UPDATE 3-Itaú says Brazil tax claim wrong, sees no need for action

Fri Aug 16, 2013 6:40pm EDT

By Guillermo Parra-Bernal and Natalia Gómez

SAO PAULO Aug 16 (Reuters) - Itaú Unibanco Holding SA , Brazil's No. 1 bank by market value, has no plans to build a provision against a potential 18.7 billion real ($7.98 billion) tax claim from the government, saying the possibility of a loss is "remote."

The São Paulo-based bank was "surprised" by the leak of information that the Federal Revenue Service wanted back taxes related to the merger that created Itaú Unibanco five years ago, Claudia Politanski, Itaú's senior vice president for legal affairs, said in a telephone interview on Friday.

The tax agency, which has gained global renown for its tough tactics, recently intensified pressure on enterprises ranging from commodity exporters to financial and industrial companies that it accuses of tax evasion. The crackdown coincides with eroding revenue and more spending at all levels of government.

Itaú shares shed as much as 2.4 percent on the news, nearing their steepest intraday decline in six weeks.

Officials at the agency, which in Brazil is nicknamed "The Lion," argue that Banco Itaú Holding Financeira SA's purchase of União de Bancos Brasileiros SA five years ago should have been carried out differently, without generating the tax shelter it did. The process used by Itaú was endorsed at the time by securities regulator CVM, antitrust watchdog Cade and the central bank, which oversees the banking industry.

"The goal of the agency's claim is to deconstruct what we did with the merger. But I can tell you that their suggestions run counter to the current banking industry rules, makes no sense in economic terms and would be impossible to implement," Politanski said.

Itaú is appealing the decision, Politanski added. The tax agency did not comment, despite repeated requests by Reuters.

Itaú received the notification from the agency in June.

"We expect this case to turn into another lengthy legal process," Mario Pierry, head of equity research for Deutsche Bank Securities in São Paulo, wrote in a client note.

LEAK

The authority, has also raised similar charges against Banco Santander Brasil SA for its purchase of Banco do Estado de São Paulo SA in the late 1990s, and against BM&FBovespa SA, for the merger that created the country's sole financial exchange. The dispute is still going on.

The Federal Revenue Service has won some cases in which mergers were carried out "exclusively to generate goodwill and thus to benefit from the tax shield of such goodwill," said Carlos Macedo, an analyst with Goldman Sachs Group Inc. In other cases in which deals took place at market-driven prices, such as Itaú's or BM&FBovespa's, the agency has been less successful.

"Much like for BM&FBovespa and Santander Brasil, we believe the merger between Itaú and Unibanco falls in the second category, reducing the risk to the bank's capital," Macedo said.

The tax agency is demanding that Itaú pay an additional 11.8 billion reais in income taxes and 6.9 billion reais in levies on corporate profits.

Politanski said the leak of information about the claim, which was published early on Friday by a local newsletter, violated tax secrecy rules. In Brazil, legal processes between the tax agency and plaintiffs are protected by a code of secrecy.

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