Brazil: Value-Added Tax On Imported Oil Industry Goods

The discovery of new oil and natural gas reserves in the Santos Basin and the Ninth Round of Public Bidding for exploration licences is the backdrop to a revival of the debate over the application of ICMS (Imposto sobre Circulação de Mercadorias e Serviços, a value-added tax) to goods imported for the oil industry. ICMS Agreement 112/2007, which came into force at the beginning of October 2007, authorizes the states of Ceará, Pernambuco, Rio de Janeiro and Rio Grande do Norte to revoke the tax benefit granted under ICMS Agreement 58/99 for goods to be used in producing, refining or processing oil or natural gas.

The benefit provided for under ICMS Agreement 58, which has been in force since 1999, allows the states which signed the agreement to grant exemption from ICMS on customs clearance of goods imported under the special importation regime for certain oil industry-related assets, REPETRO, which was established by Federal Decree 4543/02.

On November 14, 2007, the State of Rio de Janeiro published SEF Resolution 82, incorporating the terms of ICMS Agreement 112/2007 into state law, with retroactive effect to October 22, 2007. However, the Resolution maintained the benefits under ICMS Agreement 58/99 for goods that enter Brazil temporarily (no more than 24 months) for use in the production of oil and natural gas. With the ratification of ICMS Agreement 112/2007, the way is open for the States to collect ICMS on importation of these goods.

ICMS Agreement 130, which was published on November 28, 2007 but was rejected by the state of Ceará, provides for a specific tax treatment on importation of these goods, by authorizing the signatory states to concede an exemption or reduction in ICMS on goods imported for use in exploration or production facilities. As a result, Brazilian states can, at least in theory, collect ICMS on the importation of oil industry-related goods in the same way they collect ICMS on any other imported goods. In practice, however, the states' powers to collect ICMS on oil-related imported goods may not be as broad as they appear.

One limitation is the nature of the legal transaction under which the goods are imported. In practice, most of the contracts entered into by the oil industry are not sales agreements, and because ownership of the goods is not transferred, ICMS, which applies to the circulation of goods, does not attach. In a recent decision, for example, the Supreme Federal Court found that a lease of aircraft was not a transaction giving rise to circulation of goods, and that ICMS did not apply to the transaction (RE 461.968/SP).

Another issue to be considered is timing. The states clearly intend to collect ICMS immediately, in the absence of legal provisions creating ICMS exemptions or reductions, such as ICMS Agreement 58/99. However, the immediate attachment of ICMS to goods imported for the oil industry is questionable.

The states base their argument for immediate collection of ICMS on the fact that the revocation of an exemption is not the same as the creation of a new tax, but simply the return of a tax that was suspended, and that therefore the tax attaches as soon as the revocation comes into force. According to the tax authorities, therefore, upon revocation of the exemption under ICMS Agreement 58/99, they are not bound by the principle of prospective application of taxes.

Under Brazilian law, however, the principle of prospective application of taxes is a broad one, under which new taxes, or increased taxes, cannot have effect in the fiscal year in which they were created, and even then may not apply prior to 90 days from the publication of the legislation that created them. Although the Federal Constitution refers only to the creation of new taxes and the increase of existing taxes, with no mention of revocation of tax exemptions, the National Tax Code does refer to revocation of tax exemptions in art. 104 (III). It is true that art. 104 (III) of the National Tax Code refers expressly to taxes on income and property, but the principle of prospective application applied only to those taxes under the previous constitution.

A last point relates to the State of Rio de Janeiro, which has legislation dealing specifically with importation of equipment for the oil industry (the Valentim Law). Some companies in the oil industry challenged the constitutionality of the Law, given the terms of ICMS Agreement 58/99, and the appeal court of Rio de Janeiro suspended the effects of the legislation. The companies that benefit from the court of appeal's decision can argue that the Valentim Law, which deals specifically with the ICMS Law, does not produce effects against them, and therefore ICMS does not apply to the equipment they import.

Given that ICMS Agreement 130 will not be ratified, the states will likely reject ICMS Agreement 58/99 and begin to charge ICMS at full rates on goods imported for use in the oil industry, particularly Rio de Janeiro. However, there are good legal arguments to challenge the immediate application of ICMS on such goods, and even to challenge the constitutionality of the tax, given that the goods are imported temporarily under lease agreements, and have not been bought and sold.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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