2012 Annual Report - ZTE

ZTE CORPORATIONNotes to Financial Statements(Prepared under Hong Kong Financial Reporting Standards)31 December 201247. CONTINGENT LIABILITIES (continued)(g)On 3 January 2012, ZTE DO BRAZIL LTDA (“ZTE Brazil”), a wholly-owned subsidiary of the Company,received a notice of administrative penalty issued by the tax bureau of Sao Paulo State of Brazil. Itwas alleged in the notice that ZTE Brazil had not paid the ICMS tax (a tax payable in respect of thetransit of goods and related services between different states) to the tax bureau of Sao Paulo Statein respect of goods imported at Espirito Santo State and transported to Sao Paulo State during theperiod from October 2006 to December 2008. The tax amount outstanding was approximately BRL74.70million (equivalent to approximately RMB224 million).On 20 January 2012, ZTE Brazil submitted an administrative defence to the level 1 administrative courtunder the tax bureau of Sao Paulo State, stating that ZTE Brazil had paid the ICMS tax at EspiritoSanto State. Pursuant to an agreement between Sao Paulo State and Espirito Santo State in June2009 and Order No. 56045/2010 of Sao Paulo State, which provided that the agreement should applyto ICMS tax incurred prior to May 2009, ZTE Brazil was not required to pay ICMS to the tax bureau ofSao Paulo State. On 13 April 2012, ZTE Brazil received the judgement of the primary trial of the level 1administrative court under the tax bureau of Sao Paulo State, which endorsed the administrative penaltyimposed by the tax bureau of Sao Paulo State. On 11 June 2012, ZTE Brazil filed an appeal with thelevel 2 administrative court under the tax bureau of Sao Paulo State. On 29 November 2012, the taxbureau of Sao Paulo State issued a notice that ZTE Brazil had paid the ICMS or made a remedialpayment thereof and recommended suspension of execution of the notice of administrative penalty. Thecase is pending judgement by the level 2 administrative court under the tax bureau of Sao Paulo State.Based on the legal opinion furnished by legal counsels engaged by the Company and the currentprogress of the case, the Directors of the Company are of the opinion that the aforesaid case willnot have any material adverse impact on the financial conditions of the Group for the current period.(h)In November 2012, ZTE Brazil, a wholly-owned subsidiary of the Company, filed an application withthe Civil Court of Brasilia to freeze the assets of a Brazilian company on the grounds that the saidBrazilian company had failed to honour purchase payments of approximately BRL31,353,700 (equivalentto approximately RMB93,951,400). On 30 November 2012, Civil Court No. 15 of Sao Paulo City, Brazilnotified ZTE Brazil that the said Brazilian company had filed a lawsuit with the said court allegingthat ZTE Brazil had committed fraud and negligence in the course of cooperation and demandingcompensation for direct and indirect losses in the aggregate amount of approximately BRL82,974,500(equivalent to approximately RMB249 million). The Company has appointed an external legal counselto conduct active defence in respect of the said case.Based on the legal opinion furnished by legal counsels engaged by the Company and the currentprogress of the case, the Directors of the Company are of the opinion that the aforesaid case will nothave any material adverse impact on the financial conditions and operating results of the Group forthe current period.414