11 de abril de 2013 / 18:09 / en 4 años

Vale gets little relief for $15.5 bln tax debt from court ruling

* Ruling only impacts Vale for 1996-2001 taxes

* Bulk of foreign unit tax case remains unresolved

* Decision may raise risk for Brazil multinationals

By Jeb Blount

RIO DE JANEIRO, April 11 (Reuters) - A Brazilian Supreme Court ruling on Wednesday will trim global miner Vale SA’s 30.5 billion real ($15.5 billion) disputed tax liability by about 5 percent while leaving the bulk of the debt up to future decisions by Brazil courts, company documents show.

The court’s complex and incomplete decision on the constitutionality of Brazilian tax rules for foreign subsidiaries only resolved related Brazilian tax assessments on Vale for the 1996-to-2001 period.

That period makes up most of a 1.5 billion real tax bill, plus interest and penalties, that Vale received in 2007 for the profits at foreign units in 1996-2002, according to Vale filings with securities regulators.

The rules being challenged came in effect in 2001 and cannot be applied retroactively, the court said. Vale general counsel Clovis Torres called the decision a “great victory” late Wednesday. He said it would make a significant dent in the company’s tax liability.

The other 29 billion real of Vale liabilities under the 2001 regulations remain unresolved by the courts after more than a decade of litigation. And while Vale has the biggest tax debt under the 2001 rules, other companies also face assessments.

Vale preferred shares, the company’s most traded class of stock fell 1.6 percent to 32.40 reais in Sao Paulo on Thursday, on track for its lowest close in more than a week. On Wednesday, they fell 3.5 percent. Vale is down 21 percent this year.

Leaving the case unresolved, the court raised the regulatory and political risk not just for Vale but also for other rapidly globalizing Brazilian multinationals such as meat packer JBS SA , aircraft maker Embraer SA and construction giant Odebrecht SA.

“The best thing we can say for Vale about the ruling is that it is inconclusive,” mining company analysts Filipe Hirai and Karel Luketic BoA Merrill Lynch in Sao Paulo wrote in a note to investors late Wednesday. “The ruling was a negative surprise, but not conclusive for Vale.”

Vale’s press office said on Thursday it is still trying to determine what part of the 1996-2002 assessment applies to the period before the rules were made in 2001.

TAX TIMING LOSS

Vale also lost a key point.

The Supreme Court challenge stems from a 2001 decision by Brazil’s tax authorities to change the way taxable income from foreign units is determined. At the time, the expansion of Brazilian companies abroad led to concerns that they would use foreign subsidiaries to evade Brazilian taxes needed to fund the country’s schools, health care, roads and other infrastructure.

The new tax provision, Article 74 of Presidential Decree 2,158, requires parent companies to book foreign subsidiary earnings as soon as they are made, even if the earnings aren’t immediately returned to the parent in the form of dividends.

The practice was supported by the government but attacked by Vale and the CNI, Brazil’s main industrial lobby group as double taxation. It’s also a rule that could lead to multinationals paying taxes on foreign operations that actually make losses, not profits, CNI lawyers said.

“Vale lost one thesis, the timing of taxation, but still maintains the strong thesis of not being double taxed,” Hirai and Luketic wrote. “The problem is that there is no time-frame for this to be concluded.”

Vale is hoping that tax treaties between Brazil and other nations limiting the ability of each party to tax the same profits will prevail over Article 74.

Much of the Supreme Court deliberation was based on how to apply the 2001 rules to two types of subsidiaries. Generally accepted accounting rules treat foreign subsidiaries in which a Brazilian company has clear voting control differently than those where Brazilians own only a minority, but influential, stake.

Taxation on the affiliated companies is harder to determine because the Brazilian company, while it does not control the subsidiary, has influence on how investments are made and profits are paid out as dividends, the government argues.

SPLIT DECISION

Six of the court’s 11 justices said Brazil’s 2001 rules for taxing foreign affiliated companies are unconstitutional, as long as the foreign unit was based outside a tax haven.

Hirai and Luketic said this point could increase Vale’s tax savings to as much as $1 billion, or about 6.5 percent, of outstanding liabilities.

An issue left undecided was whether Brazil’s tax rules for controlled subsidiaries not based in tax havens or affiliated companies in tax havens are constitutional.

The court also declined to rule on whether Brazil’s tax rules violate double taxation treaties designed to prevent two countries from taxing the same profit. They returned that issue to lower courts to reconsider in the light of their other rulings.

“If the Supreme Court had any message it was that tax havens are no good,” wrote Edmo Chagas, mining company analyst with BTG Pactual Group in Rio de Janeiro. “This, however, left the main issue in the constitutional case unresolved: are profits from subsidiaries in non-tax havens.”

Brazil’s Central Bank maintains a list of countries and overseas jurisdictions it considers tax havens, or places where accounting and other rules allow companies to evade taxation. Vale said it has no units in tax havens.

The country’s main business lobby CNI, which led the constitutional challenge, called the ruling a “partial victory.”

$1 = 1.9860 Brazilian reais Reporting by Jeb Blount; editing by Gunna Dickson

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