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Brazil increases tax benefits for the oil and gas sector

18 October 2017

ITR Correspondent

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The federal government has amended the customs and tax treatment applicable to the oil and gas sector to boost investment and provide tax certainty.

Provisional Measure (PM) 795 and Decree 9128, published on August 18 2017, bring changes to the legislation concerning the customs and tax treatment related to the exploration, development and production of oil, natural gas, and other hydrocarbon fluids. They aim to improve the tax and customs legislation applicable to the oil and gas (O&G) industry, establishing clear tax rules to provide legal certainty to the companies and tax authorities, and encouraging investments in the sector.

PM 795, which will come into force on January 1 2018, will allow the full deduction of expenses related to the exploration and production of oil and natural gas from the taxable bases of the corporate income tax (IRPJ) and social contribution on net profit (CSLL). A similar provision was only applicable to Petrobras, and now the deduction has been extended to other O&G companies.

Moreover, companies will be allowed to fully deduct the charges regarding the exhaustion of assets formed until December 2022, as well as depreciation charges of machinery, equipment and facilitation instruments used in O&G activities.

PM 795 amended Law 9481/1997, establishing new percentages for the application of a 0% rate of the withholding income tax (IRRF) on remittances abroad, in the event of simultaneous execution of charter or vessel lease agreements, as well as service agreements, related to the exploration and production of oil or natural gas, executed between related companies.

Accordingly, as of January 1 2018, the new percentages applying to the total value of the agreements (i.e. vessel lease/charter and services agreements, executed simultaneously) for IRRF exemption purposes, will be the following:

  • 70% for vessels with floating production units or storage and unloading systems (formerly 85%);
  • 65% for vessels with a drilling-type system for drilling, completing and maintaining wells (formerly 80%); and
  • 50% for other types of vessel (formerly 65%).

In the case of simultaneous execution of charter or vessel lease agreements, as well as of service agreements, related to the activities of transportation, handling, transfer, storage and regasification of liquefied natural gas, executed between related parties, the application of the 0% IRRF rate is limited to 60% of the total value of the agreements.

We emphasise that the new percentages do not apply to vessels used on maritime support (i.e. executed for the logistic support to ships and installations in national territorial waters and in the economic zone, performing research and exploitation of minerals and hydrocarbons).

Furthermore, the PM allows companies to adopt the new percentages for events that occurred until 2014 by paying (in one lump sum or in 12 instalments with interest) in January 2018 the IRRF differences plus interest, without penalties, provided that the companies give up pre-existing administrative proceedings and judicial lawsuits regarding such amounts.

The provisions of Law 9481/1997 were amended to include new conditions regarding the definition of the service providers and chartering entities deemed as related parties, as of the publication date of August 18 2017, of PM 795/2017.

Additionally, the PM clarifies that the definition of a fixed percentage for the applicability of the 0% IRRF rate does not change the terms of the agreement and the nature of the lease/charter agreement for purposes of the (non) levy of the contribution for intervention in the economic domain (CIDE), and social contribution on the imports of goods and services (PIS-import and COFINS-import). Also, it clarifies that an IRRF tax rate of 25% applies to remittances abroad to entities located in tax havens or an underprivileged tax regime, calculated on the total amount of the remittance.

Further, the PM provides that, until December 31 2019, the profit earned abroad by a directly or indirectly controlled or related company, regarding the activities performed in Brazil in the oil and natural gas industry, should not be included in the calculation of the IRPJ and CSLL of the Brazilian parent company.

Another relevant development was the introduction of a new special import regime with the suspension of federal taxes for goods imported on a permanent basis, which are intended for the activities of exploration, development and production of oil, natural gas and other hydrocarbon fluids, comprising the import duty (II), excise tax (IPI), PIS-import and COFINS-import. This new import regime with tax suspension was designed to eliminate distortions in the REPETRO temporary admission regime.

The PM also granted the suspension of payment of federal taxes on imports or domestic acquisitions of raw materials, intermediate products, and packaging materials to be applied in the production of finished products destined to the be used in the O&G activities. The taxes suspended were the II, IPI, PIS-import, COFINS-import, PIS, and COFINS. The suspension will be in force for up to one year, extendable for a total period not exceeding five years. Exceptionally, in justified cases, the term can be extended for a period exceeding five years, in compliance with the regulations to be issued by the Brazilian Federal Revenue Service (RFB).

According to the PM, the tax suspensions will be converted into an exemption or 0% rate if the imported goods or the product manufactured with the tax benefit is dully applied on the activities of exploration, development and production of oil, gas and other hydrocarbon fluids.

Moreover, the suspensions described above will only be applied to events commencing before December 31 2040, according to the recently published RFB Normative Instruction 1743/2017.

The PM entered into force on the date of its publication, but must be converted into law within 120 days by the National Congress, under penalty of losing its effectiveness retroactively.

In what regards the REPETRO, the latest novelty refers to the extension of the regime until December 31 2040, by the publication of Decree 9128/2017.

Established in 1999, the REPETRO was created to attract and enable investments in the O&G sector. The regime extension until 2040 is justified by the long maturation cycle of the investments in the sector.

The Decree also included, in the list of customs benefits comprised by the REPETRO, the import of goods for permanent stay with suspension of federal taxes levied on imports, as described above.

Finally, the Decree clarified that the goods admitted under the REPETRO until December 31 2017 will be subject to the previous ruling, until the end of the concession date. However, the said goods may be migrated to the new rules between January 1 and December 31 2018.

The publication of these rules is intended to provide a more secure and stable environment to the O&G players, taking into consideration the next bid rounds and the urgent need for collection of significant concession signing bonus by the federal government, to reduce the public deficit.

By Luis Rogério Godinho Farinelli (lfarinelli@machadoassociados.com.br), Fernando Telles da Silva (fsilva@machadoassociados.com.br ) and Mabel de Ávila Santos (mavila@machadoassociados.com.br), members of Machado Associados’s tax team in Brazil.






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