Brief comments on Brazilian Mineral Royalty (CFEM) Taxable event and tax base

Transcription

1 Brief comments on Brazilian Mineral Royalty (CFEM) Taxable event and tax base

2 I What is CFEM? Article 20 (IX) of Brazil s 1988 Constitution expressly ratified public domain over mineral resources, based on the legal framework underpinning the use of these resources that has been in effect since the 1934 Constitution: Art. 20. The following are the property of the Federal Government: IX - mineral resources, including those of the subsoil. Paragraph one of the same article also stated that the Member States, the Federal District and the Municipalities, as well as to the Federal Government s Agencies, will either participate in the profits derived from the exploitation of mineral resources or be financially compensated for that: 1º. The States, the Federal District and the Municipalities, as well the Federal Government s Agencies, shall participate in the profits derived from the exploitation of oil, natural gas, or water resources for the purpose of generating electricity and other mineral resources in their respective territory, continental shelf, territorial sea or exclusive economic zone, or be financially compensated for such exploitation. In compliance with this constitutional provision, Law No /1989 created the Financial Compensation for the Exploitation of Mineral Resources CFEM (royalty payments), stating that the obligation to pay the tax is triggered by the exploitation of mineral resources for economic purposes. The taxable event takes place until the last stage of the beneficiation process and before industrial transformation: Art. 6 The financial compensation for the exploitation of mineral resources for economic exploitation shall be up to 3% (three percent) of the net revenue resulting from the sale of the mineral product, obtained after the last stage of the beneficiation process and before its industrial transformation.. Law No /1990 (which defines the tax basis and the apportionment rates for CFEM between Member States, the Federal District and Municipalities) and Decree No. 01/1991 (which regulates its collection) have also been enacted. Although created under the guise of a Financial Compensation, the CFEM is structured as a participation in the financial result derived from the mining activity. This is a settled issue by legal scholars and the courts alike1, and therefore no argument can be made that it is but a compensation, a fee, or a tax. This is therefore revenue which has its origins in the Federal Government, regulated under Administrative Law. 1 STF, RE / DF, First Court, Justice Sepúlveda Pertence, DJ , p. 21.

3 II Taxable event Law No. 7990/1989 sets forth that the Mining Rights Holder s obligation to pay the CFEM arises upon the economic use of mineral resources2. The taxable event takes place until the last stage of the beneficiation process and before industrial transformation. The time element that triggers the taxable event is the output of the mineral product through a sale. To that end, despite considering that the CFEM s taxable event (time element) is the output of the mineral product through a sale, art. 15 of Decree No. 01/19913 (of contestable constitutionality) equates it with the consumption or use of the mineral substance, in any establishment of the mining company. It is important to determine the time when the taxable event takes place because that is when the tax elements, such as tax rate and tax base, between the mining company and the DNPM are established. In fact, the CFEM statute aims to avoid regarding the sale of any good other than a mineral product, i.e., a product resulting from the industrial transformation of the mineral product, such as metal alloys or any other goods resulting from the transformation of the mineral substance, as the time element for the taxable event. properties4 of the mineral substances processed or that it does not entail its inclusion in the taxable event of the Tax on Manufactured Products (IPI). This statute sets forth two criteria that bring forward the CFEM s taxable event to the time of the output of the mineral product, thus configuring the consumption of the substance within the supply chain: the mineralogical loss of properties or its inclusion in the IPI taxable event. In view of this legal framework, it can be stated that the taxable event of the CFEM occurs when the mineral substance is economically exploited by the holder of the Mining Right who authorizes such use. And this will occur (i) on the first output through sale of the mineral product, as effected by the holder of the Mining Right; or, when there is consumption of the substance by the holder thereof, in (ii) mineralogical loss, (iii) or in the manufacturing of the substance, subjecting it to a levy of IPI levy, albeit at the rate of 0%. 4 In this regard, DNPM issued Normative Guideline No. 07/2012, determining the ineffectiveness of mineralogical loss of properties as a taxable event for the CFEM. Based on the aforementioned normative act, DNPM made it official that only the inclusion of the product obtained within the IPI levy triggers the taxable event, which defines the tax base cost of production, to the detriment of Net value of the sale. Therefore, in order to regulate art. 6 of Law No. 7990/1989 (which provides that the taxable event of CFEM occurs after the last stage of the beneficiation process and before its industrial transformation), item III, of art. 14, of Decree No. 01/1991 describes what may be considered beneficiation of the mineral substance (e.g. fragmentation, pulverization, classification, concentration, etc.), but stipulates: provided that it does not result in mineralogical loss of original 2 Law No. 7990/1989: Art. 1º The use of water resources for the generation of electric energy and mineral resources, by any of the regimes provided by law, will provide financial compensation to the States, Federal District and Municipalities, to be calculated, distributed and applied in the manner established in this Law. (our emphasis) 3 Art. 15. The following constitutes a taxable event for the financial compensation due for the exploitation of mineral resources: the output from sale of the mineral product from the areas of the deposit, mine, salt or other mineral deposits from which it comes, or from any establishment, always after the last stage of the beneficiation process adopted and prior to its industrial transformation. Sole paragraph: The consumption or use of the mineral substance in the manufacturing process carried out within the areas of the deposit, mine, salt or other mineral deposits, its bordering areas or in any establishment shall be likened to an output through sale.

4 III Tax base Law No. 7990/1989 establishes that the CFEM rates vary from 0.2% to 3%, depending on the mineral exploited and levied on the net revenue resulting from the sale of the mineral product, excluding taxes levied on the sale, and on shipping and insurance costs. Just as Decree No. 01/1991 created a new time element for the taxable event of CFEM levy, by likening the output through sale to the consumption or use of the substance by the mining company, it also provided for the applicable tax base, considering that, in the absence of a sale transaction, no net sales exist. The option elected was the cost of production (consisting of the sum of direct and indirect operational and administrative expenses) calculated up to the time of the taxable event of the CFEM, as set forth in 1, art. 14, of the Decree and in art. 2, of Normative Instruction DNPM nº 06/2000. Therefore, the CFEM has two tax bases, depending on the time of the taxable event: (i) net sales, in the event of output due to sale of the mineral product; (ii) and cost of production, in the event of consumption. IV - Rates CFEM rates vary depending on the mineral exploited: Aluminum ores, manganese, salt and potassium: 3%; Iron ore, fertilizer, coal and other substances: 2%; Gold: 1%, if exploited by mining companies; Precious stones, colored stones, carbonaceous, noble metals and gold, when exploited under PLG regime (not by mining companies): 0.2%. William Freire Advogados Associados Paulo Honório de Castro Júnior Rodrigo H. Pires Gabriela Cristina Mota Ribeiro

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