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Vale Faces Prolonged Tax Battle After Court Ruling

The $15.5 billion tax dispute that has been weighing on Vale SA (VALE5), the world’s largest iron-ore producer, will be prolonged after Brazil’s Supreme Court decided to reassess the case.

Vale’s decade-long challenge of a government claim that it owes taxes for profits generated by foreign subsidiaries must be analyzed separately from a broader case filed by a trade association. In a modest victory for Vale, the court ruled yesterday that taxes on foreign profit can’t be applied before 2002, reducing Vale’s potential claims by as much as 1.47 billion reais out of a total 30.5 billion reais ($15.5 billion).

Vale shares had the biggest two-day loss in almost a month in Sao Paulo as the court failed to bring the dispute to an end. Goldman Sachs Group Inc. and Bank of America Corp. said in research notes before the ruling that they expected a final decision favorable to Vale.

“The market had bought a definition and got frustrated,” Rafael Weber, who helps manage about 5.4 billion reais at Geracao Futuro Corretora, said in a telephone interview from Porto Alegre, Brazil. “Nothing is resolved.”

The stock dropped 1.5 percent to 32.40 reais at the close today, extending its two-day decline to 4.9 percent, the most since March 13.

Tax Havens

The Supreme Court in Brasilia ruled that Brazilian companies must pay taxes on profits of their foreign units if they are based in tax havens, while the applicability of payments in other jurisdictions will be discussed on a case- base-case scenario. The decision affects exporters such as Vale, Gerdau SA and Cia de Bebidas das Americas, which are fighting tax claims.

While still low, the ruling means there is now a higher chance that Vale may have to pay the claims in full, Bank of America analysts led by Felipe Hirai said yesterday.

“Despite the high expectations of a positive ruling, the probability of Vale losing the final case and having to pay the liability in full increased,” the Sao Paulo-based analysts wrote in a note to clients.

Vale, which has a holding based in Austria, doesn’t have operations in countries with tax havens and the claims the company received for the 1996-2001 period will be removed after the ruling, Clovis Torres, the firm’s top lawyer, said in a conference call yesterday. The court still has to judge the case of units in countries where Brazil has tax agreements, he said, declining to estimate how long a final decision may take.

“There’s no established timeframe, they can take all the time they want,” he said. “The fact that the retroactivity wasn’t considered was a big victory for us.”

Overdue Taxes

The Supreme Court also upheld an appeal from Vale to allow the company not to pay collateral until their case is brought to trial in the court.

Brazil is demanding Vale pay 30.5 billion reais in foreign units tax for 1996 to 2008, the company said April 2 in a filing with the U.S. Securities and Exchange Commission. The claims for the 1996-2002 period includes overdue taxes for 461 million reais and an additional 1 billion reais in interests and penalties, it said. Vale expects the country to file additional claims for the years after 2008, it said then.

To contact the reporters on this story: Juan Pablo Spinetto in Rio de Janeiro at jspinetto@bloomberg.net; Mario Sergio Lima in Brasilia Newsroom at mlima11@bloomberg.net

To contact the editor responsible for this story: James Attwood at jattwood3@bloomberg.net

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