Oil and gas: attention to tax and accounting schedule must be continuous

Adriana Costa and Glória Cunha

In November, the National Agency of Petroleum, Natural Gas and Biofuels (ANP) held two pre-salt area auctions: the Transfer of Surplus Rights With Compensation Bidding Round, on Nov-6, and the Production Sharing Bidding Round, on Nov-7.

Even the expectations not being met, the oil and gas area once again records activity, which should generate new flows and chain activation in producing areas.

States and municipalities also celebrate with relief the amounts that will be unlocked and injected into their economies.

Although the outlook is not as expected, companies in this segment need to strengthen their businesses, a necessity imposed by the complexity of the Brazilian tax scenario and the so-called “Brazil cost”, which remain challenges to be overcome by Brazilian companies.

Taxation applied to the oil and gas sector

A number of complex and specific tax issues permeate the oil and gas segment in Brazil, imposing the need for companies to pay permanent attention to the rules dictated by the country.

In recent years, Brazil has been formatting a new taxation model for the segment, in addition to issuing new regulatory legislation, measures that provide greater legal certainty to investors in the area.

Aiming to stimulate the development of the oil and gas sector, the government has adopted tax benefits to make the Brazilian business environment more attractive and competitive. Among them, we can mention:

•DRAWBACK: Import of goods with suspension of taxes, intended for industrialization and with subsequent export.

• REPEX: Importation of Crude Oil and Derivatives with tax suspension, conditioned to future exportation of the same products, in the same state in which they were imported.

• TEMPORARY ADMISSION: Taxes due on importation may be totally or partially suspended, depending on the length of stay of the goods in Brazil and subject to subsequent return.

• REPETRO-SPED: Originally created in 1999, under the name of Repetro, the special customs regime with tax benefits for goods destined to research activities and mining of oil and natural gas deposits, has been undergoing changes. In 2017, it was renamed Repetro-Sped, according to Law 13.586/17. In addition to adopting the Public Digital Bookkeeping System (Sped) as a means of verification and centralization of responsibilities, the regime underwent changes, including the effective period being extended until 2040. Among the benefits is the suspension of taxes on imports of the goods indicated in Annexes I and II of IN 1781 and the suspension of federal taxes on imports or acquisitions in the domestic market of raw materials, intermediate products and packaging materials to be used fully in the production process.

A number of issues still need specific regulation from the Brazilian Federal Revenue and from the States for this special regime, which makes a constant follow up of the publication of rules and their practical effects necessary.

It is also necessary to consider the impacts of the long awaited Tax Reform, which should bring news in this field, placing Brazil in better conditions of competitiveness.

The course of this reform, however, involves a number of steps, and its effects and transition rules have so far been uncertain. It is up to the players in the oil exploration and production chain to follow up on developments, and to reassess their planning when the new rules are consolidated.

Import rules for goods and services

Another point that deserves the attention of companies in the sector is the importation of goods and services. Since the effective final rate may be around 50%, failure to follow these rules may compromise financial planning.

About services:

Import duties apply on all types of services including technical, administrative and royalties. In addition to analyzing the incidence of taxes such as IRRF, ISS, CIDE, PIS/COFINS, it is necessary to investigate bilateral agreements between the countries involved in order to avoid double taxation, when possible.

Importing and exporting services will trigger another tax liability called Siscoserv.

Read also: Siscoserv: what it is, requirement, deadlines, fines and penalties

About goods:

The importation of goods must be processed in Brazilian customs with the help of specialists in customs services, and the importing company must have previous registration in the System for Registration and Track-down of Customs Agents' Activities (RADAR). Several taxes are levied on the importation of goods such as Import Tax (II), IPI, ICMS, PIS/COFINS, in addition to customs duties.

Other Issues Impacting Business

There are other aspects to be analyzed, such as the applicability of international accounting standards. For example, IFRS 16 (CPC 06 - R02), in force since January 2019, directly impacts lease agreements so commonly adopted by companies in the oil and gas sector.

On the other hand, the IFRS 6 that deals with the exploration and evaluation of mineral resources has not been officially published and adopted in Brazil.

Read more: IFRS 16 influences the accounting of companies' operating profit

Other issues involve choosing the transfer price control method. There are different control methods and the company should choose the method that result in the minor impact on the calculation of Income Tax and Social Contribution on Net Income (CSLL).

Read more: Transfer price: efficiency of the process should be on the tax agenda of multinationals

Expert advice to meet challenges

The oil and gas industry demands long term and high risk investments. This requires planning and management to deal with the challenges and complexity of the Brazilian scenario.

Relying on specialists who know the Brazilian law and the industry's particularities thoroughly is the way. The advice is essential in assessing the tax burden of projects, choosing the best tax regime, identifying Repetro-Sped's constraints, among others, and adopting the best compliance practices.

Domingues e Pinho Contadores has extensive experience in serving domestic and foreign oil and gas companies, from its deployment in Brazil to its daily operational support Accounting, Tax, Personnel, Financial Management, Siscoserv and Bacen, among others areas.