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TWN Info Service on WTO and Trade Issues (Dec14/06)
23 December 2014
Third World Network
 

Panel 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 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), 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 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 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 services.
 
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. +

 


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