USA: Vale To Pay $9.6 Billion To Settle Decade-Long Tax Fight
29 November 2013
Posted by: Author: Juan Pablo Spinetto
Author: Juan Pablo Spinetto (Bloomberg)
Vale SA, the world’s biggest iron-ore producer, agreed to pay 22.3 billion reais ($9.6 billion) to
settle a decade-long tax dispute with Brazil over profits of its
foreign units, ahead of a deadline tomorrow.
Vale will pay 5.97 billion reais at the end of this month
and 16.4 billion reais in 179 monthly installments, plus
interest, after its board decided to join a settlement program
offered by the government, the Rio de Janeiro-based company said
in a filing late yesterday. Shares jumped.
Brazil’s biggest exporters including Vale, brewer Cia. de
Bebidas das Americas and steelmaker Gerdau SA (GGBR4) have been fighting
a combined 75 billion reais in tax claims on profit of their
foreign subsidiaries, according to the country’s tax agency. The
net present value of Vale’s liabilities is $6.6 billion, below
the $10 billion that was being anticipated by investors,
according to JPMorgan Chase & Co. estimates.
"We view this announcement as positive for Vale,”
JPMorgan analysts including Rodolfo Angele wrote in a note to
clients. "We now can turn the page on the uncertainties
surrounding this legal imbroglio to focus on industry and
Exporters were offered a chance to settle out of court in
September when Congress passed legislation that scraps fines,
interest and legal charges if companies opt to pay their claims
in one tranche, or reduces taxes and interest if they pay the
debt in installments. The deadline to join the settlement
program, known as Refis in Portuguese, is tomorrow. Share Price
Vale was taking too much risk by continuing the legal fight
without certainty of victory and the settlement may help its
share price to recover, said Rafael Weber, who helps manage
about 5.5 billion reais in stocks at Geracao Futuro Corretora.
"While nobody wants to pay, Vale managed to reduce the
claim significantly and extend the period of time for payments,
giving investors predictability on the case,” he said by
telephone from Porto Alegre, Brazil. "This was an issue that
was bothering the company’s valuation.”
The tax dispute has weighed on Vale’s shares, which have
underperformed its main rivals this year. The stock is down 23
percent through yesterday while BHP Billiton Ltd. (BHP), the world’s
largest mining company, advanced 0.5 percent and Rio Tinto
Group, the second-biggest, fell 2 percent in Sydney over the
Vale’s shares added 2.7 percent to 32.30 reais at the close
in Sao Paulo today, the steepest gain on a closing basis since
Oct. 14. Appeal Suspension
The company estimated its total tax liability from the case
at 45 billion reais for the 2003-2012 period, including
penalties, interests and fees.
In the event that other companies win favorable court
rulings on their tax liabilities, Vale could still benefit from
those decisions, irrespective of its settlement with the
government, Chief Executive Officer Murilo Ferreira said on a
conference call yesterday after the announcement.
"In case we have a decision of the Supreme Court regarding
the merits of the litigation, for sure this decision should be
applicable to all the taxpayers including Vale,” he said.
AmBev, as the Brazilian unit of brewer Anheuser-Busch InBev
NV (ABI) is known, declined to comment in an e-mailed statement today
on whether it would follow Vale into the settlement program.
Gerdau CEO Andre Gerdau Johannpeter told reporters in Rio
yesterday that the company still hadn’t decided on the option,
echoing comments made last month. Negative Outlook
Petroleo Brasileiro SA, which according to its last 20-F
form filed to the U.S. Securities & Exchange Commission has
$1.66 billion at stake in a similar dispute, also declined to
comment, as did Cia. Siderurgica Nacional SA, Brazil’s third-largest steelmaker. CSN has 1.97 billion reais in tax claims for
profits earned by its foreign subsidiaries, according to its 20-F document filed April 30.
Vale’s settlement follows the suspension of its appeal
against the claim in Brazil’s Superior Court on Nov. 26. The
company was waiting on the ruling before deciding on the
government’s settlement offer, a person with knowledge of the
case told Bloomberg News last month.
Brazil’s Finance ministry declined to comment on Vale’s tax
After the settlement announcement, Standard & Poor’s
lowered its outlook on Vale’s debt to negative from stable,
citing the new liabilities. Fitch Ratings said today that the
company’s ratings remain unaffected by the tax agreement. Cash Flow
"The tax payment will be funded by our operating cash
flow, not requiring additional indebtedness, and not causing
significant changes in our financial planning,” Ferreira said
in yesterday’s statement.
Since his appointment in 2011, Ferreira has been seeking to
resolve tax claims and legal disputes. On Dec 19. the company
agreed to pay the equivalent of $553 million to settle Swiss and
Brazilian tax disputes.
This article first appeared in bloomberg.com.