Vale Charged $5.6 Billion in Back Taxes, Mounts Appeal

Vale (VALE5) SA, the world’s biggest iron- ore producer, said Brazil delivered “unfavorable rulings” on 9.8 billion reais ($5.6 billion) in unpaid taxes.

The decision was delivered at an “administrative level,” Vale, based in Rio de Janeiro, said in an e-mailed statement late yesterday, without elaborating on the reasons or level of the legal decision. The company said it will lodge an appeal.

Vale, also Brazil’s biggest exporter, has been fighting tax claims from the government amid growth in its exports and rising minerals prices. It estimated in April the total amount of tax liabilities could be as much as 34.6 billion reais.

“With its current cash generation, it wouldn’t be such a problem for Vale” to pay at least part of the disputed amount, said Leonardo Brito, an equity analyst at hedge fund Teorica Investimentos in Rio. “It will still take time before a final ruling as the company will appeal,” he said by telephone today.

Vale dropped 0.8 percent to 41.23 reais in Sao Paulo today, the most in almost two weeks. Rio Tinto Group (RIO), the world’s second-largest iron-ore exporter after Vale, gained 4.9 percent in London.

The government is seeking tax payments on profits at foreign operations from 1994 to 2008 and additional unpaid royalties from operations in Brazil, according to an April 28 filing with the U.S. Securities and Exchange Commission.

Vale is challenging since 2003 the application of the regulation that requires the payment of tax in Brazil over net income generated by foreign subsidiaries on the grounds that it disregards double taxation treaties, according to the filing.

Overdue Royalties

Brazil’s National Mineral Production Department, or DNPM, in August started talks with Vale over about 4 billion reais of overdue royalties. The negotiations, originally due to end in October, were extended twice and are due to conclude next month.

Vale’s tax disputes may bring “additional uncertainties” for investors and weigh on its share price performance in the near term, Barclays Plc analysts led by Leonardo Correa in Sao Paulo said in a note to clients today. The stock has dropped about 21 percent in the past 12 months, almost tripling the 8 percent decline of the Brazilian Benchmark Bovespa Index. (IBOV)

Vale is defending the tax claims at a time the government is tightening control over natural resources. Brazil put Petroleo Brasileiro SA (PETR4), the state controlled oil producer, in charge of the country’s largest oil reservoirs in 2010 and is preparing a bill to increase mining taxes.

Vale’s press office declined to provide additional details when contacted by e-mail.

To contact the reporters on this story: Juan Pablo Spinetto in Rio de Janeiro at jspinetto@bloomberg.net; Peter Millard in Rio de Janeiro at pmillard1@bloomberg.net

To contact the editor responsible for this story: Dale Crofts at dcrofts@bloomberg.net

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