Info Service on WTO and Trade Issues (Nov14/10)
25 November 2014
Third World Network
friends and colleagues,
are pleased to share with you this report by SUNS (#7920 dated
20 November 2014) on 3 important issues that were discussed at
the meeting of the WTO Dispute Settlement Body (DSB) on 18 November.
The first is Brazil’s objection to a challenge by the European Union
to a set of Brazilian taxes and charges in the automotive sector,
on information and communication technology, automation and related
goods. At stake is the policy space of a developing country to innovate
and develop its domestic industries within the WTO framework of agreements.
According to Brazil at the DSB meeting, “these programmes are a fundamental
tool for the promotion of sustainable development of its economy,
for the promotion of more technological innovation, for enhancing
the skills of the workforce and for increased participation in international
trade flows.” The EU argues that the measures are inconsistent
with Brazil’s WTO obligations and thus seek to establish a dispute
second relates to a DSB decision on India’s measures concerning the
importation of certain agricultural products from the United States.
third is a statement by Australia concerning its disputes with Ukraine,
Honduras, the Dominican Republic, Cuba and Indonesia over its tobacco
plain packaging measures.
Brazil blocks EU panel request over taxation and charges
Published in SUNS #7920 dated 20 November 2014
19 Nov (Kanaga Raja) -- A request for the establishment of a panel
by the European Union concerning Brazilian taxes and charges in the
automotive sector, on information and communication technology, automation
and related goods, as well as other measures was blocked by Brazil
at a meeting of the WTO Dispute Settlement Body (DSB) on Tuesday.
This was a first-time request and panel establishment will be automatic
when the request comes up again before the DSB.
According to the EU communication to the DSB, in the automotive sector,
Brazil has established a "Programme of incentive to the technological
innovation and densification of the automotive supply chain",
also known as "INOVAR-AUTO".
Under the INOVAR-AUTO programme, Brazil provides tax advantages with
respect to the "Tax on Industrial Products" (IPI). The tax
advantages consist of a reduction of the IPI tax burden on the sale
of the products (motor vehicles) covered by the programme.
According to the EU, to benefit from the INOVAR-AUTO programme, companies
need to be "accredited" by means of an administrative decision.
There are three types of "accreditation": (i) for domestic
manufacturers; (ii) for local distributors without manufacturing activities
in Brazil; and (iii) for investors in domestic manufacturing capacity.
In order to be "accredited", eligible operators must fulfil
certain conditions which concern, depending on the accreditation sought,
in particular a minimum number of manufacturing activities in Brazil
and/or minimum levels of expenditure in Brazil on research and development,
engineering, basic industrial technology and capacity-building of
actual and potential suppliers.
Under the INOVAR-AUTO programme, accredited companies can earn tax
credits which can be used, under certain conditions, to offset the
IPI otherwise due on the domestic sale of motor vehicles covered by
The tax credits are linked to the level of expenditure in Brazil on
certain items, including strategic inputs and tools, research and
development, or capacity-building of suppliers.
According to the EU communication, expenditure in Brazil to purchase
strategic inputs (automotive components) and tools is the item which
translates into the largest tax credit and it is thus decisive as
regards the actual tax burden on the sale of motor vehicles.
As a result, the advantage of a lower tax burden on finished vehicles
is contingent for the greatest part on the use of domestically-sourced
inputs (or, in other words, the level of domestic content in motor
Tax credits can be used to offset up to 30 percentage points of IPI
tax due on the sale of motor vehicles. Any excess tax credit can be
used to offset the IPI due on the domestic commercialisation of imported
vehicles, but only up to a maximum number of products.
Tax credits are not used to offset the IPI tax at the border, which
is generally due with limited exceptions.
However, motor vehicles from a limited number of WTO Members benefit
from a special reduction in IPI rates that apply both at the point
of importation and in subsequent sales, said the EU communication.
The EU argued that the INOVAR-AUTO programme is inconsistent with
Brazil's obligations under the GATT 1994, the SCM Agreement and the
The communication also highlighted that Brazil has adopted and maintains
legislation granting advantages in relation to taxes, duties, contributions
and charges, which are contingent upon domestic production and technological
development of information and communication technology (ICT), automation
and related goods in Brazil.
The set of advantages primarily consist of tax exemptions or reductions
applied in connection with taxes levied on the sale of the relevant
goods or on the revenue generated through those sales. These advantages
apply in relation to a limited number of accredited companies established
The EU communication said that the set of advantages contingent upon
domestic production and technological development of information and
communication technology (ICT), automation and related goods in Brazil
are inconsistent with Brazil's obligations under the GATT 1994, the
SCM Agreement and the TRIMS Agreement.
The EU also complained that Brazil has put in place certain programmes
that confer benefits to "predominantly exporting companies"
in the form of a suspension, and ultimately an exemption, of taxes
otherwise due in relation to their supplies.
In its statement at the DSB, the EU said that the dispute revolves
around a number of programmes in the automobiles, information and
communication technologies and automation sectors that grant domestic
producers certain tax advantages consisting of the exemption from
or reduction of taxes and charges levied on the sale of goods.
These advantages are contingent upon, inter alia, local content requirements,
production according to certain processing operations and investment
in research and development in Brazil.
According to the EU, these advantages result in a higher tax burden
on imported goods and create incentives to source locally in Brazil.
"The measures are thus discriminatory and aimed at import substitution."
The EU further said that the dispute also addresses tax exemption
schemes for Brazilian companies meeting certain export targets, in
contravention of the prohibition on export contingent subsidies.
According to the EU, this is not the first time that it has raised
this issue. It had expressed its concerns in other WTO bodies about
the use by Brazil of indirect taxes as a means of protecting and promoting
Some measures have existed for some time, although in principle they
were temporary in nature, the EU acknowledged.
However, it recent times it has witnessed a continuous extension and
expansion of these measures. In particular, the so-called Informatics
Law, which covers broad categories of goods such as electronic goods,
industrial automated machines or medical diagnostics equipment, has
again been prolonged recently and would in principle expire only in
The EU said that it is similarly concerned over the introduction of
new measures to cover an increasing number of economic sectors of
major trade importance for the EU, such as the automotive sector.
This is the case of INOVAR-AUTO, enacted in 2012, replacing a previous
temporary, but equally discriminatory regime.
In its statement at the DSB, Brazil said that the dispute puts into
question programmes that were established as a result of careful analysis
of the challenges posed to the most dynamic sectors of the Brazilian
These programmes were established in close consultation with the private
sector with a view to promoting a paradigm shift in both productivity
and technological performance. They are also aimed at fostering innovation
and workforce capacity in a rapidly changing global productive structure.
According to Brazil, these programmes benefit directly, in a non-discriminatory
manner, both domestic and foreign investments.
Brazil said that it has thus put in place a comprehensive programme
for promoting each of these aspects in key sectors of its economy:
the INOVAR-AUTO for the automotive industry and the Informatics Law
and other legislation for the IT industry.
Noting that these programmes establish certain tax benefits concerning
investments in technology and workforce capacity as well as production-step
requirements, Brazil underlined that they do not discriminate on the
basis of origin nor are they contingent upon the use of domestic inputs
or finished goods benefiting from the programmes.
"The requirements are origin-neutral and designed to generate
benefits to domestic and foreign investments alike," said Brazil.
Brazil did not wish to restrict trade, but this is rather a matter
of increasing production and trade with new technological standards.
For instance, imports of both electronic products and auto-parts have
increased significantly after the establishment of their respective
With regards to the Special Regime for the Purchase of Capital Goods
for Exporting Enterprises (RECAP) and tax suspension to predominantly
exporting companies (PEP), Brazil said that these are simply mechanisms
to facilitate the redemption of taxes that tend to accumulate.
Tax credits, in the case of companies that mainly export, tend to
accumulate as the exported final products are exempt from direct taxes,
it explained, adding that these credits are not easily offset with
other taxes nor are they readily refunded by the tax authorities.
In these programmes, no benefit is given out by the government. They
are not tax programmes to promote exports, but merely a mechanism
to ensure that exporters are not penalised with unredeemable tax credits
in their regular business activities, it said.
Brazil recalled that European companies benefit largely from the programmes
at issue and it did not believe that the EU has experienced any negative
commercial impact deriving from these measures.
For Brazil, these programmes are a fundamental tool for the promotion
of sustainable development of its economy, for the promotion of more
technological innovation, for enhancing the skills of the workforce
and for increased participation in international trade flows.
JOINT INDIA-US REQUEST FOR DSB DECISION IN AGRICULTURAL PRODUCTS DISPUTE
Under a separate agenda item of Indian measures concerning the importation
of certain agricultural products from the United States, trade officials
said that the DSB agreed to a joint request by India and the US for
a delay in the adoption or possible appeal of the panel report in
their dispute on this issue.
Taking into account the current workload of the Appellate Body, the
joint India-US request considered that the draft DSB decision, if
adopted, would provide greater flexibility in scheduling any possible
appeal of the panel report in this dispute, which was circulated on
14 October 2014.
According to the draft decision, the DSB agrees that, upon a request
by India or the US, the DSB shall no later than 26 January 2015 adopt
the report of the panel unless the DSB decides by consensus not to
do so, or either party to the dispute notifies the DSB of its decision
(Under dispute settlement procedures, within 60 days after the date
of circulation of a panel report to the Members, the report shall
be adopted at a DSB meeting unless a party to the dispute formally
notifies the DSB of its decision to appeal or the DSB decides by consensus
not to adopt the report.)
In its statement at the DSB on this issue, the US said that among
other things, the proposed DSB decision reflects that the WTO dispute
settlement system as a whole is currently facing a significant volume
of disputes, including the Appellate Body.
Insisting on adoption or appeal today therefore would essentially
have ensured that the Appellate Body would not be able to adhere to
the 90-day deadline that Members have set out in Article 17.5 of the
Dispute Settlement Understanding (DSU), it said.
OTHER BUSINESS: AUSTRALIA'S STATEMENT ON TOBACCO PLAIN PACKAGING
Meanwhile, under ‘other business', Australia made a statement concerning
its disputes with Ukraine, Honduras, the Dominican Republic, Cuba
and Indonesia over its tobacco plain packaging measures.
In its statement, Australia recalled the recent interventions by the
complainants in the disputes at the November meetings of the TRIPS
Council and the Technical Barriers to Trade (TBT) Committee.
Australia believed that the actions of Ukraine and Honduras in again
placing Australia's measure on the agenda of the TRIPS Council, and
of Ukraine in again placing Australia's measure on the agenda of the
TBT Committee, are not in accordance with the established rules and
practices of either the TRIPS Council or the TBT Committee.
As Australia had stated in the TRIPS Council and the TBT Committee,
it is not appropriate for Members to continue to raise items in these
WTO bodies when the measure at issue is already subject to dispute
That is clearly the case in relation to the disputes concerning Australia's
tobacco plain packaging measure, where the panel has been composed,
a timetable and working procedures issued, and the first written submissions
by the complainants have been filed.
According to Australia, ordinarily, trade concerns are first raised
by Members in bodies such as the TRIPS Council and the TBT Committee.
If those concerns remain unresolved, Members may then challenge the
relevant measures through dispute settlement proceedings.
At that point, the focus turns to the DSB and the dispute settlement
process, and the matter is no longer considered under regular committee
processes. This is important for coherence between the WTO's regular
committee structure and the dispute settlement system.
This is recognised in the text of the TBT and TRIPS Agreements, said
Australia, citing in this context Article 14 of the TBT Agreement
and Article 64 of the TRIPS Agreement.
"The continued discussion of Australia's tobacco plain packaging
measure in the TRIPS Council and the TBT Committee appears to be creating
a parallel process alongside the ongoing dispute settlement proceedings."
According to Australia, Ukraine's suggestion at the November TBT Committee
that its action in raising Australia's measure was "a matter
of transparency and courtesy" to all WTO Members stands at odds
with its stance rejecting any transparency arrangements in the current
disputes, which would have afforded all Members access to information
in the proceedings.
Moreover, Australia added, as the matter is now under the jurisdiction
of the DSB, it is, as provided under Article 2.2 of the DSU, a matter
for the DSB to "inform the relevant Councils and Committees of
any developments in the disputes related to provisions of the respective
It noted that in the most recent interventions in the TRIPS Council
and TBT Committee, reference was also made to proposed tobacco plain
packaging measures currently being considered by New Zealand, Ireland
and the United Kingdom as well as France and Finland.
The complainants in Australia's dispute urged those other Members
considering similar tobacco control measures to allow the dispute
settlement process with Australia to conclude before implementing
their own measures.
It would seem to Australia, therefore, that the main purpose of recent
statements to the TRIPS Council and TBT Committee was to dissuade
other Members from introducing tobacco plain packaging.
"This would instil a form of regulatory chill, which is a well-known
tactic of the tobacco industry to avoid countries implementing tobacco
control measures," said Australia.
Australia said that it will continue to defend its tobacco plain packaging
measure in any forum, be it in the TRIPS Council, or the TBT Committee,
or the DSB.
As it had stated repeatedly, tobacco plain packaging is a legitimate
measure designed to pursue a legitimate objective - the protection
of public health. "Australia's position on this matter has not
Australia considered that the appropriate forum for Members to argue
a case currently under consideration by a panel is before that panel.
According to trade officials, Ukraine said that it expects the dispute
now under a DSB panel to move forward quickly, while Honduras said
that it has a legitimate right to raise the issue at the appropriate
bodies if its feels that its interests are affected. +