VZCZCXRO7043
PP RUEHRG
DE RUEHBR #2193/01 3311724
ZNR UUUUU ZZH
P 271724Z NOV 07
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC PRIORITY 0544
INFO RUEHSO/AMCONSUL SAO PAULO 1238
RUEHRI/AMCONSUL RIO DE JANEIRO 5498
RUEHRG/AMCONSUL RECIFE 7432

UNCLAS SECTION 01 OF 07 BRASILIA 002193 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EB/TPP/BTA AND WHA 
DEPT PASS USTR - KDUCKWORTH/GBLUE 
 
E.O. 12958:  N/A 
TAGS: ETRD KIPR EFIN ECON BR
SUBJECT: Brazil:  Draft National Trade Estimate 
 
REF:  STATE 119763 
 
¶1.   (U) Per reftel, set forth in paragraph 2 below is the text of 
post's draft of the National Trade Estimate.  Post notes a new 
industrial policy is expected to be announced before the holidays, 
which may affect the subsidiaries and investment sections. 
 
¶2.  (SBU) Begin Text. 
 
TRADE SUMMARY 
 
The U.S. goods trade deficit with Brazil was $1.636 billion through 
September 2007, a decrease of $4.579 billion from the same time 
period in 2006. U.S. goods exports through September 2007 were 
approximately $17.564 billion, up 28.75 percent from the same time 
the previous year.  Corresponding U.S. imports from Brazil through 
September 2007 were approximately 19.2 billion, down 3.3 percent 
from the same period in 2006.  Brazil is currently the 13th largest 
export market for U.S. goods (as of September). (Data most 
up-to-date available from U.S. 
Census,www.census.gov/foreign-trade/balance/c 3510.html. 
 
U.S. exports of private commercial services (i.e., excluding 
military and government) to Brazil were $7.6 billion in 2006, and 
U.S. imports were $2.8 billion.  Sales of services in Brazil by 
majority U.S.-owned affiliates were $10.7 billion in 2005 (latest 
data available), while sales of services in the United States by 
majority Brazilian-owned firms were $540 million. 
 
The stock position (on a historical cost basis) of U.S. foreign 
direct investment (FDI) in Brazil in 2006 was $32.6 billion, up from 
$29.6 billion in 2005.  U.S. FDI in Brazil is concentrated largely 
in the manufacturing, finance, and banking sectors. 
 
IMPORT POLICIES 
 
Brazil's average applied tariff rate was 11.46 percent as of 
September 2007, an increase from the November 2006 average applied 
tariff of 10.59 percent, caused in large measure by increases in 
tariffs on textiles 
(from 18 percent to 26 percent) and on footwear and apparel 
(from 20 percent to 35 percent).  Brazil is a member of Mercosul, a 
customs union formed in 1991 and comprised of Argentina, Brazil, 
Paraguay, and Uruguay.  Bolivia, Chile, Colombia, Ecuador, and Peru 
have individually become affiliated with Mercosul as Associate 
Members between 1996 and 2004.  Venezuela was proposed as a full 
member in 2005, although the process of completely integrating the 
Caracas regime into the bloc will take time, if its accession is 
approved by all Mercosul members.  Full common external tariff (CET) 
product coverage scheduled for implementation in 2006 has been 
delayed.  CETs range from zero percent to 35 percent ad valorem, 
with a number of country-specific exceptions.  Currently, Brazil 
maintains its maximum allowable 100 exceptions to the CET. 
 
High CETs significantly impede increased imports of U.S. 
agricultural products, distilled spirits, and computer and 
telecommunications equipment.  Brazil applies additional federal and 
state taxes and charges that can effectively double the actual cost 
of importing products into Brazil.  One safeguard measure is in 
place against grated coconut.  A number of imports are prohibited, 
including foreign blood products, all used consumer goods such as 
machinery, automobiles, clothing, refurbished medical equipment and 
tires.  A 25 percent merchant marine tax on long-distance freight at 
Brazilian ports puts U.S. agricultural products at a competitive 
disadvantage to Mercosul products.  Brazil applies a 60 percent flat 
import tax on most manufactured retail goods imported via mail and 
express shipment by individuals that go through a simplified customs 
clearance procedure called RTS (simplified tax regime).  Goods with 
a value of over US $3000 cannot be imported using this regime. 
 
Import Licensing/Customs Valuation 
 
All importers must register with the Secretariat of Foreign Trade 
(SECEX) to access Brazil's "SISCOMEX" computerized trade 
documentation system.  SISCOMEX registration requirements are 
onerous, including a minimum capital requirement.  The new updated 
SISCOMEX system, installed in early 2007, cut the wait time for 
import-export license processing almost in half.  In addition, fees 
are assessed for each import statement submitted through SISCOMEX. 
Most imports into Brazil are covered by an "automatic import 
license" regime.  Brazil's non-automatic import licensing system 
includes imports of products that require authorization from 
specific ministries or agencies such as beverages (Ministry of 
Agriculture), pharmaceuticals (Ministry of Health), and arms and 
munitions (National Defense Ministry).  Although a list of products 
subject to non-automatic import licensing procedures is published on 
the Brazilian Ministry of Development, Industry and Trade website, 
 
BRASILIA 00002193  002 OF 007 
 
 
(www.desenvolvimento.gov.br 
/arquivo/secex/conPorImportacao/AnuentesLInao Auto.pdf), specific 
information related to non-automatic import license requirements and 
explanations for rejections of non-automatic import license 
applications are lacking.  These measures have made importing into 
Brazil less transparent and more cumbersome for U.S. exporters. 
 
U.S. companies continue to complain of onerous and burdensome 
documentation requirements, which are required before certain types 
of goods can enter Brazil - even on a temporary basis.  For example, 
the Ministry of Health's regulatory agency, ANVISA, must approve 
product registrations for imported pharmaceuticals, medical devices, 
health and fitness equipment, cosmetics, and processed food 
products.  Currently, the registration process at ANVISA takes about 
three to six months for new versions of existing products, but can 
take over six months to register products new to the market. 
Registration of pharmaceutical products can take over one year, 
since ANVISA requires that a full battery of clinical testing be 
performed in Brazil, regardless of whether or not the drug already 
has FDA approval. 
 
ANVISA implemented regulations late last year (regulation 185) to 
comply with federal legislation (Law 10742, which came in force in 
October 2003).  This regulation now requires companies to submit 
economic information (some of it proprietary) including projected 
worldwide pricing intentions, in order to register medical devices. 
Attempts by industry representatives to challenge this new 
requirement have been unsuccessful thus far, and no new devices have 
been registered since it was established. Implementation of such 
import measures not only delays entry of state-of-the-art U.S. 
pharmaceutical and medical products into the Brazilian market; it 
also renders it impossible for U.S. companies to demonstrate 
new-to-market goods at industry trade shows. 
 
The United States has raised a concern with Brazil that the state of 
Rio de Janeiro administers the ICMS tax (a value-added tax collected 
by individual states) in a way that provides a preferential tax 
advantage to a Brazilian soda ash supplier located within the state. 
 Although the tax is designed to be refunded upon export of goods 
outside of the country, exporters in many states have had difficulty 
receiving rebates of the ICMS, if at all.  Similarly, some U.S. 
companies have raised concerns about the arbitrary application of 
various quotas and non-automatic import licensing procedures, such 
as authorizations from the Federal Police and the Nuclear Regulatory 
Agency.  For example, Brazil maintains extremely restrictive import 
quotas and requires non-automatic import license approval for 
imports of lithium compounds, including lithium carbonate and 
lithium hydroxide, citing the potential nuclear applications of 
these products.  These products, however, are widely available 
without restriction in global markets.  The United States has raised 
this issue with Brazil on several occasions, both bilaterally and in 
the WTO. 
 
STANDARDS, TESTING, LABELING AND CERTIFICATION 
 
Sanitary and Phytosanitary Measures 
 
While some progress has been made in the area of sanitary and 
phytosanitary measures, significant issues remain that restrict U.S. 
agricultural and food exports.  For example, due to concerns about 
bovine spongiform encephalopathy (BSE), Brazil restricts U.S. 
exports of low-risk beef without scientific justification and 
contrary to the World Animal Health Organization (OIE).  Brazil 
continues to prohibit the import of poultry and poultry products 
from the entire United States.  Sound scientific justifications for 
these restrictions have not been provided.  Brazil's ban on wheat 
from the states of Washington, Oregon, Idaho, California, Nevada, 
and Arizona due to phytosanitary concerns remains in place.  While 
the United States understands that some of these SPS measures are 
being rewritten, the ban continues to adversely affect U.S. 
agricultural exports. 
 
Biotechnology 
 
Brazil's President signed into law the country's first Biosafety 
Bill (Law 11105) on March 24, 2005, replacing the previous legal 
framework in use since 1995 under which agricultural biotechnology 
was developed in Brazil.  This law, which also includes provisions 
for stem cell research, became effective on March 28, 2005 after its 
publication in Brazil's official registry (Diario Oficial). 
Implementing regulations for the law were issued by presidential 
decree on November 23, 2005. 
 
President Lula signed Law Number 11460 on March 21, 2007 which 
altered provisions of the Biotech Law Number 11105. The main change 
involves reduction of the number of votes needed on the 27 member 
National Technical Commission of Biosafety (CTNBio) board (from 
 
BRASILIA 00002193  003 OF 007 
 
 
two-thirds to a simple majority) to approve individual biotech 
proposals.  No biotech events had been approved since CTNBio became 
operational in 2006, creating a backlog of over 500 events, due to 
the use of administrative maneuvers and red tape by board members 
who are environmentalists or members of anti-biotech groups.  The 
CTNBio has approved 3 biotech events since May 2007, but the 
decisions are currently blocked by a court injunction. 
 
GOVERNMENT PROCUREMENT 
 
Brazil is not a signatory to the WTO Agreement on Government 
Procurement, and transparency in Brazil's procurement processes is 
at times lacking.  The United States government has received 
complaints concerning lack of transparency and preferences for 
Brazilian products in tenders for government and hospitals, 
including for domestically produced medical equipment.  Limitations 
on foreign capital participation in procurement bids reportedly 
impair access for potential service providers in the energy, 
construction, security and defense sectors.  Brazilian federal, 
state and municipal governments, as well as related agencies and 
companies, in general follow a "buy national" policy.  Law 8666 
(1993), which covers most government procurement other than 
informatics and telecommunications, requires non-discriminatory 
treatment for all bidders regardless of the nationality or origin of 
the product or service.  However, the law's implementing regulations 
allow consideration of non-price factors, giving preferences to 
certain goods produced in Brazil and stipulating local content 
requirements for eligibility for fiscal benefits. 
 
Decree 1070 (1994), which regulates the procurement of information 
technology goods and services, requires federal agencies and 
parastatal entities to give preferences to locally produced computer 
products based on a complicated and nontransparent price/technology 
matrix.  However, Brazil permits foreign companies with legal 
entities in the country to compete for procurement-related 
multilateral development bank loans and opens selected procurements 
to international tenders. 
 
EXPORT SUBSIDIES 
 
The Government of Brazil offers a variety of tax, tariff, and 
financing incentives to encourage production for export and the use 
of Brazilian-made inputs in domestic production.  For example, 
Brazil's National Bank for Economic and Social Development (BNDES) 
provides long-term financing to Brazilian industries through several 
different programs.  The interest rates charged on this financing 
are customarily lower than the prevailing market interest rates for 
domestic financing.  One BNDES program, FINAME, provides capital 
financing to Brazilian companies for, among other things, expansion 
and modernization projects as well as acquisition or leasing of new 
machinery and equipment.  One goal of this program is to support the 
purchase of domestic over imported equipment and machinery.  These 
programs can be used for financing capacity expansions and equipment 
purchases in industries such as steel and agriculture. 
 
On November 21, 2005, Brazil's President signed Law 11196 which 
contains provisions originally included in Provisional Measures (MP) 
255/2005 and 252/2005 (commonly referred to as MP do Bem) that 
provide tax benefits to qualifying exporters.  The law's Special 
Regime for the Information Technology Exportation Platform (REPES) 
suspends PIS/PASEP and COFINS (social security) taxes on goods and 
services imported by companies that commit to export software and 
information technology services to the extent that those exports 
account for over 80 percent of annual gross income.  The MP's 
Special Regime for the Acquisition of Capital Goods by Exporting 
Enterprises (RECAP) suspends these same taxes on new machines, 
instruments and equipment imported by companies that commit for a 
period of at least three years to exports goods and services such 
that they account for at least 80 percent of overall gross income. 
 
Brazil restored tax breaks to exporters with the enactment of Law 
11529, which went into effect on October 22.  This measure attempts 
to help industries hurt by the strengthening real.  This law allows 
certain Brazilian industrial sectors (textiles, furniture, 
ornamental stones, woodworking, leatherworking, shoes, leather 
goods, heavy and agricultural machinery manufacturers, apparel and 
automotive - including parts) to apply PIS (social integration 
program)-COFINS tax credits to the purchase of capital goods, both 
domestic and imported, to be used for manufacturing finished 
products.  The law also expands the government's program for 
exporting companies purchasing capital goods.  To be exempt from 
paying the 9.25 percent PIS-Cofins tax on these purchases, companies 
must prove they derive at least 70 percent of their revenues from 
exportation.  This benchmark was lowered to 60 percent for companies 
in the sectors covered by the legislation. 
 
INTELLECTUAL PROPERTY RIGHTS (IPR) PROTECTION 
 
BRASILIA 00002193  004 OF 007 
 
 
 
Patents and Trademarks 
 
Law 10196 (2001) includes some problematic provisions, including a 
requirement that National Health Surveillance Agency (ANVISA) 
approval be obtained prior to the issuance of a pharmaceutical 
patent.  This raises concerns with respect to transparency and 
compliance with Article 27 of the TRIPS agreement, which U.S. 
officials have communicated to Brazilian counterparts, and has 
contributed to a backlog in patent issuance. 
 
Invoking TRIPS provisions, on May 4 Brazil issued a compulsory 
license for Merck Sharp & Dohme's anti-retroviral drug efavirenz 
(brand name: Stocrin), used in treating HIV/AIDS after a breakdown 
in negotiations with the company.  The Brazilian government cited 
the need for cost savings in its free public treatment program for 
HIV victims. 
 
Although Brazil's patent backlog remains high, estimated at between 
130,000 and 150,000 applications, the GoB has taken concrete steps 
to streamline processing, including an upgrade of its outdated 
computer system.  Over the past two years it has increased the 
number of patent and trademark examiners over 155% from 180 to 460 
and increased median salaries 50% to retain experienced employees. 
In mid-2006, the National Institute of Industrial Property (INPI) 
instituted a new system of streamlined, paperless processing for 
trademarks.  By the end of 2007, the GoB estimates that new patent 
applications will be adjudicated within five years of submission; by 
the end of 2009 the goal is within four years. 
 
The GoB has also raised trademark approvals almost six-fold since 
2003 and expects to shorten processing time to less than a year by 
the end of 2007, down from the current 18 month wait.  The U.S. 
Patent and Trademark Office (USPTO) is working with INPI to help 
that agency in its modernization efforts.  A group of INPI 
biotechnology patent examiners is expected to return from an 
eight-month training course at USPTO facilities in January 2007. 
This year, at its General Assembly meeting, WIPO appointed INPI an 
International Searching Authority (ISA) and International 
Preliminary Examining Authorities (IPEAs) under the Patent 
Cooperation Treaty (PCT) for international patent applications. 
 
In 2006, Brazil announced plans to join the Madrid Agreement 
Concerning the International Registration of Mark ("Madrid 
Protocol"), but the executive branch yet to submit this proposal the 
Brazilian Congress for approval.  Should this plan be realized, 
rightsholders who seek trademark protection in Brazil would then be 
able to take advantage of a streamlined international trademark 
registration system, making Brazil the first country in South 
America where this system is available. 
 
The United States government has also received complaints that 
unauthorized copies of pharmaceutical products have received 
sanitary registrations that rely on undisclosed tests and other 
confidential data, raising concerns of consistency with TRIPS 
 
SIPDIS 
Article 39.3.  Law 10603 (2002) on data confidentiality covers 
pharmaceuticals for veterinary use, fertilizers, agrotoxins, and 
their components and related products.  The law does not cover 
pharmaceuticals for human use.  If the product is not commercialized 
within two years of the date of sanitary registration, third parties 
may request use of the data for registration purposes. 
 
Copyrights 
 
Brazil's Law 9610 (1998) on copyrights included changes intended to 
bring Brazil into compliance with the Berne Convention and TRIPS.  A 
1998 software law protects computer programs for 50 years as 
"literary works," and makes software infringement a fiscal and an 
intellectual property crime.  Brazil is not a party to the World 
Intellectual Property Organization Treaties on Copyright, and 
Performances and Phonograms. 
 
Piracy remains a serious problem. The International Intellectual 
Property Alliance (IIPA) estimated losses due to piracy of 
copyrighted materials in Brazil totaled at least $927.8 million in 
¶2006.  The U.S. government has engaged intensively with the 
Brazilian government on copyright enforcement in recent years.  IPR 
enforcement efforts by the government of Brazil led to a substantial 
increase in 2006 seizures of counterfeit goods over the previous 
year.  In recognition of its improved anti-piracy enforcement 
efforts, USTR upgraded Brazil's status to "Watch List" in its 
Special 301 Report in 2007 with an "Out-of-Cycle Review" to monitor 
continued improvement of the intellectual property enforcement in 
the country. 
 
SERVICES BARRIERS 
 
 
BRASILIA 00002193  005 OF 007 
 
 
Telecommunications 
 
The telecommunications sector was privatized following the passage 
of the 1997 General Telecommunications Law, but has presented some 
regulatory challenges.  In the fixed-line sector, for example, 
interconnection charges and other incumbency advantages have 
provided strong barriers to entry, and the companies created during 
a transitional duopoly stage have not fared well. 
 
Brazil has not yet ratified its original WTO basic 
telecommunications commitments.  In 2001, Brazil withdrew its 
schedule of commitments due to concerns raised by certain WTO 
Members that it maintained the legal prerogative of the Executive 
Branch to limit foreign participation in this sector, thereby 
creating significant uncertainty for investors.  This legal 
prerogative is contained in Brazil's 1997 General Law on 
Telecommunications and is inscribed in Brazil's constitution.  While 
Brazil has not pursued the constitutional change required to allow a 
revision of its offer to open up this sector, the current regulatory 
environment generally reflects the obligations contained in the WTO 
Basic Telecommunications Reference Paper. 
 
Audio Visual Services 
 
Brazil limits foreign ownership of cable and media companies, and 
has some restrictions on foreign programming contents.  Foreign 
ownership of cable companies is limited to 49 percent, and the 
foreign owner must have a headquarters in Brazil and have had a 
presence in the country for the prior ten years.  Foreign cable and 
satellite television programmers are subject to an eleven percent 
remittance tax. The tax, however, can be avoided if the programmer 
invests three percent of its remittances in co-production of 
Brazilian audio-visual services.  National cable and satellite 
operators are subject to a fixed title levy on foreign content and 
foreign advertising released on their channels.  Law 10610 (2002) 
limits foreign ownership in media outlets to 30 percent, including 
the print and "open broadcast" (non-cable) television sectors. 
Brazil's legislature is considering extension of this restriction to 
cover Internet Service Providers, pay TV channels and operators, and 
content producers and distributors.  Such a change would pose a 
serious threat to a number of U.S. companies operating in Brazil as 
content producers/distributors.  Open television companies are also 
subject to a regulation requiring that 80 percent of their 
programming content be domestic in origin. 
 
Law 10454 (2002) aims to promote the national film industry through 
creation of the National Film Agency (ANCINE) and through various 
regulatory measures.  The law imposes a fixed title levy on the 
release of foreign films in theaters, foreign home entertainment 
products, and foreign programming for broadcast television. 
 
Remittances to foreign producers of audiovisual works are subject to 
a 25 percent income withholding tax.  Brazilian distributors of 
foreign films are subject to a levy equal to 11 percent of their 
withholding taxes.  This tax, called the CONDECINE (Contribution to 
the Development of a National Film Industry), is waived for the 
Brazilian distributor if the producer of the foreign audiovisual 
work agrees to invest an amount equal to 70 percent of the income 
withholding tax on their remittances in co-productions with 
Brazilian film companies.  The CONDECINE tax is also levied on any 
foreign cinematographic or video phonographic advertisement.  The 
fee may vary according to the advertising content and the 
transmission segment. 
 
Brazil also requires that 100 percent of all films and television 
shows be printed locally.  Importation of color prints for the 
theatrical and television markets is prohibited.  Theatrical screen 
quotas for local films exist.  Quotas on domestic titles for home 
video distributors, while not currently enforced, present another 
potential hindrance to commerce. 
 
Express Delivery Services 
 
A bill (PL 1491/99) that would reorganize the National Postal 
System, thought to be a potential threat to U.S. express delivery 
businesses, has been under consideration in the Brazilian Congress 
since 1999.  The proposal, as it stands now, would create a 
regulatory agency for postal services as well as a new Postal 
Company of Brazil, owned and operated by the federal government. 
Although the bill would end the government monopoly over postal 
services after a ten-year period, it would also create a monopoly on 
the delivery of certain types of correspondence and parcels that are 
not now subject to regulation, such as express delivery packages, 
thereby significantly inhibiting market access by U.S. firms. 
 
The Lula Administration has sent a message to the Brazilian Congress 
requesting that the bill be withdrawn, but to date the Brazilian 
 
BRASILIA 00002193  006 OF 007 
 
 
Congress has not acted on this request.  Brazil applies a 60 percent 
flat import tax on most manufactured retail goods imported by 
individuals that go through a simplified customs clearance procedure 
called RTS (simplified tax regime) that is used by express delivery 
services and prohibits commercial imports via the express channel. 
This flat tax substantially increases the cost to consumers of using 
express delivery services.  Brazilian Customs is in the process of 
switching to an automated express delivery clearance system, which 
will significantly reduce customs clearance times for express 
packages once it is implemented.  Customs originally expected to 
complete implementation of the system by the end of 2007, however a 
revised schedule now calls for completion in the first quarter of 
¶2008.  After implementation of this system is complete, Customs has 
plans to redraft express delivery regulations to remove some current 
of the restrictions on express delivery. 
 
The U.S. Government is engaging the Brazilian government on use of 
ATA Carnets. The ATA Carnet will ease the temporary importation of 
commercial samples, professional equipment, and goods for 
exhibitions and fairs. 
 
Financial Services 
 
Brazil has not yet ratified its commitments from the 1997 Financial 
Services negotiations (known as the Fifth Protocol) or taken the 
necessary steps to make them binding under the General Agreement on 
Trade in Services (GATS).  Brazil is South America's largest 
insurance market and earnings from premiums have grown rapidly in 
recent years.  In 1996, Brazil eliminated the distinction between 
foreign and domestic capital, and many major U.S. firms have since 
entered the market mainly via joint ventures with established 
companies.  Article 192 of the Brazilian Federal Constitution, along 
with Article 52 of the Transitory Provisions, requires a 
presidential decree to permit foreign investments in domestic 
financial institutions.  Additionally, Article 18 of Law 4595/64 
determines how authorizations may be obtained for foreign 
institutions to operate in the Brazilian markets.  In practice, a 
number of these presidential decrees have been granted based on a 
determination that the investment is in the national interest. 
On January 15, 2007, Complementary Law 126 was published in Brazil, 
eliminating the previous state monopoly on reinsurance, which had 
been in place since 1939.   Previously the domain of the government 
controlled Brazilian Institute of Reinsurance (IRB), the regulation 
of co-insurance, reinsurance and retrocession (the practice of one 
reinsurance company essentially insuring another reinsurance company 
by accepting business that the other company had agreed to 
underwrite) transactions and their intermediation will be handled by 
the National Private Insurance Council (CNSP) with oversight from 
the insurance supervisory body, the Brazilian Private Insurance 
Superintendence (SUSEP).  The IRB will continue operating in the 
market only as a local reinsurer. 
The new law authorizes three different types of reinsurance 
companies to operate in Brazil: 
-- local reinsurers:  reinsurers with registered offices in Brazil 
and incorporated for the sole purpose of conducting reinsurance and 
retrocession transactions; 
-- "admitted" reinsurers:  reinsurers with registered offices abroad 
and with a representative office in Brazil, which, in compliance 
with the requirements of the Complementary Law and the rules 
applicable to reinsurance and retrocession activities, has 
registered as such with SUSEP for the conduct of reinsurance and 
retrocession transactions; and 
-- "eventual" reinsurers:  foreign reinsurance companies with 
registered offices abroad that do not have a representative office 
in Brazil, which, upon compliance with the requirements established 
in the Complementary Law and with the rules applicable to 
reinsurance and retrocession activities, has registered as such with 
SUSEP to conduct reinsurance and retrocession transactions. 
Service trade opportunities in some sectors have been affected by 
limitations on foreign capital participation.  Brazil's constitution 
precludes the expansion of foreign-owned banks until new financial 
sector legislation is issued.  For practical reasons, the required 
legislation has not been issued, but Brazil's President has the 
authority to authorize new foreign participants on a case-by-case 
basis.  In practice, Brazil has approved the great majority of 
foreign service suppliers to enter the market or expand existing 
operations.  United States financial service suppliers have 
established significant operations in Brazil.  As of December 2006, 
Central Bank records indicate that foreign-owned or controlled 
assets accounted for 24.8 percent of Brazil's total banking sector 
equity. 
INVESTMENT BARRIERS 
 
In addition to restrictions discussed above, Law 7565 (1986) 
restricts foreign investment in domestic airline companies to a 
maximum of 20 percent.  Foreign ownership of land adjacent to 
national borders remains prohibited under Law 6634 (1979), unless 
 
BRASILIA 00002193  007 OF 007 
 
 
approved by Brazil's National Security Council.  U.S. and other 
foreign firms have major investments in Brazil, with the U.S. 
accounting for around one-fifth of total foreign investment, per 
Central Bank statistics.  There is neither a bilateral investment 
treaty nor a treaty on the avoidance of double taxation between the 
United States and Brazil.  (Note:  A new industrial policy is due to 
be announced before Christmas.  End Note.) 
 
Energy 
 
In 2004, Brazil began implementing new energy legislation to 
restructure the power generation and distribution sector.  The new 
legislation gives the state a leading role in determining, for 
example, how much new power capacity is needed based on forecasts by 
an independent Energy Research Institute (IPE), which was created in 
¶2005.  The new model separates into two different competition groups 
power generators that have not yet amortized their investments (new 
energy) and those that have (old energy), based on whether a 
facility had been built by a certain cut-off date.  This dual-pool 
structure has disadvantaged some U.S. companies that invested in the 
sector during privatization in the late 1990s and whose investments 
have not been amortized, but which are nevertheless included in the 
old energy pool.  The Brazilian government is still in the midst of 
implementing the new model. 
 
This year the Government of Brazil plans to open bids for new 
hydroelectric power plants in an attempt to avoid projected power 
shortages that private industry estimates forecast to occur as soon 
as 2009.  In contrast, government officials have projected that 
electrical energy shortages will not begin until 2015 at the current 
rate of growth in energy consumption, particularly in the electrical 
and natural gas sectors, by both industrial and residential 
consumers.  Industry sources and media reports predict an earlier 
date, claiming that measures taken by the Brazilian government to 
avoid an energy shortage will be insufficient largely due to 
environmental restrictions that delay the implementation of new 
hydroelectric and other power sources. 
 
End Text. 
 
SOBEL