Tax & Accounting Blog

Meaningful Changes to REPETRO SPED – Rebuilding the Oil and Gas Sector in Brazil – Part II

Blog, Global Trade, ONESOURCE March 16, 2018

On December 15, 2017, we published part I of an article titled, “Meaningful Changes to REPETRO SPED Could Rebuild the Oil and Gas Sector in Brazil“, in which we discussed the concept, history and application of REPETRO, as well as an initial analysis of the impacts endured by the special regime after going through significant changes promoted by the Brazilian government.

At the time, we highlighted that changes promoted by the Brazilian authorities based on a Provisional Measure (MP 795), a legal act in Brazil, in which the president enacts a temporary law without approval of the National Congress. Its deadline for parliamentary approval was on 12/15/2017.

The provisional measure was approved by national congress, and the President of the Republic sanctioned its conversion into Law 13,586, which provides for the tax treatment of exploration and development activities in the field of oil or natural gas. In addition, this law established a special tax regime for the exploration, development and production activities of oil, natural gas and other fluid hydrocarbons.

Following the enactment of Law 13,586, the government issued a series of normative instructions aimed at consolidating the new model of taxation for the oil and gas sector that began with the publication of Provisional Measure 795 and Decree 9128.

Several initiatives defined by the federal government in this Law seek to bring greater legal certainty to the Oil and Gas sector. Some of those highlights include:

  • The ability for companies to deduct investments made in the exploration and production phases of the calculation basis of Corporate Income Tax (IRPJ) and Social Contribution on Net Income (CSLL); two significant taxes on operations in Brazil.
  • A detail of operations and incidences of taxation withholding income tax (IRRF) on shipments abroad platform / vessel charters.
  • A program for the termination of litigation associated with split contracts, a term used in the petroleum industry for the charter contracts of vessels that are entered into simultaneously with contracts for the provision of operating services. The contractual split occurs when a company charters a vessel with a foreign ship owner, and at the same time concludes an agreement of operation of the vessel with a local company linked to the ship owner.
  • The creation of REPETRO SPED, with the modality of importation of assets, without the payment of taxes, since it is part of a list [1] elaborated by the Brazilian government (Annex I of IN RFB 1781/2017), excluding, however, the importation of vessels destined for coastal shipping, as well as port support navigation and maritime support navigation.

Operation of REPETRO SPED

Focused still on the objective of defining the operational norms related to REPETRO SPED, the Brazilian government revoked Normative Instruction IN RFB 1.743, published before the approval of MP 795, and reissued the matter, now with the legal base approved by national congress, publishing the Normative Instruction IN RFB 1.781, which is the legal normative device in force for the operations of REPETRO SPED.

Among the changes adopted by the government in the text of the new normative instruction, some highlights include:

  • The application of temporary admission with remission and permanent importation valid until 12/31/2040.
  • In contracts with simultaneous execution for importation and rendering of services, the legal entity responsible for the payment of the installments related to the lease, assignment, and or leasing or charter, shall be the importer of the good.
  • The designated legal entity is excluded. The contracted company to provide services must be headquartered in Brazil.
  • Comprehensive changes to the guarantee rules for payment of taxes on temporary imports:
    • Waived warranty for importers certified as AEO (Authorized Economic Operator), values of taxes less than R$100,000.00, or when it is a vessel / platform used in a global contract
    • Asset Bond – Equity Required minimum of R$10 Million and no more than R$5 million in relation to the guarantor.
    • The guarantee must be previously approved by the Brazilian authorities.
  • An additional time of 6 months, which may be extended automatically for an equal period, will be allowed for the demobilization of the equipment admitted to REPETRO.

The implementation of these new rules is bringing additional concerns to an already complex industry that is struggling with monitoring and ensuring compliance to their day to day operations.

REPETRO SPED and State Legislations

After the changes promoted in the REPETRO SPED Legislation by the federal government, the attention of the Oil and Gas market turned to the treatment of the States related to ICMS [2], a tax under state administration that was applied to all import operations.

As widely awaited by the industry, the Official Gazette of the Federal Government, in its edition of January 17, 2018, published the ICMS Agreement CONFAZ [3], No. 3/2018, which provides for ICMS benefits applicable to operations with goods destined for research, exploration or production of oil and natural gas.

The next step now is the ratification and incorporation by the states and the Federal District, in their domestic legislations, of the application of this agreement. The State of São Paulo went ahead and, through State Decree No. 63.208, internalized the rules of ICMS Agreement No. 03/2018. We can now wait for the main Brazilian oil producing states to follow the example of São Paulo and internalize the agreement in their legal ICMS regulations.

The expectation is that this issue has a short-term solution, since it is a fact that changes in REPETRO’s policy have brought important results to Brazil since its implementation in 1999. An analysis of REPETRO’s impact on the profitability of the projects, elaborated by the Institute of Economics of the Federal University of Rio de Janeiro, among other conclusions, corroborates the importance of REPETRO as an instrument that allows the attractiveness of investments for the oil activity in the upstream segment.

Therefore, we hope the regulation of this customs treatment by the Executive Power will contribute to the expected success in the next round of bids to be held in 2018 and 2019.

The purpose of these discussions is to propose a single goal, through leveraging the development of national industries. By doing so, this will help optimize gains in operations within the Oil and Gas industry. Our proposal is to observe and evaluate the effectiveness of how REPETRO SPED impacts economic and social development.

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[1] The Brazilian government allows importing items from a list drawn up by the customs authorities, without the payment of taxes, with the condition that they be applied in oil exploration activities.

[2] ICMS – The Tax on Operations related to the Circulation of Goods and Provision of Interstate and Intermunicipal Transportation and Communication Services (ICMS) is a Federal Tax on Brazilian State Administration, meaning, only the governments of the States and the Federal District have the authority to institute, (according to article 155, II, of the 1988 Constitution). Its characteristic in the application of the Tax or to calculate the ICMS, one must consider several factors, such as Source-Destination, Product, Company, Client, etc. The control of ICMS tax collection is characterized according to the corporate framework in Simples Nacional, Presumed Profit and Real Profit. https://pt.wikipedia.org/wiki/Imposto_sobre_Circula%C3%A7%C3%A3o_de_Mercadorias_e_Servi%C3%A7os

[3] CONFAZ – The National Council of Finance Policy – CONFAZ is the college formed by the Secretaries of Finance, Finance or Taxation of the States and the Federal District, whose meetings are chaired by the Minister of Finance, and it is the responsibility of the Ministry of Finance to enter into agreements for concession purposes or revocation of exemptions, incentives and fiscal and financial benefits of the Tax on Operations related to the Circulation of Goods and on Services of Interstate, Intermunicipal and Communication Services – ICMS https://www.confaz.fazenda.gov.br/acesso-a-informacao/institucional/CONFAZ