A Guide to Brazilian Oil & Gas Taxation

TAX A Guide to Brazilian Oil & Gas Taxation

2011 edition

kpmg.com/BR 2 | Section or Brochure name

Contents

Welcome Introduction...... 3

Oil & Gas industry in Brazil...... 4

How to invest in Brazil...... 5

Foreign Exchange Controls...... 8

Tax Overview...... 9

Trade & Customs...... 16

Special Custom Regimes and Tax incentives ...... 19

International Tax Matters...... 23

M&A Tax Matters...... 28

Labor Law...... 30

Individual taxation...... 36

Oil & Gas industry in Brazil and KPMG ...... 38

KPMG in Brazil...... 39

As one of the world’s leading Based on the National Petroleum, commodity and natural resources Natural Gas and Biofuel Agency (ANP), producers, Brazil has been a the Oil & Gas industry has grown by player on the world stage. more than 300% since 1997, which means that the sector’s contribution The new Oil & Gas discoveries to the GDP has grown from 2.75% to have increased the optimism and around 10% in 2006. For the period from investments in this sector. It is within 2006 to 2010 the investments that have this context that Brazil is consolidating been reported to ANP by the current its image as one of the preferred concessionaires total US$ 33.8 billion, destinations for foreign investments, a figure that may grow considerably increasing the participation of major as a result of the discoveries. players and interest of newcomers, capable of participating in important Within this scenario, Brazil has become alliances with international petroleum one of the most attractive countries for exporters and capable of alleviating investments in the Oil & Gas sector and pressure on price highs as a result of the a number of much larger investments length of its coastline and the potential have been already announced by major for its reserves, which total around players. Due to that, it has been noticed 14,000 million barrels in 2010, according an increasing volume of M&A activity, to the Brazilian Agency for Petroleum, as well as an unprecedent presence Natural Gas and Biofuels (ANP). of newcomers starting operating in different levels of the supply chain. Such new discoveries, specially in the pre-salt area located off the coast, are considered as the largest discoveries in the world since the year 2000 and the largest discoveries in the West since 1976. Market analyses made by KPMG Oil & Gas Center of Excellence have revealed that the present capacity of the Brazilian Oil & Gas industry represents only 3% of what it will be in 25 years. The projections show that the sector in Brazil should double its size on every five or six years.

Oil & Gas industry in Brazil is regulated by Law 9,478/97 and ANP, which is responsible for regulating, contracting and supervising the activities of exploration, development, production, refining, distribution and retail.

According to the mentioned legislation, Local Content percentages according to where the activities related to the Oil & Gas O&G industry is an extremely blocks were located: ground, shallow industry in Brazil should be, in principle, competitive sector with an increasing waters or deep waters. As from the 7th performed exclusively by the Federal demand of goods and services to rounds, the minimum requirements Government. It is also stated in the support the development of its were expanded for a list of itens for law that private entities may develop projects, a characteristic that pushes exploration and development phase. such activities by way of concession O&G players to search for prices and It is important to note that the local agreements, authorizations or resources in the international market. In content policy is relatively new in Brazil production share regime contract. order to foster the development of the and has suffered several modifications local industry and mitigate an excessive As a general rule, O&G contracts in the last years. Due to that, investors use of resources from international in Brazil are usually based on shall take proper attention to the suppliers, governments may impose concession agreements, which require compliance of local content policy which a local content policy, in which O&G industry players to incorporate a is one of the key drivers when doing players are required to acquire goods local entity to carry out activities in business in the O&G industry in Brazil. and contract services from local Brazil. Periodically, ANP promotes suppliers and service providers. Pre-salt bidding rounds – also known as Brazil In the year of 2007, Brazilian Rounds – for companies intending Local content requirement in Brazil is Government announced the discovery to participate in public concessions currently regulated by Resolution 36/07 of a deep-sea field of large oil and gas for the exploration, development and of the Ministry of Mines and Energy. reserves. This area has been named production of Oil and Natural Gas. In In practical terms, the public bidding Pre-Salt, considering its location general, the public bidding stipulates rounds stipulate a minimum percentage about 7 Km below the sea bed, under eligibility requirements, usually of local content. The percentage of a series of layers of rock and salt. involving tax clearing certificates and local content utilized by each bidder local content policy, for instance. This announcement has been very may be an aspect to be considered commented in the global community, It is important to outline that companies by the government authority to rank emphasizing the impact of this new involved in O&G contracts are subject the bidding companies in the round. resource for the Brazilian economy. to Governmental takes, a compensation After each bidding round, the due by companies for the exploration Because of the significance of these percentage of local content utilized of the O&G. Currently, there are four reserves, the Brazilian government has by the winner of the bidding process types of Governmental takes foreseen been studying a potential change in is included in the concession in Law 9,478/97: (i) Signature Bonus; the exploration and production (E&P) contract. The non-compliance (ii) Royalties; (iii) Special Participation; model adopted up to now. Several with the agreed local content shall and (iv) Area Retention Tax. In addition, discussions have arisen regarding give cause to fines established it is also important to note that the current contracting practices and in the concession agreements. concession agreements have been royalties distribution in this industry stipulating an obligation to invest 1% In general terms, local content may and it is still uncertain what should of the gross revenues in Research be measured by the proportion be the extent of the changes that & Development. This issue is also between the sum of values of the may come up in the next years. found in the “Tax overview” section. goods and services acquired, direct Based on a change in the Law or indirectly, by the concessionaire 9,478 made in 2010, the exploration, from a Brazilian source and the total development and production of oil amount of goods and services acquired and gas shall be carried out through related to the whole operation. concession agreements or through The minimum percentage for local the production share regime in content was firstly required in the the pre-salt and strategic areas. 5th and 6th rounds with different

Brazil’s rapidly growing economy, in addition to the Brazilian tax law, which is considered firm, create an attractive environment for investors, and with careful planning, companies and funds can take advantage of several benefits of choosing Brazil for its investments.

Setting up the business Subsidiaries Limitadas (Limited Foreign investors may enter the In general, foreign investors tend to Liability Companies) Brazilian market directly through a incorporate a subsidiary rather than set The articles of incorporation of branch or a subsidiary or through up a branch in Brazilian territory due a Limitada follow the form of a third parties by means of distribution to the following: (i) the shareholders partnership contract, requiring at and sales representation activities. are not responsible for the Brazilian least two investors. Nevertheless, it is Exploration and production activities subsidiary’s debts, except for specific considered an entity that is separate usually require the incorporation of a provisions set forth by corporate, from its quotaholders. Nonresident local company, because, for example, tax, labor and bankruptcy rules, and quota holders must grant a power of of the concession bidding rounds rules. (ii) the process of establishing a attorney to a representative in Brazil On the other hand, the decision on subsidiary in Brazil is fairly simple and to receive service of notice and act on whether to establish a local company much less time consuming when their behalf at quota holders’ meetings. for the suppliers of the O&G chain compared to establishing a branch. The corporate capital, which must be would depend on a variety of factors, Laws regulating the formation of legal denominated in Brazilian currency, such as, comparison between the costs entities in Brazil are applicable to foreign is divided into quotas with fixed or associated with import of goods and and Brazilian entities or individuals different unit values as specified in the services versus the local operation, as in substantially the same manner. articles of incorporation. In this regard, well as, local content requirements. the responsibility for the payment of Nonresident individuals or legal entities In most cases, distribution and sales any corporate obligation is limited may adopt any type of legal entity representation save costs when to the quotaholder’s participation. recognized by Brazilian legislation, compared to the incorporation of being the more common strutures, Recently Brazilian government a local company. However, these the Limitadas (Limited Liability introduced the limited liability company, alternatives may be accompanied Companies) or SAs (Corporations). in which it is possible to have just one by a lack of control of the foreign single investor (EIRELI, or empresa investors over the way third parties individual de responsabilidade limitada), distribute or sell their products in to be in force as from January, 2012. Brazil and deal with their trademarks. This legal entity should have a minimum amount of 100 times the Brazilian minimum wage as capital (current minimum wage at R$ 545.00).

Regular independent audits are FIP – Investment Fund Consortiums (JV Agreements) required for Limitadas which holds in Participations The E&P agreements are usually total assets higher than R$ 240 Fundo de Investimento em structured as consortiums in million or accrued annual gross Participações or “FIP”is a feasible and Brazil. The consortiums are not revenues higher than R$ 300 million. efficient investment vehicle in Brazil. regarded as legal entitites and It is not a legal entity but a pool of involve a specific project, for a pre- SAs (Corporations) resources, incorporated by investors determined period of time while The organization and operation of an as co-ownership, aiming at investing maintaining the corporate autonomy SA is governed by the Law 6,404/76 in securities. As a matter of fact, a FIP of each party of the consortium. and it was designated to stimulate the is only permitted to invest in shares, development of the Brazilian capital The consortium is regulated by arts. debentures, subscription bonuses market and to provide additional 278 and 279 of Brazilian Corporate Law and other securities convertible into protection for minority shareholders. (Law 6,404/76) and is managed by one shares issued by corporations (“S.A.”). of the entities, designated as the lead- The SAs may be either publicy or The advantage of using the FIP company, which will be responsible for private held, depending on whether structure investments in Brazil is the accounting records, bookkeeping their securities are accepted for that (i) this investment vehicle is not and safekeeping of documents that trading in the securities market. subject to taxation in Brazil; and (ii) evidence the consortium operations. The corporate capital is divided into its distributions to foreign investors The company’s responsibility for negotiable shares which are indivisible are not subject to withholding the consortium’s operations is in relation to the company. In this sense, income tax either, provided that the generally defined in the agreement. shares can be ordinary (essential rights following requirements are met: In this regard, it is a common of a shareholder, especially in respect • None of the investors are located practice to stipulate the company’s to participation in the company’s results or residing in low tax jurisdictions. responsibilities in the same proportion and right to vote in the company’s to their participation in the consortium. general meeting) and preferred • One single investor cannot alone, Thus, in principle, companies do (preferential rights with respect to or in conjunction with its related not share joint responsibility for dividends and/or reimbursement of parties, own more than 40% of consortium’s operations from a capital, however with no right to vote the total quotas (akin to shares corporate perspective. New rules of in the company’s general meeting). conceptually) issued by the FIP. joint withholding tax responsibility The shareholder’s responsibility is • One single investor – solely or along were introduced for cases where limited to the value of shares held. with its related parties – cannot have the right to receive 40% In addition, as a general rule, legal or more of the total income and entities incorporated as SAs proceeds distributed by the FIP. are required to follow publicity rules and are obliged to carry out regular independent audits. Branches In addition to subsidiaries, foreign investors may also enter the Brazilian market directly through a branch. In general, the O&G industry does not operate through a branch because of the lengthy process of incorporation and the need of authorization from the Ministry of Development, Industry and Commerce. It is important to bear in mind that a branch is subject to Brazilian law and courts with regards to its business and transactions carried out in Brazil.

© 2011 KPMG Auditores Independentes, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in Brazil. A Guide to Brazilian Oil & Gas Taxation | 7 the consortium fails to collect the Interest on Net Equity (“INE”) Interest withholding taxes levied on services Another option for remitting income Remittances of interest to contracted by the own consortium. to foreign shareholders is the Interest foreign parties are subject to on Net Equity, which is a hybrid 15% withholding tax (or 25% for Because of the limited provisions in remuneration with characteristics recipients in low tax jurisdictions). the Brazilian corporate law, there is resembling both interest and dividends. some flexibility to define the terms It should be noted that Brazil has thin of the consortium agreements INE is calculated by applying the capitalization rules (generally 2:1, or which shall define the contribution long-term interest rate (TJLP- Taxa de 0.3:1 for low tax jurisdictions, for of each party, share of revenues or Juros de Longo Prazo) to the Brazilian the debt to equity ratio) and transfer production, costs and other operational entity’s adjusted equity (accounting pricing rules. Both rules may apply aspects of the parties’ relationship. value, adjusted for the increases and on interest payments, and in this decreases to equity during the year). case, the non-deductible excess Repatriation of Profits and amount is added back for corporate Investment Proceeds Deductibility of INE is limited to income tax purposes (disallowed) Brazil’s tax system provides strategies the greater of: (1) 50% of the net and may not be carried forward. that a foreign investor can find useful accounting income (before corporate in structuring its investment in Brazil. income tax), and (2) 50% of retained Capital gains earnings and profit reserves. The Nonresidents’ capital gains deriving Dividends applicable tax to foreign shareholders from a sale of an asset located in Brazil, Dividends paid to foreign shareholders receiving INE payments is a withholding including shares in a Brazilian company, are exempt from withholding tax. tax of 15% (or 25% for recipients are subject to withholding income tax Dividends may be paid out of net located in a low tax jurisdiction). at 15% (25% if the seller is located in accounting income (after taxes) a listed low tax jurisdiction). In case for the year or profit reserves. of a sale between two non-residents of an asset located in Brazil,the representative of the nonresident buyer is responsible for withholding and paying the Brazilian tax on capital gains.

All foreign exchange transactions must be contracted with an authorized agent (normally a private financial institution authorized by the Central Bank to operate in the exchange market). Most foreign exchange transactions do not depend on Central Bank’s pre-approval or approval, which make the exchange operation process simple and straightforward.

Foreign direct investments in Brazil (e.g. FIP and FII) are also required assistance, etc.), should be also subject must be registered with the Brazilian to register such investments in an to Brazilian Central Bank’s online Central Bank (RDE-IED). Their proper electronic Central Bank registration electronic registration system RDE- registration is very important in system, the so-called RDE-Portfolio. ROF (Registro Declaratório Eletrônico enabling the future repatriation of de Operações Financeiras) in order to In addition to that, most cross-border capital and remittance of dividends, allow future remittance to funds abroad financial transactions such as loans, interest on equity, and capital in connection to such agreements. rentals, leases, as well as agreements gains. Foreign investors that make involving transfer of technology certain financial investments in the (royalties, know-how, technical Brazilian financial and capital market

Introduction Branches of foreign companies, Actual profit system The Brazilian tax system is based on although rare, are generally taxed Under the actual profit system, net the principle of strict legality and its in the same manner as standalone taxable income corresponds to the main principles are defined by the subsidiaries. A company is, in company’s net book profit, adjusted Federal Tax Code of 1966 and by the principle, considered resident in by certain inclusions and deductions Federal Constitution of 1988. Three Brazil if it has been incorporated provided by the Brazilian legislation. jurisdictions and tax collection levels under Brazilian corporate law and Deductible expenses are generally are defined by tax legislation. Thus, is domiciled in Brazilian territory. all items related to the ordinary taxes may be levied by the federal, In addition, Brazilian law requires the business of a company, properly state and municipal governments. company’s effective management to documented and which are necessary On the other hand, there is a be in Brazil. Please refer to permanent to maintain its source of income. separation of jurisdictions and establishment issues in the chapter Tax losses powers between the judiciary and on International Tax Matters. Under the actual profit system, the administrative boards for the The two main methods to calculate companies may accrue tax losses judgment of controversies. A tax corporate income tax and social to offset with its future taxable matter is usually analyzed at the contribution tax due on profits profits. In this regard, it is important administrative level before the judiciary. foreseen by legislation are: actual to outline that there is no tax The federal tax system is managed profit and presumed profit. consolidation in Brazil and, therefore, by the Receita Federal do Brasil it is not possible to offset tax losses Corporate income tax (IRPJ) (RFB), which is part of the Ministry from other group companies. Brazilian corporate income tax is of the Economy (Ministério da charged on net taxable income. It The main aspects in connection Fazenda). States and municipalities applies at a basic rate of 15%, plus to tax losses that should be have similar agencies. a surtax of 10% on annual income considered are the following: Corporate taxation that exceeds R$ 240,000.00 per • Tax losses may be carried Federal corporate income taxes year or R$ 20,000.00 per month. forward indefinitely. Brazilian tax legislation does Social contribution tax not foresee specific provisions • The offset is limited to a maximum on profits (CSLL) for companies involved in the 30% of annual taxable income. This tax was introduced to fund social Oil & Gas industry from an and welfare programs and is paid in • No carry back of losses is allowed. income tax perspective. addition to the corporate income tax. • Non-operational losses may be There are two income taxes in Brazil: CSLL is also a tax levied on net taxable carried forward, but they may only the corporate income tax (IRPJ – income and is applied at a rate of be utilized to offset non-operational Imposto de Renda das Pessoas 9%. It is not deductible for corporate profits (e.g., capital gains). Jurídicas) and the social contribution income tax purposes. CSLL’s tax tax on profits (CSLL – Contribuição • Tax losses are lost if there is a base is similar to the tax base of the Social sobre o Lucro Líquido). They change in a taxpayer’s control corporate income tax, although some are charged on similar bases. and type of activity between the specific adjustments may be applicable time the losses are generated Profits, income and capital gains to one tax and not to the other. and the time they are utilized. earned worldwide are subject to Brazilian corporate income taxes. There is no distinction made as to the origin of the capital (i.e. whether the investors are foreign or domestic).

Presumed profit system Law 11,941 created the Transitional Under the non-cumulative system, Brazilian companies may elect to Tax Regime (so called “RTT”) through taxpayers may generally recognize PIS compute corporate taxes based which the tax computation shall and COFINS credits corresponding on presumed net profits, provided follow the prevailing accounting to 1.65% and 7.6% of certain inputs. they (a) do not have total revenues rules in force in 2007. Brazilian tax Such tax credits may be also used in the preceding year higher than authorities regulated that all tax to offset future PIS (1.65%) and R$ 48 million, (b) are not financial adjustments, for Brazilian corporate COFINS (7.6%) or other federal institutions, similar entities or factoring taxes purposes, should be performed taxes due, provided certain companies, (c) do not earn foreign in an electronic system (FCONT – requirements are observed. profits, income or gains (i.e. directly Controle Fiscal Contábil de Transição) or through foreign subsidiaries) and and informed on annual basis. The PIS and COFINS non-cumulative (d) do not qualify for an exemption or regime is mandatory for companies Tax Audits reduction of the corporate income tax. subject to the actual profit method of Tax audits are performed by federal computing corporate income taxes. The election is made annually, at the tax inspectors on a random basis. The PIS and COFINS cumulative beginning of the year and the choice The scope and frequency of auditing system remains applicable for certain may be renewed every year. The does not follow a set pattern. In entities, such as companies under election is valid for both corporate general, the right of the tax authorities the presumed profit system. In income tax and social contribution to make corporate income tax addition, the cumulative system still tax on profits. The presumed profit assessments (statute of limitation applies to revenues deriving from is measured by applying a certain for tax purposes) expires 5 years after telecommunications, transport and predetermined percentage, which the end of the tax year in which the software development services. varies according to the activity of the tax return should have been filed. taxpayer, to the gross sales. The total Such activities are generally subject to a amount of capital gains, financial Administrative appeals against 0.65% tax rate for PIS and 3% tax rate revenue and other revenue are then assessments must be filed within for COFINS, and no credits are available. added to this presumed profit base. 30 days of assessment. If the Revenues related to export transactions Finally, the corresponding tax rates assessment is upheld, the taxpayer and the sale of permanent assets are, are applied to the presumed profit. may appeal to an administrative court. in general, exempt from these taxes. If still unsuccessful, the taxpayer For instance, for the income tax, can appeal to the judicial court. Additionally, as of May 1, 2004, the the percentage for the revenues import of goods and services are derived from the sale of products Gross revenues taxes also subject to PIS and COFINS at a is 8%, while the percentage PIS (Programa de integração Social) combined rate of 9.25%. This applies for service revenue is 32%. and COFINS (Contribuição para o to taxpayers under both cumulative Financiamento da Seguridade Social) For the social contribution tax and non-cumulative regimes. In some are federal social contributions on profits, the percentages are cases, taxpayers may recognize PIS charged on revenues, on a monthly 12% and 32%, respectively. and COFINS credits on the import. basis, under two regimes: Transitional Tax Regime (RTT) cumulative and non-cumulative. In what regards to the O&G industry, it At the end of 2007, Law 11,638 was is important to outline that most of the enacted and started the process of products derived from oil and gas are harmonazing the Brazilian generally subject to a tax concentration special accepted accounting principles regime of PIS and Cofins. Under this (BR-GAAP) with the international special regime, also known as “PIS/ accounting standards (IFRS). Cofins Monofásico”, the PIS and Cofins are levied at specific rates on the sale of certain products derived from oil in order to concentrate the calculation and payment of social contributions in one specific taxpayer within the operational chain.

Indirect taxes IPI IPI (Imposto sobre Produtos Industrializados) is a federal tax levied on the import and manufacturing of products. In many aspects, it operates like a value added tax, which is charged on the value aggregated to the final merchandise. As a general rule, IPI paid on a prior transaction can be used to offset the IPI liability arising out of subsequent taxed operations. The applicable rate depends on the product and its classification under the IPI tax rates table (TIPI). The classification within TIPI generally follows the Brussels Harmonized Tax Codes. IPI also has a regulatory nature, i.e., the Brazilian Government may increase its rates at any time by decree as a way to implement financial and economic policies. Additionally, IPI rates can be increased for products considered non-essencial. In the O&G industry, it is important to note that IPI is not levied on sale of oil, gas and other products derived from petroleum due to a special tax exemption set forth in the Brazilian Constitution.

ICMS (Imposto sobre Circulação In general, ICMS taxpayers are entitled ISS (Imposto sobre Serviços) de Mercadorias e Serviços) to a tax credit in the amount of the tax ISS is a municipal tax levied on ICMS is a state tax levied on the import paid in the previous transaction. The the revenues derived from the of products and transactions involving tax credit may be offset against future provision of services. Although the movement of goods (which also ICMS payables. If the purchaser is not it is a municipal tax, the services encompass electricity), inter-municipal an ICMS taxpayer, and depending on subject to the ISS are listed in federal and interstate transportation services whether its sales are subject to this law (Lei Complementar 116/03). and communication services. Tax tax, ICMS may become a cost and The tax base is the price of the service rates may be higher depending will not be recoverable as a credit. and the rates vary from 2% to 5%, on the local legislation and type Brazilian tax legislation also foresees according to the municipality where of operation. In many aspects, it special tax treatments in regard to the service provider is located, where operates like a value-added tax. ICMS for activities related to the the service is provided and the type In general, when transactions involve Oil & Gas industry, as follows: of the service. For most services, two different states, the rates are there is significant debate as to (i) Brazilian constitution stipulates 7% (when the purchaser is located whether the ISS should be paid to that interstate operations involving in the states of the North, Northeast the municipality where the service sale of oil, natural gas and biofuel and Center West regions or in the provider is located or where the should be assessed by ICMS only state of Espírito Santo) or 12% (for service is performed. The taxpayer in the State where the product is purchases located in the South and is, in principle, the service provider. consumed. This model of ICMS taxation Southeast regions). For transactions has raisen several discussions in the However, the municipal tax within the same state and in the case past in regard to tax leakage for the legislation may impose a of imports, the rates may be 17%, State where the oil was produced. withholding responsibility on the 18% or 19%. Certain products and company acquiring the services. services are subject to 25% ICMS. (ii) Downstream-related activities are usually subject to a tax ISS also applies on the import Regarding imports, the ICMS tax substitution/concentration system of services. In this case, the base is equal to the CIF value, plus where oil refineries are supposed taxpayer is the service provider. the applicable import tax, IPI, certain to compute and collect the ICMS Furthermore, Lei Complementar customs expenses, the ICMS itself and assessed in future operations. 116/03 introduced an ISS exemption PIS and COFINS due on the import. to certain exports of services. (iii) Special tax reductions on ICMS ICMS is also due either when a product calculation are available for natural When providing a service also involves is resold in the domestic market gas commercialization; etc. a sale of goods, ISS applies to the or when it is physically removed total price of the transaction, except from a manufacturing facility. The Besides the above, there are several when there is a specific provision taxable base is equal to the value of tax benefits available for manufacturers determining the applicability of ICMS the transaction, including the ICMS and other foreign companies on the value of the products sold. itself (gross-up), insurance, freight related to REPETRO that may grant and conditional discounts. IPI must the exemption of ICMS on the also be added to the ICMS tax base industrialization and commercialization when the transaction is carried of equipments, parts and products out between non-ICMS taxpayers related to the O&G industry. or when it involves a product that will not be further manufactured or resold (e.g. fixed assets).

Other federal taxes The rates depend upon the nature The tax base is the quantity of product Import tax (II) of the payment, the residence of imported or sold. The tax rates The import tax is a federal tax the beneficiary and the existence correspond to fixed prices based applied to the CIF value of imported of tax treaties between Brazil and on the volume sold or imported. products upon its customs the country where the beneficiary is IOF clearance at variable rates. located. Most common rates range IOF is a federal tax levied on credit, from 15% to 25%. As a general The taxable event is the physical entry exchange, insurance and securitiy rule, income paid to beneficiaries of foreign goods into the country. transactions and may be assessed located in low tax jurisdictions is Specific applicable rates depend on the at a maximum rate of 25%.The tax subject to 25% withholding tax. classification of the imported products rates are defined by government’s in the Mercosur Common External Tariff CIDE Social Contribution decrees any changes and may tables (“TEC”), which generally follow CIDE (Contribuição de Intervenção no become effective immediately. the Brussels Harmonized Tax Codes. Domínio Econômico) is a contribution Some examples of IOF taxation: levied on payments due to non- Import tax is a cumulative tax, (i) Exchange operations: The inflow or residents in the form of royalties, meaning that no credits are granted. outflow of foreign capital imply on an technical and administrative services exchange transaction. In case of direct Withholding income tax and technical assistance, among investment, the inflow of capital is Withholding income tax applies on others, at a rate of 10%. Note that, subject to 0.38%. The IOF is zero-rated certain domestic transactions, such unlike the withholding tax, CIDE is in case of dividends and interest on as payment of fees to some service a tax imposed on the Brazilian payer equity remitted abroad. The IOF is 6% in providers, payment of salary and of the fees and, therefore, may not relation to foreign loans which average financial income resulting from be reduced by tax treaties and does term is less than 720 days and for banking investments. In most cases, not generate a tax credit abroad. foreign loans with average term higher the withholding tax is a prepayment There is a limited tax credit granted to than 720 days, IOF is zero-rated. IOF of income tax on the individual or the Brazilian entity for CIDE paid on is also zero-rated on interest on loans. entity’s final tax return. However, in royalties for the use of trademarks or some cases it is considered a final trade names which reduces the tax’s taxation. Also, withholding income effective rate. Law 11,452, enacted tax is due on most nonresidents’ on February 27, 2007, established income that has a Brazilian source that royalties for a software license of payment (e.g., royalties, service are no longer subject to this levy. fees, capital gains, interest, etc.). The Oil & Gas industry also has the CIDE Oil tax (CIDE Combustíveis), which tax event is is the import and sale of specific products derived from oil, such as gasoline and diesel. Export transactions are not subject to CIDE Oil Tax.

(ii) Investment in the Brazilian Financial unload of goods in the Brazilian Signature Bonus and Capital markets: port and has the following rates: A lump sum tax due by field concessionaires for the exploration and For general investments in the Brazilian • 25% for long distance transportation production of Oil & Gas. Amounts due financial and capital markets, IOF is (cross-country transportation); are determined by the ANP on the bid. charged at a 6%. However, IOF is levied • 10% for cabotagefreight at 2% rate in case the foreign capital Area Retention Tax (transportation between is invested in (i) variable income bonds An annual tax due by field Brazilian ports); and within the Stock/Future Exchange concessionaires for the exploration Markets, (ii) acquisition of shares • 40% for river and lake transportation and production of Oil & Gas. Amounts issued by listed entities during public involving liquid bulk cargoes in the due are determined by the ANP on offerings, (iii) acquisition of quotas of north and northeast regions of Brazil. the bid and vary depending on field participation investment fund (FIP), size and geological characteristics. However, the AFRMM should emerging business investment fund be exempt on the maritime Investments in R&D or fund that invest on the referred transportation related to the import ANP has been imposing on concession funds, (iv) conversion of ADRs/GDRs of products under special customs agreements a clause obliging into local shares and (v) change in regimes which foreseen that the O&G companies to carry out R&D the foreign investor regime from manufactured good shall be further investments. This measure aims to direct investment (Law 4.131) to exported. It is important to highlight foster the technological research and investment in shares traded in the that the exemption or suspension development of new technologies, stock exchange market (Resolution of this contribution depends on a products and processes for the Oil & 2.689). Capital repatriation associated previous analysis and approval by Gas industry, as well as to encourage with these investments is zero-rated. the Ministry of Transportation. the creation of O&G centers of (iii) Currency exchange operations excellence and development of Governmental Takes related to the inflow of revenue derived national R&D institutions. The Brazilian government introduced from the export of goods and services specific taxes charged from investors According to the referred clause, the and outflow of funds derived from the of the exploitation of O&G. Find O&G company should invest in Brazil import of goods are subject to an IOF below a brief description of the a minimum amount of 1% of the rate of 0%. The import of services, generally referred to as governmental gross revenue derived from the E&P however, is subject to IOF at 0.38%. participations, imposed by Law of oil fields which are assessed by the (iv) For local loans, IOF may be 9,478/97 and regulated by Decree Special Participation mentioned above. levied up to a maximum rate of 2,705/98 for the Oil & Gas industry. Note that up to 50% of the amount 1.88% depending on the length invested in R&D may be applied for Note that additional remuneration of the outstanding balance. the own O&G company’s projects. The to the oil field land owner may be remaining amount should be invested (v) Insurance operations: IOF tax determined by the ANP on the bid. in universities and other R&D related rates may range from 0% to 7.38%. Royalties institutions authorized by ANP. For securities transactions, the IOF A monthly tax due by field tax rate may vary from 0% to 1.5% The amount destined to R&D may concessionaires for the exploration depending on the type of investment. be deducted in the calculation and production of Oil & Gas. Tax rates of the Special Participation. Contribution for Renovation of vary from 5% to 10% and are applied the Merchant Marin (AFRMM) on sales revenue (ANP price reference The AFRMM is a federal tax levied is considered for this purpose). on the maritime transportation Special Participation price (including specific insurance A quarterly tax due by field and general port expenses) concessionaires for the exploration and which is regulated by the Law production of Oil & Gas of high volume 10,893/04. The tax event is the or high profit margin fields. Tax rates vary from 10% to 40% and apply on sales revenue adjusted by deductions allowed by the law (ANP price reference is considered for this purpose).

Other Taxes In relation to municipal taxes, IPTU Brazilian tax legislation sets forth In addition to the taxes previously (Imposto territorial Urbano) is an specific rates for the withholding described, Brazilian tax environment urban real estate property tax annually taxes mentioned above. In principle, foresees additional federal, state charged by municipalities based on this withholding obligation was or municipal taxes that may also be the assessed value of the property imposed to companies as an assessed on companies’ regular (which may not correspond to fair anticipation of the taxes regularly operations. Please find below a market value). Tax rates vary according assessed on its operations. brief overview of the main taxes to the municipality and location of Specifically in relation to the ISS, applicable for companies. the property. The IPTU taxpayer is there are a number of discussions the owner of the real estate, or the ITR (Imposto sobre a Propriedade regarding to which municipality the tenant if the property is leased and Territorial Rural) is an annual federal tax is due and that usually depends on the agreement provides for it. property tax levied on the ownership the type of service being rendered or or possession of real estate located Finally, ITBI (Imposto sobre the location of the service provider. outside urban perimeters. Tax basis Transmissão de Bens Imóveis) is a Also, for services involving manpower vary according to the value, size and real estate transfer tax charged at supply, social security tax (INSS) is location of the real estate, and tax rates variable rates (from 2% to 6%). This usually withheld upon the payment of vary in accordance with land use. tax is usually not levied if real estate the invoice at tax rates ranging from is transferred under a corporate In regard to state taxes, ITCMD 11% to 15% (depending on the risks reorganization (e.g., mergers, spinoffs, (Imposto sobre Transmissão “causa related to the activity to be performed). capital contribution in kind, etc.). mortis” e Doação de quaisquer Bens In some cases, unrecoverable tax ou Direitos) is a tax levied on the Withholding obligations credits should be recognized in transfer of the ownership of goods According to Brazilian tax legislation, connection to INSS withheld greater and rights by way of causa mortis payments in connection to render than the tax effectively due based on succession and donations. Tax rates of services and supply of goods the company’s regular operation. vary according to state legislation. between legal entities may be subject to withholding taxes, specifically In addition, IPVA (Imposto sobre a income tax (IR), social contribution Propriedade de Veículos Automotores) (CSLL), PIS and Cofins social is a state tax levied on the ownership contributions, Service tax (ISS) and of motorized vehicles (cars, trucks, social security (INSS), when applicable. boats, etc.). The tax base is the value of the vehicle with rates varying according to state legislation.

Brazil remains one of the world’s contract (for the exchange of generally may be used to offset any largest exporters of agricultural foreign currency into Reais or vice federal taxes payable. On the other products, although exports of versa), exporters must also register hand, several restrictions and the manufactured goods have largely transactions with Brazilian Central associated bureaucracy make the increased and products such as Bank (BACEN), which is responsible utilization of the ICMS tax credits very airplanes, steel, electronics and many for controlling the country’s inflow and difficult for companies with a high level more have reached similar statistics. outflow of foreign currency. of exports. The expansion of Brazilian sales to In practice, each foreign exchange Certain payments abroad related to nontraditional countries or those contract is linked to a specific customs exports, such as agent commissions countries with a small share in total transaction through interconnected and interest related to export exports has been an important feature electronic systems, Integrated Foreign financing, also benefit from a zero rate in the success story of Brazilian Trade System (SISCOMEX), under withholding tax. exports. Exports to Eastern Europe, which import and export transactions Africa, Latin America, Asia and Oceania Under certain regimes, specific tax are registered, and its foreign currency have shown an impressive growth. exemptions may also be granted on exchange counterpart, Brazilian Central imported raw materials or parts to be With respect to operational import and Bank Information System (SISBACEN), used in the manufacturing of products export chains, Brazilian importers and which is controlled by BACEN. to be exported. exporters are required to obtain specific Export transactions generally do registrations. However, in reality, most Export Financing not require preapprovals, except for imports are not subject to pre-licenses, Banks provide financing for exporters transactions involving certain listed while exports are, in general, tax-free. against forward sales contracts and by products. This list includes animals Brazilian foreign exchange regulations discounting drafts accepted by foreign or products of animal origin, oil, still play a significant role in the importers. This financing is also made gas, goods containing nuclear and operational side due to registration available for “indirect exporters” or radioactive materials, and weapons, requirements – currency exchange manufacturing companies, which among others. contracts associated with imports and export through trading companies. exports are linked with federal tax and Tax Implications Exporters may use these funds to customs systems. Penalties may be Export revenues are generally tax buy raw materials to be used in the enforced in cases where a Brazilian exempt in Brazil, except for Brazilian manufacturing of finished products to importer or exporter fails to settle such corporate taxes. be exported. contracts in due time. In theory, an export tax exists, but In principle, BNDES provides the Exports it is currently only applied to a very following types of financing on exports General Comments restricted list of products, such as through authorized financial institutions: Trade policy is conducted by the cigarettes, certain types of furs, • Pre-Shipping: financing for the Chamber of Foreign Trade (CAMEX) cowhide, weapons and ammunitions. production of goods to be exported which works under the Ministry of Generally speaking, exports are in specific shipments. Development, Industry and Commerce not subject to Excise Tax (IPI), State (MDIC). Exporters must register, • Fast Pre-Shipping: financing for the Value-Added Tax (ICMS) or Social usually through the assistance of a production of goods to be exported Integration Program (PIS) and Social forwarder, with Secretariat of Foreign within 6 to 12 months. Security Contribution (COFINS), while Commerce (SECEX) – a governmental a credit mechanism is allowed for the • Special Pre-Shipping: financing for the agency responsible for controlling same taxes paid on inputs used in the domestic production of goods to be imports and exports. manufacturing of exported products. exported that are not tied to specific Since an export transaction carries The credits related to federal taxes shipments but have a preset time the requirement of executing a (IPI, PIS and COFINS) are normally period for such. corresponding currency exchange easily consumed by exporters as they

• Pre-Shipping anchor companies: day period starting from the date Trading Companies financing for the sale of goods of issuance. This is also obtained Trading companies generally play produced by small and medium through the SISCOMEX electronic a very active role in the import and companies through an export system. Certain products, such export of products due to their company. as petrochemicals, human blood, practical experience and knowledge weapons, herbicides and pesticides, of operational and documentation • Post-Shipping: financing for the and leather, among others, also require aspects. Trading companies may commercialization of goods and preapproval from certain government work as outsourced, independent services abroad, through refinancing agencies before the import license is customs brokers, preparing the to the exporter or through the use of issued. import and export paperwork and a buyer’s credit facility. customs clearance, and may also The import of used products requires Imports import products on behalf of Brazilian pre-licenses, which is normally only General Comments companies. granted if a similar product of Brazilian Considering that foreign trade balance origin is not readily available. Trade Treaties is one of the main objectives of federal Mercosur economic policy, imports have been of From a BACEN perspective, Brazilian Mercosur is a customs free trade zone critical importance and have played a importers are required to close the comprised of 5 member countries: significant role in recent years in Brazil. corresponding foreign exchange Argentina, Brazil, Paraguay, Uruguay Since the opening of the Brazilian contracts to settle the import and Venezuela (the Venezuela inclusion economy at the beginning of the 1990’s, transactions within a certain period; is still in process). when a strong spike on imports ensued otherwise, high fines can be imposed. what would become the trademark of The main objectives of the Mercosur, as Tax Implications the last decade, this adverse condition a global trader, are the total elimination Brazil imposes federal, state and, has been largely reversed in recent of import tariffs between the members, sometimes, municipal taxes on the years by the historical improvements the increase of the current free trade import of goods and services. The on exports. This is largely due to the agreements’ framework, and the import of goods is subject to Import development, modernization and diversification of the current import and Tax (II), IPI, ICMS, PIS and COFINS and increased competitiveness of the export table of products. other miscellaneous customs duties, as Brazilian industries exposed to the explained on the topic related to import Therefore, products traded between global economy. taxes. Mercosur member countries are While import restrictions have been exempt from import tariffs, provided The classification of products under TEC a major element of Brazilian trade the products have a Mercosur origin. is crucial to determine the applicable policies, import tariffs have been Mercosur origin rules are generally rate for most taxes. TEC is based on the reduced across the board in recent based on minimum local added value Brussels Harmonized Code. years. The negotiation of a Mercosur and changes in the classification of the Common External Tariff (TEC) has RADAR product. not only made Brazil one of the major RADAR is a system that sets access However, each member country players in the region but also demanded to the registration and tracking of may include certain products in the simplification of import regulations performance of companies on customs an “exception list”, under which listed to the extent that imports, with some transactions. The purpose of the products are not necessarily subject to exceptions, do not require pre-licenses. system is to provide objective, real-time the common rate applicable to non- In addition, the introduction of the information, including customs, tax and Mercosur members, but to a higher or electronic system for the registration accounting information to enable the lower rate, depending on the case. of imports and exports SISCOMEX identification of the behavior and infer has contributed to speeding up the risk profile of various agents relating Other Agreements registrations and customs clearance as to foreign trade. Brazil has entered into other a whole. agreements with different countries in In order to operate in the foreign trade the Americas, such as the Free Trade Brazilian importers must be registered a company must possess a RADAR Area of the Americas (FTTA/ALCA) – the with SECEX prior to carrying out import registration. Among other requirements Latin American Integration Association transactions. Import transactions must to obtain such license, the company (ALADI), and World Trade Organization also be registered in the SISCOMEX must be able to prove its economic (WTO). In addition to these agreements, electronic system under which an substance and business purpose Brazil has bilateral agreements of import declaration (DI) must be and demonstrate the capability of economic supplementation with obtained to clear customs. performing exports. Uruguay, Argentina and Mexico, as well In case a pre-license is necessary, as partial reaching bilateral agreements this may vary according to the type of economic supplementation with of product imported and the import Guiana and Suriname. system adopted, it must be obtained prior to the shipment of products to Brazil and is generally valid for a 90

Origin Rules Customs Valuation In case the import price does not In general, imports covered by trade Brazilian customs rules provide for a comply with such rules, the import treaties benefit from import tax rate customs valuation policy based on the price base must be justified. To do reductions or exemptions provided 1994 General Agreement on Trade and this, the importer must then fill out a certain conditions are met, which Tariffs (GATT), effectively introduced in customs valuation form and present are essentially related to compliance Brazil in 1996. The main purpose of the proper documentation showing that with origin rules. It is important to methods provided by Brazilian customs the customs value adopted reflects the mention that origin rules are intrinsically rules is to demonstrate the fair market actual value of the transaction at fair associated with the country where the value of the import transaction when market conditions by using one of the products are manufactured, regardless compared to an actual transaction. 6 methods provided in the customs of the country that is listed as the seller This is made by means of using the legislation. of the products. methods foreseen under Brazilian The value of the transaction is the most customs valuation rules, which are Origin rules basically require a accepted and used method. It consists generally based on either: (a) the value minimum local added value in the of adding certain costs and expenses of the transaction (b) comparables, (c) manufacturing country or a change in associated with the product to the total resale, or (d) cost methodologies. The the tax classification with respect to the cost of the imported product in order to import price is verified for customs product exported when compared to determine a real value that is as close valuation purposes at the moment its components. In some cases, both as possible to the value of an import an import declaration is registered in requirements must be met depending transaction at arms’ length conditions. the SISCOMEX system. It is based on the product traded and the countries It is important to mention that the on internal lists of prices that are not involved. relationship between the exporter and publicly available and are used by the Brazilian importer is a key factor Imports of products originating Brazilian customs authorities as an for Brazilian customs authorities when from Mercosur member countries initial basis for comparison. There applying customs valuation rules. (Argentina, Paraguay and Uruguay) should be no customs valuation issues Special customs regimes. generally benefit from a 100% to the extent that the customs value is reduction of import tax, provided that within these parameters. a minimum local added value of 60% occurred in the exporting country. A different local added value percentage may apply depending on the traded product and also the specific trade agreement.

A wide range of government incentives of Repetro needs to be combined The import shall be done with or are available for startup projects with a subsequent temporary import without cover exchange and the export in Brazil. Generally speaking, the of the goods. must be done exclusively in free international investor has equal access convertible currency. ICMS Tax benefits may be also available, to these incentives and treatment depending on the provisions of ICMS Other Special Custom Regimes when compared with local investors. Tax legislation in force in the State • Drawback grants the beneficiary an The use of government incentives is where the activities will carried out. In exemption from import tax, IPI, PIS a significant feature of the Brazilian this regard, note that Covenant ICMS and COFINS and exempts imports business environment. Usually, 130/2007 authorized Brazilian States of raw materials to be used in the incentives take the form of subsidized to grant tax reductions in connection manufacturing of products to be loan financing and tax exemptions or to importation of goods supported by exported. A minimum level of local reductions, rather than cash grants. REPETRO’s special custom regimes. manufacturing is required. ICMS REPETRO benefits may also be available. Who is eligible? The REPETRO tax regime is a special Regarding eligibility, the following may • Temporary admission system benefit that applies to the imports benefit from the REPETRO: allows the import of goods which will and exports of goods destined to the remain in the country on a temporary exploitation of Oil & Gas in the Brazilian • The owner of concession or permit basis with a total or partial exemption territory. to carry out the activities of research from taxes levied on imports. This or exploration of oil or natural gas Under the REPETRO regime, the may benefit, for instance, goods that reserves. purchase of the permitted products enter the country under a lease or shall benefit from II, IPI, PIS, COFINS • Those contracted by the legal rental transaction and those related federal taxes suspension. person mentioned above, for the to sports and cultural events and rendering of services employed in commercial fairs and exhibitions. The companies that have authorization the execution of the activities object In some specific situations, this or concessions to carry out such of the concession or permit, as well benefit may be applicable to goods activities in Brazil may benefit from the as other sub-contracted parties. that are used in certain restricted regime provided some requirements manufacturing processes of products are met and previous authorization Which products are permitted? to be exported. is obtained from the federal tax The list of products and goods which authorities. are permitted to be imported through • Special Temporary Admission this special custom regime is included System for Manufacturing There are basically three types of in the Appendix of the Normative Purposes (temporary admission to benefits: Instruction SRF 844/2008. However, upgrade another product) is similar • Temporary import of foreign this list is not extensive. Therefore, it to the regular temporary admission equipment without II, IPI and PIS and does not encompass all the products system, but the exemption from Cofins; and equipment currently utilized by taxes is granted on the import the O&G companies in the research or of goods to be applied to certain • Import of raw material, parts extraction of oil. restricted manufacturing processes and pieces to be used in the of products to be exported. In manufacturing of goods to be REPEX – Special Regime for the principle, it does not apply in cases exported (drawback); and Import of Crude Oil and its Derivatives where the manufactured goods are It allows the import of crude oil and • Presumed export, which allows the sold locally. its derivatives, with tax suspension, Brazilian suppliers of goods to sell in order that afterwards it may be • Temporary export system applies to them to foreign parties with the exported in the exact state in which it the export of goods that will be out of benefits applicable to exports with was imported. the country on a temporary basis and the possibility of keeping the goods provides a total or partial exemption in the Brazilian territory; this last type from taxes levied on the export and

on the subsequent re-import. This • Export Processing Zones (ZPEs Federal, state, and local tax may benefit, for instance, goods – Zonas de Processamento de incentives that leave the country to sports and Exportação) are planned industrial Federal government incentive cultural events and commercial fairs areas in which the operations of programs are designed to promote and exhibitions. In other cases, it established companies are exempt domestic policy objectives, including allows the export and re-import of from federal taxes (II, IPI), surcharges the growth of exports and the goods that will be subject to certain on freight for merchant marine capitalization of domestic private restricted manufacturing processes renovation, Finsocial and taxes on industry, whereas state and local abroad. financial transactions (IOF). They incentive programs are directed toward also enjoy exchange freedom which specific objectives such as increasing • Special Temporary Export System means they are not obliged to local employment opportunities. for Manufacturing Purposes convert the foreign currency obtained (Temporary admission to be State and local governments commonly in their exports into Reais, provided upgraded by another product) is grant an exemption or defer indirect and that most of their products are sent similar to the regular temporary property taxes that they are entitled to the foreign market. export regime and allows the export to levy, and provide assistance to and re-import of goods that will • Presumed export (exportação ficta) potential investors in obtaining access be subject to certain restricted occurs when goods are sold to a to available federal programs. Thus, a manufacturing processes abroad. nonresident, but do not physically company that has decided to establish Import taxes are due, however, on leave the country. The transaction a new plant for export production and the foreign products aggregated to is still considered an export for which is eligible for federal programs the re-imported good. customs, foreign exchange and tax will seek the best available package of purposes.This benefit only applies in local incentives when deciding where • Bonded warehouse (entreposto specific cases provided by law. to locate a plant. aduaneiro) is a special import system whereby the Brazilian party may • Tariffex (Ex-tarifário) is another import Brazilian government incentive defer the payment of taxes due on tax benefit available on imports of programs are subject to frequent the import by keeping the imported equipment in cases where there revisions, both in relation to their goods stored in a bonded warehouse. is no similar equipment in the basic approach as well as the specific The taxes are due only upon the country. The tax benefit consists of categories and rates of tax incentives customs clearance, i.e., the removal an exemption from or reduction of granted. Accordingly, companies of the goods from the bonded the import tax and is granted after planning to avail themselves of warehouse. Note that Brazilian the importer submits and obtains incentive programs should, as a tax legislation foresees a specific approval from the authorities. first step, obtain the latest available bonded warehouse regime for Oil information. • Linha Azul (Blue Line) allows the & Gas related platforms (Normative benefited company to speed up Usually, federal and state governments Instruction 513 issued by Brazilian the customs clearance process. In do not give cash grants to reduce Revenue Service). In accordance to order to benefit from this regime, initial outlays on industrial buildings this special custom regime, parts, the company must comply with a and equipment. As an exception, materials and other components number of requirements including an capital grants in the form of land can utilized in the construction/ audit of its external controls over the be obtained from local governments conversion of oil platforms may be customs processes. and are often provided through state subject to a tax deferment of federal development agencies. taxes assessed upon its importation. • Special Deposit is a special custom regime permits tax suspension for Additionally, there are various • DAC (Depósito Alfandegado the stocking of replacing items, parts government incentive programs Certificado) is a regime under which and pieces for vehicles, machines, providing low cost financing. In former products are presumed exported equipments, devices and others, years, Brazil has experienced chronic but physically remain in a bonded according to the Brazilian rules inflation and even presently continues warehouse in Brazil. This is a federal and provided that the imported to have high bank interest rates. Under benefit and might not apply in case of goods are without exchange cover. these circumstances, subsidized rate state taxes. The accepted items should have financing has long been very important • Manaus Free Trade Zone allows the following destination: (i) Re- for certain sectors of the Brazilian companies located in a Trade Zone exportation; (ii) Exportation; or (iii) economy, and has formed the basis for (Zona Franca de Manaus) to benefit Transfer to another special customs the expansion and modernization of from an exemption of IPI and PIS regime. Brazilian agriculture. and COFINS on products to be consumed and/or manufactured within the Zona Franca de Manaus. ICMS tax incentives may also be available. Projects applying for this benefit must meet the requirements set forth in the legislation.

Regional and Industry Incentive Minimum Manufacturing Process quality or productivity increase, Programs (PPB) resulting in more competitiveness in Various concessions are offered to The PPB benefit is usually applicable the market. encourage economic development in to Brazilian companies engaged in the Tax benefits apply for most companies Brazil, either on a regional or industry manufacturing and sales of products investing in technology innovation and basis, by offering taxpayers the and services related to specific types of include, among others: opportunity to invest part of their tax technology, such as goods and services liability and by granting certain fiscal related to information technology and • Special deductions and tax reductions incentives, summarized below, for automation. The incentive was initially on the income tax computation in approved investments. addressed to the computer industry, connection to expenses incurred but later expanded to include a wider during technological research. Superintendence of Amazonas range of electronic products and Development (SUDAM) and • 50% tax reduction of the IPI levied telecommunication equipment. Superintendence of Northeast on machines, equipments or spare Development (SUDENE) The PPB benefit is granted to Brazilian parts and tools in connection to companies that have a project approved technological research. Companies located in the Northeast by the Ministry of Technology and region and the Amazon region may • Full depreciation in the year of Science (MTC) and that annually invest benefit from certain tax incentives. acquisition of new fixed assets in a percentage (limited to 5%) of their connection to technological research. SUDAM and SUDENE are both gross revenues derived from the sale of administratively and financially technology related goods and services • Accelerated amortization for independent special agencies. SUDAM with Research and Development (R&D) intangible assets acquired in oversees development in the Amazon in the country. The percentage varies connection to technological research. region. The region encompasses the per year. The benefits are basically • WHT zero-rated on remittances states of Acre, Pará, Roraima, Rondônia, related to Excise Tax (IPI) and State abroad related to trademarks, Amapá, Amazonas, Tocantins, Mato Value-Added Tax (ICMS). patents and cultivars. Grosso, Mato Grosso do Sul, Goiás and A reduction of the IPI tax due is granted part of Maranhão. • Deduction of the expenses incurred as follows: in technological research along The purpose of SUDENE is to promote • 80% through December 2014; with the possibility to exclude up inclusion and sustainable development to 100% of these expenses on the in the Northeast region. The • 75% from January through income tax calculation (from 60% to geographical definition of the Northeast December 2015; 80% depending on the number of region encompasses the states of • 70% from January 2016 through researchers employed by the legal Maranhão, Piauí, Ceará, Rio Grande do December 2019; and entity, plus 20% in case of research Norte, Paraíba, Pernambuco, Alagoas, projects linked to patents granted Sergipe, Bahia and part of the states of • After 2016 the benefit is scheduled to and registered cultivars). Minas Gerais and Espírito Santo. be extinguished. • In addition to that, the national Both programs are administered by For ICMS, the benefits vary according government may also grant the Brazilian federal government, and to the state involved. Basically, the a financial support by way of are affiliated to the Ministry of National benefit may relate to a reduction of the subventions of up to 60% of the Integration. Under these programs, ICMS rate for intrastate transactions. A value paid as remuneration to companies can receive either partial deferral or exemption of ICMS due or a researchers (holding Masters or or complete tax exemption on income “special credit” (crédito outorgado). PhDs) employed in activities of taxes for Brazilian companies. The Technology Innovation Incentives technological innovation located in tax exemption applies only to income Law 11,196/05 and Decree 5,798/06 the Brazilian territory. from facilities operating in the provide for various tax benefits with designated regions and the benefits Companies enjoying these benefits the purpose of fostering research are available for companies that have may not be entitled to other and development and technological setup, modernization, extension and benefits such as the PPB (minimum advances. diversification projects in the region. manufacturing process). Technology innovation is defined Eligibility for these concessions as the creation of a new product or depends on SUDAM/SUDENE’s manufacturing process as well as approval of an industrial project or a the inclusion of new functionalities project for the expansion of an existing or characteristics to a product or industry. SUDAM/SUDENE not only process, which results in incremental evaluate the project in terms of its improvements and in an effective technical and economic feasibility, but also verify whether the project is appropriate within the overall economic development of the region.

Benefits for Information Technology Special Acquisition Regime of Law 12,431/2011 and Information and Communication Capital Goods (RECAP) Law 12,431 (which converted the Technology Companies RECAP is a tax regime that allows Provisional Measure 517) was recently Law 11.774/08 grants benefits special tax conditions for the acquisition enacted by the Brazilian government for companies in the Information of fixed assets by exporters. Export which granted specific tax incentives Technology (IT) sector. These benefits companies under RECAP regime will associated to infrastructure projects apply to companies from the be exempted from PIS and COFINS on for the raising of funds through the aforementioned sector seeking to acquisition of capital goods. issuance of debentures. improve their professional capability to Special Incentive Regime for In general terms, income paid by develop new software. Oil Companies Infrastructure special purpose entities (incorporated Through this law, the Brazilian Development in North, Northeast to implement infrastructure projects) government allows some companies in and Midwest Regions (REPENEC) through debenture instruments should be exempt of income tax when paid to the IT sector to have their professional REPENEC is a benefit that grants Brazilian individuals and, for Brazilian development costs and expenses suspension on II, PIS/COFINS, entities, the income tax was reduced to excluded from net profit in calculating PIS/COFINS-Import and IPI to 15% (withheld). actual profit, with no detriment to their be used for domestic sales or normal expenses deductibility. This import of machinery, equipments Although this benefit was not extended provisional measure has also created and construction materials for for non residents who directly acquires other benefits, including ones related to implementation of infrastructure debentures, non residents may benefit social security contributions. work in the North, Northeast and from a zero-rated WHT for income Industrial Warehouse Regime under Midwest, in the petrochemical, oil received from investments funds which the Customs Computerized Control refining and production of ammonia has at least 85% of its equity invested (RECOF) and Special Customs Regime and urea from natural gas. The company in debentures issued by entities for Imports of Inputs (RECOM) may also be granted exemption of the involved in infrastructure projects. already suspended taxes in case it This tax benefit should not be applicable RECOF and RECOM are special proves the utilization of the inputs in the for beneficiaries located in low tax systems under which certain products infrastructure work. may be imported, and sometimes jurisdictions. Special Incentive Regime for acquired in the local market, without Corporate Income Tax Reductions Infrastructure Development (REIDI) taxes – i.e., Import Tax (II), IPI, Social Certain expenditures incurred by REIDI is a special tax regime created Integration Program (PIS) and Social corporate taxpayers in specific cultural, with the purpose of fostering Security Contribution (COFINS), if audiovisual, children funds donation development and implementation of they are used in the manufacturing of and meal programs may also generate projects in the infrastructure sector. The products to be exported. The benefit reductions in the amount of corporate main tax benefit granted is exemption may also apply to ICMS. income tax liability under the actual from PIS and COFINS upon local and profit method. These reductions, There is a list of products that may foreign acquisitions. Legal entities however, are subject to individual and be imported under such systems must have a previously approved global limits varying from 1% to 4% of (mainly parts for vehicles, aircrafts infrastructure project in order to qualify the amount of tax due. and electronics). There are several for the REIDI benefits. requirements that must be met, including rigid control over the imported Development Fund of Port Activities inventory. The main advantage of these (FUNDAP) systems is that the products may be FUNDAP is a special state incentive imported without foreign exchange that allows a deferral of the ICMS due coverage, i.e., the foreign party may on imports performed by qualified keep title over the products and trading companies located in the State contract the Brazilian importer for the of Espírito Santo, which, in practice, manufacturing function. results in a significant financial benefit.

Permanent establishment Also, the Brazilian Civil Code prohibits Tax treaties As a general rule, only companies foreign entities to operate in Brazil Brazil has signed double taxation incorporated in Brazil are generally without authorization. In principle, treaties with various countries. The subject to taxation as residents. authorization is granted by means main method of tax relief under the of establishing a branch, which treaties is the foreign tax credit. The In principle, Brazilian companies is taxable in Brazil in the same existing treaties offer very limited must register for tax purposes. manner as a Brazilian legal entity. opportunities to reduce or eliminate Companies that carry out taxable withholding taxes on payments abroad. activities in the country, but have not Nevertheless, the following situations Additionally, tax sparing clauses are also properly registered for tax purposes, may potentially generate a taxable found in most treaties currently in force. are also subject to taxation. presence in Brazil and, therefore, it is recommended to analyze the specific Brazil has double taxation treaties with Contrary to the international activities that would be carried out the following countries: Argentina, mainstream, Brazilian tax law does not in Brazil to assess eventual risks. Austria, Belgium, Canada, Chile, contain the permanent establishment China, the Czech Republic, Denmark, concept and does not provide clear • De facto branch: the foreign company Ecuador, Finland, France, Hungary, guidance regarding the potential tax has an unregistered branch or office. India, Israel, Italy, Japan, Luxembourg, impacts of having foreign entities • Consignment: sales are made Mexico, the Netherlands, Norway, carrying out business in Brazil. under consignment and proper the Philippines, Peru, Portugal, There is also a lack of guidance accounting records are not kept Slovakia, South Africa, South Korea, from the tax authorities, and we are by the consignee in Brazil. Spain, Sweden and Ukraine. aware of only a few administrative • Binding agent: sales are made in Treaties with Venezuela, Paraguay precedents (tax assessments) on Brazil through a resident agent and Russia have been executed the matter. This may be because or representative of a foreign but are pending final approval in certain cases, the tax burden on company who has, and habitually from the National Congress. nonresident’s income is even higher exercises, the authority to bind than the eventual resident’s taxation the company to a contract. that a permanent establishment characterization would generate.

Withholding tax rates These rates may be increased to Low tax jurisdictions The rates depend upon the nature 25% if the beneficiary of payments Previously, the concept of the low of the payment, the residence of is located in low tax jurisdictions. tax jurisdiction included: (i) low tax the beneficiary and the existence jurisdictions that do not tax income or The following are currently not of tax treaties between Brazil and when doing so impose a rate equal to subject to withholding tax (some the country where the beneficiary or lower than 20%, and (ii) jurisdictions requirements may apply): is located. The most common rates whose national legislation allows range from 15% to 25%. As a general • Dividends (if related to post- confidentiality as to ownership of rule, income paid to beneficiaries January 1996 profits) – 0% shares or the corporate organization located in low tax jurisdictions is of legal entities. This definition was • Interest and commission on subject to 25% withholding tax. brought about by Law 9,430/96 export financing – 0% and Law 10,451/02, and it was only The following are the main • Interest and commission applicable for transfer pricing purposes. withholding tax rates applicable to on export notes – 0% payments made to nonresidents: However, due to the changes • Export commissions – 0% in the Brazilian legislation: • Interest on certain • The applicability of the concept was Withholding Type of Payment government bonds – 0% broadened. With Law 9,779/99, Tax Rate cross border remittances or • International hedging – 0% Interest 15% payments of any kind made to low • Air and sea rentals, charters, tax jurisdictions became subject Interest on Equity 15% demurrage, container and freight to a higher 25% withholding tax payments to foreign companies – 0% (instead of the standard 15% rate). Royalties 15% Note that the WHT rate applicable • The definition of low-tax jurisdiction Technical Service for charter of vessels may represent was expanded by Law 11,727/08 and Technical 15% a key advantage for O&G players to “a country or a place where Assistance Fees operating in Brazil. However, it is legislation does not allow the access Lease and important to stress that this benefit to the information related to the 15% rental fees has been subject to several challanges corporate structure of legal entities, by the Brazilian tax authorities. its ownership, or to the identification of the ultimate beneficiary of the earnings attributed to non-residents.”

Due to the broad concepts in the Privileged tax regimes Under this new rule, the Brazilian Brazilian provisions, and difficulties in Law 11,727/08 (amended by Law Revenue Services has listed determining whether or not payments 11,941/09) has also created a new (in Normative Instruction – IN were being made to a tax haven concept, the so-called “privileged tax 1,037/2010) the following regimes jurisdiction, the Brazilian Revenue regime” for transfer pricing purposes. as “privileged tax regimes”: Services has listed (in Normative According to the law, a “privileged • Holding Companies in Denmark, Instruction – IN 1,037/2010) the tax regime” is regime that: which do not perform a following jurisdictions as “tax havens”: substantial economic activity. “I – does not tax income, or Andorra, Alderney (Channel Island), taxes it at a maximum rate • Uruguay (only with respect to American Samoa, American Virgin equal to or lower than 20%. “Sociedad Anonima Financiera Islands, Anguilla, Antigua and Barbuda, de Inversion – Safis” until Aruba, Ascension Island, Bahamas, II – grants tax advantages to non- December 31, 2010). Bahrain, Barbados, Campione d’Itália, resident individuals or legal entities: Belize, Bermuda, British Virgin Islands, • Iceland (only with respect a.) without requiring the performance Brunei, Cayman Islands, Cook Islands, to International Trading of a substantial economic activity Costa Rica, Cyprus, Djibouti, Dominica, Companies – ITCs). in the country or jurisdiction. Eastern Samoa, French Polynesia, • Hungary (only with respect to Guernsey (Channel Island), Gibraltar, b.) provided that no substantial Offshore KFT companies). Granada, Hong Kong, Isle of Man, economic activity is performed Jersey (Channel Island), Kiribati, Labuan, in the country or jurisdiction. • United States of America (only Lebanon, Liberia, Liechtenstein, Macau, with respect to Limited Liability III – does not tax earnings originated Madeira Island, Maldives, Marshall Companies, or LLCs, with abroad or taxes them at a maximum Islands, Mauritius Islands, Montserrat, participation of non-resident rate equal to or lower than 20%. Monaco, Nauru, The Netherlands investors and that are not subject Antilles, Niue Isle, Norfolk Island, Oman, IV – does not allow the access to to federal income tax in the USA). Panama, Pitcairn Island, Queshm Island, information related to the corporate • Spain (only with respect to Saint Cristobal and Nevis,Saint Helena structure, ownership of goods or “Entidad de Tenancia de Valores Island, Saint Pierre and Miquelon, Saint rights, or to the economic transactions Extranjeros” – ETVE) (**). Kitts and Nevis, Saint Vincent and the performed.” (Loose translation) Grenadines, San Marino, Santa Lucia, • Malta (only with respect to Sark (Channel Island), Seychelles, International Trading Company Singapore, Solomon Island, Swaziland, (ITC) and International Switzerland(*), Tonga, Tristan da Holding Company (IHC)). Cunha Island, Turks and Caicos Islands, • Holding companies in Netherlands, United Arab Emirates, and Vanuatu. which do not perform a substantial economic activity (***)

(*) – Swiss government requested the Brazilian tax authorities to be excluded from the tax haven list and, until a final the decision is issued, Switzerland should not be treated as low tax jurisdiction for Brazilian tax purposes.

(**) Spanish government requested the Brazilian tax authorities to be excluded from the privileged tax regime list and, until a final decision is issued, Spain should not be treated as privileged tax regimes for tax purposes.

(***)The inclusion of these companies has been suspended by Declaratory Act 10/2010 due to a revision request presented by that country.

Although there has been a lot of • The Cost Plus Method (CPL – Método • Purchase or Production Cost plus discussion around the applicability of this do Custo de Produção mais Lucro) Taxes and Profit Margin Method new definition, based on the wording uses the average cost of production in (CAP – Custo de Aquisição ou of the law, the concept of privileged tax the country where the products were Produção Mais Tributos e Lucro): regime is relevant for: (a) transfer pricing originally produced, plus taxes and Weighted arithmetic average of the purposes, (b) thin capitalization rules, charges imposed by that country on costs of acquisition or production and (c) the deductibility of expenses. exports, and a profit margin of 20%. of the exported goods and services, increased by taxes levied in Brazil Transfer pricing rules On export transactions, safe harbors and profit margin of 15% over the Transfer pricing rules have been in exist to ease the compliance burden for sum of the costs plus taxes. place in Brazil since 1997 and apply certain exporters, for example, when to: pricing transactions between the price of the exported goods is Service transactions are also subject related parties, to transactions with greater than 90% of the same product to transfer pricing rules, but royalties companies in tax haven jurisdictions sold in Brazil, or when income from and fees for technical, scientific, (and under a privileged tax regime), exports makes up less than 5% of administrative or similar assistance are and also to transactions between a net income. When none of the safe not, provided some conditions are met Brazilian company and its exclusive harbors are applicable and the transfer (e.g. registration of the agreement with distributor, regardless of the ownership pricing analysis is required, one of the the INPI (Intellectual Property Agency)). relationship between the parties. following methods should be used: The transfer pricing analysis must It is important to bear in mind that • The Comparable Uncontrolled Price be prepared by Brazilian companies Brazilian TP methods does not follow Method (PVEx – Método do Preço on an annual basis, and general OECD standards and also does not de Venda nas Exportações) uses information must be disclosed on expressly utilize Arm’s lenght principle. the average sales price on exports the annual income tax return. Brazilian tax legislation provides specific to non-related parties for equivalent Thin capitalization rules methods which generally foresee fixed or similar goods, services, or rights Brazil’s new thin capitalization profit margins regardless the company’s during the same tax year and under rules were recently introduced by profit margins. There is no “best method similar payment conditions. Provisional Measure 472/2009 (and rule” and, therefore, taxpayers are free • The Wholesale Price Method converted into Law 12,249/2010). to opt for any of the methods available. (PVA – Método do Preço de Venda According to the thin capitalization Brazilian taxpayers may choose por Atacado no País de Destino, rules, some requirements must be one of the following methods for Diminuído do Lucro): Comparison of satisfied for an entity to be allowed valuing import transactions: the sales price with the wholesale to deduct certain interest expenses. market price of similar or equivalent • The Comparable Uncontrolled For the interest expense arising from goods sold in the wholesale market Price Method (PIC – Método business operations financed by debt, of the country to which the product dos Preços Independentes the debt cannot be greater than: is exported under similar payment Comparados) uses the average of conditions, less sales taxes in 1) Two times the amount of the similar or identical purchase and that country and a profit margin participation of the lender in the sale operations between unrelated of 15% on the wholesale price. net equity of the borrower. parties, on the Brazilian market or the market of other countries, • Retail price method (PVV – Método 2) Two times the amount of the under similar payment conditions. do Preço de Venda a Varejo no País net equity of the borrower, if the de Destino, Diminuído do Lucro): lender is a foreign party without • The Resale Price Method (PRL – Comparison of the sales price participation in the borrower. Método do Preço de Revenda with the average price of similar menos Lucro) uses the average 3) 30% of the net equity of the borrower or equivalent goods sold between resale price for transactions with when the lender is located in a unrelated parties on the retail unrelated buyers, less unconditional tax haven jurisdiction or operating market of the country to which the discounts granted, taxes and under a privileged tax regime goods are exported under similar contributions on sales, commissions, (whether a related party or not). payment conditions, less sales brokerage fees paid, and a profit taxes in that country and a profit On cases 1 and 2 above, the total margin of 20% on the resale price. margin of 30% on the retail price. amount of the Brazilian entity’s debt • The Resale Price Method II (PRL II – cannot exceed twice the amount of the Método do Preço de Revenda menos foreign related parties’ participation Lucro II) uses the average resale in the Brazilian entity’s net equity. price for transactions with unrelated Brazilian companies are not prohibited buyers, less unconditional discounts, from being thinly capitalized, taxes and social contributions on rather, the deductibility of interest the sales, commissions and fees expenses generated by a thinly paid, plus a profit margin of 60% capitalized company is limited. on the resale price after deducting the value added in Brazil.

Deductibility on payments abroad For example, royalties for trademarks Taxation on foreign Law 12,249/2010 also provides are limited to 1% of net revenue and profits (CFC rules) requirements that must be met by royalties for patents are limited to a Brazilian controlled foreign company taxpayers in order for the payments percentage of net revenue that varies rules are relatively new, and some to beneficiaries located in a tax haven according to the type of industry provisions are quite different than jurisdiction or under a privileged (from 1% to 5%). Collectively, they the concepts and provisions present tax regime to be deductible: may not exceed 5%. However, as in the CFC legislation of other there are specific tax deduction countries. Profits generated by a i. the identification of the beneficial limitations, they are not subject to foreign subsidiary or branch must be owner must be obtainable. Brazilian transfer pricing rules. included in the December 31 financial ii. the operational ability of the foreign statements of the Brazilian company in Service fees party to effectively carry out the the year in which the profits are earned, Different taxation applies to service operation agreed with the Brazilian regardless of an effective dividend fees depending on whether the party must be demonstrated. or profit distribution. In certain other services are considered technical circumstances, such as the liquidation iii. the payment, and the proof of the or non-technical. There is no clear of a Brazilian company, foreign profits delivery of the goods, services, or definition in Brazilian legislation for may be subject to Brazilian tax before rights to the Brazilian party must technical and non-technical services. December 31. Brazilian tax law provides be able to be substantiated. However, in recent withholding that a subsidiary’s financial statements tax regulations the tax authorities Royalties must be prepared according to its local described technical services as the Withholding tax is levied on royalty commercial legislation and translated work or enterprise whose performance payments at a standard rate of 15% or into Brazilian currency (Reais). requires specialized technical at the applicable treaty rate. Royalty knowledge and that is rendered by Consolidation of profits and losses of payments are also subject to CIDE independent professionals or artists. foreign companies, in principle, is not (contribution for intervention in the permitted for Brazilian tax purposes economy) at 10%. CIDE is not a Non-technical services are subject (except for branches of the same entity withholding tax. It is charged to the to 25% withholding tax while located within the same jurisdiction entity that pays the royalties and CIDE technical services are subject to 15% if certain conditions are met). Foreign generates a partial tax credit in the case withholding tax and also to the CIDE profits earned by a Brazilian entity of royalties for trademarks and patents. at a 10% rate. Both technical and through its subsidiaries must be non-technical services are subject In addition, there is also discussion considered on a per subsidiary basis. to PIS and COFINS and ISS. PIS as to whether royalties are also and COFINS rates are 1.65% and However, a foreign subsidiary must subject to PIS and COFINS (and ISS). 7.6%, respectively. ISS rates can consolidate the results of its foreign In fact, Brazilian Federal Revenue vary from 2% to 5%, depending subsidiaries (second and further has recently come up with decisions on the municipality regulations. tiers) in its financial statements. in favor of the non-triggering of PIS and COFINS on the remittance Transfer pricing rules must be observed On the other hand, losses incurred by of royalties’ payment abroad. The if the fees are to be paid to related the Brazilian entity through a foreign referred decisions make clear that the parties and general tax deductibility company may not be used to offset agreement shall clearly discriminate requirements, such as evidence of the Brazilian profits. However, regulations the amount related to royalties from work performed, formal agreements, allow the offsetting of such losses technical services /assistance. etc, should be considered as well. against future profits of the same subsidiary, without quantitative or Royalties for trademarks, patents and If the services involve the transfer of qualitative limitations. Finally, it should know-how as well as other agreements technology, specific requirements may be noted that if foreign profits are involving the transfer of technology apply to remittances abroad as well subject to income tax in the country in (specialized technical services and as to tax deductibility, as mentioned which the foreign company is located, technical assistance) are subject in the royalties section above. the Brazilian parent company is entitled to specific requirements for both to a tax credit in Brazil. However, this remittances abroad and deductibility. credit and the corresponding offset The agreements must be registered are subject to certain limitations. with the Central Bank and the INPI (Federal Intellectual Property Agency). It is mandatory that Brazilian companies holding investments abroad Royalties are limited to certain use the actual profits method (lucro global and individual limits real) to compute corporate taxes. based on net revenue.

Introduction Acquisition investigation results, representations Brazil has been an attractive market The acquisition of an existing business and warranties, indemnification for foreign investors due to a variety may be accomplished through the clauses and guarantees, among of economic factors, including relative purchase of either the company’s other case specific provisions. economic and political stability, shares or its assets. In principle, Besides other regulatory requirements, control over inflation and a large the sale or purchase of shares is the acquisition of a publicly held and growing consumer market. a relatively simpler transaction company must be communicated to in comparison to an asset deal, The Brazilian merger and acquisition the CVM (Brazilian Securities Exchange specially because of operational (M&A) environment is dynamic Commission) and disclosed to the matters and indirect taxation. in the sense that tax laws are market as a material event. In addition, subject to frequent changes, The acquisition of a Limitada is the purchaser of the controlling stake creating not only pitfalls that can effective upon the approval and is required to make a tender offer frustrate M&A tax advisers, but registration of an amendment to for the acquisition of the remaining also tax planning opportunities. the articles of incorporation of the common shares of the company for target company, in order to reflect the a price equal to at least 80% of the Furthermore, while at times Brazilian assignment and transfer of quotas price paid for the controlling shares. tax law is considered firm, it can to the new partners. Additionally, a also provide significant flexibility The acquisition of companies in the detailed purchase and sale agreement for Brazilian tax planning. O&G industry may be subject to is usually executed, including specific regulatory approvals (e.g. ANP). Overall, there is a relatively high purchase terms and conditions, tax burden in Brazil, with complex confidentiality and non-compete Succession issues and interrelated tax provisions. provisions and, based on due diligence The succession of tax attributes and Therefore, good tax planning is investigation results, representations liabilities is among the most significant essential for the parties involved and warranties, indemnification issues involved in acquisitions. In this in any M&A project in Brazil. clauses and guarantees, among regard, the buyer is responsible for the other case specific provisions. past tax and labor on a share deal. Even In this sense, merger and acquisition when the transaction is structured transactions commence with On the other hand, the acquisition as an asset deal, tax succession is preliminary negotiations between of a privately held S.A. is effective still a major concern, specialy when the parties on purchase terms and upon the approval and execution of the assets purchased fall within the conditions, representations and a share transfer in the Share Transfer definition of commercial, industrial warranties, and noncompete and Book. A purchase and sale agreement or professional establishment. indemnification provisions, which is usually executed, including may be reflected in a memorandum purchase terms and conditions, of understanding providing for confidentiality and non-compete further exclusive negotiations and provisions and, based on due diligence due diligence investigations. As a preliminary discussion point, the parties of the transaction should consider whether to pursue it through an asset or share acquisition, at which time it should be noted that the outcome of due diligence investigations may determine the most cost-effective alternative.

Due diligence While good acquisition due diligence The tax benefit associated to this The main purpose of due diligence is important worldwide, it is premium depends on several factors investigations is to allow the particularly important in Brazil. and would, in principle, correspond prospective purchaser to better assess to approximately 34% of its value. The complexity of the tax system, the value of proposed transactions the large amount of tax litigation Anti-Avoidance Rules and identify related contingencies. In necessary to resolve tax issues, and Brazilian tax legislation (National addition, due diligence results may be the protective labor regulations, among Tax Code) currently provides that taken into account in the drafting of other issues, complicate the evaluation tax authorities may have the power specific provisions in the transaction of Brazilian targets, and sometimes the to disregard, for tax purposes, the documents, especially when it is negotiations, significantly. It is common acts or transactions intended to: (i) necessary to address any issues to observe a number of potential tax reduce the amount of a tax due, (ii) verified during the investigations. contingencies (issues not yet identified/ avoid or postpone the payment of The investigations are also useful in the assessed by the tax authorities or a tax due, or (iii) conceal aspects of determination of steps to be taken by included in a tax lawsuit) that may sum a taxable event or the true nature the purchaser when the transaction is to significant amounts. Some of the of elements that give rise to such completed, both in terms of remedying the most common issues encompass: an event. However, such provisions any identified problems and planning are still pending ordinary law and • Informal practices – income not for future administrative adjustments. administrative regulation in order to be recorded /false invoices entered fully effective from a legal perspective. The scope and length of the due in the accounting ledger. diligence process will depend on the Although there is still a lack of • “Outsourced” or unregistered circumstances of each transaction. regulation, this provision has been employees. Various aspects of the target company limiting tax planning in Brazil and may be analyzed, and many times • Doubtful /aggressive tax planning. created a change of the mindset of a separate investigation by an audit Brazilian tax authorities as well as • Low quality of financial firm is conducted simultaneously administrative judges. Lately, tax information /controls. with the legal investigation courts in Brazil have increased their conducted by qualified attorneys. • Inclusion of private/ scrutiny of transactions and are looking shareholders’ interests with for business substance. Thus, the tax In Brazil, certain public records can the company’s interests. system has been moving towards and should be checked during a due the adoption of the “substance over diligence. The ownership of real estate, Premium Tax Benefit form” principle. Several decisions for instance, is reflected in records kept Premium is the difference between from our administrative courts by the appropriate Real Estate Registry. the purchase price and the net equity (and also from our civil courts) Corporate documents such as articles of the acquired entity. Provided corroborate this tax environment. of incorporation can be obtained some requirements are met and with the Registry of Commerce. provided the buyer is a Brazilian entity, the premium may generate a Additionally, Brazilian courts, including tax deduction over a certain period. labor and tax courts, are prepared This may be achieved after a merger to issue certificates indicating any between the buyer and the acquired pending lawsuits involving the target entity. A number of considerations company. In addition to the examination arising from the accounting of public records, various documents harmonization process, towards are requested from the target company IFRS, may impact the amount and the and then analyzed by the attorneys period of the premium tax benefit representing the prospective purchaser.

Until the 1940s, labor rules in Brazil may be treated as compensation for General Requirements were found in laws, decrees and services performed and be subject to Terms of Employment various regulations, and no specific all taxes and contributions applicable Since the law establishes most code or standard existed consolidating to salary payments. In addition, these provisions of an employment all rules in force. This made it extremely benefits must be included in the contract, it is uncommon to have difficult to follow all changes and calculation of severance payments. an extensive written contract with regulations. In 1943, through the lower level employees. Employees Some may argue that the labor enactment of Decree-law No. 5452/43, have a work booklet Employment legislation has been favorable to known as Consolidation of Labor Laws Record Card and Social Security employees. In addition, employees (CLT), the entire labor legislation was Card (CTPS), signed by the employer do not assume the possible costs of consolidated into a single piece of stating the position and salary, thus, the process (burden of the defeated legislation, which has been governing establishing the formal labor contract. party) should their claims fail to be all labor relations to this day. based on circumstances that have A foreign employee may not be hired At that time, the strength of the actually resulted in loss for employees unless he presents his foreigner Brazilian economy was based on the during their work for an employer. identity card issued by the Brazilian manufacturing sector, and this sector Thus, there are a high number of authorities. All employees must be was chosen as the main basis for the claims in the Labor Court, which registered in the employee’s register creation of standards and rules that result in increased expenses for of the firm and have their work would comprise the CLT. However, the companies involved in such litigation. booklet signed by the employer. current labor market is considerably As a result, many companies may be An annual return must be filed with different from the one of 60 years in an unfavorable, even vulnerable, the local office of the Ministry of ago, since the service sector has situation regarding the labor legislation. Labor reporting the total number been accounting for an increasing In many cases, human resource of employees and specifying portion of the Gross Domestic Product policies are adopted that are not the number of foreigners and (GDP). Additional factors, such as provided in the current legislation minors employed, if any. new technologies, the use of more with the intent to benefit employees specialized workforce and more flexible Working Conditions and to follow market trends and labor agreements have contributed Employers are required to make practices. Thus, the great majority of and shaped the current labor market. reasonable provisions for the companies may be subject to the risk comfort and convenience of their Nevertheless, since the time of its of questioning by their employees employees. Appropriate dining enactment, the CLT has never been and/or the competent authorities. facilities or meal vouchers must be significantly updated or revised and The Labor Law Consolidation provided on premises where more in some cases, its provisions are encompasses the Labor Law Code than 300 persons are employed. obsolete for the current day and age. and amendments introduced by the Working Hours This situation becomes more serious Federal Constitution (FC) of 1988. The workweek, determined by the FC, as the labor environment evolves in line The following is a summary of the is 44 hours per week, conventionally with a more global economy. Currently, principal CLT items of general interest. treated in Brazil as 8 hours a day from market practices in terms of benefits Labor inspectors regularly enforce Monday to Friday and 4 hours on and human resource relationships have the numerous detailed requirements Saturdays. For employees paid on a become more flexible and provide covering such matters as recordkeeping monthly basis, the number of hours more comfort for employees to carry and payment of overtime and benefits. per month is 220 hours and 30 days are out their work. For this purposes It is essential that the personnel always considered in computing the various benefits are granted to department is knowledgeable number of working days per month. employees, such as a car, cell phone, about current labor laws in order to bonuses and others. However, by effectively deal with these matters. virtue of the legislation, such benefits

Transfer of Employees prove the existence of an employment Fringe Benefits An employee may be transferred to relationship and favor settlements Assuming certain requirements a new location if the arrangement as a means of resolving disputes. are met, some benefits such as is justified by the requirements of transportation, meal payments, Additionally, employees are not required the organization. If the assignment pension plans and insurance policy to assume the costs of litigation. As is temporary, the employee must premiums are not considered part of a result, labor claims tend to cause receive a payment increase of at employee remuneration and, therefore, expenses for the company involved. least 25%. Moving expenses must are not subject to the payment of also be paid by the employer. Typically, a labor claim is filed against the labor rights or social security. a company after an employee’s Trial Period Additional Salary contract is terminated. Brazilian Employees may be hired for a trial In certain instances, additional labor law allows an employee to file period, which cannot exceed 90 days. remuneration is required, as follows: a labor claim seeking rights for an Termination of Employment employment during the 5 years period • overtime rate must be at least After the experimental period, if prior to the date the claim is filed and 50% greater than regular pay; an employee is dismissed without up to 2 years after the dismissal. • night shift work must be paid at just cause, the employer must pay Employee Remuneration a rate at least 20% higher than a penalty equivalent to 50% of the Remuneration Frequency equivalent daytime work; amount deposited in the employee’s Employees must be paid in Brazilian Government Severence Indemnity • for hazardous work, the salary currency on a monthly basis or on Fund for Employees (FGTS) account must be increased by 30%; a shorter time period if stipulated (retirement fund). The employee by the employment contract. • for work dangerous to health, the will receive 40% of this amount salary may be increased by 10% and the other 10% will go to the Therefore, salaries are generally (minimum), 20% (medium), or government as a social contribution. referred to in terms of a monthly 40% (maximum) depending salary as opposed to an annual salary. Litigation on the level of potential harm The salary amount is paid 13 times Historically, Brazilian labor law has to health and well-being. during the year (see details below). been notoriously partial to employees. Brazilian labor courts generally allow Employers may not reduce the admittance of oral evidence to salaries except under extraordinary circumstances.

Minimum Wage 13th Month’s Salary Prior Notice on Dismissal The federal minimum monthly (Christmas Bonus) The employer or the employee salary is currently equivalent to R$ An additional one-month salary, also wishing to terminate an employment 540. Note that different minimum known as the 13th salary, is paid to relationship should give a thirty salary requirements may be granted employees as an annual bonus. Every days notice. If the company wants to specific regions, states and for year employers are obligated to pay to terminate the working contract specific categories of professionals. a bonus in the month of December without giving or before the end of equal to 1/12 of the salary earned for prior notice, it must pay the related Equal Pay each month of service during that days to the dismissed employee. There are general provisions in calendar year. This bonus must be Brazilian law prohibiting employment Other labor rights agreed and included in the basis for calculating discrimination based on gender, payments may be also due, unemployment insurance and social religion, race or other nonmaterial depending on the employment security contributions. Part of the factors. The only affirmative action contract signed with the individual, bonus must be paid during the year programs relate to the employment of his activities and on the Collective (normally when vacations are taken), individuals with physical handicaps. Bargain/Agreement negotiated and the remainder is paid in December. with the respective labor union. Labor law provides that all work of Dismissed employees are entitled to equal value must be paid at the same General Disclaimer receive proportionally to the period rate regardless of the nationality, Note that the labor rights described effectively worked during the year. age, gender or marital status of the above are those to which all employees employee performing the function. Profit Sharing are generally entitled to according However, differences in length of The legislation provides that to Brazilian labor laws. Other rights service, if over 2 years, may be taken agreements for profit sharing must may exist that may be provided for in into account to justify different salary be agreed upon by the employer the labor convention applicable to a levels. Companies that have a career and commissions appointed by specific company. Although detailing track plan may have differences in the employees. It is debatable on all possible rights that may be granted salary levels in accordance with whether the payment of profit to employees in Brazil is outside the seniority and merit; however, such sharing is mandatory or optional, scope of this publication, the most career plans need to be registered but there are several companies, significant issues are highlighted above. with the Brazilian Ministry of Labor. which have not been paying it. Labor Rights However, if a company has a profit Vacation sharing policy in place then pursuant Upon completion of each 12 month to current legislation profit sharing work period, employees are entitled payments are not subject to payroll to paid vacation of up to 30 calendar taxes and are not included in labor days. The employee can choose to rights calculation basis, but they do have up to 10 days of vacation paid attract personal withholding income tax. in cash. Vacation compensation is equivalent to one month salary, plus a 1/3 monthly salary as a vacation bonus. Vacation bonuses must be included in the basis for calculating unemployment insurance and social security contributions. Employees should not accumulate 2 or more years of vacation entitlements, otherwise the excess must be compensated at twice the normal rate of pay. If an employee is dismissed (other than with cause) he/ she must be compensated for unused vacation time, even if proportionally to the worked period.

Payroll Taxes The contributions to FGTS are Learning (Senac), Social Service Of Retirement Fund (FGTS) – not applicable for payments to Commerce (Sesc) and Service of Government Severence Indemnity independent professionals and are Support to Micro and Small Companies Fund for Employees not mandatory for compensation of (Sebrae), resulting in a total social directors that are not employees. security contribution rate of 27% to Each month, the employer must 29%. Note that these rates may be contribute the equivalent of 8% of Social Security (INSS) higher depending upon a company´s total salary of each employee for FGTS Employers Contributions activity, number of employees and purposes. This amount is deposited in Social security contributions have to history of work related accidents. each employee’s name in a separate be paid monthly by the employer to the account with the bank designated by Federal Social Security Agency (INSS). the government. An employee may only The contribution rate of 20% is applied use this fund in special circumstances, on gross salaries without limits. The such as retirement or dismissal contribution is further increased by without just cause. In any case, the working accident insurance, education employer must pay the employee contribution and contributions to 40% of the actual balance of the other governmental institutions such FGTS account as well as an additional as National Service for Commercial 10% to the federal government.

Payments to independent Basis for Calculation Foreign workers contractors, directors or managing Benefits paid by the state are Two thirds of the employees of all directors without an employment calculated based on the “benefit companies must be Brazilian citizens, relationship with the company (e.g., wage”. The benefit wage is that part both in terms of numbers and total service and management fees) are of an employee salary on which the payroll. Exceptions may be made for subject to INSS at a rate of 20%. employer’s social security contributions skilled professionals and technicians are calculated. The specific rules to in the event that Brazilians are not Employee Contributions calculate may vary in accordance available for a particular position. Employee contributions are made at with the nature of the benefit. lower rates (between 8% and 11%) Portuguese citizens, as well as based on a specific progressive Health Insurance foreigners residing in Brazil for over table and must be withheld monthly During the first 15 days of sick leave 10 years, who have a Brazilian spouse and paid to INSS by the employer. the employer pays the employee or child born in the country, qualify salary. If the insured is unable to work as Brazilian citizens for the above For instance, the monthly social for a period longer than 15 day, the purposes. However, there is a debate security contributions paid by benefit wage is paid to the insured by as to whether this provision of the employees who receive salaries equal the INSS for the remaining duration of Labor Law Consolidation was revoked to, or higher than, approximately the sick leave. This insurance may be by the Federal Constitution/88. R$ 3,689.66 per month are limited converted into a disability pension. to 11% of the salary amount. All foreigners coming to work in Brazil Retirement Pension must obtain a valid visa. Generally, Withholding Income Tax This benefit is paid to men over 65 visas are issued to the directors and Income taxes on Brazilian source and to women over 60 years old, employees of a foreign company, an payments made to individuals as provided they have made 180 monthly individual establishing a significant remuneration for services must contributions. For farm workers, the new investment in Brazil and to new be withheld on a monthly basis in age threshold drops to 60 years for transfers of a foreign company with accordance with a specific progressive male and 55 years for female workers. existing operations in Brazil, where the table, as further listed below. The transfer has skills not available in the withholding rate for individual income An early retirement pension may be Brazilian labor market. In practice, the taxes ranges from 7.5% to 27.5%. granted if a man has worked for at latter requirement is not rigidly applied. least 30 years and a woman for at Portion Income least 25 years. The maximum pension Therefore, sponsoring companies Income to be – from % is available after 35 years of service must obtain residence visas and work – to (R$) deducted (R$) for men and 30 years for women. permits for expatriate personnel. (R$) Experience varies depending on the Other Benefits type of job position, the industry in 0.00 1.499.15 0.00% 0.00 Other benefits are available to which the company operates and employees in Brazil. These include, 1.499.16 2.246.75 7.50% 112.43 the current labor policy. The work among others, maternity insurance, visas issued to foreigners are either 2.246.76 2.995.70 15.00% 280.94 funeral insurance and disability pension, temporary visas (valid for up to all of which are calculated in a similar two years) or permanent visas (no 2.995.71 3.743.19 22.50% 505.62 manner to the 13th month salary. time restriction on residence – the 3.743.20 - 27.50% 692.78 restriction is in regards of the activity Government Inspection that is developed, for up to fi ve years). Employers must submit all accounting Temporary visas can be renewed For more information of records and other documentation for a further period of two years and individual taxation please to government inspectors, upon changed into a permanent visa after refer to the specific topic. their request, to demonstrate the fourth year. Permanent visas may compliance with social security rules. Social Security Benefits be issued to the directors of entities The Brazilian social security system Union Contributions with at least US$150 thousand or US$ provides minimal benefits. Health, Employers’ contributions to labor 600 thousand in equity investments. disability and senior pension benefits unions are paid in January of each Foreign companies who wish to are very small for the vast majority year and are calculated on the employ foreign citizens must provide of Brazilians. In addition, a significant basis of a company’s registered the following documents and proportion of the population is engaged capital per a progressive chart information to the Ministry of Labor: in occupations where access to the prepared by the Union. social security system is limited. • the amount of registered All employees must pay Union capital in the local company. The state health care system contributions equal to one day’s is rudimentary and is generally wages. This contribution is deducted • the number of Brazilian and foreign overloaded. Accordingly, the majority from employee salary in March. employees in the local company. of employees have access to private health insurance plans provided by corporate employers or trade unions.

• the justification for the Split payroll Two distinct workloads are eligible for employment of the applicant. Brazilian legislation does not expressly this shift rotation regime: 8 hours or 12 foresee the treatment to be applied to hours, where the 12 hours regime is • name and passport number cases in which a split payroll scheme restricted to activities of exploration, of the applicant. is put in place. In practical terms, due drilling, production of petroleum • information on salary and benefits. to the lack of specific provisions and located in the sea or in distant land considering that the general provisions areas or with difficult access as well • Power of Attorney, for of the social security code are broad, as transfer of petroleum from the sea. representation of the applicant the authorities may understand that In principle, the employee should not before the Ministry of Labor. the social security would be due in remain in this shift rotation regime • résumé (C.V.), diploma and Brazil on top of the total remuneration for more than 15 consecutive days. academic transcripts. received. Brazilian income tax must be In consideration, the employer must paid on total income on a worldwide • the employment contract. provide the additional labor rights: basis. Visa issuance consequences (i) night shift work payments; (ii) • completed application form. must also be considered. free food and transportation; (iii) 24 The Federal Constitution/88 ensures Labor Regime in the Oil hour of rest for every three turns equal protection of the basic rights of & Gas Industry worked; and (iv) payment in double liberty, personal security and property The labor regime in the Oil & Gas for the suppressed rest hours. ownership to both Brazilian nationals Industry is regulated by Law n. and foreign residents. However, 5,811/72, which foresees specific foreigners are prohibited from engaging provisions for employees involved in certain activities, are limited as to the in Oil & Gas activities. As per the amount of rural land they may own, and mentioned law, employees may be may not own property in frontier areas. kept in their work stations under a shift rotation regime in cases when an operational continuity is indispensable.

Basis of assessment Foreign income carnê-leão Taxation of capital gains Residents in Brazil, whether Brazilian The withholding tax mechanism Real estate capital gains are taxable or foreign nationals, are subject to tax only applies to payments made by at a 15% rate. Capital gains are on their worldwide income. Individuals Brazilian companies to individuals. exempt from taxation if all of the reporting foreign income received The tax due on foreign income is following conditions are met: a similar may recognize a foreign tax credit for calculated in accordance with the same transaction has not occurred within the respective taxes paid, provided progressive table, but the individual the previous five years, the residential there is a tax treaty or a reciprocity himself (or a service provider) must real estate is sold for a price lower agreement in place between Brazil compute and pay the tax through than or equal to R$ 440,000 and the and the particular foreign country. the regime known as Carnê-leão. individual does not own other real The credit taken must be net of any estate. There is also an exemption if the The deadline for both the reporting of refund and supported by original taxpayer uses the sales proceeds to the foreign income and the payment documents evidencing payment purchase another piece of real estate of the corresponding tax is the last to the foreign taxing jurisdiction. within the following six months. working day of the month following the Income subject to tax includes month when the income was received. Gains from the sale of foreign all monetary compensation Foreign tax credits can generally be stock or personal property that and fringe benefits. used to offset the Brazilian tax liability. was acquired prior to becoming a Brazilian resident are not taxable. For foreigners working in Brazil this Annual income tax return includes, among others, the cost An annual income tax return must Concept of residence of travel for family home leave, as be filed by the last working day of Permanent visa well as allowances for housing, April reporting the income earned Individuals transferring to Brazil on education, automobiles, medical and in the previous calendar year a permanent visa are subject to tax other living expenses. In addition, (January 1 to December 31). as residents from the date of arrival. any reimbursement of taxes paid Permanent working visas are generally All Brazilian tax residents are required is included in taxable income. Non- granted only to applicants who will to disclose their worldwide personal monetary fringe benefits, such as perform management activities as assets and liabilities held as of the use of a company car or country business administrators, general December 31 of each year. Although club membership, are also included managers or directors of Brazilian part of the filing obligation, there in taxable income. No distinction is professional or business companies is no tax assessed on the gross or made between personal expenses duly appointed as stated in the their net assets of a fiscal resident. reimbursed by the company to the articles of incorporation. The Brazilian employee and personal expenses company has basically two options paid directly to a third party by the to formalize the recruitment of an company. Moving allowances are individual with a permanent visa: generally nontaxable but in certain (i) with an employment contract, cases may be treated differently. where the company will pay a monthly Brazilian companies making salary and will incur in other labor payments to individuals must charges, as well as being included in withhold the personal income tax the Brazilian company’s payroll; or on a monthly basis in accordance (ii) without an employment contract, with the applicable progressive where the company will pay a pro tax rate. Specific allowances and labor remuneration in Brazil. deductions are available for income tax computation of individuals.

Temporary visa Business visa Repatriation process Individuals transferring to Brazil with a A business visa holder is allowed to Upon departure from Brazil, a fiscal temporary visa to work as an employee remain in the country for 90 days resident must report his income and of a Brazilian entity are considered (renewable) and would only be able to pay any taxes until that date. The residents for tax purposes as of conduct business as allowed under the taxpayer must file a final income tax the date of arrival and, as such, are rules applicable to the holder of this return and obtain a tax clearance certifi taxable on their worldwide income. type of visa. For these purposes, the cate (granting nonresident tax status) short-stay business visa is applicable that will enable him to request Central If an individual enters for any other to persons who wish to travel to Brazil. Bank permission to repatriate all purpose on a temporary visa and does assets held in local currency, provided not have an employment contract with these assets have been properly a Brazilian entity, he will be working reported in the annual tax returns. under a technical agreement for the rendering of technical assistance in Brazil but remains an employee of the parent company. In this case, the individual’s tax status for the fi rst 183 days of physical presence in Brazil will be that of a nonresident.

The Oil & Gas industry has been Our high-standard services • Assessment and corporate undergoing very rapid development, also enable us to: governance of knowledge, mainly due to technological advances security and risk management • Have professionals dedicated and the way world prices have been information systems. to the Oil & Gas sector. changing. This development is also • Assistance to clients in the due to companies that are striving to • Keep abreast of the latest effective communication of be recognized on the global market developments in the area and their business performance. and are competing for the capital be prepared to offer responses required to discover new opportunities. to the trends in the sector. • Quick responses in a changing corporate governance environment. KPMG, which operates with the • Disseminate publications, research Oil & Gas industry and provides results and articles on relevant • Advisory on environmental and services to small, middle-sized and questions for the industry. stakeholding issues, including large companies, from the beginning reviews of sustainability reports, • Conduct continuous training of the review of feasibility studies, development of global reporting courses for professionals and through the development of the area initiatives and audits of problems clients from the Oil & Gas sector. and right up to the commercialization arising from greenhouse effect gases. stage, has the resources to offer The services that the KPMG member • Preparation and advisory for you a service that may suit your firms can offer are the following: the conversion to IFRS. company’s strategic needs. • Support for international • Audit of the statutory These resources have been obtained investors investing in the financial statements and by KPMG through gathering together region, through tax, financial and risk advisory services. professionals from the Audit, Tax and regulatory advisory services. Advisory practices, all of whom are • Internal audit advisory and services. • Support in Merger and Acquisition dedicated to companies of the Oil processes, and divestment • Support for the team and for & Gas industry, to create one of the of assets and companies. Brazilian and foreign executives. largest practices in Oil & Gas in Brazil, providing services to approximately • International tax advisory, 60% of the main companies in the compliance and organization. world that operate in this industry. • Project due diligence for assessing Our Center of Excellence in Oil & Gas new investments and initiatives. located in Rio de Janeiro and KPMG’s • Independent assessments Global Centers of Excellence located and reports. around the world can provide direct access to the most recent knowledge • Support for joint ventures, and in terms of industry, capabilities, advisory services in investment resources and technical development. management and in the efficiency and effectiveness of the investment, The aim in our Centers of Excellence at the same limiting the risk. is to obtain immediate, direct responses for the rapid evolution of the Oil & Gas industry.

KPMG in Brazil employs approximately 4,000 professionals working in 21 cities located in 12 States and the Federal District. KPMG in Brazil has offices located in São Paulo (head office), Belo Horizonte, Brasília, Campinas, Campo Grande, Curitiba, Florianópolis, Fortaleza, Goiânia, Joinville, Londrina, Manaus, Osasco, Porto Alegre, Recife, Ribeirão Preto, Rio de Janeiro, Salvador, São Carlos São José dos Campos and Uberlândia. Through Audit, Tax and Advisory services, the Organization offers, worldwide, a consistent set of accounting and financial skills and competences, based on a profound knowledge of the market segment of each client, a very significant differential feature. In order to offer quality services, KPMG transforms its knowledge and experience accumulated over the years, in many various areas, into value for its clients, through multidisciplinary engagement teams. Organizing and carrying out accurate market intelligence work is considered by KPMG as a decisive point in building the strategies adopted by the organization for providing services to its clients. This methodology provides detailed knowledge of each sector of the market and makes it possible to develop leading service practices with respect to the individual particularities of each client.

Manuel Fernandes Partner, Audit Tel.: +55 (21) 3515-9412 [email protected]

Roberto Haddad Partner, Tax Tel: +55 (21) 3515-9469 [email protected]

Júlio Chamarelli de Cepêda Partner, Tax Tel.: +55 (21) 3515-9133 [email protected]

Pieter van Dijk Partner, Management Consulting Tel.: +55 (21) 3515-9444 [email protected]

Augusto Sales Partner, Transactions & Restructuring Tel.: +55 (21) 3515-9443 [email protected]

www.kpmg.com/BR

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