Contingencies and Reassessed Taxes

6 Months Ended

Jun. 30, 2011

Contingencies and Reassessed Taxes Disclosure [Abstract]

NOTE 6 — CONTINGENCIES AND REASSESSED TAXES

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


	June 30, 2011 (unaudited)						December 31, 2010
					Long						Long
	Total		Current		Term		Total		Current		Term
R$000’	Liability		Liability		Liability		Liability		Liability		Liability
Reassessed taxes
Federal taxes (PAES)		11,009		1,530		9,479		11,639		1,580		10,059
Contingencies
ISS tax litigation		7,450		—		7,450		6,616		—		6,616
Labor litigation		1,649		—		1,649		1,885		—		1,885
Property leasing and other litigation		684		—		684		691		—		691


TOTAL		20,792		1,530		19,262		20,831		1,580		19,251

Reassessed taxes

The Company successfully applied to join two subsequent amnesty programs offered by the Brazilian federal government (REFIS in 1999 and PAES in 2003) to renegotiate Brazilian federal taxes not paid by Venbo in 1999, 2001 and at the beginning of 2002 in arrears. The second amnesty program (PAES) included the balance of the previous one (REFIS) and unpaid 2001 and 2002 federal taxes, as well as Social Security penalties.

In February 2005, the Company compared its remaining debt regarding PAES with statements provided by the Brazilian Federal Government. Those statements reported that Company’s total tax liability would be greater than the figures in the Company’s balance sheet, in the amount of approximately R$3.2 million.

During March, 2005, the Company filed a formal request with the Brazilian Federal Authorities, claiming to have its total tax liability reviewed. Such request, reconciled the amounts the Company had accrued in its accounting books to the amounts reported in the official statement at the same period. The Company believes that the amounts accrued at the balance sheet as of June 30, 2011, of R$11.0 million (R$11.6 million in December 31, 2010) are sufficient, however, there is no assurance that the outcome of this situation will not derive further liability to the Company. As of June 30, 2011, the difference between such tax liability at the statements provided by the Brazilian Federal Government and the statements reported by the Company’s was R$4.7 million (R$4.7 million in December 31, 2010).

In 2008, the Brazilian federal government detected miscalculation of the interest accrued by most companies that had joined both amnesty programs. The Company’s total tax liability increased R$2.8 million accordingly.

In accordance to the amnesty programs the Company has been paying monthly installments equivalent to 1.5% of Venbo ´s gross sales, with interest accruing at rates set by the Brazilian federal government, which are currently 6.0% per year (6.0% per year also in December 31, 2010).

During second quarter ended June 30, 2011, the Company paid approximately R$0.7 million (R$0.7 million in the same period of 2010) as part of the PAES program and no interest was charged on these payments.

During the third quarter of 2009, the Brazilian federal government launched a third amnesty program to consolidate balances from previous programs and other tax debts. The Company applied to join such program. However, the rules for the amnesty program, on tax liability consolidation and reduction in consequence to number of monthly installments chosen, have not yet been fully formalized by the Brazilian fiscal authorities. At the present moment, the Company cannot estimate when the Government will consolidate the total tax liability of such amnesty program and also cannot estimate if any material adjustment will be necessary.

Contingencies

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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 June 30, 2011, the Company has totaled R$7.4 million (R$6.6 million in December 31, 2010) in deposits, 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 tax 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 in its Consolidated Income Statements.

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 tax 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 complaint of similar magnitude.

As of June 30, 2011 the Company accounted for labor related liabilities the amount of R$1.6 million (R$1.9 million in December 31, 2010), which is considered by the Company’s management, based on the opinion of its legal advisors, sufficient to cover the Company’s current labor contingencies.

Other contingencies

The Company has experienced other contingencies related to the former owner of Venbo, to franchisees or ex-franchisees, to owners of properties where the Company held lease contracts and others. The Company cannot predict the receipt of additional claims that might be material or that might need Company ´s disbursements.

Based on an analysis of possible losses, taking into account the applicable litigation and settlement strategies of its legal advisors, the Company has sufficient resources to cover its current contingencies.