On April 4, 2018, in line with the “Gas to Grow” initiative, Brazil’s National Finance Policy Council (CONFAZ) published the Agreement (Ajuste Sinief) 03/18 (the “Agreement”), which grants differentiated tax treatment for the fulfillment of tax obligations related to transactions involving the transportation of Natural Gas (NG) through pipelines and allows the fulfillment of the obligations based on the contractual flows.

Below we highlight the main aspects of the Agreement:

  1. Scope: The differentiated tax treatment applies to transactions performed by the establishments of senders, recipients and providers of transportation services operating through gas pipelines located in the states of Alagoas, Amazonas, Bahia, Espírito Santo, Mato Grosso, Mato Grosso do Sul, Minas Gerais, Paraíba, Paraná, Pernambuco, Rio de Janeiro, Rio Grande do Norte, Rio Grande do Sul, Santa Catarina, São Paulo and Sergipe, duly enrolled and lists in Act Cotepe/ICMS.

  2. Condition for enjoyment: The enjoyment of the differentiated tax treatment is conditioned upon the regular input of the relevant information related to the transactions and movement of NG into the Information System (IS), to be approved by Cotepe/ICMS and funded by the providers of pipeline transportation services. During the transition period, which will precede the availability of the IS (and last through December 31, 2018), the pipeline users will need to present monthly reports containing the information related to the transactions performed, as defined in the Act Cotepe/ICMS. As of January 1, 2019, the effectiveness of the Agreement will depend on the effective implementation of the IS.

  3. The differentiated treatment: For purposes of taxation, the receiving and delivery points as well as the respective economic values provided for in the agreement will be considered, regardless of the physical flow in the pipeline. The issuance of the tax invoices will be based on the quantities of NG effectively measured in the receiving and delivery points, requested by senders and recipients and confirmed by the pipeline transportation service providers, pursuant to the contracts. The documents may be issued monthly until the fifth business day of the month following the one when the triggering event took place, without prejudice to the payment of the ICMS related to this triggering event on the date provided for in the legislation. Specific provisions shall be observed as to the issuance of electronic tax invoices, depending on whether the hiring of the transportation service was performed by the sender or the recipient of the NG or whether more than one transportation service provider is hired, and for interconnection of pipelines installations.

  4. Joint and several liability: The senders, recipients and providers of transportation services must verify, at the receiving and delivery points of the pipeline, if the transactions are in line with the provisions of the Agreement; and shall be joint and severally liable for the unpaid tax, related to tax invoice that they fail to receive or receive without conformity with the rules of the Agreement, except if they inform of the irregularity in the IS within 30 days from receipt of the product.

  5. Gas inventory inside the pipeline: The pipeline inventory comprehends the sum of the minimum volume necessary to initiate the movement of NG (minimum inventory) and of the volume related to the accumulated unbalance, derived from the difference between the volumes received and delivered in the transportation installation during a certain period of time. The minimum inventory may be delivered by the contractor of the transportation service (through the issuance of an electronic tax invoice without ICMS, relative to the delivery and devolution of NG); or acquired by the transportation service provider (in this case, the supplier of NG shall issue the electronic tax invoice pursuant to the legislation in force).

  6. Extraordinary losses: The extraordinary losses refer to the NG liberated into the atmosphere as a result of damages, accidents or malfunctioning of the transportation installation, resulting from acts or omissions of the provider of the transportation services. Regarding these losses, the service provider shall: (a) assess the losses monthly; (b) discriminate the losses proportionally to each contractor of the pipeline transportation services, considering the terms and conditions of the respective agreements; and (c) issue, until the fifth business day of the second month following the event, for each contractor, an electronic tax invoice without ICMS, including all information required in the Agreement. The contractor of the pipeline transportation service shall issue, until the fifth business day of the second month following the event, an electronic tax invoice with ICMS, including all information required in the Agreement.

  7. Force majeure losses: Force majeure losses derive from events that occur beyond of the control of the agents. Regarding these losses, the transportation service provider shall (a) assess the losses monthly; (b) determine the losses proportionally to each contractor of the pipeline transportation services, considering the terms and conditions of the respective agreements; and (c) issue, until the fifth business day of the second month following the event, for each contractor, an electronic tax invoice without ICMS, including all information required in the Agreement. The contractor of the pipeline transportation service shall issue, until the fifth business day of the second month following the event, an electronic tax invoice without ICMS, including all information required in the Agreement and write off the respective ICMS credit.

  8. Validity and effectiveness:The Agreement entered into force on the date of its publication but shall only produce effects as of the first day of the month following the one in which the Act Cotepe/ICMS is published, defining the form of presentation of the monthly reports containing the information related to the transactions during the transition period that precedes the implementation of the IS.