Hey, I’m Douglas, Editor-in-Chief of the Brazilian Tax Reform Portal 🇧🇷.

The Brazilian Federal Revenue Service published Interpretative Declaratory Act RFB No. 1, which clarifies the rules for deducting taxes paid abroad by controlled and affiliated companies in the calculation of the Corporate Income Tax (IRPJ) and the Social Contribution on Net Profit (CSLL) due in Brazil.

The rule establishes that the tax paid abroad may only be used to deduct the Corporate Income Tax (IRPJ) and the Social Contribution on Net Profit (CSLL) levied on the portion of the investment value adjustment corresponding to the profits earned by directly or indirectly controlled or affiliated companies domiciled abroad.

The act also imposes express limitations on the use of these amounts. Under no circumstances is it allowed to:

In addition, the amount of the deduction may not exceed the amount of IRPJ and CSLL due in Brazil for the relevant assessment period.

Another relevant point is that any difference between the limit for the utilization of the tax paid abroad—calculated before the offsetting of tax losses—and the tax effectively due after such offsetting may not result in a negative IRPJ or CSLL balance. These amounts must be recorded in Part B of the LALUR for use in future assessment periods.

Brazil began implementing, from the very first day of this year, one of the deepest transformations of its tax system. For the Oil and Gas sector—capital-intensive, characterized by long-term contracts, complex supply chains, and specific tax regimes—the Tax Reform represents both a structural opportunity and a significant competitive risk. Few sectors will feel as intensely the replacement of taxes, the shift in the taxation criterion, and the reengineering of economic relations among the Federal Government, States, Municipalities, and companies (read more)

The replacement of the current web of taxes (ICMS, ISS, PIS, Cofins, and IPI) with a dual VAT, composed of IBS and CBS, corrects a historical distortion by eliminating tax cascading and ensuring full and automatic input tax credits on inputs and investments. For a heavily export-oriented sector with long supply chains and a high volume of capital goods, this is a relevant structural gain. Added to this is the promise of credit refunds within up to 60 days, indexed to the Selic rate, which tends to significantly reduce the stock of tax credits immobilized on balance sheets and relieve chronic working capital pressures.

However, the adoption of the destination principle, replacing origin-based taxation, profoundly alters the sector’s economic geography. Regional tax incentives lose effectiveness as a competitiveness tool, and operational efficiency becomes the primary differentiator. In the midstream, this implies redesigning logistics networks, reviewing transportation contracts, the location of bases and terminals, and reassessing investments made under a different tax logic. Logistics productivity comes to define the country’s energy map.

Another sensitive point is the Selective Tax (IS), which will apply to activities associated with environmental impacts, including the exploration and refining of fossil fuels. While the environmental rationale is legitimate, the economic risk is real. Without clear technical criteria, the IS may become an additional cost factor in an industry whose effective tax burden already approaches 70% of profit in certain segments of the value chain. In projects with higher geological risk, mature fields, or marginal assets, inadequate calibration could compromise economic viability. On the other hand, if well designed, the IS can function as an inducement instrument, channeling capital toward operational efficiency, carbon capture and storage (CCUS), low-emission hydrogen, and energy transition solutions. The central point is to turn the tax into a rational economic signal, not a blind penalty.

The reform also substantially raises the bar for tax governance. In an environment of dynamic legislation, more digital oversight, and mechanisms such as split payment, compliance ceases to be an ancillary function and becomes a strategic element. Tax credits conditioned on the effective payment of the previous stage increase transparency but put pressure on cash flows, require greater integration among tax, finance, procurement, and IT areas, and heighten the risk of operational disallowances.

The maintenance of REPETRO through 2040 is, without a doubt, one of the pillars of security for Brazilian upstream activities. The regime remains the country’s main competitiveness anchor compared to other petroleum provinces, ensuring predictability in a sector whose investment cycles exceed two decades. At the same time, the expansion of IBS and CBS credits on domestic inputs may reduce dependence on imports and strengthen the local supplier chain, provided it is accompanied by industrial competitiveness.

In the upstream, full VAT non-cumulativity improves returns on invested capital by allowing full credits on services previously partially taxed, such as seismic services, engineering, logistics, and offshore support. In the midstream, destination-based taxation forces a deep reorganization of assets and contracts. In the downstream, the scenario is more delicate: single-phase taxation, concentrating the tax burden at refineries, shifts the fiscal weight to producers, eliminates credit entitlement in subsequent stages, and compresses distributors’ and retailers’ margins, requiring contract renegotiation and a review of commercial models.

Near real-time reconciliation among banking systems, ERPs, and tax documents turns data into a critical asset. Automation, tax analytics, and system integration cease to be differentiators and become prerequisites for competitive survival. Companies that master digital tax intelligence and manage to optimize their financial flows will gain a structural advantage over less prepared competitors.

The Tax Reform thus offers a rare moment of institutional reconstruction. It can usher in an era of greater rationality, transparency, and economic neutrality—or generate an environment of uncertainty, regulatory overlap, and loss of competitiveness in a sector responsible for about 12% of industrial GDP and central to the country’s energy security.

The decisive point is clear. The reform will not be merely a tax matter, but a structural shock. Oil and Gas companies will need to rapidly adapt their business models, logistics chains, contracts, systems, and governance to operate efficiently under the new regime. Those who treat the Tax Reform as a belated accounting exercise will lose margin, liquidity, and competitive ground. Those who act now, in a structured and strategic manner, will turn regulatory change into an economic advantage.

By Pedro Souza, oil & gas leader at Bip Consulting.

🇧🇷🔍 Brazil is changing. Are you watching closely?

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