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Category: Tax

The natural gas industry in Brazil had its development guided, for many years, by the business plan of a single player, which controlled practically all stages of the product value chain.

The activities predominantly performed by this player included basically all forms of introduction of natural gas into the Brazilian economy, such as the production (and mainly the processing and outflow) of offshore natural gas, the importation of natural gas from Bolivia, and the import and regasification of liquefied natural gas (LNG).

Thus, even if a given company obtained the right to produce natural gas in Brazil, it had no choice but to sell the product to the dominant player, since the input of this energy source into the Brazilian economy can only take place after its specification, and all the infrastructure for processing and treating natural gas was held by this single player.

This control also reached the natural gas transport infrastructure, such that virtually all the capacity of the transport pipelines was exclusive to this one company.

In addition to transportation, significant participation also reached most natural gas distribution companies, impacting on the capacity from the supply to the point of consumption.

Although the concentration of such activities in a single player was essential for the initial structuring of the natural gas industry in Brazil, given the need for large investments in an environment, at the time, of much uncertainty, the current reality no longer allows for this configuration. Over time, such structural control of the industry ended up having an impact on the offer of the product itself and the implementation of new investments and projects, resulting in an increase in the price of natural gas due to absence of free competition.

In view of this environment, the Gas for Growth initiative represented, in 2016, the pooling of efforts between the public power and the private sector to map out the main aspects of the natural gas industry in Brazil with a view to preparing a transitional environment in order to finally enable the entry of new players and reduce the influence of the player that had been dominant until then.

The multiplicity of issues identified within the scope of the Gas for Growth initiative led the public power, especially the part responsible for regulatory policies, to deepen its analysis of some specific fronts, understood to be strategic for the final objective of opening the natural gas market in Brazil. One of the fronts considered strategic was taxation, given the importance of thoroughly assessing the challenges faced by the industry now and in the future.

With resources from the World Bank under the META Project, the federal government, represented by the Ministry of Mines and Energy (together with the National Petroleum Agency and the Ministry of Finance, now the Ministry of Economy), hired a specific study on the "Challenges of the Brazilian tax system in the natural gas industry", which would help build a new plan for the industry in Brazil. Machado Meyer was selected in a bidding process to develop the work, which began and ended in 2018, thanks to the joint efforts of the tax and infrastructure/energy areas of the firm.

Based on all the information accumulated, the federal government launched in 2019 the New Gas Market program, which aims to make natural gas more competitive based on four main actions:

• promote competition;

• harmonize state and federal regulations in the sector;

• stimulate the integration of the gas sector with the electrical and industrial sectors; and

• remove tax barriers that prevent market opening and competition.

Based on this important milestone, Brazil entered a new phase of projects in the various stages of the natural gas industry chain. As is natural in any new phase (even more of this magnitude) and in view of the already complex Brazilian tax system, new challenges are being faced and gradually overcome.

This article aims to contribute to the debate on some of the issues that most affect the market today.

Natural gas processing: tax aspects

One of the main challenges to transform natural gas produced in Brazil into wealth concerns access to processing infrastructures, called Natural Gas Processing Units (NGPUs).

While all the NGPUs are held by a single player, which performs the activity exclusively for its own benefit, natural gas processing does not present itself as a relevant tax challenge.

However, with the entry of new players into the market, who will need to access this infrastructure to adapt the crude natural gas produced in Brazil (known in the industry as "rich gas" because it contains several other gaseous hydrocarbon streams), it is now necessary to qualify, from a legal and tax standpoint, the processing activity performed by the NGPU holder for the benefit of the natural gas owner.

The first challenge that emerges from this new activity concerns a potential conflict of jurisdiction between states and municipalities, given the possible concomitant interpretation of both entities as legitimate to charge taxes within their jurisdiction, which are the ICMS and ISS (respectively).

Although the judicial precedents point to the jurisdiction of the states to tax such activities, qualified as a kind of "industrialization to order" operation, the absence of a clear normative rule still represents some legal uncertainty for the sector.

Although the issue related to the conflict of jurisdiction between states and municipalities has been overcome (assuming the prevalence of the current judicial position on the assessment of the ICMS), the absence of state regulation regarding compliance with the principal and ancillary obligations ends up being another tax challenge to be overcome.

This is because the common ICMS legislation was conceived with reference to operations with physical, tangible goods, whose quantification takes place before (and according to) the physical movement of the goods. Natural gas, however, is a fungible product that circulates through continuous flow pipelines, and it is not possible to apply the common rules provided for in state ICMS legislation.

There are also other elements of complexity, such as the times and movements of liquid derivatives of natural gas, obtained from the processing activity. Such liquid derivatives, such as liquified gas derived from natural gas (LGNG), can be transported by other modes, which would induce compliance with the common rules for issuing tax documents, generating conflict with the special rules applicable to natural gas.

These are just some of the tax challenges of the activity of processing. Many others are still under discussion for regulations at national level.

Regasification of imported LNG: tax and customs challenges

In addition to tax challenges, the structuring of imported LNG regasification projects faces customs complexities, which are being resolved by the competent authorities on a one-off and successive manner.

Among the customs challenges faced in implementing imported LNG regasification terminals are the need for customs clearance at the terminals, which are often designed in conjunction with stationary Floating Storage Regasification Units (FSRU), and the application itself of the customs procedure of temporary admission with total suspension of taxes for these goods.

The possibility of customs clearance of such terminals and especially of the FSRUs that make them up is an example of recent improvement of customs legislation to accommodate this new reality of the natural gas industry. The legal gap, which generated legal uncertainty, was resolved with the publication of Ordinance No. 473/20, of the Federal Revenue Service of Brazil, significantly reducing doubts with respect to the legal feasibility of such projects.

Other aspects, however, still need to be better regulated, such as the temporary admission of FSRUs in the economic use mode itself with total suspension of taxes, direct discharge and customs clearance procedures, the ancillary obligations applicable for receipt, storage, and regasification of LNG (notably when there is access from third parties in the terminal or shared loads), among others.

It is worth noting that third-party access to LNG terminals is also susceptible to the same type of conflict of jurisdiction between states and municipalities faced in processing activities, and the legal interpretation is similar.

On the other hand, the times and movements of LNG in the context of import, storage, and regasification thereof are quite different from those found for processing activity. It is therefore appropriate to have specific regulations that take account of such distinctions.

Importation of natural gas and LNG: conflicts of jurisdiction

The import of natural gas from Bolivia, through the Brazil-Bolivia Gas Pipeline (Gasbol) and the import of LNG may also face tax challenges related to conflicts of jurisdiction between the states in defining what entity has standing to charge the ICMS on importation.

This controversy arises from the possible inconsistent interpretation among the states regarding the criteria legally relevant in defining in which state the "legal consignee" of the import operation is located: for example, would it be the state in which the importing establishment is formally recorded, where the goods enter the Brazilian territory (citygate of Corumbá, in the case of natural gas imported from Bolivia), where the respective customs clearance occurs or where the regasification activity occurs (in the case of LNG)?

Case law points to certain criteria, recently reinforced by the judgment on the merits of Internal Rules Appeal No. 665.134/MG, under the general repercussion framework (in a context of operations not related to the natural gas industry).

However, there are still three civil lawsuits (ACOs) pending a decision that specifically deal with the case of natural gas imported from Bolivia. Given the peculiarities (in the most various senses) of natural gas, there would be greater legal certainty after the judgment of these specific cases, in which such particularities were brought to the debate.

Natural gas transportation: tax challenges

The activity of natural gas transportation is, without a doubt, critical making the supply and demand of the product viable in Brazil, given its continental dimension and the concentration of production and processing in a few states.

Moreover, as it is a product placed into a real “grid industry", the connection between the sources of input and the points of distribution and consumption of natural gas is decisive for the optimal functioning of the sector. Other relevant aspects of this industry are the dynamism resulting from the continuous flow of natural gas and its essential nature for Brazil's own energy security, considering the importance of this input for the generation of energy by thermal power plants.

While the natural gas industry was dominated by a single player, the transport aspects of the product were not so relevant since the entire capacity of the transport pipelines was purchased by a single company and all the natural gas transported was owned by the same company.

The opening of the market to new players necessarily depends on the supply of natural gas transport capacity to third parties with the aim of enabling new trading flows with the product, thereby encouraging the competitiveness desired and price shock at the end of the chain.

Given this need and the physical characteristics of natural gas itself (which does not allow for perfect physical identification and binding of each molecule input into the transportation grid to its respective holder), a unique model was conceived in Brazil (but already adopted in other countries) for contracting for transportation capacity based on the quantities of natural gas input and withdrawn from the transport system. It is called an "entry-exit model".

According to this model, different players (sellers and buyers of natural gas, technically referred to as "shippers") can contract their own capacities to input natural gas into each carrier's transport system and remove it.

The framework of this disruptive contractual model (considering the traditional Brazilian reality) in the tax system was also a significant challenge, especially at the state level, since ICMS is also levied on inter-municipal or interstate transportation services.

The regulation of this transport model was understood as one of the priorities to give support to the other initiatives to open the market, which was done by means of Sinief Agreement No. 03/18 (especially with the changes brought about by Sinief Agreement No. 17/19).

Although the tax basis for this activity is already structured, there are still other improvements that tend to be implemented with the maturation itself of the natural gas industry in Brazil, such as the interconnection of the pipeline systems owned by the different transportation companies and the establishment of grid codes, which will also trigger new tax challenges.

Thermoelectric generation from natural gas: tax challenges

Although not a new challenge in itself, the new phase of the natural gas industry tends to intensify the tax obstacles to the activity of thermoelectric generation from natural gas. This is due to the fact that natural gas is a transitional fuel to less polluting and more environmentally friendly sources and helps preserve Brazil's energy security. It is also due to the firm demand for gas created by thermal power plants in Brazil, which makes other investments in the industry as a whole feasible.

The main tax challenge relating to thermoelectric power generation from natural gas arises from the different ICMS assessment systems for transactions involving natural gas and electric power.

This is because the ICMS tax arrangement applicable to the natural gas supply chain is the traditional one, whereby the tax must be collected from the state where the selling establishment is located. Thus, the seller collects the ICMS tax on the sale of natural gas to the state in which it is located, indicating on the tax document the amount of tax due for the respective recording of a credit by the purchaser of the product. These tax credits may be used by the purchaser to offset other ICMS debts it may ascertain in its transactions, in compliance with the non-cumulative tax principle set out in article 155, paragraph 2, subsection I, of the Federal Constitution.

The ICMS assessment system for transactions involving electric power is different, since the Federal Constitution itself establishes that the tax will not be levied on interstate transactions. The logic of the constitutional legislator in establishing such an assessment system was to assign the product of the ICMS tax collection to the states where electricity consumption occurs, since its generation tends to be concentrated in a few states, usually privileged due to natural circumstances. Consumption, on the other hand, occurs throughout the Brazilian territory. At the time when this system was conceived, the Brazilian electric grid was less diversified and massively composed of hydroelectric plants, which do not depend on inputs taxable under the ICMS.

Exit of goods exempted or not taxed under the ICMS are exceptions to the principle of non-cumulativeness, which leads to reversal of entry  of tax credits related to previous transactions (except if the ordinary legislation of the specific state authorizes the maintenance of such credits).

Additionally, the company acquiring the electric power in interstate transactions (such as a state energy distributor, for example) will have to pay the ICMS tax on its transactions selling the power within the state, which are often subject to higher rates than those for products in general (in the state of Rio de Janeiro, the ICMS tax rate on electric power corresponds to 28%, while in the other operations it is 18%, for example).

Analyzing the tax levied on the supply chain of natural gas for thermoelectric generation, it is possible to identify, therefore, a significant tax challenge related to the incompatibility of the ICMS assessment arrangements, which leads to cumulative taxation and, ultimately, higher cost in the electric power generated via natural gas, thus reducing the competitiveness of these projects.

The form usually adopted by states to mitigate the effects of the incompatibility of the ICMS taxation systems for natural gas and electric power is the use of special taxation arrangements (mainly through the granting of tax deferrals) or the granting of tax benefits (such as exemptions, in which situations there are other legal and political complexities for the valid institution of such incentives).

The incompatibility of ICMS assessment arrangements on transactions involving natural gas and electricity is, therefore, the main tax challenge to be faced with respect to natural gas thermoelectric projects.

Challenges in other sectors

In addition to the issues mentioned, which have not been completely exhausted and call for further inquiry and analysis, other important segments for the natural gas industry also face relevant tax challenges, such as fertilizer plants, the "Fafens" (regarding the fertilizer tax system, mainly imported fertilizers); intensive consuming industrial segments (sectors such as glass, ceramics, etc.); the chain for the sectors vehicular natural gas (VNG) and heavy fleet LNG; and the natural gas flow activity itself, among others.

Although the challenges are many, one may note a constant evolution in the business environment of the natural gas industry, contributing attract investments and generate wealth in Brazil. In this respect, a united effort between public authorities and the private sector is fundamental in formulating public policies that give support and legal certainty to the most modern and efficient business models for the industry.

Category: Tax

The Brazilian Federal Revenue Service (RFB) has once again expressed the understanding that the portions of the transportation voucher and food assistance paid for by the company and by the employee are treated differently for the purposes of social security contributions. On June 30, 2020, the RFB published the Cosit Consultation Resolution  No. 58/20, following some of the assumptions already adopted in Cosit Consultation Solution No. 04/19.

According to the RFB, the company hiring services through the assignment of labor may deduct from the calculation basis of the employer's social security contribution (gross amount of the invoice, receipt, or service receipt) the amounts defrayed by the borrower as transportation vouchers and food assistance, the latter in natura if before the Labor Reform, and also by means of ticket or card, if later.

The RFB highlights that the legislation authorizes the deduction from the tax basis of the withholding tax only of the portion of the transportation voucher and food assistance borne by the company. The same reasoning does not apply to the portion of co-pay deducted from employees' remuneration, which must be included in the calculation basis, since one could not contemplate "the possibility that the company would be able to deduct from the calculation basis the tax due a sum that does not belong to it."

A similar issue had already been addressed in Cosit Consultation Resolution 04/19, whereby the RFB clarified that, when the food assistance is paid by both the company and the employee, the treatment of these amount for the purposes of levying social security contributions should be different.

In that scenario, the understanding adopted was that the portion of the food assistance deducted from the employees in a co-pay system will be included in the calculation basis of the social security contributions as part of their remuneration, since the amount discounted constitutes employee salary. The share paid by the employer, in turn, would not be in the basis for calculating the contributions in question.

Although the consultation dealt only with food assistance, the discussion is similar for transportation vouchers, medical and dental assistance plans, and supplementary pension funded via co-pay with employees. There is a controversy as to whether such funds are taxed to employees and not employers, if the RFB's understanding is followed. What is discussed is whether or not these funds make up the contribution salary.

The two consultation solutions indicated are binding on the RFB and support the actions of other taxpayers, as per article 9 of Normative Instruction No. 1,396/13. Failure to comply with these guidelines may result in assessments of taxpayers and rejection of any refunds, which are rarely overturned in the administrative sphere.

However, there are favorable court decisions recognizing the possibility of excluding employees' co-pay installments from the calculation basis for social security contributions, since article Article 28, paragraph 9, of Law 8,212/91 established that the amounts received as transportation vouchers, food assistance, medical and dental assistance plans, and supplementary pension plans are not included in the contribution salary.

There are robust legal bases for it also be recognized that, in the period before the Labor Reform, the benefit of food assistance provided through vouchers or a prepaid card in the context of the PAT is not subject to taxation through social security contributions, in accordance with applicable regulations.

In view of this scenario, it is advisable for companies to carefully evaluate the treatment to be given given to the amounts paid in each case in order to ascertain the existence of excess withholding or even exposure, which may require adjustment of procedures or even the use of preventive measures.

Category: Corporate

Normative Instruction No. 81 of the National Department of Business Registration and Integration of the Ministry of Economy (DREI), issued on June 15, 2020, consolidated general rules and guidelines related to company registration procedures, which were previously scattered among various instructions and letters issued by the agency. In all, 56 rules were revoked, of which 44 were normative instructions and 12 were circular letters, regarding the incorporation, amendment, and extinguishment of companies, company names, holdings of foreigners, corporate transactions (transformation, take-over, merger, and spin-off), among other subjects.

In line with the measures and principles consolidated by the Economic Freedom Law (Law No. 13,874/19), IN 81 should simplify consultation of the general rules on the Public Register of Companies and cut the red tape for procedures relating to the registration of companies. The new instruction also amended the rules on the following subjects:

• Formation of company name. IN 81 consolidates all prohibitions for the formation of corporate names, especially the existence of a name identical or similar to another already registered with the same board of trade, indication of the size of the company, or indication of words or expressions that denote an activity not provided for in the corporate purpose. In addition, it no longer provides for the obligation to expressly indicate the corporate purpose. However, it is important to note that the Civil Code provides in its article 1,158, paragraph 2, that the name of the limited liability company must designate the corporate purpose of the company. Thus, respecting the hierarchy of the rules, IN 81 (infra-legal rule) should not contradict the Civil Code (federal law). It will be necessary to await the positions of the boards of trade, courts, and appellate courts on this issue.

• Notarization of signatures and authentication of copies. No longer will the notarization of signatures and the authentication of copies be required for acts or filings with boards of trade. All that is required is a declaration of authenticity signed by the interested party's lawyer, accountant, or book-keeper.

• Automatic filling. Previously possible only for acts organizing sole proprietorships, Eireli’s, limited liability companies (except publicly-traded companies), and cooperatives, automatic filling was expanded to acts of amendment and extinguishment, provided that specific parameters are observed and the provisions standardized by the DREI are used.

• Preferred quotas with voting restriction. It is now expressly permitted to file articles of association containing quotas of different classes, and various voting and financial rights may be assigned to their holders and even eliminate or limit their voting rights. Before IN 81, the various boards of trade had no uniform understanding on the subject. Some accepted the filling of articles of association contemplating quotas without voting rights or with restricted voting rights, while others rejected this possibility.

• Digital filling. Another important novelty brought by IN 81 and that, to a certain extent, demonstrates that the DREI is paying attention to the digital transformation we are going through is the possibility of digital filling, with the disclosure of guidelines on digital signatures. It will be incumbent on the boards of trade to choose whether to accept documents electronically signed through a third party system or signature portals or to have their own specific system for that purpose. In the event of the use of a third party system or signature portals, digital signatures should have a time stamp or other mechanism that attests to the date and time when the documents were signed, in addition to allowing for verification of authenticity over the Internet, without the need for payment for services and regardless of user authentication.

• Conversion of association into business company. The provisions relating to corporate transactions, i.e. acts of transformation, merger, amalgamation, and spin-off, have not undergone major changes. However, the prohibition on the conversion of non-profit associations into business companies and vice versa, previously provided for in IN DREI No. 35, no longer exists. With IN 81, the DREI began to regulate the scenarios for "conversion" of an association into a business company and vice versa, in addition to the sequence of acts necessary for the coordination of the filing of documents between the civil registry offices and commercial boards.

• Incorporation of a company with negative equity. IN 81 now expressly states that there will be no prohibition on the take-over of a company with negative net equity. For some time now, the specialized legal scholarship on the issue took the position that it is possible to perform such a corporate transaction, even in the case of companies with negative net equity, since there is no express prohibition in law and private law is governed by the principle of freedom of contract. However, various boards of trade had been presenting difficulties hindering filling of corporate acts in such circumstances, causing legal uncertainty for the business community.

The initiative demonstrates the effort of the recording department to simplify its processes and improve the organization of existing standards, seeking to offer more security to the Brazilian business community.

IN 81 is already in force and effect as of July 1, 2020, except for the automatic filing of acts of amendment and extinguishment of sole proprietorships, Eireli’s, and limited liability companies, as well as the incorporation of a cooperative, for which it will become effective 120 days after its publication.

We will deal with these and other changes promoted by IN 81 in more detail and depth in a series of articles in the coming weeks.

Category: Labor and employment

Following the procedure for approval of Executive Order 936/20 ("MP 936"), the Office of the President of Brazil sanctioned Federal Law No. 14,020/20. In spite of specific vetoes made to the text approved by Congress, President Jair Bolsonaro maintained the possibility for the Executive Branch to extend the maximum time limits for reduction of work hours and salary and suspension of employment contracts.

This had been one of the most relevant changes to the original wording of MP 936, especially since the first companies to enter into such agreements had already reached the deadlines for their validity, to the detriment of the employment level in Brazil.

Among the parts vetoed by the President of Brazil, the following stand out:

• Expansion of the scenarios for deduction of compensatory aid paid by the employer starting in April of 2020. According to the text approved by the Brazilian Congress, it would be possible to deduct this amount from: (i) income from the individual's nonsalaried work; (ii) taxable income received by in-home employers; and (iii) profits from farm activity, as an expense paid in the base year; and

• Integration into the employment contract of the provisions of collective bargaining agreements that have expired or are due to expire while the state of public calamity persists, a phenomenon known as "supervening activity of the collective bargaining rule";

• Payment of the emergency benefit to dismissed employees who did not meet the requirements to qualify for unemployment insurance;

• Payment of the emergency benefit to employees who, in March or April of 2020, had received the last installment of unemployment insurance;

• All proposals from the Brazilian Congress to change the rules on entering into and paying the PLR. Among the amendments proposed and vetoed by the President, the following are noted: (i) the validity of negotiation via an employee committee without labor union participation, provided that, after receiving notice, the labor union has been silent for ten days; and (ii) the possibility of entering into an agreement at least 90 days before the date of payment of the sole or final installment; and

• Change in the criteria for adjustment for inflation of labor claims and the percentage of interest applicable.

Regarding this last point, we warned in our Informative Bulletin No. 8 that the Federal Senate had made a mistake in putting together the final text sent to the Office of the President of Brazil, since, although it had withdrawn the new rule from the Consolidated Labor Laws, it maintained this amendment in Federal Law No. 8,177/91, which deals specifically with the issue.

With the presidential veto, the mistake by the Federal Senate was duly corrected, thus avoiding having the wording provided for in Federal Law No. 8,177 be out of line with the text provided for in the Consolidated Labor Laws, which would worsen legal uncertainty on an already sensitive issue.

For more information on the alternatives provided for in MP 936, the changes made by the Brazilian Congress and other measures to confront covid-19, please see our special bulletins and E-book on the subject:

EXECUTIVE ORDER NO. 936/20: UPDATE FROM JUNE 19, 2020 TEXT APPROVED BY THE FEDERAL SENATE

MP 936: NEW LABOR AND EMPLOYMENT MEASURES TO CONFRONT COVID-19

E-BOOK: ANALYSIS OF THE GENERAL IMPACTS OF COVID-19 AND MP NOS. 927 AND 928 ON LABOR RELATIONS

Category: Tax

After a long period of discussion and debate, this year the federal government enacted Law No. 13,988, which, among other measures, regulated tax settlement with respect to federal debts. The measure was widely awaited, since the National Tax Code brought in the possibility of settlement since it was published in 1966. However, subject to regulation by law, the provision remained ineffective for 54 years.

In general terms, Law No. 13,988/20 established the requirements and conditions for the Federal Government, its instrumentalities, and foundations, to promote settlements aimed at settling disputes related to the collection of tax or non-tax debt.

As regards tax matters, three major groups, subject to their own rules, were covered by the legislation:

• Debts already enrolled as outstanding debt (in the modalities of adhesion or individual proposal);

• Debts arising from a relevant and widespread controversy (only in the modality of adhesion);

• Debts arising from litigation relating to a small amount (only in the form of adhesion).

Infralegal acts, ordinances to be issued by the Ministry of Economy, the National Treasury Attorney's Office, or the Federal Revenue Service and future notices, are responsible for disciplining in detail the criteria and conditions for each type of settlement.

This is the case of PGFN Ordinance No. 14,402 and Ministry of the Economy Ordinance No. 247. The first, issued on June 16, established the conditions for exceptional settlement in the collection of debts already enrolled as outstanding debt of the Federal Government, while the second established the requirements for adhesion to tax litigation of a relevant and widespread legal controversy and/or litigation of small value. We will look at the two acts in more depth below.

PGFN Ordinance No. 14,402 - exceptional settlement for debts enrolled due to the effects of the coronavirus

PGFN Ordinance No. 14,402 brought in a set of rules for debtors and the Federal Government to enter into agreements regarding the debts already enrolled as outstanding, but with the effects caused by the coronavirus pandemic as a cause.

The objective, among others, is to enable the transitory overcoming of the economic and financial crisis and to ensure that the collection of debts is adjusted to the expectation of receipt and the capacity to generate income.

This exceptional settlement may include debts registered and managed by the PGFN whose value adjusted for inflation is equal to or less than R$ 150 million. Debts of greater value may be the subject to settlement, but via individual proposal.

Taxpayers who have debts considered irrecoverable or difficult to recover and who adhere to the exceptional settlement should pay the downpayment of 0.334% of the consolidated value of the debts within 12 months. The residual value, with discounts that vary depending on the debtor's situation or activity, should be paid in installments as follows:

a) For individual businessmen, microenterprises, small businesses, educational institutions, Charitable Hospitals, cooperative societies, and other civil society organizations covered by Law No. 13,019/14 whose debts are considered irrecoverable or difficult to recover:

• Reduction of up to 100% of the amount of interest, penalties, and legal charges, observing a limit that can vary between 30% and 70% of the total value of each debt subject to negotiation and a variation of 36 to 133 monthly and successive installments.

b) For other legal entities under judicial reorganization, judicial liquidation, extrajudicial liquidation, or bankruptcy proceedings:

• Reduction of up to 100% of the amount of interest, penalties, and legal charges, observing the limit of 50% of the total value of each debt subject to negotiation within up to 72 monthly and successive installments.

c) For individuals whose debts are considered irrecoverable or difficult to recover:

• Reduction of up to 100% of the amount of interest, penalties, and legal charges, observing the limit of 70% of the total value of each debt subject to negotiation within up to 133 monthly and successive installments.

d) For other legal entities whose debts are considered irrecoverable or difficult to recover;

• Reduction of up to 100% of the amount of interest, penalties, and legal charges, observing a limit that can vary between 35% and 50% of the total value of each debt subject to negotiation in monthly and successive installments that may vary from 36 to 72 months.

For purposes of classification of a debt as recoverable or difficult to recover, the degree of recoverability of the debts enrolled will be assessed by the PGFN, taking into account the economic situation and payment capacity of the debtors.

The ability to pay, in turn, will be measured after an examination of the actual impact of the new coronavirus pandemic on the legal entity's gross revenue or the monthly income of the individual (i.e. an assessment of the percentage reduction in revenue or gross income from March of 2020 to the date of adhesion, compared with the same period in 2019).

Adherence to the exceptional settlement will be done exclusively through the Regularize portal, on the PGFN website, between July 1 and December 29, 2020.

ME Ordinance No. 247 - settlement for significant litigation and for small value litigation

ME Ordinance No. 247 establishes the general rules for the settlement of debts linked to litigation that is significant and subject to widespread legal controversy. This modality allows the concession of a discount of up to 50% of the debt, with a maximum discharge period of 84 months.

Adherence to this modality also requires publication of a notice from the PGFN or RFB, in which the matters approved by the Minister of Economy and the other criteria will be listed. In addition to the RFB, the PGFN, and the Carf, the OAB and the confederations of the economic category may suggest to the Minister of Economy the subjects that may be joined as theories of relevant and widespread legal controversy.

A relevant and widespread legal controversy is considered to be that which goes beyond the subjective interests of the cause and, preferably, has not yet been subject to a judgment by the procedure for repetitive appeals along the lines of article 1,036 et seq. of Law No. 13,105/15.

The controversy will be considered widespread when it involves: (i) claims in at least three different federal circuit courts; (ii) more than 50 lawsuits by different taxpayers; (iii) an incidental proceeding for resolution of repetitive claims whose admissibility has been accepted by the court; and (iv) claims involving a significant portion of a certain economic or productive sector.

Relevance will be considered demonstrated when there is: (i) economic impact equal to or greater than R$ 1 billion, considering known cases; (ii) divergent decisions between the ordinary panels and the Superior Chamber of Carf; and (iii) divergent judgments or decisions in the judicial sphere.

The ordinance also establishes that, in this type of settlement, adhesion must cover all disputes existing on the date of the request and related to the theory at issue in the settlement.

The act of the Ministry of Economy also dealt with litigation of small values, exclusive to individual taxpayers, microenterprises, or small businesses and whose amounts of principal and penalty, per individual case, do not exceed 60 minimum wages.

For this modality, adhesion also requires the publication of a future public notice, which will establish the discount criteria (up to 50% of the total value of the debt), payment terms (installment payment within up to 60 months), or offer and substitution of guarantee.

Category: Infrastructure and energy

In return for Rio de Janeiro's adhesion to the tax recovery regime proposed by the Federal Government in 2017, the National Bank for Economic and Social Development (BNDES) modeled the concession of public services for drinking water supply and the collection and treatment of sanitary sewage in 64 municipalities in the state of Rio de Janeiro. Currently, these services are provided by Companhia Estadual de Águas e Esgotos do Rio de Janeiro (the “Rio de Janeiro State Water and Sewage Company”, Cedae).

Recently, the state of Rio de Janeiro submitted drafts of the public notice, concession contract, and other documents related to the project for public consultation, which will extend until July 8. The project will also be presented to the population and potential investors at two public hearings scheduled for June 25 and July 6.

BNDES has distributed the municipalities of the State of Rio de Janeiro into four lots, which may be granted to the same concessionaire or to different concessionaires for a period of 35 years. The regulation of the concessions will be under the responsibility of the Energy and Basic Sanitation Regulatory Agency of the State of Rio de Janeiro (Agenersa).

As some municipalities had already delegated sewage collection and treatment services to the private sector, the draft concession contracts even provided for the possibility that these services may be taken over in the future by the new concessionaires, especially to provide stability to performance of contracts and avoid future legal clashes.

The modeling proposal is based on a premise of associated sanitation management, according to which the municipalities (holders of these public services) delegate to the state of Rio de Janeiro the right to exploit and grant such activities to the private initiative. To structure the associated management, the following were prepared: (i) draft cooperation agreements and program contracts were prepared to regulate the conditions under which these services will be delegated from the municipalities to the State and from it to Cedae and the new concessionaires; and (ii) management contracts, the subject matter of which is the transfer to Agenersa of the inspection and regulation prerogative, including rates, of public services.

Although the concession represents a substantial reduction in Cedae's duties {assignments}, the company will be preserved to capture and treat the water to be sold to future concessionaires, in addition to, exceptionally, continuing to supply water to certain municipalities included in the lots that will be granted. This function is provided for under the terms of the interdependence contracts to be entered into between the concessionaires and Cedae.

Regarding universalization of access, the modeling proposed by BNDES has set the goal of universalization related to water supply for 99% of the municipalities referred to and the collection and treatment of sanitary sewage for 90%. An 8 to 14 year time frame was estimated for the achievement of the water supply target and 15 to 20 years for the collection and treatment of sewage. The differences in the reality of each municipality justify this variation. In parallel with the goals of universalization, investments will also be required to reduce water losses through the distribution network, which is quite common in concessions and PPPs in this sector.

In relation to public bidding, as is already common in the infrastructure sectors, the system adopted is that of an international competition with phased investment and a live auction. The judgment criterion will be the highest grant amount, which must be paid in two installments (60% as a condition for signing the contract and 40% after the term of transfer of the system).

In summary, the model proposed by BNDES for the concession of basic sanitation services in the state of Rio de Janeiro assigns: (i) to Cedae the collection, treatment, and supply of water; (ii) to the concessionaire(s) the distribution of water, collection, and treatment of sewage, and investments in infrastructure, including for the expansion of capacity and reduction of losses in the distribution network; and (iii) to Agenersa the regulation of the provision of these public services.