Vale $15 Billion Tax Verdict Seen Fueling Gain: Corporate Brazil – by Juan Pablo Spinetto, Raymond Colitt & Ney Hayashi ( – March 15, 2013)

Vale SA (VALE5) investors stand to benefit as a decade-long court battle over $15 billion in back taxes that’s been weighing on the miner’s stock nears an end.

The Supreme Court is set to rule by June on a similar case brought by Coamo Agroindustrial Cooperativa, a farming group from the southern state of Parana that’s suing tax authorities to avoid levies on profits from foreign units. A ruling in favor of the group would be in line with the legislation of most other countries, according to Peixoto & Cury Advogados, a legal firm that specializes in corporate law, including tax issues.

The case is being watched as a benchmark for Brazil’s biggest exporters — from Vale to beermaker Cia. de Bebidas das Americas to steelmaker Gerdau SA (GGBR4) — who are fighting a combined $44 billion in tax claims. A win would be a boon for Vale because investors have already priced in much of the tax losses, said Empiricus Research’s Roberto Altenhofen.

“The market is overreacting a bit about the chances of Vale having to pay all the taxes that are being claimed,” the analyst at the Sao Paulo-based consulting firm said in a phone interview. “It’s almost impossible to predict the outcome of this trial, but what we can say is that Vale seems to be willing to negotiate with tax authorities so a deal can be reached. Vale may end up paying something, but not the full amount.”

Discounted Shares

Vale trades at a 29 percent discount to Rio Tinto Group, the world’s second-biggest mining company, and a 12 percent discount to industry leader BHP Billiton Ltd. (BHP), based on trailing 12-month price-to-earnings ratios. A resolution to the tax case will help the Rio de Janeiro-based miner narrow the discount to its global peers, according to Deutsche Bank AG.

“Finding a proper solution for it could unlock significant value for Vale’s shareholders,” Deutsche Bank analysts led by Rodrigo Barros said in a Jan. 30 note to clients. The bank’s $24 price target on the U.S.-traded shares assume a $10 billion “penalty associated with this dispute.”

Joaquim Barbosa, head of the country’s top court, said on Feb. 28 that he intends to rule on the issue by June. The farm group’s case and a similar suit brought by the National Industry Confederation, known as CNI, challenge a law allowing tax authorities to charge income tax on foreign-earned profit even if it’s not sent back to Brazil.

‘Capital Exodus’

“The very moment where these companies declare that profit, they’re subject to taxation — prior to the 2001 law they could defer that payment,” Claudia Aparecida de Souza Trinidade, coordinator at the Finance Ministry’s prosecution department, said March 11 in a telephone interview. “In 2001 there was a big capital exodus and the country could not forfeit tax income. Perhaps today or tomorrow that will change.”

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