Johnston: Blame It on Rio: GE’s Brazilian Headache

David Cay Johnston has published Blame It on Rio: GE’s Brazilian Headache, 50 Tax Notes In’l ___ (June 30, 2008). Here is the summary:

In 2005 the new manager of a General Electric subsidiary in Brazil that made light bulbs and lighting equipment got a tip, the company says. It led to his discovering something curious in the company’s records: Up to 64% of annual sales were recorded as going to wholesale distributors in lightly populated regions near the Amazon River.

Valter Moreira, the manager, noted in a report to his GE bosses in America that half of Brazilians live in urban states like São Paulo and Rio de Janeiro. So why would so many sales be made, at least on paper, to areas where few people lived? Moreira’s report explained that urban Brazilian states charged the subsidiary a 19% VAT on its bulbs, switches, and fixtures, while the rural states charged just 7% or none at all.

In his PowerPoint presentation to GE executives in the United States, Moreira analyzed sales patterns by vendor and supposed location of the sale. His report cited "suspicious" invoices as "an indication of possible tax evasion" that saved GE either 12 cents or 19 cents on each dollar of sales. On $100 million of sales, that would be an extra $12 million to $19 million the company could use for all sorts of things, from lowering prices to gain market share, to funneling money to anyone from a corrupt purchasing agent to cronies of powerful politicians, or inflating the pay of its executives and sales agents.

All of these issues would come up internally in the months ahead, but would not be disclosed to American or Brazilian authorities or GE shareholders. Moreira’s report noted that concerns about suspicious practices pointing toward tax evasion had been raised internally six years earlier, in 1999. His language suggests these practices were established long before then.

Yet GE, whose internal motto is "integrity always," had allowed the practices to continue and to grow, cutting them back only after Moreira came on board. The tax schemes and subsequent events are detailed in hundreds of pages of internal GE e-mails, memos, and legal opinions obtained by Tax Analysts. A lawyer for a participant in some of the events provided the documents on the condition that the source not be identified. The internal documents offer a rare and candid look at how, behind closed doors, GE executives, managers, and lawyers dealt with evidence of systematic tax cheating that flourished over many years.

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