Mining giant Vale (NYSE:VALE) faced a setback in its tax dispute with the Brazilian government, when the country’s highest court set aside the injunction in favor of the government. As a result the company may have to shell billions in taxes on foreign earnings. The company and the government had been at adds over nearly $16 billion in taxes imposed by tax authorities on earnings abroad. The company had contended that it had already paid taxes to foreign governments.  Global mining companies have been increasingly grappling with tax issues as governments are looking to boost revenues after mineral prices skyrocketed in the past few years. Last month, the Australian government imposed a new 30% tax on iron ore and coal mining to cut its fiscal deficit, which will affect major competitors Rio Tinto (NYSE:RIO) and BHP Billiton (NYSE:BHP).
Significant impact on valuation if upheld
- Vale’s Q4 2016 Earnings Review: Recovery In Commodity Prices Translates Into Improved Results
- Vale’s Q4 2016 Earnings Preview: Favorable Commodity Pricing Environment To Drive Earnings Improvement
- Vale’s Q4 2016 Production Review: Rising Iron Ore Production Bodes Well Amid Favorable Pricing Environment
- Here’s Why Nickel Prices Fell Sharply This Week
- The Year 2016 In Review: Vale Well Placed To Benefit From Gradual Improvement In Business Conditions
- Vale’s Successful Cost Reduction And Capital Expenditure Rationalization Initiatives Prompt Revision In Our Price Estimate To $8
This latest judgment, if upheld, would be a significant burden for the company, which is significantly dependent on exports of its minerals and base metals to other countries. The country ships about 70% of its total iron ore production to Asia.
In addition to the aforementioned claims, Brazil’s National Mineral Production Department is seeking $4 billion in additional royalties, citing an understated value of Vale’s production. Switzerland’s government is also seeking tax arrears from the company.
Following the Brazilian government’s lead, various state governments including Minas Gerais have slapped tax notices on the company. Last month, the Brazilian state of Para – from which Vale produces a third of its total iron ore output – introduced a new mining tax.
This is one of the reasons for the stock’s recent underperformance, along with the dim outlook for iron ore. We recently discussed our views and analysis on the company here.Notes: