* Top court bars taxing foreign profit of some subsidiaries
* Taxation still applies to Brazilian units based in tax
* Vale calls partial decision 'victory' but stock falls 3.5
By Anthony Boadle and Jeb Blount
BRASILIA/RIO DE JANEIRO, April 10 Brazil's
Supreme Court on Wednesday declared a partial end to double
taxation of foreign units of Brazilian companies in a split
decision that global miner Vale called a "victory" in its $15
billion tax dispute with the Brazilian government.
Vale's most-traded shares fell 3.5 percent as investors
strove to interpret the court's complex rulings, as other
companies in the world's seventh-largest economy expand abroad.
The world's No. 2 mining company and largest iron ore
producer said the ruling will partly reduce its tax liability
and leaves open the door to win relief on the rest.
"This was a great victory," Clovis Torres, Vale's general
counsel told reporters and investors on a conference call. "It
will reduce our liabilities significantly."
Vale has been facing about 30 billion reais ($15
billion) in back taxes on profits by foreign units that the
company says were improperly double taxed. The bill is 15
percent larger than Vale's average annual profit for the last
Wednesday's rulings, however, only apply to tax judgments
against Vale in 1996 to 2001, just six of the 17 years under
discussion in the case, a time when Vale had yet to become one
of the world's largest and most global mining companies.
At the end of Wednesday's session, the court left most of
the tax issue facing Vale and other Brazilian multinationals
undecided. Vale is responsible for the bulk of such tax rulings.
As Brazilian companies expand abroad, the partial tax ruling
is likely to cast doubt over the future of rapidly globalizing
companies such as steelmakers Cia Siderugica Nacional
and Gerdau SA, petrochemical group Braskem SA
, meatpackers Brazil Foods SA and JBS SA
, construction group Odebrecht SA and
aircraft maker Embraer SA.
The supreme court challenge stems from a 2001 decision by
Brazil's tax authorities to change the way they determine
taxable income from foreign units. At the time, the expansion of
Brazilian companies abroad led to concerns that they would use
foreign units to evade Brazilian taxes needed to fund the
country's schools, health care, roads and other infrastructure.
The court on Wednesday said that any tax judgments based on
the 2001 rule change cannot apply to anything before that
ruling, Vale's Torres said.
The case is also based on how to apply the 2001 rules to two
types of subsidiaries. Generally accepted accounting rules treat
foreign subsidiaries in which a Brazilian company has clear
voting control differently than those where Brazilians only own
a minority, but influential stake.
Taxation on the affiliated companies is harder to determine
because the Brazilian company, while it doesn't control the
subsidiary, has influence on how investments are made and
profits are paid out as dividends, the government argues.
Six of the court's 11 justices said Brazil's 2001 rules for
taxing foreign affiliated companies are unconstitutional, as
long as the foreign unit was based outside a tax haven.
The issue of whether Brazil's tax rules for controlled
subsidiaries not based in tax havens or affiliated companies in
tax havens are constitutional was left undecided.
The court declined to rule if Brazil's tax rules violate
double taxation treaties designed to prevent two countries from
taxing the same profit. They returned that issue to lower courts
to reconsider in the light of their other rulings.
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 taxation.
The country's main business lobby CNI, which led the
constitutional challenge, called the ruling a "partial victory."
"Even though we didn't win the constitutional issue
completely, the ruling was not totally negative, because the
important points that we did not win have not been decided
definitively," said Cassio Borges, the CNI's legal director.
And, because the court upheld an injunction allowing Vale to
withhold any payments until the case is fully solved, Vale has
no immediate payment to make.
"Now we will only know how much we have to pay the tax
authorities after the end of the judgment," Vale's Torres said.
Before Vale declared victory, the company's shares fell as
investors bet otherwise. Vale preferred shares, the
company's most-traded class of stock, fell 3.5 percent in late
trading in Sao Paulo. Its common shares fell 3.3
"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.