Changes in Repetro and tax legislation in oil and natural gas area

On 08/18/2017, the publication of Decree 9.128 at the Official Gazette, amending Decree 6,759/09, ruled the administration of customs activities, and the inspection, control and taxation of foreign trade operations. On this day, Provisional Measure No. 795 was published, which, among other issues, establishes a special tax regime for the exploration, development and production of oil, natural gas and other fluid hydrocarbons.

The points to be highlighted in both acts are:

Repetro

The special customs regime for exporting and importing assets intended to research activities and oil and natural gas deposits (Repetro) exploration had its term extended until Dec31-2040.

The reach of Repetro was also expanded, with the inclusion of imports of goods for permanent residency in the country with suspension of payment of federal on import taxes.

It should also be noted that assets admitted to the Repetro until December 31, 2017 remain subject to the rules in force prior to the publication date of Decree 9128, until the final concession term of the scheme, and, optionally, between Jan-01-2018 to Dec-31-2018, to migrate to the new Repetro rules arranged in this last act.

For the MP 795, the new special tariff treatment under the Repetro was created allowing the definitive import of goods in the list the RFB should publish, with the suspension of 100% of the payment of federal taxes, whose effectiveness will be from January 1, 2018 and will only apply to the events up to Jul-31-2022.

Discounts in calculation of the Real Profit and the CSLL base

The full discounts of the amounts applied in each period of calculation in the exploration and production of oil and natural gas deposits, when determining the Real Profit (LR) and the Social Contribution on Net Profit base (CSLL),considering the following:

a) Exhaust expenses from assets formed by expenses incurred in development activities to enable the production of oil or natural gas fields are deductible in LR and CSLL calculation basis;

b) For LR and the CSLL calculation basis purposes, the accelerated assets depletion made up to Dec-31-2022, calculated by applying the depletion rate, determined by the produced units method, multiplied by 2.5;

c) The accelerated depletion rate shall be excluded from net profit, and the total accumulated depletion, including normal and accelerated depletion, shall not exceed the asset cost;

d) From the assessment period in which the asset cost limit is reached, the normal depletion value recorded in the commercial bookkeeping shall be added to the net profit for the purpose of determining the CSLL's actual profit and calculation basis;

e) For machinery, equipment, and facilitation instruments used in production development activities, the deductible depreciation, for the LR and the CSLL determination calculation base, shall be carried out according to the rates the RFB periodically publishes, for each kind of asset, under normal or average conditions. In the meantime, the taxpayer shall be entitled to compute the effectively adequate rate to the depreciation conditions, since this adequacy is proved, when adopting a rate different from that published by the RFB.

Contracts for chartering or leasing of vessels and for rendering services

In cases where simultaneous execution of a charter or lease of seagoing vessels and a service contract, related to the exploration and production of oil or natural gas, entered into with companies linked to each other, it should be noted that the reduction to zero of the withholding income tax rate (IRRF) is limited to the portion related to the charter or rent, calculated by applying, on contracts total value, the percentages as follows:

b) 85% for vessels with floating production or storage and unloading systems;

c) 80% for vessels with a probe type system for drilling, completion and maintenance of wells; and

d) 65% for other types of vessels.

From Jan-1-2018, the decrease in withholding tax rate shall be limited to the following percentages:

a) 70% for vessels with floating production or storage and unloading systems;

b) 65% for vessels with a probe type system for drilling, completion and maintenance of wells;and

c) 50% for other types of vessels.

The change in the percentage above shall not apply to vessels used in the provision of related services to transport activities, handling, transfer, storage and liquefied natural gasregasification, to which applies 60% on contracts total value.

The portion of charter contract or marine vessel rent exceeding the above limits subject to 15% withholding income tax at, except (i) where the consignment is intended for country or dependency with favored taxation or that the charterer, lessor or lessor of maritime vessel is beneficiary of privileged fiscal regime, under the terms of Articles 24 and 24a of Law No. 9,430/1996, cases in which the entire consignment will be subject to 25 % tax rate; (ii) for vessels used in maritime support navigation, established in the Law No. 9,432/1997.

Important: The application of the percentage does not affect the nature and conditions of charter contract or lease influenced by the Economic Domain Intervention Contribution (Contribuição de Intervenção de Domínio Econômico - “CIDE”) and the “PIS-Pasep-Importação” and “Cofins-Importação”.

IRRF debts until December 2014

For IRRF debts whose triggering events occurred up to Dec-31-2014, MP 795 allows the collection the difference due during January 2018, decreased in 100% from default and late payment penalties, there is thus only increase interest for late payment. In order to enjoy this differentiated treatment, the company must meet the MP requirements for documents and withdrawal of administrative and judicial lawsuits.