Through strategic agreements, government successfully minimized disbursements in three significant cases


Priscila Faricelli — Foto: Divulgação

Priscila Faricelli — Foto: Divulgação

The federal government has successfully averted a financial hit estimated at R$169.24 billion in legal judgments handed down by the Federal Supreme Court and the Superior Court of Justice in the first half of the year. This total was tied to ten significant cases in which the courts ruled favorably on arguments presented by the Federal Attorney General’s Office (AGU) and the Attorney General’s Office of the National Treasury (PGFN).

Additionally, the government considers agreements reached in three other cases as victories. These settlements will result in disbursements totaling R$5.5 billion, a figure significantly lower than initially projected, though the federal government has not disclosed the initial amount. This information was provided in a report requested by Valor from these agencies.

Negotiation is increasingly recognized as a valuable tool in AGU’s strategy. “We view some of our negotiated agreements as victories,” states Flavio José Roman, Deputy to the AGU. At the AGU, he notes with a touch of humor that the office never loses; it either wins or negotiates.

For the AGU, actively negotiating cases cultivates a positive relationship with the judiciary, particularly when scheduling hearings. “We are unequivocal about our stance. Negotiation is always on the table for us,” says Mr. Roman.

The AGU has noticed that the judiciary is increasingly mindful of the economic consequences of its rulings, a shift backed by legal mandates. According to the Law on the Introduction to the Norms of Brazilian Law (Law No. 13655 of 2018), judges must consider the implications of their decisions, particularly when these are based on broad legal principles.

“This shift required judges to adopt a new perspective. Notably, the current chief justice of the Supreme Court [Justice Luís Roberto Barroso] has appointed an economic advisor specifically to address these concerns,” Mr. Roman adds.

The stipulations of Law No. 13655/2018 have heightened the AGU’s attention to the financial stakes in litigation. Nonetheless, this has drawn criticism, particularly from legal professionals, who argue that these financial estimates are often exaggerated. A notable instance was the “lifetime review” case, a social security matter in which the financial impact projected by the federal government vastly differed from that of taxpayers.

“We’re in the dark about how these numbers are computed,” states Maria Raphaela Matthiesen, a partner at Mannrich e Vasconcelos Advogados. She points out that while these figures are included in the fiscal risks annex of the Budgetary Guidelines Law (LDO) and shared with judges during their rulings, the methodology and data sources remain opaque.

Economist Tiago Sbardelotto from XP Investimentos, who is also a licensed auditor with the National Treasury, clarifies that the projected financial impacts outlined in the LDO are often much more significant than the actual outcomes. According to him, the Federal Revenue Office bases its calculations on the assumption that all eligible taxpayers will pursue legal action, a scenario that rarely materializes.

Ms. Matthiesen points out that the Superior Court of Justice has recently started implementing time limits on its decisions—a process known as modulation. This approach generally indicates a judicial concern about the economic impacts of decisions by attempting to mitigate their retroactive effects.

In her review of cases listed under tax risks, Ms. Matthiesen notes that none of the items adjudicated in the first half of the year favored taxpayers. However, among the tax decisions during this period, she identified one clear victory and one partial win for taxpayers.

The outright victory occurred in a Superior Court of Justice ruling that determined the ICMS sales tax should not be included in the base calculation for the social taxes PIS and Cofins owed by taxpayers under the progressive tax substitution system. There is no available estimate on the financial impact of this case (Special Appeal 1896678 and Special Appeal 1958265).

The federal government considers a “half victory” a complete win in a case regarding the inclusion of income from real estate rentals in the PIS tax base. This applies both to companies primarily engaged in this type of operation and those for which rental is an incidental and subordinate activity.

For the lawyer, if leasing is not integral to a company’s corporate purpose, it should not be taxed. “In their decision, the Supreme Court agreed that the tax applies but restricted its scope to instances where leasing aligns with the company’s corporate objective. Rentals undertaken as sporadic or auxiliary activities are exempt from this tax,” she explained.

These positive outcomes for the federal government in the higher courts align with a strategy by Finance Minister Fernando Haddad, who has prioritized fiscal risks within the judiciary since his tenure began. When identifying cases that could significantly impact public finances, the minister intervenes, often collaborating with the AGU and PGFN to negotiate directly with the justices.

The first half of the year saw significant legal victories. Just before the recess, the Superior Court of Justice ruled on a batch of cases with repetitive effects, establishing legal precedents in favor of the federal government.

Meanwhile, at the Federal Supreme Court, a notable judgment involved the remuneration of Workers’ Severance Fund (FGTS) accounts. Initially, the court ruled in favor of the taxpayers, allowing for a higher rate of remuneration. However, following a motion for reconsideration, this decision was reversed, and it was determined that workers only receive remuneration based on inflation. While the government did not count this outcome as a victory, it exemplifies the negotiation strategies in play (direct action for the declaration of unconstitutionality 5090).

The law firm brokered an agreement with trade union centers and proposed to the Federal Supreme Court that the fund’s resources be adjusted merely for inflation. Mr. Roman emphasized that the objective was to demonstrate to workers and their representatives that increasing the fund’s remuneration could negatively impact public policies intended to benefit lower-income individuals.

“The support of the [trade union] federations was fundamental in persuading not only the justices but also the people,” says the deputy from the AGU. The impact of the ruling remains unestimated.

Judgments in the first half of the year echo the successes of 2023, where the federal government fared well in the courts. For instance, at the Superior Court of Justice, all tax cases from the Fiscal Risks Annex of the LDO were decided favorably, including the upheld taxation of tax benefits after an appeal by taxpayers. In the tax domain alone, favorable judgments in 2023 helped avert losses totaling R$195.6 billion.

Economist Tiago Sbardelotto notes that the government’s dual strategy of making the judiciary aware of the negative impacts on public accounts and negotiating in cases where a federal defeat seemed likely has been effective. “Even in instances where the federal government faced adverse decisions, the effects have been substantially mitigated,” he states.

The agreements enable the government to reduce interest costs and extend payments through 2026 via court-ordered payments, which are excluded from the spending cap and fiscal targets, explains the economist. “We believe that the culmination of both strategies is to mitigate fiscal impacts in the medium term when fiscal regulations tighten. This progress is undeniable. However, it’s also crucial to preemptively address the surge in the judicialization of benefits, a trend that has markedly increased recently,” notes Mr. Sbardelotto.

Priscila Faricelli, a partner at Demarest Advogados, notes that the pandemic has led to an increase in major tax cases being adjudicated via virtual hearings. According to her, the majority of these cases have been resolved in ways that do not favor the taxpayers.

“For at least a decade, the PGFN has refined its approach in higher courts,” she observes. However, she also points out that judges, as political figures, have become increasingly budget-conscious. “The clearest evidence of this focus on budgetary matters is the nature of the modulations, which invariably aim to protect the budget,” she adds.

*Por Beatriz Olivon, Jéssica Sant’Ana — Brasília

Source: Valor International
Brazilian sales up 12% in value and 23.5% in volume, says Amcham


Abrão Neto — Foto: Rogerio Vieira/Valor

Abrão Neto — Foto: Rogerio Vieira/Valor

Brazilian exports to the United States reached a record $19.2 billion in the first half of this year. The trade between the countries grew 12% in value (or $2.1 billion) and 23.5% in volume (4 million tonnes), compared to the same period in 2023, according to the Brazil-US Trade Monitor of the American Chamber of Commerce for Brazil (Amcham Brazil).

On the other hand, Brazilian imports from the United States amounted to $19.4 billion, a slight drop compared to the same period last year.

Even with slightly lower imports, there was an increase in eight of the ten products most imported by Brazil from the United States.

The highlights of the period were aircraft (62.4%), ethylene polymers (50.8%), crude oil (48.9%), medicines (32.9%), natural gas (545.9%) and non-electric motors and machinery (20.2%).

The trade between the countries has been performing well, with a 5.1% increase in bilateral trade compared to the same period last year, reaching $38.7 billion in transactions. This growth is more than double the increase in Brazil’s trade with the world in the period (2.5%).

Trade between Brazil and the United States is expected to be more balanced in the yearly results. According to Abrão Neto, CEO of Amcham Brazil, the bilateral trade deficit is expected to be close to zero, unlike that recorded in the last decade. “Trade growth will be driven by Brazilian exports, which will be an important result for the Brazilian economy,” he says.

The American market was the fastest-growing destination for Brazilian exports in terms of value during the year. Nominal growth was $2.1 billion. The increase is 12% compared to the same period last year, and is more than eight times higher than Brazilian sales to other long-standing trading partners such as China (3.9%), the European Union (2.1%) and South America (-24.3%). In total global exports ($7.1 billion), the United States accounted for almost 30% of the total increase recorded in the period.

According to the Trade Monitor, growth can be seen in all sectors, led by the extractive industry (89.2%), followed by agriculture (19.4%) and the manufacturing industry (2.3%).

Of the ten main products exported to the US, eight showed increases, especially crude oil (108.3%), which rose to first place in the export ranking; aircraft (11.9%); and petroleum fuels (202.1%), which rose from 11th to 4th place.

This strong sale of crude oil to the US contributed to a greater share of the extractive industry in total exports, 17.7%, compared to the 10.5% share in the same period of 2023. The agricultural sector rose to 5.3% from 5.0%, driven by the increase in Brazilian sales of unroasted coffee (44.6%).

In the manufacturing sector, Amcham saw a drop of 8 percentage points, from 83.8% to 76.6%. Despite this, the sector is the best performer among the most exported items, accounting for eight of the top ten products.

Ms. Abrão Neto said that the diversity of the US market compared to Brazil’s other trading partners has had an impact on the increase recorded in the period and is reflected in other areas of the country. “This growth has a very positive impact on job creation and revenue generation within the Brazilian market,” he said.

The main points of departure for exports are concentrated in the South and Southeast of the country, with São Paulo accounting for 31.9% of the total, followed by Rio de Janeiro (17.7%), Minas Gerais (10.1%), Espírito Santo (8.1%) and Rio Grande do Sul (4.6%). At the same time, the imports also have São Paulo as the main point of entry, with 31.8% of total imports, followed by Rio de Janeiro (21.8%), Bahia (7.7%), Santa Catarina (5.9%) and Minas Gerais (5.0%).

The most common means of transporting this production is by sea, according to the survey. In the first half of 2024, the sea accounted for 87.7% of export transportation, followed by air, with 11.5%. As for imports, the maritime transport is also the main mode of transportation, with 62.5%, while 36.8% was done by air.

According to Amcham, Brazil is expected to show progress in 2024 compared to last year, especially in exports. “We expect the trade flow to grow in relation to last year, reaching the second-highest trade flow since records began, probably second only to 2022,” said Mr. Abrão Neto.

Por Ívina Garcia — São Paulo

Source: Valor International
Rise was driven by increased production and global demand, with significant growth in sales to the USA and China


Revenue from shipments in the crop year ending in June also set a record, reaching $9.8 billion, an increase of 20.7% — Foto: Divulgação

Revenue from shipments in the crop year ending in June also set a record, reaching $9.8 billion, an increase of 20.7% — Foto: Divulgação

Brazil’s coffee exports for the 2023/24 crop year (July 2023 to June 2024) reached a record 47.3 million 60-kilogram bags, according to the Brazilian Coffee Exporters Council (Cecafé). This volume is 32.7% higher than the 2022/23 cycle. The previous record was set in the 2020/21 crop year, with 45.6 million bags exported.

Revenue from shipments in the crop year ending in June also set a record, reaching $9.8 billion, an increase of 20.7%.

Cecafé president Márcio Ferreira stated in a note that the larger crop in Brazil allowed the country to expand its share in global trade, “occupying spaces left by reduced supply from other producers, such as Indonesia and Vietnam, mainly with national conilon and robusta.”

According to the organization, the United States was the main destination for Brazilian coffee, purchasing 7.1 million bags, or 2.8% more than in the 2022/23 crop year. Germany and Belgium followed. Brazil also increased coffee sales to China by 186.1%, reaching 1.64 million bags.

Produced in larger volumes in Brazil, arabica coffee remains the most exported type. In the crop year, 35.4 million bags of this variety were shipped, an increase of 16.7%. Meanwhile, exports of canéforas (conilon and robusta) surged to 8.238 million bags. This increase of 461.1% reflected the lower availability of the product in Vietnam and Indonesia, which faced climatic problems.

Mr. Ferreira also noted that investments in research and technology “that improved the quality and productivity” of Brazilian canéforas also enabled the country to expand its share in the global market.

In June alone, the last month of the 2023/24 crop year, Brazil exported 3.5 million bags of coffee, the highest amount recorded for the month in history. Revenue of $851.4 million was also unprecedented for the period, according to Cecafé.

*Por Paulo Santos — São Paulo

Source: Valor International
Second stage of offer had R$110bn in orders until last week; low price, inflated orders, Equatorial behind high market interest


The book-building period for the second phase of the offer for Sabesp ends this Monday — Foto: Victor Moriyama/Bloomberg

The book-building period for the second phase of the offer for Sabesp ends this Monday — Foto: Victor Moriyama/Bloomberg

With a relatively low share price, the second phase of water utility Sabesp’s privatization has seen strong demand in the financial market. At this stage, the São Paulo state government intends to sell 17% of the company to the market through a dispersed offer. Demand exceeded R$110 billion in orders at the end of last week, according to people familiar with the matter. The amount is inflated as there is an expectation of sharing among interested investors. Real demand is expected to be around R$30 billion, sources say.

Despite strong demand, the price per share is expected to be R$67, or 19.42% below the closing price at the end of Friday’s trading session, at R$83.15. The amount will likely be the same as that offered by Equatorial, in the first phase of the offer—under Sabesp’s privatization model, the proposal for the first phase should be a cap for the second stage, according to people involved in the process.

As a result, the amount to be received by the São Paulo state government in the second phase should be R$7.9 billion. The amount adds to the R$6.9 billion offered by Equatorial, which will become the company’s primary shareholder with 15% of the capital. The total amount raised should be around R$14.8 billion, through the sale of 32% of the shares. The state government, which currently controls the company, will hold 18% of Sabesp’s capital.

The book-building period for the second phase of the offer ends this Monday. The pricing of the shares will only be confirmed next Thursday, and the offer will be settled next Monday.

After that, the antitrust watchdog CADE will have time to assess the operation before Equatorial is officially confirmed as a primary shareholder. A source close to the company sees no potential problem in the antitrust regulator’s analysis but points out that the estimated deadline is up to 60 days. Only then will Sabesp be able to appoint a new board members and executive officers and start a 100-day plan to carry out the first internal changes to the company’s management.

The first phase of privatization, completed on June 28, received only one proposal from a group interested in becoming a primary shareholder. Equatorial, in addition to holding 15% of the business, will have the power to appoint the chair and other strategic positions. The group will not be able to sell its shares until 2029. The 17% offered in the second phase has no such restriction.

According to market sources who spoke under the condition of anonymity, the high demand in the second stage of the process is not only due to inflated orders but also due to a large gap in price compared to the current share trading level. Furthermore, investors welcomed Equatorial as a primary shareholder.

Among those interested in becoming minority shareholders are large foreign and domestic funds with a longer-term investment profile, sources say. Among the groups interested in taking on a relevant stake in the company is Perfin Infra, which planned to participate in the Aegea consortium to become a primary shareholder, had the operator submitted a proposal, according to one source.

People familiar with the process expect share prices to be reduced shortly after the offering, due to a gap between the privatization value and the current trading price. However, in the market, the expectation is that the privatization will generate a significant increase in Sabesp shares’ value in the long run.

In reports by Citi, UBS, Itaú BBA, Bradesco, and XP between May and June, Sabesp’s target price exceeded R$100. The reports have not yet been updated to reflect the recent offer results but the amounts already captured expected advances with privatization, mainly related to the implementation of a new regulatory model, which will allow greater gains and more predictability for shareholders’ financial return.

*Por Fernanda Guimarães, Taís Hirata — São Paulo

Source: Valor International
Gap between borrowing and lending rates hit 18.85 percentage points in May, marking the narrowest margin since July 2022


Alessandra Ribeiro — Foto: Leonardo Rodrigues/Valor

Alessandra Ribeiro — Foto: Leonardo Rodrigues/Valor

The banking spread in Brazil, the premium that financial institutions add to loans, has dipped to its lowest point in nearly two years. Yet, the fluctuating interest rate landscape casts shadows over the sustainability of this trend.

In May, the average banking spread, which gauges the disparity between the rates financial institutions charge on loans and the rates at which they acquire funds, was recorded at 18.85 percentage points. This is a significant drop of 3.13 points from May of the previous year, marking the commencement of the decline and representing the lowest figure since July 2022. The Central Bank reports that this reduction occurred both among legal entities, where spreads decreased by 1.21 points to 8.4, and individuals, where they dropped 4.45 points to 23.86.

This shift is largely attributed to changes in the composition of credit issued post-pandemic, with a tilt towards safer, lower-interest loans. “Since the end of 2022, banks have become slightly more selective,” noted Rafael Schiozer, a finance professor at Fundação Getulio Vargas.

A shift in credit allocation priorities is evident, with a pronounced focus on options like cash credit cards and financing for durable goods or vehicles. Central Bank data reveals a 41.3% increase in vehicle purchase credit this year alone.

Alessandra Ribeiro, director of macroeconomics and sector analysis at Tendências Consultoria, attributes the significant reduction in the individual banking spread partly to a decrease in default rates, which dropped from 4.2% in May last year to 3.7% in the same month of 2024.

She points to improved labor market conditions and the Desenrola Program (the government’s debt renegotiation program), which facilitated debt renegotiation, as crucial contributors to this trend. “The decline in defaults, combined with a robust job market, lowers the perceived risk,” Ms. Ribeiro noted. “This, in turn, enables banks to mitigate the risk priced into their rates, fostering a reduction in the spread.”

Another factor contributing to the reduced spreads was the series of cuts in the Selic, Brazil’s benchmark interest rate, by the Central Bank’s Monetary Policy Committee (COPOM). From August 2023 to May, the benchmark interest rate decreased to 10.5% from 13.75%, measured annually. However, the uncertain future trajectory of the Selic, influenced by an unpredictable external environment, fiscal instability, and President Lula’s criticisms of the Central Bank, casts doubt on the continued narrowing of the spread.

The reduction cycle paused in June, and according to the latest Focus survey, market projections hold that the basic interest rate will stay at the current level of 10.5% through year-end. Earlier in the year, projections anticipated the Selic would close at 9%.

“The future of the spread hinges somewhat on the stabilization of long-term rates,” said Mr. Schiozer. “If investors believe that President Lula’s actions have minimal impact on monetary policy and that fiscal policy will remain stable, long-term rates are likely to decrease, encouraging banks to embrace more risk. Conversely, if the situation worsens or remains unresolved, banks may become more cautious.”

Rubens Sardenberg, director of economics, prudential regulation, and risks at the Brazilian Federation of Banks (Febraban), said that the medium-term trajectory of the banking spread “heavily depends on how the macroeconomic scenario unfolds.”

Conversely, Bruno Lavieri, chief economist at consultancy 4intelligence, argues that keeping the Selic rate stable at its current level through the year’s end “wouldn’t impede” the narrowing of the spread. He suggested that the spread “seems more influenced by banks’ risk aversion rather than the broader economic cycle.”

“The outlook is for the spread to continue its downward trend, though at a gradual pace, given that defaults, particularly among individuals, have also been decreasing slowly,” Mr. Lavieri added.

In addition to cyclical shifts, structural measures aimed at reducing the banking spread have been intensified since the administration of former President Michel Temer. These efforts include updates to the positive credit register, the launch of open finance, and the establishment of a new legal framework for guarantees. “We’re not stationary; we are making progress, but it’s a long-term journey,” noted Mr. Sardenberg of Febraban.

The current economic team under President Lula views the spread in Brazil as being driven primarily by two factors: default rates and the profit margins of financial institutions. The Ministry of Finance estimates that reducing the impact of these two factors on the spread by half would equate to a permanent 5-percentage-point reduction in the Selic rate.

Furthermore, to enhance overall credit access for legal entities, the economic team is promoting two legislative measures. The first (14,905/24), ratified by President Lula in late June, standardizes the regulations for lending outside the traditional banking system. The second (2,925/23), aimed at safeguarding capital market investors from accounting fraud, is currently pending in Brazil’s Lower House, the Chamber of Deputies. Analysts anticipate that these measures will enable companies to secure more affordable credit from the capital market despite the persistently high banking spread.

A third, broader factor that the Ministry of Finance considers a potential reducer of the banking spread for companies is the tax reform on consumption. The Ministry asserts that the new regulations will permit borrowers to reclaim taxes incorporated into transactions, effectively lowering the margin.

Ms. Ribeiro, from Tendências Consultoria, expresses skepticism about the reform’s direct influence on reducing the spread but acknowledges a possible indirect impact. According to her, enhancing the tax system could boost productivity and competitiveness, which in turn would affect growth potential and employment. This improvement could lower risk perception, ultimately impacting the spread. “We see more potential through this indirect route,” she noted.

*Por Estevão Taiar, Gabriel Shinohara — Brasília

Source: Valor International
National Petroleum Agency’s Director-General Rodolfo Saboia says regulator needs mandate; lack of resources could be an issue


Rodolfo Saboia — Foto: Leo Pinheiro/Valor

Rodolfo Saboia — Foto: Leo Pinheiro/Valor

Brazil’s Petroleum Agency (ANP) is gearing up to regulate the hydrogen market, but according to the agency’s director-general, Rodolfo Saboia, a lack of resources could hinder this effort. Mr. Saboia mentioned Tuesday that the agency is “like a player waiting to enter the field” regarding hydrogen. He added that while the ANP is preparing to engage in the market, it still needs the official mandate.

“The ANP is observing the developments in hydrogen regulation and its integration into Brazil’s energy mix,” Mr. Saboia said at an event hosted by the Federation of Industries of the State of Rio de Janeiro (FIRJAN) on Tuesday. “It is expected that the ANP will be tasked with regulating hydrogen, but we are currently in the position of a player waiting to enter the field and unable to act yet.”

Mr. Saboia, whose term ends on December 22, noted that ANP staff are independently preparing and qualifying themselves to become hydrogen specialists. “The agency needs to await the legal mandate to allocate resources, which are currently scarce, for personnel training,” he said.

ANP staff have emphasized in recent months that the agency is facing a resource shortage. Mr. Saboia stated that it is difficult to specify which operations are delayed due to the situation, but he acknowledged a backlog of demands. “There is an opinion from the TCU [a public spending watchdog], for example, stating that the lack of personnel impacts the regulation of the new gas market. We haven’t had a public exam since 2015, and the budget has been declining for over 10 years,” he said.

Industry experts attending the FIRJAN event agreed on the need to advance hydrogen market regulation. Paulo Emílio Valadão de Miranda, president of the Brazilian Hydrogen Association (ABH2) and a professor at the Federal University of Rio de Janeiro (UFRJ), emphasized the importance of strengthening Brazil’s domestic market to position the country as a future hydrogen exporter. “Brazil has the potential to develop a significant internal market for the energy use of hydrogen, which will help decarbonize societal activities,” he said.

A bill regulating so-called green hydrogen, which has low carbon emissions, was approved by the Senate on July 3 and, due to modifications, will return to the Lower House for further consideration. The Senate included provisions for hydrogen production from hydropower, ethanol, biogas, and biomethane. The original text only allowed for solar and wind generation.

*Por Kariny Leal — Rio de Janeiro

Source: Valor International

The accounting scandal at retail chain Americanas has intensified discussions around “clawback” policies for recouping bonuses and benefits previously awarded to executives. This practice is becoming increasingly common both in Brazil and the United States, particularly among Brazilian companies with ADRs listed on the American market, such as Ambev and Vale, which already implement such rules.


Americanas said that it is awaiting the conclusion of ongoing investigations to reclaim any bonuses that improperly awarded — Foto: Domingos Peixoto/Agência Globo

Americanas said that it is awaiting the conclusion of ongoing investigations to reclaim any bonuses that improperly awarded — Foto: Domingos Peixoto/Agência Globo

Antonio Tavares Paes Júnior, a partner at Costa Tavares Paes Advogados with a master’s degree in corporate law from Columbia University, reports a surge in inquiries about clawback clauses. “The Americanas case has shed light on a topic that was previously obscure and rarely discussed outside confidential settings,” he said.

Reflecting the growing adoption of these clawback clauses, Mr. Paes Júnior noted an expansion in the range of scenarios they cover. He pointed to a recent contract he drafted, stipulating that an executive must return bonuses if they breach a non-compete agreement.

In May, B3, the Brazilian stock exchange, initiated a public consultation to discuss whether companies at its highest governance level should be mandated to implement clawback rules. These provisions typically allow a company to recoup compensation in cases of contractual breaches or managerial misconduct.

In the United States, the Securities and Exchange Commission (SEC) required companies listed on major stock exchanges like the New York Stock Exchange or Nasdaq to institute a clawback policy by December 1, 2023. This mandate also affects Brazilian companies with American Depositary Receipts (ADRs) traded in the U.S.

For instance, Ambev has a clawback policy that mandates the return of any compensation improperly received over the three completed fiscal years if the company’s financial statements are restated. In accounting terms, a fiscal year refers to a 12-month period used by corporations to compute their financial outcomes.

In its documentation, the beverage giant Ambev revealed that its clawback policy was implemented on December 1 of the previous year, aligning with the New York Stock Exchange requirements. When queried via email about whether the financial scandal at Americanas influenced the formulation of its clauses, Ambev responded that it was merely adhering to U.S. capital market regulations.

Similarly, Vale, also listed on the New York Stock Exchange, had established clawback clauses prior to the SEC’s mandate requiring such policies. The mining giant, however, chose not to comment on the issue.

Although Brazil lacks a specific law mandating clawback policies for bonus payments, numerous companies have pursued legal action to recoup payments made to executives implicated in fraud or corruption.

Americanas, currently without a clawback policy, has said that it is awaiting the conclusion of ongoing investigations to hold those involved in the alleged embezzlement accountable and to reclaim any bonuses that may have been improperly awarded. Similarly, shipbuilder Sete Brasil, which has been under court-supervised reorganization since 2016, has adopted this approach.

Engulfed in the wave of corruption scandals unveiled by Operation Car Wash, which uncovered corruption schemes in Brazil, Sete Brasil is seeking the return of bonuses from three former executives who received these payments during their tenure, as reported by Valor.

The lawsuits against these executives are confidential, but a source familiar with their developments confirmed that both have been ordered to repay millions of dollars to Sete Brasil. One of these cases is currently pending appeal before Brazil’s Superior Court of Justice.

The third executive involved with Sete Brasil consented to repay the court-mandated sum in installments.

“Having a ‘clawback’ policy simplifies the process of reclaiming funds [that were received improperly],” said Marcelo Lamego Carpenter, a partner at Sergio Bermudes Advogados, which represents Sete Brasil. “In Sete Brasil’s situation, had the executives been under such a policy, it might have precluded the numerous defenses [they presented in court].”

Moreover, a 2010 resolution from Brazil’s Central Bank mandates that unpaid portions of variable compensation for directors of financial institutions “must be proportionally returned” in cases of significant profit declines. “This is not a clawback per se,” clarifies Érika Seddon, a labor law partner at Mattos Filho.

An expert who asked to remain anonymous believes the Americanas scandal will likely encourage the adoption of clawback policies, though it’s largely driven by the existing obligations from the SEC.

On the regulatory front, a recent directive from the Brazilian Securities and Exchange Commission (CVM) requires companies with a clawback policy to disclose it on the agency’s website, according to Henrique Ferreira Antunes, a partner in the capital markets practice at Mattos Filho. “The concept of clawback as a cornerstone of good governance has been around, but it was truly catalyzed in 2022 by the SEC’s mandates, affecting both American and Brazilian companies listed abroad,” Mr. Antunes further explained.

*Por Rodrigo Carro — São Paulo

Source: Valor International
Negotiations underway to establish measures for limiting standard VAT rate to 26.5%


Rodrigo Pacheco — Foto: Jefferson Rudy/Agência Senado

Rodrigo Pacheco — Foto: Jefferson Rudy/Agência Senado

Members of the Ministry of Finance and the Senate are already negotiating ways to ensure the effectiveness of the provision included in the consumer tax reform regulations to limit the standard rate to 26.5%. Under discussion is the creation of a program that establishes a hierarchy of measures that can be adopted to reduce the tax rate if it exceeds the maximum limit. Valor has learned the idea is to include this detail in the text of the bill as it goes through the Senate.

Supplementary Bill (PLP) 68, the main proposal for regulating consumer tax reform, was passed on Wednesday night in the Lower House. The lawmakers included in the bill text a measure to limit the standard rate to 26.5%, the sum of the Contribution on Goods and Services (CBS) and the Tax on Goods and Services (IBS).

The initiative came in the face of an increase in exceptions, intending to prevent them from raising the standard rate of the new Value Added Tax (VAT). However, parliamentarians, members of the government, and experts pondered that it was not clear enough how this measure would work in practice.

As a result, people close to the economic team have already contacted senators to establish a program that sets out responsibilities and a timetable for action. The first mechanism would be a command for the government to reduce the number of exceptions to general taxation. This would be followed by other measures such as linearly cutting exceptionalities and raising taxes on income to compensate for the consumption tax. Or a combination of these measures. The details are still being worked out.

In an initial survey, the idea was presented to the Senate leadership, whose president is Senator Rodrigo Pacheco. According to sources, the idea was well received. Negotiators have argued that the tax rate cap needs to be backed up by a set of measures that allow it to be complied with. It’s a logic similar to that of the fiscal framework, in which the fiscal target is supported by a “ladder” of restrictions on spending in the event of non-compliance.

In the suggestion put forward by the government, exceeding the 26.5% limit could itself be a trigger to set off the reviews of the tax reform’s exceptionalities, which will otherwise be carried out every five years.

This way, the measures to ensure the VAT rate does not exceed the stipulated level would be triggered automatically. The version approved in the Lower House only stipulates that, in the event of the cap being exceeded, the government will send a supplementary bill to revise the list of exceptions. However, it does not impose any kind of penalty if the bill is not approved, which makes it possible for the rule not to be complied with in practice.

This mechanism was not initially on the radar of the government and Congress, but it was a political solution to include proteins in the tax-exempt basic food basket. The exemption of meat had been facing resistance because, in theory, it would cause an increase of 0.53 percentage points in the standard rate, estimated at 26.5% without considering this exception.

The increase would happen because the reform is based on maintaining current tax collection. Therefore, reducing taxes on products such as animal protein, cheese and medicines, as the Lower House has done, would increase the standard rate charged on other products.

According to coalition parliamentarians who defended the inclusion of proteins in the basic food basket, the contradiction between increasing the list of exceptions and capping the tax rate could be mitigated by efficiency gains in the fight against tax evasion, delinquency, and litigation in tax collection. This gain could occur, said a source in the technical area, but it will depend on how the collection of IBS and CBS is structured.

The government’s ambition is to have a system that is at the cutting edge of technology, like the banking services in Brazil today. This would make tax collection more efficient and the country’s consumption tax system the most modern in the world.

These changes will be discussed at the same time as the Finance Ministry is working on the next stage: income tax. The issue has been studied by the technical area since last year, but the proposal will begin to be formatted in August. The plan is to send it to Congress at the end of this year, after the elections, in order to discuss it in the first half of 2025.

As soon as he was officially confirmed as the rapporteur for the regulation project, Senator Eduardo Braga told journalists that he would maintain the objective of guaranteeing the neutrality of the tax burden in this case. He was also the rapporteur for the constitutional amendment proposal that established the tax reform.

The bill is expected to pass through the Constitution and Justice Committee (CCJ) before going to the floor vote. As the supplementary bill is expected to be altered by Mr. Braga and receive possible amendments from other senators, the tendency is for the proposal to still go back to the Lower House this year.

The government intends to finish the approval of this part of the consumer tax reform regulations by December. At the same time, the Lower House is still debating the project for the management committee of the new IBS.

*Por Fernando Exman, Julia Lindner, Caetano Tonet, Lu Aiko Otta — Brasília

Source:Valor International
Senate President Pacheco’s proposal alters indexation, freezes payments, and sets debt at R$700bn to be repaid over a span of 30 years


Rodrigo Pacheco — Foto: Geraldo Magela/Agência Senado

Rodrigo Pacheco — Foto: Geraldo Magela/Agência Senado

Brazilian Senate President Rodrigo Pacheco introduced on Tuesday (9) a supplementary bill proposing new guidelines for state debt repayment to the federal government. This legislative change, initiated by the Senate leader, proposes that the total principal of around R$700 billion be fixed and repaid over a span of 30 years. The largest portions of this debt are attributed to the states of Minas Gerais, São Paulo, Rio de Janeiro, and Rio Grande do Sul.

Under the new bill, states would have the option to negotiate the transfer of assets to reduce their federal debts. The interest adjustment index could shift from the current rate of IPCA plus 4% to just the IPCA (Brazil’s benchmark inflation index). Moreover, states could receive a reduction of up to two percentage points on the interest rate by transferring assets amounting to over 20% of the total debt value.

If the transferred asset value falls between 10% and 20% of the total debt, states can secure a deduction of one percentage point. Additionally, the bill includes provisions for further reductions: one percentage point if the equivalent funds are invested within the state in education, infrastructure, or public safety, and another percentage point is allocated to the National Equalization Fund, which benefits all entities, including those without debts.

Originally, the Ministry of Finance had proposed that reductions in debt interest be contingent upon increasing enrollments in technical secondary education. However, Senator Pacheco’s bill stipulates that investments must be flexible but are conditional upon states achieving annual performance goals related to technical secondary education. Should a state fail to meet these benchmarks, 60% of the funds must mandatorily be directed towards developing vocational education.

Sources from the Ministry of Finance have expressed reservations about the Senate’s proposal, describing it as “far from ideal” and markedly different from the original plan proposed by the ministry. Preliminary internal evaluations suggest that the proposal could harm the federal budget by disrupting financial flows and may not even benefit states like Minas Gerais and Rio de Janeiro, which are actively seeking to renegotiate their debts.

When asked about the bill, Finance Minister Fernando Haddad acknowledged that he had not yet reviewed the text but emphasized the importance of ensuring it does not adversely affect federal accounts.

“We are aiming for zero impact on the federal government’s primary accounts. It’s crucial to maintain this stance, as any deviation could lead to significant issues with the national accounts, and we cannot afford errors in this area,” the minister told reporters.

Senate President Pacheco appointed Senator Davi Alcolumbre, the head of the Constitution and Justice Commission (CCJ) and a close ally, as the rapporteur. Mr. Pacheco aims for the proposal to be voted on by July 18th, just before the informal recess of the Brazilian Congress begins.

Despite the urgency, the Senate president has called for “collaboration” from his colleagues, acknowledging the lack of a unified stance among the Ministry of Finance and governors.

“We have a sustainable program, a project that has been thoroughly developed in collaboration with the Ministry of Finance and the governors. Clearly, not all points have been settled with the Ministry of Finance or the governors. Now is the moment for everyone to come to the table and work out what can be improved,” he stated.

According to government insiders, Senator Pacheco might be broadening benefits for states as a strategic move to counteract criticism from Minas Gerais Governor Romeu Zema, as both are locked in a political rivalry.

Senator Pacheco noted that if the indebted states join the Program for the Full Payment of State Debts (ProPag) and reduce the interest rate to 4%, their combined debts would decrease from R$700 billion to R$672 billion. Despite the federal government foregoing R$28 billion annually under this plan, Mr. Pacheco argues that the arrangement is ultimately beneficial for both parties.

“The federal government’s aim is to collect, and the state’s aim is to pay, yet the debt gap widens. We are offering a way to balance this out. This is more than a financial transaction—it’s about strengthening the federal relationship. It involves investing in the states, allowing the federal budget to effectively collect the principal,” he contended.

The proposed bill includes an option for states to transfer “net and certain credits” with the private sector to the federal government. For instance, this could allow the Minas Gerais government to apply what remains of Vale’s compensation payments for the Brumadinho dam disaster towards reducing its debt burden. Federal government officials, however, are cautious about this clause, expressing concerns about the inclusion of potentially unrecoverable debts.

As the bill was being drafted, governors and lawmakers pushed to incorporate options for negotiating discounts on both interest and principal amounts of the state debts. Senator Pacheco pointed out that such discounts would contravene the Fiscal Responsibility Law (LRF).

Efforts by governors to utilize funds from the States Compensation Fund, established during tax reform, to alleviate debt were also proposed but ultimately rejected.

Felipe Salto, former secretary of Finance and Planning for São Paulo and now chief economist at Warren Investimentos, expresses deep concerns about the Senate’s proposal. “In practice, real interest rates could effectively drop to zero. This poses a significant obstacle to achieving fiscal balance, as it could diminish vital financial revenue streams while simultaneously encouraging increased spending due to the created fiscal space,” he explained.

“As if that were not enough, they are still creating an equalization fund, for which a percentage point from the reduced interest for states that participate will be directed into this fund, which will then be distributed among all states. Essentially, this is throwing money out the window,” he remarked.

Marcelo Fonseca, chief economist at Reag Investimentos, acknowledges the potential benefits of the federal government acting as a “lender of last resort” due to its greater borrowing capacity compared to the states. However, he notes that, upon “initial review,” Senator Pacheco’s proposal appears “fraught with issues,”—some of which are recurrent—notably, the lack of “substantial conditions that allow adjustments and reforms,” which are crucial for states to improve their fiscal health.

Source: Valor International
Mining company to cut list to three by July’s end, with CEO appointment expected in August


Vale’s board wants to turn the page and is looking for an executive who can lead the company’s growth process — Foto: Leo Pinheiro/Valor

Vale’s board wants to turn the page and is looking for an executive who can lead the company’s growth process — Foto: Leo Pinheiro/Valor

An initial shortlist of 15 potential candidates for Vale’s CEO position was made public Tuesday amidst the mining company’s troubled succession process, which has been dragging on since 2023. The names—most of them revealed by O Globo Columnist Lauro Jardim—include executives from major Brazilian companies, including EmbraerGerdauKlabin, and Engie. Only two are from the mining sector, two are foreigners, and only one is a woman, engineer Ana Zambelli, who has a long history in the oil and gas sector.

Valor found that this first selection, prepared by Russell Reynolds consultancy, has displeased Previ, the pension fund of Banco do Brasil’s employees, as it lacks a name closer to the government.

In the selection process, the head-hunting consultancy indicates some executives who are regarded as top priorities for the position and suggests candidates who are willing to participate in a second stage of the process. The idea is that three names would be selected by the end of the month and the selection would be completed by the end of August, according to people familiar with the matter. Valor did not have access to the scores each of these top candidates received.

Some of the company’s shareholders interviewed by Valor expressed dissatisfaction with the list prepared by the consultancy.

Names such as Cristiano Teixeira (Klabin), Gustavo Werneck (Gerdau), and Francisco Gomes Neto (Embraer) were well received by shareholders given their successful track record in their respective companies. Other names, such as Pedro Parente (EB Capital) and Antonio Maciel Neto (CAOA), are said not to represent the invigorating “new blood” that the company wants to bring in to grow again, according to sources. When contacted, none of the executives on the list returned the calls. The foreign executives cited, Pablo Di Si (Volkswagen) and Antonio Filosa (Jeep), would face resistance from shareholders. Mr. Filosa said he has not been contacted.

The selection carried out by the head-hunting consultancy focused on names linked to the industrial sector, according to one candidate who spoke with Valor. The list does not include executives linked to the financial market.

Some shareholders argue that Vale’s succession process should be accelerated to end the crisis opened by the expected change in command. However, the difficulty in finding an executive who could start immediately is highlighted as the main hindrance in the process.

Executives included in the list who spoke on condition of anonymity confirmed that immediate availability may be a problem but it could be negotiated. Some cite problems related to the environmental disasters caused by Vale’s dam bursts in Mariana (2015) and Brumadinho (2019), in Minas Gerais, although the company represents an important challenge in a seasoned executive’s career.

Behind the scenes, Previ, a key shareholder since Vale’s 1997 privatization, has been seen as the Brazilian president’s point of contact for the CEO succession process from the start of the Lula administration. This process has been marked by several government attempts to intervene in the company.

Sources close to Previ denied that there is any type of pressure to change or add names to the first list of candidates provided by Russel Reynolds. Valor found that the list was submitted on Monday (8) to the people and compensation committee, coordinated by Previ’s CEO João Fukunaga, who holds one of the pension fund’s two seats on Vale’s board of directors. Previ’s other board member is the company’s chairman, Daniel Stieler. The board met on Tuesday (9) and the list was discussed. Messrs. Fukunaga and Stieler did not immediately respond to Valor’s request for comments.

Some names close to the government that have been mentioned as possible candidates include Paulo Caffarelli, former Banco do Brasil CEO, and, more recently, Bruno Dantas, president of the Federal Court of Accounts (TCU). The first name cited was former Minister of Finance Guido Mantega, but this potential nomination wasn’t well received by the market. The discussions about the mining company’s succession divided the board. Other names mentioned during the succession process included Vale’s former CEO Murilo Ferreira, who was ahead of the mining company during the Rousseff administration, and Aldemir Bendine. Their names were not on Russell Reynolds’s initial list. Mr. Dantas did not immediately respond to Valor’s request for comments.

Vale’s CEO succession process has a defined governance protocol, and the company has announced a timeline for Eduardo Bartolomeo, the current CEO, to be replaced by December. However, the negative impact of this prolonged process on the company has prompted shareholders and managers to work towards expediting the CEO transition. Officially, these expedited dates are not part of the company’s publicly disclosed timeline.

Russell Reynolds’s first list will be narrowed down to reduce the number of candidates to three names. According to sources, there is an agreement under which the final list should include an internal candidate, who could be Chief Financial Officer Gustavo Pimenta. Then, there would be two other candidates to be appointed and the name of the new CEO would emerge from this list of three.

Valor found that in the first list, the consultancy made a selection by including candidates according to technical criteria. However, the final decision on whoever would move on to the next stage of selection will be up to Vale’s board of directors, currently comprised of 11 members, after two independent directors resigned. José Luciano Penido resigned in March when a letter signed by him criticizing the succession process became public. He made a recanting statement a month later and an internal investigation by Vale indicated that the succession process complied with governance. Last week, Canadian board member Vera Marie Inkster also resigned.

The board was reduced to six independent members, which is below the rules set by the company’s bylaws. Vale should call an Extraordinary General Meeting (AGE), on a date yet to be set, to reconstitute the board.

In a note released on Tuesday (9) night, the mining company informed that Russell Reynolds continues to provide the company with advisory services to select the new CEO. “The actions by Vale’s board of directors continue to be carried out as per communication to the market on May 1, 2024. Vale’s CEO succession process is carried out in compliance with the company’s bylaws and corporate policies, as well as the board of directors’ internal regulations and current legislation.” The company adds that Vale’s board of directors has not reached any conclusion to date regarding the list of candidates and reaffirms that it will keep the market posted on any relevant developments regarding the selection of the new CEO.

Vale’s management is pursuing an executive with a profile capable of taking the company back to growth after the problems that followed dam collapses in recent years. The company faces environmental licensing problems, especially in Pará, where its main reserves are located, in Carajás. According to sources close to the company, there is a mix of competencies to be observed in choosing the new CEO. That includes, for example, a required international experience in previous positions held by the executive. Another point pursued is that the executive has good communication skills and a focus on institutional relationships with stakeholders.

*Por Mônica Scaramuzzo, Francisco Góes, Stella Fontes, Kariny Leal — São Paulo, Rio de Janeiro

Source: Valor International