FACTBOX-Brazil faces delays in changing oil laws

July 6 (Reuters) - Brazil is struggling to overhaul laws governing how energy companies can tap into massive offshore oil reserves discovered two years ago.

The government of President Luiz Inacio Lula da Silva in 2007 halted auctions of offshore areas possibly linked to massive undersea discoveries that hold the promise of turning the South American nation into a major oil exporter.

Lula wants to give the state greater control over the reserves and invest the proceeds of oil sales in economic development.

The following is a description of the existing system of taxes and participation of private companies in Brazil's oil sector, and some proposed changes.

EXISTING SYSTEM

* Companies participate in competitive auctions to win the rights to explore for oil in blocks. If a company, including state-run Petrobras (PETR4.SA)(PBR.N), makes a discovery and begins oil production it must pay taxes and royalties to the government.

* Payments include a signing bonus at the start of the exploration period, a 10 percent royalty, a "special participation" tax of up to 40 percent that varies with fields' production, and a per-acre fee for use of the area in question.

* Royalties and "special participation" taxes are split up among municipalities and states near oil production areas. Another portion goes to the central government, with parts of it set aside for specific ministries.

PROPOSED CHANGES

* The government wants to change concessions to a production-sharing system in which the government owns a part of the oil produced. One idea is to use an auction to determine how much oil companies would give to the government. Those offering a higher percentage would have a better chance of winning.

* The government would create a development fund for oil revenues and invest them in health and education projects. Supporters say it would help prevent oil revenues from spurring inflation and making other industries less competitive by strengthening the exchange rate. They also say it would create a more equitable distribution of oil revenues than the current system in which a few states are the main beneficiaries.

* The new system would create a state agency to serve as an administrator of contracts for the sub-salt oil fields.

CRITICISMS

* Government adversaries say the proposal for a new law has stalled the development of the massive fields and risked reducing investor interest. Authorities withdrew the bidding for some fields just as prices were hitting their peak, meaning Brazil may have missed out on a chance to bring in massive investments and billions of dollars in signing bonuses.

* Critics say the government could quickly increase its tax revenue from oil by simply adjusting the tax and royalty rates in a much simpler process. But doing so would have a large impact on state-run Petrobras, which the government wants to avoid.

* Under a production-sharing system the government would be in charge of selling some of the oil, which critics say would open the door for corruption by officials charged with marketing and distributing the oil. (Editing by Stuart Grudgings and Jim Marshall)