Message-ID: <14510128.1075844506742.JavaMail.evans@thyme> Date: Fri, 23 Jun 2000 04:06:00 -0700 (PDT) From: lynn.aven@enron.com To: brent.hendry@enron.com Subject: Status of PIS/Cofins Laws as it effects Enron's trading operations Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: Lynn Aven X-To: Sara Shackleton@ENRON_DEVELOPMENT, Brent Hendry X-cc: X-bcc: X-Folder: \Sara_Shackleton_Dec2000_June2001_1\Notes Folders\Notes inbox X-Origin: SHACKLETON-S X-FileName: sshackle.nsf Sara/Brent: I did not include you on the initial distribution but thought you might be interested in this since it will have an impact on whether our trading business in Brazil can be profitable. Regards Lynn ---------------------- Forwarded by Lynn Aven/NA/Enron on 06/23/2000 11:08 AM --------------------------- Lynn Aven 06/23/2000 09:28 AM To: Remi Collonges/SA/Enron@Enron, David M Rosenberg/SA/Enron@Enron, Ricardo Lisboa, Don Black/SA/Enron@Enron, Brett R Wiggs/SA/Enron@Enron cc: Joe Kishkill/SA/Enron@Enron, Kent Castleman, Sami Arap/SA/Enron@Enron, Andrea Bertone/SA/Enron@Enron, Rick Hopkinson Subject: Status of PIS/Cofins Laws as it effects Enron's trading operations As you are aware, the application of the PIS/Cofins tax has a significant impact on the ability to profitably conduct a trading and marketing business in Brazil. This message summarizes the impact of recent activity relating to the current application of the PIS/Cofins tax and addresses the prospects for tax reform that will hopefully settle this issue. Over a year ago, Medida Provisoria 1998 - 1 was issued that contained language that has been interpreted by taxpayers to exclude from their tax base amounts which had been paid to subcontractors, thus making the tax noncumulative. The interpretation of Medida Provisoria 1998 - 1 as it related to PIS/Cofins taxes is not clear and many Brazilian taxpayers, including Enron entities, had filed for injunctions from the collection of PIS/Cofins on gross revenue, awaiting clearer guidance. The recent release of Medida Provisoria 1998 - 18 simply deleted the language that taxpayers had been using the challenge the payment of the PIS/Cofins on gross revenue. Taxpayers no longer have constitutional challenge to the tax. After talking with local counsel, I have a better understanding of the impact of this latest medida provisoria. A medida provisoria is a provisional measure issued under the executive power of the president. Under the Brazilian constitution, it has the effect of law but is effective for only 30 days if not approved by the congress. This particular medida provisoria has been reissued every 30 days in order to keep the measure effective. The issuance of the latest medida provisoria is an attempt to end the discussion regarding the PIS/Cofins issue. One view is that this approach will hopefully increase the pressure to resolve this issue. There have been recent press releases indicating that tax reform in Brazil will not happen in 2000. My sources indicate that this may not be the case. There are discussions taking place that will move a small tax reform bill forward in three areas in which there seems to be consensus between the Treasury Department and the Executive Branch (President). This tax reform is expected to move forward in August, 2000. These items are as follows: 1. End of Cumulative PIS/Cofins 2. Unification of ICMS legislation 3. reducing tax burden on exports How does all of this impact the development of a trading and marketing business in Brazil? 1. We no longer have the option to pay PIS/Cofins on a net basis on current transactions based upon a favorable interpretation of Medida Provisoria 1998 - 1.Since we would have had to book a reserve for the tax that we were not paying, this impacts the cash flow and not the earnings that could be booked from a transaction. 2. We cannot use as a base case in forecasting our earnings from trading activity that we will pay PIS/Cofins tax only on the net margin. 3. The PIS/Cofins issue is being discussed at the highest levels of government by some of the most politically influential people. The key issue seems to be the timing of any change. The recent breakdown in the discussions stemmed from the issue of whether the change would be delayed for 2-3 years or phased in versus an immediate change in the application of the tax. Any assumptions that Enron makes regarding the application of this tax must include a risk assessment that the changes, if enacted, may never become effective or may be delayed due to revenue constraints that cause the government to continue the historical application of the tax to gross revenue. I have been told that Enron probably cannot add significant influence in the effort directed towards tax reform since the issue is being discussed at the highest levels of government by influential people. However, I think Enron needs to focus on getting relief through specific exemptions, much like financial institutions have been able to get. There is at least one bank that has been given approval to act as power marketer that could be helpful in opening doors for this discussion. Obtaining specific exemptions from the PIS/Cofins tax for the power and gas marketing businesses would allow us to develop the business and not have to worry about being caught in the midst of turmoil surrounding tax reform. I will keep you posted on tax reform progress as it progresses and will be glad to assist in the development or arguments to support specific regulatory relief for Enron's trading businesses. Regards Lynn