The Rio de Janeiro State Assembly has passed a bill creating a financial compensation to be paid by the concessionaries for exploration and production of oil and gas that operate in confronting areas to Rio de Janeiro State and that do not comply with the requirements of local content.
The financial compensation created by the Bill of Law no. 3,265/2020 consists in the levy of the State-value added tax (“ICMS”) over the supply of goods and equipment that have not complied with the minimal local content clause.
The ICMS will be levied at a 15% rate, resulting from the difference of the ICMS internal rate (18%) and the ICMS Repetro rate (3%) sets forth in State Law no. 8,890/2020, which regulates the Repetro-Sped at the State level.
The State Assembly stated that the new financial compensation aims at compensating losses suffered by the State as a result of the non-compliance of the local content rules.
In our opinion, the Bill is unconstitutional and illegal for the following reasons, among others:
(i) the State of Rio de Janeiro has no power to inspect the compliance of local content rules, which are established and inspected by the Federal Government and ANP (the Oil and Gas Agency), as the federal body with power and capacity to inspect the oil and gas activities and the compliance with the minimum local content clause. As a result, the State of Rio is not able to apply penalties related to the compliance or non-compliance of the minimum local content clause;
(ii) the Bill establishes the non-compliance of the minimum local content clause as an ICMS triggering event. The calculation basis would be the supply of goods and equipment that had not met the minimum local content clause. However, such event should not be an ICMS triggering event, since it is not foreseen in article 155 of the Federal Constitution as an ICMS triggering event;
(iii) the Bill created an ICMS levy that is based on the violation of a federal rule, meaning that the Bill created a tax levy as a penalty for the non-fulfilment of the local minimum local content rule, in violation of article 3 of the National Tax Code;
(iv) the ICMS Agreement no. 03/2018, as amended by ICMS Agreement no. 220/2019, does not require taxpayers to comply with the local content rules to benefit from the 3% ICMS on the acquisition of permanent goods under Repetro-Sped regime. The bill creates a condition not foreseen in the ICMS Agreement no. 03/2018 (as amended), being illegal for that reason.
After the approval by the State Assembly, the bill was sent to the State Governor for sanction or veto.
With the sanction of the bill by the Governor, the law will enter in force in 90 days. It may create a significant financial impact to the concessionaries for exploration and production of oil and gas in the State of Rio de Janeiro.
Taxpayers impacted by the coming law may bring the matter to the State court in order to avoid the new ICMS charge.
The Schmidt, Valois, Miranda, Ferreira & Agel team is at your disposal for any clarification on the matters of this newsletter.