KEY SENATOR SAYS CLIMATE IS RIGHT FOR BILATERAL

UNCLAS SECTION 01 OF 02 BRASILIA 002147 SIPDIS SENSITIVE SIPDIS EPSC FOR LISA KUBISKE TREASURY FOR OASIA - J. HOEK E.O. 12958: N/A TAGS: EINV EFIN ECON PREL BR SUBJECT: KEY SENATOR SAYS CLIMATE IS RIGHT FOR BILATERAL TAX TREATY ¶1. (SBU) Summary. Aloizio Mercadante, chairman of the Senate Economic Affairs Committee, told Ambassador Sobel on October 18 that the bilateral relationship is at a very favorable point and the bilateral agenda must be resumed without delay so as to expand economic relations. He predicted the Senate would approve the bilateral agreement on diplomatic properties and that a potential bilateral tax treaty would be favorably viewed in the Congress. End summary. Great Expectations for Expanded Bilateral Trade ¶2. (SBU) Mercadante told the Ambassador there is a great expectation in Brazil that trade relations can be expanded, in view of good bilateral relations, Brazilian economic growth of about five percent of GDP a year, the fiscal responsibility of the Lula administration, and high demand for infrastructure investment and logistics. He said the U.S. is already Brazil's top trading partner, with U.S. purchases accounting for 10.8 percent of Brazil's exports, but the current exchange rate is increasingly a problem for Brazil. Public Finance Weakness ¶3. (SBU) The main problem on the economic horizon at present is a certain frailty in public finances, coupled with high taxes, although states and the federal government are unable to collect some taxes, he said. Firms are to receive a tax credit under the Kandir Law but do not, which is a serious problem. On the positive side, Mercadante noted, the fiscal situation of the states has been improving, although exports as a percentage of GDP has dropped. If there is tax relief for exports, Mercadante continued, states will not receive enough income (presumably federal revenue transfers). Tax Treaty ¶4. (SBU) Mercadante said the political atmosphere is very favorable, particularly in the Senate, for the negotiation of a bilateral tax treaty. Passage would not be difficult, but a proposal must address concrete issues, and he urged the USG to provide a draft to interested senators as soon as possible. Ambassador Sobel said Jorge Rashid, head of the Federal Revenue Service, had told him Brazil did not want to lose revenue. Ambassador also pointed out Brazil is the biggest country with which the U.S. has no tax treaty. ¶5. (SBU) Mercadante clearly supports a bilateral tax treaty. He offered to help reach out to other key senators and suggested several names for Embassy outreach. When the Ambassador told him of a U.S. firm doing business in Brazil that was going to write off USD 500 million in losses because of a tax problem, Mercadante asked the Ambassador for a list of non-reimbursed tax credits affecting U.S. companies so he could look into the matter, and promised to contact the American Chamber of Commerce in Sao Paulo. He volunteered to convene a public hearing in the Economic Affairs Committee with state governors to help clarify the situation, and suggested the Federation of Industries of Sao Paulo (FIESP) should survey firms to determine the extent of the problem. Property Agreement ¶6. (SBU) Mercadante said the bilateral agreement on buying and selling diplomatic properties will be easily approved in the Senate. An adviser to Mercadante told us subsequently that approval could require a bill to exempt the U.S. Embassy from the collection of INSS payments (equivalent to social security) in order to guarantee reciprocity, but it would not be controversial. (Note: the property agreement was approved in the Chamber of Deputies on October 31 and sent to the Senate.) Participants -------------- ¶7. U.S. BRASILIA 00002147 002 OF 002 Ambassador Sobel Tara Erath, economics counselor Dale Prince, political officer (notetaker) Brazil Aloizio Mercadante, Senator (Workers Party, Sao Paulo state) Marcelo Zero, foreign policy adviser Sobel