Brazilian O&G associations raise concerns about tax reform regulation

Brazilian oil and gas market observers criticized supplementary bills PLP 68/2024 and PLP 210/24, approved in the senate, claiming they contain legal flaws and potentially harm competition.

Designed to help regulate the tax reform, the bills are subject to presidential approval.

Lawyers asked for comment by BNamericas agreed with most of the criticisms.

Evaristo Pinheiro, president of private refiner association Refina Brasil, said the decision by the rapporteur of the tax reform, senator Eduardo Braga, to remove the collection of the selective tax on the export of minerals and oil from the final text of bill 68/2024 generates legal problems and the risk of endless lawsuits.

“Taxing extraction and not exports means creating jobs abroad. Because of internal reference and transfer pricing mechanisms, the current model makes it more advantageous for the big oil companies to sell crude oil abroad than to resell it to private domestic refineries,” he said in a release.

According to Refina Brasil, a supplementary bill cannot change the constitutional rule, which established taxation on both extraction and sale, regardless of the destination. But the lawyers BNamericas spoke to disagreed on that point.

Created under the tax reform, the selective tax will apply to products considered harmful to health and the environment and is aimed at discouraging consumption of such products.

Petroleum association IBP, which represents the major oil companies operating in the country, raised concerns about the inclusion of the oil refining industry as a beneficiary of tax incentives linked to the Manaus free trade zone in Amazonas state under PLP 68/2024. 

The measure threatens free competition, according to IBP, since companies are competing in the same market where some are exempt from taxes and others must pay up. A specific beneficiary will be the Ream refinery, which Atem Distribuidora bought from national oil company Petrobras in 2022.

IBP also criticized PLP 210/24, which limits the right of companies to use credits to reduce taxes owed in the event of a federal primary deficit, that is, when tax revenues fall short of government spending.

“This measure represents not only an indirect increase in the tax burden on companies, but also directly affects their cash flow,” IBP said in a release.

PLP 210/24 also prohibits the granting, extension or prolongation of tax incentives or benefits. IBP highlighted that it is unclear whether these prohibitions refer only to new cases or apply retroactively.

“The potential limitation for pre-existing tax incentives or benefits in the legislation could characterize a violation of the constitutional principles of isonomy and equality and the competitive neutrality of the tax and make new investments unfeasible,” said IBP.

What the lawyers wrote

Tiago Severini, Vieira Rezende Advogados

“The refiners were in favor of the selective tax being applied to oil exports because this would tend to make it more attractive for oil companies to sell to the domestic market. If there is a selective duty on domestic sales, but not on exports, the oil bought by the refineries tends to become more expensive.

“I believe that export immunity is provided for in the constitution and covers all taxes. So PLP 68/2024 merely adjusted the provision to constitutionally guaranteed immunity. It is not granting an exemption or removing exports from the hypothesis of incidence in sales. 

“IBP's criticism [on tax credit limitation] is broader. In the IVA system [value-added tax, which unifies taxes prior to the tax reform], which has always been the focus of the reform, there’s no restriction on the use of credits, precisely to ensure non-cumulativeness.

“Halting this full credit in the event of a primary deficit ends up 'opening the door' to restrictions on the use of the credit (others can be provided for by ordinary law), as well as punishing the company with an increase in the tax burden, specifically in a year when its results may be in deficit.”

Paloma Rosa, Vieira Rezende Advogados

“Regarding the criticism of PLP 210/24, I understand that the attempt to restrict the use of tax credits creates legal uncertainty in the tax system applied in the country. Therefore, it will probably have a negative impact on business.

“As for restricting the freedom to create, expand or extend tax incentives/benefits, it will be necessary to carry out a case-by-case analysis of the nature of each benefit or incentive. The application of such rules in an unguided and unjustified manner can bring extreme legal uncertainty to the market, especially to sectors that rely on benefits, as is the case in the oil and gas sector.

“In relation to the inclusion of refineries in the Manaus free zone tax regime, this could cause a serious distortion or imbalance in the sector. I believe that this inclusion needs to be re-evaluated.

“Concerning the non-taxation of oil exports, I believe that the PLP has merely adjusted the proposed text to be in line with the constitutional provision granting tax immunity to export operations. To interpret that the term "commercialization" – provided for in the constitution – would also cover export operations would, at the very least, allow the existence of a contradiction of terms, that is, the use of an interpretation that tends to ignore the coherence and necessary harmonization of the legal system in force.

“Even if the text of the PLP maintained the mention of export operations as a hypothesis for the incidence of the selective tax, such a provision would invariably be unconstitutional, since it’s not up to the supplementary law to ‘re-establish’ the incidence of a constitutionally immune operation.”

André Carvalho, Veirano Advogados

“The criticism of the inclusion of refineries in the Manaus free trade zone makes sense. It distorts the system. Buying fuel without taxation, while the rest of Brazil will be subject to taxation... this erodes competition. 

“PLP 210/24, in turn, will attack the cash flow of companies, including those outside the oil sector. This brings legal uncertainty.

“I disagree with Refina Brasil's position on charging excise duty on oil exports. That would be trying to correct one distortion, the levying of selective tax on hydrocarbons, with another even greater distortion: taxing exports. The very levying of the selective tax in the original text of PLP 68/2024 is controversial, especially in the case of exports.”