VZCZCXRO5376
RR RUEHRG
DE RUEHBR #0195/01 0321945
ZNR UUUUU ZZH
R 011945Z FEB 07
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 8023
INFO RUEHRI/AMCONSUL RIO DE JANEIRO 3813
RUEHRG/AMCONSUL RECIFE 6197
RUEHSO/AMCONSUL SAO PAULO 9154
RUEHBU/AMEMBASSY BUENOS AIRES 4571
RUEHAC/AMEMBASSY ASUNCION 5926
RUEHMN/AMEMBASSY MONTEVIDEO 6735
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 02 BRASILIA 000195 
 
SIPDIS 
 
SIPDIS 
 
STATE PASS USTR - SCRONIN/MSULLIVAN 
USDOC FOR 4332/ITA/MAC/WH/OLAC/MCAMPOS 
USDOC FOR 3134/ITA/USCS/OIO/WH/RD/DRAMBO 
AID/W FOR LAC 
 
E.O. 12958:  N/A 
TAGS: ETRD BEXP ECON BR
SUBJECT: EU TO APPROACH BRAZILIAN GOVERNMENT ON TAXATION OF 
COSMETICS IMPORTS 
 
 
¶1.  (U)  Action Request - paragraph 2. 
 
¶2.  (U)  Summary and Action request.  On January 31, EU 
Econ/Commercial Counselor Fabian Delcros approached Commercial 
Attache with respect to problems that EU cosmetics companies were 
experiencing regarding alleged discriminatory taxation upon their 
exports to Brazil.  In essence, the EU argues that the GOB's 
Industrial Property Tax is being levied in a discriminatory manner 
because it is assessed against domestic goods at the industrial 
level but against imported goods at the wholesale level - and the 
wholesale price structure is higher because that total includes the 
importers' profit margins.  The higher IPI levied on imported 
products, the EU states, appears to constitute a violation of 
Article III:2 of the 1994 GATT provisions on national treatment for 
taxation of imported products.  Delcros provided Commercial Attache 
with an Aide Memoire on this issue (set forth at paragraph 3) and 
wondered if US Embassy might be willing to join forces with EU 
diplomats here on a joint demarche to the GOB.  While post has 
worked on behalf of U.S. cosmetics exporters which have experienced 
problems with Brazilian customs regarding invoicing, to date we have 
not heard any complaints from them about the application of the IPI 
tax.  Post seeks Washington guidance as to how to respond to the 
EU's proposal for a coordinated approach.  End Summary and Action 
Request. 
 
¶3.  (U)  Text of EU Aide Memoire 
 
The European Commission is concerned about an apparent tax tax 
discrimination against cosmetic products imported into Brazil.  Such 
products are always subject to the industrial tax (IPI) at the 
wholesaler stage, thus resulting in a higher tax burden than that 
applicable to the like domestic products, which are subject to this 
tax at the industrial stage.  This tax discrimination appears to be 
inconsistent with Brazil's obligations under the GATT 1994. 
 
Decree 4.544 of 26 December 2002, which regulates the application of 
the IPI (Imposto sobre Produtos Industrializados), establishes in 
Section II the cases where non-industrial business is assimilated to 
industrial business for the purposes of the application of the tax. 
Decree 4.544 covers both the trading of locally produced goods and 
the trading of imported goods. 
 
According to Section II of Decree 4.544 of 26 December 2002, these 
are the cases where the trading of imported products is assimilated 
to production and therefore subject to the IPI: 
 
--  Wholesalers and retailers receiving the imported goods from an 
importer from the same business group or corporation (Article 9.II) 
--  Wholesalers and retailers trading on goods imported on their 
behalf through a third legal entity (i.e., and importer (Article 
9.IX). 
 
However, by virtue of Article 9.VIII, wholesalers of imported 
cosmetic products are assimilated to producers, and therefore 
subject to the IPI tax, in all cases, whether the importation is 
done on behalf of the importer or on the wholesaler behalf and/or 
the ownership relationship between importer and trader.  "Os 
estabelecimentos atacadistas que adquirirem de estabelecimentos 
importadores produtos de procedencia estrangeira, classificados nas 
posicoes 33.03 a 33.07 da TIPI (Medida Provisoria n. 2.158, de 24 
agosto de 2001, art. 39)".  This assimilation does not apply to 
domestic cosmetic products, but only to imported ones. 
 
Therefore, by its own terms, Decree 4.544 clearly discriminates 
against imported cosmetic products if compared to locally produced 
goods.  The latter are subject to the IPI only once, at the 
industrial stage.  On the other hand, imported cosmetic products are 
subject to the IPI twice:  firstly, when the importation takes 
place; secondly, when the wholesaler receives the goods from the 
importer.  Although the importer is credited for the industrial tax 
paid, the consequences of the Brazilian tax provisions are a higher 
amount of tax finally borne by imported goods, due to the fact that 
at the wholesaler stage the taxable base includes the importer's 
profit margin.  Consequently, imported cosmetic products are taxed 
in excess of the like domestic products.  This higher tax burden 
affects the final retail price and it affords protection to domestic 
production. 
 
For the reasons mentioned above, Brazil's provisions on the 
application of IPI to imported cosmetics appears to constitute a de 
 
BRASILIA 00000195  002 OF 002 
 
 
lege discrimination against imported cosmetic products inconsistent 
with article III:2 of the GATT 1994 ("National treatment on internal 
Taxation and Regulation"), which stipulates that the products of the 
territory of any contracting party imported into the territory of 
any other contracting party shall not be subject to internal taxes 
in excess of those applied to like domestic products. 
 
We therefore request the Brazilian authorities to give due 
consideration to this matter in order to ensure a level playing 
field for imported and domestic goods. 
 
End Text of EU Aide Memoire. 
 
Sobel