Brazil: Federal Government Amends The Tax Treatment Applied To Oil And Gas Companies

Last Updated: 24 October 2017
Article by Felsberg E Associados

Federal Government Amends the Tax Treatment Applied to Oil and Gas Companies, Extends REPETRO´s Term and Creates New Special Regimes for the Importation and Local Acquisition of Goods Used in the Exploration, Development and Production of Oil, Natural Gas and Other Fluid Hydrocarbons

On August 18th, 2017, the Federal Government published two important normative acts, which amend the tax treatment applied to oil and gas companies, create new special regimes for the importation and local acquisition of goods used in the exploration, development and production of oil, natural gas and other fluid hydrocarbons and extend the REPETRO's term.

Please find below the main innovations brought by Provisional Measure No. 795/2017 ("MP 795/17") and Decree No. 9,128/2017 ("Decree 9128/17").

MP 795/17

  • New split percentages for purposes of Withholding Income Tax ("IRRF") on charter or lease agreements of vessels executed along with service agreements: As from January 2018, the application of the IRRF zero percent rate on charter or lease agreements of maritime vessels executed simultaneously with service agreements with parties that are deemed as related between themselves will be limited to the amount corresponding to the following percentages over the global amount of such agreements:
  1. Seventy percent, in case of floating production, storage and offloading vessels (FPSOs);
  2. Sixty-five percent, in case of vessels with rig systems for drilling, completion and maintenance of oil wells; and
  3. Fifty percent, for other types of vessels.

Please note that the former rules were limited to prospecting and exploration phases, while the modifications brought by MP 795/17 extended such rules to the exploration and production phases of oil or natural gas.

Additionally, as from January 2018, in case of simultaneous execution of charter or lease agreement of vessels and service agreements related to the transport, movement, transfer, storage and regasification of liquefied natural gas with parties that are deemed related, the percentage to apply the zero percent IRRF rate will correspond to sixty percent of the global amount of such agreements.

It should be noted that the new percentages are not applicable to vessels used in maritime support navigation (which remain subject to the former split rules) and that, according to the provisions of MP 795/17, they should not modify the nature and conditions of the charter or lease agreements for purposes of CIDE and PIS/COFINS-Imports.

Said provisional measure set forth that the amounts that surpass those corresponding to the application of the abovementioned percentages should be taxed by IRRF at a 15% rate (general rule), and in case of payments to tax havens or to beneficiaries under privileged taxation regimes the whole amount remitted is subject to a 25% IRRF.

MP 795/17 also broadened the concept of "related party" for purposes of applying the abovementioned split rules, by means of including those classified as controlling partner or affiliated company by Law No. 6,404/76, those under common corporate or administrative control, or which at least ten percent of their equity is held by the same individual or entity, as well as those associated through a consortium, among others.

Finally, MP 795/17 established that the percentages in force before January 2018, which were created by Law No. 13,043/14 (effective as of January 1st, 2015), should have been observed in transactions whose taxable events occurred until December 31st, 2014.

In this sense, said provisional measure sets forth that amounts of unpaid IRRF due to the non-application of such split percentages may be paid in up to twelve monthly installments, beginning in January 2018, added only by late payment interests (the payment of fines is dismissed in this case).

It should be stressed that these provisions of MP 795/17 are highly questionable and in our opinion they could be challenged judicially, as they provide for a retroactive taxation not allowed by our Federal Constitution and National Tax Code.

Effectiveness: As from January 2018.

  • Special regime for the permanent importation of goods: MP 795/17 established a new special regime that suspends, until July 2022, the federal taxes levied on the permanent importation of goods (Import Tax, IPI and PIS/COFINS-Imports) destined to the exploration, development and production of oil, natural gas and other fluid hydrocarbons.

Provided that the destination of the imported good is observed, the suspension of the Import Tax and IPI will be converted into exemption and the suspension of PIS/COFINS-Imports will be converted into zero percent rate, after a five-year term counted from the registration of the respective Import Declaration (Declaração de Importação).

The list of goods eligible for such regime, as well as other specific provisions, is yet to be regulated by the Federal Revenue Office.

Effectiveness: From January 1st, 2018 to July 31st, 2022.

  • Suspension of federal taxes on the import and local acquisition of inputs, as well as on local acquisition of final products, destined to the exploration, development and production of oil, natural gas and other fluid hydrocarbons: The federal taxes that are levied on the importation (Import Tax, IPI and PIS/COFINS-Imports) or local acquisition (IPI and PIS/COFINS) of raw materials, intermediary products and packaging material used in the manufacturing process of final products destined to the abovementioned activities is suspended until July 2022.

Such tax suspension is also applicable to the importation or local acquisition of goods by the so-called intermediary-manufacturers that use them in the industrialization of intermediary products to be directly provided to companies that carry on the abovementioned manufacturing activities.

Moreover, it is worth stressing that the acquisition of the final products resulting from such manufacturing processes also benefits from the suspension of federal taxes (IPI and PIS/COFINS).

Provided that the destination of the final product to the referred activities is effected, the suspension of the federal taxes referred to above will be converted into tax exemption, in case of Import tax and IPI, and into zero percent tax rate, concerning PIS/COFINS-Imports and PIS/COFINS.

The list of goods eligible for such regime, as well as other specific provisions, is yet to be regulated by the Federal Revenue Office.

Effectiveness: From January 1st, 2018 to July 31st, 2022.

  • Deductible expenses from Income Tax ("IRPJ") and Social Contribution on Profits ("CSLL") tax bases: MP 795/17 provides that the expenses related to the exploration and production of oil and natural gas reservoirs can be fully deducted from IRPJ and CSLL tax bases. Former rules, which were revoked by MP 795/17, granted only to Petrobras the possibility of said deduction (article 12 of Decree-Law No. 32/1966).

Also, the deduction of depletion expenses of assets formed until December 31st, 2022, related to development activities to enable the production of oil and natural gas fields may be accelerated by multiplying the depletion rate by 2.5.

Effectiveness: As from January 1st, 2018.

  • Taxation of profits sourced abroad by controlled or affiliated companies: MP 795/17 limited to December 31st, 2019, the non-inclusion, in IRPJ and CSLL tax bases of the Brazilian controller, of the portion of the profits sourced abroad by controlled or affiliated companies, related to the activities of bareboat or time charter, operational leasing, rental, loan of goods or provision of services directly linked to the exploration and production phases of oil and natural gas in Brazil.

Effectiveness: As from August 18th, 2017.

As a final remark about the MP 795/17, it is worth explaining that, although Provisional Measures have force of law and produce immediate effects, it is enacted by the sole discretion of the Brazilian President and depends on the further approval of the Brazilian Congress to be converted into law. The term of validity of a Provisional Measure is of sixty days, extendable once for an equal period.

Decree 9128/17

Decree 9128/17 extended the term of REPETRO regime from December 31st, 2020, to December 31st, 2040.

Said Decree also provided for a new special customs treatment under the REPETRO regime, comprised of the permanent importation of goods, to be listed by the Brazilian Federal Revenue Office, with suspension of federal taxes (commented in item "ii", above).

It is worth stressing that the goods imported under REPETRO until December 31st, 2017, remain subject to the rules applicable before Decree No. 9,128/17, until the end of the term of the respective concession act. Nevertheless, said decree also provides the possibility of migrating to the new REPETRO rules between January 1st and December 31st, 2018.

Finally, please note that the Brazilian Federal Revenue Office is to publish the regulations necessary for the application of the new provisions of Decree 9128/17.

Felsberg remains available for any clarification on the above. If you have any questions, please contact Anna Flávia Izelli Greco (), Ivan Campos () or Thiago Medaglia (), partners of the Tax department, or Luis Menezes (), partner of the Oil & Gas department.

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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