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Enron Mail |
From the conference call today, I realized you had not been copied on my memo
relating to Brazil taxes. Hope this helps you understand the current tax situation. Regards Lynn ---------------------- Forwarded by Lynn Aven/ENRON_DEVELOPMENT on 06/02/2000 02:40 PM --------------------------- Lynn Aven 06/01/2000 07:19 PM To: Remi Collonges/SA/Enron@Enron, Ricardo Lisboa/SA/Enron@Enron, Joe Kishkill/SA/Enron@Enron, Rick Hopkinson cc: Kent Castleman, David M Rosenberg/SA/Enron@Enron, Don Black/SA/Enron@Enron, Brett R Wiggs/SA/Enron@Enron Subject: PIS/Cofins taxes on Brazil Trading Operations Under current Brazilian tax law, the general rule is that PIS/Cofins taxes are due on the gross revenue that a a company receives. In regards to certain activities, including the trading activity that Enron wants to engage in, there is a position that is supported by various law firms and by Arthur Andersen that the PIS/Cofins tax is payable only on the trading margin. We have received a written opinion from the LaCaz Martin law firm supporting this position and Arthur Andersen has advised that they have a number of clients that are taking this position in filing their PIS/Cofins tax returns. Discussions with LaCaz Martins have indicated that the position they advocate is not one that the Brazilian tax authorities will currently follow nor one that is without risk. Arthur Andersen has confirmed that their clients who take this position are required to book a reserve for financial accounting purposes pending the resolution of the issue. Consequently, the earnings impact of the PIS/Cofins tax will be the same for financial reporting purposes whether or not the cash taxes are paid. (LaCaz acknowledges that the reserve must be booked) There seems to be a great deal of optimism in Brazil that the PIS/Cofins will be clarified as part of the pending tax reform. The current proposals that are being considered clearly state that the PIS/Cofins tax will be a noncumulative tax similar to the ICMS (VAT) tax that exists. Tax reform appears to be a priority right now and hopefully there will be a resolution of this issue so that we can move forward knowing that Enron's trading margins will not be negatively impacted by the imposition of the PIS/Cofins tax on the total revenue. Unfortunately, the proposed legislation is anticipated to become effective in 2003, based upon an ageement between the President of Brazil and the legislature that serves to keep the tax revenues high in the short term in return for implementing a tax regime in later years that will support business development. This leaves Enron with the issue of how to treat trading transaction that are consummated before 2003. If the Enron trading company pays the PIS Cofins tax on its net margin rather than on it gross revenue under the current law that is anticipated to be in place until 2003, there is a strong likelihood that the revenue authorities will asses additional tax. Resolution of that tax dispute can be decided at the Supreme Court level. Our advisors have indicated that the resolution of the dispute at the Supreme Court does involve some political issues and that the taxpayer is more likely to get a favorable decision if the dispute is resolved after the law has been changed. In other words, although the taxpayers have a strong argument to pay the tax on the net margin under the current law, the Supreme Court would likely not rule in their favor because of the current political climate but would likely rule differently once the law had been clarified and the intent clearly stated. I am hopeful that we will get a resolution of the application of the PIS/Cofins tax before the end of 2000. We can then know for certain that only the trading margins will be subject to the PIS/Cofins taxes. However, even if we get a favorable resolution, we still need to assess the risk for the years prior to the effective date of the legislation. Not only is their the possibility that the tax will be assessed for years prior to the effective date of the new legislation, there is the possibility that penalties and interest will be imposed. I am working with Arthur Andersen in quantifying the exposure to interest and penalties and determining various legal processes to minimize those costs should the trading company get an assessment. Getting tax relief under our broad tax reform legislation will be the easiest way to achieve the goal of limiting the impact of the PIS/Cofins tax. However, if tax reform does not succeed, Enron may need to partner with financial institutions that are attempting to do similar trading transaction. Financial institutions and their lobbyists in Brazil have a much better track record in getting industry specific tax relief. I will continue to monitor tax reform. Our advisors have indicated that the tax reform movement is so strong that Enron would likely have little impact on the process if it were directly involved in monitoring change. The issue to get directly involved in tax reform needs to be made by ESA management. I will be glad to help develop the issues so that the appropriate persons can present the case for tax reform if deemed necessary. Regards Lynn
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