Why AB InBev Can Chill Over $14 Billion Brazil Tax Disputes

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By Ben Stupples

Whether you’re 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 company’s cash at stake, AB InBev Chief Executive Officer Carlos Brito can similarly relax over the global brewer’s lengthy list of outstanding tax disputes in his native Brazil.

Through Ambev SA, its publicly traded Brazilian subsidiary, AB InBev faces tax disputes with Brazil’s 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 Brazil’s tax authorities can take several years, with one of AB InBev’s cases dating back to 2005. Thus, besides legal fees, there is little chance of Brazil’s tax authority forcing the brewer to pay anything soon.

“Brazil’s tax authorities are very bureaucratic,” says Trevor Stirling, a London-based drinks industry analyst at Sanford C. Bernstein & Co. “There’s not anything untoward” about AB InBev’s disputes in Brazil, “and it’s 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 disputes—which involve Brazil’s federal tax authorities and several of the country’s 26 states—the global brewer made a provision of just $75.5 million in its 2016 accounts for them, according to data compiled by Bloomberg BNA.

‘Probable’ Risk

This provision, representing 1.7 percent of the brewer’s 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.

Brazil’s federal revenue service did not respond to two emailed requests for comment on the tax disputes.

Tax Complexity

While hops, yeast and water are key factors to AB InBev’s nectar-colored beverages, a key factor to the high number of tax disputes for companies in Brazil is the complexity of the country’s tax regime.

In 2014, it took companies worldwide 262 hours on average to comply fully with government’s 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 country’s 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 Brazil’s tax laws. But “there are efforts to improve the system by reducing the current layers of tax, which would have an impact,” she adds.

Brazilian Roots

A country where beer makes up more than 60 percent of the alcohol that its citizens consume, Brazil is at the center of AB InBev’s 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 InBev’s 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 they’ve 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.”

Heineken NV

Along with AB InBev, the world’s 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 country’s 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 Heineken’s 2016 annual report.

Involving Brazil’s 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 company’s 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 brewer’s Brazil case in a March 3 telephone call.

Ambev and Brito

By itself, since the SAB Miller acquisition, Ambev is the world’s second-largest brewer by market capitalization, and the Sao Paulo-based company has formed an important part of AB InBev’s rise.

Born in Rio de Janeiro, Carlos Brito, 56, became Ambev’s CEO in 2004. Later that year, he merged the company with Belgium’s 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 department’s budget.

However, with them often taking longer than the time between Brazil’s 2014 World Cup and the Rio 2016 Olympics, Brito will probably be wary of a similarly strict approach with AB InBev’s tax disputes. Instead, his focus will most likely be on returning the company’s key country to profitability in 2017.

“This quarter should mark the bottom,” ING’s Maenhaut said on AB InBev’s 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.”

With assistance from Craig Rose, Ed Taylor and Robert Walker.

To contact the reporter on this story: Ben Stupples in London at bstupples@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

For More Information

A full list of AB InBev’s tax disputes, including details of the U.S. and European Commission cases, is available through an extract of the company’s 2016 annual report at http://src.bna.com/mL3.

The Feb. 2 announcement concerning tax simplification from the government of Brazil is at http://on.bna.com/iw0u309G7AV.

The Dec. 15 presentation from the government of Brazil, which focused on economic growth and productivity measures, is at http://src.bna.com/mMG.

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