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Itaú and Bradesco Cut Secret Deal with Luxembourg to Save US$90.2 Million in Tax in Brazil
11/05/2014 - 18h00
A simple exchange of documents resulted in savings of US$90.2 (R$200 million) in taxes for Bradesco and Itaú-Unibanco, two of the biggest banks in Brazil.
The deal was concluded during 2008 and 2009 in Luxembourg, a tiny European fiscal paradise.
It is a clear case of tax avoidance: the banks used all legal means at their disposal to avoid meeting their obligations. However, technically speaking, no crime has been committed.
This deal has been exposed with the release of 1028 documents that detail the operations in an unprecedented manner.
These secret documents, obtained by the International Consortium of Investigative Journalists (ICIJ), an NGO based in Washington, in the United States, concern 343 companies from several countries.
They were produced by the financial consultants PricewaterhouseCoopers (PwC), which provides "tax advice services".
PwC is the same company that audits the financial results of Petrobras, and it has advised the company during the ongoing corruption scandal revealed this year by the Federal Police's Operation Lava Jato (Operation Car Wash).
Folha obtained access to the documents produced by PwC in Luxembourg, in partnership with the ICIJ. Over nearly six months, Folha, along with media outlets from another 25 countries, verified and analyzed the information extensively.
The details of how companies avoid paying tax by means of accounting operations in Luxembourg is being published this Wednesday (November 5, 2014), in one of the biggest international journalistic investigations into the matter.
Each country has its own particular circumstances. In Brazil's case, the banks used their operations in Luxembourg in order to reduce the value of the revenue declared by their subsidiaries there. Revenue obtained by Brazilian banks abroad is subject to tax both in the host country, and in Brazil.
In Luxembourg, Brazilian financial institutions receive generous accounting discounts upon consolidating their financial statements, allowing them to declare reduced revenue. The procedure is described in the PwC documents, though the obscure language makes understanding difficult.
The benefit that the Brazilian banks enjoy in Luxembourg is by means of an agreement of recognition of "tax goodwill". This is defined as "a right to credit based on anticipated returns in the future" by Everardo Maciel, secretary at the Federal Revenue from 1995 to 2002.
Because of this agreement, the banks are allowed to publish on their statements in Luxembourg what are known as "intangible tax assets".
PwC sent letters to the government of Luxembourg on behalf of Bradesco, Itaú and Unibanco, in which it requested that the intangible tax assets be recognized. The documents analyzed contain a stamp and a signature from the government of Luxembourg accepting the request.
The revenue of these institutions was thus reduced, and as a result, they were able to pay less tax - both in Luxembourg and Brazil.
Brazilian law imposes a charge of 40% on banking revenue, 25% being income tax (IRPJ, in its Portuguese acronym) and 15% being the Social Contribution on Net Revenue (CSLL).
To calculate how much tax a bank can avoid through its operations in Luxembourg, the following example may be helpful:
Imagine that the revenue of a Brazilian bank in Luxembourg is €100 million (US$135 million; R$ 301 million).
If the government of Luxembourg agrees to reduce this value to €75 million (US$101 million; R$225 million, through the "intangible tax assets"), then the financial institution will avoid incurring taxes on the difference - in this case, €25 million (US$33 million; R$75 million).
When this bank then declares its revenue in Brazil, it will avoid paying the equivalent of €10 million (US$13 million; R$30 million) (40% of €25 million) - thanks to the secret tax agreement between the financial institution and the government of Luxembourg.
Folha consulted experts from the Department of Federal Revenue of Brazil who analyzed in detail the contracts signed separately by Bradesco, Itaú and Unibanco with the government of Luxembourg.
The unanimous conclusion was that these were accounting maneuvers designed specifically to reduce tax payments in Brazil.
The sub-secretary of Inspection at the Department of Federal Revenue of Brazil, Iágaro Martins, also analyzed PwC documents at Folha's request. He came to the following conclusion:
"The Department of Federal Revenue of Brazil does not comment on specific cases. However, it has identified and investigated operations practiced by companies based in Brazil with subsidiaries abroad, designed to artificially generate losses in Brazil, with profits abroad that will not be taxed, either because they are made in fiscal paradises or because of exemption agreements. It is another example of abusive international tax practices, with the only objective being to reduce the amount of tax paid in Brazil."
The shadiest aspect in the PwC letters is the description of how "intangible tax assets" are calculated. There is no set formula. The banks simply suggest the value they would like to be considered, with this being rubber-stamped by the government of Luxembourg.
The documents prepared by PwC for Bradesco, Itaú and Unibanco are virtually identical: they suggest that the benefit should be granted because of a "hidden contribution" that the Brazilian financial institutions make to their subsidiaries in Luxembourg.
The banks' preferred Portuguese translation of this term is closer to "non-measurable contribution". But what exactly is this contribution? The banks informed the government of Luxembourg that they perform work in Brazil (incurring costs in doing so) to facilitate their operations in the fiscal paradise.
In the documents compiled by PwC, these "non-measurable" costs are described in a generic manner as being for advertising, attracting clients, development of financial products, guidance for Brazilian companies and individuals that want to have accounts in Luxembourg, sharing of research conducted by headquarters and provision of know-how in risk-management and compliance, among other services.
Bradesco, Itaú and Unibanco say that 95% of the clients and the business they had in Luxembourg at the time of these operations was the result of the work of their headquarters in Brazil.
In other words, the banks conduct a service for their own benefit in Brazil. They then declare to the government of Luxembourg that this "work" should be included on the financial statement of the subsidiary in the fiscal paradise as a so-called "intangible tax asset". They then reduce their declared profits and pay less tax as a result.
There is no evidence of irregularity in these operations. For their part, the banks deny having made these agreements with Luxembourg purely in order to reduce their fiscal obligations in Brazil.
Following the publication of the documents revealed by this report, it will be up to the Department of Federal Revenue of Brazil to decide whether any formal action is taken regarding these operations.
The Brazilian government has no estimate of how much tax banks and other companies manage to avoid through schemes such as this one in Luxembourg and other fiscal paradises.
The Federal Revenue of Brazil has a department dedicated to inspection of large contributors, which in 2013 attempted to claim a total of US$42 billion (R$105 billion) in costs, including fines and outstanding taxes.
However, this value is rarely paid, since the banks and companies usually appeal to the Contributors' Council of the Administrative Council of Fiscal Resources (CARF, in its Portuguese acronym), resulting in long cases that sometimes result in the cancellation of the fees.
In addition, the federal government often launches tax amnesty programs.
The documents analyzed by Folha indicate that Bradesco obtained the right to reduce its tax contributions in Brazil by the equivalent of R$25,258,766.40 (US$10,026,702.023) in 2009.
It is still not known whether this scheme was used just once, or whether it rolled over into subsequent years.
Bradesco was able to do this because it received authorization from the government of Luxembourg to reduce its revenue on its financial statements for 2008 by €25.2 million (US$34.25 million; R$75.86 million), which was classified as "intangible tax assets".
Applying the Brazilian tax rate of 40% to these €25.2 million produces the figure of €10.08 million (US$13.07 million; R$30.3 million).
As the tax is paid the year following the declared revenue, the exchange rate applied was that of December 31, 2009, when one Euro was worth R$2.50583. In total, therefore, Bradesco managed to avoid R$25.258 million (US$ 11.4 million) in taxes in Brazil.
In the case of Itaú, using the same formula, the bank managed to reduce its tax contributions in Brazil by a whopping R$111,977,364.00 in 2008 (US$ 50.55 million), while Unibanco dodged R$62,695,866.60 in 2009 (US$ 28.30 million).
At the time, Itaú and Unibanco were separate institutions - they merged later on.
In total, the banks managed to avoid R$200 million (US$ 90.2 million) in taxes, thanks to these agreements with the authorities in Luxembourg.
The PwC documents to which Folha had access refer only to the years of 2008 and 2009 in the case of Brazilian companies. What happened subsequently is unknown. There were no leaks from other financial consultants, with the contracts being protected by confidentiality laws in Luxembourg.
The Brazilian authorities do not have access to detailed information about the operations of companies in Luxembourg. The situation is the same in many other tax havens, in which Brazilian companies operate similar schemes in order to reduce their tax contributions in Brazil.
Translated by TOM GATEHOUSE