Tax and energy policies trigger Brazilian M&A – Briganti

New tax laws that will result in companies ´goodwill´ being valued more highly in 2015 has led to many acquisitions, while increased solar demand is also driving deals

Changes in Brazilian tax legislation, as well as the government´s drive to diversify its sources of renewable energy are creating significant opportunities for Brazilian law firms, according to Leonardo Briganti, partner at Briganti Advogados.
New tax rules to be introduced next year will also impact on some accounting rules, changing the method of evaluating assets. As the new method consists of evaluating according to the fair value, the assets will naturally have an increase in value, which is leading investors to complete acquisitions in 2014 when they can purchase businesses at cheaper prices.
The imminent change in tax legislation – that will result in a higher value of ´goodwill´ of assets as from 2015 – has led to a flurry of M&A activity.
The law changes are taking place due to the Brazilian government’s intention to make the country´s accounting regime similar to Europe´s International Financial Reporting Standards.

Companies share value to increase
“The new legislation will change the way in which the goodwill element of a company is reflected in the price of its shares”, Briganti explains. “The effect will be the increase of the company’s shares value.”
“The Brazilian government created an opportunity for foreign investors to buy companies in 2014, having the goodwill calculated under the terms of the old legislation – before the new rules are introduced in 2015 – the goodwill being therefore valued lower allowing investors to make an acquisition at a lower price,” Briganti says.
The new legislation brought some other changes, mainly regarding the tax treatment of revenues arising from foreign branches. Some companies in Brazil must now recognise some revenues from abroad for taxation purposes – in fact, such revenues will be subject to double taxation.
Briganti says that this negatively affects Brazil´s competitiveness. “This is bad for the country as it means Brazilian corporate taxpayers, when going abroad, will have to link their operations in China, for example, to their Brazilian operations,” he says.
Briganti expects that companies – that have been angered by the move, which they see as a threat to their profitability – will seek to fight the rule change via the courts. “The government has changed the law, which means Brazilian companies must recognise revenue directly produced in China, for example, [for tax purposes] – I think companies will be filing legal suits to avoid the new legislation.”
He adds that this is triggering a flurry of M&A deals in the infrastructure, telecoms and industrial sectors, with the automotive industry in particular witnessing a number of transactions.

Boost for solar sector
Meanwhile, the Brazilian government has announced its intention to start buying solar power in an effort to reduce its dependence on other energy sources, as well as give Brazil´s struggling solar sector a much-needed boost.
In addition to tax disputes potentially creating work for lawyers, the renewable energy sector is also a rich source of work. In recent years the solar power sector has endured a difficult time in Brazil. Solar power providers had been losing out to windpower companies, which were able to provide energy at a cheaper rate.
However, the Brazilian government has now made the decision that it needs to further diversify its renewable energy sources. This will be done by purchasing solar power in an effort to invigorate the domestic solar power sector.
“The government is trying to develop new sources of energy and has decided it would like to buy clear energy, so it will now be only buying from solar power producers,” Briganti says.
Foreign investors have sensed an opportunity to benefit from the surge in demand for solar power. “This is attracting a lot of international investors and it is a great opportunity to kick-start the sector – investors are interested in setting up companies with this technology in Brazil as well as buying players in the Brazilian solar power sector.”