Changes in Tax Law affecting the Oil & Gas industry | KPMG | BR

Changes in Tax Law affecting the Oil & Gas industry

Changes in Tax Law affecting the Oil & Gas industry

Provisional Presidential Decree 795 and Decree 9, 128

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Changes in Tax Law affecting the Oil & Gas industry

The Brazilian Government published Decree 9,128 and Provisional Presidential Decree 795 on August 18, 2017 introducing new rules in tax law to foster the local Oil & Gas (“O&G”) industry.

  • The main changes are focused on three areas of interest:
  • New income tax deduction rules for Exploration & Production (“E&P”)
    expenses
  • Changes in the WHT exemption for charter agreements  Extension of REPETRO until 2040 and introduction of a new scope for the import of goods that will remain in Brazil permanently (effective between 2018 and 2022)

Deductions of E&P expenses 

Tax Law now sets forth specific rules for the deduction of expenses
incurred during the exploration, development and production phases of an
O&G project:

- Exploration and Production phases - expenses may be deducted in each calendar year as incurred;

- Development phase - expenses may be deducted in proportion to the depletion of the related asset (units of production). Taxpayers may also consider an accelerated depreciation rate for such depletion (2.5 times faster);

- Machine and equipment during development phase - expenses may be depreciated considering the rates provided in income tax regulations.

WHT Exemption on Charter Agreements

A WHT exemption generally applies to payments made to a non-resident for the charter of vessels. In 2015 a limit started to be applied to this exemption when a charter agreement is executed simultaneously with a service agreement where both the Foreign Charter Company and the Local Service Company are related parties.

The Government introduced several changes in the WHT exemption rule for Charter Agreements and created an amnesty program for payments before 2015:

New Limits - As from 2018, the following limits shall apply to the WHT
exemption: 

  1. 70% for vessels with floating systems ofproduction or storage and offloading;

  2. 65% for vessels with rig systems fordrilling, completion and maintenance of wells;

  3. 50% for other types of vessels;

  4. 60% for vessels used in thetransportation, transfer, storage and regasification of LNG;

  5. Maritime Support Vessels are not subjectto the limits above.

Amnesty Program - Taxpayers may opt to calculate potential WHT due for
Contracts and Charter Payments made before 2015 that exceed the limits
currently in force for the WHT exemption. Taxpayers must pay the WHT due
without penalties and fines (only interest) in 2018 (12 installments).

Tax Havens - Tax Law clearly excludes Charter Companies located in
low-tax jurisdictions or privileged tax regimes from the WHT exemption rule.
Payments to tax havens are subject to a 25% WHT on the total amount.

REPETRO

Government officially extended REPETRO until 2040 (Decree 9,128).
Announced by the National Council of Energy Policy last year, the extension
became effective on August 18, 2017 and applies to imports of goods on a
temporary basis.

Provisional Presidential Decree 795 extended the scope of REPETRO to other transactions. The tax suspension of the federal taxes will cover imports (on a permanent basis) and acquisitions of goods from local suppliers. This new exemption will be applied to transactions taking place between 2018 and July 2022. The federal taxes charged on the import and production of goods used in E&P activities will be suspended if taxpayers meet certain conditions. 

Goods that are already in Brazil under REPETRO may also take advantage
of the new rules with the support of a specific migration request.

Despite the tax suspensions mentioned above, the State VAT (ICMS) shall still be due for most of the transactions covered by the “new” REPETRO. By the time KPMG's Tax News was issued, State Tax Authorities had not established an extension of the federal tax suspension regime to the ICMS. 

© 2017 KPMG Auditores Independentes, uma sociedade simples brasileira e firma-membro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative (“KPMG International”), uma entidade suíça. Todos os direitos reservados.

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