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Brazilian Tax System Overview

Brazilian legislation and regulations regarding accounting, taxes and corporate matters still do not provide a specific framework for the Oil and Gas industry, especially regarding upstream activities.

Brazilian legislation and regulations regarding accounting, tax and corporate matters still do not provide a specific framework for the Oil and Gas industry, especially upstream activities.

Most of the companies currently investing in upstream in Brazil initiated their activities in the late 90’s; especially since the market opened to local and foreign investors (the Brazilian state-owned company Petrobras had previously the exclusive concession monopoly). Nowadays, the industry is characterized by the presence of several companies acting both independently and through consortium agreements in order to carry out exploration, development and production activities.

As a result, the accounting procedures adopted by each one of the upstream companies are still diverse and many times influenced by the international accounting procedures adopted by the corresponding controlling companies. With the adoption of the International Financial Reporting Standards (IFRS), a few changes that typically affect upstream companies in Brazil (such as tax treatment of pre-operating expenses) have been introduced; however, there is still a lack of specific tax guidance for the sector.

Overall, current legislation is still not capable to provide adequate responses to several aspects associated with the upstream industry. Consequently, our comments in this guide are based on the present legislation and regulations as well as our current interpretation of what would be applicable to the companies engaged in upstream activities.

Accordingly, this guide is not intended to represent a complete study regarding the tax implications related to the upstream petroleum and natural gas industry in Brazil, but instead, to provide an overview of the local environment for this segment of the Oil & Gas industry.

Introduction

The current Brazilian taxation system was introduced by the 1988 Constitution, which granted power to Federal, State and Municipal Governments to collect taxes. The number and nature of the regulations enacted by each of these governmental instances led to a very complex tax environment, in which taxpayers are required to comply with many obligations, both comprising tax collection and reporting.

With the enactment of Law No. 11,638/07, Brazilian Corporate Law underwent significant changes, which aimed primarily at enabling the convergence of Brazilian accounting practices with the International Financial Reporting Standards (“IFRS”).

Law 12,973/14 currently regulates the tax implications derived from the adoption of the international accounting standards in Brazil.

A brief summary of the Brazilian Taxation System is provided below. A more thorough description of these taxes is embedded in the guide’s applicable chapters.

Federal taxes

Federal taxes vary according to their nature. The most important to the upstream industry are those levied on:

  • Revenues / Sales: Social Contributions on Gross Revenues (PIS and COFINS); 
  • Excise Tax: Federal Value-Added Tax (IPI);
  • Importation of Goods: Import Duty (II), Federal Value-Added Tax (IPI), PIS-importation and COFINS-importation; 
  • Importation of Services: PIS-importation and COFINS-importation; and    
  • Profits / Net Income: Corporate Income Tax (IRPJ), and Social Contribution on Profits (CSLL).  

Federal taxes also comprise Social Security Taxes (INSS and FGTS) and taxes levied upon financial transactions (IOF), for which we provide further comments in the specific sections.

In addition to these taxes, international transactions, especially those related to loans, royalties and service provision can be subject to the Brazilian Withholding Income Tax on Outbound Remittances (IRRF) and to the Contribution for Intervention in the Economic Domain (CIDE), for which we also give further comments in the specific sections.

An overview of the Brazilian federal taxes is shown below: 

Federal Taxes on Revenues / Sales
Tax Rate Tax base
PIS and Cofins 1,65% and 7,6% (respectively) Gross revenues, subject to a "non-cumulative" mechanism in which some credits are allowed

 

  • PIS and COFINS are calculated and paid on a monthly basis;
  • Some entities and/or revenues are not subject to the so-called “non-cumulative” system, being subject to lower rates of these taxes: PIS – 0.65% and COFINS – 3%, although it is not allowed to offset credits related to expenses incurred (e.g. entities adopting the Estimated Profit for purposes of calculating its federal income taxes);
  • Revenues derived from the exportation of goods are exempt from PIS and COFINS and the corresponding credits accrued according to the “non-cumulative” system can be kept and used to offset other federal taxes;
  •  Revenues derived from provision of services for entities resident or domiciled abroad will also be exempt from PIS and COFINS (and credits accrued according to the “non-cumulative” system can be kept and used to offset other federal taxes), as long as the applicable payments are made in a convertible currency.
Federal excise tax
Tax Rate Tax base
IPI - Federal Value-Added Tax Variable by product (HTS code) Price of the industrialized good ( there is a credit mechanism that may be compared to a VAT system)

 

  • IPI is usually calculated and paid on a monthly basis and the rates are based on the Harmonized Tariff Schedule (HTS) code;
  • IPI is to be collected by the manufacturing company (importer of goods are deemed to be manufacturing company);
  • IPI is not levied on the sales of natural gas, crude oil and its derivatives;
  • Goods exported from Brazil are exempt from IPI and the corresponding credits accrued can be used to offset other federal taxes.

 

Federal taxes on importation of goods
Tax Rate Tax base
II - Import Duty Variable by product (HTS code) Custom value of the imported good (CIF value)

 
  • II is due upon custom’s clearance and the rates are based on the Harmonized Tariff Schedule (HTS) code;
  • II is not a creditable tax.

 

Tax Rate Tax base
IPI - Federal Value-Added Tax Variable by product (HTS code)
 
Custom value of the imported good (CIF value) plus the Import Duty (there is a credit mechanism that may be compared to a VAT system)

 

  • IPI is due on the custom’s clearance and the rates are based on the Harmonized Tariff Schedule (HTS) code. 

 

Tax Rate Tax base
PIS-importation and COFINS-importation 2.1% and 9.65% (respectively). Custom value of the imported good (CIF value) 

 
  • The above-mentioned rates are the general rates applicable on the importation of goods. However, some items are subject to exemptions or different PIS-importation and COFINS-importation rates;
  • PIS-importation and COFINS-importation are due upon the registration of the Import Declaration (DI).

Federal Taxes on Importation of Services
Tax Rate Tax base
PIS-importation and COFINS-importation 1,65% and 7,6% (respectively) Amounts paid, credited, delivered or remitted abroad (before the withholding income tax), plus the Municipal Tax on Services (ISS) and the PIS-importation and COFINS-importation themselves (gross-up method).
 
  • PIS-importation and COFINS-importation are due upon payment, credit, delivery or remittance of the amounts related to the service import. 

 

Federal Taxes on Profits / net Income
Tax Rate Tax base
Corporate Income Tax (IRPJ) 25% (15% plus a 10% surtax on annual taxable income exceeding BRL240,000.00) Taxable Income, understood as the accounted for net income (profit or loss) as per financial statements as of the end of the tax period (quarter or year), adjusted by add-backs and exclusions provided by the tax legislation
Social Contribution on Profits (CSLL) 9% Similar to the IRPJ’s tax base
 
  • Taxpayers may choose one of the three taxation methods provided by the tax legislation for purposes of calculating IRPJ and CSLL: Taxable Income (Lucro Real), Estimated Profit (Lucro Presumido) and Arbitrated Income (Lucro Arbitrado);
  • Taxpayers that choose the Taxable Income method are eligible to calculate IRPJ on an annual basis (Lucro Real Anual) or quarterly basis (Lucro Real Trimestral). In case of adoption of the annual calculation period, tax anticipations (advance payments) must be calculated and collected (if applicable) on a monthly basis, based on monthly revenues (Receita Bruta e Acréscimos) or year-to-date accounted for net income (Balancete de Suspensão e Redução);
  • Tax losses, understood as the IRPJ Net Operating Losses (NOLs) and the CSLL negative bases (CSLL NOLs) have no statute of limitations, remaining available for an indefinite period. NOLs offsetting is limited to 30% of a given period's Taxable Income / CSLL positive tax base;
  • IRPJ and CSLL calculations in the Estimated Profit and Arbitrated Profit methods are not based on the company’s net income, but rather on the determination of deemed profit percentages, which varies according to the company’s activities. Under these methods, IRPJ and CSLL payments are due on a quarterly basis.
 
Social Security Taxes
Tax Rate Tax Base
INSS (Social Security Contribution) Usually ranges from 26,8% to 28,8%  Total gross compensation amounts paid to employees
FGTS (Severance Indemnity Fund) 8% 
Total gross compensation amounts paid to employees

 
  • INSS rate is based on: a) the Social Security contribution itself (20%), b) the RAT contribution (Work accident risk – 0.5% to 6%), that is determined considering the risk-level associated with the activities developed by the Company, and c) the payments of additional Social Security charges (usually 5.8%), that must be made to the Federal Government, who will then transfer the funds to third parties (Senai, Sesc, Sebrae, among others).
  • Regarding the Severance Indemnity Fund (FGTS), companies must pay a 50% fine in case of wrongful dismissal (that is, termination without cause). The applicable FGTS rate is 8%.

Taxes on Financial Transactions
Tax Rate Tax Base
IOF Varies according to the nature of the financial transaction Financial operations (e.g. outstanding loan balances, insurance contracted)

State taxes

The 1988 Federal Constitution granted authority to the Brazilian States to collect tax on circulation of goods and on provision of interstate and intercity transportation services and on communications, including import operations.

It is not a cumulative tax, that is, such tax is only assessed on the increase in the price of the product in each phase of its “circulation” process. ICMS calculation is similar to a VAT-type system, whereby in each payment period, the taxpayer must check the amount of ICMS debits (generated on the circulation of goods/rendering of services) and ICMS credits (generated on the acquisition of goods) and if the taxpayer has more debits than credits, it will have to pay the tax on the difference.

Since the collection of this tax is under state responsibility, each of the Brazilian states has specific regulations concerning ICMS calculation, rates, payments and tax filing obligations. Therefore, companies that operate in different states are subject to several different compliance requirements.

Internal ICMS rates varies from 17% to 20%, depending on which States the operation occurs. Different tax rates applies for interstate transactions: 12%, 7% or 4%. It depends on the taxpayers’ location or the origin of the goods (foreign or local) and whether it is an imported product (imported content above 40%) with similar national product.

Municipal taxes

Services supplies, other than those subject to ICMS, are subject to a cumulative tax called Imposto Sobre Serviços (ISS). This is a municipal tax on certain services listed by the federal government as per Supplementary Law 116/2003. The tax base of ISS is the price of the service rendered.

In general, the service tax is levied by the municipality in which the company is established, and its rates vary from 2% to 5%. ISS is also due on the purchase of services from entities domiciled overseas (the so-called importation of services) in case the service is performed in Brazil or in case the results of this service are deemed to be verified in the Brazilian territory.

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