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.