Energy: Brazil studies expanding tax benefits – 08/31/2023 – Market

The government wants to increase the scope of energy projects eligible for important tax breaks, but the main ministries involved in the issue are now debating whether to favor a “green” agenda or include oil and refinery projects, according to a senior source and a document seen by Reuters.

The debate highlights a central tension in the government of President Luiz Inacio Lula da Silva, who has promised to lead a transition to next-generation renewable energy sources but is still committed to developing a state-led oil industry.

The most recent point of contention is a proposal for a decree that expands the list of energy projects that currently benefit from the Reidi tax regime, which suspends the collection of federal PIS/PASEP and Cofins taxes on the implementation of infrastructure projects.

Last year, more than 500 qualified energy projects received around R$9 billion in tax exemptions.

Currently, the regime’s energy area includes only projects for generation, co-generation, transmission and distribution of electricity, in addition to the production and processing of natural gas.

The Ministry of Finance has proposed that a broader range — ranging from biofuels and green hydrogen to carbon capture and storage — should qualify for tax exemptions under Reidi.

On another front, the portfolio proposed that the issuance of incentivized debentures could encompass initiatives linked to the same agenda, also including projects involving critical minerals for the energy transition and fertilizer production. Incentivized debentures are private securities aimed at financing infrastructure projects in which individual investors are exempt from Income Tax on earnings.

The proposed tax breaks are part of a broader agenda for a “green transformation” of Brazil’s economy, which includes creating a regulated carbon market and issuing the country’s first “sustainable” sovereign bonds.

However, representatives of the Ministry of Mines and Energy are pushing to expand the incentives to include oil refineries and fuel storage facilities.

In a meeting with Ministry of Finance officials last week, registered in their public agendas, they framed the subject as a priority within the strategy of reducing Brazil’s dependence on oil derivatives, which ends up subjecting it to price volatility in events like the war in Ukraine, which sent oil soaring, the source said.

Last year, Brazil imported 28% of its diesel, an essential fuel for a country heavily dependent on road freight transport.

Technicians from the Ministry of Mines and Energy argued that an overly restricted approach to tax benefits would reduce investments in oil and gas, defending in a technical note the expansion of incentives for exploration, production, flow and transport of oil and natural gas, in addition to storage and transportation of fuels.

“It is noted that oil refining will continue to be fundamental for guaranteeing supply for a long time to come, so it is essential that projects aimed at decarbonizing refining are a priority, as they adhere to the energy transition and energy security”, says the document .

“Moreover, investments in refining may be used in the future to convert refineries into biorefineries.”

The Ministry of Finance declined to comment on the matter. The Ministry of Mines and Energy did not immediately respond.

Petrobras has forecast oil production for the next four decades while increasing investments in renewable energy. When Lula took office in January, his government signaled the return of investments in refineries for the state-owned company, after years of divestments in the sector.

Petrobras also sparked the biggest environmental controversy in Lula’s new government with a plan to drill for oil near the mouth of the Amazon River, sparking debate between “green” allies and advocates of regional oil and gas development.

Ibama rejected the drilling plan, alleging discrepancies in the environmental studies, but Petrobras is appealing the decision.