Taxes may discourage Brazil gas output, boost imports

Brazil's taxes on new steps in natural gas production may discourage increased output from offshore and pre-salt production regions, leading to more LNG imports.

Prior to Brazil opening the gas market, all of the steps of the supply chain were handled by state-controlled Petrobras, with no tax levied at each additional stage. Now a 9.25pc federal Pis/Cofins tax to generate money for social programs applies to a company's income at several stages in the supply chain, or an effective cost of 11.75pc.

Natural gas exploration and production (E&P) companies have said that the taxes applied to intermediate activities in the upstream — like gas flow from offshore basins, processing and storage — favor imported LNG over their output.

In March, a month prior to the approval of a new gas law, 23pc of gas on offer in Brazil came from imported LNG. With the decrease of hydropower generation resulting from drought in Brazil, more LNG imports may be needed for power generation.

Pis/Cofins taxation for LNG imports is duty-free, with the tax applied only on regasification. A recent change in Brazil's fiscal rules also suspends federal taxes for floating storage and regasification units that are received in Brazilian waters.

The Pis/Cofins tax on gas production is non-cumulative, meaning that if the tax was already paid during a previous step of the supply chain it can be discounted on later steps. But the tax credit process is erratic, with part of the credits returned when companies invest in new assets. E&P companies are concerned about difficulties receiving these credits, as the upstream sector is a mature industry with few opportunities to invest in smaller assets, such as machinery.

These tax uncertainties for E&P companies may result in higher costs for gas, Felipe Senges, upstream tax lead at Shell Brazil, said during a 1 June online event.

But it is not clear whether taxation on E&P may pass through to consumers, because myriad variants must be considered in the final cost, said Marcio Seixas Vianna, senior associate and tax specialist at law firm Terciotti, Andrade, Gomes, Donato.

Depending on what model that participants in the gas supply chain ultimately choose for gas supply operations, higher taxation come from intermediate steps of the supply chain performed by independent companies, "especially due to PIS/COFINS, and other taxes," Vianna said. "The greater the need for outsourcing, the greater the fiscal cost of the operation."

The extension of the Repetro import tax regime on oil and gas exploration platforms and other upstreams processes also could encourage LNG imports, Senges said, but it needs further clarification from the Brazilian tax authority.

The taxes will be an important factor in the overall expansion of the gas market. Either changes must be made to the Repetro and Reidi special tax/customs regimes — for E&P and infrastructure investments, respectively — or a new special tax regime must be created for natural gas, Vianna said. "The tax cost is one of the largest charges levied on the final product," he added.

By Flávia Pierry