The state of Rio de Janeiro, one of the most affected by the decrease in the price of oil and by the reduction in investments by virtue of the corruption scandals involving Petrobras, decided to overtax the oil companies by means of the issuance of Law 7.183/2015, which instituted the Tax on the Circulation of Goods - ICMS on oil extraction.
This tax will be levied on the operation of circulation of oil from the extraction wells to the oil company, and will have as its tax base the average selling price adopted by the oil company.
This Law has basically the same characteristics as Law 4.117/2003, which also intended to institute the ICMS over the oil extraction and was challenged by the Direct Action for the Declaration of Unconstitutionality 3.019 (DADU), still pending before the Supreme Court of Brazil and the effectiveness of which had been suspended by a decree issued by the former governor in view of the polemic related to the lawfulness of the measure and to the negative impacts on the most vital sector of the state economy.
In this DADU, both the attorney general of Brazil and the prosecution have already submitted their opinions acknowledging the unconstitutionality of Law 4.117/2003. Law 7.183/2015, maintaining the same tax base and taxable event, repeated the same illegalities and unconstitutionalities incurred by the former law.
In addition to the vices of unconstitutionality in the enactment of the Law, the levy of ICMS on oil extraction is unconstitutional in that oil extraction activities do not include a business sale or circulation of goods which generate the taxable event of ICMS, as required by Article 155, II, of the Federal Constitution.
Mineral extraction from the soil or from the seabed is considered an original acquisition, and not an economic circulation of goods. This is because, although the mines belong to the federal government, they are not the same as the product of the mine, ownership of which is in the hands of the oil company which has authorization for exploration and production.
Within the context of extreme frailty of the finances of the state of Rio de Janeiro, it is understandable that the government is seeking new sources of income. However, the need for cash does not confer, by itself, the required legitimacy to support the institution of taxes, such as the attempt of Law 7.183/2013 to institute once again the ICMS over the extraction of oil and gas, which is absolutely unconstitutional.
This article was prepared by Alessandra Gomensoro and Ricardo de Oliveira Cosentino of Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados, an International Tax Review correspondent for Brazil
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