Income taxes

Income taxes in Brazil comprise federal income tax and social contribution, which is an additional federal tax. The statutory composite enacted tax rate applicable in the periods presented is 34%. In other countries where we have operations, we are subject to various taxes rates depending on the jurisdiction.

We analyze the potential tax impact associated with undistributed earnings by each of our subsidiaries. For those subsidiaries in which the undistributed earnings would be taxable when remitted to the parent company, no deferred tax is recognized, based on generally accepted accounting principles.

The amount reported as income tax expense in our condensed consolidated financial statements is reconciled to the statutory rates as follows:


	Three-month period ended (unaudited)
	March 31, 2011									December 31, 2010									March 31, 2010
	Brazil			Foreign			Total			Brazil			Foreign			Total			Brazil			Foreign			Total
Income before discontinued operations, income taxes, equity results and noncontrolling interests		4,518			3,353			7,871			5,581			1,301			6,882			220			1,165			1,385
Exchange variation (not taxable) or not deductible		—			47			47			—			114			114			—			(416	)		(416	)


		4,518			3,400			7,918			5,581			1,415			6,996			220			749			969


Tax at Brazilian composite rate		(1,536	)		(1,156	)		(2,692	)		(1,898	)		(481	)		(2,379	)		(75	)		(254	)		(329	)
Adjustments to derive effective tax rate:
Tax benefit on interest attributed to stockholders		436			—			436			369			—			369			209			—			209
Difference on tax rates of foreign income		—			748			748			—			699			699			—			324			324
Tax incentives		171			—			171			198			—			198			17			—			17
Valuation allowance reversal (provision)
Other non-taxable, income/non deductible expenses		13			(53	)		(40	)		82			(106	)		(24	)		(4	)		22			18


Income tax per consolidated statements of income		(916	)		(461	)		(1,377	)		(1,249	)		112			(1,137	)		147			92			239

Vale and some subsidiaries in Brazil were granted with tax incentives that provide for a partial reduction of the income tax due related to certain regional operations of iron ore, railroad, manganese, copper, bauxite, alumina, aluminum, kaolin and potash. The tax benefit is calculated based on taxable profit adjusted by the tax incentive (so-called “exploration profit”) taking into consideration the operational profit of the projects that benefit from the tax incentive during a fixed period. In general, such tax incentives expire in 2018. Part of the northern railroad and iron ore operations have been granted with tax incentives for a period of 10 years starting from 2009. The tax savings must be registered in a special capital (profit) reserve in the net equity of the entity that benefits from the tax incentive and cannot be distributed as dividends to the stockholders.

We are also allowed to reinvest part of the tax savings in the acquisition of new equipment to be used in the operations that enjoy the tax benefit subject to subsequent approval from the Brazilian regulatory agencies Superintendência de Desenvolvimento da Amazônia — SUDAM and Superintendência de Desenvolvimento do Nordeste — SUDENE. When the reinvestment is approved, the corresponding tax benefit must also be accounted for in a special profit reserve and is also subject to the same restrictions with respect to future dividend distributions to the stockholders.

We also have income tax incentives related to our Goro project under development in New Caledonia (“The Goro Project”). These incentives include an income tax holiday during the construction phase of the project and throughout a 15-year period commencing in the first year in which commercial production, as defined by the applicable legislation, is achieved followed by a five-year, 50 per cent income tax holiday. The Goro Project also qualifies for certain exemptions from indirect taxes such as import duties during the construction phase and throughout the commercial life of the project. Certain of these tax benefits, including the income tax holiday, are subject to an earlier phase out, should the project achieves a specified cumulative rate of return. We are subject to a branch profit tax commencing in the first year in which commercial production is achieved, as defined by the applicable legislation. To date, we have not recorded any taxable income for New Caledonian tax purposes. The benefits of this legislation are expected to apply with respect to taxes payable once the Goro Project is in operation. We obtained tax incentives for our projects in Mozambique, Oman and Malaysia, that will take effects when those projects start their commercial operation.

We are subject to an examination by the tax authorities for up to five years regarding our operations in Brazil, up to ten years for Indonesia, and up to seven years for Canada for income taxes.