Santander avoids billion-dollar fine.
Emilio Botnvinha's bank debt of R$ 3,9 billion is being pursued by the Federal Revenue Service; the Treasury may appeal.
Yesterday, Santander bank avoided a hefty R$ 3.95 billion tax bill. The amount is being claimed by the Brazilian Federal Revenue Service, which accuses the Spanish bank of an alleged irregular tax reduction after the purchase of Banespa in 2000. The Administrative Council of Tax Appeals (Carf), the body that judges cases involving the Revenue Service, disagreed with the tax authorities' arguments and stated that it found no illegality in the operation. The government may appeal.
Since December 2008, the Brazilian Federal Revenue Service has been fighting to recover almost R$ 4 billion from Santander, arguing that the bank acted illegally by deducting a portion of the premium paid in the privatization of Banespa from its Income Tax (IR) and Social Contribution on Net Profit (CSLL). At the time, Santander paid more than R$ 7 billion for the São Paulo-based bank, a value 281% higher than the minimum bid and significantly exceeding the offers of its competitors.
Under Brazilian rules, companies can deduct part of the value paid in the acquisition of other companies from their taxes because the tax authorities consider the operation as an "investment." In these cases, up to 34% of the premium paid can be deducted from the payment of income tax and social contribution on net profit (CSLL) in the years following the transaction.
The tax authorities acknowledge the existence of this benefit, but say that the case does not apply to Santander because the law provides for the deduction only for a company headquartered in Brazil that buys another company in the country. The benefit also extends to foreign companies, but only if they are already established in Brazil. In the case judged yesterday, Banespa was bought by a Santander unit that had been opened specifically for the auction. Until buying the bank, the Spanish subsidiary had no employees or operations in Brazil; it was merely a registration.
In the ruling, the board members deemed the opening of this Brazilian branch of Santander legitimate, even though it was not effectively "operational" on the day of the auction. One of the arguments is that the privatization rules themselves required that bids for Banespa should be made by Brazilians or foreigners through a company formally established in Brazil – whether operational or not.
Furthermore, the CARF (Administrative Council of Tax Appeals) highlighted that there was an expectation of profit for the acquired bank, which explains the existence of the premium in the dispute won by the Spanish company. In other words, there was a commercial reason for the value, and Santander did not pay the premium simply to obtain a tax benefit in the future.
Following yesterday's decision, the Attorney General's Office for the National Treasury (PGFN) can appeal to a higher chamber within the CARF itself. However, it will need to find a similar case with a different outcome within the council. The PGFN stated that it will await the text of the judgment "to assess the necessary steps."