Brazil to redraw tax laws to meet local content requirements
By Chris Noon | 19 September 2011 14:39 GMT
Brazil is set to redraw the rules governing oil and gas taxation to reduce the country’s reliance on imported machinery, and stimulate the local manufacturing industry.
The O Estado de Sao Paulo newspaper reported on Monday, without naming sources, that President Dilma Rousseff wanted to overhaul the ‘Repetro’ rules to encourage local content and research and development. It comes two years after former president Luiz Inacio Lula da Silva relaxed customs procedures to allow more foreign imports. The newspaper said that the new rules are likely to be released later this year.
The Repetro tax breaks were originally instituted in 1999 to stimulate investment in upstream activities. The overall costs of exploration and production were reduced by the suspension of federal taxes such as import duty and excise tax. Companies could receive the tax breaks as long as equipment returned to its country of origin at the end of a concession period.
Interfax understands that companies bidding for new oil and gas production sharing agreements awarded by the state’s National Petroleum Agency (ANP) will have to include a minimum percentage of local content in proposals, and set out how they plan to meet the obligation. The government had previously not considered the level of local content in proposals.
The redrawing of the legislative landscape to bring maximum benefit to local manufacturers had been widely expected. Almir Barbassa, the Chief Financial Officer of state-controlled energy giant Petrobras, warned in August that the success of Brazil’s oil and gas industry may harm the country’s manufacturing sector in an economic phenomenon called ‘Dutch disease’. The increase in revenue from the country’s hydrocarbons had made the Brazilian real currency unusually strong, making the environment more challenging for the country’s manufacturers.
“We have to find ways that allow us to increase manufacturers’ ability to compete,” Barbassa was quoted as saying an interview published in the Valor Economico newspaper.
‘Dutch disease’ was coined by The Economist newspaper in 1977 to describe the decline of the manufacturing sector in The Netherlands after the discovery of a large gas field in 1959. Petrobras has cited Norway’s development of its North Sea fields as a model in order to avoid the same de-industrialisation that took place in The Netherlands.
Brazil’s manufacturing industry has been offered support. The country’s National Development Bank (BNDES) also said in August that it would offer 4 billion reals ($2.6 billion) to help equipment and services investments related to the country’s oil and gas industry. The credit line, which will be offered until the end of 2015, will help Brazilian companies meet demand for equipment and services from Petrobras as it works to extract hydrocarbons from the country’s ‘pre-salt’ deposits.
Petrobras previously provided approximately 1 billion reals ($640 million) per year in funding to its suppliers, but will no longer do so. To ensure that small suppliers can cope with the impending ramp-up in business, BNDES will lend to medium sized-firms with more than 90 million reals ($57.6 million) in annual revenues, which will use the funds to finance smaller suppliers.
“Brazil has always been open to foreign investment, but it is worried by state benefit and local content just like any other country,” a petroleum services manager from accounting firm Deloitte, who did not wish to be named, told Interfax in an interview earlier this month. A source from the Brazilian energy ministry also told Interfax that the government would consider the level of take, the size of signature payments and the potential benefits for local manufacturers involved in each individual pre-salt hydrocarbon contract.
New oil and gas legislation will need to address other local concerns. Last week, Interfax reported that uncertainty over the best way to divide oil and gas royalties between Brazil’s federal government and individual states may also slow down the country’s efforts to develop its pre-salt areas.
Brazil to redraw tax laws to meet local content requirements
Brazil is set to redraw the rules governing oil and gas taxation to reduce the country’s reliance on imported machinery, and stimulate the local manufacturing industry.
The O Estado de Sao Paulo newspaper reported on Monday, without naming sources, that President Dilma Rousseff wanted to overhaul the ‘Repetro’ rules to encourage local content and research and development. It comes two years after former president Luiz Inacio Lula da Silva relaxed customs procedures to allow more foreign imports. The newspaper said that the new rules are likely to be released later this year.
The Repetro tax breaks were originally instituted in 1999 to stimulate investment in upstream activities. The overall costs of exploration and production were reduced by the suspension of federal taxes such as import duty and excise tax. Companies could receive the tax breaks as long as equipment returned to its country of origin at the end of a concession period.
Interfax understands that companies bidding for new oil and gas production sharing agreements awarded by the state’s National Petroleum Agency (ANP) will have to include a minimum percentage of local content in proposals, and set out how they plan to meet the obligation. The government had previously not considered the level of local content in proposals.
The redrawing of the legislative landscape to bring maximum benefit to local manufacturers had been widely expected. Almir Barbassa, the Chief Financial Officer of state-controlled energy giant Petrobras, warned in August that the success of Brazil’s oil and gas industry may harm the country’s manufacturing sector in an economic phenomenon called ‘Dutch disease’. The increase in revenue from the country’s hydrocarbons had made the Brazilian real currency unusually strong, making the environment more challenging for the country’s manufacturers.
“We have to find ways that allow us to increase manufacturers’ ability to compete,” Barbassa was quoted as saying an interview published in the Valor Economico newspaper.
‘Dutch disease’ was coined by The Economist newspaper in 1977 to describe the decline of the manufacturing sector in The Netherlands after the discovery of a large gas field in 1959. Petrobras has cited Norway’s development of its North Sea fields as a model in order to avoid the same de-industrialisation that took place in The Netherlands.
Brazil’s manufacturing industry has been offered support. The country’s National Development Bank (BNDES) also said in August that it would offer 4 billion reals ($2.6 billion) to help equipment and services investments related to the country’s oil and gas industry. The credit line, which will be offered until the end of 2015, will help Brazilian companies meet demand for equipment and services from Petrobras as it works to extract hydrocarbons from the country’s ‘pre-salt’ deposits.
Petrobras previously provided approximately 1 billion reals ($640 million) per year in funding to its suppliers, but will no longer do so. To ensure that small suppliers can cope with the impending ramp-up in business, BNDES will lend to medium sized-firms with more than 90 million reals ($57.6 million) in annual revenues, which will use the funds to finance smaller suppliers.
“Brazil has always been open to foreign investment, but it is worried by state benefit and local content just like any other country,” a petroleum services manager from accounting firm Deloitte, who did not wish to be named, told Interfax in an interview earlier this month. A source from the Brazilian energy ministry also told Interfax that the government would consider the level of take, the size of signature payments and the potential benefits for local manufacturers involved in each individual pre-salt hydrocarbon contract.
New oil and gas legislation will need to address other local concerns. Last week, Interfax reported that uncertainty over the best way to divide oil and gas royalties between Brazil’s federal government and individual states may also slow down the country’s efforts to develop its pre-salt areas.