TWN Info Service on WTO and Trade Issues (Nov14/10)
25 November 2014
Third World Network  

Dear friends and colleagues,

We 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 settlement panel.

The second relates to a DSB decision on India’s measures concerning the importation of certain agricultural products from the United States.

The third is a statement by Australia concerning its disputes with Ukraine, Honduras, the Dominican Republic, Cuba and Indonesia over its tobacco plain packaging measures.

With best wishes,

Third World Network

Brazil blocks EU panel request over taxation and charges
Published in SUNS #7920 dated 20 November 2014

Geneva, 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 programme.
 
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 vehicles).
 
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 TRIMS Agreement.
 
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 in Brazil.
 
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 domestic production.
 
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 2029.
 
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 economy.
 
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 incentive programmes.
 
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 to appeal.
 
(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 settlement proceedings.
 
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 covered agreements."
 
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 changed."
 
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. +