CONSOLIDATED FINANCIAL STATEMENTS
See “Item 18. Financial Statements” beginning on page F-1.
LEGAL PROCEEDINGS Embratel
Tax Disputes
We are engaged in a significant number of ongoing disputes with the tax authorities in Brazil relating to tax assessments and other claims against Embratel. As a result, we have a substantial amount of tax-related contingencies. As of December 31, 2007, we had recorded provisions in the aggregate amount of P.6,762 million with respect to tax-related contingencies at Embratel. While we believe that our positions in these cases are well founded, there can be no assurance that we will prevail or that the amount of our provisions will be sufficient to meet any adverse judgments or penalties.
In August 2006, pursuant to an agreement among all Brazilian states, we were granted a proportional reduction of our liability for value-added goods and services tax, or ICMS (Imposto sobre Circulação de Mercadorias e Prestação de Serviços), including restatement penalties and surcharges, through July 2006. The agreement is applicable throughout all states and the Federal District of Brazil, but the implementation of its provisions depends on each state’s regulations. In the states in which the agreement has already been implemented, we made payments of P.5,353 million in settlement of all disputes related to this matter. With respect to the states in which the agreement has not yet been
implemented, we recorded a provision of P.92 million, based on our expectation that those states will also implement the terms of the agreement.
As of December 31, 2007, we had a provision of P.3,313 million in connection with our ongoing dispute with the Brazilian tax authorities regarding the payment by Embratel of income tax on inbound international income.
For more information regarding our tax-related and other contingencies in Brazil, see Note 17 to our audited consolidated financial statements.
Rate Readjustments
In June 2003, Anatel approved a tariff increase using the IGP-DI inflation index. These tariff increases were challenged in the Brazilian courts. In September 2003, the 2a Vara Federal do Distrito Federal, or the 2nd Chapter of the Federal District Court, issued an injunction requiring the tariff increase to be based on the IPCA inflation index, rather than the IGP-DI index used in the tariff rate formulas established in the concessions. Embratel and the three regional telecommunications operators adopted tariff rate increases based on this injunction. The change affected both the rates that we charged to our customers and the rates that we paid for interconnection. On July 1, 2004, the Corte Especial do Superior Tribunal de Justiça, or the Special Tribunal of the Higher Court of Justice, concluded that the IGP-DI, instead of the IPCA, must be used to calculate the increases in tariffs in the future. Companies were allowed to increase tariffs to reflect the IGP-DI inflation index, but the court decided that the difference in tariffs would not be applied retroactively. To minimize the effect on inflation, telecommunications companies agreed with Anatel and the Ministry of Communications that any increases in the rates to reflect the IGP-DI inflation index would be made gradually.
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As a result of the decision by the Special Tribunal of the Higher Court of Justice, in 2004, Embratel reversed a provision of R$66 million, recorded as cost of services and goods sold,
corresponding to the period from July through December 2003. However, a final decision is still pending.
Disputes with Third Parties
We are involved in a variety of additional litigation and administrative proceedings that have arisen in the ordinary course of business. Various disputes are in an advanced stage of the litigation process, and we may lose at least some of the cases. As of December 31, 2007, we had a provision of P.726 million for unfavorable rulings in 2007, compared to P.780 million as of December 31, 2006.
Colombian Competition Investigations
In June 2007, the Superintendent of Industry and Trade, Colombia’s competition authority, announced an investigation of our alleged failure to report the increased integration of operations between Telmex Colombia, which provides corporate Internet services, and Superview, which provides residential Internet services. The Superintendent of Industry and Trade announced a second investigation in June 2007 of our alleged failure to report our acquisitions of Superview, TV Cable and Cable Pacifico. Both investigations are in the discovery phase and we cannot predict when or how they will be resolved.
DIVIDENDS
Telmex Internacional has not paid dividends since its establishment in December 2007. The declaration, amount and payment of dividends will be determined by majority vote of the holders of A Shares and AA Shares, generally on the recommendation of the board of directors, and will depend on our results of operations, financial condition, cash requirements, future prospects and other factors deemed relevant by the holders of A Shares and AA Shares. We expect to hold a general shareholders’ meeting during the first half of 2008 that will address the distribution of dividends. In March 2008, our board of directors agreed to recommend to our shareholders for approval at a general shareholders’ meeting the declaration of a dividend in 2008 in the amount of P.0.15 per share. We cannot assure you that we will pay dividends in the future or that we will do so on a continuous and regular basis. Our bylaws provide that holders of A Shares, AA Shares and L Shares participate on a per-share basis in dividend payments and other distributions. See “Item 10. Additional Information—Bylaws and Mexican Law—Dividend Rights.”
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