Jennifer Cotta — Foto: Divulgação
The government’s decision to tax oil exports has prompted five private-sector oil companies to challenge the measure in court in an attempt to overturn the levy. Shell, Equinor, Petrogal, Repsol Sinopec and TotalEnergies filed for an injunction against the tax in a federal court on Wednesday. In a note, Shell said it “sees with concern” the creation of the tax, and that it anticipates a financial impact on the company in Brazil. A similar move is being considered by other oil companies, including smaller ones.
One of the first to move was Prio (formerly PetroRio), which filed for two injunctions in the Federal Court of Rio, which were rejected on Tuesday, sources say. There are two lawsuits, one on behalf of Prio and another on behalf of Dommo, formerly OGX, which was bought by Prio. The company declined to comment. Lawyers say the companies can now bring the request to an appellate court.
The export tax was announced last week by Finance Minister Fernando Haddad. The government introduced the 9.2% tax on crude oil exports from March to June through Provisional Measure 1.163/2023, to compensate for the drop in tax collection due to the fuel tax relief.
Shell criticized the tax in a note. “The measure, which was announced without any meaningful dialogue with the industry, throws uncertainty on new investment decisions, affecting the competitiveness of Brazil in the exploration and production sector – in which Brazil has a strong geological potential,” he said.
According to Equinor, the decision to challenge the tax in court is intended to address the industry’s concerns about the attractiveness of investments for the country. According to the Norwegian company, these investments “require predictability in the legal and regulatory structures, with absolute respect for contracts.”
The names of the five foreign companies that filed a lawsuit against the tax appear in a case filed with the 16th Federal Court of Rio de Janeiro. TotalEnergies declined to comment. Repsol Sinopec and Petrogal did not immediately reply to a request for comment.
Petrobras and ExxonMobil, which are large exporters but are not parties to the lawsuit, also declined to comment. The Brazilian Petroleum Institute (IBP) confirmed to Valor that it is considering legal action against the tax collection.
Shell pointed out that Congress may suspend the tax or extend it beyond the four months initially planned. “Therefore, it is too early to speculate on the potential impact,” the company said.
In addition to the business community, politicians have also moved to stop the tax. The Liberal Party (PL), the party of former President Jair Bolsonaro, filed a direct action of unconstitutionality (Adin) in the Federal Supreme Court (STF) to suspend the tax. “We believe that this tax is a clear setback from the point of view of economic policy, with serious consequences on the issue of legal security, in addition to circumventing the Brazilian Constitution,” said Senate opposition leader Rogério Marinho. “Minister [of Finance, Fernando] Haddad himself makes clear that it aims to increase tax collection to reduce the budget deficit,” the senator added, recalling that tax increases must respect a 90-day period before coming into effect.
The provisional measure 1,163, however, claims that the collection will be made in the form of a steering tax.
For the leader of the PL, Senator Carlos Portinho, “there is damage to the states where oil is extracted. These oil-producing states will be directly affected by this measure.” Opposition lawmakers say that the courts are the only path available, since they estimate that the government does not even intend for the provisional measure to be voted on by Congress – since these matters have immediate effect, it would run for the four months during which the temporary taxation would be implemented and then expire.
Industry observers believe, however, that the tax could be extended beyond the initial four months and remain a permanent tax. According to Fundação Getulio Vargas (FGV), the tax increases producers’ costs, affects existing contracts, and discourages investment in new exploration and production frontiers in the country.
In a note, the institution recalled that the global scenario is one of limited oil supply and that Brazil is in a beneficial position to export, being in a period of increased production and relative stability of domestic demand. “Taxing exports in a sector that contribute more than R$170 billion in annual revenues to the state only contributes to the loss of competitiveness of Brazilian oil,” he said.
Jennifer Cotta, head of the Customs Law Commission of the Brazilian Bar Association in Rio de Janeiro, said that the companies have strong arguments to suspend the collection in court, such as the fact that an export tax cannot have a collection purpose and that the collection generates a change in the conditions of the concession contracts for areas for exploration and production of oil and gas. “This tax harms basic principles of law, such as legal security and the principle of least surprise,” the lawyer, a partner at Kincaid Mendes Vianna Advogados, said.
Mr. Cotta says this tax affects the country’s credibility, which can have an impact on the attraction of investment for years, because of the perception that “the rules can change in the middle of the game.” “It is a loss for producers in Brazil, who will compete with companies abroad that do not pay this tax,” he said.
Dommo claims in a lawsuit filed with the 27th Federal Court of Rio de Janeiro that this is a steering tax that violates the principles of the Constitution, which guarantees free competition and forbids the linking of tax revenues to any entity, fund, or expenditure. Judge Geraldine Vital rejected the request, arguing that the federal government has the power to modify customs tax rates, as stated in the decision seen by Valor.
In the other case, before the 12th Federal Court of Rio de Janeiro, Prio also argues that the fee is unconstitutional since its purpose is only to collect revenue, without any objective proposal to promote the sector. Judge Marcus Livio Gomes also denied the request, saying it had not been proven that the tax would make the company’s activities unfeasible. “It has not been fully demonstrated that the introduction of the tax rate under study would violate the principles of non-binding, free competition, equal treatment, and ability to pay,” said the judge.
In a report, Fitch estimates that the impact of the charge on Prio could lead to a 12% drop in EBITDA. The company today exports most of its production, about 46,000 barrels of oil equivalent per day. “If made permanent, the new tax could encourage the oil company and other independent oil exporters to sell locally, since these sales are subject to a similar tax rate, and the low-cost production profiles offer flexibility,” he said.
When announcing the creation of the tax, Finance Minister Fernando Haddad cited the possibility that the measure would stimulate domestic refining. Representatives of the independent refineries, however, have already signaled that it is unlikely that a short-term tax will have an impact on investments in this segment. For Fitch, the charge raises concerns about the policies of the Lula administration for the energy sector. “The announcement signals the beginning of increased government interference in the sector,” it said.
Fitch also signals that the impact of the tax may be relevant for Petrobras. “Fiscal pressures and policies that weaken the company’s financial flexibility will likely put its future investments at risk.”
