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VAT Tax Issue in Brazil | 3 Months Ended
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Apr. 30, 2016
Vat Tax Issues Disclosure [Abstract] |
VAT Tax Issue [Text Block] |
| 12. | VAT Tax Issue in Brazil
Asserted Claims VAT (i.e. Value Added Tax) tax in Brazil is at the state level. We commenced operations in Brazil in May 2008 through an acquisition of Qualytextil, S.A., which subsequently became Lake Brasil Indústria e Comércio de Roupas e Equipamentos de Proteção Individual Ltda., (referred to in this footnote as “Qualytextil” and sometimes referred to in this Form 10-Q as “Lakeland Brazil”) . At the time of the acquisition, and going back to 2004, the acquired company used a port facility in a neighboring state (Recife-Pernambuco), rather than its own, in order to take advantage of incentives, in the form of a discounted VAT tax, to use such neighboring port facility. We continued this practice until April 2009. The practice was stopped largely for economic reasons, resulting from additional trucking costs and longer lead time. The Bahia state auditors (state of domicile for the Lakeland operations in Brazil) initially reviewed the period from 2004-2006 and filed a claim for unpaid VAT taxes in October 2009. The claim asserted 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. The audit notice claimed that the taxes paid to Recife-Pernambuco should have been paid to Bahia in the amount of R$4.8 million and assessed fines and interest of an additional R$5.6 million for a total of R$10.4 million (approximately US$3.0 million, $3.5 million and $6.5 million, respectively based on exchange rates at the time of the claim). Bahia had announced an amnesty for this tax whereby R$3.5 million (US$1.9 million) of the taxes claimed were paid by Qualytextil by the end of the month of May 2010, and the interest and penalties related thereto were forgiven. According to fiscal regulation of Brazil, R$2.1 million (US$1.1 million) of this amnesty payment has since been recouped as credits against future taxes due. An audit for the 2007-2009 period has been completed by the State of Bahia. In October 2010, the Company received five claims for 2007-2009 from the State of Bahia, the largest of which was for taxes of R$6.2 (US$2.3) million and fines and interest currently at R$8.3 million (US$3.1 million), for a total of R$14.6 (US$5.5) million. The Company had intended to defend itself through a regulatory process and wait for the next amnesty period. Of other claims, our attorney informed us that three claims totaling R$1.3 (US$0.5) million in respect of fines and penalties were likely to be successfully defended based on state auditor misunderstanding. As more fully described in Note 17, Lakeland and Qualytextil entered into a Shares Transfer Agreement pursuant to which, effective July 31, 2015, Zap Comércio de Brindes Corporativos Ltda (“Transferee”), a company owned by an existing Qualytextil manager, acquired all of the shares of Qualytextil and assumed liabilities of Qualytextil, including VAT tax liabilities. VAT Tax Amnesty and Loan Agreement with Transferee of Brazil Operations The Bahia State Tax Department has commenced an audit of VAT taxes for the period from 2011-2014 in October 2015. The State of Bahia declared an amnesty beginning November 1, 2015 and expiring December 18, 2015. The Company had entered into a loan agreement (the “Loan Agreement”) on December 11, 2015 with Qualytextil for the amount of R$8,584,012 (approximately USD $2.29 million) for the purpose of providing funds necessary for Qualytextil to settle the two largest outstanding VAT claims with the State of Bahia. As described under “Shares Transfer Agreement” in Note 17, the Company may be exposed to certain liabilities arising in connection with the prior operations of Qualytextil, including, without limitation, from lawsuits pending in the labor courts in Brazil and VAT taxes. Settlement of the VAT claims under amnesty would benefit the Company in that it eliminates these large VAT claims, which the Company believes will render the continued viability of Qualytextil immaterial to the Company. It should also eliminate the possibility of the transfer of shares of Qualytextil being found fraudulent on the basis of evading VAT claims and would subsequently eliminate the possibility of future encumbrance of the real estate by the state of Bahia subsequent to VAT claims. Qualytextil completed the amnesty agreement with the State of Bahia on December 18, 2015. USD $250,000 in continuing business incentives provided by Lakeland to Qualytextil in the Shares Transfer Agreement will be waived by Qualytextil as partial payment of the debt. Repayment of the loan by Qualytextil to the Company will include the following elements R$ 3,395,947 (approximately USD $900,000) in VAT credits will become available to Qualytextil from the State of Bahia to be used against future VAT payments. Qualytextil has agreed to pay amounts equal to this credit to the Company in accordance with monthly sales volume. Qualytextil will transfer the rights to a judicial deposit on a tax claim to the Company. There is a judicial deposit of R$ 3,012,326 (approximately USD $800,000), however, Qualytextil will continue to make monthly deposits to the judicial account until the case is ruled upon by the Supreme Court of Brazil or the deposit is fully funded. Attorney’s success fee will be deducted before any disbursements to the Company or Qualytextil. However, while the lawyer handling this case tells us it is probable Qualytextil will win this case, it may take years to resolve. Credits of R$ 1,025,739 (approximately USD $275,000) relating to the above case may be generated if and when the case is resolved. Qualytextil has agreed to pay amounts equal to this credit to the Company in accordance with monthly sales volume. A minimum quarterly payment of R$ 300,000 (approximately USD $80,000) will be required commencing October 2016. The Company has determined that a reserve against the collection of this loan in full is prudent; which resulted in an additional charge to the loss on disposal of discontinued operations of $2,286,022 in the fourth quarter of the fiscal year ended January 31, 2016, net of tax benefits of $834,398. Such additional losses will be available as additional tax loss carryforwards to offset cash taxes payable against future taxable income in the USA. A table summarizing all four different VAT claims remaining open and their status is listed below:
|  | Principal (tax only) |  | Total fines and fees |  | Total of the Debt |  | Negotiated fines and fees |  | Not included in amnesty settlement |  | Amnesty settlement |  | Status of unsettled items |
R$ |  |  | 305,897 |  |  | 572,264 |  |  | 878,161 |  |  | 92,853 |  |  |  |  |  | 398,750 |  |  |
USD ¹ |  | $ | 80,499 |  | $ | 150,596 |  | $ | 231,095 |  | $ | 24,435 |  |  |  |  | $ | 104,934 |  |  |
R$ |  |  | 573,457 |  |  | 1,416,106 |  |  | 1,989,563 |  |  | 236,290 |  |  | 809,747 |  |  |  |  | The new owner will continue litigation as it is expected to be decided in management favor |
USD ¹ |  | $ | 150,910 |  | $ | 372,660 |  | $ | 523,569 |  | $ | 62,182 |  | $ | 213,091 |  |  |  |  |  |
R$ |  |  | 6,081,597 |  |  | 10,638,172 |  |  | 16,719,769 |  |  | 1,903,665 |  |  |  |  |  | 7,985,262 |  |  |
USD ¹ |  | $ | 1,600,420 |  | $ | 2,799,519 |  | $ | 4,399,939 |  | $ | 500,964 |  |  |  |  | $ | 2,101,385 |  |  |
R$ |  |  | 402,071 |  |  | 876,589 |  |  | 1,278,660 |  |  | 139,858 |  |  | 541,929 |  |  |  |  | The new owner will continue litigation as it is expected to be decided in management favor |
USD ¹ |  | $ | 105,808 |  | $ | 230,681 |  | $ | 336,489 |  | $ | 36,805 |  | $ | 142,613 |  |  |  |  |  |
Total R$ |  |  | 7,363,022 |  |  | 13,503,131 |  |  | 20,866,154 |  |  | 2,372,666 |  |  | 1,351,676 |  |  | 8,384,012 |  |  |
Total USD |  | $ | 1,937,637 |  | $ | 3,553,456 |  | $ | 5,491,093 |  | $ | 624,386 |  | $ | 355,704 |  | $ | 2,206,319 |  |  |
Legal Fees |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | $ | 50,000 |  |  |
Total Loan |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | $ | 2,256,319 |  |  |
¹ USD amounts based on exchange rate of as of settlement on December 18, 2015 at 3.80. Values updated as of December 1, 2015, according to the Brazil internal finance department. Numbers may not add due to rounding. Balance Sheet Treatment in Brazil after Discontinued Operations The Company has reflected the above items on its April 30, 2016, balance sheet as follows:
|  |  |  | R$ millions |  | US$ millions |
Liabilities of discontinued operations |  | Taxes payable |  |  | 6.2 |  |  | 2.1 |

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