How the regulation of Brazil’s tax reform affects the energy sector

Approved by Brazil’s lower house on Wednesday, the bill regulating Brazil's tax reform maintained the selective tax on oil and natural gas exports. 

This tax will be applied to products that are harmful to health and the environment.

On the other hand, parliamentarians approved the 100% cashback for the CBS (contribution on goods and services) tax on energy and natural gas for low-income consumers.

A local expert told BNamericas that the tax reform should be beneficial for the energy sector, although it is still unclear if certain taxes will effectively be reduced. 

Alongside the goods and services tax (IBS), the selective tax and the CBS will replace the current PIS, Cofins, ICMS, ISS and, partially, the IPI taxes.

The bill, which amends the government's original proposal, will now be analyzed by the senate, where the oil and gas industry hopes to achieve an exemption from the selective tax. 

In a press release, petroleum and natural gas association IBP warned that imposing the selective tax would result in an increase in the costs of goods and services in the production chains with consequent inflationary pressure, reduce the competitiveness of Brazilian exports and impact the revenue of oil- and gas-producing states and municipalities.

The organization, which represents the country's main oil and gas producers and fuel distributors, estimates the impact on revenues from special participations, a type of royalty that is only taxed after operating and tax costs have been deducted, at 8 billion reais (US$1.5bn) a year.

IBP said that the sector does not rule out filing legal action if the selective tax is implemented.

Tiago Severini, a customs and tax partner at law firm Vieira Rezende, said that it is still unclear how the selective tax will be levied. 

"There’s a separate PLP [supplementary bill] to deal with these rules," he told BNamericas. 

Still, the tax reform will be beneficial for the energy sector mainly because it simplifies the tax system, he said. 

"It will only be possible to assess the effective [tax] reduction once the whole system’s up and running. But, in principle, it should remain the same for E&P and fuels, and be reduced for electricity," said Severini. 

Severini considers the CBS cashback a good idea, but he added that the amount returned will relate to the last operation.

"This way, for it to work well, non-cumulative taxation along the productive chain would have to be complete," he said. And since this is not the case, all exporting industries should continue to accumulate credit.

"It will be cheaper for consumers if energy and gas are imported or produced entirely in Brazil by companies that don't also export," he said. 

“Regarding hydroelectric generation, for example, there will be a significant reduction in the tax burden, but for thermal, or even wind and solar, there must be a trade-off between inefficiency and benefit, leaving the actual price reduction for the end consumer uncertain.”