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Changes in the tax legislation relevant to the Oil & Gas industry; extension of Repetro, and of the tax relief on imports of goods used for the transportation, transfer, storage and regasification of LNG, until 2040

22Ago2017Aug22,2017
Tax
On August 18, 2017, the Federal Official Gazette published Provisional Measure No. 795, of August 17 2017 (“MP No. 795/17”), and Decree No. 9,128, of August 17, 2017 (“Decree No. 9,182/17”), introducing and amending various provisions in the tax legislation relevant to the oil and gas industry.

We have summarized the main changes introduced by MP No. 795/17 and Decree No. 9,182/17 as follows:

1. Extension of the Repetro, and of the relief in respect of federal taxes levied on the importation of goods used for the transportation, transfer, storage or regasification of LNG, until December 31, 2040. Both of these tax incentives release taxpayers from collecting the federal taxes normally charged upon importation of goods into Brazil (i.e., Import Tax, IPI and PIS/COFINS-Import) and were formerly scheduled to end on December 31, 2020.

2. Introduction of new specific provisions in the tax legislation allowing for:

a. the complete deduction of expenses incurred in the E&P of oil and natural gas from the basis for calculation of corporate income taxes. Such tax treatment was formerly contemplated under section 416 of the Brazilian Income Tax Regulations; however, for certain historical reasons it was restricted to Petróleo Brasileiro S.A. (Petrobrás).

b. a deduction, from the basis for calculation for corporate income taxes, of the depletion expenses arising from assets formed by expenses incurred in development activities; and an accelerated depletion of assets formed prior to December 31, 2022, calculated by applying the rate of depletion, determined by the method of the units produced, multiplied by 2.5;

c. a deduction, from the basis for calculation for corporate income taxes, of the depreciation of machines, equipment and facilitating instruments applied to development activities on a straight-line basis and pursuant to the rates set forth by the Brazilian IRS (taxpayers may use different rates considered appropriate for their specific circumstances, provided they are able to justify such rates).

3. Changes in withholding income tax (“IRRF”) rules on cross-border payments as consideration for the charter of maritime vessels whenever the charter agreement is executed simultaneously with a service agreement (commonly known as contractual split structure), both being related to the E&P of oil and natural gas and signed between related parties, for the purpose of benefiting from the applicable zero rate of IRRF, as follows:

a. Introduction of new maximum percentages for the contractual split as of January 1, 2018, for purposes of benefiting from the zero rate of IRRF, under which the portion related to the cross-border charter payment must not exceed the following percentages of the total amount of the agreements:

(i) 70% (as opposed to 85%) for vessels with floating systems of production and/or storage and offloading;

(ii) 65% (as opposed to 80%) for vessels with rig systems for drilling, completion and maintenance of wells;

(iii) 50% (as opposed to 65%) for other types of vessels.

Note that MP No. 795/17 expressly excluded from these new percentages vessels used in maritime support navigation.

b. Introduction of a specific percentage for charters of vessels for the transportation, transfer, storage and regasification of LNG for the purposes of benefiting from the zero rate of IRRF, under which the portion related to the cross-border charter payment must not exceed 60% of the total amount of the agreements;

c. New rule on cross-border charter payments to black-listed jurisdictions or gray-listed entities, which are now subject to 25% of the total amount paid (based on the original wording in effect prior to MP No. 795/17, it was possible to construe a line of argument to support the view that only the portion exceeding the percentages established by law would be subject to the increased 25% IRRF rate);

d. New concept of related entities (in Portuguese: “pessoas jurídicas vinculadas”) for the purposes of compliance with the contractual split percentages, which is meant to align this concept with that contemplated under corporate law and also to include entities participating in a consortium;

e. Clarification that the application of the contractual split percentages does not change the nature and conditions of a charter agreement for the purposes of CIDE, PIS/ Pasep-Importação and COFINS-Importação (which are taxes generally applied in respect of the importation of technical services). We believe that this clarification seeks to mitigate possible uncertainty as to the actual nature of charter contracts in cases where the respective cross-border payments exceed the percentages established in the legislation, given the current scenario where the tax authorities have been claiming that the charter should not be considered autonomously, but rather as a part of the services agreement (and taxed as services). MP No. 795/17 appears to have clarified that cross-border charter payments exceeding the split percentages established in the law would jeopardize only the benefit of the zero rate of IRRF on the excess portion, and therefore would not change the nature of the contracts signed (and would not result in the application of taxes on the importation of services).

f. Recognition of retroactive effects of the percentages formerly introduced by Law No. 13.043/2014 to taxable events that occurred prior to December 31, 2014; and the introduction of an amnesty upon which taxpayers may pay the difference in the IRRF due, accrued with interest at the Selic rate, with a total waiver of fines and penalties. Under this amnesty, payments of the consolidated amount due can be made in up to 12 monthly installments, with the first installment due on January 31, 2018 and the remaining installments on the last business day of each subsequent month, together with interest at the Selic rate as from February 1, 2018 until the last day of the month prior to payment and 1% interest in the month of payment.

4. Introduction of two new special regimes providing for tax relief on the acquisition of goods relevant for E&P activities:

a. New special regime that grants total relief in respect of federal taxes on importation (i.e., Import Tax, IPI, PIS/COFINS-Import), on a permanent basis, for goods to be used in the exploration, development and production of oil and natural gas (the Brazilian IRS will regulate how taxpayers may migrate the goods imported under the Repetro to this new regime);

b. New special regime for local industry that grants total relief in respect of federal taxes on importation (i.e., Import Tax, IPI, PIS/COFINS-Import) and on local purchases (i.e., IPI, PIS/Cofins) of raw materials, intermediate products and packaging materials to be applied in the industrialization of: (i) end products to be used in E&P activities; and (ii) intermediate products to be supplied to the manufacturer of final E&P products.

Note that those special regimes will take effect as of January 1, 2018 and will be applicable only to taxable events occurring up to July 31, 2022.

As a final remark, although a Provisional Measure is a legislative instrument issued by the President that has immediate effect and status of a law, it still needs to be approved by the Congress within a maximum period of 120 days as from its publication. Note that during the legislative process, the Congress may introduce changes to the original wording of the Provisional Measure.


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