By Ricardo André Galendi Junior
On June 10th, 2026, I had the pleasure of participating in the roundtable “Side-by-Side Agreement: Law, Politics and the Future of Global Tax”, co-organized by Professors Irma Mosquera and Peter Hongler. During the event, I presented my views on the implications of the recently announced Side-by-Side (SbS) framework for Brazil.
The timing of the discussion made the topic particularly interesting. Just days earlier, Brazil had formally announced its request to qualify for the SbS Safe Harbour, and the prevailing mood among practitioners and policymakers seemed overwhelmingly positive. The prospect of Brazilian-headed MNE groups benefiting from treatment similar to that afforded to U.S. groups was widely perceived as a major achievement and a significant competitive advantage. Against that backdrop, my presentation came as something of a surprise, as I argued that the Side-by-Side framework may ultimately do more harm than good for Brazil.
Most commentators have focused on what Brazil may gain from the new framework. My concern is different. I am less interested in whether Brazil can fit within the Side-by-Side architecture and more interested in what the new framework may do to the long-overdue reform of Brazil’s international tax rules. In short, my concern is that Side-by-Side may end up preserving one of the most problematic features of the Brazilian tax system.
The Side-by-Side Refrigerator
The easiest way to understand the Side-by-Side framework is through the appliance that (I like to believe) inspired its name.
Imagine a side-by-side refrigerator, in which one compartment is colder than the other. On one side sits the freezer. This is the world of Pillar Two. Multinational groups are subject to a jurisdictional blending approach, under a nominal 15% minimum tax rate. The burden of the regime is softened by mechanisms such as QRTCs and QTIs.
On the other side sits the refrigerator. This compartment was created to accommodate the United States and its existing international tax architecture. Here, taxation is based on a less ambitious global blending model, allowing highly taxed foreign income to offset undertaxed income elsewhere. The effective rate is closer to 14%, and the regime also benefits from forms of tax credits that reduce its practical impact.
Both compartments belong to the same appliance. Yet, despite what some American commentators argue, one is clearly colder than the other. The political compromise behind Side-by-Side seems to be the recognition that not all countries are willing to accept the same degree of minimum taxation. Rather than forcing convergence, the Inclusive Framework appears willing to accommodate two different approaches.
Which Side Is Better?
The implicit assumption in the discussion over the Side-by-Side framework is that the refrigerator is the more attractive compartment. This is the reason why someone unfamiliar with the Brazilian system believes that we have a reason to celebrate. Jurisdictions with an “eligible worldwide taxation system” may qualify for the SbS Safe Harbour. Once qualified, multinational groups headquartered in those jurisdictions are effectively excluded from the Pillar Two Income Inclusion Rule (IIR) and Undertaxed Profits Rule (UTPR), much like U.S.-headed groups.
The expectation is that these jurisdictions will be more competitive because they are not implementing Pillar Two in its standard form. However, this expectation deserves closer scrutiny.
Qualification for the SbS Safe Harbour operates as a minimum standard. It does not necessarily mean that the qualifying regime is efficient, balanced, or competitive. It merely means that the regime satisfies a set of criteria agreed upon within the Inclusive Framework. A country may therefore qualify while still imposing a significantly heavier burden on its multinationals than either Pillar Two or the U.S. system. This distinction is particularly important when discussing Brazil.
We Are Not in the Refrigerator. We Are in Antarctica.
Brazil has long been an outlier in international taxation. Its worldwide taxation regime (Tributação em Bases Universais – TBU) taxes the profits of controlled foreign corporations annually, regardless of whether those profits are distributed. Unlike most CFC regimes around the world, the Brazilian rules extend to active business income and often apply even when the income has already been subject to substantial taxation abroad. In practice, Brazil taxes foreign profits at a combined rate of 34%, reduced to approximately 5% in limited sectors through deemed credits.
The contrast with both Pillar Two and the U.S. system is striking. While Pillar Two applies a 15% minimum rate and permits jurisdictional blending, Brazil applies a significantly higher rate with very limited blending. While Pillar Two recognizes QRTCs and other mechanisms intended to preserve tax incentives and substantive economic activity, the Brazilian system contains no comparable features. While the U.S. system relies on global blending and a lower effective rate, Brazil continues to impose a far more comprehensive and burdensome form of worldwide taxation.
Brazil is not merely outside the refrigerator. We are in Antarctica. Brazilian TBU is substantially more aggressive than either Pillar Two or the alternative model that Side-by-Side seeks to accommodate.
The Reform That Never Came
The irony is that Brazil itself seemed to recognize this reality. When Brazil enacted its Qualified Domestic Minimum Top-up Tax (QDMTT), Congress included a provision requiring the Executive Branch to submit, within six months, a proposal to reform the country’s worldwide taxation rules. The objective was clear. Brazil would adopt Pillar Two while simultaneously modernizing its CFC regime. The expectation was that TBU would eventually be replaced by a combination of an Income Inclusion Rule and a modern CFC regime designed according to the principles of BEPS Action 3.
This would have represented a significant improvement. An IIR would align Brazil with the emerging global architecture. A properly designed CFC regime would continue to address profit-shifting concerns while limiting taxation of genuinely active foreign business income. Yet the proposal was never submitted. The reform process simply stalled.
Side-by-Side as an Argument Against Reform
The emergence of Side-by-Side now creates a new political dynamic. Brazil has formally requested qualification under the SbS Safe Harbour and tax authorities have publicly indicated that there are no immediate plans to replace TBU with an IIR. From a narrow perspective, this position is understandable. If Brazil can obtain the benefits associated with Side-by-Side while preserving its existing regime, why undertake a politically complex reform?
The problem is that this reasoning confuses qualification with optimization. Brazil’s TBU may very well satisfy the requirements for the SbS Safe Harbour. In fact, it appears to be an unusually strong candidate. The regime taxes foreign income comprehensively, captures both active and passive income, and leaves little risk that Brazilian-headquartered groups will face effective taxation below the agreed minimum threshold.
But none of this means that the regime is desirable. The danger is that qualification under Side-by-Side becomes a justification for maintaining a system that was already widely recognized as needing reform. Instead of serving as a bridge toward modernization, Side-by-Side may become an excuse for preserving the status quo.
Better Than Nothing, But Far From a Victory
To be clear, qualification under the SbS Safe Harbour would not be meaningless. Given the alternatives, it is certainly preferable for Brazilian multinational groups to benefit from Safe Harbour treatment than not to benefit from it. But this should not be confused with a policy success. From a broader perspective, the outcome is bittersweet.
Brazil may secure recognition that its worldwide taxation regime satisfies the Inclusive Framework’s standards. Yet that very recognition may reduce the pressure for reform and lock Brazilian multinationals into a system that remains significantly more burdensome than either Pillar Two or the U.S. model.
If Brazilian multinational groups were offered a choice between the current TBU and a properly designed combination of an IIR and a CFC regime aligned with BEPS Action 3, I have little doubt about which option they would choose.
The real question is why policymakers appear so reluctant to acknowledge this reality. After the G7 Statement, the international tax debate is increasingly centered on competitiveness. Countries across the world are reassessing their tax systems in response to Pillar Two, the U.S. position, and the growing mobility of investment and economic activity.
Brazil often behaves as though these competitive pressures simply do not apply to us. I am not convinced that we are immune to tax competition. TBU makes our MNEs less competitive and divert investments that should be made in Brazil or through Brazilian entities. And that is precisely why I believe the Side-by-Side framework, despite its immediate advantages, may ultimately do more harm than good for Brazil.