On January 17, the Interstate Agreement No. 03/2018 was published providing new rules regarding the exemption and reduction of the State VAT (“ICMS”) tax base on operations with assets and/or goods destined to the activities of research, exploration or production of oil and natural gas fields (“E&P activities”), supported by the REPETRO-SPED special customs regime, which was instituted by Law No. 13,586/2017.
It is noteworthy that Interstate Agreement No. 03/2018 did not repeal Interstate Agreement No. 130/2007, which provides for the benefits applicable to operations with assets and/or goods admitted under the REPETRO regime. In effect, Interstate Agreement No. 130/2007 remains valid and applicable in a subsidiary manner under Section 11 of Interstate Agreement No. 03/2018.
As will be further detailed herein below, although the Interstate Agreement introduced important rules to the Oil and Gas industry, it also introduced controversial issues. In effect, in the transference of assets amongst the REPETRO and REPETRO-SPED special customs regimes, the States and the Federal District were authorized to charge the ICMS, if such tax was not paid by the importer when the asset was originally admitted in to the territory. In a similar manner, charging the ICMS was also authorized, in case of change in the special customs beneficiary, if the original importer failed to pay it at the time of the original transaction occurred.
We also highlight that, following the Interstate Agreement No. 03/2018 authorization, Rio de Janeiro State has already introduced a similar set rules in its ICMS legislation under Decree No. 46,233/2017, including those related to the charging of the ICMS mentioned above.
Please note that we understand that there are good grounds to challenge such ICMS imposition by alleging that these rules are unconstitutional, since (i) Interstate Agreements are not enabled to create new ICMS triggering events; and (ii) there is no triggering event that justifies the ICMS imposition over the transference of assets amongst the REPETRO and REPETRO-SPED special customs regimes and/or change in the special customs beneficiary, as provided in Interstate Agreement No. 03/2018 and Rio de Janeiro Decree No. 46,233/2017.
Below we present the main provisions of the new Interstate Agreement. We shall also provide you our comments concerning certain rules of Interstate Agreement No. 03/2018, which, in our opinion, may become hot topics for taxpayers and State tax authorities alike.
1 - Reduction of ICMS tax base - import and local acquisitions of assets
Pursuant to Section One of Interstate Agreement No. 03/2018, the States and the Federal District are authorized to reduce the ICMS tax base on imports or local acquisitions of assets and/or goods, on a permanent basis, applied to E&P activities, admitted under the REPETRO-SPED regime, so that the final ICMS tax burden is equivalent to 3% (three percent), without appropriation of the corresponding ICMS tax credit over the inflow transaction.
It is important to highlight that the abovementioned tax incentive applies to permanent assets and/or goods admitted by the Brazilian Internal Revenue Service (“RFB”) under the REPETRO-SPED regime, that is, those goods currently listed in Annexes I and II of Normative Ruling RFB No. 1,781/2017.
In addition to the aforementioned principal asset, the tax base reduction benefit also applies to: (i) equipment and other parts and pieces which shall be directly incorporated to the principal asset, or is intended to guarantee its operability; and (ii) tools used directly in the maintenance of those assets.
Pursuant to Section 4, the ICMS levied on the relevant import or local acquisition will be due to the State where occurs the economic usage of the respective asset and/or good.
Please note that in the case that, at the time of importation or local acquisition, is not yet determined the production block or filed, to which the relevant assets and/or goods will be destined, and the federal legislation allows its storage at a customs bonded warehouse, under the terms of the new legislation, the ICMS levy will be suspended until the moment when the goods are actually destined for economic usage.
It is worth mentioning that the ICMS will be paid at once, even if the asset and/or good leaves Brazilian territory and reenters herein again without any changes or improvements, or in subsequent local or interstate operations.
2 - ICMS exemption on the temporary admission of assets into the country
Pursuant to Section 2, the States and the Federal District are authorized to exempt the ICMS levied over import transactions of assets and/or goods that have been temporarily admitted into the country for engagement in E&P activities, under the REPETRO-SPED regime – assets currently listed in Annex II of Normative Ruling RFB No. 1,781/2017.
Similar to the taxable base reduction benefit, the exemption may be extended to: (i) equipment and other parts and pieces, as long as they become part of the principal asset, in order to guarantee their operability; and (ii) the tools used to maintain those goods.
3 - Exemption of the ICMS on export operations which the assets do not leave Brazilian territory and over local sales preceding such export transactions (local chain)
Pursuant to Section 3, the States and the Federal District are also authorized to exempt the ICMS levy over the following operations:
- Export transactions, even fictitious ones (i.e., which the assets do not leave Brazilian territory), or local sale of assets manufactured in Brazil to an entity which shall be liable for subsequently admit or acquire it under the REPETRO-SPED regime, thus, under Section 1 (item "1" above) or the Section 2 (item "2" above) of Interstate Agreement No. 03/2018;
- In operations preceding those described in the sub-item above, meaning the local manufacture chain of production, encompassing all the suppliers of goods and equipment intended to oil and gas exploration and production activities.
Accordingly, the States and the Federal District were also authorized not to demand the ICMS credit reversal in connection to the preceding transactions that are exempt from the ICMS taxation.
Please note that this ICMS incentive is extendable to equipment, machinery, accessories, items, parts, pieces, materials and other goods, used as inputs in the construction and assembly of floating systems and of production or drilling platforms, as well as their modular units manufactured or assembled in industrial units.
The benefit in question can also be extended to the hulls and modules, when used as input in the construction, repair and assembly of floating systems and of production or drilling platforms.
It should also be pointed out that the exemption in question may also be adopted in operations carried out under other special customs regimes, in the form of payment suspension, referring to the proof of compliance as prescribed by specific federal legislation.
4 - Worth Highlighting Issues
In accordance with Section 5, the Interstate Agreement No. 03/2018 provisions are only applicable to the asset’s local acquisition or importation by the legal entity which:
- Holds the concession or authorization by the Brazilian government to perform E&P activities in the Country, as provided by Law No. 9,478/1997;
- PETROBRAS, as provided by Law No. 12,276/2010;
- Has entered into a Production Sharing Agreement, as provided by Law No. 12,351/2010;
- Was contracted or subcontracted to provide services related to E&P activities by one of the entities mentioned above; and
- The importer assigned by the contractor mentioned in subitem 4 above, when such legal entity is not domiciled in Brazil.
Please note that, as provided by Section 6, the usage of the tax incentives granted by Interstate Agreement No. 03/2018 is conditioned to:
- The relevant assets’ importation or local acquisition be also free from the federal taxes imposition, granted by suspension or exemption rules as well as subject to zero rate tax;
- That the taxpayer be subject to the SPED ancillary obligation compliance.
5 – Migration or transference from REPETRO regime to REPETRO-SPED
Section 8 of Interstate Agreement No. 03/2018 authorizes the States and the Federal District to exempt the ICMS levy over import transactions of assets and/or goods that have been temporarily or permanently admitted into the country before December 31, 2017, by migrating or transference from REPETRO regime to REPETRO-SPED.
It is important to highlight that according to second paragraph of Section 8, such ICMS exemptionis conditioned to the compliance of the following thresholds:
- In case the ICMS was not paid when the asset was originally temporarily admitted into the country, the taxpayer must pay such ICMS outstanding amount, with no additional charges (such as interest and/or penalties), following the rules applicable at the time the original import transaction was carried out; and
- In case there is a change in the special customs regime beneficiary at the time of the transfer from the REPETRO to the REPETRO-SPED regime, such outstanding ICMS payment mentioned above shall only be required, if the original importer failed to make such payment at the time of the original transaction.
In addition to it, Section requires taxpayers to dismiss any disputes (administrative or judicial) regarding such ICMS imposition, as well as waive any right to such claims, in connection to ICMS triggering events prior to the enactment of Interstate Agreement No. 03/2018.
6 – Most Controversial Issues
Even though it is praised the fact that the Interstate Agreement No. 03/2018 introduced rules vital to the development of the Oil and Gas industry in Brazil, its wording also presented some controversial issues, which, in our opinion may imply in questioning by the tax authorities, occasional assessments and even litigation in the Brazilian administrative and judicial courts.
In effect, by reading Interstate Agreement No. 03/2018 one may observe the Brazilian States’ resistance to recognize the non-imposition of the ICMS over temporary import transactions of assets into Brazil, despite the Brazilian Supreme Court decision, which has binding effects, that the ICMS shall not levy over import transactions where there is no transference of property involved (e.g., cross-border charter or rental of assets transactions).
Section 2 provides that the Brazilian States and the Federal District are authorized to grant tax exemption to the transactions therein contemplated. However, what its wording hides is the subliminal idea that, in case Section 2 is not internalized in the relevant State ICMS legislation, the tax authorities of such State would be authorized to charge the ICMS over such transactions – what we highlight is unconstitutional as ruled by the Brazilian Supreme Court.
Another controversial issue which may also be extracted from the Interstate Agreement No. 03/2018 rules is the one regarding the transfer of assets amongst special customs regimes, i.e., from the REPETRO to the REPETRO-SPED. In effect, as provided by Section 8 of the Interstate Agreement, the States and the Federal District are authorized to grant ICMS exemption over the temporary importation of assets that occurred before December 31, 2017, and are now subject to transference from the REPETRO to the REPETRO-SPED regime, as provided by Law No. 13,586/2017.
As mentioned above, such ICMS exemption, however, is conditioned to payment of the ICMS if the tax was not paid when the asset was originally admitted in to the territory or the original importer failed to pay it at the time of the original transaction in case there is a change in the special customs beneficiary.
Please note that we understand that there are good grounds to allege that these rules are unconstitutional, since Interstate Agreements are not enabled to create new ICMS triggering events.
In addition one may construe that by imposing such ICMS payment conditions the CONFAZ, in fact, introduced a political sanction rule, in a clear attempt to reduce the array of effect of the Supreme Court decision against the imposition of the ICMS over import transactions which do not involve the assets/goods’ transfer of property.
Finally, if combined Sections 8 and 9 rules, the taxpayer will be required to pay the ICMS at every special customs regime transfer filed in connection to an asset which, at the time of importation, had the ICMS imposition rebuked by a judicial order.
7 – Applicability
Interstate Agreement No. 03/2018 rules entered into force on January 17, 2018, with effects until December 31, 2040. It is now expected that each Brazilian State and the Federal District internalize its rules, for purposes of local applicability.