Petrobras (PBR)

Notifications from the INSS - joint liability

PETROBRAS received various tax assessments related with social security charges as a result of irregular presentation of documentation required by the INSS, to eliminate its joint liability in contracting civil construction and other services, stipulated in paragraphs 5 and 6 of article 219 and paragraphs 2 and 3 of article 220 of Decree No. 3.048/99.

Since 2002, the Company, in a conservative manner, looked a provision for such contingency, which totaled R$ 712.272 thousand on September 30, 2006 and June 30, 2006.

Until September 30, 2006 PETROBRAS effected disbursements from the provisioned total, relating to the payment of notices in the amount of R$ 577.141 thousand (R$ 572.710 thousand as of June 30, 2006), and R$ 105.419 thousand in judicial deposits (R$ 109.850 thousand as of June 30, 2006).

Theoretically, from the total amount involved in assessments, that part relating to debts of contractors can be recovered by the Company, either by the retention of payments due on invoices, or by the adoption of administrative or judicial procedures.

Among the measures adopted, besides presentation of defenses, appeals and requests for reconsideration before INSS, notifications were issued to all the contractors. The requests for Administrative Revision presented before Conselho de Recursos da Previdência - CRPS, has resulted in the nullification of part of the assessments.

Internally, procedures were revised to improve the inspection of contracts and correctly demand the presentation of the documents stipulated in the legislation to substantiate the payment of the INSS payable by contractors.

Notifications from the INSS - joint liability

PETROBRAS received various tax assessments related with social security charges as a result of irregular presentation of documentation required by the INSS, to eliminate its joint liability in contracting civil construction and other services, stipulated in paragraphs 5 and 6 of article 219 and paragraphs 2 and 3 of article 220 of Decree No. 3.048/99.

68

Since 2002, the Company, in a conservative manner, looked a provision for such contingency, which totaled R$ 712.272 thousand on June 30, 2006 and March 31, 2006.

Until December 31, PETROBRAS effected disbursements from the provisioned total, relating to the payment of notices in the amount of R$ 572,710 thousand (R$ 572.670 thousand as of March 31, 2006), and R$ 109.850 thousand in judicial deposits.

Theoretically, from the total amount involved in assessments, that part relating to debts of contractors can be recovered by the Company, either by the retention of payments due on invoices, or by the adoption of administrative or judicial procedures.

Among the measures adopted, besides presentation of defenses, appeals and requests for reconsideration before INSS, notifications were issued to all the contractors. The requests for Administrative Revision presented before Conselho de Recursos da Previdência – CRPS, has resulted in the nullification of part of the assessments. We expect that the requests for revision will result in the reconsideration of several judicial decisions.

Internally, procedures were revised to improve the inspection of contracts and correctly demand the presentation of the documents stipulated in the legislation to substantiate the payment of the INSS payable by contractors.

Notifications from the INSS - joint liability

PETROBRAS received various tax assessments related with social security charges as a result of irregular presentation of documentation required by the INSS, to eliminate its joint liability in contracting civil construction and other services, stipulated in paragraphs 5 and 6 of article 219 and paragraphs 2 and 3 of article 220 of Decree No. 3.048/99.

Since 2002, the Company, in a conservative manner, constituted provision for such contingency, which totaled R$ 712.272 thousand on March 31, 2006 and December 31, 2005.

Until December 31, PETROBRAS effected disbursements from the provisioned total, relating to the payment of notices in the amount of R$ 572.670 thousand (R$ 567.326 thousand in December 2005), and R$ 107.915 thousand in judicial deposits.

Theoretically, from the total amount involved in assessments, that part relating to debts of contractors can be recovered by the Company, either by the retention of payments due on invoices, or by the adoption of administrative or judicial procedures.

Among the measures adopted, besides presentation of defenses, appeals and requests for reconsideration before INSS, notifications were issued to all the contractors. The requests for Administrative Revision presented before Conselho de Recursos da Previdência – CRPS, has resulted in the nullification of part of the assessments. We expect that the requests for revision will result in the reconsideration of several judicial decisions.

Internally, procedures were revised to improve the inspection of contracts and correctly demand the presentation of the documents stipulated in the legislation to substantiate the payment of the INSS payable by contractors.

Notifications from the INSS - joint liability

PETROBRAS received various tax assessments related with social security charges as a result of irregular presentation of documentation required by the INSS, to eliminate its joint liability in contracting civil construction and other services, stipulated in paragraphs 5 and 6 of article 219 and paragraphs 2 and 3 of article 220 of Decree No. 3.048/99.

64

Since 2002, the Company has been conservatively accruing a provision for this contingency which at June 30, 2005 totals R$ 643.258 thousand (R$ 612.779 thousands at March 31, 2005), because it considers as remote the chances of a favorable outcome on the defense filed in the administrative proceeding with said authorities.

Out of the total provisioned, PETROBRAS spent up to June 30, 2005, the amount of R$ 489.085 thousand (R$ 359.933 thousand up to March 31, 2005), in connection with the administrative proceedings filed by INSS which attributed joint liability to the Company.

Internal procedures adopted were reviewed to improve monitoring of contracts and request proper presentation of documents required in legislation to prove payment of INSS due by contractors.

In relation to the internal procedure adopted, PETROBRAS is analyzing each of the assessment notices received to try to recover the amounts from the service providers.

65

(c) Notifications from the INSS - joint liability

PETROBRAS received various tax assessments related with social security charges as a result of irregular presentation of documentation required by the INSS, to eliminate its joint liability in contracting civil construction and other services, stipulated in paragraphs 5 and 6 of article 219 and paragraphs 2 and 3 of article 220 of Decree No. 3.048/99.

On a conservative basis, the Company made a provision for this contingency amounting to R$ 398.200 at December 31, 2002, since it considers the chances of success in its defense filed against the administrative proceedings with the entity to be remote.

On September 29, 2003, PETROBRAS was issued additional INSS tax assessments also relating to its joint liability for the irregular presentation of its contractors’ documentation, referring to dates subsequent to the past notifications. Pursuant to the previous procedure, in 2003 PETROBRAS established a provision for contingencies of R$ 160.277, which reached R$ 558.477 at December 31, 2003.

On September 28, 2004, the Company set up a new provision for contingencies related to the joint liability in the total amount of R$ 96.364, referring to a period after that to which the assessments referred, reaching the balance of R$ 654.841 at December 31, 2004. Of the total amount provided, PETROBRAS had disbursed R$ 401.995 by December 31, 2004 (R$ 316.579 in 2003), referring to administrative suits filed by the INSS claiming the Company’s joint liability.

Internally, procedures were revised to improve the inspection of contracts and correctly demand the presentation of the documents stipulated in the legislation to substantiate the payment of the INSS payable by contractors.

Despite the internal procedure mentioned above, PETROBRAS is analyzing each of the assessments received in order to recover the amounts from its contractors.