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Tax News: Oil & Gas

Tax News: Oil & Gas

Changes in Tax Law affecting the Oil & Gas industry

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Conversion of Provisional Measure No. 795/17 into Law No. 13,586/17 and New Regulatory Instructions published by the Brazilian Federal Revenue Service

On December 28, 2017, President Michel Temer signed Provisional Measure No. 795 of August 17, 2017 into Law No. 13,586 (published in the Federal Register on December 29, 2017). On January 2, 2018, the Brazilian Federal Revenue Service published three instructions regulating Law No. 13,586 (Regulatory Instructions Nos. 1,778, 1,780 and 1,781), each regulating a specific aspect of the Law. The most important changes in the final version of Law No. 13,586 in comparison with the original text of Provisional Measure No. 795 are presented in each topic below.

New tax framework for the Oil & Gas ("O&G") O&G industry (updated version)

Law No. 13,586 (conversion of Provisional Measure No. 795 of 2017) introduced new tax rules relevant to the O&G industry.

The main changes affected three areas of interest:

  • New rules on the income tax deductibility of expenses incurred with Exploration and Production ("E&P") activities.
  • Changes in the exemption from withholding income tax ("IRRF") for charter contracts
  • Extension of REPETRO until 2040 and introduction of a new tax suspension scope applicable to the importation of goods that will remain in Brazil permanently (effective between 2018 and 2040) and to the local supply of goods to be used in the exploration, development and production of oil, natural gas and other fluid hydrocarbons.

Deduction 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). It is worth noting that the time limitation (expenses incurred until December 31, 2022) for the application of accelerated depletion was removed from the final version of the Law.
  • Machine and equipment expenses incurred during the development phase (excluded from the rules above) - may be depreciated considering the rates set forth by income tax regulations.

On January 2, 2018, the Federal Revenue Service published Instruction No. 1,778 to regulate the tax treatment of expenses incurred with E&P activities. This Regulatory Instruction imposed accessory controls ("sub-accounts") and defined the expenses covered by deduction rules.

WHT Exemption in Storage Contracts

There is an IRRF exemption generally applied to payments made to a non-resident in respect to charter agreements. As from 2015 (Law No. 13,043 of 2014), limits were established for the application of this WHT exemption in cases where the charter contract is executed simultaneously with a service contract and where the Charterer and the Service Provider were considered related parties for the purposes of the original wording of Law No. 13,043.

The Government introduced several amendments to the WHT exemption rule for charter contracts and created an amnesty program for payments due before 2015. The rules introduced by Law No. 13,586 were regulated by Instruction No. 1,778 of January 2, 2018.

New limits applicable from 2018 for WHT exemption:

  • 70% for vessels with floating systems of production or storage and offloading (75% according to Regulatory Instruction No. 1,778);
  • 65% for vessels with rig systems for drilling, completion and maintenance of wells;
  • 50% for other types of vessels;
  • 60% for maritime vessels used in the transportation, transfer, storage and regasification of LNG;

Vessels used for maritime support navigation are not subject to the above limits.

The final version of Law No. 13,586 expressly provides that the limitations above do not apply retroactively for charter contracts involving vessels used in maritime support navigation.

Regulatory Instruction No. 1,778 introduced specific formulas for the calculation of the limits established by Law No. 13,043.

Tax havens and Privileged Tax Regimes

Tax Law clearly excludes Charter Companies located in low-tax jurisdictions or privileged tax regimes from the WHT exemption rule set forth by Law No. 9,481 of 1997. In these cases, remittances will be subject to an increased rate of 25% over the total amount involved (unlike the provisions of Law No. 13,043 in its original wording).

Installment Program

Taxpayers may opt to calculate potential WHT charged on 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).

A paragraph of the bill including other taxes (CIDE and PIS / Cofins) in the installment program was removed from the final version of Law No. 13,586.

The WHT payment and installment payment rules were regulated on January 2, 2018 by Instruction No. 1,780. This instruction establishes rules on: debt consolidation, installment request (made by completing a specific form described by the law), among other requirements and provisions to be observed by taxpayers.

REPETRO

Brazil's federal government has officially extended REPETRO until 2040 (Decree No. 9,128 and Law No. 13,586). Announced by the National Council of Energy Policy in 2016, the extension became effective on August 18, 2017 and applies to imports of goods on a temporary or on a definitive basis and to domestic purchases of goods to be used in E&P activities.

Law No. 13,586 (conversion of Provisional Measure No. 795 of 2017) extended the scope of REPETRO's tax suspension to other transactions (with support of Repetro-Sped). The suspended payment of federal taxes will also cover imports (on a permanent basis) and purchases of goods from local suppliers. This new suspension will be applied to transactions carried out by December 31, 2040 (unlike the original provisions, which only contemplated transactions carried out by July 2022). The payment of federal taxes levied on the importation and production of goods used in E&P activities will be suspended if taxpayers meet certain conditions.

The final version of the Law included a provision that the tax suspension regime in the Definitive Import system cannot be used for vessels used for short sea shipping and inland navigation on domestic routes, nor is it applicable to port support and maritime support navigation.

In addition, a paragraph of the bill that extended the suspended payment to the entire production chain (in the case of acquisitions in the domestic market) was removed from the final version of Law No. 13,586.

Instruction No. 1,781 issued on January 2, 2018 regulates Repetro-Sped establishing the main conditions that must be met by taxpayers to be granted tax suspension: qualified beneficiaries, goods within the scope of the suspension (including two Annexes with lists of eligible goods), limitations and other rules governing the application of the tax suspension regime. Regulatory Instruction No. 1,743 issued on September 22, 2017 was revoked.

The tax suspensions mentioned above do not cover ICMS (still due on certain transactions covered by REPETRO SPED). At the time this tax news was issued, the State Tax Authorities had not yet established an extension of the federal tax suspension regime to include ICMS.

© 2018 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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