VZCZCXRO8287
RR RUEHRG
DE RUEHBR #2147/01 3201241
ZNR UUUUU ZZH
R 161241Z NOV 07
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 0453
INFO RUEHAC/AMEMBASSY ASUNCION 6405
RUEHBU/AMEMBASSY BUENOS AIRES 5124
RUEHMN/AMEMBASSY MONTEVIDEO 7098
RUEHSG/AMEMBASSY SANTIAGO 0001
RUEHRG/AMCONSUL RECIFE 7375
RUEHRI/AMCONSUL RIO DE JANEIRO 5440
RUEHSO/AMCONSUL SAO PAULO 1177
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEAIIA/CIA WASHDC
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 02 BRASILIA 002147 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
EPSC FOR LISA KUBISKE 
TREASURY FOR OASIA - J. HOEK 
 
E.O. 12958: N/A 
TAGS: EINV EFIN ECON PREL BR
SUBJECT: KEY SENATOR SAYS CLIMATE IS RIGHT FOR BILATERAL 
TAX TREATY 
 
¶1.  (SBU)  Summary.  Aloizio Mercadante, chairman of the 
Senate Economic Affairs Committee, told Ambassador Sobel on 
October 18 that the bilateral relationship is at a very 
favorable point and the bilateral agenda must be resumed 
without delay so as to expand economic relations.  He 
predicted the Senate would approve the bilateral agreement on 
diplomatic properties and that a potential bilateral tax 
treaty would be favorably viewed in the Congress.  End 
summary. 
 
Great Expectations for Expanded Bilateral Trade 
 
¶2.  (SBU)  Mercadante told the Ambassador there is a great 
expectation in Brazil that trade relations can be expanded, 
in view of good bilateral relations, Brazilian economic 
growth of about five percent of GDP a year, the fiscal 
responsibility of the Lula administration, and high demand 
for infrastructure investment and logistics.  He said the 
U.S. is already Brazil's top trading partner, with U.S. 
purchases accounting for 10.8 percent of Brazil's exports, 
but the current exchange rate is increasingly a problem for 
Brazil. 
 
Public Finance Weakness 
 
¶3.  (SBU)  The main problem on the economic horizon at 
present is a certain frailty in public finances, coupled with 
high taxes, although states and the federal government are 
unable to collect some taxes, he said.  Firms are to receive 
a tax credit under the Kandir Law but do not, which is a 
serious problem.  On the positive side, Mercadante noted, the 
fiscal situation of the states has been improving, although 
exports as a percentage of GDP has dropped.  If there is tax 
relief for exports, Mercadante continued, states will not 
receive enough income (presumably federal revenue transfers). 
 
Tax Treaty 
 
¶4.  (SBU)  Mercadante said the political atmosphere is very 
favorable, particularly in the Senate, for the negotiation of 
a bilateral tax treaty.  Passage would not be difficult, but 
a proposal must address concrete issues, and he urged the USG 
to provide a draft to interested senators as soon as 
possible.  Ambassador Sobel said Jorge Rashid, head of the 
Federal Revenue Service, had told him Brazil did not want to 
lose revenue.  Ambassador also pointed out Brazil is the 
biggest country with which the U.S. has no tax treaty. 
 
¶5.  (SBU)   Mercadante clearly supports a bilateral tax 
treaty.  He offered to help reach out to other key senators 
and suggested several names for Embassy outreach.  When the 
Ambassador told him of a U.S. firm doing business in Brazil 
that was going to write off USD 500 million in losses because 
of a tax problem, Mercadante asked the Ambassador for a list 
of non-reimbursed tax credits affecting U.S. companies so he 
could look into the matter, and promised to contact the 
American Chamber of Commerce in Sao Paulo.  He volunteered to 
convene a public hearing in the Economic Affairs Committee 
with state governors to help clarify the situation, and 
suggested the Federation of Industries of Sao Paulo (FIESP) 
should survey firms to determine the extent of the problem. 
 
Property Agreement 
 
¶6.  (SBU)  Mercadante said the bilateral agreement on buying 
and selling diplomatic properties will be easily approved in 
the Senate.  An adviser to Mercadante told us subsequently 
that approval could require a bill to exempt the U.S. Embassy 
from the collection of INSS payments (equivalent to social 
security) in order to guarantee reciprocity, but it would not 
be controversial.  (Note: the property agreement was approved 
in the Chamber of Deputies on October 31 and sent to the 
Senate.) 
 
Participants 
------------ 
 
¶7.  U.S. 
 
BRASILIA 00002147  002 OF 002 
 
 
Ambassador Sobel 
Tara Erath, economics counselor 
Dale Prince, political officer (notetaker) 
 
Brazil 
 
Aloizio Mercadante, Senator (Workers Party, Sao Paulo state) 
Marcelo Zero, foreign policy adviser 
 
Sobel