WTO Appellate Body Concludes Certain Measures concerning Discriminatory Taxation and Charges by Brazil are Inconsistent with the WTO Agreements
The WTO Appellate Body circulated its report
December 14, 2018
On December 13, 2018 (Geneva time), the World Trade Organization (WTO) circulated the Appellate Body Report on certain measures concerning discriminatory taxation and charges by Brazil which have been examined by the WTO at the request of Japan and the EU.
The Appellate Body ruled that the measures concerning taxation and charges by Brazil are inconsistent with the national treatment requirement (Article III:2 and III:4 of the GATT 1994) etc. and made a recommendation that Brazil bring the measures into compliance.
In 2011 Brazil raised the Industrial Product Tax (IPI) on automobiles and in 2012, it introduced a new tax advantage scheme which allows automobile manufacturers to offset the increased IPI if they meet certain requirements such as carrying out certain manufacturing processes in Brazil and investing in research and development in Brazil. Similar discriminatory taxation measures are also taken in the information communication technology (ICT) sector.
In addition Brazil established tax advantages contingent on export performance for exporting companies
In July 2015, Japan requested consultations with Brazil under the WTO Agreements with regard to certain measures concerning discriminatory taxation and charges by Brazil. In September 2015, a Panel was established following Japan’s request.
*The EU requested consultations with Brazil under the WTO Agreements in December 2013 with respect to the same matters. The EU requested the establishment of a panel in October 2014 and the Panel was established in November 2014.
The Panel meetings (oral hearings) were held in February and May 2016. On August 30, 2017, the WTO circulated the Panel Report agreeing with Japan's claims, and requested that Brazil bring its measures into conformity with the WTO Agreements and to withdraw the prohibited subsidies.
Brazil appealed to the WTO Appellate Body on September 28, 2017. Oral hearings were held in June 2018 and the Appellate Body finally circulated its report concerning the measures by Brazil.
[Reference] Overview of Brazil's tax measures at issue
- Tax advantages related to the ICT sector
ICT sector (electricity and electronics, semiconductors, televisions etc.) are eligible for reduction or exemption of federal taxes if such companies meet certain requirements related to domestic production, research and development and investment within Brazil, as well as the use of domestic components.
- The INOVAR-AUTO programme
The programme allows automobile manufacturers to offset IPI depending on the ratio of local contents used in manufacturing the automobiles, on the condition of meeting certain requirements, such as carrying out certain manufacturing processes in Brazil.
- Tax advantages for exporting companies
Exporting companies that earn certain ratios of their sales from exports are eligible for deferment or exemption of federal taxes imposed on their purchase and import of machinery, devices and raw materials, etc.
2. Major rulings in the Appellate Body Report
In the report, the Appellate Body agreed with Japan's argument upholding most of the Panel’s finding and recommended that Brazil bring the tax advantages applied to the ICT sector and the INOVAR-AUTO programme into conformity with the WTO Agreements.
- The Appellate Body upheld the Panel’s finding that the tax advantages applied to the ICT sector and the INOVAR-AUTO programme are inconsistent with the national treatment obligation (Article III 2 and III 4 of the GATT 1994 and Article 2.1 of the TRIMS). Furthermore, the Appellate Body upheld the Panel’s finding with respect to the domestic manufacturing requirements that include the requirement to use domestic components within the Informatics Programme and the PATVD and found that these programmes constitute local content subsidies (SCM Agreement Article 3.1 (b)).
- With respect to the counter-arguments by Japan and the EU on the issues that the Panel did not make any findings on, the Appellate Body agreed with the claims of Japan and the EU that the Panel’s finding (that the tax advantages in the ICT sector as well as the INOVAR-AUTO programme are inconsistent with the national treatment requirement (Article III 4 of the GATT 1994 and Article 2.1 of TRIMS) and fall under local content subsidies (Article 3.1(b) and 3.2 of the SCM Agreement)) applies not only when the domestic manufacturers outsource the manufacturing process to a third party as the Panel appeared to indicate, but also when the domestic manufacturers undertake the manufacturing themselves.
- On the other hand, the Appellate Body reversed the Panel’s finding that the tax advantages for the exporters constitute export subsidies (Article 3.1(a) and Article 3.2 of the SCM Agreement)
- The Appellate Body recommended that Brazil withdraw without delay the local content subsidies (Article 3.1(b) and Article 3.2 of the SCM Agreement), which are prohibited under the SCM Agreement.
[Reference] Findings in the Panel Report
- Tax advantages related to the ICT sector
- All of the four programmes of tax treatments in the ICT sector are inconsistent with the national treatment requirements (Article: III 2 and III 4 of the GATT 1994) in that they grant tax advantages on the condition of using domestic goods over imports.
- These measures, which are related to investment, are also found to be inconsistent with Article 2.1 of the TRIMs Agreement and fall under the category of local content subsidies, prohibited under Article 3.1 (b) and Article 3.2 of the SCM Agreement. The Panel recommended the withdrawal of these subsidies within 90 days.
- The INOVAR-AUTO programme
- The accreditation requirements (eg. domestic manufacturing process requirement, etc.) in order to be eligible for the tax advantages, the accrual of tax credits depending on the ratio of local contents used, and the use of such tax credits accord advantages to domestic goods and are inconsistent with the national treatment requirement (Article: III 2 and III 4 of the GATT 1994). The programme also constitutes a trade-related investment measure, and is inconsistent with Article 2.1 of the TRIMs Agreement. In addition, the tax advantages are local content subsidies, prohibited under Article 3.1 (b) and Article 3.2 of the SCM Agreement. The Panel recommended the withdrawal of the subsidies within 90 days.
- Additionally, the tax reduction of 30% of IPI accorded to finished automobiles imported from MERCOSUR and not to other Members is inconsistent with the most-favored-nation treatment requirement (Article I of the GATT 1994).
- Tax treatment for exporting companies (PEC and RECAP)
PEC and RECAP provides for reduction and decrement of federal taxes imposed on their purchase and import of machinery, devices, raw materials, etc. to exporting companies that earn certain ratios of their sales from exports. The Panel found that PEC and RECAP are export subsidies which are prohibited under Article 3.1 (a) and Article 3.2 of the SCM Agreement and thus recommended the withdrawal of the subsidies within 90 days.
3. Future schedule
The Appellate Body Report will be officially adopted at the WTO DSB meeting to be held within 30 days.
Japan requests Brazil to implement the recommendation by the Appellate Body without delay and immediately bring the WTO-inconsistent measures into conformity with related WTO Agreements.
4. Significance of this conclusion by the Appellate Body
This Appellate Body Report has significance in that it clearly reiterates that protectionist market-distorting measures, which are most commonly observed in, but not exclusive to emerging economies, are not permissible under the WTO Agreements.
Division in Charge
- For general information on WTO dispute settlements:
Office for WTO Compliance and Dispute Settlement, Multilateral Trade System Department, Trade Policy Bureau
- For information on the economic relationship between Japan and Brazil:
Latin America and Caribbean Office, Trade Policy Bureau