Offset Obligation in Brazil

1. Offset obligations in Brazil:
legal aspects & solutions
ECCO Symposium # 5
Frankfurt – November 15th 2012
Dr. Domingos PAIVA
HANNOUN & PAIVA Law Firm
Paris l São Paulo
d.paiva@hannoun-lawyers.com

2. Summary
1. Legal sources of Offset
1.1. Competent authorities
1.2. Offset legal feasibility
2. Offset requirements & selection
2.1. Common types of Offset
2.2. Selection chronogram
2.3. Selection’s criteria
3. The Offset Agreement
3.1. Some core concepts (Example: BAF – Brazilian Air Force)
3.2. Main clauses (Example: BAF – Brazilian Air Force)
4. Financial Support, Credit Insurance & Tax Issues
4.1. Financial support: Brazilian public funding
4.2. Credit insurance
4.3. Taxes issues
5. Contract engineering
5.1. Example I (Direct offset with FDI + subcontract)
5.2. Example II (Direct offset with FDI + Transfer of Technology)

3. 1. Legal sources of Offset
1.1. Competent authorities
1.2. Offset legal feasibility

4. 1.1. Competent authorities
1. Legal sources of Offset
Authorities Powers
Congress Law 8.666/1993
Public Bidding and Procurement
Law 11.079/2004
Public-Private Partnership / Project Finance Initiative – PPP/PFI
Law 12.598/2012
Support for Brazilian Defense Industry
President “Provisional Measures” (≈Decree-Law)
MP 544/2011 - Support for Brazilian Defense Industry
Ministry of Defense Decrees / Regulations:
Decree n. 6.703/2008 - National Strategy of Defense (END)
Normative Ordinance n. 764/2002 - Commercial, Industrial and
Technological Offset Policy of the Ministry of Defense
Brazilian Air Force Regulations:
Ordinance n. 1.395/GC4 (DCA 360-1/2005: Commercial, Industrial and
Technological Offset Policy of Aeronautics)
Ordinance n. 1.397/GC4 (ICA 360-1/2005: Rules for Commercial,
Industrial and Technological Offset Negotiation in Aeronautics)
Comando da
Aeronáutica –
COMAER
(or Força Aérea
Brasileira – FAB)
Support Unit Bidding Procedures
Compliance
etc.
Comando Geral
de Apoio –
COMGAP

5. 1.2. Offset legal feasibility
1. Legal sources of Offset
All sectors Defense sector
Feasibility forbidden optional optional mandatory
Act Law 8.666 Law 8.666, arts. 24 and 25 Law 11.079 (PPP) Law 12.598, art. 3 Law 12.598, art. 4
Situation - ordinary
acquisitions of
goods & services
- high-tech products
- national defense interest
- single supplier
- emergencies
(…)
≥R$ 20 millions
(US$ 10 millions)
- major public
services concessions
- major public work
concessions
- acquisitions of
defense products
& systems
- acquisitions of
defense imported
products &
systems
Procedure competitive
procedures*
direct contract methods** direct contract
methods**
direct contract
methods**
direct contract
methods**
* competitive bidding, auction etc.
**free stipulation of procurement conditions, specific negotiation of agreements.

6. 2. Offset requirements & selection
2.1. Common types of Offset
2.2. Selection chronogram

7. 2.1. Common types of Offset
2. Offset requirements & selection

8. 2.1. Common types of Offset
2. Offset requirements & selection

9. 2.2. Selection Chronogram
2. Offset requirements & selection
SELECTION PROCESS
CHRONOGRAM
EVENTS
Submission of RFP to the Bidders that signed the Confidentiality Agreement
Reception of Preliminary Proposals
Analysis of the Preliminary Proposals (technical, logistics, commercial,
industrial and Compensation Proposal)
Emission of Preliminary Selection Report
Presentation of preliminary results to Selection Comitee and indication of
short-list
Remittance of informative to each pre-selected Bidder
Face-to-face meetings: clarifications (technical, logistic, commercial and
industrial) and submission of complementary instructions for the Revised
Proposal
Negotiation and adjustment of Compensation Proposals
Technical visits to Selected Bidders
Reception of Revised Proposals
Analysis of the Revised Proposals (technical, logistics, commercial, industrial
and Compensation Proposal)
Emission of Final Selection Report
Presentation of final results to Selection Comitee and indication of Selected
Bidder
CHRONOGRAM FOR
HIRING PROCESS AND
CONTRACTUAL PHASES
EVENTS
Negotiations for final adjustment of the Proposal (definition of contractual
objects), of terms and conditions of the Commercial Contract and
Compensation Agreement
Signing of the Commercial Contract and Compensation Agreement
Development Phase
Production Phase
Delivery of Aircrafts

10. 2.3. Selection’s criteria
2. Offset requirements & selection
EVENTS (examples)
Levels of Offset
requirements
O, D, M, RC
Levels of Offset
obligation fulfillment
+, A, C, N, AA, NA
Amounts per
Category of Offset
DIRECT OFFSET: Minimum amount requested: 20% of the amount of the Offset Agreement
(directly allocated to activities of a Project carried out in Brazil)
INDIRECT OFFSET: Desirable amount: at least 50% of the amount of the Offset Agreement
(allocated to other aerospace or defense products or services to be contracted in Brazil)
NON-RELATED OFFSET: At its discretion, the Government may consider proposals of increment
of the bilateral trade in areas not related with the aerospace or defense sectors. Non-Related
Compensation + Direct Offset + Indirect Offsets should complete 100% of the amount of the
Offset Agreement
Multipliers
Co-production: 2 up to 5
Production under license: 2 up to 5
Subcontracted production: 3
Investments in the Brazilian Aerospace Industry: 5
Training at the Brazilian company: 2
Training at the Bidder and/or Technical Support in Brazil: 3
Transfer of technology: 4 up to 7
Acquisition of products pf the Brazilian Aerospace Industry: 3
Hiring of services of the industry and of Brazilian aerospace institutions: 3 up to 5
Engineering Environment: 3 up to 5
Donation and/or Lending of Equipment/Systems: 3
Costs in the Development Phase: 4

11. 3. The Offset Agreement
3.1. Some core concepts (Example: BAF – Brazilian Air Force)
3.2. Main clauses (Example: BAF – Brazilian Air Force)

12. 3.1. Some core concepts (Example: BAF – Brazilian Air Force)
 OFFSET AGREEMENT – (i) Compensation clause in the Purchase Agreement, (ii) specific contract correlated with the
purchase, or (iii) Offset Agreement:
 directly, by the Armed Forces; or
 indirectly, by the Armed Forces, when a Brazilian company have to import from the Foreign Supplier in
order to fulfill a commercial contract with BAF
 OBLIGATION – The value of the compensation
 COMPENSATION PROJECT – One or more Compensation Transactions
 COMPENSATION TRANSACTION – Each activity, which may be part of a Compensation Project, such activity being
able to generate Compensation Credits
 IMPLEMENTATION PLAN – Presents the Compensation Projects, respective values, Beneficiaries, performance
schedule and multipliers. Each commercial contract will correspond to an Implementation Plan (as attachment to
the Offset Agreement)
 COMPENSATION CREDIT – The value obtained by applying the Multipliers to the nominal value of the recognized
Compensation Transaction and which will be considered to reduce the amounts of Compensation Obligations
 MULTIPLYING FACTORS/ MULTIPLIERS – Compatible with the complexity, sensitivity, updating, among other aspects,
of each transaction, multipliers shall be those contained in the Implementation Plans, applied in order to establish
the amount of the Compensation Credit for each Compensation Transaction
3. The Offset Agreement

13. 3.2. Main clauses (Example: BAF – Brazilian Air Force)
3. The Offset Agreement
Clauses Main Features
OBJECT  Definition of Compensation Projects to be performed and total value resulting from the application of the Multipliers to such projects
FINANCIAL GUARANTEE
 At the discretion of BAF, in accordance to the characteristics of the envisaged operation
 It usually reaches 5% of the obligation
TRANSFER AND ASSIGNMENT
 Offset Agreement cannot be transferred or assigned, partially or totally, by the Foreign Supplier without previous and written consent of BAF
 Joint and several liability (in case of approved transfer or assignment)
 Obligation to report changes in corporate ownership or in legal structure of the Foreign Supplier
COMPENSATION
TRANSACTIONS  Definition of Compensation Transactions to be carried on (Co-production, Investments in the Aerospace Industry, Transfer of Technology etc)
SUBCONTRACTS
 Conditions and requirements for subcontracting by Foreign Supplier items produced by Brazilian companies
MANAGEMENT OF THE OFFSET
AGREEMENT
 Issues related to the administration of the Offset and the process of evaluating the progress of the Offset activities
 Methodology for recognition of Compensation Transactions and for generation of Compensation Credits
 Etc
AMENDMENTS OF OFFSET
AGREEMENT
 Through a proper addendum, subject to the provisions of Article 65 of Law 8.666/93, as well as to related legislation regulating the matter
SUBSEQUENT CONTRACTS
Conditions for subsequent contracts associated to a Compensation Project, which come into force in the course of the Offset Agreement, as for
instance:
 Offset obligation in the amount corresponding to at least 100% of the new foreign supply;
 Recognition of Compensation Credits as derived from acquisitions and subcontracts by the supplier with Brazilian companies which fall beyond
the Compensation Transactions or resulting from surplus in relation to the value of the Compensation previously agreed upon.
PENALTIES
Non-fulfillment of the Offset Agreement or non-justified delay in its execution might result in (at least):
 BAF turning public worldwide the infringement incurred by Foreign Supplier;
 Impairment to participate in future biddings by the Brazilian Government;
 Fines or other ways of indemnification.

14. 4. Financial Support, Credit Insurance
& Tax Issues
4.1. Financial support: Brazilian public funding
4.2. Credit insurance
4.3. Tax issues

15. 4.1. Financial support: Brazilian public funding
 BNDES (National Bank for Economic and Social Development)
 Financing (examples)
 BNDES Project Finance
 BNDES-exim’s credit lines for foreign trade
 Subscrition of securities
 shares, simple/ convertible debentures, subscription bonds, derivative products, receivables, investment
funds, etc) in publicly-listed companies, in public or private issuances, or in companies that may join the
capitals market in the short or medium term, through a private issuance
 Funding for project research & development : example FINEP
 Reimbursable and non-reimbursable resources
 Investment (ex: venture capital operations etc)
 Funding for export
 ACC & ACE
 FGI - Fundo Garantidor para Investimentos
 PROEX
 PROGER
 Pré-pagamento de Exportação
4. Financial Support,
Credit Insurance & Tax Issues

16. 4.2. Credit insurance
 Governmental guarantees for Banks (funders of the project)
Law 11.079/2004 (PPP) c/ Law 12.598/2012 (Support for Brazilian Defense Industry), Art. 5
 transfer of non-tax credits : Government payment obligations with the supplier may be transferred to
the funders of the project
 special funds : Government payment obligations are covered by state guarantor funds (ex: US$ 5 billion
federal fund for PPP, shipbuilding, civil aviation industry & other strategic programs – Law 12.712/2012)
 independent guarantees: Government may contract independent guarantees provided by international
organizations or private financial institutions
 transfer of corporate control : control of a Special Purpose Vehicle (SPV) can be transferred to the
funders of the project
Credit insurance for export
 SCE (Export Credit Insurance) & FGE (Export Guarantee Fund)
- insurance coverage against commercial, political and extraordinary risks that may affect the
economic and financial transactions related to exports of goods and services
4. Financial Support,
Credit Insurance & Tax Issues

17. 4.3. Tax issues
Main taxes
* Governmental acquisitions are exempt
** IRF tax rate increases to 25% if the taxpayer is located in a tax haven country
4. Financial Support,
Credit Insurance & Tax Issues
Transaction Items Federal Government States Municipalities
General taxes Social contributions
Import* Goods Imposto de Importação
(customs duties)
IPI-import
(tax on imported industrialized products)
CIDE: 10%
COFINS-import: 7,6%
PIS-import: 1,65%
ICMS-import
(approx. 12% up
to 17%)
Technical services Imposto de Importação
(customs duties)
CIDE: 10%
COFINS-import: 7,6%
PIS-import: 1,65%
ISS (2% up to 5%)
Technology
(royalties)
IRF
(Withholding income tax): 15%**
CIDE: 10%
COFINS-import: 7,6%
PIS-import: 1,65%
ISS (2% up to 5%)
Loans (interests) IRF
(Withholding income tax): 15%**
Investment Corporate income IRPJ
(corporate income tax) : 15% or 25%
CSLL: 9%
Dividends Exempt

18. 4.3. Tax issues
Preferential tax regimes
.
4. Financial Support,
Credit Insurance & Tax Issues
Sector Name Period Benefits Requirements
Aviation industry RETAERO
(Law 12.249)
5 years Tax relief on Federal
taxes:
IPI, COFINS, PIS
- aircraft manufacturers or “preponderant supplier”
(with at least 70% of its turnover with: aircraft
manufacturers or export)
- effective use of components/ services/ technology
in an aircraft, OR export of the final product
Ports & shipyards REPORTO
(Law 11.033)
5 years Tax relief on Federal
taxes:
IPI, COFINS, PIS
- port operators and shipbuilders
- effective use of components/ services/ technology
in capital goods (immobilizations)
Defense
(goods, services &
technology)
RETID
(Law 12.598)
5 years Tax relief on Federal
taxes:
IPI, COFINS, PIS
- qualification as “EED” or as “preponderant
supplier” (with at least 70% of its turnover with: EED,
MoD, export)
- effective use of components/ services/ technology
in a strategic product, OR export of the final product

19. 5. Contract engineering
5.1. Example I (Direct offset with FDI + subcontract)
5.2. Example II (Direct offset with FDI + Transfer of Technology)

20. 5.1. Example I (Direct offset with FDI + subcontract)
5. Contract Engineering

21. 5.2. Example II : Direct offset with FDI + Transfer of Technology
5. Contract Engineering

22. Obrigado!
(Thank you)
ECCO Symposium # 5
Frankfurt – November 15th 2012
“Offset obligations in Brazil: legal aspects & solutions”
Dr. Domingos PAIVA
HANNOUN & PAIVA Law Firm
Paris l São Paulo
d.paiva@hannoun-lawyers.com