Rio Governor Wants 18% ICMS Tax on Oil Production

Brazil's Rio de Janeiro state governor Rosinha Garotinho, of the Brazilian Socialist Party (PSB), has presented a bill charging an 18% ICMS sales tax on oil and gas production to the state congress.

According to the leader of the PSB in the state congress, Noel de Carvalho, the law could be voted for the first time on May 29, and for the second time June 3, to become effective from July 1 - although some legal experts have suggested the law would be struck down by the courts.

The new tax should help with the Rio government's strategy of discouraging construction of a pipeline by federal energy company Petrobras from the Campos basin to Sao Paulo state, a spokesperson for the Rio state energy, naval industry and oil department told BNamericas. Rio wants to ensure that plenty of oil is left in the state to make sure that construction of a new refinery in the north of the state is feasible, he said.

Existing legislation makes an exception for oil and electric power, which is taxed at the end-consumer point, unlike every other product, which is taxed at source. In the case of oil, ICMS is charged as it leaves the refinery gates, alongside other taxes such as Cide, PIS and Cofins. The Campos Basin in Rio de Janeiro accounts for around 80% of oil production in Brazil, but only a small part of that production goes to the Duque de Caxias refinery (Reduc) in Rio state. Much of the oil production goes to the state of Sao Paulo to be processed at four Petrobras refineries, and the Rio government is unhappy at not receiving any tax. "We looked for a point in the production chain were there is a commercial transaction to be taxed, and that was at the wellhead," the spokesperson said.

According to state government calculations, it would receive 70mn-150mn reais a month in revenues from the new tax regime, although if the price of a barrel of crude were to rise to US$24.7, the revenues could rise to 500mn reais a month (today US$168mn). The bill states that oil delivered to Reduc would not be taxed, the spokesperson said, but admitted that the other oil would be charged ICMS twice - once at the wellhead and again at the refinery gates. The new tax should not deter private sector investors from the oil exploration and production, as they will not foot the new ICMS bill, the spokesperson said, explaining that production companies are usually only responsible as far as the wellhead, after which the oil is taken over by a trader.

However, Mauro de Andrade, an oil analyst at oil consulting firm Deloitte Touche Tomhatsu in Rio de Janeiro, disagreed, saying the tax would not help justify construction of a refinery and would kill investment in the Brazilian oil sector. "This would mean an increase in the royalties from 10% to 28%. That makes a large number of the fields in Campos unfeasible. This definitively ends the development of an oil industry in Rio de Janeiro, and consequently Brazil, because the reserves are in Rio," Andrade told BNamericas. "However attractive geologically that the Campos basin may be if you charge royalties of 28% with the structure of indirect taxes that exists in Brazil, the projects will have a very low profit margin, or even a negative one," he said. Andrade pointed to two projects, Shell's Bijupira-Salema and ChevronTexaco's Frade, that would probably be set aside if such a tax is indeed implemented. The margins on both projects are already "very tight" and the new tax would make them unfeasible, he explained.

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