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RR RUEHRG
DE RUEHBR #0551/01 1161026
ZNR UUUUU ZZH
R 251026Z APR 08
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 1501
INFO RUEHRI/AMCONSUL RIO DE JANEIRO 6066
RUEHSO/AMCONSUL SAO PAULO 1937
RUEHRG/AMCONSUL RECIFE 7950
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 05 BRASILIA 000551 
 
SIPDIS 
 
DEPT PASS USTR FOR KATE DUCKWORTH 
DEPT PASS DOC/ITA/MAC/WH/OLAC ANNE DRISCOLL 
DEPT PASS TREASURY IA LUYEN TRAN 
DEPT PASS NSC GARY TOMASULO AND MIKE SMART 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958:N/A 
TAGS: EINV ETRD ECON EFIN CVIS BR
SUBJECT: Brazil: CEO Forum April 28 Scenesetter 
 
Ref a) Brasilia 196 - PAC cable 
Ref b) Brasilia 288 - CEOs with Rousseff cable 
Ref c) 4/16 erath/DOS-DOC-Treas-NSC e-mail Brazil CEOS with 
Rousseff 
Ref d) Brasilia 289 - investment consolidation cable 
Ref e) 4/11 erath/DOS-DOC-Treas-NSC e-mail congress lunch 
Ref f) Brasilia 129 - aviation negotiations readout 
 
¶1. (U) This message is sensitive but unclassified, please treat 
accordingly. 
 
¶2. (U) Summary:  The relationship between the United States and 
Brazil is as productive and broad-based as it as ever been, with an 
excellent relationship between President Bush and President Luiz 
Inacio Lula da Silva and new cooperation mechanisms on private 
sector priorities (CEO Forum), economic policy matters (Economic 
Partnership Dialogue) and biofuels (March 7 2007 MOU).  Regarding 
CEO Forum priorities, USG and Brazil have had Bilateral Tax Treaty 
discussions, continued discussions on bilateral investment issues 
and advanced visa cooperation.  USG has also supported workforce 
development initiatives and other exchanges, helped organize venture 
capital events, and advanced infrastructure cooperation with Brazil. 
 The CEOs jointly issued a helpful letter urging a "commercially 
meaningful conclusion" to the WTO Round this year and have worked 
together on Corporate Social Responsibility initiatives.  The April 
28 CEO Forum in Washington provides an excellent opportunity for the 
two governments to showcase our efforts to respond to business 
priorities and to receive private sector feedback on next steps and 
new priorities.  End Summary. 
 
--------------- 
Brazil Overview 
--------------- 
 
¶3.  (SBU) With a 67 percent approval rating, President Lula is more 
popular than at any other point since he took office in 2003. 
Continuity and legacy guide the policies of Lula's second term. 
Lula continues to shape his legacy as a friend of the poor and 
builder of a foundation for prosperity for the lower and middle 
classes through broad social welfare programs and a vast, new 
economic growth program of public works and growth incentives (ref 
A). At the same time, needed reforms to abolish a political culture 
of corruption, clientelism, and spoils are lacking.  Although a 
seemingly endless series of corruption scandals has not dented his 
personal popularity or that of his government, these scandals have 
felled political allies, including cabinet ministers, in recent 
years. 
 
¶4.  (U) President Lula and his economic team's prudent fiscal and 
monetary policies and reform efforts are a major reason for his 
popularity.  Brazil is now the tenth largest economy, with a 
(diminishing) trade surplus and BB-plus credit rating.  Annual GDP 
growth was 5.4 percent in 2007, with about 4 percent inflation.  The 
currency, the Real, has appreciated against the US dollar by 22 
percent since 2006, which has had a dampening effect on Brazilian 
exports.  The strong currency, however, has permitted Brazilian 
companies to ramp up investment in capital equipment.  Foreign 
Direct Investment in Brazil is increasing, with net flow USD 34.6 
billion in 2007 (versus USD 18.8 in 2006).  Of total gross inflow of 
USD 34.3 billion in 2007, USD 6.1 billion came from the United 
States (number two behind the Netherlands).  Brazilian investment in 
the United States almost tripled between 2001 (USD 1.4 billion) and 
2006 (USD 3.9 billion).  However, there are major structural 
challenges to long term growth.  Real (as opposed to nominal) 
interest rates are the highest in the world at 7.1 percent (well 
ahead of Turkey at 5.6 percent and Australia at 4.6 percent) after 
Brazil raised its nominal benchmark interest rate from 11.25 percent 
to 11.75 percent to control inflation.  The informal sector 
constitutes an estimated 40 percent of the economy, in part due to 
the tax burden (36 percent in 2007), one of the highest among large 
developing economies.  Brazil's opaque and onerous regulatory and 
legal system, as well as poor transport and other infrastructure, 
continue to constrain growth. 
 
-------------------- 
CEO FORUM PRIORITIES 
-------------------- 
 
¶5. (SBU) TAX TREATY - Information exchange under a BTT continues to 
be a challenge, both in terms of Brazil's willingness or ability to 
provide information where there is no Brazilian domestic tax 
interest and also in terms of the extent of the types of information 
Brazil would be willing to provide under a treaty.  Discussions in 
Brasilia in March between US and Brazil negotiators indicated that, 
 
BRASILIA 00000551  002 OF 005 
 
 
until the Brazilian Supreme Court rules on the constitutionality of 
information collection under Brazilian complementary law 105, 
discussions on expanding information collection further to include 
in cases where no Brazilian domestic tax interest exists can not 
proceed.  A ruling could come in 2008, but is not guaranteed.  The 
OAB (ABA-equivalent) head of the Constitutional Rights Commission 
believes the Supreme Court will likely rule to permit the current 
parameters of information collection by Brazil's federal tax 
authorities, although the head of OAB overall has publicly stated he 
believes the Supreme Court should rule to constrain information 
collection for privacy reasons.  Within the business community, 
congress, and even among ministries' officials, ambivalence exists 
on this issue.  Distrust in Receita Federal's ability to safeguard 
information and suspicions among some that tax authorities 
mis-collect and mis-use information (fueled by long memories here of 
scandals past) may impact willingness to press for further 
information exchange, depending on the types of information 
requested. 
 
¶6.  (U) In the March session, negotiators had a substantive 
technical discussion on transfer pricing that increased mutual 
understanding of each other's systems.  The United States side 
reviewed what USG seeks to achieve in BTTs on limitation of 
benefits.  The Brazilian side expressed conceptual comfort with USG 
goals in this area.  In addition, issues such as tax sparing, taxing 
source versus recipient, and arbitration also require further 
discussion.  We understand Treasury has invited Receita Federal to 
Washington for further talks.  GOB interlocutors, including Casa 
Civil, Finance, MDIC and Receita Federal consistently advocate the 
US take a "step-by-step" approach (as was done with the TIEA) to 
make incremental progress toward a BTT and to build confidence to 
make a BTT eventually possible.  In the March discussions, both 
sides agreed to make clear in discussions with the business 
community that we want to see the TIEA ratified as quickly as 
possible, but that conclusion of a BTT in the short-term is 
unrealistic. 
 
¶7. (SBU) BILATERAL INVESTMENT TREATY - It remains unclear that 
Brazil would be willing to commit to binding arbitration at the 
federal, state or municipal level for investor-state disputes.  Casa 
Civil (Dilma Rousseff) to date believes contract provisions can 
govern dispute resolution and that an international arbitration 
mechanism is unnecessary (ref B and C).   Discussions with Casa 
Civil, MRE, Finance, MDIC and CAMEX consistently indicate that, for 
strategic reasons to increase GoB and congressional confidence in 
negotiating investment agreements, Brazil prefers to start 
discussions first with a regional counterpart (ref D and 
conversations since).  In a recent meeting, Finance confirmed Brazil 
will begin an investment agreement dialogue with Argentina (MRE had 
wanted to start with a smaller country).  Brazilian companies have 
major investments in Argentina and have experienced significant 
investment problems, according to our interlocutors.  While 
ministries confirm that the CAMEX-agreed framework that Brazil will 
use to start its conversation with Argentina does not currently 
contain any reference to investor-state dispute settlement, some 
interlocutors are hopeful this element could be introduced over time 
into this dialogue.  We view willingness to engage with Argentina as 
a positive sign that GoB is beginning to tackle investment agreement 
conversations; however, we believe both Brazilian and US business as 
well as USG will need to continue to press in order to convince GoB 
to engage substantively with us on the provisions of a bilateral 
investment treaty in the near term. 
 
¶8. (U) In discussions with key members of the Brazilian Congress, 
including among others House President Chinaglia, Senator Jereissati 
(key on tax issues), Senator Maciel (Chair of Senate Constitution 
and Justice committee;  also wrote the 1996 arbitration law), and 
Senator Fortes (Chair of Senate Foreign Relations), members have 
indicated openness to further consideration of elements of both 
investment and tax treaties with the United States, provided that 
these agreements contain reciprocal commitments and demonstrate 
clearly the benefits to Brazil (ref E). 
 
¶9. (U) VISAs - We have proposed to Itamaraty that we drop all visa 
fees (excepting a uniform processing fee).  This will allow us not 
only to lessen charges on Brazilians, but also to issue combined 
business/tourist visas as we do in much of the world, saving 
applicants possible return trips if they apply for one and then find 
they need the other.  We have also proposed that our visa validities 
for business and tourist be extended to 10 years from five years, 
which will both benefit our citizens and our visa operations.  We 
are prepared to move on our side.  We can drop our fees immediately 
upon Brazil agreeing to do so.  Visa validity extension requires 
some inter-agency consultation in our government, but no legislative 
 
BRASILIA 00000551  003 OF 005 
 
 
action.  MRE's legislative proposal to update Brazilian immigration 
law currently awaits Casa Civil approval and transmission to 
congress for consideration.  If passed as proposed, the legislation 
would permit Brazil to offer 10 year visas, eliminate the 
requirement that Brazilian visas must be used within 90 days of 
issuance, and give MRE more control of its visa processing fees 
(including the $60 fee on business visas) (ref B). However, given 
the slow process on the bill, the MRE recently proposed to the 
Embassy that we come to a separate agreement covering fees and 
validity.  Such an agreement would still require legislative 
approval on their side, but MRE officials believe this could be done 
more quickly than getting the immigration bill approved. 
 
¶10. (U) Backlogs are still very high, but we have added the first of 
seven new consular officers and expect all to be in place by July. 
State Department inspectors recently recommended we add an 
additional six consular officers to Mission Brazil and we intend to 
press hard for implementation of that recommendation.  We also hope 
Brazil will be selected to participate in a pilot program to draw on 
the resources of our Eligible Family Member community to provide 
more assistance in the consular section.  Until we see the effect of 
the seven new officers and know whether we can add another six and 
participate in the EFM pilot, it is difficult to predict exactly how 
much time before we see significant reductions in the backlog. 
 
¶11. (U) INFRASTRUCTURE - The USTDA Regional Director for Latin 
America and the Caribbean recently had an excellent series of 
meetings in Brasilia, Sao Paulo and Rio with Casa Civil, BNDES 
(Brazil's National Development Bank), state governments and other 
interlocutors.  USTDA is developing a preliminary list of possible 
projects with potential for American investment and/or participation 
(ideas could include areas like port dredging, oil platform water 
discharge, urban waste management, transportation projects - 
depending on mutual interest). USTDA has proposed a draft model 
framework with Casa Civil to structure our cooperation (based on our 
agreement with India). We expect USTDA will make another visit in 
the near future to continue this dialogue on possible projects and 
we are also pursuing the possibility of adding a permanent USTDA 
person in Brazil.  In additional, the Treasury DAS for Latin America 
visited Brazil to continue dialogue with Casa Civil, Planning 
Ministry and BNDES officials on how best to structure infrastructure 
cooperation. 
 
¶12. (U) VENTURE CAPITAL - We've been actively involved over the past 
12 months. Activities have included the Institutional Investor 
Learning Journey (IILJ) in September 2007 where we organized a visit 
of representatives of 13 US Pension Funds and University Endowments 
to better understand the Brazilian Economy and its Private Equity 
and Venture Capital Opportunities; we organized, with ABDI support, 
the first meeting of  the U.S. - Brazil Venture Capital Task Force 
in March 2008; and we set up two Venture Capital and 
Entrepreneurship Forums in March 2008, with support from the 
Kauffman Foundation and ABDI and co-organized by FGV-SP and by 
PUC-RJ.  Planned activities include: FINEP and ABDI are working to 
select and finance four Brazilian ventures to participate in LARTA's 
Life Sciences Venture Capital Forum on May 30, 2008 (ABDI has yet to 
finalize the agreement); and Commerce has proposed that the second 
meeting of the U.S.-Brazil Venture Capital Task Force take place on 
August 17, 2008 in Atlanta, to coincide with the second annual 
Americas Competitiveness Forum (ACF), with ABDI agreement to this in 
principle. 
 
EXCHANGES AND PROFESSIONAL DEVELOPMENT - 
 
¶13. (U) SCIENTISTS - Brazil has first class scientists and 
facilities in a number of areas.  The U.S. Government (USG) has 
well-developed scientific cooperative arrangements in two areas with 
Brazilian counterparts:  the Agriculture Research Service of the 
U.S. Department of Agriculture (USDA/ARS) with EMBRAPA of the 
Ministry of Agriculture (this includes long-term exchanges of 
researchers); and the National Institutes of Health wit the Ministry 
of Health, FIOCRUZ (an institution that works with vaccines), and 
other health institutions.  In addition, the National Science 
Foundation (NSF) and a variety of other U.S. agencies have modest or 
limited collaborative scientific activities with Brazilian 
counterparts.  Many elements of the U.S. private sector, academia 
and non-governmental organizations (NGOs) have established 
scientific ties with Brazilian counterparts.  Brazil has 
demonstrated remarkable scientific and technological prowess in a 
number of areas, most notably with deep sea oil and gas exploration 
by PETROBRAS, aviation technology with EMBRAER, and information 
technology. 
 
¶14. (SBU) TECHNOLOGY EXCHANGE - During Minister of Defense Jobim's 
 
BRASILIA 00000551  004 OF 005 
 
 
visit to Washington, the Defense Department proposed a Defense 
Technology Security Dialogue -an annual meeting between Defense 
Department and Ministry of Defense experts on technology security 
issues.  The Dialogue would facilitate closer defense cooperation 
between our countries by creating greater transparency on our 
countries' technology security policies, procedures and decisions. 
The Dialogue will enable both sides to exchange information, and to 
troubleshoot problem issues. 
 
¶15. (U) ENGLISH LANGUAGE STUDY PROGRAM - During Secretary Rice's 
visit in March to USAID's Enter Jovem program in Salvador, Bahia, 
Governor Jacques Wagner asked Secretary Rice to help him expand 
opportunities for youth, particularly through English language 
instruction, that would help open doors for young people in growing 
industries. Secretary Rice expressed support for Governor Wagner's 
initiative.  USAID has established a model called the Challenge 
Fund, whereby USG and private companies can jointly contribute to a 
development program.   A Challenge Fund for English will build upon 
the success of Enter Jovem in reaching thousands of young people 
with employment training and subsequent jobs.  We have experienced 
in Brazil that USAID seed money can leverage very significant 
amounts of corporate funds, and can also attract support from local 
governments. 
 
¶16. (U) WORKFORCE DEVELOPMENT AND EDUCATION - Motorola announced 
recently a $100,000 grant to USAID's Enter Jovem program, to expand 
digital inclusion and training to public schools in Bahia.  USAID 
will match the Motorola donation, allowing the program to also 
expand in Pernambuco, where strong state government support offers 
the potential to reach many schools and students.  Motorola and 
Enter Jovem will present this model at a Mais Unidos workshop in Sao 
Paulo on May 12, for the over 60 U.S. companies in our CRS network. 
 
--------------------- 
UPDATE ON OTHER AREAS 
--------------------- 
 
-------------------------------- 
Biofuels and other Energy Issues 
-------------------------------- 
 
¶17. (U) Since the last CEO Forum, under the March 7, 2007 MOU, NIST, 
IMMETRO and CEN (the standards bodies for the US, Brazil, and the EU 
respectively) have issued a joint report laying the foundation for 
work on biofuels commoditization standards.  The Biofuels Steering 
Committee, with participation of the private sector Advisory Group, 
met March 3 in Washington.  We expect scientists from the United 
States (including private sector researchers) to come to Brazil this 
spring, reciprocating Brazilian scientists' September trip to the 
United States. We have continued cooperative efforts to aid Haiti, 
El Salvador, St. Kitts and Nevis, and the Dominican Republic in 
developing their own biofuels capacity.  The GOB and USG are 
pursuing cooperative scientific activities to develop the next 
generation of biofuels.  The more numerous and often better-funded 
U.S. scientists and laboratories can benefit greatly from this 
cooperation with Brazil's world-class cadre of scientists and 
laboratories, which have established an impressive record over the 
last 30 years. 
 
¶18. (SBU) We anticipate a visit by Energy Secretary Bodman in May 
and hope to use the opportunity to broaden our energy cooperation 
beyond biofuels to other areas for expanded collaboration. Brazil 
hopes to become a leading oil exporter with the development of the 
recently discovered deep water reserves in the Santos basin, near 
Sao Paulo.  Petrobras, which has been working in the Gulf of Mexico 
as the world's leader in deep water technology, hopes to capitalize 
on this find; an interest that has led to worries on the part of 
U.S. and international oil companies that the government may be 
trying to set up the parastatal Petrobras to have, if not exclusive, 
at least primary rights to these new finds.  This concern was 
amplified by the withdrawal of the auction blocks for exploration 
rights related to this area just before the auction was to take 
place.  Brazil has been a gas importer from Bolivia, a relationship 
was has been complicated by Morales' unilateral renegotiating of 
contracts with Petrobras.  Brazil also has an unfulfilled contract 
for gas imports from Argentina, shares its largest hydroelectric dam 
with Paraguay, and has ongoing conversations with Venezuela's Chavez 
over a possible gas pipeline and a cooperative oil refinery near 
Recife, for which despite rhetoric, Petrobras continues to bear the 
financial costs.  Judging by recent talks with GOB officials, more 
energy cooperation with the U.S. would be welcome. 
 
-------------- 
Civil Aviation 
 
BRASILIA 00000551  005 OF 005 
 
 
-------------- 
 
¶19. (U) US and Brazilian negotiating teams met, for the first time 
in ten years, in Rio in December.  We hope the Sao Paulo parking 
issue will be favorably resolved by end-May, allowing us to schedule 
another negotiating round in the latter half of 2008.  Increased 
frequencies, expanded code-share and cargo rights are all issues of 
importance to the US aviation community (ref F). 
 
SOBEL