Petrobras (PBR)

(c) Tax assessments - internal revenue service of Rio de Janeiro

The Internal Revenue Service of Rio de Janeiro filed two Tax Assessments against the Company in connection with Withholding Tax (IRRF) on foreign remittances of payments related to charter of vessels of movable platform types for the years 1998 through 2002.

The Internal Revenue Service, based on Law No. 9,537/97, Article 2, considers that drilling and production platforms cannot be classified as sea-going vessels and therefore should not be chartered but leased. Based on this interpretation, overseas remittances for servicing chartering agreements would be subject to withholding tax at the rate of 15% or 25%.

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21. Commitments and contingencies (Continued)

(c) Tax assessments - internal revenue service of Rio de Janeiro (Continued)

The Company disagrees with the Internal Revenue Service’s interpretation as to charter contracts, given that the Federal Supreme Court has already ruled that, in the context of its judgment with respect to the IPI (Federal VAT) tax, offshore platforms are to be classified as sea-going vessels. Additionally, the 1994 and 1999 Income Tax Regulations support the “non-taxation” (RIR/1994) and the “zero tax rate” (RIR/1999) for the remittances in question.

On June 27, 2003, the Internal Revenue Service served a tax assessment notice on the Company amounting to R$ 3,064 million (US$ 1,066) covering the period from 1999 to 2002. Using the same arguments, on February 17, 2003, another tax assessment notice had already been issued for R$ 93 million (US$ 32) with respect to 1998, against which, on March 20, 2003, the Company filed an appeal. According to the fiscal authorities, the Company should have withheld that tax, incident on remittances made to abroad for payment of the hiring of vessels of the mobile platform type, used in oil exploration and production.

PETROBRAS has defended itself against these tax assessments: i) the smaller in value has been confirmed by the first administrative level, and the corresponding appeal has been already filed by the Company, and waits judgment; ii) no first level decision has been issued so far with regard to the other one, with greater value. Based on its legal counsels advice, the Company’s Administration does not expect to obtain an unfavorable decision in this case, and thus has assessed risk of loss to be possible.

(d) Tax assessments - internal revenue service of Rio de Janeiro

The Internal Revenue Service of Rio de Janeiro filed two Tax Assessments against Petróleo Brasileiro S.A. – PETROBRAS in connection with Withholding Tax (IRRF) on foreign remittances of payments related to charter of vessels of movable platform types for the years 1998 and 1999 through 2002. The Internal Revenue Service, based on Law No. 9.537/97, article 2, considers that the drilling and production platforms do not fall within the concept of vessel and therefore they should not be chartered, but hired instead. Based on this understanding, the foreign remittances for such purposes would be subject to withholding income tax (IRRF) at 15% or 25%.

PETROBRAS disagrees with this interpretation, as the Federal Supreme Court itself has already reached a decision relating to the Federal Value-Added Tax (IPI), affirming that platforms are actually vessels. Also, the 1994 and 1999 Income Tax Regulations support the “non-taxation” (RIR/1994) and the “zero tax rate” (RIR/1999) for such remittances.

As a result of challenging the procedure adopted by PETROBRAS, the Internal Revenue Service issued on June 27, 2003 a tax assessment in the amount of R$ 3.063.797 for the period from 1999 through 2002. Based on the same arguments, on February 17, 2003 another tax assessment was filed in the amount of R$ 93.024 for year 1998, against which PETROBRAS has already filed a rebuttal on March 20, 2003.

PETROBRAS refuted these tax assessments and a rebuttal to the assessment for the lesser amount was confirmed in the lower administrative court, the related appeal having been filed, and now pending a decision. The assessment for the higher amount has not yet been determined. Based on the opinion of its legal advisers, the Company’s management does not expect an unfavorable decision in these cases. Expectation of loss: Possible.