Federal Revenue provides new tax legislation adjustments for oil and gas area

The Federal Revenue of Brazil (Receita Federal do Brasil - “RFB”), continuing the revision of the legislation applicable to oil and gas related activities, published Normative Instruction 1786/2018, in January 30, 2018, once more dealing with changes in the tax treatment of exploration and oil and natural gas development and production activities, as well as to review the levy of income tax on income paid, credited, employed, delivered or remitted to legal entities domiciled overseas, and to provide for depreciation, amortization or exhaustion of the goods purchased from related parties.

Amendment in NI RFB 1778/2017

RFB NI 1786/2018 amends the articles 2, 3, 4, and 5 of RFB NI 1778/2017, clarifying some new issues, in addition to detailing aspects previously treated and even correcting the flaws in the original publication.

Among other issues, it establishes that the exploration phase extends until the end of the term provided in contract signed with the National Agency of Petroleum, Natural Gas and Biofuels (Agência Nacional de Petróleo, Gás Natural e Biocombustíveis - “ANP”), until the total return of exploration block area, or until delivering the Declaration of Commerciality, whichever occurs first.

RFB included the Article 6-A in NI 1778/2017, indicating that the amounts applied may be fully deducted in each calculation period in oil and natural gas activity production, for the taxable income and the Social Contribution on Net Income (CSLL) calculation basis for determination purposes. It is noteworthy that the Article 2 of RFB NI 1778/2017 enables a fully deduction of the amounts applied in the exploration activity, in each calculation period.

The amounts invested in activity production comprise the comprehensive coordinated operations for oil or natural gas extraction from a field and from preparation for its movement, except for the expenses related to the development activities to enable the field production.

II) Amendment in RFB NI 1455/2014

RFB NI 1786/2018 also changed the Article 2 and 2-B of RFB Normative Instruction 1455/2014, which provides for the levy of Income Tax on income paid, credited, employed, delivered, or remitted to legal entities domiciled overseas.

For percentages calculation in cases provided for in said legal act, the contract signed in foreign currency shall have the amounts translated into domestic currency at the exchange rate of the origin country currency, established for sale by the Brazil’s Central Bank (Banco Central do Brasil - “Bacen”), corresponding date of proposal presentation by supplier, which is an integral part of contract.

III) Decree 9128/2017

RFB NI 1786/2018 also provides that assets purchased from related parties, pursuant to the sole paragraph of Article 2 of Decree 9,128/ 2017, shall be considered for depreciation, amortization or exhaustion purposes for a value not more than the net book value, and the purchaser and the seller shall be considered as related parties, if:

a) they are directly or indirectly controlled by the same party or parties;

b) there is a control or a coalition relationship between them;

>c) this purchaser is a member, holder, director or manager from purchaser legal entity;

>d) this purchaser is an associated, in the form of a consortium or condominium, as defined in the Brazilian legislation, in any enterprise.