Rio State Approves New Tax on Oil Production

Brazil's Rio de Janeiro state legislature (Alerj) this week approved unanimously a law imposing an 18% ICMS tax on oil at the wellhead, which will become effective from July 1, as part of a strategy to secure a better tax deal for the state, Rio state energy, naval industry and energy secretary Victer Wagner told BNamericas.

The 1988 constitution states that all products pay the ICMS at the point of production, and the only exception is for oil, which is paid at the refinery. Rio produces 1.3 million barrels a day, or 82% of Brazil's oil, but only refines 12%, whereas Sao Paulo produces no oil but refines 44%, Wagner said.

The Rio government claims that because of this distortion it is losing out on some 1bn reais (today US$333mn) a year in tax revenues, and has put in place a number of measures to increase its bargaining position as the federal Congress debates the federal government's tax reforms. All the Rio representatives in the federal congress, from all parties, are lobbying to change the tax reform and remove this distortion - or at least secure guarantees that a new refinery will be built in the state.

As it stands, the tax reform maintains the current distortion on oil and extends it to cover natural gas as well. "Either you charge all ICMS on production, or all on the consumption. You can't charge production except for oil to benefit Sao Paulo state," Wagner said. It is an "absurd situation where oil is produced here (in Rio), it doesn't pay tax here, and generates wealth in some states that don't produce oil," he added.

Last Friday, Rio state governor Rosinha Garotinho met with politicians and businessmen at the Rio industries federation (Firjan) to discuss the moves, and received unanimous, cross-party support, Wagner said. Oil companies cannot now stand up and complain, he said. Joao Carlos Franca de Luca, president of the Brazilian Oil Institute (IPB), which represents oil companies, was quoted by local press Wednesday as saying that the new tax would hinder investments in the oil sector. "It's hard to understand that after the law has been passed, they start to complain," Wagner said. But the state government's fight is at the federal level, over taxes, and not with oil companies, he said. "There is no absolutely no intention of harming any oil company. Quite the contrary. The state that has most helped oil companies has always been Rio de Janeiro," Wagner said. "The oil companies now have to help the state." As part of this strategy, Alerj is also considering a bill that would only allow the construction of crude oil pipelines in the state with its specific permission, according to Alerj website.

The proposal by representative Antonio Pedregal is designed to frustrate plans by federal energy company Petrobras to build a US$1.2bn, 600km pipeline carrying oil from the Campos basin in Rio to refineries in Sao Paulo, to replace some of the existing shuttle tankers that unload at a terminal in Sao Sebastiao.

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