EU Takes Aim at Brazilian “Tax Advantages” in WTO Dispute

The EU filed a formal WTO complaint against Brazil in late December, targeting a series of tax measures that it claims provide unfair advantages to the South American country’s manufacturing sector.

In the request for consultations (DS472) - the first stage of WTO dispute settlement proceedings - the EU highlighted a series of tax measures and charges that Brazil has imposed in the automotive sector over the past two years.

This began in September 2011 with a 30 percent tax increase on motor vehicles, with an exemption for domestically produced cars and trucks. This was then followed by a new tax regime called “Innovar Auto,” launched in 2012 and set to expire in 2017. The EU also flagged tax measures affecting the electronics and technology industry, along with goods produced in Free Trade Zones, and tax advantages that Brasilia provides for exporters.

Brussels claims that these measures impose a higher tax burden on imported goods than on their domestic equivalents, while conditioning tax advantages to the use of locally produced goods. These policies have, the EU says, harmed their exporters while providing Brazilian producers with unfair advantages.

For their part, Brazilian officials say that their policies are in line with WTO obligations, with Foreign Minister Luiz Alberto Figueiredo insisting that his government has “solid arguments” in its favour.

Some of the EU’s largest car manufacturers have launched or expanded their manufacturing operations in Brazil in order to take advantage of the tax system, a fact that analysts say could pose difficulties for Brussels. BMW, for instance, has publicly spoken out in support of the Brazilian “Inovar Auto” regime in the past.

The complaint comes as the EU and Mercosur- a group of which Brazil is a member - continue their efforts to wrap-up their long-running trade negotiations. The talks, which also involve Argentina, Paraguay, Uruguay, and Venezuela, have proven famously difficult since their launch nearly 15 years ago. Officials say that this new dispute is unlikely to have any ramifications on the EU-Mercosur process.

The EU is one of Brazil’s main trading partners, accounting for one-fifth of the South American country’s total trade in 2012. Brazil, meanwhile, is the EU’s eighth largest trading partner, making up just over 2 percent of the bloc’s total trade.

Parties to a WTO dispute have 60 days to conduct consultations to resolve their differences. If this fails, the complainant may then request that a panel be established to hear the case.