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 However, in the case of the Alcalis Company of Rio, this theoretical rate on soda-ash transactions is supposedly superseded by the fact that Alcalis has the right to pay simply a 2 percent ICMS levied on gross revenue, due to Rio ICMS tax- code provisions that grant this lower rate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