Japan Files WTO Challenge Against Brazilian Tax Advantages
Japan filed a WTO complaint (DS497) against Brazil last Thursday, citing alleged discriminatory taxation and charges affecting sectors such as automobiles and information and communication technology (ICT).
Sources familiar with the case told Bridges that it concerns basically the same measures as those raised in a separate dispute by the EU (DS472) in late 2013, also against Brazil. In that case, which is now at the panel stage, Japan is already participating as a third party. (See Bridges Weekly, 16 January 2014)
In a statement published by Japan’s Ministry of Economy, Trade and Industry last Thursday, Tokyo alleged that Brasilia provided favourable tax advantages only to domestic products and products imported from certain countries, therefore treating other imported products unfairly.
The measures challenged by Japan include a significant raise in September 2011 of the Brazilian Industrial Product Tax (IPI, by its acronym in Portuguese) – a value-added tax imposed on industrial products – as well as a tax advantage scheme known as “Inovar-Auto” in October 2012. The latter gives automobile manufacturers the option of offsetting their IPI provided they meet certain local content requirements.
The IPI was raised by 30 percent for automobiles in 2011. If they wish to offset this tax, producers must meet requirements such as carrying out certain manufacturing processes inside Brazil, along with investing in domestic research and development in the country.
Japan’s claim also covers tax advantages provided in other areas, such as ICT, automation, and related goods, as well as tax breaks established for exporting companies that are conditioned on export performance.
Tokyo argues that Brasilia’s measures violate the non-discrimination provisions of the General Agreement on Tariffs and Trade (GATT), along with WTO disciplines prohibiting export subsidies and “other obligations” under global trade rules.
The GATT’s most favoured nation (MFN) provision requires members not to discriminate among their fellow WTO member countries. Japan also claims there has been a breach of a separate GATT article on national treatment, which obliges members not to treat imports less favourably than their domestic counterparts once those products have entered the domestic market.
Japan’s trade and investment with Brazil has grown in recent years, with automobiles and automotive parts being among its key exports. The Asian island country is also the fifth biggest export destination for Brazilian products, according to WTO data.
Ongoing EU case
Japan’s complaint comes three months after the composition of a panel to hear the EU’s own complaint on alleged Brazilian tax advantages, which is usually an advanced stage in dispute settlement proceedings.
Citing the non-discrimination claims under the GATT, Brussels has also alleged that the Brazilian measures violate certain provisions of the WTO Agreement on Subsidies and Countervailing Measures (SCM) and the Agreement on Trade-Related Investment Measures (TRIMs).
For instance, Brussels says that the Inovar-Auto programme links tax credits to the level of expenditure involved in producing a car in Brazil, for instance the money spent on strategic inputs and tools such as automotive components. These tax credits offset the IPI that would otherwise be due on the domestic sale of motor vehicles.
Brussels explained that expense on those strategic inputs is “the item which translates into the largest tax credit,” and it is thus “decisive” upon the actual tax burden on motor vehicle sales, according to the panel request.
The EU argued that, as a result, the advantage of a lower tax burden on finished vehicles is contingent largely on using domestically-sourced inputs.
Brussels claims that this Inovar-Auto programme amounts to local content subsides prohibited under the SCM Agreement, providing a tax advantage which relies on using domestic inputs over their imported equivalents.
The EU also argues that the programme, through requiring enterprises to purchase or use Brazilian inputs in order to qualify for the tax advantage, violates the TRIMs Agreement, which says that any investment-related measures requiring enterprises to purchase domestic products run contrary to the GATT’s national treatment requirements.
The 28-nation bloc has also raised similar concerns over Brazil’s measures in providing exemptions or reductions in the fields of ICT, automation, and related goods.
The EU claims that the measures introduced by Brazil, outlining that companies exporting more than a specific percentage of their output during a certain amount of time will be exempt from taxes and charges that would otherwise apply, amount to prohibited export subsidies given that they are contingent on export performance.
Japan and Brazil must now hold consultations for a minimum of 60 days in an effort to resolve their differences. Should a mutually agreed solution not be reached during that process, Tokyo may then request that a WTO panel be established to hear the case.