Brazil: AB InBev can relax over its lengthy list of outstanding tax disputes in Brasil for now
Whether youre in the U.S., Europe or Latin America, go to a beer-serving bar and you will likely find someone sipping on a beverage from Anheuser-Busch InBev NV, the Budweiser and Corona brewer.
Despite having more than $10 billion of the companys cash at stake, AB InBev Chief Executive Officer Carlos Brito can similarly relax over the global brewers lengthy list of outstanding tax disputes in his native Brazil, Bloomberg reported on March 8.
Through Ambev SA, its publicly traded Brazilian subsidiary, AB InBev faces tax disputes with Brazils tax authorities that may lead to combined losses of $14.4 billion, according its 2016 annual report. In the report, filed March 2, the Belgium-based brewer cites over 30 tax assessments in Brazil, with Ambev receiving 10 tax assessments alone in 2016, according to data compiled by Bloomberg BNA.
Tax disputes, though, are common in Brazil and inherent to its business culture due to its three-tier system of federal, state and municipal laws, says Matthias Maenhaut, a Brussels-based drinks industry analyst at Dutch bank ING Bank N.V. On top of this culture, tax disputes raised by Brazils tax authorities can take several years, with one of AB InBevs cases dating back to 2005. Thus, besides legal fees, there is little chance of Brazils tax authority forcing the brewer to pay anything soon.
Brazils tax authorities are very bureaucratic, says Trevor Stirling, a London-based drinks industry analyst at Sanford C. Bernstein & Co. Theres not anything untoward about AB InBevs disputes in Brazil, and its only when you get to the final stage of a case where you have to make a provision.
Highlighting the low financial risk that AB InBev faces from the tax disputeswhich involve Brazils federal tax authorities and several of the countrys 26 statesthe global brewer made a provision of just $75.5 million in its 2016 accounts for them, according to data compiled by Bloomberg BNA.
This provision, representing 1.7 percent of the brewers total possible losses from the tax disputes, accounts for where the risk of a loss is probable in the final stage of a tax case, even if that stage takes several years, an AB InBev spokesman told Bloomberg BNA in a March 3 emailed statement.
Based on a legal evaluation of our chances to win, we do indeed assess whether we should set up a provision, an AB InBev spokeswoman also told Bloomberg BNA in a March 2 emailed statement.
Brazils federal revenue service did not respond to two emailed requests for comment on the tax disputes.
While hops, yeast and water are key factors to AB InBevs nectar-colored beverages, a key factor to the high number of tax disputes for companies in Brazil is the complexity of the countrys tax regime.
In 2014, it took companies worldwide 262 hours on average to comply fully with governments tax regimes, according to a 2016 tax compliance report from global tax and accounting firm PwC. In Brazil, meanwhile, companies need over 2,500 hours to comply with the countrys federal, state and municipal tax laws. This complex system can easily lead to different interpretations of the same tax legislation, and it also makes it the most time-consuming in the world, according to the PwC report.
It gives a lot of ground for tax disputes, says Priscila Vergueiro, a Sao Paulo-based tax partner at PwC, about the effects of the different interpretations of Brazils tax laws. But there are efforts to improve the system by reducing the current layers of tax, which would have an impact, she adds.
A country where beer makes up more than 60 percent of the alcohol that its citizens consume, Brazil is at the center of AB InBevs sprawling business operations as well as its existing tax disputes, which also include an Internal Revenue Service investigation and a European Commission state aid case.
After the U.S., the north of Latin America is AB InBevs largest market, where Brazil is the largest country in which the brewer operates. On March 2, the company reported a 4 percent decline in annual earnings to $16.4 billion, with poor trading in recession-hit Brazil cited as a main reason.
Brazil is about 12 percent of profits, even after the tough year theyve had, as it is the key business in Latin America North, says Duncan Fox, a London-based consumer sector analyst at Bloomberg Intelligence. Most of the trading volume decline for the company, 2 percent, was due to Brazil.
Along with AB InBev, the worlds largest brewer by market capitalization, which completed the $103 billion takeover of London-based brewer SAB Miller Plc in October 2016, top rival Heineken NV has faced similar scrutiny in recent years over its Brazilian operations from the countrys tax authorities.
The Amsterdam-based brewer, most well-known for its green-bottled namesake lager, faces legal cases in Brazil totalling 348 million euros ($368 million), according to Heinekens 2016 annual report.
Involving Brazils labor unions on separate issues, the disputes are inherited from Mexican beverage and retail company FEMSA, which sold its Brazilian beer operations to Heineken seven years ago.
Similar to AB InBev, Heineken has included an accounting provision of 269 million euros for the tax disputes, but the company does not expect any significant liability to arise from the proceedings.
The proceedings have arisen in the ordinary course of business and are common to the current economic and legal environment of Brazil, Heinken said in a note included in the companys 2016 annual report, filed Feb. 22. Heineken believes the ultimate resolution of such legal proceedings will not have a material adverse effect on its consolidated financial position or result of operation.
A Heineken spokesman declined to comment on the brewers Brazil case in a March 3 telephone call.
By itself, since the SABMiller acquisition, Ambev is the worlds second-largest brewer by market capitalization, and the Sao Paulo-based company has formed an important part of AB InBevs rise.
Born in Rio de Janeiro, Carlos Brito, 56, became Ambevs CEO in 2004. Later that year, he merged the company with Belgiums Interbrew and then acquired Anheuser-Busch for $52 billion in 2008.
Through these deals, Brito earned a reputation as a ruthless and effective cost-cutter, imposing limits on printed pages and forcing executives to justify every cent for their departments budget.
However, with them often taking longer than the time between Brazils 2014 World Cup and the Rio 2016 Olympics, Brito will probably be wary of a similarly strict approach with AB InBevs tax disputes. Instead, his focus will most likely be on returning the companys key country to profitability in 2017.
This quarter should mark the bottom, INGs Maenhaut said on AB InBevs fourth-quarter results, which the company announced last week with its full-year results and saw earnings fall in the period by 3.6 percent due to a weak Brazil. The company should now gain some earnings momentum.