Oy asks Portuguese tax authorities to return $13.6 million paid by PT Ventures

The former Portugal Telecom SGPS, now Pharol, filed a €13.6 million interception on August 30. [13.644 583,23 euros] Against the Tax and Customs Authority. The operation was published on September 3 on the Citius portal.

But contrary to all expectations, it is not one of the tax proceedings that Pharol has brought against the tax authorities for taxes imposed before 2014 which were largely in favor of the former PT SGPS. This is an Oi process that Pharol, as agreed, must participate in at the request of the Brazilian operator.

Thus Pharol filed a $13.6 million challenge against AT, but in the name of the Brazilian operator Oi there was a tax paid by PT Ventures, which remained in Oi's orbit, and which at that time was the former shareholder of the Portuguese telecommunications company SGPS.

It should be remembered that today Pharol barely owns shares in Oi, having reduced its stake in the capital of the Brazilian operator, as of June, from 0.18% to 0.1%, which means that it has practically ceased to be a shareholder of the Brazilian company.

Jornal Economico found that Oi is demanding a refund from the tax authorities for the tax paid by PT Ventures, which owned 25% of Unitel and 40% of Multitel before 2020, the year Oi sold 25% of Unitel to Sonangol. The deal closed for $1 billion.

According to a Pharol source, the tax authority's $13.6 million challenge “was a process undertaken by PT Ventures, a company that was later merged into Oi, which Pharol was involved in because it was still within its RETGS perimeter.” [Regime especial de tributação dos grupos de sociedades]. But it has no positive or negative impact on Farol, only on Oy who is demanding a refund.”

“Since it is up to Oi to request a refund and there are no payments to be made, we have agreed to the subscription at their request,” the same source adds.

It is therefore a completely different case from other tax appeals filed or charged to Varol prior to 2014.

“We have a series of operations with the tax authority totaling about 160 million,” CEO Luis Palha da Silva explained to the newspaper Jornal Económico.

“It was already around 400 million euros, but we gained almost all of it, so we reduced the value. In any case, although we are jointly and severally liable, the obligation to pay in the event of loss of the operation falls on Oi, which has counter-guarantees provided for this purpose,” explained the CEO.

In May last year, Farol won a tax case relating to the 2006 financial year – when it was still known as Portugal Telecom – and saw a potential tax contingency reduced by €147 million.

The company announced at the time that the notification to the tax authorities with the settlement note and the statement of settlement of accounts was issued “in implementation of a decision taken in a judicial appeal process, with a positive outcome for Farol's claim.”

“In this process, Varol’s potential tax liability has been reduced significantly from €170 million, as at 30 April 2023, to €22 million, representing a reduction of €147 million,” Varol noted in May last year.

Consequently, “Varol’s potential tax liabilities decreased from approximately EUR 390 million at the end of 2022 to approximately EUR 241 million on 11 May 2023, i.e. EUR 149 million, taking into account the potential late payment interest in operations.”

In the report and accounts of Farol for the first half of 2024, in the list of risks and contingencies to which the company is exposed – in addition to the requirement to return 750 million euros to ESI – Espírito Santo International (an operation that after seven years continues without clear developments) – the tax operations before 2014 were included, for which responsibility in the event of an unfavourable outcome was transferred to Oi.

“In recent years, the total volume of operations has decreased significantly and the first semester was no exception. During this period, the value of potential or probable cases decreased by 10 million euros, with the payments made by OI to the Tax Agency, and the global amount of tax contingencies, at the end of the semester, decreased by 137 million euros. Farol.

“As of June 30, 2024 and December 31, 2023, the other current liabilities item includes refunds from the Tax Authority, the value of which has been audited in order to study various technical and legal analyses that may ultimately take another time.” Type of qualification in the future “, the company explains.

Because although Farol, “for reasons of extreme caution, has been recording in its current liabilities values ​​that correspond to the recoveries it has obtained from the State in operations with a positive outcome, these amounts are being examined in order to consider the various technical analyses – legal issues, which have not yet been fully and definitively resolved, especially regarding the ownership of these values, which justifies maintaining, also this chapter, the same accounting classification as in previous years, as stated in the report and accounts.

Bank guarantees and other guarantees provided to the tax authorities included €85 million as at 30 June 2024 and 31 December 2023, relating to tax assessments received by Varol.

The company challenged these settlements in court and provided a guarantee in accordance with Portuguese legislation. Although Portuguese law always allows for the challenge of taxes paid by the Tax Administration ex officio, it does not suspend the enforcement process unless the tax is paid or a guarantee is provided. Providing a guarantee therefore avoids the payment of the tax before a decision is made on the challenge or the seizure of assets in enforcement proceedings.

Some of the guarantees previously provided have been cancelled due to slow processes and their expiry. “Despite the expiry of some of the guarantees and the consequent cancellation, most of the tax processes are still ongoing and Oi remains liable for them, with a total amount potentially reaching EUR 144 million,” the Varol report states.

The document states that “any unfavourable decisions, specifically in tax exemptions and tax benefits, will be absorbed from the values ​​of tax losses, tax exemptions and tax benefits, calculated in the years 2010, 2011, 2012 and 2013, which can be reported for the following years and which have not been used until 2018, for an amount estimated at up to seven million euros, thus there is a possibility of reducing operations to 136 million euros.

Within the scope of the agreements concluded, Oi also undertakes to replace the bank guarantees provided by Pharol to the Tax Authority with the guarantees provided by Oi.

In cases where such substitution was not possible, Oi committed to provide similar guarantees in favour of Pharol. As such, on December 31, 2020, the Telemar Norte Leste Share Pledge Agreement entered into force up to the maximum of the current potential liabilities.

“In addition, in January 2020, following the instrument of special transactions and other undertakings, signed between Pharol and Oi, the latter, through PT Participações SGPS, made a deposit in the escrow account in the amount of €34,340,803.32, with the aim of guaranteeing Pharol in “the event of a possible conviction in tax emergencies for which Oi is responsible”, the company explains in the document.

During 2021, given the establishment of Telemar Norte Leste, Oi and Pharol on May 3, 2021, and in order to maintain the existing counter-guarantees, “reformulated the pledge contract, now consisting of 64,401,909 ordinary shares” issued by Oi. If this amount is fully used in the tax emergency, Oi undertakes to strengthen the existing counter-guarantees.

In 2024, part of the escrow account was used to pay for operations, with a current value of EUR 22.8 million.

The potential tax contingency of Varol currently amounts, as mentioned above, to EUR 144 million. Of these operations, which involve potential or probable risks of loss for Varol, the value amounts to approximately EUR 17 million, according to the tax consultants’ estimate.

In the long term, Varol's management faces two major strategic challenges. Both are conditioned by a clear conviction that the various operations in which the company is involved, given the realities of the Portuguese and Luxembourg legal systems, will have a relatively distant resolution horizon.

The first challenge is to find and determine the minimum amount of capital needed to solve the operations, and ensure that current availability reasonably exceeds future needs.

The second challenge is to determine whether this treasury surplus will be used to diversify the balance sheet or returned to shareholders.