Telefonica Brasil, controlled by the Spanish group Telefonica, has warned investors about the risk that the problems of political and economic instability in Brazil will be “exacerbated” after the victory at the polls of Luiz Inacio Lula da Silva. Telefonica Brasil has included that warning in its annual report filed with the United States Securities and Exchange Commission (the SEC).
It is the first Brazilian company listed in the United States to file its annual report with the Washington-based supervisor after Lula’s return to power, which is viewed with suspicion in economic and financial circles because of the risks that his policy puts the macroeconomic and fiscal stability, increase inflation and the deficit, and scare away foreign investors.
The annual report filed by foreign companies listed in the United States (20-F) is always preceded by a chapter that lists all kinds of risks that may affect the company’s share price: economic, regulatory, technological, political, etc. Telefonica Brasil has been dedicating a chapter to political risks in recent years: “The Brazilian government has exercised, and continues to exercise, significant influence over the economy. This influence, as well as the Brazilian political and economic conditions, could negatively affect us and our price”, he repeats this year.
Following this list, Telefonica Brasil points out, as in other years, the regulatory uncertainty and repeats a phrase 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 in the Brazilian stock markets, which has negatively affected us and the trading price of our shares.”
It is then that the news comes: “These problems may be exacerbated by the results of the Brazilian presidential elections held in October 2022, in which former President Luiz Inacio Lula da Silva was re-elected (from 2003 to 2010). There is uncertainty about the policies that the new government will adopt. We cannot guarantee that the new Government will maintain the policies aimed at promoting macroeconomic stability, fiscal discipline and national and foreign investment, and the fact that the new Government does not do so may negatively affect the Brazilian economy, prices of the securities issued by Brazilian issuers like us and, ultimately, to our business, financial situation and results of operations”, it says verbatim.
The report has been registered this Friday afternoon with the US supervisor and includes recent information, such as the share repurchase plan approved on Wednesday, February 15, by the board of directors. However, although it reports that “Brazil has experienced significant political turmoil in recent years”, it does not include any mention of the assault on the democratic institutions of Brasilia on January 8. Apparently, the political chapter of the annual report has not been updated and in fact, the only time Bolsonaro is mentioned, Telefonica Brasil refers to him as “the current president”.
Taxation and lawsuits
Beyond the warnings about political risks, the Brazilian subsidiary of the group chaired by Jose Maria Alvarez-Pallete shows its concern about the possible changes that the Lula government could promote in the taxation of dividends: “The new administration proposed during the campaign Presidential President to revoke the income tax exemption on dividend distributions, which, if enacted, would increase the tax expense associated with any dividend or distribution, which could affect our ability to pay dividends and receive future dividends from our subsidiaries. Any purported tax reform, if proposed and implemented, may also significantly affect our business. Any future change in tax policy or legislation could negatively affect our activity, financial situation and operating results, ”says the company in its report.
In addition, Telefonica qualifies as “possible” that it could be defeated in other litigation with the tax authorities of much larger amounts. In federal tax procedures, the amount in claim amounts to 3,042 million reais. Much greater are the state tax procedures, where Telefonica Brasil is playing 21,712 million reais. Added to this are close to 500 million reais in municipal tax procedures and another 8,000 million in regulatory procedures. They add up to more than 33,000 million reais (about 6,000 million euros) in which the risk is not provisioned, according to its annual report.
To this are added another 5,800 million reais (just over 1,000 million euros) in proceedings brought for violating the competition rules that the Telefonica subsidiary only has covered in a small part.
In labor matters, Telefonica Brasil has registered 540 million reais to face demands from former employees and subcontractors who claim overtime payments, variable remuneration, wage parity and bonuses for unhealthy or risky work, since it considers that the risk of loss is likely. There are other labor processes for 1,490.6 million reais for which there are no provisions, since the risk of losing is lower.
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