Vale Tax Appeal Suspended as Justice Requests Revision

Vale SA, the world’s biggest iron-ore miner, had its appeal of a 30.5 billion-real ($13.3 billion) government tax claim suspended by Brazil’s Superior Court as the deadline approaches for an out-of-court settlement.

Justice Ari Pargendler, one of five presiding judges, asked to revise the case in a session today in Brasilia. The request followed Justice Napoleao Maia’s proposed approval, Justice Sergio Kukina’s rejection and Justice Benedito Goncalves abstinence. Vale shares fell the most since July.

The case, in which the Rio de Janeiro-based miner is arguing that earnings from foreign operations can’t be taxed in Brazil if they were paid abroad, probably will resume next week, Roberto Duque Estrada, a lawyer for the company, said from the tribunal. That would be after a Nov. 29 deadline for companies to accept a government proposal to scrap fines, interest and legal charges if they agree to pay in one tranche or reduce taxes and interest if they settle in installments.

“The market already priced in this dispute and just wants it to be over,” Leonardo Brito, an analyst at hedge fund Teorica Investimentos, said by telephone from Rio before today’s suspension. “This and the new set of mining rules that Brazil is establishing are pending like swords over the company’s head.”

Brazil’s biggest exporters including Vale and brewer Cia. de Bebidas das Americas are fighting a total of 75 billion reais in tax claims on profit of foreign subsidiaries, the country’s tax agency said Oct. 10.

Settlement Offer

In Vale’s case, the dispute amounts to 30.5 billion reais for the 1996-2008 period including fines and interest, according to an April 2 company filing. Tax authorities may also file claims for the period starting 2009, Vale said.

Vale, which has been battling the tax claims for more than a decade, was waiting for the court ruling before deciding on the government settlement offer, a person with knowledge of the case told Bloomberg News last month. Chief Executive Officer Murilo Ferreira told reporters Nov. 7 that Vale has enough time to make a decision on a possible settlement before the deadline.

A revised mining code for exploration in Brazil has been sent to Congress for approval.

The tax dispute has been weighing on Vale’s shares, which have underperformed its main rivals this year. The stock slumped 3.4 percent to to 30.87 reais in Sao Paulo, extending this year’s decline to 25 percent. BHP Billiton Ltd., the world’s largest mining company, advanced 1.9 percent this year and Rio Tinto Group, the second-biggest, fell 11 percent in the period.

Partial Victory

Brazil’s Supreme Court decided in April to reassess the subsidiaries tax case, prolonging the dispute. At the time Vale obtained a partial victory when the court ruled taxes on foreign profit can’t be applied before 2002, reducing the company’s potential claims by as much as 1.47 billion reais.

While the dispute may give Vale liabilities of as much as $10 billion, the companies are seeking additional benefits from the government, HSBC Holdings Plc said in a Nov. 11 client note.

“The companies are still negotiating for a better deal, which could result in lower impacts,” HSBC analysts Leonardo Correa and Luiz Fornari wrote. “There are still many doubts about how income taxes on foreign subs will be treated going forward, but our sense is that most investors already assume a higher effective tax rate in the long run.”

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