Bloomberg News

Vale Investors Overreacting to Tax Dispute Risk, Flow Says

March 30, 2012

Vale SA (VALE3) investors “may be overreacting” to the risk that the world’s largest iron-ore producer may have to pay as much as $17 billion in back taxes on foreign subsidiary income, brokerage Flow CCTVM SA said.

Brazil Supreme Court justice votes in an agriculture cooperative case indicate “positive developments” for exporters including Vale, Flow’s Renato Antunes and Aristoteles Nogueira in Sao Paulo said in a report late yesterday.

The agriculture case is set to replace a dispute filed by an industry group in 2001, whose 5-4 vote favors tax authorities, the Flow analysts said in the report. Three justices who voted against the industry group have retired, giving exporters a better chance for a favorable ruling if the agriculture case proceeds as the “leading case” for future litigation, Flow said.

Rio de Janeiro-based Vale, Brazil’s biggest exporter, has been challenging back taxes on its foreign subsidiaries’ profits since 2003 amid growing shipments and rising metals and minerals prices. The company received four tax claims totaling 30.7 billion reais including interests and penalties for the 1996-2008 period as of Dec. 31, Vale said March 6, adding that Brazilian tax authorities may also file claims for the period starting in 2009.

A Vale official in Rio, who declined to be named according to corporate policy, said the company won’t comment on the Flow report.

‘Lower Probability’

Six out of 11 justices voted to review the agriculture case in Supreme Court and use it as a benchmark for future rulings, according to the website of Brazil’s high court. Vale may benefit from the new case as it lowers the probability of a potential loss and extends the litigation period, the Flow analysts said.

“There are two main positive spillover effects for Vale: lower probability of a potential loss and a longer-than-expected process,” the analysts said. “We believe investors may be overreacting” to Vale’s risk of losing.

Vale rose 1.1 percent to 41.46 reais in the close in Sao Paulo today, its highest level since March 21. The stock has dropped 12 percent in the past year, more than twice the 5.1 percent decline in Brazil’s benchmark Bovespa stock index.

To contact the reporter on this story: Juan Pablo Spinetto in Rio de Janeiro at jspinetto@bloomberg.net Peter Millard in Rio de Janeiro at pmillard1@bloomberg.net

To contact the editor responsible for this story: Dale Crofts at dcrofts@bloomberg.net


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