Brussels, 31 October 2014
EU requests WTO panel on Brazil’s discriminatory taxes
The European Union today requested the World Trade Organization (WTO) in Geneva to rule on a dispute concerning certain Brazilian discriminatory taxes. In the EU's opinion, the Brazilian tax measures give an unfair advantage to domestic producers and go against WTO rules. By taking the case to the WTO, the EU aims to re-establish a level playing field between Brazilian and European businesses and products.
Brazil applies high internal taxes in several sectors, such as automobiles, information technologies, and machines used by industry and professionals. Brazilian products, unlike imported ones, can however benefit from selective exemptions or reductions. As a result, goods manufactured in the EU and sold in Brazil face higher taxes than Brazilian products. For instance, the tax on imported vehicles may exceed that collected on Brazilian-made cars by 30% of a car's value. Combined with customs duties levied at the border and other charges, this may amount in some cases to a prohibitive tax of 80% on the import value.
In addition, Brazil restricts trade by requiring Brazilian manufacturers to use domestic components as a condition to benefit from tax advantages. This promotes import substitution by inducing foreign producers to relocate to Brazil and to limit foreign sourcing. This hurts EU exporters of finished products and their components.
Furthermore, the challenged tax measures shield uncompetitive Brazilian manufacturers from international competition and limit the choice of affordable quality products available to Brazilian consumers. For example, a smartphone costs 50% more in Brazil than in the EU or in most other countries, even though manufacturers of IT goods in Brazil enjoy tax breaks ranging from 80% to full exemption.
At the EU's request, EU and Brazilian authorities held consultations earlier this year to try to resolve the dispute but to no avail. On the contrary, Brazil subsequently took further steps to extend and prolong some of its discriminatory taxation regimes. Significant tax relief measures for Brazilian IT goods and machinery were recently extended until 2029, whilst imports continue to be fully taxed.
Therefore, the EU is now requesting the WTO to establish a panel of experts to rule on the matter, in order to achieve a fair, permanent and satisfactory solution. The aim is to eliminate the cases of discrimination and unlawful tax incentives, without calling into question Brazil's tax policy as such or its development policies. The EU remains open to constructive engagement with the Brazilian authorities on the issues raised in the panel request. In addition, in order to allow for further discussions on the specific issue of treatment for goods produced in Manaus and other free trade zones, the EU has excluded them from the scope of the legal action.
Brazil is an important trade partner for the EU. Since mid-2012, the EU has enjoyed a trade surplus with Brazil, which can be linked to the decrease in world prices for the commodities Brazil exports. EU exports to Brazil reached their peak in 2013 but have recently declined due to the economic slowdown in Brazil, the weakening of the real, and an increasing recourse in Brazil to restrictive trade policies. The value of exports dropped from €10.6 billion in the second quarter of 2013 to €9.8 billion in the same quarter of 2014. Transport equipment, machinery and appliances constitute the bulk of EU exports to Brazil. However, the discriminatory taxes and other barriers undermine trade prospects.
The EU's request for the establishment of a WTO panel will be discussed at the meeting of the WTO Dispute Settlement Body (DSB) of 18 November. If Brazil does not agree to the establishment of a panel at that meeting, the EU may table a second request at the following DSB meeting which, according to WTO rules, Brazil cannot block. At any stage of dispute settlement procedures, the parties may decide to solve their differences through a negotiated mutually satisfactory solution.
The request for the establishment of a WTO panel is without prejudice to the EU's commitment to negotiating an Association Agreement with Mercosur, including Brazil.