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National Council of Fiscal Policy enacts ICMS Agreement No. 3/2018 regulating ICMS on E&P activities under Repetro-Sped

18Jan2018Jan18,2018
Tax; Oil and Gas

As widely expected by the industry, the federal official gazette published yesterday ICMS Agreement No. 3, of January 16, 2018 (“ICMS Agreement No. 3/18”), regulating a reduction in the basis of calculation and exemptions from ICMS levied on transactions involving goods used on E&P activities and carried out under Repetro-Sped.

As previously informed in our Memorandum to Clients of January 2nd, Law No. 13,586/17 (which resulted from the conversion into law of Provisional Measure No. 795/17) introduced special tax regimes with respect to federal taxes relevant to E&P activities. Normative Ruling No. 1,781/2017 currently regulates these special tax regimes under the so-called Repetro-Sped, as we have detailed in our Memorandum to Clients of January 10th.

Considering that Repetro-Sped is a federal tax regime, the National Council of Fiscal Policy (which has representatives from the federal and state government) enacted ICMS Agreement No. 3/18, authorizing each state to decide how to treat the ICMS levied on goods imported or acquired locally under Repetro-Sped.

This Memorandum summarizes the most significant aspects introduced by ICMS Agreement No. 3/18, as follows.

1. Reduction in the basis of calculation of ICMS levied on “permanent items”, imported or acquired locally under Repetro-Sped

  • ICMS Agreement No. 3/18 authorizes Brazilian states to reduce the basis of calculation for ICMS levied on goods imported or acquired locally under Repetro-Sped for use in E&P activities; the total ICMS burden in such case is equivalent to 3% (without the possibility of recording ICMS credits).

  • This ICMS special treatment is applicable exclusively on goods (according to their corresponding Mercosur tariff code) that are listed by the Brazilian IRS as "permanent items" under Repetro-Sped regulations (currently listed in Annex I and II of Normative Ruling No. 1,781/17).
     
    • This treatment also includes instruments and other parts and pieces to be employed directly in the main good used to ensure the operability of the listed "permanent items", in addition to tools used directly on the maintenance of goods in the "permanent items" list.
  • ICMS under this special treatment is due to the state in which the economic use of the goods takes place, pursuant to the rules set forth by federal legislation.

    • If at the time of importation or local acquisition, there is no definition as to where the O&G block or field will be located, the collection of ICMS may be temporarily suspended until the moment in which the goods leave for their economic use. This suspension is contingent upon federal legislation allowing storage of the imported goods in a non-bonded warehouse.
2. ICMS exemption on “temporary items” imported under Repetro-Sped

  • ICMS Agreement No. 3/18 authorizes Brazilian states to exempt the collection of ICMS levied on goods imported on a temporary basis under Repetro-Sped for E&P activities.
     
  • This ICMS exemption includes solely goods (according to their corresponding Mercosur tariff code) that are listed by the Brazilian IRS as "temporary items" under Repetro-Sped regulations (currently listed in Annex II of Normative Ruling No. 1,781/2017).

    • This treatment also includes instruments and other parts and pieces to be directly employed in the main good used to ensure the operability of the listed "temporary items", in addition to tools used directly on the maintenance of goods in the "temporary items" list.
       
  • This ICMS exemption is contingent upon the importation being executed without exchange coverage and maintenance of the ownership of the goods with the relevant foreign party.

  • Please note that due to specific triggering events relating to ICMS established by the constitution, it is argued that states should not be empowered to charge ICMS on importation of goods carried out without the transfer of ownership to the importer (which is exactly the case of temporary imports). In fact, the Supreme Court of Justice, the highest court for constitutional matters in Brazil, has a binding decision reinforcing that ICMS cannot be charged on imports under international commercial leasing agreement due to the absence of transfer of ownership of the goods being imported to the importer. As a direct result of this binding decision, certain states have officially suspended the issuance of violation notices and tax assessments related to the collection of ICMS on import transactions carried out without the transfer of ownership to the importer (e.g., Resolution No. 1,000/2016 from the State Treasury Office of Rio de Janeiro). 
3. ICMS exemption on transactions carried out by local industry under Repetro-Sped

  • ICMS Agreement No. 3/18 authorizes Brazilian states to exempt the following transactions from ICMS:
  1. a.Fictitious exportations or local sales of "permanent items" or "temporary items" manufactured in Brazil that will be acquired or admitted (respectively) under Repetro-Sped.

  2. Transactions occurred prior to fictitious exportations or local sales mentioned above, covering all chain of supply of goods manufactured by suppliers and sub-suppliers of the national manufacturer of goods for E&P activities[1].
  • These ICMS exemptions may also be claimed for: (a) equipment, machinery, accessories, instruments, parts, pieces, materials and other goods, used as inputs in the construction and assembly of floating systems and production or drilling platforms, as well as their modular units to be industrialized or assembled in industrial units; (b) hulls and modules, when used as inputs in the construction, repair and assembly of floating systems and of production or drilling rigs; (c) transactions carried out under special customs regimes granting relief from payment of federal taxes, pertaining to proof of compliance with specific federal legislation.

  • ICMS agreement No. 3/18 authorizes states not to require a write-off of the accrued ICMS credits when they benefit from these ICMS exemptions. 

4. General rules 

  • ICMS special treatments under ICMS Agreement No. 3/18 are limited to importation or local acquisition of goods carried out by the following parties:
  1. Holder of a concession or authorization to carry out E&P activities in Brazil, pursuant to the rules set forth by Law No. 9,478/97;
     
  2. Holder of the onerous assignment regulated under Law No. 12,276/10;
     
  3. Holder of a production sharing agreement regulated by Law No. 12,351/10;

  4. Entities hired by entities referred to in items I to III above for rendering services related to the execution of activities under a concession, authorization, onerous assignment or production sharing, as well entities subcontracted by these hired entities.
     
  5. Importer authorized by the entity hired by those entities referred to in items I to III (item IV above) if the hired entity is not a resident of Brazil.
  • Special ICMS treatments under ICMS Agreement No. 3/18 require that relevant goods benefit from federal tax relieve (either by means of tax exemption, tax suspension or a zero tax rate) under Repetro-Sped.
  • ICMS Agreement No. 3/18 establishes that the transfer of the beneficiary of the Repetro-Sped to another entity does not trigger ICMS, as long as all applicable requirements are satisfied.

5. ICMS exemption on transfer of Repetro to Repetro-Sped

  • As to transfer of Repetro to Repetro-Sped, ICMS Agreement No. 3/18 authorizes states to exempt from ICMS the importation of goods (either those under "permanent items" or "temporary items"), which are admitted prior to December 31, 2017.
     
  • The above ICMS exemption is exclusively available to:
  1. goods imported into Brazil by November 27, 2007 under ICMS Agreement No. 58/99 (which regulates ICMS treatment on importations carried out under the federal temporary admission regime);
     
  2. goods imported into Brazil by December 31, 2017 under the ICMS Agreement No. 130/07 (which regulates ICMS treatment on transactions carried out under Repetro);
     
  3. goods imported into Brazil by December 31, 2017 with the waiver of ICMS payment, under the terms of the relevant state legislation;

  4. goods imported into Brazil under the regular ICMS regime established by the relevant state legislation.
  • A relevant point that merits attention is that ICMS Agreement No. 3/18 stipulates that, if the ICMS was not collected or exempt, based on the legislation indicated in items I to IV above, at the moment of importation of the good under the federal temporary admission regime, taxpayers must collect the unpaid ICMS based on the legislation in effect at the time of the importation. In this case, the taxpayer should consider the original value of the good at the time of importation and collect the ICMS due without being required to pay fines and interest. In line with our comments in section 2, this provision is also controversial because of the specific triggering events relating to ICMS established by the constitution.

6. Final Remarks

  • ICMS treatments under ICMS Agreement No. 3/18 are optional and taxpayers interested in benefitting from them must formalize their option with the relevant state.
    • Please note that ICMS Agreement No. 3/18 conditions the option to benefit from ICMS treatments to taxpayers withdrawing from ongoing administrative or judicial discussions regarding the levy of ICMS upon import of goods without the transfer of ownership to the importer, issued prior to the effectiveness of the ICMS Agreement No. 3/18, or to waive its right to such discussion. ICMS Agreement No. 3/18 reliefs from this condition discussions involving triggering events occurred prior to the effectiveness of ICMS Agreement No. 130/07.
  • ICMS Agreement No. 3/18 entered into force on January 17, 2018, but with effects commencing as of its national ratification, and shall be effective up until December 31, 20140 (which is currently the same period for the effectiveness of Repetro-sped).

  • According to ICMS Agreement No. 3/18, states will enact their own specific rules necessary to regulate the ICMS treatment under ICMS Agreement No. 3/18. This is line with the general rule governing ICMS agreements under which they are not self-enforcing but depend on the state enactment of a law ratifying the provisions of the ICMS agreement to its relevant jurisdiction.

  • The ICMS Agreement No. 130/07, which regulates ICMS treatment on transactions carried out under Repetro, is still in effect and its provisions may subsidiary apply to the provisions of ICMS Agreement No. 3/18.

[1] Note that this provision of ICMS Agreement No. 3/18 clarifies a historical controversy under ICMS Agreement No. 130/07 as to whether the ICMS exemption established reached all supply chain prior to the fictitious export or only the transaction immediately prior to the fictitious export. 

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