The Company is in dispute with the Brazilian tax authorities regarding the tax deductibility of the amortization of goodwill recognized on the purchase of VR in March 2008. For the record, in Fiscal year 2017, Sodexo Pass do Brasil received a tax reassessment notice from the Brazilian tax authorities for fiscal years 2010, 2011 and 2012 relating to the deductibility for tax purposes of the amortization of goodwill recognized on the purchase of VR in March 2008. The reassessment amounted to 10 2 million euro (breaking down as 30 million euro in principal and 72 million euro in penalties and late payment interest).
Sodexo Pass do Brasil is firmly disputing this reassessment, which the Brazilian tax authorities originally envisaged during a previous tax audit covering fiscal years 2008 and 2009 but then abandoned. The Company considers that the goodwill amortization was valid, both in terms of its underlying reasons and the way it has been recorded. Therefore, the Company considers that there is a strong probability of winning the dispute with the tax authorities, and this has been confirmed by its tax advisors. Consequently, no provision was recorded for this dispute in the consolidated statement of financial position as of August 31, 2017.
This dispute was presented on August 14, 2018 for a judgment of the competent administrative court. The court ruled in favor of Sodexo Pass do Brasil as it considered that the goodwill and corresponding amortization were legitimately recognized on the acquisition of VR. The judgment therefore confirms that Sodexo Pass do Brasil acquired a full business structure when it purchased VR.
This judgment can be reversed on appeal. The Group believes, however, that the risk of change in this judgement is low.
The tax savings generated by this tax depreciation were off set in the consolidated accounts of the Group by a deferred tax expense of the same amount for each of the financial periods concerned, in accordance with the IFRS rules. The balance of the related deferred tax liability amounts to 49 million euro as of August 31, 2020 (69 million euro as of August 31, 2019).
In addition, Sodexo and its main competitors have a different interpretation from that of the Tax Administration on the deductibility of PIS/COFIN on certain purchases that are made at a zero rate. Proceedings are pending before the Superior Courts and, based on the opinion of our counsel, and the Group considers that its chances of success in these proceedings are good and therefore did not consider it necessary at this stage to provision for deductions to date.
In the context of the litigation initiated in 2015 by Octoplus, an adverse decision against meal voucher issuers was issued on December 17, 2019 by the French Competition Authority, which fined Sodexo Pass France, jointly and severally with Sodexo S.A., 126 million euro.
Sodexo Pass France and Sodexo S.A. received notification of this decision on February 6, 2020.
Sodexo has appealed this decision to the Paris Court of Appeal. After consultation with its legal advisors, the Group considers that it has strong arguments that may lead to the annulment or alteration of the French Competition Authority decision. As a result, no provision has been made for this litigation as of August 31, 2020.
On January 28, 2019, the International Center for Settlement of Investment Disputes (ICSID) delivered its decision in Sodexo’s arbitration claim against the Hungarian State in the Group’s favor. Due to changes in the regulatory and fiscal environment in Hungary related to the issuance of food and meal vouchers, Sodexo had filed a claim for ICSID arbitration in July 2014 against the Hungarian state.
This decision represents an important step in the process of resolving this dispute. However, the Hungarian state having applied for annulment of this decision on May 27, 2019, the Group has considered it was too early to record an income based on the decision of ICSID.
Group subsidiaries are also subject to tax audits that may result in reassessments. The main proceedings are described above. In each case, the risk is assessed by management and its advisors, and any estimated charge which could potentially result from such audits are recorded as provisions or tax liabilities.
To the best of the Group 's knowledge, there have been no other governmental, judicial or arbitral proceedings (including any such proceedings which are pending or threaten to be pending of which Sodexo is aware) which may have, or have had in the past 12 months, material effects on Sodexo and/or the Group’s financial position or profitability.
Sodexo is also involved in other litigations arising from its activities. The Group does not believe that liabilities relating to such litigation will in aggregate be material to its activities or to its consolidated financial position.
