Analysis: From Volkswagen to Bunge, concession holders in Brazil face hefty bill

By Bruno Federowski and Leonardo Goy

BRASILIA (Reuters) - Companies from Brazilian state oil company Petróleo Brasileiro SA to commodities giant Louis Dreyfus Company and German car giant Volkswagen AG could face hefty bills after Brazil's Supreme Court this month allowed local governments to charge property taxes to operators of public concessions.

The ruling settled an 18-year old spat between Petrobras, as the state-controlled oil company is known, and the city of Santos, home of Brazil's busiest container port.

Even though Petrobras does not own the terminal, and only operates it under a concession, the court ruled that it was liable to pay tax on the property.

Now Santos is demanding the oil giant and other terminal operators pay an estimated 300 million reais ($85.5 million) in back taxes and foot an annual tax bill that could total 13 million reais a year.

"This will have ramifications throughout Brazil," Santos mayor Paulo Barbosa told Reuters in an interview. "Any port city - every city that is home to any concessions - may now charge property taxes on them."

Property taxes in Brazil are set at the city level and usually hover around 1.5 percent of property values.

Santos could become the first of many regional governments to seek redress from operators of everything from ports and highways to airports as a slower-than-expected economic recovery in Latin America's largest economy has made authorities desperate for tax revenues.

Though the annual value of tax payments going forward may be small, at an annual average of around 200,000 reais ($57,136) per terminal in Santos, the city government wants to collect back taxes stretch back to 2000, when the suit was first filed.

The Supreme Court, by stating its ruling was generally applicable, has opened the door for other cities to follow suit, though there is still legal uncertainty over how far back unpaid taxes can be claimed.

Venilton Tadini, head of Brazil's association of infrastructure operators, said he expects local governments, which have seen tax collection slump due to the weak economy, to rush at the opportunity of raising revenues.

The association for highway operators said in a statement that local governments have already contacted "several" of its members to charge property taxes on toll roads, roadways and even catwalks.

An unexpected tax bill could deal a blow to a wide range of companies, including not only listed Brazilian firms such as toll-road operator CCR SA and rail firm Rumo SA, but also foreign behemoths such as commodities traders Bunge and Louis Dreyfus Company and car manufacturer Volkswagen, which operate port terminals in Brazil.

Representatives for the companies and the government declined to comment.

RENEGOTIATIONS

With margins on many of the contracts tight, the ruling could trigger renegotiations to offset the new taxes by increasing federal payments to concession operators or by allowing them to raise their tariffs more than currently forecast.

This could pose a fresh obstacle to the federal government's efforts to curb a mounting fiscal deficit, while also elevating the notoriously high logistical costs for companies operating in Brazil.

"Either the federal government transfers money to local governments or prices will have to change. Margins are far too tight," said José Di Bella Filho, the head of the port terminals association.

Charging property taxes on public concessions could also threaten future auctions of public services, the association said.

This would add fresh difficulties to government efforts to join forces with the private sector to renew the nation's ageing infrastructure, a flagship initiative of President Michel Temer, who is considering whether to seek reelection in October.

Temer's administration undertook a string of infrastructure auctions after he took office in 2016, following the impeachment of his predecessor Dilma Rousseff, seeking to tap newfound demand for Brazilian assets.

A government source involved in concessions, who requested anonymity because of the sensitivity of the subject, said the Supreme Court decision generated legal uncertainty that could drive investors away from future auctions.

That could be a heavy blow to Brazil's economic prospects. In a February survey, OECD singled out infrastructure investments as crucial to boosting Brazil's economic growth.

"Almost all areas of infrastructure are characterised by quality shortcomings and bottlenecks," the report said. "Brazilian companies suffer from high costs of transport and logistics, which reduce the profitability of many otherwise viable investment projects."

($1 = 3.51 reais)

(Reporting by Bruno Federowski and Leonardo Goy; Writing by Bruno Federowski; editing by Daniel Flynn)