax base from multinationals.