Significant changes are being made to the tax legislation governing the oil and gas sector, as well as new guidance on the taxation of capital gains.
Update to the Brazilian oil and gas tax framework
The Brazilian government enacted Provisional Measure (PM) 795/2017 on August 18 2017, bringing in significant changes to the tax legislation governing the oil and gas sector. Further, Decree 9,128/17, published on the same date, extended the application of the special customs regime (REPETRO) until December 31 2040.
However, PM 795/2017 has temporary effect because it requires approval by Congress to be converted into law. For now, it is valid for 60 days, extendable only once for an equal period.
Deduction of expenses incurred during exploration/production and development phases
PM 795/2017 closes uncertainties regarding the tax treatment of the expenses incurred in the exploration and production of oil and gas.
The previous provision regulating this matter was enacted at the time Petrobras used to have the monopoly for the exploration and production of oil and gas in Brazil. For this reason, until now, only Petrobras had express legal authorisation to deduct such amounts. The legislative change extends the authorisation for deductions of such expenses to all taxpayers performing oil and gas exploration and production activities.
Regarding the expenses related to development activities, PM 795/2017 establishes the possibility of accelerated depletion of assets until December 31 2022, based on the rate determined by the method of the units produced (UOP method) multiplied by 2.5.
This is the first time that this accounting method, so common in the oil and gas sector (UOP method), is expressly referred to in tax legislation.
Aspects regarding bare boat charter agreements
From January 1 2018, the new rule lowers the maximum percentages benefitting from a 0% withholding income tax (IRRF) on remittances related to charter agreements when they are executed, simultaneously to service agreements, by related entities (tripartite agreements).
The new percentages are listed in Table 1.
|Type of vessels||Until December 31 2017||From January 1 2018|
|Floating systems for production or storage and unloading||85%||70%|
|Systems for drilling, completion and maintenance of wells||80%||65%|
|Other types of vessels||65%||50%|
|Vessels to provide transport, handling, transfer, storage and regasification services for liquefied natural gas||N/A||60%|
PM 795/2017 further establishes that the percentages in Table 1 do not change the nature of charter agreements for the purposes of CIDE, PIS and COFINS.
Charter agreements with entities domiciled in tax havens
The new rule also establishes that a 25% IRRF applies on the entire remittance if the charter fee is paid to a beneficiary domiciled in a tax haven or subject to a privileged tax regime, regardless of the compliance with limits mentioned above.
PM 795/2017 further establishes the special import regime with total suspension of payment of federal taxes (II, IPI, PIS-Import and Cofins-Import) for goods imported on a permanent basis and destined to the exploration, development and production of oil and natural gas. The special import regime will apply to taxable events occurred up to July 31 2022.
Other particular features
Some other particular features of PM 795/2017 include:
- New concept of related entities regarding tripartite agreements;
- REPETRO – extended to 2040 (change brought by Decree 9,128/17);
- Possibility of the conversion of temporary admissions into permanent imports with tax suspension (federal), which is still to be regulated; and
- Tax suspension of federal taxes on import and local purchases of intermediary materials and inputs utilised in the manufacturing of products destined for the exploration, development and production of oil and gas.
PM 795/2017 was generally well received by companies in the oil and gas sector as the changes, together with other regulatory measures, indicate a movement by the Brazilian government to build a more attractive scenario to promote this sector in the country.
The companies in the oil and gas sector should be alert to these changes as they have a relevant impact on the total tax burden on oil and gas activities in Brazil and potential tax implications on existing charter agreements.
Finally, the Brazilian tax authorities recently issued Normative Instruction (NI) 1,743/2017, which regulates the special tax treatment established by PM 795/2017 and brings further changes to the REPETRO.
Tax authorities issue guidance on taxation of capital gains
Separately, Brazilian tax authorities (RFB) issued NI 1732/2017 on August 29 2017, which confirms the application of increased tax rates on non-resident capital gains.
By way of background, Law 13,259/2016 introduced new rates for taxing capital gains on individuals (and non-residents) arising on the alienation of Brazilian assets and rights, varying from 15% to 22.5% (depending on the amount of the gain).
Although the new rules were intended to enter into force on January 1 2016, the Brazilian Federal Revenue Authorities' (RFB) issued an Interpretative Declaratory Act 3/2016 (ADI 3/2016) on April 29 2016, stating that the increased progressive tax rates in relation to capital gains derived by individuals (and non-residents) should apply from January 1 2017.
NI 1.732/2017, recently issued, confirms the application of the new tax rates on capital gains, realised by non-residents legal entities, arising on the alienation of Brazilian assets and rights.
Multinational companies undertaking or intending to undertake reorganisations, sales or acquisitions of Brazilian investments should consider how the changes to the rates may impact their transactions.
Brazilian Congress approves TIEA between Brazil and Switzerland
The Brazilian Congress approved the tax information exchange agreement (TIEA) between Brazil and Switzerland on July 21 2017. The TIEA was signed in 2015 and governs the exchange of tax-related information between the countries. The TIEA will now be discussed in the Brazilian Federal Senate in order to complete its ratification process in Brazil.
|Fernando Giacobbo, |
and Jaime Andrade