Contingencies and Reassessed Taxes

3 Months Ended

Mar. 31, 2012

Contingencies and Reassessed Taxes Disclosure [Abstract]

NOTE 6 – CONTINGENCIES AND REASSESSED TAXES

Liabilities related to tax amnesty programs and litigation consist of the following:


R$ 000’	March 31, 2012 Unaudited						December 31, 2011
	Total Liability		Current Liability		Long Term Liability		Total Liability		Current Liability		Long Term Liability
Reassessed taxes
Federal taxes (REFIS IV)		4,233		1,912		2,321		4,121		1,940		2,181
Contingencies
REFIS IV		6,285		—		6,285		6,658				6,658
ISS tax litigation		7,860		—		7,860		7,666		—		7,666
Labor litigation		1,608		—		1,608		1,464				1,464
Property leasing and other litigation		481		—		481		246		—		246


TOTAL		20,467		1,912		18,555		20,155		1,940		18,215

Reassessed taxes

Over the past ten years, the Brazilian government has launched four amnesty programs for domestic companies to pay off tax in arrears. To apply to each program, the companies had to abandon any litigation that they may have started against the Brazilian government, and to take on the liability under dispute in such litigation. In exchange the amnesty programs guaranteed discounts of these tax debts and gave companies the opportunity to pay these debts at low interest rates over periods of time that could exceed ten years,.

Venbo had outstanding tax debts from 1999, 2000 and 2002 and, as a consequence, applied for the four amnesty programs. Venbo’s administration believed that the government had incorrectly calculated its tax liabilities in each of the amnesty program, and until September 2009 Venbo had been discussing this matter with the Brazilian government on an administrative level.

Venbo enrolled in the fourth and last amnesty program in September 2009 (the “REFIS IV program”). Its aim was to take the original debts from the previous programs, update these debts by the Brazilian Federal Bank base interest rate, and deduct the payments made during the previous programs. The Brazilian government took two years to make this calculation. At the end of September 2011, the Brazilian government announced that Venbo’s consolidated tax debt was approximately R$22.4 million. Since the amnesty program allowed income tax credits to reduce the debt, Venbo was able to reduce its tax debts by the R$11.1 million it had in income tax credits.

Venbo disagrees with the amount calculated by the Brazilian government in September 2011. Venbo believes that the Brazilian government did not consider the payments made during the prior amnesty programs, which total of R$10.4 million. According to Venbo’s records, Venbo should owe R$4.2 million after the income tax credits are included in the account.

Venbo has decided to file an administrative appeal to the Brazilian Internal Revenue Service to have the calculations for the REFIS IV program reviewed. At this time, Venbo cannot estimate what the outcome of this claim will be and whether it will be able to reduce the liability to the amount it believes it owes.

These circumstances have the following impact on the company’s consolidated financial statements:

•

the liability relating to the financing of taxes, previously stated at R$10.0 million, has been raised to R$11.3 million, charged against other operating expenses, in the income statement;

•

the portion of the liability described above which Venbo is disputing has been reclassified from the reassessed taxes account to a contingency account;

•

as described above, Venbo’s total income tax credits that were used when the debt was consolidated was R$11.3 million;

According to the REFIS IV program, Venbo will pay 154 monthly installments of approximately R$47,300; 27 monthly installments of approximately R$111,700 and 2 monthly installments of approximately R$2,700, commencing in January 2012 with interest accruing at rates set by the Brazilian federal government, which is currently 8.5%p.y.

During the three months ended March 31, 2012, the Company paid approximately R$0.5 million (R$0.4 million in the same period of 2011) related to REFIS IV program.

Contingencies

•

ISS tax litigation

None of the Company’s revenues were subject to municipal tax on services rendered (ISS) until 2003. Notwithstanding, at the beginning of 2004, a new legislation stated that royalties were to be considered liable for ISS tax payment. Although the Company is claiming in court that royalties should not be understood as payment for services rendered and therefore should not be taxed under ISS legislation, the Company is monthly depositing in court the amount claimed.

As of March 31, 2012, the Company has deposited R$7.8 million (R$7.6 million in December 31, 2011, which is considered by the Company’s management, based on the opinion of its legal advisors, sufficient to cover the Company’s current ISS tax contingencies.

During the third quarter of 2009, the Company’s claim was partially settled in court. The decision was for Rio de Janeiro municipality to reimburse the Company approximately R$0.5 million taxed before the ISS new legislation was enacted. The Company is studying how probable tax credits to be received from the municipality could be offset against taxes to be paid to the municipality, since the Company is currently depositing the amount due in court. Because of the uncertainty of realizing this tax credit, the Company did not recognize the related amount as a gain.

The referred change in ISS tax legislation triggered much debate on whether marketing fund contribution and initial fees paid by franchisees should be considered services rendered and be liable for ISS tax payment. The Company and its legal advisors understand that those figures are not covered by the ISS legislation and, accordingly, they are not subject to such taxation. The Company and its legal advisors are working to adopt all necessary measures to avoid an inadequate interpretation of ISS taxation that could lead on marketing fund contribution and initial fees.

•

Labor litigation

During 2005, the Company was ordered to pay to a former employee R$480,000. Although unusually high, the Company cannot guarantee it will not receive other labor complaints of similar magnitude.

As of March 31, 2012 the Company accounted for labor related liabilities the amount of R$1.6 million (R$1.5 million in December 31, 2011), which is considered by Management, based on the opinion of its legal advisors, sufficient to cover the Company’s existing labor contingencies.

Other contingencies

As of March 31, 2012 the Company had other unresolved claims pending related to the former owner of Venbo, to franchisees or ex-franchisees, to owners of properties where the Company held lease contracts, to former employees and others, for which its legal advisors evaluated as possible and favorable outcome. For those claims no liability was recorded in the Company’s balance sheet as per the accounting practices.

BRAZIL FAST FOOD CORP 10-Q/A