Merak Fiscal Model Library

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Brazil R/T (2004)

Fiscal Term Description
Fiscal Regime Type Royalty/Tax
Governing Legislation 1997 Petroleum Law
State Participation None
Signature Bonus Negotiable
Production Bonus None Payable
Surface Rental Negotiable
Surface Owner’s Royalty: For onshore blocks, there is a 1% royalty on gross production revenue, payable to
the surface owner and calculated monthly.
Royalties Government Royalty: There is a 10% royalty on gross production revenue payable to the government,
calculated monthly. The ANP may, at request of the Concessionaire, reduce the rate to a minimum of 5%
depending on issues such as geological risk and production forecasts
Employers are required to contribute to a savings program for employees. This tax is 1.65% of Gross
Social Integration Program
Domestic Production Revenue and is deductible for Income Tax. Model assumes all production sold
(PIS)
domestically. Model assumes all production sold domestically.
COFINS is a contribution levied on legal entities for financing the social security system. This tax is 7.6% of
Social Assistance Contribution
Domestic Gross Production Revenue and is deductible for Income Tax. Model assumes all production sold
(COFINS)
domestically.
The concessionaire is required to invest into a research and development program whenever it pays the
Research & Development Tax
Special Participation Tax for a given field. This tax is 1% of Gross Production Revenue from the field.
ƒ There are a number of other additional taxes that are not direct taxation on petroleum revenues, so have
been termed “Indirect Taxes”. These taxes are imposed by the Federal, State and Municipal governments
and apply to investment and services used by petroleum companies. This taxation is quite complex and
depends on the type of investment (tangible or intangible) and the origin (domestic or imported). The
following taxes are assumed to be the Indirect Taxes: municipal service tax (ISS), state value added tax
(ICMS), import duty (I.I.), federal tax on manufactured products (IPI), and provisional contribution on
financial transactions (CPMF), PIS and COFINS charged on equipment and goods.
ƒ A law (REPETRO) was passed in 1999, to give petroleum companies an exemption from paying certain
Indirect Taxes indirect taxes (I.I, IPI, ICMS, PIS and COFINS) and is valid on all imported goods until December 31,
2007. This exemption was further extended in July 2004 to end in 2020. The impact of indirect taxes on
Capital Investments is assumed to increase these costs by 6% while the exemption is in force, and by
38% without the exemption. The impact on Operating Costs is assumed to be a 20% increase, with the
exemption having no impact as it mainly applies to tangible goods.
ƒ Model assumes Indirect Taxes are expensed for Income Tax but not for SPT.
ƒ This interpretation was made with reference to SPE Paper 69593 “Government Share and Economic
Analysis: Case Study of Campos Basin, Brazil”, Decio H. Barbosa, ANP and Jose Gutman, ANP.

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 Brazil R/T (2004)

Fiscal Term Description

A special participation (tax) is applied in the case of a large production volume or great profitability. The
calculation is Ring Fenced on a field-by-field basis based on the Development Plan. The tax rate depends on
the production volume, the location of the field (onshore or offshore), the water depth, and the number of
years of production. The basis of the tax is the Production Net Revenue, which is defined as the gross
revenue less signature bonus, royalties, taxes, exploration expense, operating costs, abandonment provision,
and depreciation. The special participation is calculated quarterly and the number of production years is
counted from the first quarter that has production in the first day of the quarter. Deductions for the special
participation tax are as follows:
ƒ Bonus and Fees are expensed.
ƒ Exploration costs are expensed.
ƒ Tangible Development Costs are depreciated straight-line over 10 years.
ƒ Intangible Development Costs are expensed.
Special Participation ƒ Operating Costs are expensed.
ƒ Corporate Overhead Costs are not deductible.
ƒ Abandonment Provision allows future abandonment costs to be recovered straight line over the
production life.
ƒ Production and surface royalties.
ƒ Rentals.
ƒ Only taxes directly related to petroleum activities within the concession are deductible. It is not clear which
taxes are deductible. The R&D tax is the only tax assumed to be deductible.
ƒ Financial expenses (not modeled).
ƒ Interest expense and exchange rate variations are not deductible (not modeled)
ƒ Losses are carried forward indefinitely.
This tax is calculated quarterly.
In addition to the Special Participation, there are a number of other income-based taxes assessed at the
corporate or country level. These taxes include a Social Contribution Tax on Net Profits (CSL), Corporate
Income Tax (CIT), and a Surtax (AIR). The tax rates are 15%, 9%, and 10% respectively, giving a combined
tax rate of 34%. The CSL was reduced to 8% in 2003, reducing the combined rate to 33%. This reduction
was overturned and the combined tax remains at 34%. The taxes are calculated quarterly and have the
following deductions:
ƒ Signature Bonus is amortized 10 years straight-line method.
ƒ Exploration expenses are deferred until production start and amortized via 10 year straight-line method.
ƒ Tangible Development Costs are depreciated straight-line over 10 years except FPSO’s (20 years)
starting from when asset becomes operative
Income Tax ƒ Intangible Development Costs are expensed.
ƒ Operating Costs are expensed.
ƒ R&D taxes are deductible and can be included within general company costs.
ƒ Special Participation Tax
ƒ All taxes other than corporate income taxes, are assumed to be deductible and expensed.
ƒ Corporate Overhead Costs are expensed.
ƒ Financing and Interest Expenses (not modeled).
ƒ PIS and CONFINS are deductible
Tax losses can be carried forward indefinitely without interest, but only 30% of the losses can be used in any
given tax quarter.

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 Brazil R/T (2004)

Fiscal Term Description

Withholding Tax 15% on interest and capital gain remittances
Ring Fencing Around the country for income tax, and around the field for SPT and royalty.
Periodicity Model performs calculations on a quarterly basis.

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