Info Service on WTO and Trade Issues (Dec14/06)
23 December 2014
Third World Network
set in EU-Brazil dispute over taxation and charges
Published in SUNS #7941 dated 19 December 2014
Geneva, 18 Dec (Kanaga Raja) -- The Dispute Settlement Body (DSB)
of the World Trade Organisation (WTO) on Wednesday agreed to establish
a panel, at the request of the European Union, to examine Brazilian
taxes and charges in the automotive sector, on information and communication
technology, automation and related goods, as well as other measures.
This was a second-time request and panel establishment was automatic.
The United States, the Russian Federation, Argentina, Australia, Japan,
China, India, Turkey, Chinese Taipei and Korea reserved their third
party rights to the dispute.
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), by 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 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), and
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 concerns
several programmes in the automobiles, ICT and automation sectors
that confer tax advantages to domestic products that are not equally
extended to imported ones.
According to the EU, the measures are thus discriminatory and they
are also aimed at import substitution, as they are contingent upon
local content requirements.
The EU further said that the dispute also addresses tax exemptions
for companies in Brazil that meet certain export targets, in contravention
of the prohibition on export contingent subsidies.
The EU said it is troubled by the continuous extension and expansion
of these measures to cover an increasing number of sectors.
This is the case of INOVAR-AUTO, replacing a previously temporary,
but equally discriminatory regime, it said.
In its statement at the DSB, Brazil expressed regret at the EU's decision
to request the establishment of a panel in this dispute.
It reaffirmed the WTO-consistency of its programmes, saying that these
programmes have been fostering innovation and the formation of a more
skilled workforce in Brazil, while at the same time increasing trade
and promoting a dynamic interaction between investment in the covered
sectors and global trade flows.
According to Brazil, companies from several origins, and especially
European companies, established in Brazil have been positively affected
by these programmes, which have no detrimental effects on importation.
The challenged programmes are aimed at better positioning Brazil in
complex, high-end technological sectors of the global market, and
not to isolate the country from it. They are the result of a serious
diagnosis of Brazil's technological and workforce deficiencies in
certain strategic sectors and how to remedy them, it said.
In the documents submitted so far, the European Union seems to advocate
a very broad interpretation of the disciplines relating to national
treatment and local content, it added.
"If accepted, this vision of core WTO rules would unduly curtail
Members' ability to promote social and technological development and
their policy space more generally," stressed Brazil.
According to Brazil, the Special Regime for the Purchase of Capital
Goods for Exporting Enterprises (RECAP) and the tax suspension to
predominantly exporting companies (PEP), in turn, are simply mechanisms
to improve tax administration by Brazilian authorities and to facilitate
the redemption of taxes paid in excess by certain types of taxpayers.
Brazil concluded that the measures at issue are in line with Brazil's
multilateral obligations and were actually put in place with a view
to contributing to the WTO's objectives of raising the standards of
living, ensuring full employment and expanding trade in goods and
In light of these facts, Brazil said it failed to see the merit of
the present request and is prepared to demonstrate before the panel
the consistency of its measures with the covered agreements.
In other matters, concerning the dispute between Guatemala and Peru
over the additional duty imposed by Peru on imports of certain agricultural
products from Guatemala, the DSB agreed to the joint request of both
parties for a delay in the adoption or possible appeal of the report
of the panel in this dispute.
The panel report was circulated on 27 November 2014 and the 60-day
period for either the adoption or appeal of the report would expire
on 26 January 2015.
According to trade officials, in their joint request, both parties
said that they are aware of the Appellate Body's increased workload
at present, and that in these circumstances the 60-day period be extended
to 25 March 2015. +