Vivo logo, trademark of Telefónica Brasil, on the New York Stock Exchange, in a file image.NYSE
Telefónica Brasil, controlled by Spanish group Telefónica, has warned investors of the risk that problems of political and economic instability in Brazil “worsen” after Luiz Inácio Lula da Silva’s election victory. Telefónica Brasil included this warning in its annual report filed with the United States Securities and Exchange Commission (SEC).
It is the first Brazilian company listed in the United States to file its annual report with the Washington-based regulator following Lula’s return to power brings stability, which is viewed with suspicion, increase inflation and the deficit, and discourage foreign investors.
The annual report of foreign companies listed in the United States (20-F) is always preceded by a chapter that lists all types of risks that can affect the company’s share price: economic, regulatory, technological, political, etc. Telefónica Brasil has devoted a chapter to the political risks of recent years: “The Brazilian government has and continues to exercise considerable influence on the economy. This influence, as well as the political and economic conditions in Brazil, could have a negative impact on us and our price,” he repeats this year.
Next, the company lists a number of issues that could affect it (inflation, exchange rates, interest rates, energy and fiscal policies…) and mentions “economic, political or social instability” among others. Also something new: “The policies that the new Brazilian government adopts or adopts after the presidential elections of 2022.”
Following this list, as in other years, Telefónica Brasil points to the regulatory uncertainty and repeats a sentence that was already in last year’s report: “The economic and political instability of the past has led to a negative perception of the Brazilian economy and increased volatility the Brazilian equity markets, which has had a negative impact on us and the trading price of our shares.”
Then comes the news: “These problems could be exacerbated by the results of the Brazilian presidential elections in October 2022, in which former President Luiz Inácio Lula da Silva (from 2003 to 2010) was re-elected. There is uncertainty about the policies that the new government will pursue. We cannot guarantee that the new government will maintain policies promoting macroeconomic stability, fiscal discipline and domestic and foreign investment, and the failure of the new government to do so may adversely affect the Brazilian economy and prices of the securities issued by Brazil affect issuers like us and ultimately our business, financial position and results of operations.
The report was filed with US regulators this Friday afternoon and includes updates such as the stock repurchase plan approved by the board of directors on Wednesday, February 15. Although it reports that “Brazil has experienced significant political unrest in recent years,” it makes no mention of the Jan. 8 attack on Brasilia’s democratic institutions. Apparently, the annual report’s political chapter hasn’t been updated, and in fact, the only time Bolsonaro is mentioned, Telefónica Brasil refers to him as “the current president.”
Taxation and Lawsuits
Beyond warnings about political risks, the Brazilian subsidiary of the group led by José María Álvarez-Pallete has expressed concern about the possible changes the Lula government could push on dividend taxation: “The new government beat the president during the election campaign to repeal the income tax exemption on dividend distributions, which, if enacted, would increase tax expense related to dividends or distributions, which could affect our ability to pay dividends and receive future dividends from our subsidiaries. Any proposed tax reform, if proposed and implemented, could also have a significant impact on our business. Any future change in tax policy or legislation could adversely affect our business, financial condition and results of operations,” the company’s report said.
Taxes are a constant headache for Telefónica in Brazil (and other Latin American countries). It entails numerous lawsuits, which is common for large companies. The subsidiary of the Spanish group says in its annual report that it has deposited coverage of around 2,500 million reais (around 450 million euros) in tax and regulatory lawsuits with federal, state and local authorities, in which it sees “probable” losses .
In addition, Telefónica classifies it as “possible” that it could be underperformed by significantly larger sums in other legal disputes with the tax authorities. In the federal tax procedure, the amount of the claim is 3,042 million reais. Much larger are the state tax procedures, where Telefónica Brasil plays 21,712 million reais. In addition, there are almost 500 million reais in municipal tax procedures and another 8,000 million in regulatory procedures. According to his annual report, they add up to more than 33,000 million reais (around 6,000 million euros) in which the risk has not been taken care of.
In addition, there are another 5,800 million reais (just over 1,000 million euros) in proceedings for violating the competition rules, which the Telefónica subsidiary has only taken on to a small extent.
In labor matters, Telefónica Brasil has registered 540 million reais to meet claims from former employees and subcontractors demanding overtime payments, variable pay, wage parity and bonuses for unhealthy or risky work, as it considers the risk of loss likely. There are other work processes for 1,490.6 million reais for which there are no provisions because the risk of loss is lower.
Finally, the company faces various civil lawsuits amounting to just over 3,000 million reais, of which the company has recovered about a third.
Follow all information from Business And Business on Facebook and Twitteror in our weekly newsletter
Five Day Program
The most important economic dates of the day, with the keys and context to understand their scope.
RECEIVE IT IN YOUR MAIL
Subscribe to continue reading
Read without limits