Brief comments on Brazilian Mineral Royalty (CFEM)
I – What is CFEM?
Article 20 (IX) of Brazil’s 1988 Constitution expressly ratified public domain over mineral resources, based on the legal framework underpinning the use of these resources that has been in effect since the 1934 Constitution:
“Art. 20. The following are the property of the Federal Government:
IX – mineral resources, including those of the subsoil.”
Paragraph one of the same article also stated that the Member States, the Federal District and the Municipalities, as well as to the Federal Government’s Agencies, will either participate in the profits derived from the exploitation of mineral resources or be financially compensated for that:
“§ 1º. The States, the Federal District and the Municipalities, as well the Federal Government’s Agencies, shall participate in the profits derived from the exploitation of oil, natural gas, or water resources for the purpose of generating electricity and other mineral resources in their respective territory, continental shelf, territorial sea or exclusive economic zone, or be financially compensated for such exploitation.
In compliance with this constitutional provision, Law No. 7.990/1989 created the Financial Compensation for the Exploitation of Mineral Resources – CFEM (royalty payments), stating that the obligation to pay the tax is triggered by the exploitation of mineral resources for economic purposes. The taxable event takes place until the last stage of the beneficiation process and before industrial transformation:
“Art. 6 The financial compensation for the exploitation of mineral resources for economic exploitation shall be up to 3% (three percent) of the net revenue resulting from the sale of the mineral product, obtained after the last stage of the beneficiation process and before its industrial transformation..”
Law No. 8.001/1990 (which defines the tax basis and the apportionment rates for CFEM between Member States, the Federal District and Municipalities) and Decree No. 01/1991 (which regulates its collection) have also been enacted.
Although created under the guise of a “Financial Compensation”, the CFEM is structured as a participation in the financial result derived from the mining activity. This is a settled issue by legal scholars and the courts alike1, and therefore no argument can be made that it is but a compensation, a fee, or a tax.
This is therefore revenue which has its origins in the Federal Government, regulated under Administrative Law.
1 STF, RE 228.800-5 / DF, First Court, Justice Sepúlveda Pertence, DJ 16.11.2001, p. 21.
