concession contracts
Local Content
and the current trends in the Oil & Gas sector
The beginning of the exploration, development and production in the areas located on the so-called Pre-Salt polygon poses a new challenge for the suppliers of the domestic oil & gas industry. The blocks located in ultra-deep waters demand a high level of technology and technical qualification from the companies which are a part of the goods and services sector in Brazil.
Paulo Valois Pires studied at the Université Robert Schuman, Strasbourg, FR, (Certificat des Hautes Études Européennes 1992) and has a Master Degree in International Law by the University of São Paulo (1999). Pires is a founding partner of the Schmidt, Valois, Miranda, Ferreira & Agel Laws. Danielle de Aquino Ludwig Pereira is a graduate of Universidade do Estado do Rio de Janeiro – UERJ and has a specialization in Oil and Gas business and regulation from the Fundação Getúlio Vargas. She is a parther of the Schmidt, Valois, Miranda, Ferreira & Agel Laws.
78 T&B Petroleum # 32
W
ithin this scenario, the debate concerning local content, which constitutes the sum of goods and services produced in the country and acquired by the concessionaires within the scope of the Concession Contracts (“Local Content”), regains strength. The Local Content percentage is defined in each Brazil Round’s respective Tender Protocol and represents one of the determining factors for the concession of the blocks by the National Oil, Natural Gas and Biofuels Agency (“ANP”). An important change to the Brazil Rounds was the introduction of the “Local Content Brochure”, prepared by the National Oil and Gas Industry Mobilization Program (Prominp – Programa de Mobilização da Indústria Nacional de Petróleo e Gás Natural), which serves as a tool to measure the percentages established in the Concession Contracts. To fulfill the Local Content percentages established by ANP rules and, at the same time, comply with the new demands of the oil & gas sector, the market is experiencing an increase of M&A’s involving the goods and services sector, boosting the national economic scenario. By structuring joint ventures and acquiring Brazilian companies, international suppliers are able to fulfill the Local Content requirements and, furthermore, they encourage investments and the introduction of new techniques in Brazil. The oil & gas goods and services market is pulverized and the majority of the companies that act in this sector are small and they are usually family-owned businesses. Therefore, the acquisition of corporate interest of Brazilian companies must be preceded by a thorough due diligence process, that reviews all of the tax, regulatory, labor, corporate, real estate and environmental aspects, not only to find the best structure for the operation but also to mitigate any possible issues which may arise due to the cultural differences between foreign and Brazilian suppliers. The due diligence process becomes even more complex depending on the activities performed by the target company, which shall comply with specific laws and regulations applicable to its respective areas of practice. There are several features to be taken into consideration before proceeding with the acquisition of the target company. Below are listed certain important issues to be evaluated in connection with the oil & gas goods and services market. Under Brazilian tax laws, the rendering of services in Brazil by a domestic company is subject to local Services Tax (“Imposto sobre Serviços de Qualquer Natureza - ISS”), which shall be established by the municipal authorities at a maximum rate of 5% on the price of the service. The sale of goods, however, is subject to taxation by the state tax authorities by means of the State VAT Tax on Transactions Related to the Circulation of Goods, Interstate and Intermunicipal Transportation Services, and on Communications Services (“Imposto sobre Circulação