Offshore Riches – Part 2

Opinion, by Michael Royster

The Curmudgeon has never quite believed the “sky is falling” rhetoric of Rio de Janeiro politicos over the Ibsen Amendment. After all, the Amendment calls for all the royalties earned from offshore drilling to be distributed among the several states (27) and the several thousand municipalities (over 5,500) according to the distributive criteria of the FPE and the FPM, which makes it sound as if Rio will get its fair share. The Curmudgeon was wrong, the rhetoric is right.

FPE and FPM are the funds whereby Federal Government tax revenue is shared out. Brazilian Constitutions have long provided that only one governmental level can charge the same type of tax—hence there are no municipal or state income taxes, as there are in the US.

Because the taxes states and municipalities were allowed to charge were insufficient to meet their needs, mandatory redistribution of some federal taxes was ordained. By vote of the 1988 Constitutional Convention, the states’ share (FPE) was increased to 21.5 percent of those taxes.

The federal government also engages in voluntary revenue sharing. Although it has exclusive constitutional rights to ALL revenue arising from offshore and from under the ground, the federal government now voluntarily shares sixty percent of it with the states and municipalities—those having shorelines now receive 52.5 percent of offshore oil royalties, while only 7.5 percent goes to FPE and FPM.

Back to the FPE, which was specifically designed to re-distribute wealth to Brazil’s poorer regions— five percent is owed to states based upon their area, and 95 percent in inverse proportion to their per capita income—the poorer you are, the more you get. Complementary Law No. 62/1989 added further criteria, namely that 85 percent of FPE goes to the twenty (poor) states in Brazil’s North, Northeast and Center-West, fifteen percent to the remaining seven (rich) states, including Rio de Janeiro, which receives approximately two percent of the total FPE.

Under the Ibsen Amendment, it would receive this same proportion (two percent) of the oil royalties, versus the almost thirty percent it now receives. In other words, contrary to what the Curmudgeon believed, the sky really truly will crash down on Rio.

Is there hope for the State of Rio? Just last month the Federal Supreme Court declared the FPE distribution criteria of Complementary Law 62/89 unconstitutional, for failing to take account of census data and for being applied eighteen years after that law officially expired.

The Court gave Congress until December 2012 to devise a new set of criteria, but the Ibsen Amendment would apply to existing royalties, which are now Rio’s biggest source of income—and that would seem to be wrong. The outgoing Presiding Justice has publicly declared that the FPE is unconstitutional. So perhaps the STF, like Atlas, will hold up the heavens over Rio.

Or perhaps that will not be necessary. Arm-twisting by Lula is likely to ensure that the new rules do not apply to current exploration, only to pre-salt, thus saving the World Cup in 2014 and the Olympic Games in 2016. Without the royalties Rio currently receives, the money simply will not be there. Lula has invested too much personal prestige in these to permit them to fail—so they won’t.

P.S. Don’t even ask about the FPM, it’s gone awry too.

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Michael Royster, aka THE CURMUDGEON first saw Rio forty-plus years ago, moved here thirty-plus years ago, still loves it, notwithstanding being a charter member of the most persecuted minority in (North) America today, the WASPs (google it!)(get over it!)