Petrobras charters offshore rigs, platforms following tax dispute

By Peter Howard Wertheim
OGJ Correspondent

RIO DE JANEIRO, July 2 -- Petroleo Brasileiro SA (Petrobras), Brazil's state-owned oil company, reported that it has signed international contracts chartering offshore drilling and production units despite the Brazilian Internal Revenue Service's contention (on the basis of the second article of Law 9,537/97) that such rigs cannot be classified as sea-going vessels and therefore should not be chartered but leased.

Petrobras disagrees with the agency's interpretation as to charter contracts, given that Brazil's Federal Supreme Court already ruled that, with respect to the tax, offshore semisubmersible platforms are to be classified as sea-going vessels.

And according to the Income Tax Regulation (Decree 3,000/99), overseas payments for such contracts enjoy a zero withholding tax rate in line with article 691 of the same decree.

In line with current practices in the international oil market, Petrobras has been chartering offshore units for drilling and production since beginning exploration activities on the Brazilian continental shelf.

The tax agency's interpretation that overseas remittances for servicing chartering agreements would be subject to withholding tax at the rate of 15-25% could have extremely negative implications for all companies involved with offshore oil exploration and production in Brazil.

In light of Petrobras's practice in this case, the tax agency served a tax assessment notice on Feb 17 for $30 million for 1998, against which Petrobras lodged an appeal on Mar. 20. Then, on June 27, the agency served another tax assessment notice amounting to $1 million covering the period 1999-2002.

Petrobras said it intends to lodge an appeal against this most recent tax assessment notice in line with the procedure already adopted in the first case.

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