From the conference call today, I realized you had not been copied on my memo 
relating to Brazil taxes.

Hope this helps you understand the current tax situation.

Regards

Lynn
---------------------- Forwarded by Lynn Aven/ENRON_DEVELOPMENT on 06/02/2000 
02:40 PM ---------------------------


Lynn Aven
06/01/2000 07:19 PM
To: Remi Collonges/SA/Enron@Enron, Ricardo Lisboa/SA/Enron@Enron, Joe 
Kishkill/SA/Enron@Enron, Rick Hopkinson
cc: Kent Castleman, David M Rosenberg/SA/Enron@Enron, Don 
Black/SA/Enron@Enron, Brett R Wiggs/SA/Enron@Enron 

Subject: PIS/Cofins taxes on Brazil Trading Operations

Under current Brazilian tax law, the general rule is that  PIS/Cofins taxes 
are due on the gross revenue that a a company receives.  In regards to 
certain activities, including the trading activity that Enron wants to engage 
in, there is a position that is supported by various law firms and by Arthur 
Andersen that the PIS/Cofins tax is payable only on the trading margin.  We 
have received a written opinion from the LaCaz Martin law firm supporting 
this position and Arthur Andersen has advised that they have a number of 
clients that are taking this position in filing their PIS/Cofins tax returns.

Discussions with LaCaz Martins have indicated that the position they advocate 
is not one that the Brazilian tax authorities will currently follow nor one 
that is without risk.    Arthur Andersen has confirmed that their clients who 
take this position are required to  book a reserve for financial accounting 
purposes pending the resolution of the issue.  Consequently, the earnings 
impact of the PIS/Cofins tax will be the same for financial reporting 
purposes whether or not the cash taxes are paid.  (LaCaz acknowledges that 
the reserve must be booked)

There seems to be a great deal of optimism in Brazil that the PIS/Cofins will 
be clarified as part of the pending tax reform.  The current proposals that 
are being considered clearly state that the PIS/Cofins tax will be a 
noncumulative tax similar to the ICMS (VAT) tax that exists.    Tax reform 
appears to be a priority right now and hopefully there will be a resolution 
of this issue so that we can move forward knowing that Enron's trading 
margins will not be negatively impacted by the imposition of the PIS/Cofins 
tax on the total revenue.

Unfortunately, the proposed legislation is anticipated to become effective in 
2003, based upon an ageement between the President of Brazil and the 
legislature that serves to keep the tax revenues high in the short term in 
return for implementing a tax regime in later years that will support 
business development.  This leaves Enron with the issue of how to treat 
trading transaction that are consummated before 2003.

If the Enron trading company pays the PIS Cofins tax on its net margin rather 
than on it gross revenue under the current law that is anticipated to be in 
place until 2003, there is a strong likelihood that the revenue authorities 
will asses additional tax.  Resolution of that tax dispute can be decided at 
the Supreme Court level.  Our advisors have indicated that the resolution of 
the dispute at the Supreme Court does involve some  political issues and  
that the taxpayer is more likely to get a favorable decision if the dispute 
is resolved after the law has been changed.  In other words, although the 
taxpayers have a strong argument to pay the tax on the net margin under the 
current law, the Supreme Court would likely not rule in their favor because 
of the current political climate but would likely rule differently once the 
law had been clarified and the intent clearly stated.

I am hopeful that we will get a resolution of the application of the 
PIS/Cofins tax before the end of 2000.    We can then know for certain that 
only the trading margins will be subject to the PIS/Cofins taxes.  However, 
even if we get a favorable resolution, we still need to assess the risk for 
the years prior to the effective date of the legislation.    Not only is 
their the possibility that the tax will be assessed for years prior to the 
effective date of the new legislation, there is the possibility that 
penalties and interest will be imposed.   I am working with Arthur Andersen 
in quantifying the exposure to interest and penalties and determining various 
legal processes to minimize those costs should the trading company get an 
assessment.   

Getting tax relief under our broad tax reform legislation will be the easiest 
way to achieve the goal of limiting the impact of the PIS/Cofins tax.  
However, if tax reform does not succeed, Enron may need to partner with 
financial institutions that are attempting to do similar trading 
transaction.  Financial institutions and their lobbyists in Brazil have a 
much better track record in getting industry specific tax relief.

I will continue to monitor tax reform.  Our advisors have indicated that the 
tax reform movement is so strong that Enron would likely have little impact 
on the process if it were directly involved in monitoring change.     The 
issue to get directly involved in tax reform needs to be made by ESA 
management.  I will be glad to help develop the issues so that the 
appropriate persons can present the case for tax reform if deemed necessary.

Regards

Lynn
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