Brazilian Shipbuilding Industry Financing Overview

1. BRAZILIAN SHIPBUILDING, -REPAIR AND OFFSHORE INDUSTRYFINANCING, TAX BREAKS AND INCENTIVES-A GENERAL OVERVIEW-Paper prepared for the occasion of the Visit of the Governor of the State of Rio Grande do Sul, Mr. Tarso Genro, to the Republic of Korea, 2011 Claudio Köhler- Lawyer and Senior Partner Vinhas e Pessôa Advogados Rio de Janeiro- Porto Alegre- São Paulo- Recife www.vpadv.com.br ckohler@vpadv.com.br

2. Table of Contents • A- Brazilian Shipping Finance: a- REB- Brazilian Special Register (Registro Especial Brasileiro)- Law 9.432/97 and Decree 2.256/97; b- FMM- Merchant Marine Fund (Fundo de Marinha Mercante)- Law 10.893/04 • B- Selected Federal Tax Breaks and Incentives • C- Selected State and Municipal Tax Breaks and Incentives • D- Local Market Boosters and Local Content Requirements

3. Brazilian Shipping Financea- REB- Brazilian Special Ship Registry • Does not replace the ordinary Ship’s Property Registry. It is a voluntary and additional form of registration for merchant vessels, centralized in Rio de Janeiro at the Maritime Tribunal (Tribunal Marítimo). • Ship’s registered in the REB are generally granted the following preferred treatment, if compared to ordinary Brazilian flag vessels: i- same taxation and financing conditions that apply to vessels constructed for export purposes (lower international interest rates and export tax breaks); ii- access to international insurance coverage; and iii- Brazilian nationality requirement, limited to the captain and the chief engineer (others: + 2/3 of Brazilian crew);

4. Pró- REB • Legislative proposition made by SYNDARMA- Federation of Brazilian Shipping Companies, in 2010, for shipping companies with vessels registered in the REB Registry: i- modification of the income taxation to an European “tonnage tax” model; ii- exemption for shipping companies of social security payments for their crew; and iii- exemption of income tax and social security payments for the crew

5. Brazilian Shipping Financeb- FMM- Merchant Marine Fund • The FMM is a fund to provide resources for the development of the Brazilian merchant marine and the Brazilian shipbuilding and –repair industry. • Resources of the FMM: i- the participation of the FMM in the AFRMM- Additional Tax on Freights for the renewal of the Merchant Marine; ii- contributions made by the Federal Government and financial resources attributed to the FMM by the Law; iii- capital gains and repayments of loans granted by the FMM and Merchant Tax; vi- Loans granted to the FMM; vii- Fines and Penalties levied by he FMM; viii- AFRMM funds returned due to failure in the timely use by an EBN- Brazilian Shipping Company and ix- other resources.

6. AFRMM- Additional Tax on Freights for the renewal of the Merchant Marine • This tax is levied on any merchant marine disembarkation in a Brazilian port (National Hydrocarbon and Mineral Shipments are exempt). The basis for calculation is the bill of lading and encompasses all freight related costs. • AFRMM rates: i- 25%, in the case of international navigation (longo curso); ii- 10%, for cabotage navigation (similar to the North- American “Jones Act”, the “cabotagem” shipping in Brazilian waters is exclusively reserved to EBN’s- Brazilian shipping companies); iii- 40% in the case of liquid bulk transportation on rivers or lakes in the north and northeastern regions of Brazil.

7. FMM- Merchant Marine Fund- AFRMM Participation • The FMM shall be entitled to the following participation resulting from the AFRMM collection: i- 100% of the tax generated by foreign shipping companies; ii- 100% of the tax generated by a Brazilian shipping company operating a foreign flag vessel; iii- 41% of the tax generated by a Brazilian shipping company engaged in international ship transport, with a Brazilian flag ship not registered with the REB, and iv- 8% of the tax generated by a Brazilian shipping company engaged in international ship transport, with a Brazilian flag ship registered with the REB.

8. FMM- Merchant Marine Fund- primary use of funds -1- • Loans: i- to EBN’s- Brazilian shipping companies and other Brazilian companies, if it is in the interest of the development of the merchant marine and of the shipbuilding and –repair industry, up to 90% of the approved projects, for the construction of new vessels or for the purposes of jumborization, modernization, conversion or repair of own vessels, all to be contracted with a Brazilian shipyard; ii- to EBN’s- Brazilian shipping companies, Brazilian shipyard or other Brazilian companies or entities for scientific and technological research projects and education and specialization of human resources projects in the fields of the merchant marine, shipbuilding- and repair, up to 90% of the approved projects;

9. FMM- Merchant Marine Fund- primary use of funds -2- iii- to a Brazilian shipyard for the construction of a ship for export purposes or for delivery to an EBN- Brazilian shipping company or for vessel repair purposes, up to 90% of the approved projects; iv- to Brazilian shipyards, arsenals and naval bases for the new building, expansion and modernization of yard installations, up to 90% of the approved projects; and other kinds of loans and payments to financial agents. Warranties: liens and encumbrances on ship new buildings or existing fleet and other common bank guarantees. The FMM loan system is backed by the FGCN- Guarantee Fund for Naval Construction, a private guarantee fund, with a legal 5 billion R$ participation allowance of the Federal Government.- Law 11.786/08.

10. EBN- Brazilian Shipping Company AFRMM Participation -1- • The EBN’s- Brazilian shipping companies operating own and chartered vessels under Brazilian Flag shall be entitled to the following participation resulting from the AFRMM collection: i- 50% of the tax generated in an international ship transport, with a vessel not registered with REB; ii- 83% of the tax generated by in an international ship transport, with a vessel registered with REB; and iii- 100% of the tax generated in cabotage, river or lake ship transport.

11. EBN- Brazilian Shipping Company AFRMM Participation -2- • These funds shall be deposited in the name of the EBN, at Banco do Brasil S.A. in a linked account and may be assessed for the following purposes: i- purchase of new vessels built in Brazilian shipyards; ii- for the purposes of jumborization, modernization, conversions or repair of own vessels, including the purchase of machines and equipment, all to be contracted with a Brazilian shipyard; iii- repayment of principal or interests of FMM- Merchant Marine Fund loans. These funds shall be used by the EBN within 3 years after deposit to the above mentioned account. After this period the participation rights of the EBN will decay and the funds will be granted to the FMM.

12. B- Selected Federal Tax Breaks and Incentives • Tax on Industrialized Products- IPI • COFINS and PIS/ PASEP • Fictitious Draw Back (draw back “embarcação”) • Import Duty Reduction (Ex- Tarifários) • REPETRO

13. Tax on Industrialized Products- IPI • Ships pre- registered (when under construction) or registered in the REB will benefit of a total suspension and subsequent 0 tax regime in what regards the IPI Tax, this treatment is granted to: the acquisition by a Brazilian shipyards of materials and equipment, including parts, spare- parts and components to be used in shipbuilding and -repair Article 10, of the Law Nr. 9.493/97 and Decree Nr. 6.704/08

14. COFINS and PIS/ PASEP • Ships pre- registered (when under construction) or registered in the REB will benefit of a 0 tax regime in what regards the COFINS (seller) and COFINS- Importação and PIS/ PASEP (seller) and PIS/ PASEP- Importação, this treatment is granted to: the sale or import of materials and equipment, including parts, spare- parts and components to be used in shipbuilding and -repair Law Nr. 11.774/08

15. Fictitious Draw Back (draw back “embarcação”) • The internal/ national sale or repair of a vessel is deemed to be an export operation (fiction), for the purposes of the Brazilian draw back legislation. This leads to the suspension of import duties for materials, equipments, including parts, spare- parts and components incorporated in a vessel under construction, modernization, jumborization or repair in a Brazilian yard. Article 1, Paragraph 2, of the Law Nr. 8.402/92, articles 59 and following, of the Administrative Order Nr. 10/10

16. Import Duty Reduction (Ex- Tarifários) • Showing proof that there is no “similar national” product available on the market there is the possibility to have an import duty reduction granted by the Ministry of Industry and Commerce. These procedures are governed by CAMEX Resolution Nr. 35/06.

17. REPETRO • This is a special customs regime that allows a suspension of federal taxes like II- Import Tax, IPI, PIS/ PASEP, COFINS and AFRMM, for the temporary importation of certain equipments to be used in the exploration and production of oil and gas. • This customs regime is admissible for the equipments to be used in the exploration and production of oil and gas, as listed in the Normative Instruction RF 844/08, such as: - machines, equipment, instruments, tools and - exploration and production, storage and supply vessels as well as drill and production platforms, etc.

18. C- Selected State and Municipal Tax Breaks and Incentives • ICMS- Tax on the Circulation of Goods and Services The benefit consists in an exemption or at least a deferral of the ICMS Tax for internal sales/ purchases or the import of goods and materials for shipbuilding and –repair purposes. The benefits may be extensive to transactions relating to the construction of the shipyard itself. Selected State legislation for ICMS Tax benefits: in the State of Pernambuco- PRODINPE, Law Nr. 12.710/04; in Rio de Janeiro – Law Nr. 4.166/03; Decree Nr.º 33.975/03 and Joint Resolution SEFAZ/SEDEIS Nr. 020/07; the State of Rio Grande do Sul is negotiating ICMS tax reliefs on a case by case basis, according to the social and technological impact of the investment.

19. C- Selected State and Municipal Tax Breaks and Incentives • Industrial Districts: Many States offer industrial infrastructure organized in a certain Industrial District. The real estate costs are favorable for the investors. In Rio Grande do Sul, among others, there is the Industrial District of Rio Grande- DIRG, a suitable location for industries engaged in shipbuilding and –repair. • The local Municipalities may, among others, grant tax reliefs regarding the yearly Real Estate Tax- IPTU.

20. D- Local Market Boosters and Local Content Requirements • The Brazilian shipbuilding and offshore construction market has recently benefited from large new- building programs mainly established by Transpetro and Petrobrás. These programs require a large amount of local content in the building process. The main programs are: • PROMEF I and II- Local content requirements: PROMEF I- 26 SUEZMAX, AFRAMAX, PANAMAX and liquid bulker ships: 65% and PROMEF II- 23 SUEZMAX, AFRAMAX, PANAMAX, liquid bulkers and gas ships: 70%; • EBN I and II- Local content requirements: EBN I- 19 liquid bulkers and gas ships: 50%; EBN II- 20 liquid bulkers and gas ships: 60% future EBN programs over 65%; • PROREFAM- 2nd phase: 25 supply vessels- 4 AHTS, 1 OSRV and 20 PSV’s. Local content requirement: 80% for the PSV’s and 75% for the others. • Petrobrás is contracting 28 drill ships, also with large efforts to create local content. • All national or international private companies which participated in the oil field concession bids, promoted by the Brazilian Oil and Gas Agency- ANP, have contractual “local content” obligations, normally over 65%, for the purchase of equipment and services to be used in the E&P activities.