Vale SA (VALE5) investors stand to benefit as a decade-long court battle over $15 billion in back taxes that’s been weighing on the miner’s stock nears an end.
The Supreme Court is set to rule by June on a similar case brought by Coamo Agroindustrial Cooperativa, a farming group from the southern state of Parana that’s suing tax authorities to avoid levies on profits from foreign units. A ruling in favor of the group would be in line with the legislation of most other countries, according to Peixoto & Cury Advogados, a legal firm that specializes in corporate law, including tax issues.
The case is being watched as a benchmark for Brazil’s biggest exporters -- from Vale to beermaker Cia. de Bebidas das Americas to steelmaker Gerdau SA (GGBR4) -- who are fighting a combined $44 billion in tax claims. A win would be a boon for Vale because investors have already priced in much of the tax losses, said Empiricus Research’s Roberto Altenhofen.
“The market is overreacting a bit about the chances of Vale having to pay all the taxes that are being claimed,” the analyst at the Sao Paulo-based consulting firm said in a phone interview. “It’s almost impossible to predict the outcome of this trial, but what we can say is that Vale seems to be willing to negotiate with tax authorities so a deal can be reached. Vale may end up paying something, but not the full amount.”
Vale trades at a 29 percent discount to Rio Tinto Group, the world’s second-biggest mining company, and a 12 percent discount to industry leader BHP Billiton Ltd. (BHP), based on trailing 12-month price-to-earnings ratios. A resolution to the tax case will help the Rio de Janeiro-based miner narrow the discount to its global peers, according to Deutsche Bank AG.
“Finding a proper solution for it could unlock significant value for Vale’s shareholders,” Deutsche Bank analysts led by Rodrigo Barros said in a Jan. 30 note to clients. The bank’s $24 price target on the U.S.-traded shares assume a $10 billion “penalty associated with this dispute.”
Joaquim Barbosa, head of the country’s top court, said on Feb. 28 that he intends to rule on the issue by June. The farm group’s case and a similar suit brought by the National Industry Confederation, known as CNI, challenge a law allowing tax authorities to charge income tax on foreign-earned profit even if it’s not sent back to Brazil.
“The very moment where these companies declare that profit, they’re subject to taxation -- prior to the 2001 law they could defer that payment,” Claudia Aparecida de Souza Trinidade, coordinator at the Finance Ministry’s prosecution department, said March 11 in a telephone interview. “In 2001 there was a big capital exodus and the country could not forfeit tax income. Perhaps today or tomorrow that will change.”
The case pits President Dilma Rousseff’s ambitions to help domestic companies expand abroad against the need to bolster public coffers through increased tax revenue, says Marcos Joaquim Goncalves Alves, an attorney with Mattos Filho, Veiga Filho, Marrey Jr & Quiroga Advogados law firm in Brasilia. He expects the court to vote 6-to-4 in favor of exporters.
As the world’s largest iron-ore exporter, Vale gets most of its revenue from abroad. Only about 20 percent of its sales came from Brazil last year, data compiled by Bloomberg show.
As of Dec. 31, Vale faced $21 billion in claims where the likelihood of a loss was “reasonably possible but not probable,” including $15.2 billion related to the non-Brazilian subsidiaries tax dispute, it said last month. The company said it had untaxed and undistributed profits from foreign units and affiliates of $26.8 billion.
“I don’t think there’ll be a ruling against Vale in this case,” Pedro Galdi, chief strategist at Sao Paulo-based brokerage SLW Corretora, said in a phone interview. “If Vale does have to pay all those taxes in the dispute, it’d be catastrophic.”
Vale expects the issue to be settled in 2013, Chief Executive Officer Murilo Ferreira said on a call with investors Feb. 28.
“The tax disputes are being gradually solved and we expect that the conclusion will take place during this year,” he said. Vale in 2012 agreed to provision 1.4 billion reais to settle a royalties battle with Brazil, and in December said it would pay about $560 million to settle disputes with Switzerland and the Brazilian state of Minas Gerais.
Vale’s press office in Rio didn’t reply an e-mail and a phone call seeking comment. Gerdau’s press office said the company doesn’t comment on existing procedures. Coamo declined to comment. A press official for Ambev in Sao Paulo didn’t reply an e-mail seeking comments.
While Vale is poised to gain with a favorable court decision, the shares are still at risk of suffering from higher taxes as Brazil reviews its mining rules, said Rafael Weber, who helps manage about 5.4 billion reais including Vale shares at Geracao Futuro (GFUTSEL) Corretora.
‘Rules of the Game’
“Shares will rise with a positive decision, but what will give the company a better re-pricing is a clear definition of the rules of the game,” he said by telephone from Porto Alegre, Brazil. “Higher taxes will impact the company for the rest of its life. It’s not a one-off like the court’s decision.”
Vale shares have fallen 16 percent in Sao Paulo since March 6, 2012, when the company said it will challenge 30.7 billion reais in unpaid tax claims by Brazil, compared with a 2.8 percent gain for Melbourne-based BHP and a 1.3 percent drop for Rio Tinto. Vale declined 0.1 percent to close at 33.59 reais in Sao Paulo today.
“A favorable outcome would send the right message not only for Vale but for all exporters in Brazil,” Laurence Balter, chief market strategist at Oracle Investment Research in Fox Island, Washington, said in an e-mailed response to questions. “Confidence needs to be restored for Brazil to blossom.”
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