EU TO APPROACH BRAZILIAN GOVERNMENT ON TAXATION OF

UNCLAS SECTION 01 OF 02 BRASILIA 000195

SIPDIS

SIPDIS

STATE PASS USTR - SCRONIN/MSULLIVAN
USDOC FOR 4332/ITA/MAC/WH/OLAC/MCAMPOS
USDOC FOR 3134/ITA/USCS/OIO/WH/RD/DRAMBO
AID/W FOR LAC

E.O. 12958: N/A
TAGS: ETRD BEXP ECON BR
SUBJECT: EU TO APPROACH BRAZILIAN GOVERNMENT ON TAXATION OF
COSMETICS IMPORTS



1. (U) Action Request - paragraph 2.


2. (U) Summary and Action request. On January 31, EU
Econ/Commercial Counselor Fabian Delcros approached Commercial
Attache with respect to problems that EU cosmetics companies were
experiencing regarding alleged discriminatory taxation upon their
exports to Brazil. In essence, the EU argues that the GOB's
Industrial Property Tax is being levied in a discriminatory manner
because it is assessed against domestic goods at the industrial
level but against imported goods at the wholesale level - and the
wholesale price structure is higher because that total includes the
importers' profit margins. The higher IPI levied on imported
products, the EU states, appears to constitute a violation of
Article III:2 of the 1994 GATT provisions on national treatment for
taxation of imported products. Delcros provided Commercial Attache
with an Aide Memoire on this issue (set forth at paragraph 3) and
wondered if US Embassy might be willing to join forces with EU
diplomats here on a joint demarche to the GOB. While post has
worked on behalf of U.S. cosmetics exporters which have experienced
problems with Brazilian customs regarding invoicing, to date we have
not heard any complaints from them about the application of the IPI
tax. Post seeks Washington guidance as to how to respond to the
EU's proposal for a coordinated approach. End Summary and Action
Request.


3. (U) Text of EU Aide Memoire

The European Commission is concerned about an apparent tax tax
discrimination against cosmetic products imported into Brazil. Such
products are always subject to the industrial tax (IPI) at the
wholesaler stage, thus resulting in a higher tax burden than that
applicable to the like domestic products, which are subject to this
tax at the industrial stage. This tax discrimination appears to be
inconsistent with Brazil's obligations under the GATT 1994.

Decree 4.544 of 26 December 2002, which regulates the application of
the IPI (Imposto sobre Produtos Industrializados),establishes in
Section II the cases where non-industrial business is assimilated to
industrial business for the purposes of the application of the tax.
Decree 4.544 covers both the trading of locally produced goods and
the trading of imported goods.

According to Section II of Decree 4.544 of 26 December 2002, these
are the cases where the trading of imported products is assimilated
to production and therefore subject to the IPI:

-- Wholesalers and retailers receiving the imported goods from an
importer from the same business group or corporation (Article 9.II)
-- Wholesalers and retailers trading on goods imported on their
behalf through a third legal entity (i.e., and importer (Article
9.IX).

However, by virtue of Article 9.VIII, wholesalers of imported
cosmetic products are assimilated to producers, and therefore
subject to the IPI tax, in all cases, whether the importation is
done on behalf of the importer or on the wholesaler behalf and/or
the ownership relationship between importer and trader. "Os
estabelecimentos atacadistas que adquirirem de estabelecimentos
importadores produtos de procedencia estrangeira, classificados nas
posicoes 33.03 a 33.07 da TIPI (Medida Provisoria n. 2.158, de 24
agosto de 2001, art. 39)". This assimilation does not apply to
domestic cosmetic products, but only to imported ones.

Therefore, by its own terms, Decree 4.544 clearly discriminates
against imported cosmetic products if compared to locally produced
goods. The latter are subject to the IPI only once, at the
industrial stage. On the other hand, imported cosmetic products are
subject to the IPI twice: firstly, when the importation takes
place; secondly, when the wholesaler receives the goods from the
importer. Although the importer is credited for the industrial tax
paid, the consequences of the Brazilian tax provisions are a higher
amount of tax finally borne by imported goods, due to the fact that
at the wholesaler stage the taxable base includes the importer's
profit margin. Consequently, imported cosmetic products are taxed
in excess of the like domestic products. This higher tax burden
affects the final retail price and it affords protection to domestic
production.

For the reasons mentioned above, Brazil's provisions on the
application of IPI to imported cosmetics appears to constitute a de

BRASILIA 00000195 002 OF 002


lege discrimination against imported cosmetic products inconsistent
with article III:2 of the GATT 1994 ("National treatment on internal
Taxation and Regulation"),which stipulates that the products of the
territory of any contracting party imported into the territory of
any other contracting party shall not be subject to internal taxes
in excess of those applied to like domestic products.

We therefore request the Brazilian authorities to give due
consideration to this matter in order to ensure a level playing
field for imported and domestic goods.

End Text of EU Aide Memoire.

Sobel