OREANDA-NEWS.  The special purpose vehicles (SPV) several Brazilian state governments have set up to issue debt backed by unpaid taxes ("divida ativa" in Portuguese) hold some important risks, Fitch Ratings says. In general, debt issued by special purpose vehicles like these carry the private sector risk of the underlying assets. However, these vehicles also have embedded political risk. Tax debt restructuring programs may offer generous writedowns of both the past due taxes and fines. If that happens, states would need to add assets to the SPV to maintain the cash flows.

Rio de Janeiro (BBB-/Negative) created the most recent SPV. Others states should follow. Rio has approximately BRL66 billion (USD20.61 billion) in unpaid taxes and has been able to collect only BRL350 million (0.5% of the unpaid amount) per year. This modest recovery rate can be mainly explained by the reluctance to write down the debt, which overstated the amount of tax in arrears and the poor collection efforts. Rio de Janeiro estimates it could issue up to BRL4.5 billion (USD1.41 billion) in debentures backed by unpaid taxes.

Under the International Accounting Standards Board, Brazilian states should account for unpaid taxes that are unrecoverable. Many are related to long legal disputes with companies that are no longer in business. Santa Catarina (BBB-/Negative) is one example. 99.5% of its BRL10.3 billion (USD3.22 billion) in unpaid taxes is considered unrecoverable in the short term.

The state of Sao Paulo (BBB/Negative) has segregated the amount of unpaid taxes into two main categories. One holds taxes due from companies that are operational. These tax receivables accounted for 36.5% of total amount of BRL279 billion (USD92 billion) as of April 2015. Inactive companies accounted for 54.8%. The remainder is due individuals. Fitch expects unpaid taxes to be repaid by active companies at the highest rate.