SAO PAULO – A potential tax liability in the billions of dollars is delaying the sale of major stakes in miner Vale SA by Brazil's largest pension funds, according to two sources with knowledge of the matter.
Discussions over the tax issue are prolonging when and how pension funds are going to unload their Vale shares, among the most traded in Latin America.
Previ, Petros, Funcef and Fundação Cesp, which manage pensions for the employees of state-controlled Banco do Brasil SA, Petroleo Brasileiro SA, Caixa Economica Federal and CESP Companhia Energetica de Sao Paulo, respectively, have hired tax experts to determine the best way to sell their stakes with a lower tax burden, said the source, asking for anonymity to discuss the strategy freely.
Previ and Funcef declined to comment. Petros and Funcef did not reply to requests for comment.
The four pension funds own 21.3% of Vale through holding company Litel Participações SA, acquired in large part when the mining company was privatized by the Brazilian government in May 1997.
Reuters reported in March that the pension funds planned to sell 10% to 12.5% of their Vale stakes, or about 3% of total Vale shares outstanding, but the tax issue has delayed the transaction.
Litel's profit is subject to a 34% tax rate, but the pension funds are exempt from capital gains and other taxes.
The most tax-efficient way to sell the stakes would be for Litel to distribute the Vale shares to the pension funds for them to sell tax-free.
The funds have been hesitant to go ahead with distribution, however, because of concerns that it could be considered tax evasion by authorities and subject to fines, the sources said.
The scale of the potential tax payment is huge considering that in the future pension funds will have to sell their stakes to pay retirement pensions, according to Reuters simulations confirmed by one pension fund executive.
Vale's total market capitalization has risen from around eight-billion reais in 1997, when it was privatized, to 258-billion reais currently. A 21.3% stake would have had a capital gain of 53-billion reais over the last 20 years.
The shares held by Litel cannot be sold in full immediately because of lock-up agreements through 2020. A tax bill for the entire stake, including accounting items that reduce taxable profit, could reach 12-billion reais ($3 billion).
Tax lawyers hired by the pension funds have offered different solutions, according to the sources.
For example, funds that can afford to hold their stakes for longer could receive shares from Litel and keep them for up to five years before selling.
For the more cash-strapped funds, another solution could be for Litel to sell a small fraction of the shares in late 2018 or early 2019, taking advantage of the stock's more than 20% rise so far this year and accepting a hefty tax bill.
The sources said the funds under the most pressure to sell are Funcef and Petros, which is facing a 27.7-billion reais actuarial deficit. The CEO of Petros, Walter Mendes, said this month that the fund expected to sell part of its Vale stake this year.
By comparison, Previ posted a surplus in early 2018 and Funcesp has enough liquidity to delay a sale, the sources said.