UPDATE 2-Brazil tightens taxes on commods companies

Wed Apr 4, 2012 8:10pm EDT

Related Topics

* Brazil seeks to end inter-company price "manipulation"

* Agency says rule designed to prevent local tax evasion

* Crack down comes day after gov't grants $5.5 bln manufactures tax break (Adds details, background)

By Luciana Otoni

BRASILIA, April 4 (Reuters) - Brazil cracked down on multinational commodities firms Wednesday with rules to block them from shifting tax liabilities to more favorable countries.

The measure by Brazil's tax authority comes a day after the government granted $5.5 billion in tax breaks aimed largely at domestic manufactures.

Under new rules, the Brazilian units of companies such as Vale, Bunge, Cargill, Louis Dreyfus, Glencore and Noble Group must value transactions with overseas units of the same company using international price benchmarks, said Sandro Serpa, a top enforcement official at Brazil's federal tax authority.

The measure is aimed at ending "price manipulation" of inter-company imports and exports that allow multinational companies to evade Brazilian taxes, he said.

"The subject is relevant and involves billions of dollars in value transferred within companies," Serpa told reporters. "They are values that concern the whole world ... gigantic values shifting via the flow of tradable goods."

The rules come as the government steps up its "defense" against what it calls an international "currency war."

According to President Dilma Rousseff, efforts by the United States, Japan and Europe to kick-start their sluggish economies have flooded the world with a "tsunami" of cheap capital, boosting the value of developing-world currencies.

This has caused a flood of cheap imports from China and made Brazilian manufactures uncompetitive, Rousseff said. Meanwhile, demand from China for Brazil's raw materials such as iron ore and soybeans remains strong, further boosting its currency while providing few manufacturing jobs.

Brazil's real reached a 12-year high in July.

"It seems that the government has made a harsh political decision," said Alexandre Barros, founder of Early Warning, a Brasilia political risk consultancy. "They have bowed to the pressure of manufacturers and cut their taxes, but because it has no desire to slim government, it's decided to pay for it by taxing commodities producers."

Previously, a non-Brazilian unit of a multinational could sell a product to its Brazilian counterpart at an above-market price. This allowed the non-Brazilian unit to book a larger part of the profit from the overall transaction abroad, where tax rates are lower, Serpa said.

A Brazilian unit could also sell a commodity at a below-market price to a unit abroad. The foreign unit could then sell it on at the higher international price, allowing the multinational to book the profit offshore, limiting its Brazilian tax liability, Serpa said.

While Serpa's examples focused on commodities companies and traders, he said his agency will also seek to prevent similar moves by other industries to "evade" Brazilian taxes by manipulating prices.

Brazil's tax authority is already fighting to collect about $17 billion of back taxes it says Vale, the world's No. 2 mining company, owes. Vale, which is fighting the assessment in court, says the taxes were already paid by units outside of Brazil and that collection amounts to double taxation.

If the courts uphold the tax authority's claims, other major companies in Brazil could face similar large tax liabilities.

($1= 1.83 reais) (Additional reporting by Jeb Blount in Rio; Writing by Reese Ewing in Sao Paulo; Editing by Alden Bentley, David Gregorio, Gary Hill)

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