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VAT Tax Issue in Brazil | 3 Months Ended
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Apr. 30, 2014
Vat Tax Issues Disclosure [Abstract] |
VAT Tax Issue [Text Block] | 12. VAT Tax Issue in Brazil Please see footnote 10 of the Company’s Annual Report on Form 10-K for the year ended January 31, 2014 for a more detailed discussion. The Bahia state tax auditors filed several claims for VAT taxes. The claims assert that the state VAT taxes are owed to the state of domicile of the ultimate importer/user and disregarded the fact that the VAT taxes had already been paid to the neighboring state. In FY14, the Company changed its strategy regarding the large VAT tax claim as a result of the current cash flow needs in Brazil. At such time when a switch to a formal judicial proceeding is required, the Company intends to negotiate a guarantee with the court whereby the Company would either pledge its inventory as collateral for the judicial deposit or alternately would agree to deposit into an escrow account with the court system a monthly judicial deposit of a negotiated percentage of its future sales in Brazil. The Company believes it is probable it would be able to negotiate such an arrangement. The Company would then be able to avail itself of a later amnesty. Any amounts paid into the escrow would be available at such time to be applied to the amnesty payment. The Company believes it is more likely than not that it will have the cash from operations or the borrowing capacity at such time to fund such amnesty payment but no assurances can be given. Such arrangement would result in a judicial tax claim filed against the Company for 20% greater than the total claim, or approximately US $6.7 million (R15.0 million). Once this arrangement is completed, the formal judicial process could take from 5 to 10 years. The Company believes there is a strong likelihood that another amnesty would be offered by the state prior to such completion. The Company has accepted amnesty for a smaller claim which will result in 8 monthly payments of about US $19,000 (R42,000 ) which reflects abatement of 80% of penalty and interest. An accrual of US $153,000 has been charged to expense in Q4FY14 and included in Other Accrual Expenses on the Balance Sheet as of April 30, 2014. In December 2013, the Company learned of a different VAT tax claimed by the State of Sao Paulo for a tax in the amount of approximately US $45,000 and total claim including interest and penalty totaling approximately US $200,000. Management needs more time to evaluate this claim but intends to defend until the next amnesty if loss is probable and will defend totally if loss is remote. Given the lack of materiality management will make a more definite judgment when available. A table summarizing all five different VAT claims and their status is listed below:
|  | Principle |  | Interest & Penalty |  | Total |  | Approximate for Totals |  | Loss Possibility |  | Strategy |  | Collateral |
|  | R$ |  | R$ |  | R$ |  | US $ |  |  |  |  |  |  |
|  |  | 305,897 |  |  | 491,272 |  |  | 797,168 |  |  | 362,000 |  | Remote |  | To wait Judicial Process |  | New Land |
|  |  | 573,457 |  |  | 1,098,475 |  |  | 1,671,932 |  |  | 760,000 |  | Remote |  | To wait Judicial Process |  | Plant |
|  |  | 6,209,836 |  |  | 6,653,586 |  |  | 12,863,422 |  |  | 5,847,000 |  | Probable |  | To wait Judicial Process and offer Judicial Deposit (approx. 3% net sales) |  | - |
|  |  | 402,071 |  |  | 770,133 |  |  | 1,172,204 |  |  | 533,000 |  | Remote |  | To wait Judicial Process |  | New Land |
|  |  | 285,009 |  |  | 249,140 |  |  | 534,149 |  |  | 243,000 |  | Loss Agreed |  | *Accept State Amnesty (8 installments, approx. BRL 42K) |  | - |
|  |  | 7,776,270 |  |  | 9,262,605 |  |  | 17,038,875 |  |  | 7,745,000 |  |  |  | *After State Amnesty Accepted |  |  |
|  |  | PRINCIPAL |  |  | INTEREST |  |  | TOTAL |  |  |  |  |  |  |  |  |  |
|  |  | 285,009 |  |  | 15,626 |  |  | 334,835 |  |  |  |  |  |  | State Requirements |  |  |
Total |  |  | 285,009 |  |  | 15,626 |  |  | 334,835 |  |  | 152,000 |  |  |  | 8 Installments representing accepted amnesty per above |  |  |
|  | Numbers may not add due to rounding

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