Indirect Taxation

Upstream Taxation and Foreign Investment in Brazil

IV. Indirect Taxes.............................................................................................. 3 IV.1 Federal Excise Tax IPI..................................................................... 3 IV.2  State VAT on Circulation of Goods and Services ICMS.................................................................................... 3 IV.2.A Operations related to Oil and Natural Gas:............... 4 IV.2.A.1. Intra-State Operations................................................. 4 IV.2.A.2. Interstate Operations.................................................. 4 IV.3 Municipal Service Tax (ISS)............................................................. 4 IV.4  Social Integration Program (PIS) and Social Contribution on Revenues (COFINS).......................................... 5 IV.4.A Calculation Basis:.................................................................. 5 IV.4.B  Non-Cumulative System PIS and COFINS Credits:. ..................................................................................... 5 IV.5 PIS-Importation and COFINS-Importation.............................. 6 IV.5.A Importation of Goods......................................................... 7 IV.5.B Importation of Services...................................................... 7 IV.5.C P  IS-Importation and COFINS-Importation Credits:....................................................................................... 7 IV.6 Import Duties and Taxes................................................................. 7 IV.6.A Import Process - Goods. ..................................................... 7 IV.6.B Import Process - Services.................................................... 8 IV.6.C Demonstration of Total Tax Cost.................................... 8 IV.6.C.1. Importation of Goods. ................................................ 9 IV.6.C.2. Importation of Services. ............................................. 9

V.  Brazilian Withholding Income Tax (Irrf) on outbound remittances. .................................................................................................. 9 V.1 Royalties and Technical Assistance Contracts.......................... 9 V.2 Service Contracts............................................................................... 10 V.3 Dividends.............................................................................................. 10 V.4 Leasing of Capital Goods............................................................... 10 V.5 Capital Repatriation......................................................................... 11 VI. W  ithholding Taxes on local payments for Services IRPJ, CSLL, PIS AND COFINS. ......................................................................... 11 VI.1 Withholding Taxes Public Agencies..................................... 11 VII. Other Taxes.............................................................................................. 12 VII.1 Contribution on Financial Transactions (CPMF)............... 12 VII.2 Tax on Financial Operations (IOF)......................................... 12 VII.3 C  ontribution for Intervention in the Economic Domain (CIDE). .............................................................................. 13 VII.3.A  Technical and Administrative Assistance Services and Royalties................................................................... 13 VII.3.B  Importation and Sale of Petroleum, Natural Gas and Derivatives............................................................... 13 VIII. Repetro..................................................................................................... 14 VIII.1 Importation on a Temporary Admission Basis.............. 14 VIII.1.A N  ormative Ruling #IN 844/2008..................................... 15 VIII.1.B ICMS Convention #130/2007................................. 16

IV. Indirect Taxes IV.1 Federal Excise Tax IPI This federal tax is paid by manufacturers at the time of sale, either to another manufacturer that will continue the manufacturing process or to the retailer or ultimate customer. However, the subsequent manufacturer is allowed to take a credit against its IPI liability equal to the IPI paid by its suppliers. The IPI is also levied on the importation of goods. Generally, the IPI calculation basis is the value of the transaction carried out by the taxpayer. As for import operations, the basis for calculation of the IPI would consider the value of the goods (CIF) plus customs duties (II). IPI rates tend to be selective and may vary according to the nature of goods, from zero for basic supplies and rising for non-essential goods, depending on the products specific code in the Harmonized Tariff Schedule- HTS. Please see below some of the IPI rates for equipment commonly used in upstream activities.
Product Wet Christmas trees Vessels intended to support research, exploration, drilling, production and storage of oil and natural gas Tax Classication 8481.80 8906.00 Rate (%) (*) 4; 5 or 12 5 5

In short, the mechanism used for IPI calculation is that each individual establishment offsets the total IPI paid on purchases (inputs) against the total IPI collected on its sales (outputs). The amount of tax due by the company (considering the IPI due/credit in all its establishments) has to be calculated and paid monthly, as from October 1, 2004. Brazilian legislation establishes that products imported under certain special customs systems, such as the drawback system, are exempt from the IPI, provided that certain obligations are fulfilled. In addition, products or merchandise imported into free trade zones might also be exempt from the aforementioned tax. Goods exported from Brazil are exempt from IPI and the corresponding credits accrued can be taken and used to offset other federal taxes. It is important to stress that the sale of crude oil and derivatives are not subject to IPI taxation. IV.2 State VAT on the Circulation of Goods and Services ICMS The 1998 Constitution granted authority to the Brazilian States to collect the value-added tax on the circulation of goods and interstate and intermunicipal transportation and communication services, even if the transaction and/or service rendering starts in another country, including import operations. The ICMS is a non-cumulative tax and the calculation involves a system whereby in each payment period the taxpayer has to check the amount of ICMS debits (generated on the circulation of goods and services) and ICMS credits (generated on the acquisition of goods); if there are more debits than credits, then the taxpayer will have to pay the tax on the difference. The credits are computed when the goods enter the taxpayers premises and the debits are computed at the time the products exit the establishment. Taxpayers are not allowed to account for credits on materials purchased that will be used on goods that will not be taxable when they exit the company. In addition, taxpayers are not allowed to account for credits on materials purchased that will be used as consumption

Vessels used in activities involving research and acquisition of 8905.90.00 geological, geophysical and geodesic data related to exploration 8906.00 for oil and natural gas Equipment for acquisition of geological, geophysical and geodesic data related to exploration for oil and natural gas Equipment for auxiliary drilling services used in drilling and producing wells Floating cranes used in offshore rig facilities 9015.10/20/30 9015.40/80/90 8431.43 8905.90

5 5 5 5 2 2 5 5 5; 2

Tugs for vessels and support equipment used in research, 8904.00 xploration, drilling, production and storage of oil and natural gas Drilling and production risers Fixed exploration, drilling or production units (machinery) Floating production, storage and ofoading units Floating or semi-submersible exploration, drilling or production units (platforms or rigs) Remotely operated vehicles (submarine robots) 7304.29 8430.41/49 8905.90 8905.20 8479.89

(*) Please note that the IPI rates can change during the course of the time through a simple decree, without the need for any grace period. In this sense, it important to note that IPI rates have to be closely monitored and conrmed before initiating any operation involving this tax.

Upstream Taxation and Foreign Investment Direct Taxation Corporate Income 3

goods. ICMS credits related to the acquisition of goods booked as fixed assets have to be recorded on the taxpayers books in 48 consecutive monthly installments. The ICMS calculation basis is the value of the transaction or service carried out by the taxpayer. The tax calculation basis includes the value of the tax itself (gross-up method) itemization of the tax separately is only for control purposes. Regarding imports operations, the ICMS calculation basis would consider the value of the goods (CIF) plus the II and other customs expenses; plus IPI; plus the PIS and COFINS due upon importation and the ICMS itself (gross-up method). The ICMS is levied by most states at the rate of 17%, except for the states of So Paulo and Minas Gerais, where the tax rate is 18%, and Rio de Janeiro, where the tax rate is 19%. Special rates apply to interstate sales, as shown in the chart below:
FROM South and Southeast Region South and Southeast Region North, Northeast and Midwest Any State TO South and Southeast Region North, Northeast and Mid-West Any other State Non-taxpayer RATE 12% 7% 12% Internal rate of shippers state

at the rate of 17%, 18% or 19% (internal rate for the state where the buyer is located). The usual rate applicable on the sale of natural gas is twelve per cent (12%). According to Rio de Janeiro State Law # 4,117/2003 (Noel Law), the ICMS might be applicable at the rate of 19% on oil production operations the moment that the goods pass through the Production Measurement Point. IV.2.A.2 Interstate Operations According to the Brazilian Constitution and Complementary Law No.87/96, interstate operations involving petroleum and its derivatives are not subject to ICMS. The rate applicable to interstate sales of natural gas is the normal rate either twelve per cent (12%) or seven per cent (7%), the latter applicable to shipments to states located in the nations Northern and Northeastern regions. It should be noted that some operations with gas, oil and its byproducts might be subject to the tax substitution system. In short, the tax substitution system involves one company taking on the responsibility for calculating and paying over the ICMS on behalf of the entire supply chain, based on an estimated final price for the product. IV.3 Municipal Service Tax (ISS) Supplies of services other than those subject to ICMS are subject to a cumulative tax called the ISS (Imposto Sobre Servios). This is a municipal tax on certain services listed by the federal government as per Complementary Law # 116/2003. The taxable basis of ISS is the price of the service rendered. In general, the service tax is levied by the municipality in which the company is established and performs the work. Exceptions to this rule are the items described specifically in Article 3 of Complementary Law # 116/03 (such as construction work, dock services and tugboat operations) when the tax is levied by the municipality in which the work is performed (in this case, opening a specific establishment might be necessary). The most usual rate applicable is 5%.

ICMS legislation provides certain incentives, such as exemptions. However, it should be noted that since Brazil is constituted as a federation, it has 27 different ICMS tax authorities and regulations, each one of which provides a series of distinct benefits. IV.2.A Operations related to Oil and Natural Gas: In general, Oil and Gas operations are subject to ICMS taxation in a manner similar to other usual operations, as described earlier. We describe below the main difference in applicable ICMS legislation regarding Oil and Gas operations. IV.2.A.1 Intra-State Operations Normal taxation applies to these operations, which means that all oil and natural gas sales made by an oil company to refineries will be subject to the ICMS
4

However, it should be noted that the rate varies from municipality (city or township) to municipality and further depends on the service rendered. ISS is not a creditable tax like IPI or ICMS. Since it is not considered a value-added tax, the debt/credit method does not apply. Another change introduced by the referred Complementary Law is ISS taxation of services provided by foreign companies in the following situations: * The service is performed in Brazil or, * The results of such service are verified in Brazil. In either of these cases, the company that pays for the service will be responsible for payment of the ISS due on the operation. IV.4 Social Integration Program (PIS) and Social Contribution on Revenues (COFINS) The Social Integration Program (PIS) was conceived as a means for employees to share in profits through a mandatory national savings program financed by monthly deposits collected as a percentage (0.65%) of gross sales revenues. Some federal social programs are also financed with these funds. The Social Contribution on Revenues (COFINS) was created to finance special federal social programs by levying the rate of 3%, also on gross sales revenues. As from December 2002, PIS and COFINS legislation has undergone several alterations in order to implement a non-cumulative system. Such alterations mainly included allowing the taxpayer to offset amounts due with specific credits, and raised PIS and COFINS rates to 1.65% (since December 2002) and 7.6% (as from February 2004), respectively.

IV.4.A Calculation Basis: The basis for calculating PIS/COFINS includes all revenues accrued by a legal entity, regardless of the specific accounting classification in which they are booked, except for:
Exclusion from PIS/COFINS Calculation Basis canceled sales and unconditional discounts accounting adjustments such as reversal of provisions, recovery of costs and expenses; equity pick-up and dividends; non-operational revenues resulting from the sale of permanent assets; revenues already taxed, due to the application of a tax substitution system; and revenues derived from the sale of alcohol (ethanol, which is used as a fuel); revenues that are either tax-exempt, not taxed, or taxed at a rate of 0%.

Exports of goods are exempt from PIS and COFINS. Services rendered to entities resident or domiciled abroad are also exempt from PIS and COFINS if the respective payment entails inflow of foreign currency into Brazil. IV.4.B Non-Cumulative System PIS and COFINS Credits: Until November 2002, taxpayers were not able to claim any tax credit regarding PIS. In December 2002, Federal Law # 10,637/2002 was enacted, resulting from the conversion of Provisional Measure # 66/2002. Such legislation introduced some changes in the PIS calculation, increasing the rate from0.65% to 1.65%, and allowing taxpayers to offset amounts due with specific credits. The COFINS rate was hiked from 3% to 7.6% and the non-cumulative methodology was implemented as from February 2004 with enactment of Federal Law # 10,833/2003, which originated from Provisional Measure # 135/2003. Some provisions related to the non-cumulative system were changed by Federal Law # 10,865/2004 and Federal Law # 10,925/2004, which were enacted April 30, 2004 and July 31, 2004, respectively.

Upstream Taxation and Foreign Investment Direct Taxation Corporate Income 5

Considering the legislation currently in force, taxpayers can calculate PIS and COFINS credits to offset amounts due. This calculation is performed by applying the respective rates (1.65%, for PIS, and 7.6%, for COFINS), on the amounts related to:
PIS and COFINS Credits Goods acquired for resale;  Goods and services used as inputs in performing services and producing (manufacturing) other goods for sale, including fuel and lubricants;  Payments for rentals of buildings, machinery and equipment used in company activities made to another legal entity;  Expenses related to commercial leasing transactions;  Depreciation of machinery, equipment and other assets incorporated into a companys fixed assets (PP&E) acquired in order to be rented to other companies or used for producing (manufacturing) goods for sale or rendering services;  Depreciation of buildings and betterments owned by the company or leasehold buildings and improvements used in the companys activities;  Goods that have been returned;  Storage of goods and freight due on sales transactions, when the burden is borne by the seller;  Electricity and thermal energy consumed in company establishments.

Alternatively, calculation of PIS and COFINS credits on acquisition of goods intended for a companys fixed assets can be performed monthly by applying such rates to the amount corresponding to 1/48th of the acquisition value of the assets (48 installments). In some specific cases, PIS/COFINS credits on acquisition of goods for fixed assets can also be taken by applying the contributions rates in the amount corresponding to 1/24th and 1/12th of the acquisition price of the asset. PIS and COFINS are due on a monthly basis and credits not used on one month may be carried forward to the following month. It is important to mention that the exemption granted to revenues from export transactions does not entail loss of PIS and COFINS credits calculated on the inputs acquired during any given period. Indeed, export companies are granted the right to use and maintain the PIS and COFINS credits associated with the revenues from export transactions to offset against future liabilities of PIS and COFINS or any other federal taxes administrated by the Brazilian Federal Revenue Service (SRF). As from August 2004 the non-cumulative PIS and COFINS rate on financial revenues is 0% (including hedge transactions), exceptionally relating to revenues from interest on net equity JCP. Also, please note that the non-cumulative system is not applicable to all companies and revenues. Companies using the estimated profit method, for example, are subject to the PIS and COFINS under the cumulative method (no credits allowed) at rates of 0.65% and 3%, respectively. IV.5 PIS-Importation and COFINS-Importation Another significant change in PIS and COFINS legislation was taxation of operations involving importation of goods and services. This specific change was introduced by Provisional Measure #164/2004, which was later converted into Law # 10,865 on April 30, 2004.

Credits cannot be calculated considering:

The following cannot be considered in the PIS/COFINS credits:  salaries paid to individuals;  goods and services not subject to such contributions, exempt from PIS/COFINS (in this case when resold or used as an input for goods or services not subject to or exempt from PIS/COFINS, or taxed by such contributions at a 0% rate)

In principle, rights to PIS and COFINS credits apply only to goods and services acquired from legal entities established in Brazil, as well as costs and expenses incurred, paid or credited to legal entities established here. However, in several cases credits from imported goods and services are allowed, as long as they are subject to PIS-importation and COFINS-importation (refer to the next section for further information). It should be noted that, as from August 1, 2005, taxpayers are only allowed to calculate credits for PIS and COFINS purposes on depreciation of fixed assets acquired as from May 1, 2004 and when depreciation is accounted for as an operational expense.

This alteration increased the complexity of PIS and COFINS taxation, functioning almost as a new tax on imports. The relation between the PIS and COFINS on the Imports and the PIS and COFINS on Revenues is mainly through the calculation of credits, as explained below. IV.5.A Importation of Goods As from May 1, 2004, goods imported by Brazilian entities have been subject to the PIS-Importation and COFINS-Importation, with the taxable event being registration of the respective DI (Import Declaration). The basis for calculation of PIS-Importation and COFINS-Importation considers the value of the goods (CIF) and other customs expenses, plus ICMS and the PIS and COFINS due upon importation thereof (gross-up method). The regular PIS and COFINS rates applicable on importation of goods are1.65% and 7.6%, respectively. IV.5.B Importation of Services As from May 1, 2004, services rendered by foreign entities to Brazilian companies are subject to the PISImportation and COFINS-Importation, as long as: The service is performed in Brazil; or The service is performed abroad, but the results thereof are accrued in Brazil. The taxable event occurs when the taxpayer (Brazilian company) remits money abroad to pay for services. The basis for calculating the PIS-Importation and COFINSImportation is the amount paid, credited, delivered, utilized or remitted abroad (before Withholding Tax deduction) plus the Municipal Service Tax (ISS) and the PIS/COFINS Importation contributions proper (gross up method). The regular PIS and COFINS rates on importation of services are 1.65% and 7.6%, respectively.

IV.5.C PIS-Importation and COFINS-Importation Credits: Legal entities subject to the non-cumulative PIS/ COFINS system may calculate credits related to services and/or goods acquired from foreign suppliers, as long as they have paid the PIS-Importation and COFINSImportation. In this sense, the credits mentioned herein are to be calculated considering exclusively the following items:
PIS-Importation and COFINSImportation Credits  Goods acquired for resale;  Goods and services used as inputs in rendering services and producing other goods for sale, including fuel and lubricants;  Depreciation of machinery, equipment and other assets incorporated into fixed assets, acquired for rental to other companies or for production of goods for sale or performance of services;  Expenses related to commercial leasing transactions;  Electricity consumed in the companys establishments.

In principle, PIS and COFINS credits are to be calculated considering the amount of PIS-Importation and COFINS-Importation paid in the above-mentioned operations. IV.6 Import Duties and Taxes Considering the complexity and materiality of taxation on importation of goods and services, the following is a specific description of the main aspects involving this kind of operation. IV.6.A Import Process Goods According to the rules established by the Brazilian Foreign Trade Secretariat (SECEX Secretaria de Comrcio Exterior), all individual and legal entities intending to participate in any import procedure first have to be registered with that Secretariat. Such registration allows the company to use the Foreign Trade Integrated System (known as SISCOMEX) essentially to import goods. However, certain specific products require a license prior to the shipment of the material. In the event of failure to obtain the license, the company may be charged a fine for not complying with Brazilian legislation. This requirement can be easily checked directly at the SISCOMEX, by providing the system with the product Harmonized Tax System Code.
Upstream Taxation and Foreign Investment Direct Taxation Corporate Income 7

The admission of foreign goods into Brazilian territory is subject to collection of the following taxes: Customs Duty II The customs duty is paid by the importer, and it is calculated using the CIF cost (price of the merchandise, insurance and international freight). The amount paid on the importation is not refundable, so it represents a cost for the importer. The II rate applicable varies according to their Harmonized Tax System code. It is worth mentioning that, regardless of classification, most imports from Mercosur (Southern Common Market) signatory countries (Argentina, Paraguay and Uruguay), are not subject to the II (import duties are reduced to zero percent). In addition, after analyzing a formal request presented by an import company, the government may grant a reduction on the tax rate based on several factors. Among them is non-existence of a similar product manufactured in Brazil during the time of the request for reduction. IPI As mentioned earlier, the IPI is levied on the importation, paid by the importer and calculated based on the sum of the CIF cost plus the II. As with the II, the IPI rate applicable on imported goods varies according to the product classification code. ICMS As already mentioned, the importation of goods into Brazil is subject to the ICMS. The ICMS tax rate (which may vary depending on the State to which the goods are shipped) has to be applied to the value of the goods (CIF) plus the II and other customs expenses; plus IPI; plus the PIS and COFINS due upon importation and the ICMS proper (gross-up method). PIS and COFINS Importation As mentioned earlier, PIS and COFINS Importation is levied on the importation of goods. The basis for calculation is the value of the goods (CIF) and other customs expenses; plus ICMS; plus the PIS and COFINS proper (gross-up method).

IV.6.B Import Process Services As regards importation of services, the basis for calculation of the PIS/COFINS-Importation is the amount paid, credited, delivered, utilized or remitted abroad (before the Withholding Tax deduction) plus the Municipal Service Tax (ISS) and the PIS/COFINS Importation contributions proper (gross up method). It is important to stress that importation of services is not required to follow the procedure applicable to importation of goods with respect to registration in the Siscomex or related procedures. IV.6.C Demonstration of Total Tax Cost In the following chart, we provide an example on how the total amount of taxes levied on importations is to be calculated. It should be noted that the following calculations are for exemplification purposes only, and should be not used for determining the tax burden on the referred operation.

IV.6.C.1 Importation of Goods It should be noted that we assumed an II rate of 20%, IPI rate of 10% and ICMS rate of 19% (i.e. Rio de Janeiro state), as well as the regular PIS and COFINSImportation rates (1.65% and 7.6%, respectively):
Tax on Importation of goods Description FOB Value Freight CIF cost II CIF + II IPI CIF + II + IPI + ICMS + PIS + COFINS ICMS CIF + II + IPI + ICMS ICMS (for PIS and Cons purposes) CIF + ICMS + PIS + COFINS PIS and COFINS Total Tax Cost % of Tax Costs Total Cost (1) - gross-up method 9,25% 16,00% 16,00% 15,00% 10,00% Tax Rate Amounts 90.000 10.000 100.000 10.000 110.000 16.500 165.653 26.505 150.595 24.095 136.744 12.649 65.653 65,65% 165.653 A B C D E F X Y G H I J K A x Tax Rate A+B C x Tax Rate C+D+F+H E x Tax Rate (1) C+D+Y X x Tax Rate (1) A+H+X G x Tax Rate (1) B+D+F+H (I/A) A+I Ref. Formula

Besides the above-mentioned taxes, imported goods are also subject to other charges, such as the A.F.R.M.M. levied on all imports transported via maritime freight; warehousing charged for storing the product by a designated entity and Capatazia (foremanship fee) charged for moving products within port areas. V. Brazilian withholding income tax (IRRF) on outbound remittances Any payment, credit or remittance made by a company located in Brazil to an individual or legal entity residing or domiciled abroad is subject to withholding income tax (IRRF). The most important operations and corresponding rates are as following:
Description Royalties Services in General Technical Assistance Services Dividends Interest on net equity Interest on loans Leasing of capital goods Chartering of vessels Capital repatriation Rate % 15 15 15 0 15 15 15 0 0

IV.6.C.2 Importation of Services In this case, we are considering the Withholding Income Tax (IRRF) rate of 15% (grossed-up), ISS rate of 5%, as well as regular PIS and COFINS Importation rates (1.65% and 7.6%, respectively):
Tax on Services Foreign Providers Description Service Price (Net of Brazilian Taxes) Service Price (With IRRF + ISS) Withholding Income Tax (IRRF) CIDE ISS PIS COFINS Total Tax Payment Effective tax burden 15% 10% 5% 1,65% 7,60% Tax Rate Amounts 100.000 125.000 18.750 12.500 6.250 2.273 10.468 50.241 50,24% A B C D E F G (A + B + D) x 15% (A + B + D) x 10% (A + B + D) x 5% (A + B + D) x 1,65% (A + B + D) x 7,6% (B + C + D + E + F) Ref. Formula

It is important to point out that, according to the Brazilian Tax authorities, the payments/remittances made to tax haven jurisdictions are subject to a 25% (twenty-five per cent) withholding income tax rate. Regarding the chart above, the following aspects should also be mentioned: V.1 Royalties and Technical Assistance Contracts As from January 1, 2002, the Brazilian withholding tax rate applicable to royalties paid to foreign beneficiaries was changed to 15%. However, a 10% Contribution for Intervention in the Economic Domain (CIDE) is paid by the Brazilian beneficiary of the technology. (Refer to specific comments regarding the CIDE in Section VII.3).

Upstream Taxation and Foreign Investment Direct Taxation Corporate Income 9

V.2 Service Contracts Services provided to foreign individuals or legal entities residing or domiciled abroad are subject to the IRRF at a rate of 15%, regardless of the existence of transfer of technology. In that case, the corresponding remittance, payment or credit figures as the triggering event. It should be mentioned that if the service involves transfer of technology, it has to be registered with the INPI (Brazilian Patent Office), which is the federal agency responsible for analyzing the service contract and determining if there is actually transfer of technology. It is worth mentioning that if the beneficiary company is located in countries with which Brazilian has signed treaties for avoidance of double taxation (such as Spain and France), the payment, remittance or credit may be considered under the Business Profit article of the Treaty, thus, taxable only by the country where the beneficiary is located. In other words, in this case there would be no withholding income tax. However, it is important to point out that the tax authorities have issued an opinion (ruling) to the effect that the cited withholding income tax exemption would not be applicable in these cases since, according to them, such payments would not fall under the Business Profit Clause but under the clause related to Other Income. The opinion then stated that such classification (Other Income) has to be adopted even when there is no such clause in the treaty. In case of remittances to beneficiaries located in a treaty country, exclusively from a tax and legal standpoint, we believe that there are very strong arguments to claim that the payments made by a company to a non-resident party located in a country with which Brazil has a treaty are not subject to withholding income tax. Such an interpretation is based on the Business Profit Clause established by the treaties and on the fact that, according to our legislation, the provisions of international treaties have to prevail over domestic legislation.

However, because Brazil has signed a Protocol with some of treaty-countries, defining that payments related to technical services and technical assistance are to be deemed as royalties, such remittances would then have to be subject to 15% withholding income tax. The Protocol in question has only been signed with a few treaty-countries, which means that with respect to the remittances made to treaty countries with which there is no Protocol, the authorities do not have any argument to claim withholding income tax. The official interpretation of the tax authorities is that the Business Profit Clause established in the treaties would not be applicable in case of remittances derived from performance of technical assistance or technical services that do not involve transfer of technology or knowledge. Instead, technical services would be classified as Other Income under the Treaty. In case the Other Income clause is not included in the particular treaty, such payment/remittance has to be treated as non-comprised by the corresponding treaty. V.3 Dividends Dividends are not subject to withholding income tax, regardless of the beneficiarys location. V.4 Leasing of Capital Goods There is a 15% withholding income tax on remittances related to leasing of capital goods to non-resident companies (regardless of whether or not they are located in a treaty country). It should be noted that payments for leasing of capital assets (finance leases) have specific rules that might reduce the withholding Income Tax. In fact, under the Brazilian Income Tax Regulations (RIR/99), the IRRF is only to be levied on the interest portion of the payment/remittance. The amounts related to the payment for equipment amortization can be exempted from the withholding income tax. For payments/remittances derived from operational leases, the IRRF is to be calculated based on the total amount due.

10

V.5 Capital Repatriation Capital repatriation is not subject to withholding income tax up to the amount of foreign investment registered with the Brazilian Central Bank (BACEN). The portion exceeding this amount is treated as a capital gain and thus subject to 15% withholding income tax. Refer to specific comments in Section VII of this guide (Exchange Control and Foreign Investment) VI. Withholding Taxes on local payments for Services IRPJ, CSLL, PIS AND COFINS Besides the IRRF levied on payment, remittance or credit to foreign legal entities and/or individuals (See item 0, above), the RIR/99 also require taxes to be withheld on payments for professional services, credit consulting, market consulting, credit management, selection and risks and management of accounts payable and receivable by a legal entity from another legal entity within Brazil. Brazilian legislation contains an extensive list of professional services covered, among them those performed by/involving: Lawyers; Technical analyses; Technical advisory and consulting; Audit; Consulting; Accounting; and Engineering. In this respect, a Brazilian legal entity engaging professional services from another legal entity is to withhold Income Tax, PIS and COFINS at the following rates:
Withholding Taxes Tax Income Tax IRPJ Social Contribution on Prots CSLL Social Contribution on Revenues PIS Social Contribution on Revenues COFINS Total Rate (%) 1,50 1,00 0,65 3,00 6,15

Thus, the party engaging the services pays the service provider 93.85% of the price of the services and withholds the remaining 6.15% for payment to the SRF. On the other hand, the provider is to recognize a 6.15% credit on the price of the services. These tax credits are offsettable against taxes payable, thus being treated as advance tax payments. It is worth mentioning that the withholding is not applicable to payments up to R$5,000.00 (five thousand reais) per month. If there is more than one payment, the sum of the payments should be lower than that amount in order to avoid the withholding requirement. VI.1 Withholding Taxes Public Agencies Federal public agencies, autarkies and foundations are to withhold Income Tax (IRPJ), Social Contribution on Net Incomes (CSLL) and Social Contributions on Revenues (PIS and COFINS) when acquiring all kinds of goods or services from another legal entity. In this regard, it should be stressed that since January 2004 such provision has been extended to state owned enterprises and semi-state companies. Thus, since Petrobras is a semi-state company, all goods sold or services rendered to it will be subject to this withholding procedure. The following table summarizes the applicable withholding rates:
Withholding Taxes Description IRPJ Services rendered with the utilization of goods Transportation of goods Goods in general International Transportation of goods, performed by Brazilian Companies Telephone Labor Force Rental Vigilance Business Intermediation Factoring Other Services 1,20 CSLL 1,00 Rates (%) PIS 3,00 COFINS 0,65 Total 5,85

1,20 4,80

1,00 1,00

0,00 3,00

0,00 0,65

2,20 9,45

Upstream Taxation and Foreign Investment Direct Taxation Corporate Income 11

It should be noted that the chart above only contains the most important operations, such that specific consultation for a particular situation is strongly recommended. VII. Other Taxes The items that follow list the other taxes and social contributions that are levied on the normal operations of Brazilian companies, including those applicable in a direct or indirect manner to the operations carried out by upstream companies. Even if not directly related to the income accrued from operations, it is worthwhile commenting on the main aspects pertaining to such taxes and contributions, inasmuch as in some manner or another they may affect calculation of accounting results and the tax burden of companies involved in upstream activities. VII.1 Contribution on Financial Transactions (CPMF) As instituted by Law # 9,311/96, the CPMF (a sort of check transactions tax) was initially created to obtain funds for the nations health sector. It was levied on every transaction carried out through bank accounts, including transfer of financial credits. This contribution was extinguished in 2007. VII.2 Tax on Financial Operations (IOF) The IOF is a federal tax levied on credit, exchange and insurance operations and financial transactions. At present, the applicable regulations are consolidated in Decree # 6.306/07 (IOF Regulations). This tax is considered as an instrument of government economic policy, which means that the rate may be changed at any time. According to the IOF Regulations, in the case of exchange operations, for instance, the applicable rate may reach as high as twenty-five per cent (25%). After the end of CPMF, the government made some changes in the IOF legislation to increase rates on certain operations, in order to partially offset the threatened loss of tax proceeds after the CPMF was extinguished.

In the past, the IOF was due on the majority of exchange transactions, though the rules became more flexible over the course of time because of efforts to deregulate the Brazilian financial market. In this respect, at present the IOF rate on almost all payments involving exchange transactions is reduced to zero. With respect to foreign investment, it is important to point out that any investment made in a Brazilian company by an individual or corporate entity domiciled or resident overseas is subject to zero per cent (0%) IOF, provided that the investment is registered with the Brazilian Central Bank (BACEN). If there is no such registration, the operation will be subject to IOF of two and thirty-eight hundredths per cent (2.38%). In addition, the following other operations are also subject to zero per cent (0%) IOF tax treatment: Exportation of products and services. Payment of dividends, interest and repatriation of capital. However, in case of importation of services into Brazil, the operation will be subject to IOF of thirty-eight hundredths of a per cent (0.38%). In the case of interest linked to loans contracted with non-residents, the IOF rate will be five and thirty-eight hundredths per cent (5.38%) for operations of less than ninety (90) days. With regard to loans, the IOF taxpayer is the borrower. The calculation methodology depends on the type of loan: fixed amounts or undetermined amounts. The daily rate is 0.0041% for corporate taxpayers and 0.0082% for individual taxpayers. Brazilian legislation provides that IOF applied to loans with fixed (pre-determined) amounts cannot exceed 1,5% of the loan amount. In case of loans with undetermined amounts, the IOF applies indefinitely at a rate of 0.0041% per day for corporate taxpayers and 0.0082% per day for individual taxpayers.

12

VII.3 Contribution for Intervention in the Economic Domain (CIDE ) VII.3.A Technical and Administrative Assistance Services and Royalties Law # 10,168 was instituted on December 29, 2000 in order to encourage Brazilian technological development,. Article 1 of this law created the Program to Stimulate Interaction between Universities and Companies to Support Innovation. Hence, Brazilian technological development is stimulated through programs involving scientific research and technological cooperation between universities, research centers and the productive sector. Funding for this program is provided by levying the Contribution for Intervention in the Economic Domain (CIDE), instituted by Article 2 of the law. This levy is due by corporate entities that have license to use or acquire technological knowledge, companies signing contracts that entail transfer of technology, companies signing contracts providing technical and administrative assistance, all these with parties resident or domiciled overseas. The contribution is levied at the rate of ten per cent (10%) on amounts paid, credited, turned over, employed or remitted each month to parties resident or domiciled abroad, by way of remuneration arising from the obligations indicated previously. The CIDE is not considered a withholding tax, since the taxpayer is the party that remits the payment, while in the case of withholding taxes the taxpayers are the beneficiaries of the remittances.

VII.3.B Importation and Sale of Petroleum, Natural Gas and Derivatives Law # 10,336/01 instituted the CIDE on the importation and sale of petroleum, natural gas and derivatives thereof, as well as fuel alcohol. The triggering events for the CIDE are operations carried out by taxpayers involving the importation and sale on the Brazilian domestic market of gasoline, diesel and other fuels, pursuant to Article 3 of such Law. Further, according to such legal provision, CIDE taxpayers include the individual or corporate producers, formulators and importers of the liquid fuels listed in Article 3. In addition, it is important to observe Decree # 6.446/08, which reduced the specific CIDE rates instituted by Law # 10,336/01, now in effect in the following amounts:
Product Gasoline Diesel oil Jet fuel Other kerosene fuels Fuel oils Rate (R$) 180 / m3 30/ m3 0 / m3 0 / m3 0 / metric ton (mt)

Upstream Taxation and Foreign Investment Direct Taxation Corporate Income 13

VIII. Repetro The special customs system for goods to be used in exploration for and production of oil and natural gas fields REPETRO was introduced in 1999, by Decree # 3,161/1999, as a means to hasten the development of the newly opened Brazilian oil & gas industry.1 It was first regulated by Normative Ruling # 87/2000 (September 1, 2000), which was revoked on January 16, 2001 by Normative Ruling # 04/2001, which was in turn revoked on May 12, 2008 by Normative Ruling # 844/2008. This special customs system will be in force until December 31, 2020. REPETRO aims primarily to reduce the tax burden on companies involved in exploring for and producing oil and natural gas, basically through the total suspension of federal taxes (II, IPI, PIS, COFINS and AFRMM) due on the purchase or importation of selected equipment and spared parts used in drilling. The two main features of REPETRO are:

VIII.1 Importation on a Regular Temporary Admission Basis Under this system goods intended for economic use in Brazil can be imported on a temporary admission basis. Economic use is considered as the allocation of goods for performance of services in the production of other goods. Under normal temporary admission rules, available to all industries, the taxes due on importation have to be paid proportionally to the useful life of the asset compared to the length of time it will stay in Brazil. The length of time the goods remain in Brazil corresponds to the term stipulated on leasing contract operations or in rental or loan agreements. It is important to stress that the temporary admission system is not applicable to goods subject to finance lease agreements, which cover the regular importation system. In this case, all the taxes are levied. An example of a normal situation would be as follows:

The temporary admission basis, under which goods/assets leased, borrowed or rented from a foreign manufacturer or trading company are imported into Brazil; The symbolic export system, under which companies may purchase goods from Brazilian manufacturers and deem such purchases to be exports. It should be noted that a foreign company has to purchase the goods that are delivered in Brazilian territory (the goods actually never leave Brazil).

A company brings a specific asset to Brazil under an operating agreement (or rental or loan contract). The term of this agreement is three (3) years. The useful service life span of this asset, under Brazilian tax legislation, is ten (10) years. The total amount relating to taxes required in regular importation of this asset will be ten thousand United States Dollars (US$10,000.00). Based on the above premises, the total amount of the tax to be paid will be calculated in the following manner: (Term of the agreement/useful life span) vs. tax due on regular importation = (3/10) x 10,000 = 3,000

It should be noted that from 1953 to 1997 the exploration, extraction and rening of oil and natural gas in Brazil were monopolies of the (then) state-owned enterprise Petrobras.

It should be emphasized that this rule covers operating lease agreements, as well as rental or loan contracts, signed as from January 1, 1999.

14

However, according to Decree # 4.543/2002, certain goods related to the oil and gas industry that are specifically listed in applicable regulations can be brought to Brazil on a temporary basis and not be subject to the proportional taxation rule described above. In that case, payment of the federal taxes (II, IPI, PIS, Cofins and AFRMM) is suspended. This is the special customs system called REPETRO, as previously mentioned and, according to Decree # 5.138/2004, it will be in force up to December 31, 2020. It is important to note that if the goods that are subject to tax suspension treatment do not leave Brazilian territory after expiration of the contractual term and remain in Brazil permanently, the federal tax suspension will expire and the taxes will be due just like on a regular import operation. Normative Ruling # 844/2008, established the goods eligible for tax suspension are the following:
Annex to Normative Ruling #IN 844/2008 Vessels supporting research, production and storage activities of oil or natural gas; Machinery, devices, instruments, tools and equipment intended for oil and natural gas exploration and production activities; Drilling and production platforms, as well as those intended to support oil and natural gas exploration and production activities; Motor vehicles assembled with machinery, equipment, instruments and tools intended for oil and natural gas exploration and production activities; Specially made structures for platforms

VIII.1.A ICMS As regards the ICMS, most of the states in Brazil are signatories of the ICMS Convention # 58/1999, which treats the ICMS the same as federal taxes for importation under the regular temporary admission basis, i.e. proportional payment. As from November 2007 ICMS Convention # 130/2007 has been in force, providing the ICMS tax treatment for goods brought into Brazil under REPETRO. According to Convention # 130/2007, states are authorized to grant total exemption on importation of goods related to oil and gas exploration phases, under REPETRO Temporary Admission. As an alternative, states can charge this operation at a 1,5% (one and half percent) rate on a cumulative basis. Regarding the importation of goods related to oil and gas production phases, the tax burden will be equivalent to 7,5% (seven and a half percent) rate under the non-cumulative system (ICSM credits granted) or, alternatively, at 3% (three percent) rate, without any ICMS tax credit. In this case, there is a specific list of goods subject to this ICMS special treatment described above, based on the Harmonized Tariff Schedule (HTS) code, as follows:

It is important to mention that Normative Ruling # IN 4/2001, revoked by Normative Ruling # IN 844/2008, established specific goods that could be subject to tax suspension under REPETRO, using the Harmonized Tariff Schedule (HTS) codes. Just recently, ruling # IN 844/2008 introduced a wide range of goods that can be imported under such system, as shown in the above chart.

Upstream Taxation and Foreign Investment Direct Taxation Corporate Income 15

Annex to ICMS Convention #130/2007 Products Umbilical cords Rigid steel pipes Drilling and production risers Steel pipes commercially known as steel owline Steel pipes and valves used for connecting steel pipes and flexible lines, commercially known as pipeline end terminators - PLETs Wellhead systems Underwater equipment made of steel tubes, fuse pieces and valves, used to connect the exible line to the PLET, commercially known as Vertical connection module VCM Jaquets or Caissons Steel cable Aluminum riser used for drilling and production of oil Flexible lines High pressure concrete pump unit Plumping system with motor, reduction box, valve and centrifuge pump with maximum capacity of 442 1/min used to transfer uids from the measurement tank to other equipment used on oil well production tests. No oil vacuum pump for RST tools used in acquiring geological data related to oil and natural gas exploration Reciprocating compressor used to cool the energy distribution room of the vessel, with capacity of 60.010 refrigerating units/h at 3500 RPM, intended for pipe laying, commercially known as flexible lines, that connect the oil wellhead to hydrocarbon delivery point (natural gas or oil) Natural gas compressor, used for carriage in gas pipeline Natural gas compressor, used for articial lifting activity in wells Three head burner for oil elds Centrifuge used to recover drilling uid found on gravel cut by bit Vertical axis centrifuge designed to recover drilling gravel liquids, with motors, with discharge and related materials to be used on drilling units called Verti-G. Davit to rescue boat Subterranean hoists for acquisition of geological data related to oil and gas exploration. Electrical hoists for vessels Fixed exploration, drilling or production units Equipment for ancillary services on oil well drilling and production Thermal plotter used for recording data Chemical products mixer used in oil well treatment Mixer and recycler of cement together with pipes belonging to the equipment, intended to prepare the portfolio for dry cement, for ancillary services used on drilling and production of oil wells, commercially called by CBS mixer Remotely operated vehicles (submarine robots) High pressure hydraulic unit, complete with electric motors, pumps, hydraulic uid lters, tanks, pipes - used for shipping and ltering the risers hydraulic system uids and also used to compensate the drilling mobile unit movement. Safety ow valve (model FBSV-E series 01016) used for closing well in case of operational emergency. Manifold Wet Christmas tree Equipment made of valves and connections, used for cementing of oil well walls, commercially known as Cementing head 13-3/8. Transformer (460V) with power 2.500kVA to be used on drilling, exploration or production vessels Tool calibrator Armored cable, commercially known as Multi-conductor wireline model 1-23 Relief tanker used for transshipment and transportation of oil stored in FPSOs units Tugs for vessels and support equipment used in research, exploration, drilling, production and storage of oil and natural gas. Floating or semi-submersible exploration, drilling or production units (platforms) Floating crane used in offshore rig facilities Floating, production, storage and ofoading units Vessels intended for exploration and gathering of geological, geophysical and geodesic data relating to oil and natural gas explorations Vessels supporting oil and natural gas research, exploration, drilling, production and storage activities Life safety boat Equipment for acquisition of geological, geophysical and geodesic data related to oil and natural gas exploration NBM/SH 3917.39 7304.10.10 or 7305.1 7304.29 7305.19.00 7307.19.20 7307.99 7307.99.00 7308.90 7312.10 7608.20.90 8307.10 8413.40.00 8413.70.90 8414.10 8414.30.19 8414.80 8414.80 8417.80.90 8421.19.90 8421.19.90 8425.19.10 8425.20.00 8425.31 8430.41 e 8430.49 8431.43 8471.60.49 8474.39.00 8474.80.90 8479.89 8479.89.99 8481.40.00 8481.80 8481.80 8481.80.99 8504.34.00 8543.89.99 8544.59.00 8901.20.00 8904.00 8905.20 8905.90 8905.90 8905.90.00 or 8906.00 8906.00 8906.90.00 9015.10, 9015.20, 9015.30,9015.40, 9015.80 e 9015.90 9015.90.90 9015.90.90

Instruments, parts, accessories and devices classied in sub-position 9015.40 Electronic micro-processor, used in well logging equipments

16

It should be noted that for ICMS purposes, there are specific goods that can be imported on a Temporary Admission basis under the REPETRO System listed on the chart above. However, for federal tax purposes, there is no specific list with HTS codes but rather a general list that defines some goods to be used in oil and gas activities which is presented in Normative Ruling # IN 844/2008. In this sense, there are possibilities for importing goods with federal tax benefits under REPETRO but not subject to ICMS. It is important to stress that this agreement is still being regulated by the states of Brazil. Therefore, it should be noted that there are 27 different Brazilian States, and at present, only eight States have regulated the Convention and now grant its benefits. In this context, the following is a list of the States that have issued internal Decrees regulating the rules introduced by the Convention # 130/2007:

State of Rio de Janeiro Rio de Janeiro State enacted Law # 3,851/02 (Valentim Law), which established that the importation under REPETRO of some assets and services used in oil and gas activities performed in this State are subject to ICMS at a rate of 18% as from June 30, 2003. This legislation has been the subject of a great deal of controversy and dispute (including cases all the way up to the Brazilian Supreme Court STF). In October 2007 the State of Rio de Janeiro was excluded from ICMS Convention # 58/1999 and, therefore, can charge normally all importations under the temporary admission basis (including the REPETRO system). In November 2007, the State of Rio de Janeiro signed ICMS Convention # 130/2007 and in 2008 issued a specific Decree, regulating ICMS treatment for REPETRO, extending to taxpayers the treatment described in the referred Convention.

States Amazonas Bahia Cear Esprito Santo Mato Grosso Mato Grosso do Sul Minas Gerais Rio de Janeiro Rio Grande do Sul Rondnia Roraima Tocantins

Decrees Decree # 27.439/2008 Decree #11.167/2008 Decree #29.106/2008 Decree # 2.113-R/2008 Decree # 1.133/2008 Decree 12.455/2008 Decree # 44.767/2008 Decree # 41.142/2008 Decree #45.738/2008 Decree # 13.608/2008 Decree # 8.580/2007 Decree # 3.310/2008

Upstream Taxation and Foreign Investment Direct Taxation Corporate Income 17

Deloitte provides services in audit, tax, risk management, corporate nance, consulting, outsourcing, human capital management and actuarial consulting to clients spanning multiple industries. With a global network of member rms in more than 140 countries, Deloitte brings world class capabilities and deep local expertise to help clients succeed the best performance, wherever they operate.

Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, and its network of member rms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu and its member rms.

For more information, please contact: comunicacao@deloitte.com or 55 (11) 5186-6686 2008 Deloitte Touche Tohmatsu.