C ORPORATE C RIME R EPORTER

GE Has a Brazilian Sized Headache

22 Corporate Crime Reporter 27, June 30, 2008



In 2005, a manager at a General Electric subsidiary in Brazil was perplexed.

Why were up to 64 percent of the company’s annual sales being recorded as going to distributors in lightly populated area near the Amazon River?

Why?

Because, this manager learned, while urban Brazilian states charged a 19 percent VAT tax on bulbs, switches and fixtures, the rural states charge just seven percent.

He told his superiors at GE in the United States that the suspicious invoices indicated possible tax evasion that saved GE anywhere from 12 to 19 cents on every dollar of sales.

The whole sordid affair is laid out in the current issue of Tax Notes International.

The article – Blame It on Rio: GE’s Brazilian Headache – was written by David Cay Johnston, who retired from the New York Times in April, taking a buyout after 13 years as a Pulitzer Prize winning business reporter there.

Johnston says that a lawyer for an unnamed participant in some of the GE events in Brazil provided him with hundreds of pages of internal GE e-mails, memos, and legal opinions.

Johnston says that he was working on the story while at the Times, but the Times let him take the story with him to Tax Analysts, the publisher of Tax Notes, when he moved over earlier this month.

According to the article, the GE manager, Valter Moreira, noted in a report that “100 percent of invoices to these customers” were “different than normal practice,” and he directed the local sales team to “stop this practice.”

The report also noted that concerns about suspicious practices pointing toward tax evasion had been raised internally six years earlier, in 1999.

Johnston reports that the internal documents show that the scheme Moreira found was no anomaly at the Brazilian lighting operation, known as GE Lighting or GEVISA.

“The documents discuss a second Brazilian invoicing scheme to escape state-level VAT and a separate system to evade tens of millions of dollars in Brazilian payroll taxes on compensation to the sales force, which did business in other Latin American countries as well,” Johnston reported.

Gary Sheffer, a senior GE spokesman, told Johnston that the VAT and payroll tax issues were of so little significance that the company was surprised any reporter would spend time looking into them.

But according Johnston, “while Sheffer dismissed the Brazilian tax issues as gnats on an elephant, GE took them seriously enough to commission advice from its Brazilian lawyers.”

And the Brazilian lawyers warned of “criminal tax implication,” “untrue fiscal documentation,” and “fraud” in explaining that if Brazilian authorities learned what had taken place, they would probably bring charges of tax evasion, labor tax fraud, collusion, and other crimes.

Johnston says that the lawyers cited a “high risk” of prosecution if Brazilian authorities found out what had happened.

According to the report, the Brazilian lawyers noted that GE had allowed the VAT practices to continue long after management became aware of them.

Johnston reports that one of the lawyers wrote that he was afraid that any chance to claim the company acted in good faith had been destroyed, because “good faith ceases when GE becomes aware of these facts and does nothing to correct them.”

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