Tax Law and the Oil, Natural Gas and Biofuel Industries in Brazil
© Springer International Publishing Switzerland 2015
Yanko Marcius de Alencar Xavier (ed.)Energy Law in Brazil10.1007/978-3-319-14268-5_99. Tax Law and the Oil, Natural Gas and Biofuel Industries in Brazil
(1)
Federal University of Rio Grande do Norte, Natal, Brazil
Abstract
The energy scenario of a country cannot ignore the tax regime adopted for companies in the sector. The tax has a direct relationship to the efficiency levels of the regulated energy sector. Therefore, it is necessary to analyze the tax system adopted in a certain sector, allowing economic agents to understand its operation, to point bottlenecks and inefficient tax rules and, thus, make it possible to introduce modifications or reforms in taxation. In turn, the Brazilian tax system is one of the most complex in the world, obliging the researcher to detail its nuances and facilitate the understanding to the taxpayer. From this perspective, the purpose of this chapter is to present an overview of Brazilian taxation, focusing on several taxes on the oil, biofuel and gas sectors. The chapter begins by presenting a general context of the Brazilian tax system, highlighting the operation of taxation at federal, state and municipal levels. Then the work exposes the general aspects of taxes on the oil, natural gas and biofuel industries, focusing on nine different taxes. At last, two special tax regimes applicable to oil and natural gas industries are presented.
9.1 Introduction
Conceptually, a distinction can be made between types of “taxation” observed in the oil, natural gas and biofuel industries in Brazil. The so-called lato sensu taxation is subdivided into two species: strictu sensu taxation, corresponding to the different taxes existing in Brazilian legal order that follow the legal concept of “taxation” contained in Brazilian law, specifically in art. 3 of the Brazilian National Tax Code (CTN),1 and the so-called government participations, which are paid to the Brazilian government by companies that engage in the exploration and production of oil and natural gas either for participation in the result of production or as financial compensation for exploration (the most common example of government participation, also adopted in other countries, and the payment of royalties). Although government participation, under the terms of Brazilian law, is not a tax per se, its fiscal nature is undeniable, as is its impact on the oil and natural gas industries.2
Because of the complex nature of the Brazilian tax system, a brief overview of the Brazilian tax structure and the different direct or indirect taxes imposed on business activities will be presented before discussing the specificities of taxation in the oil, natural gas and biofuel industries in Brazil. Indeed, as we shall see, the country has one of the most complex and wide-ranging tax systems in the world.3
The federation model adopted in Brazil is divided into four basic entities, each one endowed with its own legal characteristic: the Federal Union, the States (a total of 26), the Federal District and the Municipalities (a total of 5,570). This different federal entities have their own features from a legislative, administrative and budgetary viewpoint. Owing to such characteristics, the Constitution of the Federal Republic of Brazil of 1988 (CF/88) assigned the different federal entities with their own responsibility to institute and collect taxes, resulting in the existence of different taxes and tax guidelines.4
The first characteristic—related to the Brazilian federative model and the responsibility of the different federal entities to institute and charge taxes—has an immediate effect on Brazilian tax law. They are legal guidelines that determine, delimit and regulate the different taxes charged in the country, who charges them and how they are charged. Schematically, there is a hierarchy between the different legal guidelines exiting in Brazil, from a general guideline that determines essential rules in terms of the functioning of the tax system (in this case, CF/88), to guidelines with specific traits, which describe the procedure of how a determinate tax must be collected (procedure that can be described, for example, by a federal decree).
In summary, we can present the hierarchy of legal-tax guidelines using the following outline5 , 6:
I.
the Constitution of the Federal Republic of Brazil of 1988: responsible for delimiting the taxing authority of the different federal entities, determining the possible taxes to be created and who can create and charge them; it also contains guidelines on limitations to the authority to tax and legal guidelines that function as a brake or limitation mechanism to the activity of instituting and charging taxes; under this scenario, CF/88 is the first formal source of tax guidelines7;
II.
the different “complementary laws”: infraconstitutional guidelines that have the function of (II.a) resolving conflicts of authority over tax matters between the different federal entities, (II.b) regulating the constitutional limits to taxing power, (II.c) establishing general tax guidelines, such as defining taxes and their subspecies8;
III.
the so-called ordinary laws: infraconstitutional guideline for the institution of different taxes; whereas the Federal Constitution of 1988 and the different complementary laws determine the standards for creating taxes, ordinary laws (which can be created by all federal entities—Federal Union, Federal District and Municipalities) institute/create the taxes;
IV.
the different infralegal guidelines, such as decrees, resolutions, ordinances etc., come under the authority of different federal entities and are responsible for regulating a given tax guideline or procedure, such as how income tax will be collected from companies.
The scheme described above demonstrates the array of legal guidelines in place to regulate and enforce the tax system and the imposition/collection of such taxes. Many of these guidelines are created exclusively by the federal entities responsible for instituting taxes. A combined total of 309,147 different federal (instituted by the Federal Union), state (instituted by the States and Federal District) and municipal (instituted by the Municipalities and Federal District) tax guidelines have been implemented in Brazil since the promulgation of the Federal Constitution of 1988.9 Obviously, such a large number of guidelines have a direct impact on companies and individuals in terms of understanding and complying with their different tax obligations. Companies in particular employ a host of professionals (lawyers, accountants, economists, etc.) who are responsible for understanding and complying with the different tax procedures related to the business sector, resulting in high costs for companies.
In the case of business activity, we can list the different taxes imposed on companies, starting from an analysis of existing tax bases, such as income, patrimony and consumption.10
Brazil has adopted a tax model based on income, represented by income tax, collected from both individuals (tax on the income of natural persons—IRPF11) and legal persons/companies (tax on the income of legal persons—IRPJ) by the Federal Union. With respect to companies, the IRPJ accounts for a significant part of taxes paid by economic agents. In short, the basis for calculating the IRPJ is the profit made by the company, either real (profit earned by the company, adjusted for additions, exclusions or compensations prescribed by the legal-tax guidelines), presumed (option available to some taxpayers, where the individual pays a legal percentage of gross revenues, obtaining a value representative of presumed profit) or arbitrated (when it is not possible to calculate real profit and the taxpayer does not meet the requirements for taxation based on presumed profit). The tax rate of the IRPJ is 15 % of profit made by a company (real, presumed or arbitrated), calculated monthly, quarterly or annually.12
The Brazilian tax system also imposes a tax on certain products that undergo industrial processes, called Tax on Industrialized Products (IPI). Under the auspices of the Federal Union, the IPI is imposed on products that have been submitted to any operation that modifies their characteristics or finality or improves them for consumption.13 Comparatively, the IPI resembles the value-added tax adopted by a number of countries.
Other taxes commonly imposed on business activity are the Import Tax (II) and Export Tax (IE). These two taxes are the responsibility of the Federal Union, and, as the term suggests, both are imposed on the sale of products on the international market, through either the import of specific goods or the export of products produced in Brazil. The II is applicable to products entering the Brazilian market; in this case, the taxpayer is normally the importer. The IE is charged from the moment the national merchandise (or foreign merchandise manufactured in Brazil) leaves the country bound for foreign markets; the taxpayer is the exporter.14
Brazil also has a value-added tax charged by the States and the Federal District, denominated the Tax on the Circulation of Goods and Provision of Services (ICMS). The ICMS is charged, for example, in operations related to the circulation of goods, imposed on the value of the operation involving the circulation of a given product. The ICMS has true residual authority, given that it is only charged on the circulation of goods and services not under the auspices of Municipalities, an issue that will be explained later. On the other hand, due to the authority of the States and Federal District to institute and charge the ICMS, there is a myriad of state guidelines that regulate the aforementioned tax, making its understanding and application a difficult task for contributing companies.
The Tax on Services of Any Nature (ISS or ISSQN) is a value-added tax instituted in Municipalities (and the Federal District). The ISS is charged from the moment in which a private entity provides a given service in the Municipality in charge of collection, where the individual or company that provided the service is responsible for paying said tax. To that end, the price of the service rendered is used to calculate the tax. An important observation is the possible conflict between charging the ISS (municipal) and the ICMS (state), given that, in theory, both can be charged for services. To solve this problem and avoid double taxation, the Brazilian legislature created Federal Law No. 116, of July 31, 2003. This law gives Municipalities (and the Federal District) the authority to collect the ISS, listing a number of services that are susceptible to the tax; if a service is not included in the list of Federal Law No. 116/2003, the tax to be charged will be the ICMS.
It is important to mention three different taxes on assets that act indirectly on business activities: the Urban Building and Land Tax (IPTU), charged by Municipalities and the Federal District; the Rural Land Tax (ITR), charged by the Federal Union; and the Tax on Automotive Vehicles (IPVA), charged by the States and the Federal District. The taxes mentioned are charged on the assets/property of the parties, either immovable assets (IPTU and ITR) or automobiles (IPTU). Indirectly, these taxes are charged on economic activity since a number of companies are established in any given physical space and are owners of automobiles.15
Finally, there are three important taxes charged by the Federal Union to finance Brazilian social security, namely Social Contribution on Net Corporate Profits (CSLL), Contribution to the Social Integration Program/Civil Service Asset Formation Program (PIS/Pasep) and Contribution to Social Security Financing (COFINS). The CSLL, as the term suggests, is another tax on the income of companies, specifically on real or presumed profit, similar to the IRPJ. Since the rate can vary from 9 to 15 % of profits, the CSLL, unlike the IRPJ, can be applied before the calculation of IRPJ. The PIS/Pasep, a tax on gross revenues, has two regimes, denominated cumulative16 (with a rate of 0.65 %) and noncumulative17 (with a rate of 1.65 %). The Cofins resembles the PIS/Pasep in that it is charged on the gross monthly revenue of companies. It has a cumulative (with a rate of 3 %) and noncumulative regime (with a rate of 7.6 %).18
In general terms, these are the main corporate taxes and will serve as the basis for analyzing strictu sensu taxation of the oil, natural gas and biofuel industries. Their ramifications in each energy sector will be presented in the next topics.
9.2 Tax Law and the Oil Industry in Brazil
Starting from the scheme proposed earlier, we will begin our analysis with a study of the IRPJ applied to the Brazilian oil sector. In principle, there are problems and particularities with charging the IRPJ, given that different companies operating in the oil chain (exploration and production companies, refineries, distributors and fuel retailers) follow the general framework of the IRPJ. In other words, the taxes are charged on profits earned by the companies (real, presumed or arbitrated), with a rate of 15 %, and can be calculated monthly, quarterly or annually.19
With respect to the CSLL, the conditions are similar to those of the IRPJ. Companies in the oil chain (exploration and production, refineries, distributors and fuel retailers) also pay the CSLL, which is charged on profits (real or presumed), with a basic rate than can vary between 9 and 15 % and is calculated monthly or quarterly.
In the case of the IPI, the tax can only be charged on oil derivatives (ex.: gasoline, diesel, lubricants, liquefied petroleum gas—LPG—etc.) since crude oil does not undergo any modification or manufacturing process and therefore would not be subject to this tax. It is expressly stated in the Federal Constitution of 1988 that oil derivatives are exempt from paying the IPI and that only the ICMS, II and IE can be charged.20
In regard to the II, there are different forms of charging this tax in the oil industry, depending on the nature of the asset taxed. First, the II is charged on goods and services related to oil exploration and production (ex.: Christmas trees, vessels, maritime platforms, drilling rigs, etc.). In the first case, there are different types of rates instituted by the Federal Union, by means of federal decree, which can be either a fixed value, which varies according to the amount of good imported, or a percentage charged on the value of the good imported.21 In relation to the importation of crude oil and its derivatives, current Brazilian law exempts these products from the II.22 , 23
Specifically in the case of the IE, the main implications of the aforementioned tax in the oil industry are related to the export of crude oil and its derivatives. The base rate applied for exports in Brazil is 30 % of the product exported.24 However, the Federal Executive Branch can currently reduce this rate, as is the case of the export of oil and its derivatives, which are not subject to the IE.
The ICMS has an important role in the analysis of taxation in the oil and natural gas sectors, particularly due to the different constitutional guidelines that deal with collecting the aforementioned tax on oil derivatives.
Before discussing the ICMS tax on oil derivatives, it is important to underscore that debate is ongoing in the Brazilian Judiciary Branch regarding charging the ICMS on oil extraction, which would fall to state governments. This discussion emerged after the creation of State Law No. 4.117 on September 29, 2013, instituted by the State of Rio de Janeiro. The problem lies in the fact that, in principle, the charging of ICMS—on oil extraction—does not meet the principles and parameters contained in the Federal Constitution of 1988 and infraconstitutional law, thereby making this law unconstitutional. Because of the model for controlling constitutionality adopted in Brazil, the discussion surrounding the constitutionality or not of State Law No. 4.117/03 is currently taking place in the Supreme Federal Court, by means of Direct Action on Unconstitutionality no. 3.019-1/RJ.25
In regard to charging ICMS on operations involving oil derivatives, as mentioned previously, the Federal Constitution of 1988 contains a number of items that regulate this issue. The first basic rule that can be derived from the Federal Constitution of 1988 is regarding the exemption of the ICMS on operations sending oil and derivatives to other States.26 This same constitutional rule was reproduced in Federal Law No. 87, of September 13, 1996, stating that the ICMS will not be charged on interstate operations involving oil and oil derivatives, provided it is destined for industrialization and commercialization.27 On the other hand, in accordance with the exception contained in the Federal Constitution of 1988, ICMS will be charged on operations involving oil-derived fuels. In such cases, the system adopted by the aforementioned Federal Constitution is highly complex and still depends on the complementary law and guideline created due to the conjunction of interests in all the States (denominated “Covenant”) to regulate the issue since it has yet to be defined which fuels are subject to the payment of the ICMS. As long as the procedures to collect ICMS on operations involving fuels and lubricants remain unregulated, each Brazilian State will continue to establish its own tax rate.
The procedure for collecting the ISS is simpler since the municipal tax is usually charged when a determinate service is provided and it is up to the Municipality where the service is rendered to collect said tax. Thus, research, drilling, cementing, diving, profiling, concretion and other services related to oil exploration and production28 are subject to payment of the ISS, which will have a maximum rate of 5 % on the value of the service; this rate is stipulated by the different Municipalities.
In regard to PIS/Pasep and Cofins, it was previously mentioned that the collection methodology for the former calculates tax based on gross revenue, at a rate of 0.65 % (cumulative regime) and 1.65 % (noncumulative regime); in the case of Cofins, the approach is similar, with a rate of 5 % (cumulative regime) and 7.6 % (noncumulative regime) on monthly gross revenue.
However, in addition to the basic rule for collecting PIS/Pasep and Cofins, Brazilian law also stipulates specific hypotheses for collecting the aforementioned taxes from producers and importers of derivatives. For example, Law No. 9.718, of November 27, 1998, provides for different rates on gross revenues earned from the sale of gasoline, diesel oil and LPG.29
The last oil sector tax to be discussed is the Contribution for the Intervention into the Economic Domains-Fuels (CIDE-Combustíveis), a tax imposed by the Federal Union. The CIDE-Combustíveis is a recent tax, instituted by Constitutional Amendment No. 33 on December 11, 2004, and is charged on the importation and sale of oil and its derivatives, natural gas and its derivatives and ethanol fuel.30 Unlike most taxes discussed so far, the CIDE-Combustíveis rate is not a percentage of the value of fuel sold but rather a fixed value that varies according to the amount of product sold, for example, a fixed value of R$ 860.00 for each cubic meter of gasoline.31 According to Brazilian law, the CIDE-Combustíveis taxpayer will be the company or person that produces, formulates or imports the types of fuel specified in article 3 of Law No. 10.336, of December 19, 2001 (gasoline and its variants, diesel and its variations, aviation kerosene and other kerosenes, fuel oils, liquefied petroleum gas, including that derived from naphtha and natural gas and ethanol fuel). In accordance with the 1988 Federal Constitution, the amount collected from CIDE-Combustíveis will be used, for example, for financing environmental projects pertaining to the oil sector and transport infrastructure programs.32
9.3 Tax Law and the Gas Industry in Brazil
In regard to taxation in the Brazilian gas sector, there are many similarities with taxes applied in the oil industry. Differences are in regard to the nature of certain activities conducted in the gas industry and the imposition of taxable bases and rates of certain taxes.
Similar to the oil industry, the companies in charge of natural gas exploration and production, as well as gas transport and distribution companies, are charged the IRPJ and the CSLL. In the first case—IRPJ—the rate is 15 % on the company’s profit, whether real, presumed or arbitrated, and the taxis calculated on a monthly, quarterly or annual basis. With respect to CSLL, companies that explore, produce and distribute natural gas must pay the tax at a rate that varies between 9 and 15 %, charged on their profits (real or presumed) and calculated monthly or quarterly.
In the case of the IPI charged on natural gas, in principle (and owing to the nature of the tax) there is no provision for levying it because this fuel is usually a crude raw material, which does not undergo modification or industrialization, the legal basis for imposing the IPI. On the other hand, there are situations where natural gas is modified as is the case with LPG, which would allow IPI to be charged. In the current scenario, however, all oil gases (including natural gas) are exempt from the IPI.33
In relation to charging the II on the import of natural gas (and correlated products, such as LPG, propane, butane, etc.), similar to petroleum and its derivatives, the current rate is 0 %, as determined by federal decrees instituted by the Federal Union.34
In regard to the IE, with a base rate of 30 % on the value of the product exported,35 due to the different federal decrees instituted by the Federal Union, natural gas and correlated products are not subject to the tax.
The ICMS on natural gas has a unique particularity, especially owing to the already mentioned nature of the tax on the added value adopted in Brazil, whose institution and collection is the responsibility of the States and Federal District and results in a complex legal system, with different state laws regulating the issue. Added to this is the fact that the Federal Constitution of 1988 contains specific clauses on the ICMS taxation regime regarding natural gas and its derivatives, which also has a direct effect on infraconstitutional legislation.
Similar to the guidelines related to collection of the ICMS on operations with oil and oil derivatives, the Federal Constitution of 1988 states that there will be no taxes imposed on operations involving gas fuels derived from petroleum (such as LPG, which can be derived from both petroleum and natural gas), provided its destination/consumption is in other States.36 ICMS is charged on interstate operations involving natural gas and its derivatives, and, as specified in the Federal Constitution of 1988, revenues from the tax can be shared between the States of origin and destination, when operations are destined for nontaxpayers.37 Thus, as in the ICMS charged on fuels derived from petroleum, the ICMS tax rates on natural gas and derivatives are jointly defined between the States and the Federal District, using a legal instrument called “Covenant,” which has not been formalized and depends on each State (and the Federal District) to determine its own rates.
Concerning collection of the ISS for activities and services involving natural gas, similar to what occurs in the oil sector, the municipal tax is required for research activities/services, drilling, cementing, diving, profiling, concretion and other services involving the exploration and exploitation of natural gas.38 The ISS is collected by the Municipality where the service provider is located, at a maximum rate of 5 % of the value of the service provided.
The PIS/Pasep and Cofins are taxes charged by the Federal Union directly on revenues of companies working in the gas sector (producers, transporters and distributors), at rates of 0.65 % (cumulative regime) and 1.65 % (noncumulative regime) for PIS/Pasep and 5 % (cumulative regime) and 7.6 % (noncumulative regime) for Cofins.
One of the exceptions is the commercialization of LPG derived from natural gas, where rates are based on gross revenue from the sale of the product, with rates of 10.2 % for PIS/Pasep and 47.7 % for Cofins.39
With respect to CIDE-Combustíveis, natural gas is not currently subject to the federal tax, but it may be in the future because of the guideline contained in the 1988 Constitution, through a specific infraconstitutional law.40 On the other hand, LPG derived from natural gas is subject to CIDE-Combustíveis, in accordance with Federal Law No. 10.366, of December 19, 2001,41 with a rate of R$ 250.00 per ton of LPG sold.42 Thus, as in cases of the commercialization of fuels derived from oil, the company or individual that produces, formulates or imports LPG derived from natural gas will be liable for payment of CIDE-Combustíveis. It is also important to remember that the CIDE-Combustíveis tax is used to finance environmental projects linked to the natural gas and oil industries as well as transport infrastructure programs in Brazil.43
9.4 Tax Law and the Biofuel Industry in Brazil
In the case of biofuels, the analysis of different taxes on the sector will use the same methodology adopted for taxing the oil and gas sectors. The primary difference lies in the two main types of biofuels produced in Brazil, ethanol and biodiesel, which, in certain cases, exhibit differences in the tax regime applied or tax rates charged.
Companies in the ethanol and biodiesel production chain (refineries, distributors and resalers) are subject to the IRPJ and CSLL. The IRPJ is charged monthly, quarterly or annually at a rate of 15 % of corporate profits (real, presumed or arbitrated). In the case of the CSLL, the tax is charged monthly or quarterly on the profit (real or presumed) of companies in the ethanol and biodiesel production chain, with rates varying between 9 and 15 %.
Both ethanol and biodiesel are currently exempt from the IPI tax, in accordance with the Table of Tax Rates on Industrialized Products.44
Unlike the oil and gas industries, the II is charged on the import and export of ethanol and biodiesel. In these cases, rates can vary from 2 to 12 % for ethanol, depending on the product imported, and 14 % for biodiesel, which is charged on the value of the product imported.45
In relation to the IE, the system is the same as that found in the oil and gas sectors: the general rule is that the IE is charged at a maximum rate of 30 % of the value of the product exported. The Federal Union can reduce the rate by a federal decree.