Tax changes for the oil and gas industry in 2018

A new tax regime for oil and gas companies was defined by the conversion of Provisional Measure No. 795/2017 into Law 13.586/ 2017 and the edition of Normative Instructions of the Federal Revenue of Brazil (RFB) and of the General Attorney of National Treasury (PGFN).

Companies should be aware, as joining the installment of debts related to the difference due Withholding Income Tax Rate (IRRF) under the PGFN must be requested until Jan-31.

We present below a summary of the main issues in each normative rule:

I - Law No. 13.586/2017

As a result of the conversion into law of Provisional Measure 795/2017, Law 13.586 establishes the special tax regime for the exploration, development and production activities of oil, natural gas and other fluid hydrocarbons.

a) There is a possibility of 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), as provided for in the law.

b) In cases where simultaneous execution of charter or lease of seagoing vessels and service contract, related to the exploration and production of oil or natural gas, entered into with legal entities linked to each other, 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:

• 85% for vessels with floating production or storage and unloading systems;
• 80% for vessels with a probe type system for drilling, completion and maintenance of wells; and
• 65% for other types of vessels.

From Jan-01-2018, the decrease to zero of the IRRF rate is limited to the following percentages:

• 70% for vessels with floating production or storage and unloading systems;
• 65% for vessels with a probe type system for drilling, completion and maintenance of wells; and
• 50% for other types of vessels.

c) For IRRF debts whose triggering events occurred up to Dec-31-2014, the legal entity may collect the difference due during January 2018, with a 100% reduction in fines for late payment and automatic fine. However, in order to live up to the aforementioned treatment, the legal entity must fulfill the requirements set forth in said law.

d) Until Dec-31-2019, the portion of the income earned abroad, by direct or indirect subsidiary, or affiliated company, corresponding to the chartering activities for time or bare hull, operating lease, rental, loan of goods or provision of services directly related to the exploration and production phases of oil and natural gas in the Brazilian territory will not be computed in determining the real profit and the CSLL calculation basis of the controlling company domiciled in the country.

e) The law also establishes the Special Arrangements for Import with suspension of the payment of the Import Tax (II), the Tax on Manufactured Products (IPI), the contribution to “PIS-Pasep-Importação” and “Cofins-Importação”, goods whose permanence in the country is final and destined to the exploration, development and production of oil, natural gas and other fluid hydrocarbons, by Law No. 9.478/1997, Law No. 12.276/2010 and Law No. 12.351/2010.

f) There was suspension of payment of the contribution to the II, IPI, the Contribution to “PIS-Pasep-Importação”, “Cofins-Importação”, PIS-Pasep and Cofins, on import or acquisition in the domestic market of raw materials , intermediate products and packaging materials to be used integrally in the production process of final product destined to the activities mentioned in the previous item. Once the final product has its destination effected, the suspension is converted into an aliquot of zero, regarding the contribution to PIS and Cofins; and the term of suspension of payment of federal taxes for the application of the special regime will be up to 1 year, may be prolonged for a period not exceeding 5 years in total.

g) The suspensions of taxes provided in letters "e" and "f" will only apply to the events that occurred up to Dec-31-2040 (previously the Provisional Measure authorized only until Jul-31-2022).

II - Normative Instruction RFB nº 1778/2017

This Normative Instruction came to regulate the tax treatment of exploration and development activities and production of oil and natural gas that is dealt with in Law 13,586 / 2017.

The following topics are discussed in the text:

a) Full deduction of the amounts applied in the oil and natural gas exploration;

b) Depletion of assets resulting from expenses incurred in development activities;

c) Rate of depreciation of machines, equipment, and facilitating instruments.

III - RFB Normative Instruction No. 1780/2017

By this Normative Instruction, the payment and installment of debts related to the Withholding Income Tax Rate (IRRF) referred to in art. 3 of Law No. 13,586 / 2017, with a 100% reduction in fines for late payment and automatic fine (item "c" in the summary of the law).

IV - RFB Normative Instruction No. 1781/2017

It provides for the special customs regime for economic use destined to goods to be used in the exploration, development and production of the oil and natural gas deposits (Repetro-Sped), Normative Instruction 1743/2013 was repealed and altering procedures related to the subject, among them the possibility of qualification until Dec-31-2040.

V - PGFN Ordinance No. 21/2018

This ordinance deals with the payment and installment of debts related to the Withholding Income Tax Rate (IRRF) due to the partial reduction of said tax, in the event of 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 legal entities linked to each other, 3 of Law No. 13.586 / 2017. The application must be submitted by Jan-31-2018.

VI - Normative Instruction RFB No. 1.786/2018

It amends the following rules, in addition to disposing of the depreciation, amortization or exhaustion of the assets acquired from related parties in accordance with the sole paragraph of art. 2 of Decree 9.128 / 2017:

a) Article 2, 3, 4 and 5 of RFB Normative Instruction No. 1.778 / 2017, which provides for the tax treatment of the exploration and development activities and production of oil and natural gas dealt with in Law 13,586 / 2017;

b) Articles 2 and 2-B of RFB Normative Instruction No. 1.455/2014, which provides for the incidence of Withholding Income Tax on income paid, credited, used, delivered or remitted to legal entities domiciled abroad.