On March 7, Brazilian Congress majority members voted to overturn the presidential vetoes to the Royalties Law (Law No. 12.734 of 2012).

With the vetoes overturned, the Federal Government, the states and municipalities that produce oil and gas will suffer significant loss of tax revenues. The portion of royalties owed to the Federal Government will be reduced from 30% to 20%. Producer states and municipalities located directly across oil fields will have their share reduced from 26.25% to 20%. The affected municipalities will have their share reduced from 8.75% to 2%.

On the other hand, non-producer states and municipalities will have their share increased from 8.75% to 40%. 

In light of the outcome of the voting, reactions start bursting forth in producer states and municipalities, aiming at restoring the prior criteria for distribution of royalties.

Congress members of producer states try to annul the session that overturned the vetoes under the allegation that the Congress internal Rules were not complied with, since the vetoes were not analyzed by a mixed commission before going to the Plenary.

The producer states’ governors will also file direct actions for declaration of unconstitutionality (ADI) at the Supreme Federal Court (STF), upholding that the law such as approved violates the Constitution. 

In this regard, here’s the understanding of the Brazilian Presidency with respect to the legal nature of the royalties:

“The royalties set in the laws currently in effect constitute a financial compensation provided to producer and adjoining states and municipalities by virtue of the oil exploration in their territory. In light of their indemnity nature, the royalties are incorporated to the revenues originating from these same entities, also for the purposes of future availability. Therefore, such revenue is deemed certain, and in several cases it was object of securitization or of transactions for    advancement of receivables. Alteration of such juridical reality violates the provisions of subsection XXXVI of art. 5 and the principle of budget balance set forth in  art. 167, both of the Brazilian Constitution”.

Another important reaction to the Congress voting came from the Governor of the State of Rio de Janeiro.

The referred governor ordered the suspension of all state’s payments except public servants’ salaries until a decision is rendered by the Supreme Federal Court (STF) on the unconstitutionality of the law passed by Brazilian Congress, which rejected President Dilma Rousseff’s vetoes in respect of the redistribution of the royalties. 

The Governor will also study the possibility of canceling several previously granted tax incentives. In the environmental area, the review of already granted environmental licenses will be studied.