(BHP) Court Piles Taxes on Vale

A week ago, Australian lower house has announced the approval of tax on profit for coal and iron ore mining. The news came as a blow to BHP Billiton Ltd. (BHP), Rio Tinto plc (RIO), Xstrata and other iron-ore and coal miners operating in Australia. These companies have to bear an estimated burden of about A$11 billion ($10.8 billion) as extra charges in the first three years.

When the worldwide arguments and disputes on the issue of Australian tax imposition was just taking shape, the Brazilian court–the 2nd Federal Regional Tribunal, upheld a ruling on Vale S.A (VALE), requiring the miner to pay 25 billion reais ($14 billion) in back taxes on overseas profits.

The Tribunal’s ruling followed a lower court decision ordering the foreign units of local companies to pay income tax in Brazil even if they are paying taxes in their homeland. This has raised the risk of double taxation on Brazilian companies’  foreign earnings.

On this issue, Vale has forwarded an argument that the ruling, which calls for a double taxation, is banned by Brazil’s Constitution. They have also questioned the term ‘foreign profits’, which they presume has not yet been defined by the tribunal ruling. On this ground, the company feels that the matter will still be subject to appeal to the Superior Court of Justice and to the Supreme Court of Justice.

Uncertainty arises on the ground that if the decision of the Tribunal is upheld, it could open door to cases against many Brazil-based companies that have tax liabilities on foreign earnings. For Vale, this may also amount to a huge past tax liability to the Brazilian government, perhaps greater than the company’s first-half profit of 21.6 billion reais.

Vale opined that the court of appeal’s decision will not have any immediate economic or financial impact on the company. Besides, the company was considering its legal options for combating the upcoming crisis.

In 2011, the price of iron ore has shown a decline of 20%, nickel lost nearly one-third of its value, and copper prices plummeted more than 20% worldwide. On this backdrop of falling commodities prices and environmental delays, Vale recently announced its capital spending budget for 2012, which confirmed a decline of 11%; pushing back its iron ore project by two years.

It seems that the bleak outlook for iron ore and other commodity prices coupled with the impact of the tax dispute, could hurt the company’s earnings in the upcoming quarter.

Vale S.A. engages in the mining and production of ferrous and non-ferrous metals, operating in coal mining, fertilizer business and logistics as well. It is one of the world’s largest producers and exporters of iron ore and pellets. The company keeps improvising its competitiveness against rivals Rio Tinto plc and BHP Billiton Ltd.

We currently maintain a long-term Neutral recommendation on the stock. Vale has a Zacks # 3 Rank, which translates into a short-term (1-3 months) Hold rating.

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