Sara/Brent:

I did not include you on the initial distribution but thought you might be 
interested in this since it will have an impact on whether our trading 
business in Brazil can be profitable.

Regards

Lynn
---------------------- Forwarded by Lynn Aven/NA/Enron on 06/23/2000 11:08 AM 
---------------------------


Lynn Aven
06/23/2000 09:28 AM
To: Remi Collonges/SA/Enron@Enron, David M Rosenberg/SA/Enron@Enron, Ricardo 
Lisboa, Don Black/SA/Enron@Enron, Brett R Wiggs/SA/Enron@Enron
cc: Joe Kishkill/SA/Enron@Enron, Kent Castleman, Sami Arap/SA/Enron@Enron, 
Andrea Bertone/SA/Enron@Enron, Rick Hopkinson 

Subject: Status of PIS/Cofins Laws as it effects Enron's trading operations

As you are aware, the application of the PIS/Cofins tax has a significant 
impact on the ability to profitably conduct  a trading and marketing business 
in Brazil.  This message summarizes the impact of recent activity relating to 
the current application of the PIS/Cofins tax and addresses the prospects for 
tax reform that will hopefully settle this issue.

Over a year ago, Medida Provisoria 1998 - 1 was issued that contained 
language that has been interpreted by taxpayers to exclude from their tax 
base amounts which had been paid to subcontractors, thus making the tax 
noncumulative.  The interpretation of Medida Provisoria 1998 - 1 as it 
related to  PIS/Cofins  taxes is not clear and many Brazilian taxpayers, 
including Enron entities, had filed for injunctions from the collection of 
PIS/Cofins on gross revenue, awaiting clearer guidance.

The recent release of Medida Provisoria 1998 - 18 simply deleted the language 
that taxpayers had been using the challenge the payment of the PIS/Cofins on 
gross revenue.  Taxpayers no longer have  constitutional challenge to the tax.

After talking with local counsel, I have a better understanding of the impact 
of this latest medida provisoria.  A medida provisoria is a provisional 
measure issued under the executive power of the president.  Under the 
Brazilian constitution, it has the effect of law but is effective for only 30 
days if not approved by the congress.   This particular medida provisoria has 
been reissued every 30 days in order to keep the measure effective.  The 
issuance of the latest medida provisoria is an attempt to end the discussion 
regarding the PIS/Cofins issue.  One view is that this approach will 
hopefully increase the pressure to resolve this issue.

There have been recent press releases indicating that tax reform in Brazil 
will not happen in 2000.   My sources indicate that this may not be the 
case.  There are discussions taking place that will move a small tax reform 
bill  forward in three areas  in which there seems to be consensus between 
the Treasury Department and the Executive Branch (President).  This tax 
reform is expected to move forward in August, 2000.    These items are as 
follows:

1.  End of Cumulative PIS/Cofins
2.  Unification of ICMS legislation 
3.  reducing tax burden on exports

How does all of this impact the development of a trading and marketing 
business in Brazil?

1.  We no longer have the option to pay PIS/Cofins on a net basis on current 
transactions based upon a favorable interpretation of Medida Provisoria 1998 
- 1.Since we would have had to book a reserve for the tax that we were not 
paying, this impacts the cash flow and not the earnings that could be booked 
from a transaction.
2.  We cannot use as a base case in forecasting our earnings from trading 
activity that we will pay PIS/Cofins tax only on the net margin.
3.  The PIS/Cofins issue is being discussed at the highest levels of 
government by some of the most politically influential people.  The key issue 
seems to be the timing of any change.  The recent breakdown in the 
discussions stemmed from the issue of whether the change would be delayed for 
2-3 years or phased in versus an immediate change in the application of the 
tax.  Any assumptions that Enron makes regarding the application of this tax 
must include a risk assessment that the changes, if enacted, may never become 
effective or may be delayed due to revenue constraints that cause the 
government to continue the historical application of the tax to gross revenue.

I have been told that Enron probably cannot add significant influence in the 
effort directed towards tax reform since the issue is being discussed at the 
highest levels of government by influential people.  However, I think Enron 
needs to focus on getting relief through specific exemptions, much like 
financial institutions have been able to get.   There is at least one bank 
that has been given approval to act as  power marketer that could be helpful 
in opening doors for this discussion.   Obtaining specific exemptions from 
the PIS/Cofins tax for the power and gas marketing businesses would allow us 
to develop the business and not have to worry about being caught in the midst 
of turmoil surrounding tax reform.

I will keep you posted on tax reform progress as it progresses  and will be 
glad to  assist in the development or arguments to support specific 
regulatory relief for Enron's trading businesses.

Regards

Lynn