Brazil expands tax cuts to nat gas projects

The Brazilian federal government will include the natural gas sector in an existing tax incentive program for infrastructure investments, a move that could boost the country's burgeoning gas markets.

The new ordinance will let natural gas production, processing, pipelines and local distribution system projects waive up to 9.25pc in federal taxes on machinery or feedstock under the existing Special Regime to Incentivize Infrastructure Investments (REIDI). REIDI was created in 2007 for transportation, power, ports, energy, irrigation and sanitation sectors, to eliminate the PIS and Cofins taxes which generate funds for social programs.

Companies can mandate gas structure projects get the PIS/Cofins tax breaks, which are then deducted from the machinery and feedstock purchase invoices. These taxes will be later zeroed-out when the equipment, feedstocks or other products are used by the project.

The update to the REIDI to include natural gas projects is aimed at "giving more legal certainty to entrepreneurs" and help "increase the investment in the gas sector", the Ministry of Mines and Energy told Argus.

At least one natural gas pipeline construction project applied for the tax break in the past, but it was not clearly defined by law. The inclusion of the natural gas sector, particularly the possibility of including non-oil associated gas production infrastructure in the tax break, is one more signal from the government that it will open the gas sector and attract infrastructure investments. The biofuels sector has asked for the same benefit but has not yet been granted.

Including natural gas in the REIDI tax break may encourage more domestic natural gas production, said Renata Beckert Isfer, partner at oil and gas exploration company Petres Energy.

"Brazil's overly demanding regulatory framework and its high royalty payments for onshore E&P companies make the production of natural gas economically unfeasible in areas that could be producing and generating more jobs and income," Isfer said.

It can also speed up the expansion of market capacity and reduce the cost of projects, said Márcio Seixas, an energy sector tax advisory attorney at the law firm Terciotti, Andrade, Gomes, Donato.

The newly opening gas market in Brazil will depend on deep levels of investment to gain liquidity. Tax breaks for construction of new infrastructure can accelerate the expansion of the 9,409km pipeline network and add more gas processing capacity to the 14 existing units, with 96mn m³/d processing capacity.

Seixas said gas businesses are still hoping for even deeper tax cuts, like the oil industry gets under the REPETRO law, where production, import and sales taxes can also be trimmed.

By Flávia Pierry