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INCOME AND SOCIAL CONTRIBUTION TAXES | 12 Months Ended
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Dec. 31, 2017
INCOME AND SOCIAL CONTRIBUTION TAXES |
INCOME AND SOCIAL CONTRIBUTION TAXES | NOTE 8 - INCOME AND SOCIAL CONTRIBUTION TAXES In Brazil, income taxes include federal income tax (IR) and social contribution (CS), which represents an additional federal income tax. The statutory rates for income tax and social contribution are 25% and 9%, respectively, and are applicable for the years ended December 31, 2017, 2016 and 2015. The foreign subsidiaries of the Company are subject to taxation at rates ranging between 22.6% and 35.0%, without considering there are subsidiaries abroad with zero tax rate, which have mainly financial activities. The differences between the Brazilian tax rates and the rates of other countries are presented under “Difference in tax rates in foreign companies” in the reconciliation of income tax and social contribution below. a) Reconciliations of income and social contribution taxes at statutory rates to amounts presented in the Statement of Income are as follows:
|  | 2017 |  | 2016 |  | 2015 |
Income (loss) before income taxes |  | (43,276 | ) | (2,581,615 | ) | (6,094,408 | )
Statutory tax rates |  | 34 | % | 34 | % | 34 | %
Income and social contribution taxes at statutory rates |  | 14,714 |  | 877,749 |  | 2,072,099 |
Tax adjustment with respect to: |  |  |  |  |  |  |
- Difference in tax rates in foreign companies |  | (183,787 | ) | (1,162,174 | ) | (222,553 | )
- Equity in earnings of unconsolidated companies |  | (11,763 | ) | (4,342 | ) | (8,331 | )
- Interest on equity* |  | 113 |  | (162 | ) | 63,407 |
- Tax credits and incentives |  | 23,185 |  | 18,494 |  | 19,459 |
- Tax deductible goodwill recorded in statutory books |  | — |  | 36,469 |  | 233,029 |
- No recognition of deferred tax assets |  | — |  | (40,279 | ) | (387,668 | )
- Capital Gain** |  | (98,290 | ) | — |  | — |
- Write-down of deferred tax asset*** |  | — |  | — |  | (284,014 | )
- Other permanent differences, net |  | (39,563 | ) | (30,069 | ) | 12,994 |
Income and social contribution taxes |  | (295,391 | ) | (304,314 | ) | 1,498,422 |
Current |  | (313,758 | ) | (110,511 | ) | (158,450 | )
Deferred |  | 18,367 |  | (193,803 | ) | 1,656,872 |
(*) Brazilian Law 9,249/95 provides that a company may, at its sole discretion, consider dividends distributions to shareholders to be considered as interest on own capital — subject to specific limitations - which has the effect of a taxable deduction in the determination of income tax and social contribution. The limitation is the greater of (i) shareholders’ equity multiplied by the TJLP (Long Term Interest Rate) rate or (ii) 50% of the net income in the fiscal year. This expense is not recognized for financial reporting purposes and thus it does not impact accounting profit. (**) The merger of Gerdau Aços Especiais S.A. and Gerdau América Latina Part. S.A. at Gerdau S.A., generated a taxable capital gain. (***) The Company assessed the recoverability of certain deferred income tax assets and, due to the lack of expected utilization of these assets because of the adjustment of the long-term investment plan in one of its foreign subsidiaries and registered a write-down of R$ 284,014 in 2015. b) Breakdown and changes in deferred income and social contribution tax assets and liabilities at statutory tax rates:
|  | Balance as of January 1, 2015 |  | Recognized in income |  | Comprehensive Income |  | Balance as of December 31, 2015 |
Tax loss carryforward |  | 1,003,441 |  | (259,976 | ) | 144,515 |  | 887,980 |
Social contribution tax losses |  | 148,827 |  | 42,811 |  | — |  | 191,638 |
Provision for tax, civil and labor liabilities |  | 527,731 |  | 110,318 |  | 1,517 |  | 639,566 |
Benefits granted to employees |  | 431,328 |  | (25,694 | ) | 144,231 |  | 549,865 |
Other temporary differences |  | 210,609 |  | 247,458 |  | (76,076 | ) | 381,991 |
Deferred exchange variance* |  | 874,742 |  | 1,292,709 |  | (9,302 | ) | 2,158,149 |
Provision for losses |  | 54,938 |  | 95,596 |  | 1,144 |  | 151,678 |
Difference between book value and tax base of assets acquired in business combinations |  | (1,628,973 | ) | 153,650 |  | (92,557 | ) | (1,567,880 | )
|  | 1,622,643 |  | 1,656,872 |  | 113,472 |  | 3,392,987 |
Non-current assets |  | 2,567,189 |  |  |  |  |  | 4,307,462 |
Non-current liabilities |  | (944,546 | ) |  |  |  |  | (914,475 | )
* Corresponds to deferred taxes over foreign exchange gains and loss which certain subsidiaries elected to tax on a cash basis
|  | Balance as of December 31, 2015 |  | Recognized in income |  | Effect of selling of subsidiary and others |  | Comprehensive Income |  | Balance as of December 31, 2016 |
Tax loss carryforward |  | 887,980 |  | 327,743 |  | (263,297 | ) | (78,069 | ) | 874,357 |
Social contribution tax losses |  | 191,638 |  | 120,254 |  | — |  | — |  | 311,892 |
Provision for tax, civil and labor liabilities |  | 639,566 |  | 118,526 |  | (2,671 | ) | (223 | ) | 755,198 |
Benefits granted to employees |  | 549,865 |  | (67,133 | ) | 34,982 |  | (85,177 | ) | 432,537 |
Other temporary differences |  | 381,991 |  | (21,985 | ) | 20,776 |  | (30,020 | ) | 350,762 |
Deferred exchange variance* |  | 2,158,149 |  | (907,690 | ) | — |  | 1,083 |  | 1,251,542 |
Provision for losses |  | 151,678 |  | (34,059 | ) | (4,671 | ) | (12 | ) | 112,936 |
Difference between book value and tax base of assets acquired in business combinations |  | (1,567,880 | ) | 270,541 |  | 2,984 |  | 216,925 |  | (1,077,430 | )
|  | 3,392,987 |  | (193,803 | ) | (211,897 | ) | 24,507 |  | 3,011,794 |
Non-current assets |  | 4,307,462 |  |  |  |  |  |  |  | 3,407,230 |
Non-current liabilities |  | (914,475 | ) |  |  |  |  |  |  | (395,436 | )
* Corresponds to deferred taxes over foreign exchange gains and loss which certain subsidiaries elected to tax on a cash basis
|  | Balance as of December 31, 2016 |  | Recognized in income |  | Effect of selling of subsidiary and Others |  | Comprehensive Income |  | Balance as of December 31, 2017 |
Tax loss carryforward |  | 874,357 |  | 157,402 |  | (22,362 | ) | (35,759 | ) | 973,638 |
Social contribution tax losses |  | 311,892 |  | 58,963 |  | (15,073 | ) | — |  | 355,782 |
Provision for tax, civil and labor liabilities |  | 755,198 |  | (479,836 | ) | 101 |  | — |  | 275,463 |
Benefits granted to employees |  | 432,537 |  | (48,466 | ) | (9,363 | ) | (91,905 | ) | 282,803 |
Other temporary differences |  | 350,762 |  | (81,627 | ) | 92,174 |  | 48,991 |  | 410,300 |
Deferred exchange variance* |  | 1,251,542 |  | (199,200 | ) | 8,185 |  | — |  | 1,060,527 |
Provision for losses |  | 112,936 |  | (2,208 | ) | — |  | — |  | 110,728 |
Difference between book value and tax base of assets acquired in business combinations |  | (1,077,430 | ) | 613,339 |  | (51,606 | ) | 18,163 |  | (497,534 | )
|  | 3,011,794 |  | 18,367 |  | 2,056 |  | (60,510 | ) | 2,971,707 |
Non-current assets |  | 3,407,230 |  |  |  |  |  |  |  | 3,054,393 |
Non-current liabilities |  | (395,436 | ) |  |  |  |  |  |  | (82,686 | )
* Corresponds to deferred taxes over foreign exchange gains and loss which certain subsidiaries elected to tax on a cash basis The recoverability analysis of deferred tax balances related to tax loss carryforwards and social contribution tax losses performed by the Company are based on its business plans and aligned with other projections and analysis performed by the Company as, for example, the impairment of assets tests. c) Estimated recovery and reversal of income and social contribution tax assets and liabilities are as follows:
|  | Assets |
|  | 2017 |  | 2016 |
2017 |  | — |  | 512,422 |
2018 |  | 326,356 |  | 391,384 |
2019 |  | 198,590 |  | 364,030 |
2020 |  | 400,597 |  | 535,937 |
2021 |  | 369,857 |  | 499,984 |
2022 on |  | 1,758,993 |  | 1,103,473 |
|  | 3,054,393 |  | 3,407,230 |
|  | Liabilities |
|  | 2017 |  | 2016 |
2017 |  | — |  | (2,283 | )
2018 |  | (2,680 | ) | (89,052 | )
2019 |  | (6,116 | ) | (56,006 | )
2020 |  | (6,498 | ) | (154,664 | )
2021 |  | (4,745 | ) | (14,496 | )
2022 on |  | (62,647 | ) | (78,935 | )
|  | (82,686 | ) | (395,436 | )
d) Tax Assets not booked: Due to the lack of opportunity to use tax losses and negative basis of social contribution in some companies in Brazil, the Company has not recorded a portion of tax assets of R$ 312,741 (R$ 317,889 as of December 31, 2016), which do not have an expiration date. The subsidiaries abroad had R$ 360,152 (R$ 349,072 as of December 31, 2016) of tax credits on capital losses for which deferred tax assets have not been booked and which expire between 2029 and 2035 and also several tax losses of state credits in the amount of R$ 1,137,548 (R$ 857,215 as of December 31, 2016), which expire at various dates between 2018 and 2037.

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