Telefónica has just taken a hit in its tax fight in Peru. It was his first stop on a particular tax ‘via crucis’ in Latin America. But there is another stop: Brazil. The telecommunications operator has been accumulating a very relevant amount of money in tax litigation in the country in recent years. In total, these open fronts add up to 5,800 million euros, although the company reduces the figure to more ‘realistic’ levels to 4,700 million. Due to the proximity of some of these processes, the provisions have been increasing but at a relatively slow pace.
Brazil is a country in which litigation, not only in the fiscal aspect, is high. Especially in the telecommunications sector. Telefónica was not going to be an exception. At the tax level, there are two specific paths: state and federal taxes. The former have to do mainly with what is known in this market as the ICMS, the indirect tax levied on telecommunications services. There is a discussion with the Brazilian Public Treasury in relation to the services that should be subject to the liquidation of said tax. All processes related to this are being challenged both in administrative and judicial instances. The accumulated amount of possible contingencies, including interest and sanctions, is just over 3,000 million euros, according to the latest balance sheet of the telecommunications company.
To the state taxes we must also add the other second front: that of the federal ones. Among them are the Income Tax of Legal Entities (IRPJ) and the Tax on local Companies called Social Contribution on Liquid Profit. Among all of them, according to the same balance, they totaled almost 2,650 million euros. A specific case stands out: the tax amortization in the years between 2011 and 2017 of the goodwill originated by the acquisitions of vivo and GVT and its subsequent merger with the country’s subsidiary.
These processes related to acquisitions in the country are, like the rest, in the administrative and judicial phase and awaiting a final resolution. But no type of provision has been registered to deal with possible disbursements since, according to the operator, their risk rating is “not probable” and it has external reports that support its position. Regarding the indirect tax levied on telecom companies, it also has these reports. But there are certain provisions to cover some risks.
Specifically, the provisions for Brazilian tax disputes at the end of September, the last period for which there are definitive figures, amounted to 467 million euros, as reflected in the update of the annual report (20-F) that the operator sent in November to the US securities regulator (SEC). At the start of the year it stood at 340 million euros and at the end of 2020 it stood at 282 million. As the different processes progress, these ‘reserves’ of money to address possible disbursements grow, as has happened in other cases such as Peru.
The sum of both types of taxes amounts to almost 5,700 million euros. This is the estimate of the total money you should face with all open cases. However, the company underestimates the ‘possible’ contingencies they have to address. These were reduced to just under 4,800 million. That is to say, it is an adjustment eliminating the cases in which in all probability they will obtain a victory, either in the judicial or administrative channels.
Spain and Peru, heads and tails
Brazil is, therefore, the next stop on the company’s particular tax ‘via crucis’ in the Latin American market. The other one that is already going through it is Peru. Last week, the country’s Supreme Courts sentenced the Peruvian subsidiary to pay 790 million euros of income tax for the years 2000 and 2001. For this case there was a provision that had been fed in recent years and that covers the entirety, so the impact on accounts is relative. The penalty is around 100 million euros and the rest are accrued default interest due to the delay in the process.
Despite the fact that this would represent the end of the procedure, the company has announced that it will go to the International Center for Settlement of Investment Disputes (ICSID), a World Bank entity that mediates in this type of conflict. They understand that there is a basis to obtain a favorable resolution and reduce that bill. Insist that the calculation of default interest is made based on a formula that has been knocked down by the Constitutional Court.
These processes are the ‘cross’. The ‘face’ must be found precisely in Spain. The teleco modified in the last three years two historical resolutions in its favor with the Tax Agency. These are two returns that between the two add up to 2,200 million. Both come from a similar procedure. The first was executed in the first months of 2019 and added 700 million in liquidation and another 200 in late-payment interest. The second is more recent. It arrived in the last quarter of last year and represents the income of 790 million in taxes and 526 in interest. Both revenues have been used mainly to reduce debt. After the setback in Peru and these Spanish victories, eyes are on Brazil.