On 16 May 2013, the Secretary of State Treasury of Rio de Janeiro issued Resolution SEFAZ # 631/2013 transforming the ICMS exemption granted to import of goods and equipment for use in exploration of oil and natural gas in a "tax basis reduction", so that the tax burden is equivalent to 1.5 percent, without the right to appropriate the corresponding credit.

On 21 May, the relevant resolution was rectified to establish that the transformation of the ICMS exemption benefit in a tax basis reduction also applies to the importation of goods and equipment of interconnected use during the exploration and production phases entering into the country to perform temporary services for a period shorter than 24 months.

In this sense, the tax exemption, now revoked, was destined to the importation of listed goods and equipment, as well as its parts, pieces and accessories, provided by Sole Annex of State Decree # 41,142/2008 and carried out under the Temporary Admission Regime, to be used in oil and gas installations during their exploration phase or during both the exploration and production phases for a period shorter than 24 months, as provided by REPETRO rules.

In fact, Convenio ICMS # 130/2007 authorises the states and the federal district to elect between exempting or "reducing the ICMS basis" on imports of goods and equipment destined to exploration activities or to both the exploration and production activities for a period shorter than 24 months.

The state of Rio de Janeiro, when incorporating the provisions of Convenio ICMS # 130/2007 through Decree # 41,142/2008, originally stated that temporary import of goods and equipment to be used in exploration activities, or in both exploration and production activities for a period shorter than 24 months, would be entitled to exemption.

Note, however, that § 1 of Article 2 and § 4 of Article 5 of State Decree # 41,142/2008 already authorised the Secretary of State Treasury of Rio de Janeiro to enact a normative act transforming the existing exemption into an ICMS tax basis reduction, aiming at "increasing" the tax burden.

Notwithstanding the state decree wording, the revocation of the existing exemption through a mere resolution is of disputable constitutionality.

With respect to the enforcement of such change in 2013, note that the first panel of the Brazilian Supreme Court, while ruling on an ex-officio appeal over Extraordinary Appeal 562.669, acknowledged that the revocation of ICMS exemptions, while being a matter associated with the economic policy of each member state, does not need to be approved on the preceding fiscal year or within 90 days from the date on which such revocation enters into full force and effect, as required by the Brazilian Constitution. Accordingly, based on such interpretation, even though the change in the taxation implies increase in the tax burden, it could be applied in the current year.

Nevertheless, in our view, the procedure adopted by the state of Rio de Janeiro is not consistent with the constitutional principles of legality, security and certainty warranted to the taxpayer.