US embassy cable - 04BRASILIA1002

UNCLAS SECTION 01 OF 02 BRASILIA 001002 
 
SIPDIS 
 
STATE FOR WHA/BSC 
USDOC FOR 4322/ITA/MAC/WH/OLAC/WBASTIAN/JANDERSEN/DMCDO UGALL 
USDOC ALSO FOR 4110/USDOC/ITA/MAC/TCC/RIGOLI 
PLEASE PASS TO USTR FOR SCONIN AND LYANG 
 
E.O. 12958: N/A 
TAGS: ETRD, BEXP, BR, Trade 
SUBJECT: BRAZIL'S TREATMENT OF SODA ASH IMPORTS 
 
Refs: A) State 79087 B) 2003 USDOC 5383 
 
1.  As requested in ref A, Econoffs delivered the demarche 
concerning ICMS (Merchandise and Service Circulation) tax on 
imported soda ash to Luis Balduino and Felipe Gastao of the 
Ministry of External Affairs' (MRE) Market Access Division on 
April 15.  Balduino has been our working-level contact at MRE 
on this issue for the last year, designated by then head of the 
General Secretariat for Economic Integration and Foreign Trade, 
Ambassador Clodoaldo Hugueney.  Balduino clarified what 
Hugueney had earlier reported on a preliminary basis to 
EconCouns and Tradeoff about Itamaraty's action in the matter: 
that he consulted Rio State officials in September - October 
2003 to determine whether the acknowledged difference in ICMS 
tax rates for imported (19 percent) versus locally produced (2 
percent) soda ash can be viewed other than as a national 
treatment issue.  Balduino stated that the soda ash case is the 
only allegation of which he is aware that the ICMS tax causes 
negative effects on imports. 
 
2.  According to Balduino, Rio state tax officials maintain 
that the ICMS rate, levied on a per-transaction basis, remains 
theoretically the same for imported and domestically produced 
soda ash.  However, in the case of the Alcalis Company of Rio, 
this theoretical rate on soda-ash transactions is supposedly 
superseded by the fact that Alcalis has the right to pay simply 
a 2 percent ICMS levied on gross revenue, due to Rio ICMS tax- 
code provisions that grant this lower rate to producers and 
refiners of table salt ("sal para alimentacao" in Portuguese.) 
Econoffs asked the obvious question as to why this 2% rate 
should apply to non-table-salt parts of Alcalis's business. 
Balduino said Rio state officials assert that the ICMS tax 
cannot be declared discriminatory against imported soda ash 
because of 1) the difference in the calculation base, and 2) 
the opportunity of the soda-ash importer to recover the ICMS 
tax via tax credits.  The 2 percent ICMS rate on gross revenue 
does not allow for this sort of reimbursement.  State officials 
claim to Itamaraty that Alcalis may thus, in fact, pay more in 
net tax than an importer of soda ash would.  Balduino could not 
elaborate which, if any, downstream tax liabilities this 
alleged eligibility for ICMS tax credits could be claimed 
against by the soda-ash importer. 
 
3.  Balduino summed-up that the MRE at this stage, on the basis 
of the response from Rio state, had found no prima facie 
evidence of abuse of the national treatment clause, and 
therefore of any inconsistency with WTO obligations on the part 
of Brazil's (Rio state's) actions.  However, as a result of our 
demarche, Itamaraty will now pursue the case further, he said. 
He requested information on the potential consequences of 301 
and/or GSP action against Brazil as a result of U.S. soda ash 
industry petitions. 
 
COMMENT AND RECOMMENDATION 
 
4.  To refute the Rio state authorities' case, we now need to 
document the lack of substance specifically to their claim that 
tax credits accrued by soda-ash importers who pay a 19% ICMS is 
or can be recuperated via subsequent tax-credits, and that 
Alcalis is indeed ineligible for such credits.  From our old 
files of this case, it seems the same point may have been 
asserted in 2001; we cannot tell if the U.S. manufacturer has 
previously addressed it in the process of USG consideration. 
To verify if, in fact, Alcalis has been paying less ICMS tax to 
Rio state since the imposition of the 2001 Decree would 
presumably require access to the company's tax records.  It of 
course seems most unlikely that Alcalis could actually be 
assessed a higher ICMS liability than its imported competitors. 
Do updated figures from the U.S. industry show declining market 
share since the imposition of the 2001 decree?  It would also 
help if U.S. industry would identify major Sao Paulo glass 
producers (presumably the largest imports of soda ash) that 
have shifted purchases from the U.S. to Alcalis due to the ICMS- 
generated cost differences.  Post will shortly seek an update 
from the MRE on Brazil's position on this matter; meanwhile Rio 
Consulate-General FCS is trying to independently research these 
specific aspects. 
 
5.  Separately, in response to ref B's query on import 
procedures for soda ash, the MRE has confirmed that prior 
authorization from the Federal Police Department is required 
for soda-ash imports because of the potential for diversion 
from legitimate uses to uses involving narcotics or drugs that 
cause physical dependency.  Ministry of Justice decree 
("portaria") 1.274 of August 25, 2003 details the requirements 
and lists soda ash as a chemical product subject to this 
authorization. 
 
HRINAK