UPDATE 2-Split court leaves Brazil foreign-unit tax debt in doubt

Wed Apr 10, 2013 5:41pm EDT

* Top court bars taxing foreign profit of some subsidiaries

* Taxation still applies to Brazilian units based in tax havens

* Vale shares fall in Sao Paulo after unclear decision

By Anthony Boadle and Jeb Blount

BRASILIA/RIO DE JANEIRO, April 10 (Reuters) - Brazil's Supreme Court on Wednesday declared a partial end to double taxation of foreign units of Brazilian companies in a split decision that may fail to resolve a dispute over billions of dollars in back taxes on Vale SA and other Brazilian multinationals.

Vale shares fell more than 3 percent on concern that the ruling would not free it of about $15 billion in back tax assessments. The world's No. 2 mining company and largest iron ore producer has been facing about 30 billion reais ($15 billion) in back taxes on profits by foreign units that Vale says were improperly double taxed. The bill is 15 percent larger than the company's average annual profit for the last three years.

The partial ruling rests on the difference between subsidiaries controlled by a Brazilian parent and affiliated companies in which a Brazilian company has a significant and influential stake but no control.

Six of the court's 11 justices said Brazil's rules for taxing foreign affiliated companies was unconstitutional, as long as the foreign unit was based outside a tax haven.

The court declined to rule if Brazil's tax rules violate double taxation treaties designed to prevent taxation of the same profit by two separate countries. They returned that issue to lower courts to reconsider in the light of their rulings.

The issue of whether Brazil's tax rules for controlled subsidiaries outside of tax havens or affiliated companies in tax havens are constitutional was still under debate by the court late on Wednesday.

Brazil's Central Bank maintains a list of countries and overseas jurisdictions it considers tax havens, or places where accounting and other rules allow companies to evade legitimate taxation.

Vale shares fell as investors bet the ruling will not free Vale of its tax obligations or only free the company of part of their assessment.

Vale preferred shares, the company's most-traded class of stock, fell 3.5 percent in late afternoon trading in Sao Paulo. Its common shares fell 3.3 percent.

"It's still very confusing, the market is still trying to figure it out, but most are seeing this as negative for Vale, that they lost," said Douglas Pinto, a trader with BGC Liquidez, a Sao Paulo brokerage.

Other companies, including steelmaker Cia. Siderurgica Nacional SA, chemical company Braskem SA and construction group Odebrecht, could also be affected by the ruling.

The final declaration, made after televised deliberations in Brazil's capital, Brasilia, was in line with the justices' preliminary votes at the beginning of the session.

As of 5:40 p.m. (2040 GMT) court deliberations continued on related taxation issues.

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