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Brazilian IRS Normative Ruling No. 1,743/2017 – Repetro-Sped

2Out2017Oct2,2017
Tax
On September 26, 2017, the Brazilian IRS published Normative Ruling No. 1,743/2017 (“NR”), which regulates a new special customs regime for goods to be used in the exploration, development and production of oil and gas (the so-called “Repetro-Sped”).

As detailed in our Memorandum of August 22, 2017, the recently published Provisional Measure No. 795/2107 (“PM”) introduces new special tax regimes, stipulating full tax relief on importation and acquisition of goods relevant to E&P activities, which are in addition to the relief that has long benefited the oil & gas industry, known as Repetro.

NR regulates the newly introduced special tax regimes, amends certain rules in the current Repetro and provides for the adoption of a digital bookkeeping system (“SPED”) for the control of transactions under Repetro.

This memorandum seeks to summarize the most relevant rules introduced by the NR and which may directly affect the structures currently adopted by the E&P industry, as follows:

1. Restriction on federal tax relief under the temporary admission regime for the importation of production platforms and FPSOs. The O&G industry has historically imported production platforms and FPSOs under the temporary admission regime, which grants full relief from federal taxes typically levied on the importation of goods into Brazil. NR limits the cases in which the temporary admission regime is permitted. In the case of the importation of production platforms and FPSO, full tax relief under the temporary admission regime is now permitted only when:

(i) the corresponding charter, lease or rental agreement: (a) is executed at the same time as the agreement for the operating services of the platform or FPSO; and (b) is executed between unrelated entities; or

(ii) the production platforms and FPSOs are used on a temporarily basis (up to 4 years) in O&G blocks/fields for production tests or anticipated production systems.

This restriction may lead to a scenario in which the importation of production platforms and FPSOs between related entities that are not used for production tests or anticipated production systems, may only benefit from Repetro-Sped if they are imported on a permanent basis, as further detailed in item 3 below. Alternatively, such related entities in this situation may be able to benefit from a different temporary admission regime that grants partial relief from federal taxes, which are proportional to the time the production platforms and FPSO remain in Brazil (limited to 100 months).

In our view, the restriction on full tax relief on the importation of production platforms and FPSOs (item ‘(i)’ above), which is based on whether or not the charter, lease or rental agreement is executed between related entities, establishes a discriminatory rule that lacks grounds from a legal and customs perspective.

2. General restriction regarding the temporary admission regime. NR introduces a restriction on the temporary admission regime, which directly affects relevant imports supported by charter agreements, as widely adopted by the O&G industry. Pursuant to the NR, there is no benefit (as to full or partial relief from federal taxes) under the temporary admission regime when the present value (calculated on the basis of 12-month LIBOR) of the total consideration arising from agreements for bareboat charter, rental, lease or assignment is greater than the value of the imported assets/equipment themselves.

3. Regulations on the special tax regimes introduced by the PM. In addition to the special customs regimes under the current Repetro, Repetro-Sped regulates certain special customs treatment introduced by the PM, as follows:

(a) total relief with respect to federal taxes on importation (i.e., Import Tax, IPI and PIS/COFINS-Import), on a permanent basis, for goods listed in the NR, which will be used in the exploration, development and production of oil and natural gas;

(b) total relief with respect to federal taxes on importation (i.e., Import Tax, IPI and PIS/COFINS-Import) and on local purchases (i.e., IPI and PIS/Cofins) of raw materials, intermediate products and packaging materials to be used in the manufacture of products to be used in E&P activities.

4. List of goods that may benefit from Repetro-Sped. NR introduces 2 (two) lists of goods (annexes I and II) that may benefit from Repetro-Sped, describing their technical and commercial use, as per the Mercosur classification code (NCM). Annex I lists the assets/equipment benefiting from the tax relief on permanent importation only. Annex II lists assets/equipment that may benefit from the tax relief on permanent or temporary importation. However the Brazilian IRS, in preparing these lists appears to have deliberately included certain assets/equipment in Annex I (which only grants tax relief on goods imported on a permanent basis), which items, given their technical characteristics and the fact that such items are not normally imported on a permanent basis, should in fact have been listed in Annex II.

5. 
Period of federal tax relief on goods imported on a permanent basis. Differently from the 5-year maximum term set by the PM, NR stipulates that tax relief on goods imported on a permanent basis will apply for the period right up to December 31, 2040, i.e., the same period currently applicable for Repetro. There are high expectations that Congress will approve current proposals to amend the PM in order to replace the 5-year period with the 2040 period.

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