BRAZIL'S TREATMENT OF SODA ASH IMPORTS

UNCLAS SECTION 01 OF 02 BRASILIA 001002

SIPDIS

STATE FOR WHA/BSC
USDOC FOR 4322/ITA/MAC/WH/OLAC/WBASTIAN/JANDERSEN/DMCDO UGALL
USDOC ALSO FOR 4110/USDOC/ITA/MAC/TCC/RIGOLI
PLEASE PASS TO USTR FOR SCONIN AND LYANG

E.O. 12958: N/A
TAGS: ETRD BEXP BR
SUBJECT: BRAZIL'S TREATMENT OF SODA ASH IMPORTS

Refs: A) State 79087 B) 2003 USDOC 5383


1. As requested in ref A, Econoffs delivered the demarche
concerning ICMS (Merchandise and Service Circulation) tax on
imported soda ash to Luis Balduino and Felipe Gastao of the
Ministry of External Affairs' (MRE) Market Access Division on
April 15. Balduino has been our working-level contact at MRE
on this issue for the last year, designated by then head of the
General Secretariat for Economic Integration and Foreign Trade,
Ambassador Clodoaldo Hugueney. Balduino clarified what
Hugueney had earlier reported on a preliminary basis to
EconCouns and Tradeoff about Itamaraty's action in the matter:
that he consulted Rio State officials in September - October
2003 to determine whether the acknowledged difference in ICMS
tax rates for imported (19 percent) versus locally produced (2
percent) soda ash can be viewed other than as a national
treatment issue. Balduino stated that the soda ash case is the
only allegation of which he is aware that the ICMS tax causes
negative effects on imports.


2. According to Balduino, Rio state tax officials maintain
that the ICMS rate, levied on a per-transaction basis, remains
theoretically the same for imported and domestically produced
soda ash. However, in the case of the Alcalis Company of Rio,
this theoretical rate on soda-ash transactions is supposedly
superseded by the fact that Alcalis has the right to pay simply
a 2 percent ICMS levied on gross revenue, due to Rio ICMS tax-
code provisions that grant this lower rate to producers and
refiners of table salt ("sal para alimentacao" in Portuguese.)
Econoffs asked the obvious question as to why this 2% rate
should apply to non-table-salt parts of Alcalis's business.
Balduino said Rio state officials assert that the ICMS tax
cannot be declared discriminatory against imported soda ash
because of 1) the difference in the calculation base, and 2)
the opportunity of the soda-ash importer to recover the ICMS
tax via tax credits. The 2 percent ICMS rate on gross revenue
does not allow for this sort of reimbursement. State officials
claim to Itamaraty that Alcalis may thus, in fact, pay more in
net tax than an importer of soda ash would. Balduino could not
elaborate which, if any, downstream tax liabilities this
alleged eligibility for ICMS tax credits could be claimed
against by the soda-ash importer.


3. Balduino summed-up that the MRE at this stage, on the basis
of the response from Rio state, had found no prima facie
evidence of abuse of the national treatment clause, and
therefore of any inconsistency with WTO obligations on the part
of Brazil's (Rio state's) actions. However, as a result of our
demarche, Itamaraty will now pursue the case further, he said.
He requested information on the potential consequences of 301
and/or GSP action against Brazil as a result of U.S. soda ash
industry petitions.

COMMENT AND RECOMMENDATION


4. To refute the Rio state authorities' case, we now need to
document the lack of substance specifically to their claim that
tax credits accrued by soda-ash importers who pay a 19% ICMS is
or can be recuperated via subsequent tax-credits, and that
Alcalis is indeed ineligible for such credits. From our old
files of this case, it seems the same point may have been
asserted in 2001; we cannot tell if the U.S. manufacturer has
previously addressed it in the process of USG consideration.
To verify if, in fact, Alcalis has been paying less ICMS tax to
Rio state since the imposition of the 2001 Decree would
presumably require access to the company's tax records. It of
course seems most unlikely that Alcalis could actually be
assessed a higher ICMS liability than its imported competitors.
Do updated figures from the U.S. industry show declining market
share since the imposition of the 2001 decree? It would also
help if U.S. industry would identify major Sao Paulo glass
producers (presumably the largest imports of soda ash) that
have shifted purchases from the U.S. to Alcalis due to the ICMS-
generated cost differences. Post will shortly seek an update
from the MRE on Brazil's position on this matter; meanwhile Rio
Consulate-General FCS is trying to independently research these
specific aspects.


5. Separately, in response to ref B's query on import
procedures for soda ash, the MRE has confirmed that prior
authorization from the Federal Police Department is required
for soda-ash imports because of the potential for diversion
from legitimate uses to uses involving narcotics or drugs that
cause physical dependency. Ministry of Justice decree
("portaria") 1.274 of August 25, 2003 details the requirements
and lists soda ash as a chemical product subject to this
authorization.

HRINAK