Brazil’s Supreme Court puts off landmark foreign tax case

Reuters/Rio de Janeiro

Vale alone faces 30.5bn reais ($15.1bn) in tax judgments related to the case, or 15% more than the company’s average annual profit in the last three years.

The ruling will impact other multinationals such as Cia Siderurgica Nacional, chemical maker Braskem SA and steelmaker Gerdau SA.

The court’s 10 active judges will use the extra time to try to come to a majority decision in the case.

The judges’ opinions, plus an 11th written decision by a judge who recently left the court, differ too much to decide the case or create a precedent on how to tax foreign profits, justice Gilmar Mendes told reporters after the court’s session.

Preliminary rulings, or votes, in the case, which has dragged through the Brazilian justice system for 12 years, combined with changes in the court suggest that the companies have a narrow edge over the government, Rodolfo De Angele and other JPMorgan Chase & Co mining company analysts wrote in a Wednesday report to investors.

Chief Justice Joaquim Barbosa said he planned to vote that the tax rules are unconstitutional except for subsidiaries based in jurisdictions declared unfair tax havens by the Brazilian government.

The case, which is being led by Brazil’s National Confederation of Industry (CNI), revolves around the treatment of foreign profits for Brazilian tax calculation.

Brazilian companies object to their government’s attempt to tax their foreign profits before the foreign subsidiaries repatriate the profits to the Brazilian parent.

The plaintiffs say that this is a second tax on foreign profits, which are already taxed by authorities where the subsidiary is based. To consider that foreign profit part of the Brazilian unit’s profit before it returns home as dividends also results in taxation of changes in the value of the parent company’s equity in foreign units.

“Foreign equity can rise even when foreign profit falls,” said Paulo Ayres Barreto, who argued in front of the court for the CNI. “That’s essentially taxing losses.”

The government argued that its measures, introduced in 2001, were designed to prevent tax evasion through the use of foreign tax havens.