WT/DS472/R/Add.1  
WT/DS497/R/Add.1  
 
30 August 2017  
(17-4585) Page: 1/107 
  Original: English  
 
  BRAZIL – CERTAIN MEASURES CON CERNING TAXATION AND  CHARGES  
REPORT S OF THE PANEL  
Addendum  
This addendum  contains Annexes A to C to the Report s of the Panel to be found in documents  
WT/DS472/R, WT/DS497/R . 
 
 
_______________  
 
 WT/DS472/R/Add.1 • WT/DS497/R/Add.1  
 
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  LIST OF ANNEXES  
ANNEX A  
WORKING P ROCEDURES OF THE PAN EL 
Contents  Page  
Annex  A-1 Working Procedures of the Panel  A-2 
Annex  A-2 Additional Working Procedures of the Panel Concerning Business Confidential 
Information  A-7 
Annex  A-3 Joint working procedures of the Panels  A-8 
Annex A -4 Additional Joint Working Procedures of the Panel Concerning Business 
Confidential Information  A-13 
ANNEX B  
ARGUMENTS OF THE PAR TIES 
EUROPEAN UNION  
Contents  Page  
Annex  B-1 First part of the execut ive summary of the arguments of the European Union  B-2 
Annex B-2 Second part of the execut ive summary of the arguments of the European Union  B-13 
JAPAN  
Contents  Page  
Annex  B-3 First part of the executive summary of the arguments of Japan   B-27 
Annex  B-4 Second p art of the executive summary of the arguments of Japan  B-38 
 
BRAZIL  
Contents  Page  
Annex  B-5 First part of the executive summary of the arguments of Brazil  B-49 
Annex  B-6 Second part of the executive summary of the arguments of Brazil  B-60 
ANNEX C  
ARGUMENTS OF THE THI RD PARTIES  
Contents  Page  
Annex  C-1 Executive summa ry of the arguments of Argentina  C-2 
Annex  C-2 Executive summa ry of the arguments of Australia  C-10 
Annex  C-3 Executive su mmary of the arguments of Canada  C-11 
Annex C -4 Executive su mmary of the arguments of Korea  C-13 
Annex C -5 Execut ive summary of the arguments of Ukraine  C-15 
Annex C -6 Executive summary of the arguments of the United States  C-17 
 
 WT/DS472 /R/Add.1 • WT/DS497 /R/Add.1  
 
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  ANNEX A  
WORKING PROCEDURES O F THE PANEL  
Contents  Page  
Annex  A-1 Working Procedures of the Panel  A-2 
Annex  A-2 Additional Working Pro cedures of the Panel Concerning Business Confidential 
Information  A-7 
Annex  A-3 Joint working procedures of the Panels  A-8 
Annex A -4 Additional Joint Working Procedures of the Panel Concerning Business 
Confidential Information  A-13 WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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ANNEX  A-1 
WORKING  PROCEDURES OF THE PANEL  
Adopted on 28 April 2015  
 
1.1.  In its proceedings, the Panel shall follow the relevant provisions of the Understanding on 
Rules and Procedures Governing the Settlement of Disputes (DSU). In addition, the following 
Working Procedures sha ll apply.  
General  
 
1.2.  The deliberations of the Panel and the documents submitted to it shall be kept confidential. 
Nothing in the DSU or in these Working Procedures shall preclude a party to the dispute (hereafter 
"party") from disclosing statements of its ow n positions to the public. Members shall treat as 
confidential information submitted to the Panel by another Member which the submitting Member 
has designated as confidential. Where a party submits a confidential version of its written 
submissions to the P anel, it shall also,  upon request of a Member, provide a non -confidential 
summary of the information contained in its submissions that could be disclosed to the public.  
1.3.  The Panel shall meet in closed session. The parties, and Members having notified their  
interest in the dispute to the Dispute Settlement Body in accordance with Article 10 of the DSU  
(hereafter "third parties"), shall be present at the meetings only when invited by the Panel to 
appear before it.  
1.4.  Each party and third party has the right to determine the composition of its own delegation  
when meeting with the Panel. Each party and third party shall have the responsibility for all 
members of its own delegation and shall ensure that each member of such delegation acts in 
accordance with the DSU  and these Working Procedures, particularly with regard to the 
confidentiality of the proceedings.  
Submissions  
 
1.5.  Before the first substantive meeting of the Panel with the parties, each party shall submit a 
written submission in which its presents the fact s of the case and its arguments, in accordance 
with the timetable adopted by the Panel. Each party shall also submit to the Panel, prior to the 
second substantive meeting of the Panel, a written rebuttal, in accordance with the timetable 
adopted by the Pan el.  
1.6.  A party shall submit any request for a preliminary ruling at the earliest possible opportunity 
and in any event no later than in its first written submission to the Panel. If the European Union 
requests such a ruling, Brazil shall submit its response to the request in its first written 
submission. If Brazil requests such a ruling, the European Union shall submit its response to the 
request prior to the first substantive meeting of the Panel, at a time to be determined by the Panel 
in light of the reque st. Exceptions to this procedure shall be granted upon a showing of good 
cause.  
1.7.  Each party shall submit all factual evidence to the Panel no later than during the first 
substantive meeting, except with respect to evidence necessary for purposes of rebuttal , answers 
to questions or comments on answers provided by the other party. Exceptions to this procedure 
shall be granted upon a showing of good cause. Where such exception has been granted, the Panel 
shall accord the other party a period of time for commen t, as appropriate, on any new factual 
evidence submitted after the first substantive meeting.   
1.8.  Where the  original language of exhibits is not a WTO working language, the submitting party 
or third party shall submit a translation of such exhibits or of thei r relevant parts into  the WTO 
working language of the submission  at the same time. The Panel may grant reasonable extensions 
of time for the translation of such exhibits upon a showing of good cause. Any objection as to the WT/DS472 /R/Add.1 • WT/DS497 /R/Add.1  
 
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  accuracy of a translation should  be raised promptly  in writing, no later than the next filing or 
meeting (whichever occurs earlier) following the submission which contains the translation in 
question. Any objection shall be accompanied by a detailed explanation of the grounds of objectio n 
and an alternative translation. Should a party become aware of any inaccuracies in the translations 
of the exhibits submitted by that party, it shall inform the Panel and the other party promptly and 
provide a new translation.  
1.9.  In order to facilitate the  work of the Panel, each party and third party  is invited to make its 
subm issions in accordance with the WTO Editorial G uide for Panel Submissions attached as 
Annex  1, to the extent that it is practical to do so.  
1.10.   To facilitate the maintenance of the record  of the dispute and maximize the clarity of 
submissions, each party and third party shall sequentially number its exhibits throughout the 
course of the dispute. For example, exhibits submitted by the European Union could be numbered 
EU-1, EU -2, etc. If the  last exhibit in connection with the first submission was numbered EU -5, the 
first exhibit of the next submission thus would be numbered EU -6. 
Questions  
 
1.11.   The Panel may at any time pose questions to the parties and third parties, orally or in 
writing, inclu ding prior to each substantive meeting.  
Substantive meetings  
 
1.12.   Each party shall provide to the Panel the list of members of its delegation in advance of 
each meeting with the Panel and no later than 5.00  p.m. (Geneva time) the previous working day.  
1.13.   The fir st substantive meeting of the Panel with the parties shall be conducted as follows:  
a. The Panel shall invite the European Union to make an opening statement to present its 
case first. Subsequently, the Panel shall invite Brazil to present its point of view. Before 
each party takes the floor, it shall provide the Panel and other participants at the 
meeting with a provisional written version of its statement. In the event that 
interpretation is needed, each party shall provide additional copies for the interpre ters, 
through the Panel Secretary. Each party shall make available to the Panel and the other 
party, the final version of its opening statement as well a s its closing statement, if any, 
preferably at the end of the meeting, and in any event no later than 5 .00 p.m. (Geneva 
time) on the first working day following the meeting.  
b. After the conclusion of the statements, the Panel shall give each party the opportunity to 
ask each other questions or make comments, through the Panel. Each party shall then 
have an op portunity to answer these questions orally. Each party shall send in writing, 
within a timeframe to be determined by the Panel, any questions to the other party to 
which it wishes to receive a response in writing. Each party shall be invited to respond in 
writing to the other party's written questions within a deadline to be determined by the 
Panel.  
c. The Panel may subsequently pose questions to the parties. Each party shall then have an 
opportunity to answer these questions orally. The Panel shall send in wr iting, within a 
timeframe to be determined by it, any questions to the parties to which it wishes to 
receive a response in writing. Each party shall be invited to respond in writing to such 
questions within a deadline to be determined by the Panel.  
d. Once th e questioning has concluded, the Panel shall afford each party an opportunity to 
present a brief closing statement, with the European Union presenting its statement 
first.  ..... WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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  1.14.   The second substantive meeting of the Panel with the parties shall be conducted as follows:  
a. The Panel shall ask Brazil if it wishes to avail itself of the right to present its case first. If 
so, the Panel shall invite Brazil to present its opening statement, followed by the 
European Union. If Brazil chooses not to avail itself of that ri ght, the Panel shall invite 
the European Union to present its opening statement first. Before each party takes the 
floor, it shall provide the Panel and other participants at the meeting with a provisional 
written version of its statement. In the event tha t interpretation is needed, each party 
shall provide additional copies for the interpreters, through the Panel Secretary. Each 
party shall make available to the Panel and the other party the final version of its 
opening statement as well a s its closing sta tement, if any, preferably at the end of the 
meeting, and in any event no later than 5.00  p.m. (Geneva time) of the first working 
day following the meeting.  
b. After the conclusion of the statements, the Panel shall give each party the opportunity to 
ask each  other questions or make comments, through the Panel. Each party shall then 
have an opportunity to answer these questions orally. Each party shall send in writing, 
within a timeframe to be determined by the Panel, any questions to the other party to 
which it wishes to receive a response in writing. Each party shall be invited to respond in 
writing to the other party's written questions within a deadline to be determined by the 
Panel.  
c. The Panel may subsequently pose questions to the parties. Each party shall  then have an 
opportunity to answer these questions orally. The Panel shall send in writing, within a 
timeframe to be determined by it, any questions to the parties to which it wishes to 
receive a response in writing. Each party shall be invited to respond  in writing to such 
questions within a deadline to be determined by the Panel.  
d. Once the questioning has concluded, the Panel shall afford each party an opportunity to 
present a brief closing statement, with the party that presented its opening statement 
first, presenting its closing statement first.  
Third parties  
 
1.15.   The Panel shall invite each third party to transmit to the Panel a written submission prior to 
the first substantive meeting  of the Panel with the parties, in accordance with the timetable 
adopte d by the Panel.  
1.16.   Each third party shall also be invited to present its views orally during a session of this first 
substantive meeting, set aside for that purpose. Each third party shall provide to the Panel the list 
of members of its delegation in advance  of this session and no later than 5.00  p.m. (Geneva time) 
the previous working day.  
1.17.   The third -party session shall be conducted as follows:  
a. All third parties may be present during the entirety of this session.  
b. The Panel shall first hear the arguments of the third parties in alphabetical order. Third 
parties present at the third -party session and intending to present their views orally at 
that session, shall provide the Panel, the parties and other third -parties with provisional 
written versions of their s tatements before they take the floor. Third parties shall make 
available to the Panel, the parties and other third parties the final versions of their 
statements, preferably at the end of the session, and in any event no later than 
5.00 p.m. (Geneva time) of the first working day following the session.  
c. After the third parties have made their statements, the parties may be given the 
opportunity, through the Panel, to ask the third parties questions for clarification on any 
matter raised in the third parties'  submissions or statements. Each party shall send in 
writing, within a timeframe to be determined by the Panel, any questions to a third party 
to which it wishes to receive a response in writing.  WT/DS472 /R/Add.1 • WT/DS497 /R/Add.1  
 
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  d. The Panel may subsequently pose questions to the third part ies. Each third party shall 
then have an opportunity to answer these questions orally. The Panel shall send in 
writing, within a timeframe to be determined by it, any questions to the third parties to 
which it wishes to receive a response in writing. Each third party shall be invited to 
respond in writing to such questions within a deadline to be determined by the Panel.  
Descriptive part  
 
1.18.   The description of the arguments of the parties and third parties in the descriptive part of 
the Panel report shall cons ist of executive summaries provided by the parties and third parties, 
which shall be annexed  as addenda to the report. These executive summaries shall not in any way 
serve as a substitute for the submissions of the parties and third parties in the Panel's examination 
of the case.  
1.19.   Each party shall submit executive summaries of the facts and arguments as presented to 
the Pa nel in its written submissions and oral statements, in accordance with the timetable adopted 
by the Panel . These summaries may also inclu de a summary of responses to questions . Each such 
executive summary shall not exceed 15 pages. The Panel will not summarize in the descriptive 
part of its report, or annex to its report, the parties' responses to questions.  
1.20.   Each third party shall submit an  executive summary of its arguments as presented in its 
written submission and statement in accordance with the timetable adopted by the Panel. This 
summary may also include a summary of responses to questions, where relevant. The executive 
summary to be p rovided by each third party shall not exceed 6  pages.  
Interim review  
 
1.21.   Following issuance of the interim report, each party may submit a written request to review 
precise aspects of the interim report. Either party may also request a further meeting with t he 
Panel in accordance with the timetable adopted by the Panel. The right to request such a meeting 
shall be exercised no later than a date at least two working days following receipt by the panel of 
the parties' written requests (if any) for review. The e xact date will be determined by the Panel 
and communicated to the parties in due course.    
1.22.   In the event that no further meeting with the Panel is requested, each party may submit 
written comments on the other party's written request for review, in accordan ce with the timetable 
adopted by the Panel. Such comments shall be limited to commenting on the other party's written 
request for review.  
1.23.   The interim report, as well as the final report prior to its official circulation, shall be kept 
strictly confidentia l and shall not be disclosed.  
Service of documents  
 
1.24.   The following procedures regarding service of documents shall apply:  
a. Each party and third party  shall submit all documents to the Panel by filing them with 
the DS  Registry (office No. 2047) .  
b. Each party a nd third party shall file 6 paper copies of all documents it submits to the 
Panel. Exhibits may be filed in 4 copies on CD -ROM or DVD and 4 paper copies. The 
DS Registrar shall stamp the documents with the date and time of the filing. The paper 
version sha ll constitute the official version for the purposes of the  record of the dispute.  
c. Each party and third party shall also provide an electronic copy of all documents it 
submits to the Panel at the same time as the paper versions, preferably in Microsoft 
Word  format, either on a CD -ROM, a DVD or as an e -mail attachment. If the electronic 
copy is provided by e -mail, it should be addressed to DSRegistry@wto.org, with a copy 
to ****.****@wto.org  and ****.****@wto.org . If a CD -ROM or DVD is provided, it 
shall be f iled with the DS Registry.  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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  d. Each party shall serve any document submitted to the Panel directly on the other party. 
Each party shall, in addition, serve on all third parties its written submissions in advance 
of the first substantive meeting with the Panel.  Each third party shall serve any 
document submitted to the Panel directly on the parties and all other third parties. Each 
party and third party shall confirm, in writing, that copies have been served as required 
at the time it provides each document to t he Panel.  
e. Each party and third party  shall file its documents with the DS Registry and serve  copies 
on the other party (and third parties where appropriate) by 5.00  p.m. (Geneva time) on 
the due dates established by the Panel.  A party or third party may submit its documents 
to another party or third party in electronic  format only,  subject to the recipient party or 
third party's prior written approval and provided that the Panel Secretary  is notified . 
f. The Panel shall provide the parties with an electronic v ersion of the descriptive part, the 
interim report and the final report, as well as of other documents as appropriate. When 
the Panel transmits to the parties or third parties both paper and electronic versions of a 
document, the paper version shall consti tute the official version for the purposes of the 
record of the dispute.  
1.25.   The Panel reserves the right to modify these procedures as necessary, after consultation 
with the parties.  
 WT/DS472 /R/Add.1 • WT/DS497 /R/Add.1  
 
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  ANNEX A -2 
ADDITIONAL WORKING P ROCEDURES OF THE PAN EL CONCERNING  
BUSINESS CONFIDENTIAL INFORMA TION 
Adopted on 28 April 2015  
 
 
1.1.  Each party shall treat as confidential information submitted to the Panel by the other party 
which the submitting party has designated as business confidential information (BCI).  
1.2.  No person may have access  to BCI other than  a member of the Secretariat or the Panel, a 
person specifically authorized by the Secretariat or the Panel , and employees, agents, and advisors 
of the parties.  
1.3.  BCI obtained under these procedures may be used only for the purpose of provi ding 
information and argumentation in this dispute and for no other purpose.  
1.4.  The party submitting BCI shall mark the cover and/or first page of the document containing 
BCI, and each page of the document, to indicate the presence of such information. The sp ecific 
information in question shall be placed between double brackets, as follows: [[xx,xxx.xx]]. The 
first page or cover of the document shall state "Contains business confidential information on 
pages xxxxxx ", and each page of the document shall contain  the notice "Contains Business 
Confidential Information " at the top of the page.  
1.5.  Where a party submits a document containing BCI to the Panel, the other party when 
referring to that BCI in its documents, including written submissions and oral statements, s hall 
clearly identify all such information in those documents in accordance with the procedures laid 
down in paragraph 4.   
1.6.  The Panel will not disclose BCI, in its report or in any other way, to persons not authorized 
under these procedures to have access to BCI. The Panel may, however, make statements of 
conclusion drawn from such information. Before the Panel circulates its final report to the 
Members, the Panel will give each party an opportunity to review the report to ensure that it does 
not contain an y information that the party has designated as BCI.  
1.7.  Submissions containing BCI will be included in the record forwarded to the Appellate Body in 
the event of an appeal of the Panel's Report.  
 WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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  ANNEX A -3 
JOINT WORKING PROCEDURES O F THE PANEL S 
Adopted on 9 O ctober 2015  
 
 
1.1.  Pursuant to Article 9.3 of the DSU, the timetable s in DS472 and DS497  are harmonized. The 
Panels shall, to the greatest extent possible, conduct a single panel process, with a single record, 
resulting in separate reports contained in a single  document, taking into account the rights of all 
Members concerned, and in such a manner that the rights that parties or third parties would 
otherwise have enjoyed are in no way impaired.  
1.2.  In its proceedings, the Panel s shall follow the relevant provisions  of the Understanding on 
Rules and Procedures Governing the Settlement of Disputes (DSU). In addition, the following 
Working Procedures shall apply.  
General  
 
1.3.  The deliberations of the Panel s and the documents submitted to it shall be kept confidential. 
Nothing in the DSU or in these Working Procedures shall preclude a party to a dispute (hereafter 
"party") from disclosing statements of its own positions to the public. Members shall treat as 
confidential information submitted to the Panel s by another Member w hich the submitting Member 
has designated as confidential. Where a party submits a confidential version of its written 
submissions to the Panel s, it shall also,  upon request of a Member, provide a non -confidential 
summary of the information contained in it s submissions that could be disclosed to the public.  
1.4.  The Panel s shall meet in closed session. The parties, and Members having notified their 
interest in either dispute to the Dispute Settlement Body in accordance with Article 10 of the DSU  
(hereafter "thi rd parties"), shall be present at the meetings only when invited by the Panel s to 
appear before them.  
1.5.  The parties and third parties shall treat business confidential information in accordance with 
the procedures set forth in the Additional Joint Working P rocedures of the Panels Concerning 
Business Confidential Information, set out in Annex 1 to these Working Procedures.  
1.6.  Each party and third party has the right to determine the composition of its own delegation  
when meeting with the Panel s. Each party and third party shall have the responsibility for all 
members of its own delegation and shall ensure that each member of such delegation acts in 
accordance with the DSU and these Working Procedures, particularly with regard to the 
confidentiality of the procee dings.  
Submissions  
 
1.7.  Before the first substantive meeting of the Panel s with the parties, each party shall submit a 
written submission in which it presents the facts of the case and its arguments, in accordance with 
the timetable adopted by the Panel s. Eac h party shall also submit to the Panel s, prior to the 
second substantive meeting of the Panel s, a written rebuttal, in accordance with the timetable 
adopted by the Panel s.  
1.8.  A party shall submit any request for a preliminary ruling at the earliest possible opportunity 
and in any event no later than in its first written submission to the Panel s. If a party requests such 
a preliminary ruling, the other part y shall submit its respective response to such request within a 
time limit specified by the Panel s.  Exce ptions to this procedure will be granted upon a showing of 
good cause.  
1.9.  Each party shall submit all factual evidence to the Panel s no later than during the first 
substantive meeting, except with respect to evidence necessary for purposes of rebuttal, answer s ..... WT/DS472 /R/Add.1 • WT/DS497 /R/Add.1  
 
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  to questions or comments on answers provided by the opposing  party or parties. Exceptions to this 
procedure shall be granted upon a showing of good cause. Where such exception has been 
granted, the Panel s shall accord the opposing  party or parties a peri od of time for comment, as 
appropriate, on any new factual evidence submitted after the first  substantive meeting.   
1.10.   Where the  original language of exhibits is not a WTO working language, the submitting 
party or third party shall submit a translation of suc h exhibits or of their relevant parts into  the 
WTO working language of the submission  at the same time. The Panel s may grant reasonable 
extensions of time for the translation of such exhibits upon a showing of good cause. Any objection 
as to the accuracy o f a translation should be raised promptly  in writing, no later than the next 
filing or meeting (whichever occurs earlier) following the submission which contains the translation 
in question. Any objection shall be accompanied by a detailed explanation of t he grounds of 
objection and an alternative translation. Should a party become aware of any inaccuracies in the 
translations of the exhibits submitted by that party, it shall inform the Panel s and the other parties  
promptly and provide a new translation.  
1.11.   In order to facilitate the work of the Panel s, each party and third party  is invited to make its 
subm issions in accordance with the WTO Editorial G uide for Panel Submissions (electronic copy 
provided), to the extent that it is practical to do so . To facilit ate the maintenance of the record of 
the dispute s and maximize the clarity of submissions, each party and third party shall sequentially 
number its exhibits throughout the course of the dispute. Exhibits submitted by the European 
Union could be numbered EU -1, EU -2, etc., exhibits submitted by Japan could be numbered JPN -1, 
JPN-2, etc., and exhibits submitted by Brazil could be numbered BRA -1, BRA -2, etc. If the last 
exhibit in connection with the first submission was numbered EU -5, the first exhibit of the next 
submission thus would be numbered EU -6. In order to avoid unnecessary duplication of exhibits, 
the complaining  parties may file joint exhibits  by numbering them accordingly, for example JE -1, 
JE-2, etc.  The P arties and third parties in one dispute may  refer to arguments and evidence 
already submitted in the other dispute without needing to repeat them in their entirety or provide 
an equivalent exhibit. The source of any such references shall be clearly identified.   
Questions  
1.12.   The Panel s may at any time pose questions to the parties and third parties, orally or in 
writing, including prior to each substantive meeting. The Panels shall ensure that a precise 
deadline is set forth for the submission of written responses and shall provide sufficient time for 
the parties and third parties to prepare their written responses.   
Substantive meetings  
 
1.13.   Each party shall provide to the Panel s the list of members of its delegation in advance of 
each meeting with the Panel s and no later than 5.00  p.m. (Geneva time) the p revious working 
day.  
1.14.   The first substantive meeting of the Panel s with the parties shall be conducted as follows:  
a. The Panel shall invite the European Union and Japan to make opening statements to 
present their cases first. Subsequently, the Panel s shall in vite Brazil to present its point 
of view. Before each party takes the floor, it shall provide the Panel s and other 
participants at the meeting with a provisional written version of its statement. In the 
event that interpretation is needed, each party shall  provide additional copies for the 
interpreters, through the Panel s' Secretary. Each party shall make available to the 
Panel s and the other parties, the final version of its opening statement as well a s its 
closing statement, if any, preferably at the end of the meeting, and in any event no later 
than 5.00  p.m. (Geneva time) on the first working day following the meeting.  
b. After the conclusion of the statements, the Panel s shall give each party the opportunity 
to ask each other questions or make comments, th rough the Panel s. Each party shall 
then have an opportunity to answer these questions orally. Each party shall send in 
writing, within a timeframe to be determined by the Panel s, any questions to the other 
party or parties to which it wishes to receive a r esponse in writing. Each party shall be ..... WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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  invited to respond in writing to the other party or parties' written questions within a 
deadline to be determined by the Panel s. 
c. The Panel s may subsequently pose questions to the parties. Each party shall then have 
an opportunity to answer these questions orally. The Panel s shall send in writing, within 
a timeframe to be determined by them, any questions to the parties to which they wish 
to receive a response in writing. Each party shall be invited to respond in writi ng to such 
questions within a deadline to be determined by the Panel s. 
d. Once the questioning has concluded, the Panel s shall afford each party an opportunity to 
present a brief closing statement, with the European Union and Japan presenting their 
statements  first.  
1.15.   The second substantive meeting of the Panel s with the parties shall be conducted as 
follows:  
a. The Panel s shall ask Brazil if it wishes to avail itself of the right to present its case first. 
If so, the Panel s shall invite Brazil to present its open ing statement, followed by the 
European Union and Japan. If Brazil chooses not to avail itself of that right, the Panel s 
shall invite the European Union and Japan to present their opening statements first. 
Before each party takes the floor, it shall provid e the Panel s and other participants at the 
meeting with a provisional written version of its statement. In the event that 
interpretation is needed, each party shall provide additional copies for the interpreters, 
through the Panel s' Secretary. Each party s hall make available to the Panel s and the 
other parties the final version of its opening statement as well a s its closing statement, if 
any, preferably at the end of the meeting, and in any event no later than 5.00  p.m. 
(Geneva time) of the first working d ay following the meeting.  
b. After the conclusion of the statements, the Panel s shall give each party the opportunity 
to ask each other questions or make comments, through the Panel s. Each party shall 
then have an opportunity to answer these questions orally.  Each party shall send in 
writing, within a timeframe to be determined by the Panel s, any questions to another 
party or parties to which it wishes to receive a response in writing. Each party shall be 
invited to respond in writing to such written questions  within a deadline to be 
determined by the Panel s. 
c. The Panel s may subsequently pose questions to the parties. Each party shall then have 
an opportunity to answer these questions orally. The Panel s shall send in writing, within 
a timeframe to be determined by them, any questions to the parties to which they wish 
to receive a response in writing. Each party shall be invited to respond in writing to such 
questions within a deadline to be determined by the Panel s. 
d. Once the questioning has concluded, the Panel s shall afford each party an opportunity to 
present a brief closing statement, with the party that presented its opening statement 
first, presenting its closing statement first.  
Third parties  
 
1.16.   The Panels shall invite each third party to transmit to the Panels a written submission prior 
to the first substantive meeting of the Panels  with the parties, in accordance with the timetable 
adopted by the Panels.  
1.17.    All third parties shall also be invited to present their views orally during a session of this 
first su bstantive meeting, set aside for that purpose. All third parties shall provide to the Panels 
the list of members of their delegation in advance of this session and no later than 5.00 p.m. 
(Geneva time) the previous working day.  
1.18.   The written submissions and oral statements shall address only the issues raised in the 
disputes in which the relevant third parties have notified their interest to the DSB.  WT/DS472 /R/Add.1 • WT/DS497 /R/Add.1  
 
- A-11 - 
 
  1.19.   The third -party session shall be conducted as follows:  
a. All third parties may be present during the entirety of  this session.  
b. The Panels shall first hear the arguments of the third parties in alphabetical order. Third 
parties present at the third -party session and intending to present their views orally at 
that session, shall provide the Panels, the parties and ot her third -parties with provisional 
written versions of their statements before they take the floor. Third parties shall make 
available to the Panels, the parties and other third parties the final versions of their 
statements, preferably at the end of the s ession, and in any event no later than 
5.00 p.m. (Geneva time) of the first working day following the session.  
c. After the third parties have made their statements, the parties may be given the 
opportunity, through the Panels, to ask the third parties quest ions for clarification on any 
matter raised in the third parties' submissions or statements. Each party shall send in 
writing, within a timeframe to be determined by the Panels, any questions to a third 
party to which it wishes to receive a response in wri ting.  
d. The Panels may subsequently pose questions to the third parties. Each third party shall 
then have an opportunity to answer these questions orally. The Panels shall send in 
writing, within a timeframe to be determined by them, any questions to the th ird parties 
to which they wish to receive a response in writing. Each third party shall be invited to 
respond in writing to such questions within a deadline to be determined by the Panels.  
Descriptive part  
 
1.20.   The description of the arguments of the parties a nd third parties in the descriptive part of 
the Panel report s shall consist  of executive summaries provided by the parties and third parties, 
which shall be annexed  as addenda to the report s. These executive summaries shall not in any 
way serve as a substi tute for the submissions of the parties and third parties in the Panels ' 
examination of the case s.  
1.21.   Each party shall submit executive summaries of the facts and arguments as presented to 
the Pa nels in its written submissions and oral statements, in accorda nce with the timetable 
adopted by the Panel s. These summaries may also include a summary of responses to questions . 
Each such executive summary shall not exceed 15 pages. The Panel s will not summarize in the 
descriptive part of its report s, or annex to its  report s, the parties' responses to questions.   
1.22.   Each third party shall submit an executive summary of its arguments as presented in its 
written submission and statement in accordance with the timetable adopted by the Panel s. This 
summary may also include a  summary of responses to questions, where relevant. The executive 
summary to be provided by each third party shall not exceed 6  pages.  
Interim review  
 
1.23.   Following issuance of the interim report s, each party may submit a written request to 
review precise asp ects of the interim report s. Either party may also request a further meeting with 
the Panel s in accordance with the timetable adopted by the Panel s. The right to request such a 
meeting shall be exercised no later than a date at least two working days follo wing receipt by the 
panel s of the parties' written requests (if any) for review. The exact date will be determined by the 
Panel s and communicated to the parties in due course.    
1.24.   In the event that no further meeting with the Panel s is requested, each party may submit 
written comments on the other party or parties' written request for review, in accordance with the 
timetable adopted by the Panel s. Such comments shall be limited to commenting on the other 
party or parties' written request for review.  
1.25.   The inte rim report s, as well as the final report prior to their official circulation, shall be kept 
strictly confidential and shall not be disclosed.  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
- A-12 - 
 
  Service of documents  
 
1.26.   The following procedures regarding service of documents shall apply:  
a. Each party and third pa rty shall submit all documents to the Panel s by filing them with 
the DS  Registry (office No. 2047) .   
b. Each party and third party shall file 6 paper copies of all documents it submits to the 
Panel s. Exhibits may be filed in 4 copies on CD -ROM or DVD and 4  paper copies . The 
DS Registrar shall stamp the documents with the date and time of the filing. The paper 
version shall constitute the official version for the purposes of the  record of the dispute s. 
c. Each party and third party shall also provide an electroni c copy of all documents it 
submits to the Panel s at the same time as the paper versions, preferably in Microsoft 
Word format, either on a CD -ROM, a DVD or as an e -mail attachment. If the electronic 
copy is provided by e -mail, it should be addressed to DSRe gistry@wto.org, with a copy 
to ****.****@wto.org , ****.****@wto.org  and ****.****@wto.org . If a CD -ROM or 
DVD is provided, it shall be filed with the DS Registry.  
d. Each party shall serve any document submitted to the  Panels directly on the other party 
or parties. Each party shall, in addition, serve on all third parties (WT/DS472 and 
WT/DS497) its written submissions in advance of the first substantive meeting with the 
Panels. Each third party shall serve any document  submitted to the Panels directly on 
the parties and all other third parties (WT/DS472 and WT/DS497). Each party and third 
party shall confirm, in writing, that copies have been served as required at the time it 
provides each document to the Panels.  
e. Each p arty and third party shall file its documents with the DS Registry and serve copies 
on the other party or parties (and third parties where appropriate) by 5.00 p.m. (Geneva 
time) on the due dates established by the Panels. A party or third party may submit  its 
documents to another party or third party in electronic format only, subject to the 
recipient party or third party's prior written approval and provided that the Panel 
Secretary is notified.  
f. The Panel s shall provide the parties with an electronic vers ion of the descriptive part, the 
interim report s and the final report s, as well as of other documents as appropriate. 
When the Panel s transmit to the parties or third parties both paper and electronic 
versions of a document, the paper version shall constit ute the official version for the 
purposes of the record of the dispute s. 
1.27.   The Panel s reserve the right to modify these procedures as necessary, after consultation 
with the parties.  WT/DS472 /R/Add.1 • WT/DS497 /R/Add.1  
 
- A-13 - 
 
  ANNEX A -4 
ADDITIONAL JOINT WORKING PROCEDURES O F THE PANEL S CONCERNING  
BUSINESS CONFIDENTIAL I NFORMATION  
Adopted on 9 October 2015  
 
 
1.1.  Each party shall treat as confidential information submitted to the Panel s by the other party 
which the submitting party has designated as business confidential information (BCI).  
1.2.  No person may hav e access to BCI other than  a member of the Secretariat or the Panel s, a 
person specifically authorized by the Secretariat or the Panel s, and employees, agents, and 
advisors of the parties.  
1.3.  BCI obtained under these procedures may be used only for the purpos e of providing 
information and argumentation in this dispute and for no other purpose.  
1.4.  The party submitting BCI shall mark the cover and/or first page of the document containing 
BCI, and each page of the document, to indicate the presence of such informati on. The specific 
information in question shall be placed between double brackets, as follows: [[xx,xxx.xx]]. The 
first page or cover of the document shall state "Contains business confidential information on 
pages xxxxxx ", and each page of the document sha ll contain the notice "Contains Business 
Confidential Information " at the top of the page.  
1.5.  Where a party submits a document containing BCI to the Panel s, the other party when 
referring to that BCI in its documents, including written submissions and oral st atements, shall 
clearly identify all such information in those documents in accordance with the procedures laid 
down in paragraph 4.   
1.6.  The Panel s will not disclose BCI, in its report or in any other way, to persons not authorized 
under these procedures to have access to BCI. The Panel s may, however, make statements of 
conclusion drawn from such information. Before the Panel s circulate its final report to the 
Members, the Panel s will give each party an opportunity to review the report to ensure that it does 
not contain any information that the party has designated as BCI.  
1.7.  Submissions containing BCI will be included in the record forwarded to the Appellate Body in 
the event of an appeal of the Panels ' Report.  
 
_______________  
 
 
 
 
 
 
 
 WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
- B-1 - 
 
  ANNEX B  
ARGUMENTS OF THE PARTIES  
EUROPEAN UNION  
Contents  Page  
Annex  B-1 First part of the execut ive summary of the arguments of the European Union  B-2 
Annex  B-2 Second part of the execut ive summary of the arguments of the European Union  B-13 
JAPAN  
Contents  Page  
Annex  B-3 First part of the executive summary of the arguments of Japan   B-27 
Annex  B-4 Second part of the executive summary of the arguments of Japan   B-38 
 
BRAZIL  
Contents  Page  
Annex  B-5 First part of the executive summary of the arguments of Brazil  B-49 
Annex  B-6 Second part of the executive summary of the arguments of Brazil  B-60 
 
 
 WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
- B-2 - 
 
  ANNEX B -1 
FIRST PART OF THE EX ECUTIVE SUMMARY OF T HE ARGUMENTS OF THE EUROPEAN UNION  
1. INTRODUCTION  
1. The European Union takes issue with seven fiscal incentive programmes providi ng for a 
reduction of indirect taxes on goods produced in Brazil, that result in the like products from other 
WTO Members being discriminated in a manner prohibited by the GATT 1994, the 
TRIMs  Agreement as well as the SCM Agreement.   
2. The present case co ncerns therefore Brazil's discriminatory application of the following 
internal federal taxes:  
IPI (Imposto sobre Produtos Industrializados  – Tax on Industrialised Products),  
PIS/PASEP ( Programa de Integração Social  – Social Integration Programme / Programa 
de Formação do Patrimônio do Servidor Público  – Civil Service Asset Formation 
Programme) ,  
COFINS ( Contribuição para o Financiamento da Seguridade Social  – Contribution to 
Social Security Financing),  
PIS/PASEP -Importação (Programa de Integração Social e de Formação do Patrimônio do 
Servidor Público incidente na Importação de Produtos Est rangeiros ou Serviços – Social 
Integration and Civil Service Asset Formation Programmes applicable to Imports of 
Foreign Goods or Services),  
COFINS -Importação (Contribuição para o Financiamento da Seguridade Social incidentes 
sobre a importação de bens e serviços – Contribution to Social Security Financing 
applicable to Imports of Goods or Services),  
CIDE ( Contribuição sobre Intervenção no Domínio Econômico  – Contribution of 
Intervention in the Economic Domain).  
3. It is not disputed that those taxes  are internal indirect taxes.  
2. PROCEDURAL BACKGROUND  
4. On 31 October 2014, the European Union requested the establishment of a panel pursuant 
to Article 6 of the WTO Understanding on Rules and Procedures Governing the Settlement of 
Disputes (DSU), Artic le XXIII of the General Agreement on Tariffs and Trade, 1994  (GATT 1994), 
Articles 4.4 and 30 of the Agreement on Subsidies and Countervailing Measures (SCM Agreement), 
and Article 8 of the Agreement on Trade -Related Investment Measures (TRIMs  Agreement). On 26 
March 2015, the WTO Director -General composed the Panel pursuant to Article 8.7 of the DSU.  
5. Argentina, Australia, Canada, China, Colombia, India, Japan, Korea, Russia, South Africa, 
the Chinese Taipei, Turkey and the United States reserved their r ights to participate in the Panel 
proceedings as third parties.  
3. OVERVIEW OF THE LEGAL  ISSUES IN THIS DISPU TE: LEGAL STANDARD  
6. The most prominent feature in the Brazilian measures at issue is the tax discrimination 
against imported goods, particularly through the use of tax advantages tied to local content 
requirements. Furthermore, with respect to the INOVAR -AUTO programme ( Programa de Incentivo 
à Inovação Tecnológica e Adensamento da Cadeia Produtiva de Veículos Automotores) , Brazil also 
discriminates  between products originating from MERCOSUR and Mexico, on the one hand, and 
products originating from other WTO members, including the European Union, on the other hand. WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
- B-3 - 
 
  Brazil also provides subsidies which are contingent upon either the use of domestic o ver imported 
products or export performance.  
3.1. DISCRIMINATION BETWEE N IMPORTED PRODUCTS AND LIKE DOMESTIC PR ODUCTS : ARTICLE III:2,  
FIRST SENTENCE OF TH E GATT  1994 
7. As articulated by the relevant WTO case -law, the analysis of whether an internal tax or  other 
internal charges are inconsistent with the first sentence of Article III:2 of the GATT 1994 requires 
a two -step test analysis: (i) whether imported and domestic products are like products; and (ii) 
whether the imported products are taxed "in excess of" the domestic products. With respect to the 
first condition, where a WTO Member draws an origin -based distinction in respect of internal taxes, 
a comparison of specific products is not required and, consequently, it is not necessary to examine 
the vario us likeness criteria. With respect to the second element, even the slightest difference in 
the tax burden between imported and domestic like products amounts to a breach of Article III:2, 
first sentence.  
3.2. DISCRIMINATION BETWEE N IMPORTED PRODUCTS FROM D IFFERENT THIRD COUNT RIES 
(MOST-FAVOURED NATION) 
8. Based on the text of Article I:1, the following elements must be demonstrated to establish a 
violation: (i) that the measure at issue falls within the scope of application of Article I:1; (ii) that 
the imp orted products at issue are "like" products within the meaning of Article I:1; (iii) that the 
measure at issue confers an "advantage, favour, privilege, or immunity" (hereafter, "advantage") 
on a product originating in the territory of any country; and (iv ) that the advantage so accorded is 
not extended "immediately" and "unconditionally" to "like" products originating in the territory of 
all Members. In sum, Article I:1 prohibits imposing conditions that have a detrimental impact on 
the equality of competi tive opportunities for like imported products from any Member.  
3.3. DISCRIMINATION BETWEE N IMPORTED PRODUCTS AND LIKE DOMESTIC PR ODUCTS (NATIONAL 
TREATMENT ) THROUGH LOCAL CONTEN T REQUIREMENTS : ARTICLES III:4  AND III:5  OF THE 
GATT  1994  AND ARTICLES 2.1 AND 2.2, TOGETHER WITH PARAGRAPH 1(A) OF THE ANNEX OF THE 
TRIM S AGREEMENT  
9. According to the relevant WTO case -law, for a violation of Article III:4 to be established, 
three elements must be satisfied: (i) the imported and domestic products at issue are "like  
products"; (ii) the measure at issue is a "law, regulation, or requirement affecting their internal 
sale, offering for sale, purchase, transportation, distribution, or use"; and (iii) the imported 
products are accorded "less favourable" treatment than tha t accorded to like domestic products. In 
sum, imposing requirements on operators to achieve directly or indirectly a particular level of 
domestic content in order to obtain a benefit from the government runs contrary to Article III:4 of 
the GATT 1994, beca use it negatively affects the internal sale, offering for sale, purchase or use of 
like imported products. This conclusion is also supported both contextually as well as a matter of a 
more specific legal basis in the context of trade -related investment mea sures by Articles 2.1, 2.2 
and the Annex of the TRIMS agreement.  
10. According to the relevant GATT jurisprudence, in order to apply the obligation in the first 
sentence of Article III:5, it is required to determine (i) whether there is an "internal quant itative 
regulation relating to the mixture, processing or use of products in specific amounts or 
proportions"; and (ii) whether such regulation "requires, directly or indirectly, that any specified 
amount or proportion of any product which is the subject o f the regulation must be supplied from 
domestic sources". This provision is also infringed if internal quantitative regulations are applied in 
a manner so as to afford protection to domestic production. In that respect, Article III:1 of the 
GATT 1994 serve s as relevant context to understand under which circumstances a measure is 
applied primarily with a protectionist purpose.  
11. Overall, paragraphs 4 and 5 of Article III of the GATT 1994 as well as paragraph 1(a) of the 
Annex to the TRIMs Agreement indicat e that the use of local content requirement is inconsistent 
with the the basic principle of granting national treatment to imported products.  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
- B-4 - 
 
  3.4. PROHIBITED SUBSIDIES THROUGH FISCAL MEASU RES  
12. The SCM Agreement regulates the use of fiscal measures as s ubsidies, and prohibits 
situations where those subsidies are contingent, solely or as one of several other conditions, upon 
(a) export performance, and (b) the use of domestic over imported products.  
13. Firstly, when a government foregoes or does not col lect revenue arising from indirect 
taxation that is otherwise due according to the organising principles and structure of its own 
system, a subsidy is deemed to exist in accordance with Article 1.1 of the SCM Agreement. 
Secondly, when obtaining the subsidy  is subject to export performance, this amounts to a 
prohibited subsidy under Article 3.1(a) of the SCM Agreement. Thirdly, when the subsidy is 
contignet upon the use of domestic over imported products then it is prohibited subsidy pursuant 
to Article 3.1( b) of the SCM Agreement. Fourthly, prohibited subsidies are per se  specific according 
to Article 2.3 of the SCM Agreement. Article 3.2 of the SCM Agreement  provides that a Member 
shall neither grant nor maintain prohibited subsidies.  
14. The European Union  considers that the notion of "domestic" and "imported" in Article  3.1(b) 
of the SCM Agreement does not depend on the rules of origin of the Member concerned. Certainly, 
if the rules of origin of that Member confirm the domestic over imported nature of the  goods at 
issue, those rules could be used a fortiori  to confirm that the discrimination takes place also as 
understood by that Member.  
15. The European Union submits that the terms "domestic over imported" in Article 3.1(b) of the 
SCM Agreement should be  understood as juxtaposing two opposing concepts: one, of goods which 
are considered as national or domestic because they are obtained, substantially transformed, 
made in or brought into existence that country; and another of goods that are brought in or 
imported into the country. Since "domestic" is juxtaposed in this provision of the SCM Agreement 
to "imported" goods, this indicates that a product that has not been imported, but that is present 
in the market or came into existence in that market cannot be  considered "imported" for the 
purposes of Article 3.1(b) of the SCM Agreement, and must logically be considered as "domestic".  
4. MEASURES IN THE AUTOM OTIVE SECTOR  
16. Under the INOVAR -AUTO programme, Brazil provides tax advantages with respect to the 
IPI. The tax advantages primarily consist in a reduction of the IPI tax burden on the sale of the 
products (motor vehicles) covered by the programme. The goal and operation of the INOVAR -
AUTO programme can be summarily explained as "slowing import growth and developing local 
suppliers" as shown by statistical evidence.  
4.1. MEASURE AT ISSUE  
17. Since 2011, Brazil applies a special tax scheme for the automotive sector. The programme 
has been gradually modified and formally called INOVAR -AUTO programme in April  2012. This 
programme covers a number of 52 product codes, as per Annex I of Decree  7,819/2012.  
18. The INOVAR -AUTO programme operates in two steps: as a first step, it increases the IPI tax 
rates for the covered products by 30 percentage points; as a seco nd step, it offers a system of tax 
credits through which accredited companies may offset most of the IPI tax burden on motor 
vehicles, namely an amount of IPI tax corresponding to up to 30% of the taxable value of the 
vehicles. Furthermore, it offers a red uction of 30 percentage points in the IPI rates for motor 
vehicles originating in MERCOSUR and Mexico, under certain conditions. Accordingly, the practical 
effect of the INOVAR -AUTO programme for motor vehicles is to maintain the previous 
(i.e. pre2011) ta x treatment only for domestic products and for products from preferential origins, 
while increasing the IPI by 30 percentage points for the like products from the rest of the World, 
including the European Union.  
19. To benefit from the INOVAR -AUTO program me, companies need to be "accredited" 
(habilitadas)  by means of an administrative decision ( Portaria ). There are three types of 
"accreditation" ( habilitação ): (i) for domestic manufacturers; (ii) for local distributors without 
manufacturing activities in B razil; and (iii) for investors in domestic manufacturing capacity. In 
order to be "accredited", eligible operators must fulfil certain conditions which concern, depending WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
- B-5 - 
 
  on the accreditation sought, in particular a minimum number of manufacturing activiti es in Brazil 
and/or minimum levels of expenditure in Brazil on research and development, engineering, basic 
industrial technology and capacity -building of actual and potential suppliers.  
20. Under the INOVAR -AUTO programme, accredited companies can earn ta x credits which can 
be used, under certain conditions, to offset the IPI otherwise due on the domestic sale of motor 
vehicles covered by the programme. The tax credits are linked to the level of expenditure in Brazil 
on certain items, including strategic i nputs and tools, research and development, or capacity -
building of suppliers. Expenditure in Brazil to purchase strategic inputs (automotive components) 
and tools is the item which translates into the largest tax credit and it is thus decisive as regards 
the actual tax burden on the sale of motor vehicles. As a result, the advantage of a lower tax 
burden on finished vehicles is contingent for the greatest part on the use of domestically sourced 
inputs.  
21. Any excess tax credit can be used to offset up to 3 0 percentage points of the IPI due on the 
domestic commercialisation of imported vehicles, but only up to a maximum number of products 
(i.e. 4,800 vehicules/year per company). Tax credits are not used to offset the IPI tax at the 
border, which is generally  due with limited exceptions. However, motor vehicles from a limited 
number of WTO Members benefit from a special reduction in IPI rates that apply both at the point 
of importation and in subsequent sales. Special provisions also apply to companies accredi ted as 
investors and companies producing certain vehicles by fitting vehicle bodies on a chassis.  
22. A traceability system is put in place in order to ensure that manufacturers comply with the 
domestic content requirements under the INOVAR -AUTO programme.  It involves independent 
reporting on the local content levels of automotive components and tools by relevant Brazilian 
manufacturers. This enables the Brazilian authorities to verify and cross -check the levels of local 
content reported by motor vehicle ma nufacturers. Further, a "deductible portion" is deducted from 
the expenditures on strategic inputs and tooling, so that the presumed IPI credits only arise if such 
strategic inputs and tooling contain a specific level of local content.  
4.2. LEGAL CLAIMS 
23. The European Union submits that the INOVAR -AUTO programme, as embodied and 
developed in the relevant legal instruments and also as applied by the relevant Brazilian 
authorities, is inconsistent with Brazil's obligations under Articles III:2, I:1, III:4 a nd III:5 of the 
GATT 1994, Article 2.1 of the TRIMS Agreement, in conjunction with Article 2.2 and with 
paragraph 1(a) of the Agreement's Illustrative List, and with Articles 3.1(b) and 3.2 of the 
SCM Agreement.  
24. By reserving to domestic companies the a ccess to tax credits which may alleviate an amount 
of IPI tax of up to 30% of the IPI taxable base for the relevant products, the INOVAR -AUTO 
programme imposes a fiscal burden on imported products in excess of that imposed on the like 
domestic products and  therefore violates Article III:2, first sentence of the GATT 1994.  
25. By according motor vehicles, automotive components and tools originating from the EU less 
favourable treatment than that accorded to like domestic products, through the conditions for 
company accreditation, the content requirements contained in the manufacturing steps as well as 
through the calculation and use of the tax credits under the INOVAR -AUTO programme, Brazil 
violates Article III:4 of the GATT 1994.    
26. The INOVAR -AUTO progr amme is inconsistent with  Article III:5 of the GATT 1994, because 
the conditions regarding the minimum number of processing activities that producers of 
automotive products need to perform in Brazil in order to benefit from the IPI reductions, as well 
as the percentages relating to specific domestic input that are used for the calculation of the tax 
credits amount to internal quantitative regulations relating to the processing of products, which 
require a specified proportion of products to be sourced loca lly (Article III:5, first sentence); and, 
subsidiarily, because the conditions relating to the minimum processing activities that must be 
carried out in Brazil amount to an internal quantitative regulation that is applied so as to afford 
protection to dome stic production (Article III:5, second sentence).  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
- B-6 - 
 
  27. The INOVAR -AUTO programme is not a subsidy exclusively paid to domestic producers 
within the meaning of Article III:8(b) of the GATT 1994, as Brazil attempts to assert. Furthermore, 
the European Union d isagrees with Brazil, which maintains that the requirements to perform 
certain manufacturing steps in Brazil, to invest in R&D and in engineering in Brazil in order to 
benefit from the tax advantages under the INOVAR -AUTO programme are stages of production  and 
other requirements which are not relating to products, thus falling outside the scope of Article III.  
28. Brazil's national treatment violations are not justified under Articles XX(b) and (g) of the 
GATT 1994 because energy efficiency and road safety are only elements of boosting 
competitiveness of the domestic auto industry and not aims in themselves. Furthermore, 30 out of 
the 52 covered product codes are exempted from the energy efficiency requirements. In any 
event, the discriminatory treatment und er the INOVAR -AUTO programme makes no contribution to 
the protection of the alleged human life or health and exhaustible natural resources objectives, as 
those objectives do not require discriminating between domestic and imported products. There are 
sever al WTO -compatible alternative measures, making an equivalent (actually a more important) 
contribution to the objectives sought, while being less trade restrictive. Furthermore, the measure 
at issue was not taken in conjunction with domestic restrictions. F inally, the measure at issue does 
not fulfil the requirements of the chapeau  of Article XX.  
29. A violation of Article 2.1 of the TRIMs Agreement is established by demonstrating two 
elements: (i) the existence of an investment measure related to trade in g oods ( i.e., a TRIM); and 
(ii) either (a) the inconsistency of that measure with Article III (or Article XI) of the GATT 1994, or 
(b) that the measure falls under paragraph (a) of the Annex. The European Union considers that 
the INOVAR -AUTO programme is a t rade-related investment measure within the meaning of 
Article  1 of the TRIMS Agreement. Since the EU has already established that the INOVAR -AUTO 
programme is inconsistent with Articles III:2, III:4, and III:5 of the GATT 1994, it also violates 
Article 2.1  of the TRIMS Agreement. In addition, the requirement related to the purchase or use of 
inputs and manufacturing equipment, as well as laboratory equipement, of Brazilian origin in order 
to benefit from the IPI reduction falls squarely within the Illustrat ive List of the TRIMs Agreement 
and notably under paragraph 1(a) of the Annex to the TRIMs Agreement relating to measures that 
are inconsistent with Article III:4 of the GATT 1994. Therefore, the INOVAR -Auto programme is 
also inconsistent with Brazil's obl igations pursuant to Article 2.2 of the TRIMs Agreement.  
30. The INOVAR -AUTO programme is inconsistent with Brazil's obligations under the 
SCM Agreement. In particular, the INOVAR -AUTO programme provides advantages that are 
subsidies within the meaning of  Article 1.1 of the SCM Agreement, and which are inconsistent with 
Articles 3.1(b) and 3.2 of the SCM Agreement because they are contingent upon the use of 
domestic over similar imported goods from other WTO Members, including the EU.  
31. By failing to acc ord immediately and unconditionally the same advantages it accords to the 
products at issue originating in the other MERCOSUR members and Mexico to the like products 
from the European Union, Brazil acts inconsistently with Article I:1 of the GATT 1994.  
32. The advantages accorded by Brazil to Argentina, Mexico and Uruguay are manifestly  not 
justified under the Enabling Clause. There is no clear link between LAIA, ECAs, the INOVAR -AUTO 
programme and the relevant provisions of the Enabling Clause relied on by  Brazil. The Montevideo 
Treaty and the subsequent ECAs concluded between Brazil and other LAIA members do not cover 
internal taxation. In addition, the specific conditions in paragraphs 2(b) and 2(c) of the Enabling 
Clause are not fulfilled.  
5. MEASURES RE LATING TO INFORMATION AND COMMUNICATION TECHNOLOGY , AUTOMATION AND 
RELATED GOOD  
5.1. MEASURE AT ISSUE  
33. Brazil has adopted and maintains legislation granting advantages in relation to taxes, duties, 
contributions and charges, which are contingent upon do mestic production and technological 
development of information and communication technology, automation and related goods (ICT) in 
Brazil. The set of advantages primarily consist in tax exemptions or reductions applied in 
connection with taxes levied on th e sale of the relevant goods or on the revenue generated WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
- B-7 - 
 
  through those sales. These advantages apply in relation to products manufactured in Brazil by 
companies accredited under each programme.  
34. This system of advantages is embodied in and applied thro ugh a comprehensive set of inter -
related measures: (1) the Informatics Programme;  (2) the  "Programme of Incentives for the 
Semiconductors Sector"  (PADIS, Programa de Incentivos ao Setor de Semicondutores ); (3) the 
"Programme of Support to the Technological  Developments of the Industry of Digital TV 
Equipment" (PATVD, Programa de Apoio ao Desenvolvimento Tecnológico da Indústria de 
Equipamentos para TV Digital ); and (4) the "Programme for Digital Inclusion" ( Inclusão Digital ). 
5.1.1.  Informatics programme  
35. In order to benefit from the tax advantages under the Informatics programme, an ICT 
producer needs to be "accredited" ( habilitadas ) by means of an administrative decision ( Portaria ) 
granted jointly by the Ministry for Development, Industry and Trade and the Ministry of Science 
and Technology. In order to be accredited, an ICT producer must invest in R&D in Brazil in the ICT 
sector (reaching a minimum investment target expressed as a percentage of its domestic turnover 
in the product it is accredited for, minus the acquisition cost of the products incentivised under the 
Informatics or PADIS programme) and it must produce that product in Brazil in accordance with 
the terms of the "Basic Productive Process" (PPB, Processo Productivo Basico ).  
36. PPBs determi ne the minimum manufacturing steps that need to be carried out in Braizil for a 
product to be considered as effectively "industrialised" in Brazil. They identify products that, 
according to Brazil itself, are produced in Brazil and are truly Brazilian prod ucts. They are issued 
by inter -ministerial decision ( Portaria ) at the initiative of the company seeking the tax advantages. 
PPBs aim at maximising domestic added value by requiring that certain production steps take 
place in Brazil and that certain input, parts or components are sourced in Brazil (either produced 
by the accredited company itself or by other companies in Brazil, including sometimes in 
accordance with their respective PPBs).  
37. In addition, PPB compliant products that are "developed" in Bra zil benefit from greater tax 
advantages. Products are considered "developed" in Brazil when they meet the specifications, rules 
and standards laid down in Brazilian law and when the related specifications, projects and 
developments are carried out by resid ents in Brazil, and in Brazilian facilities, as mandated by 
Portaria 950/2006. In order to benefit from this characterisation, such status needs to be 
recognised (" reconhecimento ") by means of an administrative decision by the Ministry of Science, 
Technolo gy and Innovation.  
38. Products manufactured by companies accredited under the Informatics programme benefit 
from an IPI rate reduction or exemption when they are put on the Brazilian market. The tax 
incentive is expressed as a percentage reduction of the IPI rate applicable to all like products 
(identified on the basis of the NCM nomenclature) and tends to decrease over time. The 
percentage reduction tends to be higher in less prosperous Brazilian regions. A  
suspension/exemption from the IPI tax otherwise due is also granted to accredited companies on 
the purchase of raw materials, intermediate goods and packaging material used in the production 
of the product they are accredited for.  
5.1.2.  PADIS and PATVD programmes  
39. Both PADIS and PATVD programmes ess entially reflect the structure and architecture of the 
Informatics programme but they apply to a smaller set of products. In addition they grant a larger 
pallet of tax advantages.  
40. PADIS grants exemptions from several indirect taxes and duties applicab e on a set of goods 
classified by the Brazilian legislation as "final products", provided the producer of those products 
performs in Brazil certain development and production steps (including design, creation, 
development, manufacturing, cutting, encapsula tion  and testing). Those products are (i) 
semiconductors; (ii) displays; and (iii) strategic inputs and equipment, produced in accordance 
with PPB, for the production of semiconductors or displays. Under PATVD similar exemptions are 
granted to companies t hat develop and manufacture in Brazil Digital TV trasmitters, either in WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
- B-8 - 
 
  accordance with the relevant PPB or in compliance with Portaria 5,906/2006, that defines when a a 
product is to be considered as developed in Brazil.  
41. In order to benefit from the p rogrammes, companies must be "accreditated" by the relevant 
Ministries. To be accredited, they must invest in R&D in Brazil a minimum percentage of their 
gross revenue from sales of the final products.  
42. Accredited companies do not pay any IPI, PIS/PASE P, COFINS, PIS/PASEP -Importação, 
COFINS -Importação, and CIDE (as well as ordinary customs duties in the context of the PADIS 
programme) on the purchase or imports of machinery, tools, instruments, and equipment, as well 
as of software and inputs, for the p roduction of the final products mentioned above or the Digital 
TV trasmitters. In addition, those same final products and Digital TV trasmitters produced by the 
accredited companies are exempted from PIS/PASEP, COFINS and IPI when they are put on the 
Brazilian market.  
5.1.3.  Digital Inclusion programme  
43. Pursuant to the Digital Inclusion programme, Brazil exempts retail sales of a number of 
consumer electronics (such as laptops, input and output units, routers, smartphones and other 
hardware) from paymen t of PIS/PASEP and COFINS, provided that such products are produced in 
Brazil in accordance with their respective PPBs. The Digital Inclusion programme incentivises the 
sales of products that fall within the scope of the Informatics programme.  
5.2. LEGAL C LAIMS 
44. The set of tax reduction/exemption/suspensionmentioned above, as embodied and 
developed in the Informatics,  PADIS, PATVD and Digital Inclusion programmes and also as applied 
by the relevant Brazilian authorities, are inconsistent with Brazil's ob ligations under the WTO 
agreement as follows.  
45. As a preliminary point the EU underlines that the benefits arising from compliance with the 
relevant programmes consists precisely in a decrease of the fiscal charge that is applicable to each 
individual p roduct produced by the accredited company when that product is put on the Brazilian 
market. Moreover, the text of Article III as well as the relevant case -law confirms that Article III 
applies to products, including pre -market or production requirements wh en they affect the equality 
of competitive conditions for imported products in the market.  
46. Furthermore, the EU submits that those programmes create a distinction for tax purposes 
between imported and domestic products based on factors such as as the p lace of production of 
the products, the origin of the parts or components, the place of the technical development of the 
products and the obligations assumed by the producer in relation to R&D investments in Brazil. 
This is clearly an origin based distinct ion because imported products do not comply with those 
requirements. Therefore, for the purpose of Article III:2 and Article III:4 it is sufficient to observe 
that there could be and indeed there are imported products that are like the incentivised domesti c 
ones.  
47. Finally a product that is produced, manufactured or assembled in Brazil, regardless of the 
origin of its components, is necessarily a domestic product. Conversely, a product that is imported 
in Brazil is certainly not a domestic product. It fo llows that when a product is produced, 
manufactured or assembled in Brazil, for assessing if a product is domestic it is irrelevant to 
estimate the value of the imported components in proportion to the total value of that product.  
48. With regard to Artic le III:2, the EU recalls only domestic products (products produced or 
manufactured in Brazil) can benefit from the Informatics,  PADIS, PATVD and Digital Inclusion 
programmes. Therefore, those programmes  impose an indirect tax burden on imported products in  
excess of that imposed on like domestic products. The prohibition of discrimination between 
imported and domestic like products enshrined in Article III:2 makes neither a distinction among 
intermediate and final products, nor does it allow to compare the tax burden imposed on imported 
intermediate products when they are put on the Brazilian market, with the tax burden imposed on 
domestic intermediate products later in time, when the final product that incorporates the 
intermediate product is put on the Bra zilian market.  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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  49. The conditions for accreditation under those programmes taken together result in less 
favourable treatment granted to imported intermediate and final products than that accorded to 
like domestic intermediate and final products contrary t o Article III:4. In any event, the 
imposition, under the terms of the corresponding PPBs, of an obligation to use local inputs in the 
production of ICT products, as a condition to benefit from the exemptions or reductions, also 
affords less favourable trea tment to imported intermediate products than that accorded to like 
domestic intermediate products. The less favourable treatment for like imported products arises at 
least at three levels.  
50. First, imported products are subject to a higher indirect tax burden. The fact that in certain 
circumsances (identical rates for intermediate and final product) the tax burden imposed on a 
domestic intermediate product when the final product incorporating it is sold on the Brazilian 
market may be nominally the same a s the tax burden generally imposed on the imported like 
intermediate product when it is put on the Brazilian market, does not mean that there is identical 
treatment between domestic and imported intermediate products. Indeed, this observation takes 
into ac count neither the time value of money, nor the fact that the payment of indirect taxes on 
the purchase of intermediate products constitutes a costs that the producer must recoup by 
increasing the price of its products. Moroever, it does not consider the ef fects resulting from the 
combined application of different programmes.  
51. Second, there is an incentive for companies accredited under PADIS and the Informatics 
programme to purchase intermediate products incentivised by those two programmes, so as to 
reduce the amount of resources that they must invest in R&D in Brazil.  
52. Third, other companies are incentivised to purchase products that are exempted from IPI, 
PIS/PASEP and COFINS because in that way they do not have to claim a compensation or 
reimburs ement of a tax credit and undergo the paperwork and delaies to obtain either.  
53. Furthermore, the EU submits that those programmes are incompatible with Article III:5 first 
sentence because the conditions imposed under the terms of the corresponding PPBs  regarding the 
minimum number of processing activities that producers of ICT, automation and related products 
need to perform in Brazil in order to benefit from the exemptions or reductions amount to an 
internal quantitative regulation relating to the proc essing of products, which requires a specified 
proportion of the final product to be sourced locally. In an event the conditions relating to the 
minimum number of processing activities to be carried out in Brazil amount to an internal 
quantitative regulati on that is applied so as to afford protection to domestic production contrary to 
Article III:5 second sentence.  
54. The four challenged programmes by requiring, under the terms of the PPBs, the purchase or 
use of inputs and manufacturing equipment of Braz ilian origin or from Brazilian sources in order to 
benefit from the exemptions or reductions, squarely fall under the list of examples under 
paragraph 1(a) of the Annex to the TRIMs Agreement of measures that are inconsistent with 
Article III: 4 of the GAT T 1994 and are therefore contrary to Article 2.1 of the TRIMS Agreement. 
It is undisputed that those programmes are investment measures. Moreover, they are also 
necessarily trade -related because requirements to use domestic products as a condition to obtai n 
tax advantages, by definition, always favour the use of domestic products over imported products, 
and therefore affect trade in goods. e.  
55. Article III:8(b) does not provide a valid defence agains those claims raised by the EU as that 
provisions only a pplies to the payment of subsidies which involve the "expenditure of revenue by a 
government", and not to subsidies in the form of exemption or reduction of internal taxes. Second, 
Article III:8(b) exempts payments to domestic producers from the national t reatment obligation, 
but only to the extent that those payments do not discriminate between domestic and imported 
goods.  
56. Those programmes are also inconsistent with Articles 3.1(b) and 3.2 of the SCM  Agreement. 
The government foregoes revenue that was otherwise due when it grants a tax exemption or 
reduction on the products sold by accredited companies and also when it grants a tax exemption 
or suspension (as well as ordinary customs duties exemptions) on the products purchased or 
imported by those comp anies (e.g. machinery, tools, instruments, and equipment, as well as of 
software and inputs). The fact that some of those tax incentives apply on intermediate products WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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  does not change that conclusion, for the reasons mentioned in paragraph 50 above, which apply 
mutatis mutandis . By definition, the foregoing of certain taxes that would otherwise be due clearly 
confers a benefit. Given that the tax benefits at issue are contingent upon the use of domestic 
over imported inputs they constitute prohibited subsid ies. 
57. The PATVD programme is not justified under Article XX(a) of the GATT 1994 because it does 
not aim to protect Brazil's public morals but merely aims at pursuing an industrial policy objective 
of Brazil. In any event, it makes no contribution to the  protection of the alleged public morals 
objective, as that objective does not require discriminating between domestic and imported 
products. An equivalent (actually a more important) contribution could have been achieved by 
WTO-consistent, less trade rest rictive means. Finally, the measure at issue does not fulfil the 
requirements of the chapeau  of Article XX.  
6. MEASURES PROVIDING TA X ADVANTAGES TO EXPO RTERS  
58. Brazil has put in place certain programmes that confer benefits to "predominantly exporting 
companies" in the form of a suspension, and ultimately an exemption, of taxes otherwise due in 
relation to their supplies.  
6.1. THE RECAP  PROGRAMME  
59. Brazil has introduced a " Special Regime for the Purchase of Capital Goods for Exporting 
Enterprises"  (RECAP, Regime Especial  de Aquisição de Bens de Capital para Empresas  
Exportadoras ). Under this programme, Brazil suspends (and ultimately exempts) the application of 
PIS/PASEP, COFINS, PIS/PASEP  Importação and COFINS  Importação with regard to purchases by 
legal persons that are "predominantly exporting companies", that is, companies that exported at 
least 50 percent of their gross turnover over the preceding year and commit to maintain at least 
that export level for a period of two calendar years.1 
60. In orde r to benefit from the RECAP programme, "predominantly exporting companies" must 
be accredited.   
61. PIS/PASEP, COFINS, PIS/PASEP -Importação  and COFINS -Importação  are suspended as 
regards the domestic purchase or importation by accredited companies of mach inery, tools, 
instruments and other equipment (i.e. capital goods). The suspension is not limited to the 
equipment, or the proportion thereof, that is to be used in the production of goods for export 
(which can be exempted from indirect taxes), but it appl ies generally (i.e. also as regards the 
capital goods, or the proportion thereof, used in the production of goods to be sold domestically). 
The suspension becomes a zero rate (thus, an exemption) when certain conditions are met, 
namely the verification of the respect during the relevant time period of the required export 
threshold. If an accredited company does not incorporate the capital goods to its fixed assets or if 
it sells the goods before the conversion of the suspension into a zero rate, it can be r equired to 
pay the suspended contributions as well as interests and penalties. If the export threshold is not 
achieved, only interest and penalties are due, proportionally to the difference between the exports 
actually made and the export threshold.  
6.2. THE SCHEME OF EXPORT CONT INGENT SUBSIDIES FOR  THE PURCHASE OF RAW MATERIALS , 
INTERMEDIATE GOODS A ND PACKAGING MATERIA LS 
62. Brazil suspends (and ultimately exempts) the application of IPI, PIS/PASEP, PIS/PASEP  
Importação , COFINS and COFINS  Importação  with r egard to raw materials, intermediate goods 
and packaging materials to accredited or registered legal persons that are "predominantly 
exporting companies", that is, producers that exported at least 50 percent of their gross turnover 
over the preceding year.  These benefits are therefore conditional on those companies achieving or 
exceeding a certain export target, expressed as a percentage of the companies' turnover. The 
benefits apply in relation to purchases of by the beneficiaries of the scheme. The suspen sion is not 
limited to the inputs to be used in the production of goods for export (which can be exempted from 
                                                
1 In addition, the RECAP programme is also available to those companies that, even if their export  
activities did not reach 50 percent of their gross turnover over the course of the preceding year, commit to 
match or exceed this threshold for the following three years.  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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  indirect taxes), but it applies also as regards inputs processed or otherwise used in the production 
of goods for the domestic market.  
63. The t ax suspension expires and the tax become definitively non -due upon exportation or 
sale on the domestic market of the final goods incorporating the raw materials, intermediate goods 
and packaging materials. In other cases, however, the taxes and contributio ns become payable, 
together with interests and penalties.  
6.3. LEGAL CLAIMS  
64. The RECAP programme and the scheme of export contingent subsidies for the purchase of 
raw materials, intermediate goods and packaging materials are prohibited subsidies program mes. 
The government foregoes revenue when it grants a tax suspension/exemption on the products 
purchased or imported by those companies, contray to the general rule under Brazilian law 
according to which the purchase of those products entails the payment o f the mentioned taxes and 
the accrual of a tax credit that can be compensated with other tax liabilities or reimbursed as the 
case may be.  
65. Brazil has not demonstrated the existence of a general rule according to which all tax credit 
accumulating compa nies would be exempted to pay indirect taxes on their purchases. By 
definition, the foregoing of certain taxes that would otherwise be due clearly confers a benefit. 
Given that those subsidies are are contingent upon export performance they are prohibited 
subsidies inconsistent with Articles 3.1(a) and 3.2 of the SCM Agreement.  
7. CONCLUSIONS AND REQUE ST FOR RELIEF  
66. The European Union requests the Panel to find that the measures at issue are inconsistent 
with the the GATT 1994, the TRIMs Agreement and th e SCM Agreement.  
67. The INOVAR -AUTO programme , as embodied and developed in the mentioned instruments 
and also as applied by the relevant Brazilian authorities is inconsistent with Brazil's obligations 
under the GATT 1994, the SCM Agreement and the TRIMs  Agreement. The national treatment 
violations are not justified under Articles XX(b) and (g) of the GATT 1994 and the MFN violations 
are not justified under the Enabling Clause.  
68. In particular, the INOVAR -AUTO programme is inconsistent with:  
o Article III :2 of the GATT 1994 because motor vehicles of the EU imported into 
Brazil are subject to a IPI tax burden in excess of that borne by like domestic 
products;  
 
o Article III:4 of the GATT 1994 because motor vehicles, automotive components 
and tools of the EU imported into Brazil are accorded less favourable 
treatment than that accorded to like products of Brazilian origin;  
 
o Article III:5 of the GATT 1994 because conditions imposed on manufacturing 
activities amount to an internal regulation relating to the pr ocessing of 
products and an internal regulation that is applied so as to afford protection to 
domestic products;  
 
o Article 2.1 of the TRIMS Agreement, in conjunction with Article 2.2 and with 
paragraph 1(a) of the Agreement's Illustrative List because the p rogramme is 
a trade -related investment measure inconsistent with Article III:4 of the GATT 
1994; and  
 
o Articles 3.1(b) and 3.2 of the SCM Agreement because the programme provides 
tax advantages that are subsidies within the meaning of Article 1.1 SCM 
Agreem ent and contingent upon the use of domestic over similar imported 
goods;  
 WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
- B-12 - 
 
  o Article I:1 of the GATT 1994 because the EU products at issue are not accorded 
immediately and unconditionally any advantage granted to like products 
originating in certain other cou ntries.  
 
69. The set of advantages contingent upon domestic production and technological development 
of ICT goods in Brazil, as embodied and developed in the Informatics,  PADIS, PATVD and Digital 
Inclusion programmes  and also as applied by the relevant Bra zilian authorities, are inconsistent 
with Brazil's obligations under the GATT 1994, the SCM Agreement and the TRIMs  Agreement. The 
national treatment violations (PATVD) are not justified under Article XX(a) of the GATT 1994.  
70. The Informatics, PADIS, PAT VD and Digital Inclusion programmes , as embodied and 
developed in the mentioned instruments and as applied by the relevant Brazilian authorities, are 
inconsisten with : 
o The first sentence of Article III:2 of the GATT 1994 because imported ICT goods  
(Informa tics)/ semiconductors , displays, and strategic inputs and equipment  
(PADIS)/ digital TV transmitters  (PATVD)/ consumer electronics  (Digital 
Inclusion) are taxed in excess of like domestic products;  
 
o Article III:4 of the GATT 1994 because Brazil grants a les s favourable treatment 
to producers of imported goods as regards to the conditions for accreditation 
in order to benefit from tax exemptions;  
 
o Article III:4 of the GATT 1994 because Brazil grants a less favourable treatment 
to imported inputs by requiring to use local inputs in order to benefit from tax 
exemptions;  
 
o Article III:5 first sentence of the GATT 1994 because Brazil imposes conditions 
which amount to an internal quantitative regulation relating to the processing 
or use of products which requires a  proportion of the products to be supplied 
from domestic sources ; in the alternative with Article III:5 second sentence 
because Brazil applies internal quantitative regulations relating to the 
minimum processing activities that must be carried out in Braz il so as to 
afford protection to domestic production;  
 
o Article 2.1 of the TRIMS Agreement, in conjunction with Article 2.2 and with 
paragraph 1(a) of the Agreement's Illustrative List because the requirement 
to purchase or use inputs of Brazilian sources i s a trade -related investment 
measure; and  
 
o Articles 3.1(b) and 3.2 of the SCM Agreement, in conjunction with 1.1 of the 
SCM Agreement because Brazil provides advantages that are subsidies within 
the meaning of Article 1.1 SCM Agreement and contingent upon the use of 
domestic over similar imported goods .  
 
71. The RECAP programme , as embodied and developed in the mentioned instruments and also 
as applied by the relevant Brazilian authorities, is inconsistent with Articles 3.1(a) and 3.2 of the 
SCM Agreement because the RECAP programme provides for subsidies contingent upon export 
performance.  
72. The scheme of export contingent subsidies for the purchase of raw materials, intermediate 
goods and packaging materials , as embodied and developed in the mentioned i nstruments and 
also as applied by the relevant Brazilian authorities, is inconsistent with Articles  3.1(a) and 3.2 of 
the SCM Agreement because the scheme provides for subsidies contingent upon export 
performance.  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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  ANNEX B -2 
SECOND PART OF THE INTEGRATED E XECUTIVE SUMMARY  OF THE ARGUMENTS OF 
THE EUROPEAN UNION  
1. GENERAL ISSUES  
 
1. In this section the EU addresses horizontal arguments raised by Brazil, demonstrating that 
they are without merit.  
1.1.1.  Article III of the GATT 1994 applies  to the INOVAR -AUTO  and the 
ICT-related programmes  
2. The obligations contained in Articles III:2, III:4 and III:5 of the GATT 1994 fully apply to the 
INOVAR -AUTO and the ICT -related programmes.  
3. The EU disagrees with Brazil that the programmes at issue es cape the discipli nes of 
Article  III. The text of Article III as well as the relevant case -law confirms that Article III applies to 
products (including through pre -market or production requirements) when they affect the equality 
of competitive conditions for imported produc ts in the market. Article III:1 refers explicitly to 
"regulations requiring the mixture processing or use of products" and Article III:5 contains similar 
language. Moreover, the illustrative list of TRIMs that are inconsistent with Article III:4 contained 
in the Annex to the TRIMs Agreement refers explicitly to measures which require the purchase or 
use of products of domestic origin or from any domestic source specified in terms of a proportion 
of volume or value of a company local production. Thus, by its  plain terms, Article III also covers 
measures that concerns the production or processing of products.  
4. In order to establish whether measures is are caught by Article III of the GATT 1994, it 
should be demonstrated that how those measures alter the com petitive conditions between 
domestic and like imported products in the market of the Member in question. Brazil's approach 
that the programmes are addressed to "producers" as opposed to products and that they concern 
"pre-market" stages is formalistic and it would open a loophole in the non -discrimination 
obligations, allowing Members to introduce measures which alter the conditions of competition to 
the detriment of imports, just because "formally" they are addressed to producers. Moreover, the 
terms "pre -market" do not appear in the covered agreements.  
5. Moreover, the case -law shows that measures affecting the equality of competitive conditions 
between domestic and imported products cannot be limited to measures directly regulating 
products or imposing ma rket requirements. That the case -law demonstrates that any measure 
affecting the equality of competitive conditions between domestic and imported products is 
covered by Article III.  
6. The programmes at issue modify the conditions of competition between p roducts produced 
in Brazil in accordance with the requirements under those programmes and imported like products. 
The benefit arising from compliance with those requirements consists in a decrease of the fiscal 
charge that is applicable to each individual product produced by the accredited company when that 
product is put on the Brazilian market.  
7. The programmes at issue draw an origin -based distinction granting fiscal advantages only to 
products produced in Brazil and/or incorporating a certain level of  Brazilian input products. 
Pursuant to the programmes at issue, if in producing a given product a company decides to take 
certain development or production steps outside Brazil, the resulting product can never benefit 
from the advantageous tax treatment. L ikewise, by providing tax benefits for products when 
certain manufacturing steps are carried out in Brazil or parts and components of those products 
are produced in Brazil, the programmes incentivise the purchase and use of products made in 
Brazil as input s into the production process.  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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  8. The EU disagrees Brazil that Article III:8(b) applies in the present case . First, as clarified by 
the 1992 GATT Panel Report in United States – Measures Affecting Alcoholic and Malt Beverages  
and the Appellate Body Report  in Canada – Periodicals , Article III:8(b) applies only to the payment 
of subsidies which involve the "expenditure of revenue by a government". In this case, the 
programmes at issue do not involve the expenditure of revenue by Brazil, but rather the 
exempt ion of domestic products from internal taxes imposed on like imported products or the 
remission of such taxes. Second, the panel in Indonesia – Autos found that 
Article  III:8(b)  exempts payments to domestic producers from the national treatment obligation,  
but only to the extent that those payments do not discriminate between domestic and imported 
goods. Since the programmes at issue discriminate between imported and domestic products they 
do not fall within the scope of Article III:8(b). Third, the EU reca lls that when there is tax 
discrimination between imported and domestic product, there is no need to show any impact of 
such different taxation on the market to demonstrate a violati on of Article III:2 of the GATT  1994. 
The prohibition of discriminatory ta xes in Article III:2, first sentence, is not conditional on a "trade 
effects test" nor is it qualified by a de minimis  standard so even the smallest amount of "excess" is 
too much. Likewise, also a violation of Article III:4 does not require an analysis of  the actual 
effects of the measure on trade, but essentially an analysis of the design, architecture,  revealing 
structure and expected operation of the measure. Finally, Brazil wrongly argues that the subsidies 
in question are paid to producers to compens ate for the costs of complying with the challenged 
programmes. Brazil does not demonstrate that those programmes impose additional costs that the 
accredited companies would not have to incur in any case, it does not demonstrate the 
proportionality between the alleged costs and the advantages, and falls into contradiction when it 
asserts that those programmes give no advantage to the producers of intermediate products which 
are nevertheless subject to the same alleged additional costs as those imposed on pro ducers of 
finished products. Moreover, a similar off -setting argument has been already rejected in EC and 
certain Member States – Large Civil Aircraft  because it would unduly restrict the scope of the SCM 
Agreement. Finally, the programmes at issue rely on  a reduction of indirect taxation as the tool to 
improve the competitive condition of domestic products  when they are put in the market.   
1.1.2.  Brazil fails to justify certain national treatment violations under Article 
XX of the GATT 1994  
9. The EU high lights the manifest disconnect between the measures at issue and the attempted 
justifications in the present case. Brazil failed to establish that the discriminatory features of the 
INOVAR -AUTO and the PATVD programmes can be justified under Article XX of the GATT 1994. 
This will be further discussed below.  
1.1.3.  The programmes at issue confer a subsidy within the meaning of Article 
1.1 of the SCM Agreement  
10. The EU disagrees with Brazil that, with respect to inputs, suspensions and exemptions of 
non-cumulative valued added taxes along the production chain do not constitute a subsidy within 
the meaning of Article 1.1 of the SCM Agreement  
11. First, Brazil has failed to show that the suspension/exemption of otherwise revenue collected 
at the time of the pu rchases by accredited companies is the "prevailing domestic standard" 
established by the tax rules in Brazil. Brazil is not consistent with the alleged general rule. The 
suspension of IPI for certain goods does not imply the suspension of other similar con tributions 
imposed on the same transactions, such as PIS/PASEP and COFINS. Even within the IPI tax, a 
quick glance at the TIPI shows that Brazil is not consistent. Brazilian legislation show on the other 
hand that the "prevailing domestic standard" is the opposite of the one advocated by Brazil: 
companies pay indirect taxes on their purchases of input and accrue a tax credit even when the 
products they produce is subject to low or not taxation.  
12. Second , there is revenue foregone or not collected in the sense of Article 1.1(a)(1)(ii) of the 
SCM Agreement. It cannot be denied that the same nominal amount of money has a different 
value over time. Moreover, the time -value of money assumes particular relevance in times of high 
inflation. Currently, Brazil's i nflation rate is around 10% a year. Accordingly, the suspension or 
exemption of indirect taxes on the purchase of inputs is a significant advantage for a company in 
terms of improved cash flow/working capital and, thus, it represents a cost for the governm ent. 
The arguments developed by Brazil to deny that cash flow effect, merely tend to minimise that 
effect because companies in general compensate their tax credits in the month following the WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
- B-15 - 
 
  accrual of the credits. By the same token the simulations provide d by Brazil in Exhibit BRA -109 are 
misleading and do not disprove the existence of a cash flow effect inherent to the suspension or 
exemption of indirect taxes on the purchase of input products. In any case, low taxation of 
intermediate products also means  lower production costs for final products, which in turns 
translate in a smaller tax basis for indirect taxes on final products. As a consequence there is an 
advantage for the producers of intermediate products that benefit of a low indirect tax rate on 
their output and a loss of revenue for the State all along the production chain.  
13. Finally , the EU fails to see how the programmes at issue do not confer a benefit in the sense 
of Article 1.1(b) of the SCM Agreement. As already recalled the panel in EC an d certain Member 
States – Large Civil Aircraft  rejected the argument that Brazil tries to make about the offsetting of 
costs and benefit of the challenges programmes. In any event, Brazil’s argument must fail also 
because it lacks in facts.  
14. Brazil sho ws how complying with the R&D investment requirement under the Informatics 
programme provides an advantage to accredited companies. Indeed, that thanks to the 
Informatics programme many companies have set up their own research institute in Brazil in order 
to optimize the resources invested in R&D. ICT producers in Brazil benefit from those R&D 
investments, not only indirectly through a development of the general technological environment 
but also directly because they can invest in R&D activities in -house o r set up their own research 
institute in which they can invest they own resources.  
1.1.4.  The programmes at issue are prohibited subsidies  
15. Brazil fails to rebut the EU's argument with respect to the INOVAR -AUTO and the ICT -related 
programmes as subsidi es contingent upon the use of domestic over imported products in the sense 
of Article 3.1(b) of the SCM Agreement. It is uncontested that in this case imported products 
(including both inputs and final products) cannot benefit from the advantages granted t hrough the 
programmes. Brazil wrongly argues that a mere requirement to attach the imported wheels to the 
imported structure using the imported fasteners would not make the resulting bicycle "domestic" 
for the purpose of Article 3.1(b) of the SCM Agreement  as the percentage of value -added in the 
territory would be virtually zero. Brazil conveniently switches to an example which does not show 
the need to use domestic bicycles part over imported parts. The point is not whether the resulting 
bicycle is "domest ic" or not. Rather, what matters is whether in order to make such an incentivised 
bicycle, the programme required the use of domestic over imported parts either directly or 
indirectly. Brazil further does not seriously dispute that the programmes for predo minantly 
exporting companies (i.e. RECAP and the programme of fiscal incentives with respect to raw 
materials, intermediate goods and packaging materials) are contingent upon export performance 
in the sense of Article 3.1(a) of the SCM Agreement. Brazil me rely attempts to justify the chosen 
export thresholds in order to benefit from the programmes. Whether the export threshold is set on 
the basis of the level of credit accumulation by certain companies or because of any other reason, 
this does not put into question the fact that the subsidies are granted only if certain export 
conditions are met.  
1.1.5.  Brazil's argument about the lack of trade effects of the measures is 
inapposite  
16. The EU fails to see the relevance of Brazil's argument. As noted by the Appellate Body, a 
panel is not required to focus its examination primarily on numerical or statistical data regarding 
the effects of the measure in practice. The programmes at issue are designed to promote the 
development of the domestic industry in Brazil . Whether Brazil's programmes have achieved total 
or partial import substitution is irrelevant. As a matter of fact, Brazil has not shown any figures 
indicating what level of imports would have been reached but for the incentivising programmes.  
1.1.6.  Final remarks  
17. As noted in the EU's responses to the Panel's questions to the Parties, the EU disagrees with 
Brazil that the changes made by Law 13,137/2015 as well as Portaria  257/2014 are outside the 
Panel's terms of reference. Furthermore, since Brazil a cknowledges that the PIS/PASEP -
Importação  and the COFINS -Importação amount to indirect taxes, and absent any further reaction 
by Brazil during the first meeting with the Panel, the EU considers it unnecessary to further WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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  develop its alternative claim under Article II:1(b) of the GATT 1994 in the context of the ICT -
related programmes.  
2. MEASURES IN THE AUTO MOTIVE SECTOR: THE I NOVAR -AUTO PROGRAMME   
2.1.1.  Factual arguments related to vehicle energy efficiency  
18. The EU points out three inconsistencies with  respect to Brazil's allegations regarding its 
vehicle energy efficiency policy. First, Brazil links energy efficiency exclusively to domestic 
products and local content requirements, while discriminating like imported products. The products 
at issue from the EU are capable of achieving similar vehicle energy efficiency. Attempting to 
justify the discriminatory aspects of the INOVAR -AUTO programme under the guise of 
environmental protection (and road safety) lacks any scientific substantiation. Second , ener gy 
efficiency (and road safety) concerns seem relevant to Brazil in the context of the INOVAR -AUTO 
programme but only insofar as they boost the competitiveness of the domestic auto industry and 
not as aims in themselves. The aim of the programme is definit ely the protection and development 
of the domestic industry, as it results very clearly from the explanatory memorandum which Brazil 
itself quotes in its first written submission. However, after the EU demonstrated how the 
explanatory memorandum to the INO VAR-AUTO programme in fact contradicted Brazil's 
assertions, Brazil tried to dismiss the importance of the explanatory memoranda in general. Third, 
Brazil has failed to offer a plausible explanation about why 30 out of the 52 product codes covered 
by the I NOVAR -AUTO programme are exempted from the energy efficiency requirements.  
2.1.2.  The INOVAR -AUTO programme is inconsistent with Brazil's national 
treatment obligations  
3.3.2.1.  The INOVAR -AUTO programme draws origin -based distinctions between like 
import ed and domestic products  
19. The INOVAR -AUTO programme draws origin -based distinctions (both explicitly, and by its 
design and structure) between domestic and imported motor vehicles with respect to all three 
steps necessary for benefiting from the IPI tax  reduction through the use of IPI tax credits: (i) the 
conditions for accreditation to participate in the INOVAR -AUTO programme; (ii) the manner in 
which IPI tax credits are calculated; and (iii) the conditions for using such credits.  
20. First, INOVAR -AUTO's accreditation conditions draw origin -based distinctions between 
foreign and domestic manufacturers, including newcomers. Because the accreditation conditions 
require manufacturing activities in Brazil, as well as certain domestic spending in R&D and/o r 
engineering, foreign manufacturers are put in a less favorable situation than domestic 
manufacturers and newcomers. The three modes of accredit ation under Article 2 of 
Decree  7,819/2012 draw explicit origin -based distinctions between domestic and importe d motor 
vehicles.  
21. Second , the INOVAR -AUTO programme draws discriminatory distinctions between imported 
and domestic like products through the manner in which IPI tax credits are calculated and accrued. 
In particular, the INOVAR -AUTO programme sets cond itions for earning IPI tax credits that 
distinguish between foreign and domestic motor vehicles, both in terms of the ability to earn 
credits and with regard to the overall amount of IPI credits to be earned. These distinctions clearly 
put imported goods a t a competitive disadvantage.  
22. Two basic categories of expenditures that can result in the accrual of IPI tax credits must 
occur "in the Country" to result in the accrual of IPI tax credits. In order to ensure that strategic 
inputs and tools actually o riginate "in the Country", Brazil designed a calculation system  where the 
"deductible portion" ensures that the value of the IPI credit resulting from expenditures on 
strategic inputs and tools is reduced to the extent that such goods incorporate content 
manufactured outside Brazil. This local content requirement is monitored through a traceability 
system, so as to ensure that only satisfying levels of domestic content incorporated into the 
products at issue attract tax credits. As a result, the combined ef fect of the "in the Country" 
requirement and the local content requirement through the "deductible portion" (and traceability 
system) draw origin -based distinctions between imported and domestic like products by its very WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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  design, structure and operation. Br azil fails to discuss the EU's arguments with regard to the 
deductible portion and the traceability system.  
23. Lastly , the INOVAR -AUTO programme draws origin -based distinctions with respect to the 
use of the IPI credits. Decree 7,819/2012 explicitly provi des that IPI credits must be used on 
domestic vehicles first, and only if such credits remain unused, they may be used on imported 
vehicles. These conditions constitute additional origin -based distinctions, confirming that domestic 
and imported motor vehic les subject to the INOVAR -AUTO programme are "like" products within 
the meaning of Articles III:2 and III:4 of the GATT 1994. Brazil does not address the EU's 
arguments with regard to the origin -based distinctions with respect to the use of the IPI credits . 
Accordingly, the EU considers that Brazil concedes this point.  
3.3.2.2.  The INOVAR -AUTO programme contains local content requirements and is not a 
subsidy to domestic producers under Article III:8(b) of the GATT 1994  
24. The EU disagrees that the clear local content requirements embodied in the INOVAR -AUTO 
programme are only "pre -market requirements" and production stages which do not affect the 
products at issue. Requirements like a minimum number of manufacturing steps to be performed 
in Brazil cannot be characterised as merely production stages, especially as such requirements are 
coupled with rules on a deductible part and a traceability system which seek to ensure that only 
products incorporating a certain level of domestic content may benefit of the  programme.  
25. The EU explained that the provisions of Article III:8(b) of the GATT 1994 cover only 
payments  to domestic producers stricto sensu , and cannot be broadly construed so as to include 
government revenue  that is  otherwise due  which is foregone  or not collected. As clarified by 
previous case -law, Article III:8(b) applies only to the payment of subsidies which involve the 
"expenditure of revenue by a government", and not to subsidies in the form of exemption or 
reduction of internal taxes, like in the present case.  
3.3.2.3.  The INOVAR -AUTO programme is inconsistent with Articles III:2, III:4 and III:5 
of the GATT 1994  
26. Brazil failed to rebut the EU's prima facie  case with regard to the national treatment 
violations. The INOVAR -AUTO programme is  inconsistent with Article III:2 of the GATT 1994 . All 
different sets of conditions (accreditation, calculation of tax credits and their use) confirm an 
origin -based distinction between domestic and imported goods. In addition, the INOVAR -AUTO 
programme is  inconsistent with Article III:4 of the GATT 1994 , with respect to motor vehicles, as 
well as automotive components and tools originating in the EU and imported into Brazil, which are 
accorded less favourable treatment than that accorded to like products o f Brazilian origin. The less 
favourable treatment results from the conditions for accreditation to the programme, as well as 
from the rules on the calculation and use of the presumed IPI tax credits. Finally, certain 
requirements of the INOVAR -AUTO program me more specifically violate the provisions of 
Article  III:5 of the GATT 1994 , because they refer to conditions relating to the minimum number of 
manufacturing steps, together with the calculation of the tax credits, which manufacturers of 
motor vehicles n eed to perform in Brazil, which amount to an internal quantitative regulation 
relating to the processing of products, as such conditions require a specified proportion of the final 
product from domestic sources.  
2.1.3.  The discriminatory aspects of the IN OVAR -AUTO programme are not 
justified under Articles XX(b) and (g) of the GATT 1994  
2.1.3.1  Article XX(b) of the GATT 1994  
27. The INOVAR -AUTO programme cannot be justified under Article XX(b).  
28. First, Brazil has not shown that the discriminatory aspec ts of the INOVAR -AUTO programme, 
including the local content requirements, have been adopted or enforced to protect human, animal 
or plant life or health. The Explanatory Memorandum of the Provisional Measure 563/2012, which 
then was turned into Decree 7,8 19/2012, demonstrates that energy efficiency and vehicle safety 
were rather seen as elements of boosting competitiveness of the domestic auto industry and not WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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  as aims in themselves. There is a manifest disconnection between the objectives allegedly pursued  
by Brazil and the discriminatory elements in the programme.  
29. Second , the discriminatory aspects of the INOVAR -AUTO programme are clearly not 
necessary to protect human, animal or plant life or health. Furthermore, there is an apparent 
contradiction bet ween the overall alleged objective of energy efficiency of the INOVAR -AUTO 
programme and the fact that the energy efficiency requirement does not apply to accredited 
companies that only produce or market in Brazil the types of vehicl es listed in Annex IV o f 
Decree  7,819/2012. These exemptions concern 30 product codes out of the 52 codes covered by 
the INOVAR -AUTO programme. Thus, the contribution made by the INOVAR -AUTO programme to 
the protection of the alleged objectives is not a material  contribution.  
30. Third, there are other alternatives reasonably available to Brazil, capable of making an 
equivalent contribution to the objectives allegedly pursued. Such reasonably available alternatives 
could be: (i) that Brazil provides tax exemptions for sales of al l the products at issue which comply 
with Brazil's energy efficiency and road safety standards, regardless of whether they are imported 
or domestically produced; and (ii) the elimination or the substantial reduction of customs duties on 
the products at iss ue which comply with Brazil's energy efficiency and road safety requirements.  
31. Finally , the measure at issue does not comply with the conditions of the chapeau  of 
Article  XX of the GATT 1994. The INOVAR -AUTO programme unjustifiably discriminates between  
countries where the same conditions prevail and the incentives accorded to domestic producers 
result in a disguised restriction on international trade. There is no link between the discriminatory 
treatment and the alleged energy efficiency and road safety  objectives of the INOVAR -AUTO 
programme. Like products at issue from the EU meet at least similar levels of energy efficiency 
and road safety, as Brazil itself indirectly admits when it takes as a reference point relevant 
European standards. The discrimin ation between domestic and imported products is arbitrary and 
unjustifiable, and amounts to a disguised restriction on international trade.  
2.1.3.2  Article XX(g) of the GATT 1994  
32. The INOVAR -AUTO programme cannot be justified under Article XX(g). First, Brazil has not 
shown that the discriminatory aspects of the INOVAR -AUTO programme have been adopted or 
enforced for the conservation of exhaustible natural resources. Second , the discriminatory aspects 
of the INOVAR -AUTO programme clearly do not "relate t o" the conservation of exhaustible natural 
resources. Brazil has not demonstrated that there is "a close and genuine relationship of ends and 
means" between the measure at issue and the conservation of exhaustible natural resources. 
Third, the measure at i ssue is not even -handed, as it is not made effective in conjunction with 
restrictions on domestic production or consumption. The EU has already explained that energy 
efficiency requirements are not applied in practice for 30 product codes out of the 52 cod es 
covered by the INOVAR -AUTO programme. Finally , the measure at issue does not comply with the 
conditions of the chapeau  of Article XX of the GATT 1994. The INOVAR -AUTO programme 
unjustifiably discriminates between countries where the same conditions prev ail and the incentives 
accorded to domestic producers (and others, such as distributors of domestic products) result in a 
disguised restriction on international trade.  
2.1.4.  TRIMs claims  
33. The EU notes that Brazil agrees that the INOVAR -AUTO programme i s an investment 
measure. Furthermore, the programme is a trade -related investment measure and its specific 
requirements clearly fall under the list of examples in paragraph 1(a) of the Annex to the TRIMs 
Agreement. As already explained, requirements such a s those related to the purchase or use of 
inputs and manufacturing equipment, as well as laboratory equipment, of Brazilian origin, in order 
to benefit from the IPI reductions cannot be characterised as pre -market requirements.  
2.1.5.  SCM claims  
34. The EU  clearly disagrees with Brazil's assertion according to which the INOVAR -AUTO 
programme is not a subsidy contingent upon the use of domestic over imported goods. Brazil's 
alleges that domestic transactions cannot be considered a "use" in the sense of Artic le 3 of the 
SCM Agreement. The EU recalls that tax credits do not simply accrue from expenditures on WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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  strategic inputs and tools, as Brazil maintains, but the rules on calculation make sure that only 
goods produced with a sufficient proportion of domestic c ontent may attract IPI tax credits. Finally, 
Brazil invokes trade data which demonstrates an increase rather than a decrease of imports of 
inputs after the establishment of the INOVAR -AUTO programme. The EU recalls that there is 
abundant case -law clarifyin g that an inconsistency with certain provisions such as Articles III:2, 
III:4 and I:1 of the GATT 1994 is not contingent upon the actual trade effects of a measure. A 
similar reasoning applies with regard to an inconsistency with Articles 3.1(b) and 3.2 of  the SCM 
Agreement.  
2.1.6.  The advantages accorded to Argentina, Mexico and Uruguay violate 
Brazil's MFN obligations and are not justified under the Enabling Clause  
35. Brazil does not rebut the EU's claim under Article I:1 of the GATT 1994. Instead, Brazi l 
concedes its MFN violation and relies directly on the Enabling Clause. However, Brazil's measures 
at issue are manifestly  not within the purview of the Enabling Clause.  
36. First, there is no clear link between LAIA, ECAs, the INOVAR -AUTO programme and the 
relevant provisions of the Enabling Clause. Brazil has never notified the INOVAR -AUTO programme 
as required by paragraph 4 of the Enabling Clause or by the specific provisions of the transparency 
mechanisms for RTAs (with respect to paragraph 2(c)) and  for PTAs (with respect to paragraph 
2(b)). The Treaty of Montevideo (TM 80) and the subsequent LAIA notifications directly or 
indirectly refer to paragraph 2(c), while Brazil raised as a defence in the present case only 
paragraph 2(b) of the Enabling Clau se. In the event of a finding that Brazil's failure to notify the 
relevant arrangement under paragraph 4 of the Enabling Clause precludes Brazil from relying on 
the Enabling Clause, the EU still requests the Panel to make findings with respect to the non -
fulfilment by the measures at issue of the conditions in paragraphs 2(b) and (c) of the Enabling 
Clause. This would be particularly relevant in the event of an appeal, as well as for implementation 
purposes.  
37. Second , both the "umbrella treaty" of Montevi deo establishing LAIA and the subsequent 
ECAs do not cover internal taxation. The mentioned treaties refer to the elimination of tariffs 
(customs duties) among the members in certain circumstances.  
38. Third, Paragraph 2(b) allows developing countries to d eviate from the MFN obligation with 
respect to non -tariff measures, but only in the qualifying context of instruments multilaterally 
negotiated under the auspices of the GATT. The ECAs and LAIA are obviously not "multilateral 
instruments negotiated under t he auspices of the GATT", but rather regional instruments. In 
addition, even if one were to accept Brazil's argument and read the provision as "under the 
auspices of the WTO", there is no multilateral agreement with respect to internal taxation to fulfil 
this condition. Similarly, the provision cannot be interpreted as the GATT 194 being the agreement 
negotiated under its own auspices. Finally, Japan has explained that for the purposes of paragraph 
2(b) "non -tariff measures" do not cover internal taxation. Thus, the present case does not qualify 
under paragraph 2(b) of the Enabling Clause.  
39. Fourth , at this stage of development of the WTO law, paragraph 2(c) does not allow 
developing countries to deviate from the MFN obligation with respect to non -tariff measures. "May" 
should be understood as a faculty and not as an obligation. Prescription of the relevant criteria is a 
pre-condition. There are other similar examples when certain provisions required subsequent 
action by the Membership in order to become a pplicable. In the present case, internal taxation 
measures are clearly not tariff measures and thus cannot be subject to preferential arrangements 
under paragraph 2(c) of the Enabling Clause.  
40. The treatment accorded by Articles 21 and 22 of Decree 7,819 /2012 is not conditioned upon 
the conclusion of subsequent ECAs. Brazil did not invoke the Enabling Clause with regard to the 
products at issue from Paraguay and Venezuela.  
41. Although very similar to Article XXIV:4 of the GATT 1994, the language of the p aragraph 
3(a) contains two main textual differences: (i) it is mandatory ("shall"), as opposed to "should be" 
and thus cannot be considered merely "purposive"; (ii) it refers not only to "not to raise barriers to 
trade" but also to "not create undue diffic ulties for the trade". The relevant condition in paragraph 
3(a) may be read as "not to raise barriers to or create unjustified burdens on other Members". In WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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  other words, the arrangements falling within the scope of paragraphs 2(b) and 2(c) of the Enabling 
Clause should be crafted in a reasonable  way. 
42. Paragraph 3(b) sets trade creation as a priority under the Enabling Clause in the case of, for 
instance, a PTA not only within the members to the PTA, but also on an MFN basis, in such a way 
that the former  process does not constitute an impediment to the latter. This provision is relevant 
not only with respect to the reduction or elimination of tariffs, but also with respect to the 
reduction or elimination of other restrictions to trade.  
3. MEASURES RELATIN G TO ICT, AUTOMATION  AND RELATED GOODS  
3.1. INFORMATICS PROGRAMM E 
3.1.1.  Factual issues  
43. First, Brazil maintains that PPBs do not establish a "minimum percentage of components 
that must be produced locally". However, an examination of the first model PP B or of the current 
three general PPBs mentioned by Brazil confirms the description given by the EU in its first written 
submission. PPBs contain local content requirements expressed in terms of processing operation or 
production steps to be carried out in  Brazil and often also in terms of local sourcing or specific 
quotas of Brazilian intermediate products that must be used by the accredited company.  
44. Second , to the extent that PPBs require that the input, parts and components incorporated 
in the produc t are produced locally, they impose the use of domestic products instead of imported 
ones. A quick glance to Portarias  confirms that they contain local content requirements expressed 
in terms of components or intermediate products that must be manufactured  by the accredited 
company or a third party in Brazil.  
45. Third, Brazil argues that in order for a product to be "domestic " for the purposes of Article 
3.1(b) of the SCM Agreement a substantial percentage of value of the product must have been 
added in t he territory of the concerned country. However, Brazil fails to provide any objective 
criteria that would allow to establish when a product is domestic and when it is not and it is unable 
to show on which treaty language his position is founded.  
46. Lastly, Brazil asserts that in about ¼ of the PPBs in force compliance with certain processing 
steps can be replaced with additional investments in R&D. However, the possibility of replacing 
some processing steps with additional R&D investment is limited as it concerns clearly a minority 
of the PPBs, and specific processing steps, but not all of the steps which make a product complying 
with PPB one that is effectively produced in Brazil and that is therefore domestic.  
3.1.2.  Legal Claims  
3.1.2.1  Pre-market req uirements altering the competitive relation 
between imported and domestic products fall within Article III of 
the GATT   
47. What Brazil has called "pre -market requirements" are in reality requirements that make sure 
that the accredited company can sell the  incentivised products with tax advantages, thereby 
affecting the competitive position of imported and domestic "like products" in the Brazilian 
marketplace. Thus, the benefit arising from complying with the requirements of the Informatics 
programme (or an y of the other programmes) does relate to products  when they are put on the 
Brazilian markets. In any event, the text of Article III as well as the relevant case -law confirms 
that Article III applies to products (including through pre -market or production requirements) 
when they affect the equality of competitive conditions for imported products in the market.   
48. The EU recalls the Appellate Body Report in Thailand – Cigarettes  falling within the purview 
of Articles III:2 and III:4, which is particularly  relevant in the present disputes for several reasons.  
First, like the present case, it concerned an indirect value added tax. The Appellate Body 
underlined that some legal requirements applicable to the sellers of imported cigarettes had an 
impact on the  amount of tax applicable on the sale of imported cigarettes, while the sale of 
domestic cigarettes was exempted. Despite those requirements applied to the sellers and not to WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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  the cigarettes directly, they could fall within the purview of Articles III:2 and  III:4  because they 
resulted in different level of taxation. Second, the Appellate Body also ruled that the fact that 
seller of imported cigarettes could claim back the VAT paid on their purchase at a later stage 
through a tax credit mechanism did not sav e the measure from Article III:2 of the GATT 1994. 
This seems to be sufficient to reject Brazil’s argument that there is not difference between the 
situation of a company paying IPI on the input and claiming back the credit at a later stage and 
the situati on of a company having the IPI suspended on the purchase of its input.  
3.1.2.2   Article III:2  
49. The Informatics programme draws an origin -based distinction between domestic and 
imported products. Requiring certain production steps to be carried out in B razil in order for a 
product to benefit from a tax incentive is necessarily non -origin -neutral, because like imported 
products that have not undergone the same production steps in Brazil are by definition excluded 
from the incentive. The same reasoning app lies a fortiori  when the PPB requires not only that 
certain production steps take place in Brazil, but also that the product incorporates inputs 
manufactured in Brazil or sourced in Brazil. The position of the EU is perfectly consistent with the 
case-law a nd notably with the Report of the panel in Indonesia – Autos which  shows that origin 
based distinctions can come in the form of local content requirements.  Moreover, the EU 
maintains that the obligation contained in Article III:2 of the GATT 1994 does not  differentiate 
between inputs and finished products. The question of whether the incentivised product is a 
product that can be used as input in other more complex products is clearly irrelevant, as Article 
III:2 applies to all types of products and each in dividual transaction.  
3.1.2.3   Article III:4  
50. Brazil's narrow reading of the term "affect" in Article III:4 goes against consistent case -law, 
which recognises that the term "affecting" gives this provision a broad scope of application, 
thereby including  any measure capable of influencing  a manufacturer's choice between the 
imported product and the like domestic product. There is no need to demonstrate that such choice 
is mandated or that such effects have actually been produced. The tax incentives provid ed for by 
the Informatics programme applies only to products produced in Brazil in accordance with a PPB. 
The position of those products in the Brazilian market is therefore improved vis -à-vis like imported 
products which do not benefit from the same tax r eductions or exemption.  
51. Brazil maintains that Brazilian companies purchase a high proportion of imported input and 
this should prove that there is not violation of Article III:4. However, Brazil does not demonstrate 
that figures provided in Exhibits B RA-32 and 34 are correct, let alone that it has done anything to 
check their reliability. In any case, the high percentage of imported input used by accredited 
companies would demonstrate that the local content requirements contained in the PPBs so far 
have not been particularly effective in promoting local production of input for ICT products and 
that Brazilian producers still need to import most of those inputs. .  
52. The EU emphasizes that the less favourable treatment of imported products arises at thr ee 
levels at least. First, the mechanism for the calculation of the amount of resources that must be 
invested in compulsory R&D in the context of the Informatics and the PADIS programme, provides 
for a deduction of the sums paid when purchasing incentivise d products and thereby incentives the 
purchase those products to the detriment of like imported products. Second, whenever a product 
benefits from an exemption or suspension of an indirect tax, a lower administrative burden for the 
purchaser of that produc t arises compared to the purchase of a product subject to the tax. Unlike 
the purchaser of the incentivised product, the purchaser of the latter products has to compensate 
or ask for the reimbursement of a tax credit. That creates an incentive to buy domes tic products 
incentivised under the programme, and in particular with respect to intermediate products, which 
are purchased by other producers. Brazil has explicitly confirmed that the mechanism for the 
calculation of the amount of resources to be invested  in R&D pursuant to PADIS and the 
Informatics Programme provide for a deduction of the acquisition costs of incentivised products. It 
has also confirmed that the procedure for the compensation or reimbursement of tax credits is 
burdensome and time consumin g. Third, imported products are treated less favourably because 
they are subject to a higher indirect tax burden when put on the Brazilian market, in comparison 
with like domestic products incentivised by the Informatics programme. The reduction of the tax  
burden applied on incentivised products is the consequence explicitly provided for complying with 
the challenge programmes.  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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  3.1.2.4   Article III:5  
53. Brazil argues that the production step requirements laid down in the Informatics programme 
by means of the PPBs fall outside the scope of Article III:5 on the basis of two panel reports in 
EEC-Animal feed proteins  and Canada -FIRA. However, these reports do not confirm the narrow 
reading of Article III:5 proposed by Brazil. Even though the panel in EEC-Anima l feed proteins  
followed a rather narrow interpretation of Article III:5 first sentence, it adopted a rather broad 
reading to Article III:5 second sentence. Likewise, the panel report in Canada -FIRA cannot be 
considered conclusive for the definition of the  scope of Article III:5.  
 
54. With regard to the first sentence of Article III:5 , it is clear that the claim of the EU under 
Article III:5, first sentence is twofold. The EU claims that PPBs contain requirements relating to 
both (a) the minimum number of processing steps the producers of ICT products need to carry out 
in Brazil and (b) the proportion of local inputs that producers need to use to manufacture ICT 
products in Brazil. However, Brazil basically tries to rebut the part of sub -claim(a), but makes  no 
argument with regard to sub -claim (b). With regard to sub -claim (a), the EU confirms its 
arguments contained its first written submission.  
 
55. With regard to the second sentence of Article III:5 , the EU has argued that the minimum 
processing steps th at must be carried out in Brazil constitute internal quantitative regulation that 
is applied so as to afford protection to domestic production. Unlike the first sentence, the second 
sentence of Article III:5 refers to quantitative regulations but it does n ot say that those regulations 
must require any specified amounts or proportion of any product, which is the subject of the 
regulation to be supplied from domestic sources. It is clear that a regulation for the purpose of the 
second sentence of Article III: 5 can be considered ‘quantitative’ when it limits the quantities of 
imported product so as to afford protection to domestic production.  
 
56. The only argument that Brazil develops as regards the second sentence of Article III:5 is 
based on paragraph 5 of the Ad Article to Article III:5, but Brazil does not demonstrate that the 
conditions required by that provision are met.  
 
3.1.2.5   TRIMs Agreement  
57. The EU recalls that it has demonstrated in its first written submission that many PPBs 
contain local con tent requirements expressed in terms of minimum percentage of local parts or 
components (sometimes produced in accordance with their own PPBs) that the accredited 
company must source in Brazil (purchase or manufacture itself) in the production of ICT produ cts, 
in order to comply with the Informatics programme and that the domestic content requirements 
included in the Informatics programme are undoubtedly "related to trade in goods", as they affect 
ICT products marketed in Brazil.  
 
3.1.2.6   Article 3(1)(b) o f the SCM Agreement   
58. The EU maintains that the Informatics programme, insofar as requires the use of domestic 
over imported products as explained before, is inconsistent with Articles 3.1(b) and 3.2 of the SCM 
Agreement. The EU contends that if the res ulting final product can only be subsidised when a given 
intermediate product is sourced locally or made in Brazil by the recipient, then the subsidy must 
be considered as contingent upon the use of domestic over imported products.  
 
59. Further, Brazil rea ding of paragraph 130 of the Appellate Body in Canada – Autos is not 
correct. The Appellate Body rejected the Panel’s reasoning that under no circumstances any value 
added requirement can result in a finding of contingency "in law " upon the use of domestic  over 
imported product. At the same time, the Appellate Body recognised that Article 3.1(b) of the SCM 
Agreement also extends to subsidies contingent "in fact" upon the use of domestic over imported 
goods. Unfortunately, the Appellate Body could not comple te the analysis neither on the 
contingency in law nor on the contingency in fact. A subsequent Appellate Body in US – FSC 
(Article 21.5) casts light on how contingency on the use of domestic over imported good "whether 
solely or as one of several other con ditions " should be interpreted in the context of Article 3.1(a) 
of the SCM Agreement. The EU submits that mutatis mutandis  the same logic should apply in the 
context of Article 3.1(b) of the SCM Agreement.  
 WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
- B-23 - 
 
  60. Brazil also argues that several products prod uced according to a PPB are not domestic within 
the meaning of Article 3.1(b) of the SCM Agreement and that in order for a product to be 
"domestic " for the purposes of Article 3.1(b) of the SCM Agreement a substantial percentage of 
value must have been add ed in the territory of the concerned country and that when the value of 
imported input is more that 90% of the product, than the product should not be domestic. 
However, t his position finds no support in the text, structure or objective of Article 3.1(b) o f the 
SCM Agreement , nor has Brazil ever pointed to any case law that could support this reading   
 
3.2. PADIS PROGRAMME  
61. The EU maintains that the PADIS programme is inconsistent with the GATT 1994, the TRIMs 
Agreement and the SCM Agreement. The discuss ion of claims  against the Informatics programme  
applies mutatis mutandis  to the parallel legal claim raised against the PADIS programmes. Despite 
the PADIS programme does not contemplate the adoption of Portarias setting out PPBs for the 
incetivised produc ts,  the production steps requirements laid out in the legal instruments defining 
the PADIS programme are designed in such a way so as to incentivise the use of domestic over 
like imported goods.  
 
3.3. PATVD PROGRAMME  
62. For essentially the same reasons developed with regard to the Informatics programme, the 
EU asserts that the PATVD programme is inconsistent with the GATT 1994, the TRIMs Agreement 
and the SCM Agreement. For the sake of conciseness, the EU does not repeat those reasons, but 
focuses on Bra zil's legal defence  under Article XX(a) of the GATT 1994.  
 
3.3.1.  EU's rebuttal of Brazil's Article XX(a) defence  
63. The PATVD programme cannot be justified under Article XX(a) of the GATT 1994 , because it 
does not aim to protect Brazil’s public morals b ut merely aims at pursuing an industrial policy 
objective of Brazil.  
 
64. First, the public moral objective advanced by Brazil is just a general social and economic 
development objective which characterise nearly any governmental action and thus it does n ot 
constitute a public moral standard, otherwise any governmental action which is taken in the public 
interest could be justified under Article XX(a).  
 
65. Second , in any event, the PATVD programme does not pass the necessity test. It does not 
make a mater ial contribution to the protection of the alleged public morals objective. Notably, the 
discriminatory aspects of the PATVD are not necessary to achieve that objective and rather they 
run counter it. In addition, a n equivalent contribution could have been achieved by WTO -
consistent, less trade restrictive means.  
 
66. Finally , the measure at issue does not fulfil the requirements of the chapeau  of Article XX. 
The PATVD programme constitutes a means of arbitrary or unjustifiable discrimination between 
countr ies where the same conditions prevail and a disguised restriction on international trade. The 
domestic content requirements in PATVD discriminate between Brazil and other countries, and this 
discrimination runs counter to the purported objective of PATVD.  
 
3.4. DIGITAL INCLUSION PR OGRAMME  
67. For essentially the same reasons developed with regard to the Informatics programme, the 
EU maintains that the Digital Inclusion programme is inconsistent with the GATT 1994, the TRIMs 
Agreement and the SCM Agreement. Brazil has clarified that the tax advantages provided for by the 
Digital Inclusion programme are not only available to the sellers of those products at the retail 
level, but also to the producers (already benefitting from the Informatics programme) that may  
sell consumers electronics directly to companies or governmental entities.  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
- B-24 - 
 
  4. MEASURES PROVIDING T AX ADVANTAGES TO PRE DOMINANTLY EXPORTING  
COMPANIES  
4.1. CLAIMS RELATING TO T HE RECAP PROGRAMME  
68. The EU asserts that Brazil has failed to rebut the EU's cl aim that the RECAP programme 
amounts to a prohibited subsidy under Article 3.1(a) of the SCM Agreement and that Brazil, thus, 
acts contrary to Article 3.2 of the SCM Agreement.  
 
4.1.1.  The RECAP programme provides subsidies in accordance with the 
definitio n under Article 1.1 of the SCM Agreement  
69. The EU considers that the RECAP programme provides a financial contribution to the 
accredited companies in the form of revenue otherwise foregone or not collected in the sense of 
Article 1.1(a)(1)(ii) of the SCM  Agreement.  
 
70. First, there is no general rule of taxation by which "predominantly credit accumulating 
companies" are exempted from paying PIS/PASEP, COFINS, PIS/PASEP -Importação  and COFINS -
Importação  contributions in Brazil. Brazil has equally failed to  demonstrate that this rule is part of 
its organising principles. Specifically with respect to the RECAP programme, Brazil has not adduced 
evidence showing why the 50% export threshold is appropriate with respect to RECAP companies.   
 
71. Second , the EU d isagrees with Brazil that tax authorities cannot make a horizontal rule for 
predominantly credit accumulating companies. Brazil wrongly focuses on the difficulties in 
predicting ex ante  which sectors would be in a credit accumulation situation. The EU cons iders that 
Brazil could device a general rule to prevent tax credit accumulation with respect to companies (as 
opposed to sectors) whereby companies accumulating a particular amount of tax credits in the 
preceding or preceding years could benefit from a su spension of taxes. The ultimate exemption 
could be subject to the company actually having more tax credits than debits in a given year . 
 
72. Third, in the view of the  EU, Brazil alleges the existence of a general rule to avoid credit 
accumulation but exemp ts the sales of products by RECAP accredited companies in the Brazilian 
market.  While the EU understands the logic of exempting taxes on capital goods of exporting 
companies (which are not subject to taxes when exporting their products), the EU fails to 
understand the logic of also exempting from the payment of those contributions when the RECAP 
company sells 49% of its production in Brazil.  
 
73. Fourth , the appropriate normative benchmark in this case should be the tax treatment of 
comparable income of co mparably situated taxpayers, i.e. the purchase of capital goods by non -
accredited companies under the RECAP programme.  
 
74. Fifth, when the government suspends/exempts the collection of PIS/PASEP, COFINS, 
PIS/PASEP -Importação  and COFINS -Importação  contrib utions on those transactions made by a 
RECAP accredited company, it foregoes or does not collect revenue otherwise due. The suspension 
and exemption of taxes otherwise due increases the cash flow of the accredited company, which 
does not need to anticipate  the amounts to the tax authorities.  
 
75. Sixth, the EU disagrees that pursuant to Article 1, XII of Law 11,774/08, the totality of 
PIS/COFINS tax credits generated by the purchase of capital goods may be offset immediately. 
There would always be a risk th at the tax authorities would collect less revenue.  
 
76. Finally , the EU observes that Brazil does not contest the fact that, under the normative 
benchmark, when purchasing certain capital goods non -accredited companies are subject to an 
additional 1% in th e case of COFINS -Importaçao  that does not generate any right to a tax credit. 
Brazil does not deny that the RECAP beneficiary never pays the COFINS -Importação  amounts due 
on the import transaction, including the additional 1%; and later on, with regard to the revenue 
from domestic sales, a lower COFINS rate applies, without any additional percentages. Th is means 
that the additional 1% is definitely lost to the government with respect to RECAP companies.  
 
77. With respect to benefit in accordance to Article 1(1)(b) of the SCM Agreement, even if the 
RECAP programme were to be considered merely as a tax deferral ( quod non ), the programme 
would be improving the cash flow conditions of the accredited companies, which do not need to WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
- B-25 - 
 
  advance the money when it was d ue in comparison to the prevailing normative benchmark. This in 
itself would provide a benefit to the accredited companies pursuant to the RECAP programme.   
 
78. The EU also fails to see how the tax suspension  and exemption pursuant to the RECAP 
programme could increase the price of inputs. Whether the seller to a RECAP company will decide 
to increase its price is pure speculation. Rather, the reality would indicate the opposite. According 
to the RECAP programme, the invoices to the RECAP entity must specif y that the transaction is 
made subject to the PIS/PASEP and COFINS suspension. Thus, it should be expected that the price 
of the capital good is equal or less than the price charged by the same producers to other non -
accredited companies.  
 
79. Finally, the  EU disagrees that the RECAP programme merely equalises the conditions of 
competition by making all companies in the Brazilian market not credit accumulators. The RECAP 
programme provides an advantage in the form of better cash flow for the accredited comp anies 
when compared to what the rule would be absent the programme. This was clearly spelled out in 
the Explanatory Memorandum.  
 
4.1.2.  The RECAP programme provides subsidies which are contingent 
upon export performance  
80. The EU disagrees with Brazil tha t the criteria for the accreditation under the programme (i.e. 
the 50% export requirement) do not constitute export contingency, but an objective threshold 
above which tax credits are accumulated. In addition to the fact that Brazil has failed to show on 
which basis it sets the 50% export requirement generally, the text of Article 13 of Law 
11,196/2005 explicitly states that, in order to obtain the RECAP benefits, the company in question 
must commit to a certain level of export performance. The reasons behi nd requiring such an 
export commitment are irrelevant to determine whether the subsidy is contingent upon export 
performance in the sense of Article 3.1(a) of the SCM Agreement.  
 
4.2. CLAIMS RELATING TO T HE SCHEME OF EXPORT CONTINGENT SUBSIDIES  FOR 
THE PUR CHASE OF RAW MATERIA LS, INTERMEDIATE GOO DS AND 
PACKAGING MATERIALS  
81. The EU maintains that the scheme at issue amounts to a prohibited subsidy under Article 
3.1(a) of the SCM Agreement. Since the reasons alleged by Brazil with respect to the RECAP and 
PEC programmes are identical, the EU incorporates in this section, mutatis mutandi , the claims 
under the RECAP programme. However, the EU makes some specific comments below.  
 
4.2.1.  The PEC programme provides subsidies in accordance with the 
definition under  Article 1.1 of the SCM Agreement  
82. The EU considers that the PEC programme provides a financial contribution to the accredited 
companies in the form of foregoing or not collecting revenue otherwise due in the sense of Article 
1.1(a)(1)(ii) of the SCM Ag reement.  
 
83. First, Brazil makes an artificial distinction between companies that do not tend to 
accumulate credits and, hence, "operate normally in the credit -debit system", on the one hand, 
and "credit accumulating companies", such as a PEC, on the othe r hand, "which are not similarly 
situated with regard to their tax burden". Brazil wrongly assumes that companies whose gross 
profit predominantly originates from products subject to taxation "can expect to offset regularly 
the totality of their credits in  the next month of production", whereas companies whose gross 
profits originate predominantly from products subject to low taxation or exempted, such as a PEC, 
structurally and increasingly accumulate credits tied up with the tax authority. Whether a compa ny 
can offset its tax credits in the next month of production depends on multiple factors such as its 
organization, profitability, economic activity, etc. In fact, for many companies, it may take more 
than a month between the purchase of inputs and the mak ing/selling of the final product 
incorporating those inputs.  
 
84. Second , Brazil also wrongly argues that in the case of predominantly exporting companies 
most taxes on inputs are not due as in principle they are incorporated into exempted final 
products,  and thus would have to be reimbursed. The logic of Brazil's taxation system in a non -
cumulative regime is that it decides to impose a cost of the companies purchasing the inputs (and WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
- B-26 - 
 
  having to advance taxes on the inputs) even if those amounts are compens ated (with no legal 
interest) later on. In other words, the "cost of money" is with the companies, not with the 
government. Thus, Brazil's argument is incorrect and entirely circular.  
 
85. Third, Brazil wrongly argues that the PEC programme, as well as the  other "special regimes" 
identified by Brazil in its first written submission, are an expression of a general rule of taxation 
and the proper tax regulation for certain types of companies and for a certain type of product. The 
common features of special re gimes are not tackling the phenomenon of credit accumulation. 
Rather, they target very specific sectors in an effort to boost their performance such as promoting 
exports of technology and IT services (REPES), boosting the competitiveness of the domestic 
aeronautic industry and substitute imports (RETAERO), achieving independency of defense 
(RETID), and incentivising the use of computers in schools (REICOMP).  
 
86. Fourth , the EU also disagrees with Brazil's perception that the EU's reasoning would impose 
an excessive burden on predominantly credit -accumulating companies and would ultimately lead 
to an additional cost for the government, which would have to pay interest on the amounts 
reimbursed to these companies. As explained before, Brazil could well tackl e the phenomenon of 
credit accumulation by foreseen a general rule which ensures that the tax credits/tax debits are 
even out quickly.  
 
87. Fifth, Brazil wrongly asserts that the PEC programme is an effective means to apply the 
destination principle refle cted in footnote 1 of the SCM Agreement, which further demonstrates 
that there is no revenue foregone otherwise due.  However, the EU does not take issue with the 
fact that under the PEC (or RECAP) programme exported products are not subject to indirect 
taxation; rather, the EU considers that the same exemption with respect to products sold locally 
amounts to a subsidy. Brazil then further makes incorrect economic assumptions to show that a 
predominantly exporting company would bear an additional burden of t he credits that could not be 
offset.  
 
88. Finally , Brazil wrongly argues that is no revenue foregone if the good is destined to the 
domestic market, since the full weight of the tax liabilities apply without any credits with which to 
offset them. The EU h as shown in its first written submission that, even if the same nominal 
amount is collected by the government, it does so at different moments, thereby improving the 
cash flow of the beneficiaries at the expense of the financial loss for the government whe n 
compared to the general regimes.  
 
89. With the same reasons stated in the context of the RECAP programme, the EU disagrees 
with Brazil 's arguments regarding Article 1(1)(b) of the SCM Agreement.  
 
4.2.2.  The PEC programme provides subsidies which are con tingent upon 
export performance  
90. With the same reasons stated in the context of the RECAP programme, the EU disagrees 
with Brazil that the criteria for the accreditation under the PEC programme (i.e. the 50% export 
requirement) do not constitute export contingency, but an objective threshold above which tax 
credits are accumulated.  
 
5. CONCLUSIONS  
91. In view of the foregoing, as well as the previous submissions made before in these 
proceedings, the EU requests the Panel to find that the measures at iss ue are inconsistent with the 
GATT 1994, the TRIMs Agreement and the SCM Agreement and to recommend that Brazil brings 
itself into compliance with its obligations under the covered agreements.  
 
 
 
 WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
- B-27 - 
 
 ANNEX B -3 
FIRST PART OF THE EX ECUTIVE SUMMARY OF T HE ARGUME NTS OF JAPAN  
I. EXECUTIVE SUMMARY OF JAPAN'S FIRST WRITTEN SUBMISSION  
1. This dispute is about a range of Brazilian tax policies that are structured and designed to tilt 
the competitive landscape in favor of domestic products through differential taxation, di fferential 
treatment, preferential subsidies, and other forms of discrimination on the basis of national origin. 
In particular, the measures at issue concern the tax incentive programmes for the automotive 
sector, the information and communication technolo gy (ICT) sector, and exporting companies.  
2. As for the automotive sector , INOVAR -AUTO reduces the tax burden associated with the 
IPI,1 a generally applicable value -added tax  (VAT), due on motor vehicles depending on criteria 
such as their origins and the lev els of local content . For information and communications 
technology (ICT) products, under a suite of measures (i.e. the Informatics Programme, PADIS,2 
PATVD,3 and the Digital Inclusion Programme), Brazil reduces or eliminates various taxes on goods 
includi ng the IPI, PIS/PASEP , COFINS , PIS/PASEP -Importação and COFINS -Importação 
contributions ,4 if such goods are produced domestically and/or contain a specific level of local 
content.  For goods for export – including capital goods, raw materials, intermediate goods, and 
packaging – RECAP5 and PEC6 suspend and/or eliminate applicable IPI, P IS/PASEP , COFINS , 
PIS/PASEP -Importação and COFINS -Importação taxes. All of these measures accord preferences 
to domestic products through tax reductions and exemptions and rel ated requirements.  
3. As discussed in greater detail below, these measures are inconsistent with core WTO 
obligations: Articles I:1 , III:2, III:4, and III:5 of the GATT 1994, Article 2.1 of the 
TRIMs  Agreement, and Articles 3.1(a) and (b) and 3.2 of the SCM A greement.  
4. This dispute is not about Brazil's ability to adopt policies to promote development, support 
domestic research and development (R&D), and/or develop human capital. Japan fully appreciates 
that all WTO Members, including Brazil, have the prerogati ve to pursue such objectives, provided 
that they are WTO -consistent. As such, w hat Japan is challenging is not Brazil's policy itself, but 
Brazil's choice of measures for that policy. Japan also s tresses that it is the overall structure and 
design of the m easures at issue in this dispute which tend to shed the most light on the 
WTO-inconsistencies at issue, rather than the sometimes arcane details of Brazil's tax policies.  
A. Overview of Brazil's Taxation System and Industrial Policy  
5. Brazil is known for it s complex tax schemes. In particular, as relevant in this dispute, Brazil 
imposes a number of indirect taxes on importation and domestic sale of goods. Among such 
indirect taxes are (i) the IPI, which is similar to a VAT and taxable upon importation and do mestic 
sale of industrialized goods; (ii) social contributions known as PIS/PASEP and COFINS, and (iii) the 
import -focused variants of (ii), i.e. PIS/PASEP -Importação and COFINS -Importação. All of these 
are federal taxes. In addition, one of the taxes impo sed at the sub -federal level is the value -added 
tax on goods and services known as Imposto sobre Circulação de Mercadoria e Serviços (ICMS). 
These various indirect taxes result in a significant increase in the prices of domestic and imported 
goods faced by  consumers in the marketplace. Furthermore, imported goods incur additional costs 
including import duties (Impostos sobre a Importação, or II) and customs clearance fees. The 
                                                
1 I.e. Tax on Industrialized Products ( Imposto sobre Produtos Industrializados ). 
2 I.e. the Programme of Incentives for the Semiconductors Sector ( Programa de Incentivos ao Setor de 
Semicondutores ). 
3 I.e. the Programme of Support to the Technological Development of the Industry of Digital Equipment 
(Programa de Apoio ao Desenvolvimento T ecnológico da Indústria de Equipamentos para TV Digital ). 
4 I.e. the Programa de Integração Social  (Social Integration Programme), Programa de Formação do 
Patrimônio do Servidor Público  (i.e. Civil Service Asset Formation Programme) and Contribuição para o  
Financiamento da Seguridade Social  (Contribution to Social Security Financing).  
5 I.e. the Special Regime for the Purchase of Capital Goods for Exporting Enterprises ( Regime Especial 
de Aquisição de Bens de Capital para Empresas Exportadoras ). 
6 I.e. the Regime for Preponderantly Exporting Companies.  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
- B-28 - 
 
 measures at issue in this dispute primarily concern the selective reduction of, a nd/or exemption 
from, the IPI, PIS/PASEP, COFINS, PIS/PASEP -Importação and COFINS -Importação.  
6. The IPI tax  is an indirect tax applied to all "industrialized" products, i.e. those products that 
have been modified through a production process. The IPI operate s as a VAT on manufactured 
products. Specifically, at each stage of the production process of a good, the manufacturer's IPI 
liability will be equal to the difference between the sales price to the downstream producer or 
consumer, and the purchase price of  the inputs (including if the input s are imported). In this 
sense, the IPI is described as "non -cumulative" – i.e. the tax base is the value added by each 
individual manufacturer, rather than the cumulative value added by all producers.  
7. The PIS and PASEP a re taxes levied monthly on the gross revenue of businesses, and 
described as "social contributions". The PIS/PASEP contributions are collected to finance public 
funds for insurance for unemployment, child benefit and allowance for low paid workers. The 
COFINS is a tax for social security financing applied to the monthly invoicing. As individual sales of 
goods add to business es' gross revenue, t he PIS/PASEP and COFINS , like the IPI, operate as 
indirect taxes on sales of goods. The PIS/PASEP and COFINS are du e either under a cumulative 
regime or a non -cumulative regime. The cumulative regime applies for certain types of companies 
(e.g. financial institutions and companies that elect the presumed profit regime for income tax 
purposes), as well as certain types of revenues (e.g. income from the sale of newspapers, 
telecommunication services, public transportation, education services, and civil construction). 
Otherwise the non -cumulative regime applies. The cumulative and non -cumulative regimes each 
have their own  specific assessment rates.  
8. PIS/PASEP -Importação and COFINS -Importação are the import -focused variants of 
PIS/PASEP and COFINS (and thus they exist in both cumulative and non -cumulative varieties). As 
such, PIS/PASEP -Importação and COFINS -Importação qualif y as " internal taxes or other internal 
charges " within the meaning of Article III:2. These contributions are levied upon individual import 
transactions of goods and services. The taxable base is the customs value.  
9. The non -cumulative taxes described above – i.e. the IPI, the non -cumulative version of 
PIS/PASEP and COFINS, and PIS/PASEP -Importação and COFINS -Importação – operate through a 
system of tax credits. When a manufacturer purchases or imports an input, it pays the applicable 
non-cumulative tax to th e Brazilian government on the basis of the value of the input, and 
receives a credit of equal value. When the manufacturer then sells its finished product to a 
downstream producer or consumer, the manufacturer accrues a liability based on the value of the 
finished product. The net amount of tax due is the liability arising from the sale of the finished 
product, minus the credit arising from the purchase of the inputs.  
B. Legal Standards  
10. Japan's claims in this dispute are based on several provisions in the c overed Agreements: 
Article III:2 of the GATT 1994; Article III:4 of the GATT 1994; Article III:5 of the GATT 1994; 
Article 2.1 of the TRIMS Agreement , separately and in conjunction with Article 2.2 and paragraph 
1(a) of the Agreement ’s Illustrative List ; Articles 3.1(b) and 3.2 of the SCM Agreement; and Article 
I:1 of the GATT 1994. The common thread among all of these claims is discrimination that is 
inherent in all of the challenged Brazilian measures by according preferences to domestic products 
through tax reductions, exemptions, and related requirements.  
C. INOVAR -AUTO Is Inconsistent with Brazil's WTO -Legal Obligations  
11. INOVAR -AUTO is a tax incentive programme in the automotive sector introduced in 2012 as 
part of a broader Brasil Maior industrial poli cy. Brazil argues that INOVAR -AUTO was introduced in 
order to achieve a variety of policy objectives including qualitative improvement of vehicles, 
technological and safety innovation and energy efficiency. In reality, however, INOVAR -AUTO 
incorporates, bo th explicitly and by its structure and design, and irrespective of Brazil's subjective 
intent, a number of origin -based distinctions between imported and domestic products – including 
both motor vehicles as well as the parts and components that go into the m, and the equipment 
used in automotive manufacturing. In essence, INOVAR -AUTO is a mix of preferential tax policies 
for motor vehicles, as well as local content requirements that reach all the way to so -called Tier 3 
auto inputs, or lower -level auto parts , components, and sub -components.  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
- B-29 - 
 
 12. Japan challenges the specific features of INOVAR -AUTO, a tax incentive programme which 
imposes a generally applicable 30 percentage point increase in the IPI tax rates for motor vehicles, 
while also allowing for the possi bility of a reduction or exemption from this 30 -point increase. 
There are two ways to achieve a reduction/exemption  of the IPI due on motor vehicles : (i) 
offsetting the IPI with the use of "presumed" IPI tax credits, and (ii) IPI tax rate reduction without  
the use of such credits .  
13. In order to be eligible for item (i) above, companies must become accredited. They can do 
this by satisfying a particular combination of the following criteria: perform a certain minimum 
number of manufacturing activities, direct ly or through third parties, within Brazil for at least 80% 
of vehicles that are produced; spend a certain minimum percentage of gross revenues on R&D in 
Brazil; spend a certain minimum percentage of gross revenues in Brazil on engineering, basic 
industria l technology and the capability of corresponding suppliers; and/or have a certain number 
of models of vehicles certified by INMETRO, Brazil's vehicular tagging programme. Current 
manufacturers of domestic motor vehicles in Brazil, as well as companies that  have committed to 
establish or expand manufacturing operations in Brazil, are required to satisfy different and less 
onerous combinations of these criteria than companies that manufacture motor vehicles outside 
Brazil and companies that market imported mo tor vehicles in Brazil.  
14. Once the accreditation requirements are fulfilled, a company may earn "presumed" IPI tax 
credits, which can be used to offset an amount of IPI tax corresponding to up to 30% of the 
taxable base (the sales price) in domestic transac tions. The accrual of "presumed" IPI tax credits 
is linked to the level of expenditure made "in the Country" ( no País ) on certain items, including 
strategic inputs ( insumos estratégicos ) and tooling ( ferramentaria ). This "in the Country" 
requirement is con strued to mean that both the buyer and the seller are located in Brazil. 
Therefore, expenditures on imported strategic inputs and tooling cannot accrue IPI tax credits, 
because the seller (exporter) is not located in Brazil. In addition , under Implementing  Order 
257/2014, IPI tax credits arising from  expenditures on strategic inputs and tooling are reduced if 
they do not contain specified levels of local content . 
15. INOVAR -AUTO also provides for item (ii) above – i.e. IPI tax reductions without the use of 
IPI tax credits available under certain circumstances. Under INOVAR -AUTO, motor vehicles 
produced in other Mercosur countries and/or Mexico, if imported by companies accredited under 
Article 2, item I or item III of Decree 7,819 (i.e. domestic manufacturers or  investors), receive an 
automatic 30 percentage point reduction in the applicable IPI rate, effectively eliminating the 
higher IPI rate introduced by INOVAR -AUTO for motor vehicles in general. In addition to the tax 
reduction explained above, motor vehicle s imported from Uruguay (which is also a Mercosur 
member) are subject to even more favorable treatment by extending the automatic IPI rate 
reduction to motor vehicles from Uruguay, regardless of accreditation. Moreover, motor vehicles 
from any member state , including one outside the Mercosur/Mexico group, may also be able to 
benefit from a 30 percentage point IPI tax rate reduction, if imported by an accredited company.  
16. In light of the features described above, INOVAR -AUTO discriminates on the basis of ori gin 
with respect to both motor vehicles as well as automotive components and manufacturing 
equipment. Thus, regardless of the stated objectives of INOVAR -AUTO, or the Brazilian 
government's subjective intent, INOVAR -AUTO distorts the equality of competitiv e conditions 
between imported and domestic products, and promotes precisely the type of protection to 
domestic production as mentioned by the Appellate Body. Through a complex web of 
requirements, INOVAR -AUTO protects the domestic motor vehicle and automot ive components 
industry, by making it more difficult for production, importation, purchase and/or use of foreign 
motor vehicles and automotive  components to result in reduction in the IPI imposed on vehicles. 
Indeed, this is precisely how the measure is st ructured and designed to operate.  
17. The protectionist aspects of INOVAR -AUTO are inconsistent with WTO rules in several 
different ways:  
(i) As internal taxes on imported motor vehicles in excess of those applied to like 
domestic products, in violation of th e first sentence of Article III:2 of the 
GATT  1994;  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
- B-30 - 
 
 (ii) As internal taxes applied so as to afford protection to domestic production, in 
violation of the second sentence of Article III:2 of the GATT 1994;  
(iii) As less favourable treatment for imported mo tor vehicles and automotive 
parts than like domestic products, in violation of Article III:4 of the 
GATT  1994;  
(iv) As an internal quantitative regulation relating to the mixture, processing or 
use of automotive components in specified amounts or proporti ons, which 
requires that specified amounts or proportion be supplied from domestic 
sources , and which is applied so as to afford protection to domestic 
production , in violation of Article III:5 of the GATT 1994;  
(v) As a trade -related investment measure th at is inconsistent with the above -
listed provisions of the GATT 1994, in violation of Article 2.1 of the 
TRIMs  Agreement , separately and in conjunction with Article 2.2 and 
paragraph 1(a) of the Agreement ’s Illustrative List ; 
(vi) As a tax subsidy to domes tic motor vehicle producers to use domestic over 
imported automotive components, in violation of Articles 3.1(b) and 3.2 of the 
SCM Agreement; and  
(vii) As a measure that denies motor vehicles originating in most WTO Members 
the same advantages as those gr anted to motor vehicles originating in 
Mercosur and Mexico (which are Brazil's close trading partners), in violation of 
Article I:1 of the GATT 1994.  
D. The ICT Measures are Inconsistent with Brazil's WTO -Legal Obligations  
18. Four ICT -related programmes are b eing challenged in this dispute: the Informatics 
Programme, PADIS (the Support Program me for the Technological Development of the 
Semiconductor Industry), PATVD (the Support Program me for the Technological Development of 
the Digital TV Equipment Industry),  and the Digital Inclusion Programme (collectively, the 
"ICT Measures").  
19. Brazil's ICT policies have their roots in one of the measures subject to this dispute: the tax 
reduction programme under the Informatics Law , or the Informatics Programme . The Informa tics 
Programme  reduces or eliminates the applicable IPI tax  due on domestic ICT products on  certain 
condition s. Specifically , to claim benefits arising under the Informatics Programme, companies that 
manufacture covered products must obtain a product -specific accreditation ( habilitação ) from the 
Brazilian government, which involves demonstrating that they produce the relevant product in 
Brazil in accordance with the terms of the particular product -specific Processo Produtivo B ásico 
("basic production process") , or PPB. In turn, PPBs identify particular intermediate manufacturing 
steps that must take place in Brazil in order for companies to be accredited. Since 1991, the 
Informatics Law has been amended and expanded so that it  now affects a large number of product 
categories even beyond core ICT equipment.  
20. PADIS  is a tax incentive programme for semiconductor electronic devices, information 
displays, and supplies and dedicated equipment for those products. PADIS eliminates , inter alia , 
the IPI, PIS/PASEP, COFINS  payments otherwise due on the gross revenue from sales of those 
products . As with the Informatics Programme, in order to benefit under PADIS, companies must 
obtain product -specific accreditations from the Brazilian gover nment. Accreditation requires the 
performance of certain manufacturing steps in Brazil, which are specified either in Brazilian laws 
and regulations (i.e.  in the case of semiconductor electronic devices and displays) , or else in PPBs 
(i.e. in the case of s upplies and dedicated equipment).  
21. PATVD  is a tax incentive programme for the digital TV equipment industry, the basic 
structure of which is very similar to that of PADIS. PATVD eliminates , inter alia , the IPI, PIS/PASEP  
and COFINS otherwise due on the gros s revenue from sales of radio frequency signal transmitting 
equipment for digital televisions. As with PADIS, companies must obtain product -specific 
accreditations from the Brazilian government in order to benefit from PATVD. This requires that WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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 companies p roduce covered products in accordance with the requirements of the relevant PPB , or 
meet alternative criteria . 
22. The Digital Inclusion Programme  eliminates the PIS/PASEP and COFINS contributions 
otherwise due on the gross revenue from sales of certain consum er electronic products, such as 
computers, routers, smartphones and other hardware. The products covered by the Digital 
Inclusion Programme are also covered by the Informatics Programme, and thus the two 
complement each other: the Informatics Programme reduces or eliminates the applicable IPI, 
while the Digital Inclusion Programme eliminates the applicable PIS/PASEP and COFINS.  
23. Thus, the ICT Measures at issue in this dispute have several similar features  that make them 
problematic from a WTO perspective : they involve product -specific exemptions from generally 
applicable taxes due on products; and they all make the exemptions conditional on the 
performance of certain intermediate manufacturing processes in Brazil (which are specified either 
in PPBs or other legal instruments). As such, imported products cannot benefit from tax 
exemptions/reductions under these programmes, resulting in origin -based distinctions between 
imported and domestic products. In addition, these programmes, either explicitly or through the 
manufacturing steps requirements, require the use of domestic over imported inputs.  
24. Accordingly, the Informatics Programme, PADIS, PATVD, and the Digital Inclusion 
Programme, and each of the legal instruments through which they are established and 
administered – both individually and collectively – in light of their structure and design, are 
inconsistent with Brazil's obligations under the following provisions of  the GATT 1994, the 
TRIMs  Agreement and the SCM Agreemen t: 
(i) Article III:2 of the GATT 199 4, because imported ICT, automation and related 
products are subject, directly or indirectly, to internal tax burdens in excess of 
those applied, directly or indirectly, to like domestic products; and because 
imported ICT, automation and related products a nd directly competitive or 
substitutable products that are domestically produced are taxed in a manner 
that affords protection to domestic production.  
(ii) Article III:4 of the GATT 1994, because the conditions and requirements to 
benefit from tax advantag es under the respective programmes  result in less 
favourable treatment for imported products than that accorded to like 
domestic products; and because the requirement to use local inputs and 
equipment in the production of ICT, automation and related produc ts results in 
less favourable treatment for imported inputs and equipment than that 
accorded to like domestic products.  
(iii) Article III:5 of the GATT 1994, because the criteria and/or requirements to 
benefit from tax advantages under the respective progr ammes, including 
(inter alia ) the requirement to perform certain manufacturing steps in Brazil, 
the requirement to use specific kinds of inputs  and/or the minimum levels of 
local content or national value added, amount to internal quantitative 
regulations relating to the mixture, processing or use of products in specified 
amounts or proportions, which require that a specified amount or proportion 
of the final product be supplied from domestic sources; and because the said 
criteria and/or requirements also a mount to internal quantitative regulations 
that are applied so as to afford protection to domestic production.  
(iv) Article 2.1 of the TRIMs Agreement, separately and in conjunction with 
Article  2.2 and paragraph 1(a) of the Illustrative List in the Annex to the 
TRIMs Agreement, because the programme and related legal instruments are 
TRIMs that are inconsistent with Article III of the GATT 1994; and because 
they require the purchase or use of products of domestic origin or  from 
domestic sources in order to obtain tax advantages.  
(v) Articles 3.1(b) and 3.2 of the SCM Agreement, because the programmes and 
related legal instruments are and/or confer subsidies within the meaning of WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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 Article 1.1 of the SCM Agreement that are contingent upon the use of 
domestic ov er imported products . 
E. RECAP and PEC Are Export Subsidies  
25. In recent years, Brazil has established two programmes that confer benefits to 
"predominantly exporting companies" in the form of a suspension, and ultimately an exemption, of 
taxes otherwise due in relation to their inputs and capital goods.  
26. First, under the RECAP programme ( established by Law 11,196 /2005), companies that are 
accredited as "predominantly exporting companies" are entitled to purchase (i.e. purchase 
domestically or import) capital g oods (machinery, tools or other equipment) free of PIS/PASEP, 
COFINS, PIS/PASEP -Importação  or COFINS -Importação (i.e. these taxes are suspended and, 
generally, eventually exempted) – whereas in the absence of RECAP , the companies would 
generally be respons ible for paying each of those taxes immediately . "Predominantly exporting 
companies" is defined to mean that the companies meet certain levels of export performance – 
currently, 50% of gross turnover.  
27. Second, under PEC (established by Law 10,637/2002 and L aw 10,865/2004), companies 
that are accredited as "predominantly exporting companies" are entitled to acquire (i.e. purchase 
domestically or import) raw materials, intermediate goods and packaging materials without having 
to pay IPI, PIS/PASEP, COFINS, PIS /PASEP -Importação  or COFINS -Importação  (i.e.these taxes are 
suspended and, generally, eventually exempted) – whereas i n the absence of PEC, the companies 
would generally be responsible for paying each of those taxes immediately . In the absence of PEC, 
the company would generally be responsible for paying each of those taxes immediately. As with 
RECAP, "Predominantly exporting companies" is defined to mean that the companies meet certain 
levels of export performance – currently, 50% of gross turnover.  
28. Thus,  both schemes have a similar design and structure, including because they provide 
certain tax -related advantages to companies accredited as "predominantly exporting companies". 
However, RECAP and PEC provide tax -related advantages with respect to different  products: 
RECAP pertains to new capital goods , and PEC pertains to raw materials, intermediate goods and 
packaging materials. In addition, another difference between the two schemes is that PEC 
suspends  IPI for covered products, whereas RECAP does not cov er IPI.  
29. In addition, neither RECAP nor PEC requires that the specific goods eligible for 
suspensions/exemptions be consumed in the production of exported products. Rather, these 
programmes grant suspensions/exemptions for goods irrespective of  whether the y are exported  or 
destined for the domestic market  – provided that the companies that purchase the relevant goods 
are accredited, which (as noted above) requires that they be deemed "predominantly exporting 
companies" , and provided that  other  applicable re quirements are met.. 
30. Accordingly, both RECAP and PEC are subsidies contingent on export performance within the 
meaning of the SCM Agreement, and thus are inconsistent with Brazil's obligations under Article s 
3.1(a) and 3.2 of the SCM Agreement.  
F. Conclus ion 
31. The measures challenged in this dispute discriminate against Japanese and other foreign 
motor vehicles, automotive components and equipment, and ICT products. They also confer 
prohibited export subsidies. They place Japanese and other foreign products at a significant and 
cross-cutting competitive disadvantage in the marketplace. In addition, INOVAR -AUTO in particular 
denies Japanese products the MFN treatment to which they are entitled.  
32. Accordingly, Japan requests that the Panel find that INOVAR -AUTO, the ICT Measures, and 
RECAP and PEC are inconsistent with the provisions of the covered agreements listed above and in 
Japan's panel request.  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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 II. EXECUTIVE SUMMARY OF JAPAN'S OPENING STATEMENT AT THE FIRST MEETING OF THE PANEL 
A. Introduction  
33. This dispute involves three categories of measures. The first is INOVAR -AUTO, w hich 
provides a tax reduction for motor vehicles manufactured in Brazil with the use of strategic inputs 
and tooling of domestic origin, whereas imported motor vehicles are not eligible for the reduction 
except under very limited circumstances. In addition, INOVAR -AUTO completely exempts imported 
motor vehicles from the 30 percentage point IPI tax rate if the vehicles originate in other 
MERCOSUR countries or Mexico.  
34. The second set of measures  are the ICT Measures. The ICT Measures are similar to INOVAR -
AUTO in the sense that they reduce  or exempt  applicable IPI taxes and/or other  internal taxes 
otherwise due on the sale of covered products, provided that these products are manufactured in 
Brazil with a sufficient number of  manufacturing steps also performed  in Brazil, and provided that 
they incorporate domestic inputs , in accordance with PPBs and other legal instruments . 
35. The third set of measures consists of RECAP and PEC, two programmes that c onfer benefits 
to "predominantly exporting companies" in the form of a suspension, and ultimately an exemption, 
of internal taxes otherwise due in relation to their inputs and capital goods. These programmes 
explicitly condition the benefits upon export pe rformance, because "predominantly exporting 
companies" is currently defined as companies that export at least 50% of gross turnover.  
36. Japan would like to note that  in its first written submission,  Brazil essentially does  not 
dispute the basic  facts describe d by Japan . In particular , Brazil appears to accept the accuracy of 
Japan's description of the objective features and operation of the measures, including the benefits 
that they confer, the conditions for receiving the benefits, and the identification of t he legal 
instruments containing this information. As such, the core issue in this dispute appears to  be 
whether or not, based on the undisputed facts, the challenged measures violate the 
WTO Agreement in the ways identified in Japan's panel request and first written submission, 
including through origin -based discrimination, contingency upon the use of domestic over imported 
inputs (or local content requirements),  and contingency upon export performance.  
37. Japan will address four specific legal issues that sho uld inform the Panel's examination of all 
the measures at issue in this dispute.  
B. Brazil's Characterization of the Challenged Measures' Policy Objectives is 
Without Merit  
38. Brazil characterizes INOVAR -AUTO, the ICT Measures, RECAP and PEC as all being int ended 
for legitimate policy objectives such as innovation, the promotion of research and development, 
safety, protection of the environment and tax administration , and states that "[t]here is no 
masked intent behind them ." However, Brazil's characterizatio n is unavailing for a number of 
reasons.  
39. First, Japan fully agrees that WTO Members have the right to pursue a range of policy goals 
including those referred to by Brazil. Japan also recognizes governments' discretion to adopt 
industrial measures in order to achieve such policy goals. However, Members are at the same time 
obliged to pursue their policy objectives in a manner consistent with their obligations under the 
WTO rules, which the Members themselves undertook. In other words, a WTO -inconsistent 
meas ure cannot simply be excused because it was intended for a legitimate purpose. Rather, as 
prior WTO jurisprudence has made abundantly clear , what matters are the objective features  of 
the relevant measures, including the text of any relevant legal instrume nts, as well as the "design, 
the architecture, and the revealing structure of a measure".  
40. Second, Brazil's characterizations of the measures' purposes in most instances are no more 
than mere allegations of Brazil's subjective intent which lack any evidenti ary support. In fact, the 
policy objectives identified by Brazil are contradicted by, or otherwise cannot explain, the objective 
features and operation of the measures that Japan is taking issue with in this dispute.  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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 41. Starting with INOVAR -AUTO, Brazil chara cterizes INOVAR -AUTO as a "specific tax regime for 
the automotive sector in Brazil aiming at supporting technological development, innovation, safety, 
environmental protection, energy efficiency and improvement of the quality of cars, trucks, buses 
and aut o parts". Brazil also asserts that the tax reduction is granted to offset the costs companies 
incur in order to satisfy various requirements under INOVAR -AUTO, including the R&D investment 
requirement. On these bases, Brazil submits that INOVAR -AUTO "as a whole" does not violate 
WTO national treatment obligations.  
42. Brazil's description of INOVAR -AUTO's policy objectives is misplaced, because Japan is not 
challenging INOVAR -AUTO on the basis that each aspect of the measure is WTO -inconsistent. Nor 
does Japan contend that INOVAR -AUTO's sole purpose is to distort trade. Rather, Japan challenges 
INOVAR -AUTO because it has certain specific features that are WTO -inconsistent, i.e. the 
differential treatment of imported and domestic products with regard to accredita tion, as well as 
the calculation and use of IPI tax credits, and origin -based preferences for motor vehicles 
originating in other MERCOSUR countries and Mexico.  
43. This discriminatory treatment cannot be explained or justified by any of the objectives 
allege d by Brazil. Whereas Brazil submits that INOVAR -AUTO is intended to achieve legitimate 
policy goals , it provides no explanation as to specifically how each type of discriminatory treatment 
between imported and domestic products under INOVAR -AUTO serve s these objectives. For 
example , the up -to-30 percentage point reduction in IPI taxes on motor vehicles available under 
INOVAR -AUTO accrues through expenditures in Brazil on "strategic inputs and tooling" – i.e. 
domestic motor vehicle components parts and manuf acturing equipment. However, t he definitions 
of these terms lack any reference to energy efficiency or vehicle safety ,7 while they contain certain 
criteria relating to the origins of these products . As such, there is no basis on which to characterize 
this aspect of INOVAR -AUTO as serving the objectives alleged by Brazil , such as energy efficiency 
and vehicle safety.  
44. In fact, Brazil even appears to admit that this aspect of INOVAR -AUTO is not directly related 
to the policy goals it asserts. Specifically, Bra zil does not dispute the differential treatment of 
domestic and imported strategic inputs and tooling with respect to calculation and use of 
presumed IPI credits, but argues that "this potential difference is . . . justified under paragraphs 
(b) and (g) of  Article XX" because it "ensure[s] the effective supply and development of a domestic 
auto parts industry able to provide environmentally friendly and energy efficient auto parts . . .". 
Essentially, Brazil's argument is that environmental goals require a strong domestic industry, so 
any measure that strengthens the domestic industry is justified – even if it is plainly 
discriminatory. Obviously this falls short of the means -end connection required under items (b) 
and (g) of Article XX. Moreover, Brazil has  a range of reasonably available alternatives which 
would be less trade -restrictive than INOVAR -AUTO. INOVAR -AUTO also fails to meet the 
requirements of the chapeau of Article XX. Accordingly, even if Brazil had established that 
INOVAR -AUTO is provisionall y justified under Article XX – which it has not done – Brazil's 
Article  XX defence s would still fail.  
45. With respect to the ICT Measures, Brazil argues that the Informatics Programme is designed 
to "promote industrialization, technological innovation and the  development of a skilled 
workforce." With respect to PADIS, Brazil asserts that the purpose is to "ensure a minimum 
productive capacity of semiconductor consistent with the protection of basic strategic interests[]". 
With respect to PATVD, Brazil asserts that it "guarantee[s] access to culture, education and 
information through digital television in Brazil". Brazil also invokes defence under Article XX(a) in 
this regard. In addition, Brazil asserts that the Digital Inclusion Programme is "aimed at increasi ng 
the access of the Brazilian population to computers and information technology products". Brazil 
also raises an "offsetting" argument, stating that the benefits under the ICT Measures are 
designed to subsidi se investments made in R&D and the production chain.  
46. Brazil again fails to address the core issue. As explained in Japan's first written submission, 
a key aspect of all four ICT Measures is their incorporation of domestic production requirements 
with respect to both final and intermediate products, vi a PPBs and other legal instruments. These 
requirements necessarily result in different tax rates for domestic and imported ICT products. 
However, the policy objectives identified by Brazil cannot explain these differences, leaving a 
number of questions una nswered. Brazil's "offsetting " argument is meritless because there is no 
                                                
7 Implementing Order 257/2014, Exhibit JE -158, Articles 1 and 2.  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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 evidence of any quantitative correspondence between the actual amount of investments made to 
meet the requirements of the ICT Measures and the amount of tax subsidies conferred .  
47. Moreover, with respect to PATVD in particular (i.e. the only ICT Measure for which Brazil has 
invoked Article XX): there is a range of less trade -restrictive measures that are reasonably 
available to achieve the programme's stated objectives. PATVD also falls short of the means -end 
connection required under item (a) of Article XX, let alone the requirement  of the chapeau. 
Accordingly, even if Brazil had established that PATVD is provisionally justified under Article XX – 
which it has not done – Brazil's Article  XX defense would still fail.  
48. Turning to RECAP and PEC, which are tax programmes for "predominantly exporting 
companies", Brazil asserts that these measures are intended to address a problem of tax credit 
accumulation, and not subsidies contingent upon ex port performance. In particular, Brazil 
contends that predominantly exporting companies "tend" to accumulate tax credits, and recovering 
these tax credits requires "submitting a great number of tax reimbursement requests" which 
imposes an administrative bu rden on Brazil's tax authorities.  
49. However, contrary to what Brazil contends, RECAP and PEC reward export performance 
itself, rather than the accumulation of IPI credits. The relevant legal texts could not be more 
straightforward in this regard: for example , a category of beneficiaries of RECAP is defined as "a 
legal person that (a) had gross revenue from export sales that is 50% or greater of total gross 
revenue from sales of goods and services . . . and (b) commits to maintain this 50% or greater 
export pe rcentage . . .". Similarly, the beneficiaries of PEC are defined as "persons whose gross 
revenue derived from exports . . . exceeded 50% of their total gross revenue from the sales of 
goods and services . . ." or "a legal person . . . when its gross revenu es from export . . . was equal 
to or greater than 50% of its to total gross revenue from the sale of goods and services . . .". 
Furthermore, the advantages under RECAP and PEC do not depend on the actual credit/debit 
balance of the company in the sense tha t but for those measures, beneficiary companies always or 
necessarily would have accumulated tax credits. Finally, Brazil's contention regarding  the 
measures' purpose, even in terms of its subjective intent, is also undermined by evidence.  
C. Irrelevance o f Market Data  
50. On the basis of market data, Brazil argues that the "in excess of" and "less favourable 
treatment" requirements of Japan's Article III claims are not met. In particular, with respect to 
INOVAR -AUTO, Brazil asserts that INOVAR -AUTO"  has impose d no adverse effects on the 
competitive opportunities for imported products". Rather, according to Brazil, after the introduction 
of INOVAR -AUTO "the deficit in Brazil's balance of trade concerning the sector has continuously 
increased."  
51. As an initial matt er, it is not clear how Brazil has obtained the alleged "market data", 
because Brazil does not specify their sources. More importantly, in Japan's view, Brazil's 
arguments are legally irrelevant to the matter before the Panel. As the Appellate Body has 
explained, an analysis under Article III of the GATT 1994 should be "grounded in close scrutiny" of 
the "fundamental thrust and effect of the measure itself", and "need not be based on the actual 
effects of the contested measure in the marketplace." Moreover,  the Appellate Body in Japan – 
Alcoholic Beverages II  and Korea – Alcoholic Beverages  further stated that "it is irrelevant [to 
Article III inconsistency] that the 'trade effects' of the tax differential between imported and 
domestic products, as reflected  in the volumes of imports, are insignificant or even non -existent."  
52. In addition, and in any event, Brazil's "market data" do not even establish the empirical 
proposition that they purport to show – i.e. that the challenged measures have not put imports a t 
a disadvantage. Brazil does not address the counterfactual level of imports in the absence of the 
challenged measures.  
D. The Scope of Article III of the GATT 1994  
53. As for the third legal issue, Brazil argu es that INOVAR -AUTO and the ICT Measures  fall 
outside the scope of Article III , because they relate to production, or "pre-market " stages, and not 
to products . In particular, Brazil argues that INOVAR -AUTO's accreditation requirements, including WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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 the minimum production step requirement, do not result in a ny inconsistency with Article III  
because they are supposedly "pre -market requirements that do not affect products".  
54. These arguments rely on a false dichotomy between measures that affect goods at the 
so-called "pre -market" stage, i.e. those that pertain t o production and intermediate goods, and, on 
the other hand, those that affect downstream goods directly. In fact, there is no reference 
whatsoever in the texts of Article III, including paragraphs 2, 4 and 5, to the alleged distinctions 
between "pre -marke t" and "post -market" stages. Nor have any WTO panels or the Appellate Body 
ever relied on such distinctions. On the contrary, the text of Article III clearly indicates that the 
scope of this Article is broad enough to cover both "pre -market" and "post -market" stages, as well 
as any other stages. This is evident with respect to Article III:2, first sentence, which covers 
excess taxation to which imported products are subject, directly or indirectly.  
55. Similarly, Article III:4 covers "all laws, regulations and  requirements affecting their internal 
sale, offering for sale, purchase, transportation, distribution or use." As the Appellate Body has 
stated, the word "affecting" has a "'broad scope of application'". Thus, any measure that affects 
the internal sale, o ffering for sale, purchase, transportation, distribution or use of products, in any 
manner whatsoever "may fall within the scope of Article III:4. In addition, Article III:5 prohibits 
certain types of "internal quantitative regulation relating to the mixtu re, processing or use of 
products", which evidently covers measures that affect "pre -market" stages.  
56. Turning to Article III:8(b) of the GATT 1994, which Brazil also invokes, this provision cannot 
be construed to justify origin -based discrimination that has  been found to be inconsistent with 
other provisions of Article III, including paragraphs 2, 4 and 5. As explained by the panel in 
Indonesia – Autos , "the purpose of Article III:8(b) is to confirm that subsidies to producers do not 
violate Article III, so long as they do not have any component that introduces discrimination 
between imported and domestic products".  
57. In addition, the tax advantages under INOVAR -AUTO and the ICT Measures do not constitute 
"the payment of subsidies exclusively to domestic produ cers[]" as set forth in Article  III:8(b). In 
Canada – Periodicals , the Appellate Body found that the phrase "the payment of subsidies" only 
covers those subsidies that "involve[] the expenditure of revenue by a government[]", as opposed 
to e.g. revenue for egone that is otherwise due. As such, subsidies in the form of tax reductions or 
exemptions, as is the case with INOVAR -AUTO and the ICT Measures, cannot be justified under 
Article III:8(b).  
E. Inapplicability of the Enabling Clause  
58. The fourth issue is the  applicability of the Enabling Clause. In its first written submission, 
Japan established that INOVAR -AUTO is inconsistent with Article I:1 of the GATT 1994  because it 
provides "advantage[s]" to motor vehicles originating in other MERCOSUR members and Mexi co, 
which are not available to motor vehicles originating elsewhere. Brazil does not deny that INOVAR -
AUTO favours motor vehicles from other MERCOSUR countries and Mexico, but instead argues that 
such discrimination is permitted under paragraph 2(b) of the  Enabling Clause.  
59. However, Brazil's argument fails. First, the Enabling Clause sets forth special treatment for 
developing Members by granting exceptions to the MFN principle , which is  one of the pillars of the 
WTO Agreement . In particular, paragraph 4 of  the Enabling Clause explicitly requires the  Member  
taking an action under the Enabling Clause to notify , ex ante, other Members  and furnish them 
with all relevant  information , and to afford adequate opportunity for prompt consultations at the 
request of a ny interested Member.  Second, while Brazil argues that the differential treatment 
under INOVAR -AUTO falls within "non -tariff measures" set out in paragraph 2(b) of the Enabling 
Clause, paragraph 2(b) does not endorse exceptions to the MFN principle with re spect to "non -
tariff measures" themselves, as Brazil appears to understand.  Instead , paragraph 2(b) pertains to 
differential and more favourable treatment with respect to " the provisions of the General 
Agreement concerning  non-tariff measures governed by t he provisions of instruments 
multilaterally negotiated under the auspices of the GATT ".8 However, Brazil does not even assert, 
much less establish, that INOVAR -AUTO provides for an exception with respect to "the  provisions 
of the General Agreement . . . go verned by the provisions of instruments multilaterally negotiated 
under the auspices of the GATT".  In addition, while Brazil briefly refers to  paragraph 2(c) of the 
                                                
8 Emphasis added.  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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 Enabling Clause, it fails to  put forward any argument  to substantiate its defence.  Third, t he term 
"non-tariff measures" should not be interpreted as including anything  that does not relate to 
tariffs; rather, "non -tariff measures" should be construed to refer specifically to non -tariff trade 
measures, such as direct import/export restrictions, and not to behind -the-border measures, such 
as internal tax reductions.  
F. Conclusion  
60. The common denominator of all the measures in this dispute is discrimination. Brazil's 
measures upset the competitive balance between imported and domestic products, to t he 
detriment of the former. Japan has explained and documented these instances of discrimination in 
painstaking detail, and Brazil does not dispute the basic facts. Rather, Brazil in its first written 
submission attempts to persuade the Panel that the  meas ures are all intended for legitimate policy 
objectives. Brazil also invokes Article XX defenses in this regard with respect to some of the 
measures. However, none of the goals stated by Brazil can explain the specific features of the 
measures that Japan is  challenging. In sum, Brazil fails to rebut the prima facie case put forward 
by the complainants.  
 WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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 ANNEX B -4 
SECOND PART OF THE E XECUTIVE SUMMARY OF THE ARGUMENTS OF JAP AN 
I. EXECUTIVE SUMMARY OF  JAPAN'S SECOND WRITT EN SUBMISSION  
1. Japan's first written sub mission performed a detailed factual and legal analysis of the 
measures at issue in this dispute, which was based on an examination of their structure, design, 
and operation. Based on this analysis, Japan concluded that each of the measures at issue in thi s 
dispute is inconsistent with the provisions of the covered agreements cited in Japan's panel 
request.  
2. In response, Brazil acknowledges that "the overall factual explanations made by the 
complainants are correct[]". Thus, there is no disagreement between  the parties with respect to 
the core facts at issue. However, Brazil disputes the legal basis for Japan's arguments, by drawing 
upon legal theories that are inconsistent with the text of the covered agreements, and inconsistent 
with findings in prior pane l and Appellate Body reports.  
3. In reality, Brazil's arguments represent attempts to weaken the interpretation of key WTO 
rules, which if accepted would open the door to circumvention by other WTO Members. 
Accordingly, it is important both for Japan's intere sts in this case and systemically, that Brazil's 
legal theories be rejected.  
 A. Cross -Cutting Issues  
1. Brazil Does Not Dispute the Key Discriminatory Features Underlying the 
Measures at Issue  
4. INOVAR -AUTO operates against the background of an IPI tax on m otor vehicles that was 
raised by 30 percentage points in 2011 . INOVAR -AUTO enables domestic companies to benefit 
from an up -to-30 percentage point reduction of IPI on motor vehicles under certain conditions.  
There are two ways to achieve such a reduction: (i) offsetting the IPI with the use of "presumed" 
IPI tax credits, and (ii) IPI tax rate reduction without the use of such credits . Brazil does not 
dispute the specific features of INOVAR -AUTO as described by Japan.  
5. The ICT Measures  at issue in this disput e (i.e. the Informatics Programme, PADIS, PATVD, 
and the Digital Inclusion Programme) all have similar features : they involve product -specific 
reductions/ exemptions from generally applicable taxes due on products (i.e.  IPI, PIS/PASEP and 
COFINS, and PIS/PA SEP-Importação  and COFINS -Importação ); and they all make the 
reductions/ exemptions conditional on the performance of certain intermediate manufacturing 
processes in Brazil, which are specified either in PPBs or other legal instruments. Unless 
specifically exempted, all the production steps in PPBs or  other relevant legal instruments must 
take place in Brazil. In addition, given the nature of the particular production steps covered by 
PPBs or other relevant legal instruments, the requirement to perform certa in manufacturing steps 
in Brazil is tantamount to requiring the incorporation of domestic content into the finished product. 
Furthermore, certain PPBs contain numerical thresholds indicating a required level of local content. 
Brazil does not dispute the sp ecific features of the ICT Measures as described by Japan.  
6. RECAP and PEC grant  tax suspensions and/or exemptions to companies accredited as 
"predominantly exporting companies", which require s that they meet certain levels of export 
performance – currently,  50% of gross turnover  (for both programmes) . Accredited companies 
qualify for tax benefits for purchases (including imports) of certain products: for RECAP, the 
benefits accrue on purchase/import of capital equipment; for PEC, the benefits accrue on the 
purchase/import of raw materials, intermediate goods and packaging materials. The benefits take 
the form of a suspension of applicable taxes (in the case of RECAP, PIS/PASEP and COFINS, and 
PIS/PASEP -Importação  and COFINS -Importação ; in the case of PEC, all  of these taxes as well as 
IPI). Suspension leads to exemption from having to pay the relevant taxes  under certain 
conditions.  Brazil seems to have no disagreement with Japan as regards the specific requirements WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
- B-39 - 
 
 and operation of RECAP and PEC as a factual matter. Rather, Brazil only disputes the legal 
question of the appropriate normative benchmark for determining wh ether a fina ncial contribution 
exists.  
2. Despite Brazil's Continued Protestations, Its "Policy Objective " 
Arguments Still Do Not Constitute a Valid Defence  
7. Japan's oral statement at the first substantive meeting with the Panel discussed Brazil's 
arguments that the challenged measures are intended for legitimate policy objectives such as 
innovation, the promotion of research and development, safe ty, protection of the environment, 
and tax administration. Japan explained that such arguments are mere assertions that are not 
supported by objective features establishing the discriminatory nature of the measures, such as 
their design, structure, and ope ration, and thus do not constitute valid defence.  
8. Nonetheless, and without doing anything more to fix the flaws in its arguments, Brazil 
continues to argue – or in some instances just suggest – that it intended  to pursue legitimate 
policy objectives such a s innovation, R&D, safety, environment through the challenged 
programmes. Brazil's  arguments are no more than  mere assertions because it fails to explain how 
those purported policy objectives are embodied or manifested in the specific requirements or 
opera tion of the challenged measures . Brazil's description of the purported policy objectives 
appear to be ex post  rationalizations and are often misleading as to the true structure and design 
of the challenged measures.  
3. The Mere Fact That an Alleged Tax Sub sidy Is Provided to Domestic 
Producers Does Not Necessarily Warrant a Determination of WTO -
Consistency  
9. Throughout the proceedings, Brazil has asserted that the tax advantages under INOVAR -
AUTO and the ICT measures are subsidies "directed to domestic produc ers, not domestic 
products[]", and therefore, according to Brazil, they fall outside the scope of Article  III of the GATT 
1994 and other relevant provisions. In particular, Brazil contends that requirements to carry out 
certain manufacturing steps domestic ally (including production of intermediate goods) do not 
constitute a form of discrimination (e.g. local content requirements or preferential treatment for 
final goods) inconsistent with Articles III:2, III:4  and III:5 of the GATT 1994, Article 2 and 
parag raph 1(a) of the Illustrative List of the TRIMs Agreement, and that they do not run afoul of 
the subsidy prohibition reflected in Articles 3.1(b) and 3.2 of the SCM Agreement.  
10. However, the mere fact that a subsidy is granted to domestic producers and/or co ntingent 
on the domestic performance of certain production processes does not shield it from a finding that 
it is WTO -inconsistent. Rather, such a subsidy can nonetheless fall within the scope of the above -
listed provisions if it meets the specific conditi ons mentioned in these provisions.  
11. In this regard, it should be noted that it is always individual persons or legal entities that 
receive subsidies, because a product cannot itself receive money. As such, whenever a 
government wishes to favour a particular  product by means of a subsidy, the recipient of such a 
subsidy is always individual persons or legal entities, such as producers, marketers, or consumers 
of the targeted product. Accordingly, if merely being directed towards particular producers or 
pertai ning to production processes cured any WTO -inconsistency, then circumvention of WTO 
disciplines would be trivially easy. Members could simply provide a grant, for example, in the 
amount of a certain percentage (or even the entirety) of the price of the tar geted product in the 
form of a subsidy to domestic producers of such a product. Under Brazil's theory, such a measure 
would automatically be WTO -consistent. In other words, the legal theory that Brazil's defence 
relies upon grants Members unlimited discret ion to manipulate the competitive landscape among 
products, and indeed would eviscerate core WTO disciplines on non -discrimination.  
12. Furthermore, there is nothing in the text or context of the relevant legal provisions – 
i.e. Articles III:2, III:4, III:5 a nd III:8(b) of the GATT 1994, Article 2 and paragraph 1(a) of the 
Illustrative List of the TRIMs Agreement, and Article 3.1(b) and 3.2 of the SCM Agreement – 
suggesting that subsidies to domestic producers are necessarily WTO -consistent in all cases, 
regar dless of the discriminatory elements that they contain. Rather, all of these provisions can WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
- B-40 - 
 
 cover subsidies to domestic producers or subsidies contingent on domestic performance of certain 
production processes, so long as such subsidies involve discriminat ion between products.  
 B. INOVAR -AUTO  
1. Brazil Fails to Rebut Japan's Demonstration That INOVAR -AUTO Is 
Inconsistent with Article III:2 of the GATT 1994  
13. In its first written submission, Japan explained that through the increase in the IPI rate 
applicable to motor vehicles by 30 percentage points and possible reduction of the increased IPI, 
INOVAR -AUTO imposes internal taxes on imported motor vehicles that are in excess of IPI 
imposed on domestic motor vehicles inconsistent with the first sentence of Articl e III:2 of the 
GATT 1994. This discriminatory taxation occurs as a result of origin -based distinctions with respect 
to all the three prerequisites that must be satisfied in order to benefit from the tax reduction.  
14. In particular, first, Japan explained that  the accreditation requirements for INOVAR -AUTO 
are more onerous for manufacturers of domestic motor vehicles than for foreign manufacturers of 
imported motor vehicles. In response, Brazil argues that the distinct requirements for 
manufacturers of domestic  and imported motor vehicles, though different, are not 
necessarily more onerous for imported motor vehicles.  However, this argument misses the 
point. Decree 7,819/2012 sets out three categories of requirements related to accreditation  in 
addition to the p roduction steps requirement. Domestic manufacturers of motor vehicles only need 
to meet two of these three requirements, whereas importers of foreign motor vehicles must meet 
all three. Moreover, domestic motor vehicle manufacturers are more likely to meet  any of these 
three requirements as a result of their domestic production activity and other business operations. 
Thus, the requirements as a whole are discriminatory against imported motor vehicles.  
15. Second, Japan explained that accruing presumed IPI tax c redits is easier for manufacturers 
of domestic motor vehicles than for manufacturers of imported motor vehicles, because the former 
are more likely to make the required types of expenditures "in the Country" that result in the 
accrual of such tax credits ( i.e. expenditures on strategic inputs, tooling, and other categories of 
expenditures). In response, Brazil acknowledges that strategic inputs and tooling must originate in 
Brazil in order to result in the accrual of IPI tax credits. In addition, Brazil doe s not disagree with 
Japan's observation that domestic manufacturers are more likely to satisfy all of the expenditure 
requirements, because the expenditures must be made "in the Country". Indeed, Brazil's only 
argument regarding the accrual of tax credits is to assert that "the credits may be acquired by 
both the importers and the producers, without the actual need of incorporating the inputs into 
production." However, Brazil's assertion that importers can theoretically acquire presumed IPI 
credits on the s ame condition as domestic manufacturers is in fact at odds with the definitions of 
the terms "strategic inputs" and "tooling" under INOVAR -AUTO.  
16. Third, Japan explained that Article 14 § 2(ii) of Decree 7,819/2012 (as amended) provides 
explicitly that IPI c redits must be used on domestic vehicles before they are used on imported 
vehicles, and they can only be used on a limited number of imported vehicles (i.e. no more than 
4,800  vehicles per year ). In response, Brazil acknowledges that Japan is correct, stat ing: "Brazil 
does not deny that INOVAR -AUTO, through the method of calculation and use of presumed IPI 
credits, may favour certain domestic strategic inputs and machinery . . . ." . On this basis alone, it 
is possible to find that INOVAR -AUTO is inconsiste nt with Articles III:2 and III:4 of the GATT 1994.  
17. Fourth, Japan explained that INOVAR -AUTO is inconsistent with the second sentence of 
Article III:2, because it involves the application of the IPI tax in a manner so as to afford 
production to domestic man ufacturers of motor vehicles. Brazil fails to provide any response, 
except to assert: "as INOVAR -AUTO conforms to the requirements of Article III:2, first sentence, it 
also conforms to second sentence, as the products at issue are similarly taxed." Japan r ejects the 
premise of this argument – i.e. INOVAR -AUTO is not consistent with the first sentence of Article 
III:2. Moreover, Brazil misinterprets the relationship between the first and second sentences of 
Article III:2. In fact, it is possible for a measur e to be inconsistent with the second sentence, 
without being inconsistent with the first.  
 WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
- B-41 - 
 
 2. Brazil Fails to Rebut Japan's Demonstration That INOVAR -AUTO Is 
Inconsistent with Article III:4 of the GATT 1994  
18. Japan established in its first written submission  that INOVAR -AUTO discriminates against 
imported motor vehicles, with respect to (i) accreditation, (ii) the accrual of presumed IPI tax 
credits, and (iii) the use of such credits. These forms of discrimination are relevant to Japan's 
claims under both Art icle III:2 as well as Article III:4, as they constitute "less favourable 
treatment" for imported motor vehicles. In addition, Japan also established that INOVAR -AUTO 
accords less favourable treatment to foreign motor vehicle components and equipment (i.e. what 
Brazil's legal instruments, such as Decree 7,819/2012, refer to as strategic inputs and tooling, 
respectively). In particular, to (i) become accredited and (ii)  accrue presumed IPI tax credits, 
companies must make expenditures on domestic strategic in puts or tooling. Furthermore, due to 
the "deductible portion", such expenditures are more valuable if the purchased Tier 1 components 
and equipment have a greater level of domestic Tier 2 and Tier 3 content. Thus, the less 
favourable treatment extends acro ss all Tier 1, Tier  2 and Tier 3 components and manufacturing 
equipment.  
19. Brazil acknowledges that INOVAR -AUTO results in less favourable treatment for imported 
motor vehicle components and manufacturing equipment. In particular, Brazil states: "Brazil does  
not deny that INOVAR -AUTO, through the method of calculation and use of presumed IPI credits, 
may favour certain domestic strategic inputs and machinery". Thus, there is no question that 
INOVAR -AUTO is inconsistent with Article III:4 in this regard.  
20. Howev er, as far as discrimination with respect to motor vehicles is concerned, Brazil argues 
that accreditation "do[es] not relate to Article III:4 as the provision deals with products in the 
marketplace." This is a version of Brazil's "pre -market" argument tha t Japan previously rebutted. 
Any measure that affects the internal sale, offering for sale, purchase, transportation, distribution 
or use of products, in any manner whatsoever may fall within the scope of Article III:4.  
21. Furthermore, Brazil is factually inc orrect that the accreditation requirements only affect 
products at the pre -market stage. Rather, the accreditation requirements affect companies' 
eligibility for an up -to-30 percentage point reduction in IPI taxes on motor vehicles, and thus they 
have a di rect effect on motor vehicles. Moreover, they have a direct effect on certain motor vehicle 
components. Thus, there is no factual or legal support for Brazil's objection to Japan's claims under 
Article III:4.  
3. Brazil Fails to Rebut Japan's Demonstration That INOVAR -AUTO Is 
Inconsistent with Article III:5 of the GATT 1994  
22. Japan explained that INOVAR -AUTO is inconsistent with both the first and second sentences 
of Article III:5. With respect to the first sentence: both the minimum production steps requireme nt 
associated with accreditation, as well as the local content requirement associated with the accrual 
of IPI tax credits, mean that INOVAR -AUTO is an "internal quantitative regulation[] relating to the 
mixture, processing or use of products in specified a mounts or proportions[]". Through both types 
of requirements, INOVAR -AUTO "requires, directly or indirectly, that any specified amount or 
proportion of any product which is the subject of the regulation must be supplied from domestic 
sources."  
23. In response , Brazil argues that "production -step requirements set out in the INOVAR -AUTO 
do not establish an obligation to source goods domestically, contrary to what Japan has asserted; 
they only require that certain stages of production be performed in Brazil." Thi s is an instance of 
Brazil's false dichotomy between production processes and products. What Brazil fails to 
acknowledge is that the requirement to perform a certain production process in -country can be 
tantamount to a requirement to use the output of that  production process in a downstream 
application. Accordingly, INOVAR -AUTO does, in fact, require that certain goods be sourced 
domestically, contrary to Brazil's argument.  
24. Brazil also argues that INOVAR -AUTO's local content requirement related to strategic  inputs 
and tooling falls outside the scope of Article III:5, because it is supposedly "more closely 
associated to purchase obligations" than to "mixture, processing or use". However, Brazil is 
incorrect to assume that these two categories are mutually exc lusive. The fact that INOVAR -AUTO WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
- B-42 - 
 
 requires expenditures on domestic goods (i.e. in order to achieve an up -to-30 percentage point 
reduction in IPI taxes due on motor vehicles) should not prevent a finding of inconsistency with 
Article III:5.  
4. Brazil Fails  to Establish that INOVAR -AUTO Can Be Justified Under 
Article XX of the GATT 1994  
a. INOVAR -AUTO Is Not Provisionally Justified Under Article XX(b) of 
the GATT 1994  
25. Brazil has failed to establish that there is a genuine relationship between the objective o f 
protecting human, animal or plant life or health, and the discriminatory elements of INOVAR -
AUTO. In fact, Brazil's first written submission contains only one paragraph that purports to 
explain how INOVAR -AUTO contributes to these objectives. The paragra ph asserts that INOVAR -
AUTO contributes to energy efficiency, vehicle safety, and reduced CO2 emissions, but contains no 
explanation for these assertions. Further, the factual background section of Brazil's first 
submission contains isolated pieces of info rmation that could potentially figure in Brazil's Article XX 
defence, such as discussion of broader programmes to achieve these goals as well as the 
accreditation requirements related to reducing emissions. However, Brazil fails to even explain 
whether Bra zil considers these facts relevant to its Article XX defence, and if so, why. 
Furthermore, there are several possible alternatives to INOVAR -AUTO.  Brazil had many options 
available to it in crafting a measure to promote energy efficiency or other purported  objectives of 
INOVAR -AUTO. It was unnecessary to resort to a measure that is so plainly discriminatory on so 
many levels. Brazil thus fails to justify INOVAR -AUTO under Article XX(b) of the GATT 1994.  
b. INOVAR -AUTO Is Not Provisionally Justified Under Ar ticle XX(g) of 
the GATT 1994  
26. Brazil argues that INOVAR -AUTO's design and structure supposedly demonstrate a clear link 
with the conservation of petroleum and its derivatives, including gasoline. In this regard, Brazil 
references several features of INOVAR -AUTO, such as its energy efficiency targets, as well as 
incentives for expenditures on R&D and engineering in Brazil. On this basis, Brazil asserts that 
INOVAR -AUTO "as a whole" is justified under Article XX(g) of the GATT 1994.  
27. However, Brazil's argument  is misplaced because Japan is not challenging INOVAR -AUTO's 
requirements regarding energy efficiency targets or R&D spending in the first place. Rather, Japan 
is taking issue with specific features of INOVAR -AUTO that are discriminatory – e.g. the 
accredi tation requirements; the method of accrual of presumed IPI credits for strategic inputs and 
tooling, which are the only way to accrue a presumed IPI credit worth up to 30 percentage points 
of the IPI tax due; and the conditions to use such presumed IPI cre dits. Brazil must explain how 
those specific features of INOVAR -AUTO are supposedly related to the objective of conserving 
petroleum and its derivatives, such that there is a "close and genuine relationship" between the 
end and means. Brazil fails to provi de any explanation whatsoever in this regard, and its argument 
is without merit.  
c. INOVAR -AUTO Does Not Satisfy the Requirements of the Chapeau 
of Article XX of the GATT 1994  
28. The chapeau of Article XX of the GATT 1994 requires that the subject measure is  "not 
applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination 
between countries where the same conditions prevail, or a disguised restriction on international 
trade". The burden of proof rests on the defending party,  i.e. Brazil.  
29. However, Brazil fails to establish a prima facie  case. Brazil attempts to demonstrate that 
INOVAR -AUTO is not "applied in a manner which would constitute a means of arbitrary or 
unjustifiable discrimination between countries where the same co nditions prevail", for three 
reasons: Brazil considers that the "conditions for accreditation are reasonable[]"; Brazil considers 
that "IPI reductions and credits are based on reasonable criteria[]"; and Brazil considers that "the 
requirement that investme nts be made in Brazil is consistent with the objectives of INOVAR -
AUTO[]". However, all of these allegations amount to nothing more than mere repetition of Brazil's 
arguments related to Article III of the GATT 1994 (i.e. that the requirements of INOVAR -AUTO are WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
- B-43 - 
 
 supposedly not discriminatory and are consistent with its purported policy objectives). In other 
words, Brazil's argument is flawed in precisely the same way that the Appellate Body warned 
against in US – Gasoline : it logically refers to the same sta ndards by which a violation of the 
substantive rule should be determined to have occurred. Thus, Brazil falls short of establishing that 
INOVAR -AUTO is not applied in a manner which would constitute a means of arbitrary or 
unjustifiable discrimination. In addition, contrary to Brazil's contention that INOVAR -AUTO meets 
the requirements of the chapeau, the fact that the discrimination under the measure at issue has 
no connection to the purported policy objectives by definition means that those requirements h ave 
not been met.  
30. Brazil's failure to show that INOVAR -AUTO is not applied in a manner that constitutes 
arbitrary or unjustifiable discrimination between countries where the same conditions prevail, is 
itself evidence that INOVAR -AUTO is also applied in a  manner that constitutes a disguised 
restriction on international trade. Furthermore, considering the objectives advocated in Article 1 of 
Decree 7,819, INOVAR -AUTO is a restriction "taken under the guise of a measure formally within 
the terms of an except ion listed in Article XX". Thus, INOVAR -AUTO fails to meet the requirements 
of the chapeau of Article XX.  
5. Brazil Fails to Rebut Japan's Demonstration That INOVAR -AUTO Is 
Inconsistent with Article 2 and Paragraph 1(a) of the Illustrative List of 
the TRIM s Agreement   
31. In its first written submission, Japan explained that INOVAR -AUTO is inconsistent with 
Articles 2  and paragraph 1(a) of the Illustrative List of the TRIMs Agreement. The inconsistency 
with Article 2.1 stems from INOVAR -AUTO's inconsistency wit h Article  III of the GATT 1994 . In 
addition, INOVAR -AUTO falls under paragraph 1(a) of the Illustrative List, due to its two local 
content requirements (i.e. those associated with the accreditation requirements and the accrual of 
presumed IPI tax credits).  Further , as the panel in Indonesia – Autos  has clarified, measures that 
"have investment objectives and investment features and which refer to investment programmes" , 
and that are "aimed at encouraging the development of a local manufacturing capability .  . . fall 
within any reasonable interpretation of the term 'investment measures'". INOVAR -AUTO is such a 
measure, as even Brazil acknowledges that one of its objectives is "'to strengthen the national 
automotive industry.'"  
32. In response, Brazil does not den y that INOVAR -AUTO falls under paragraph 1(a) of the 
Illustrative List. In addition, Brazil acknowledges that INOVAR -AUTO is an investment measure. 
However, Brazil asserts that INOVAR -AUTO is not trade -related because "the requirements under 
[] INOVAR -AUTO  are related to production, not to trade in goods[]". Yet Brazil fails to explain why 
it believes that production -related measures cannot also be trade -related. Indeed, as just noted, 
Brazil does not disagree with Japan that INOVAR -AUTO falls under paragra ph 1(a) of the 
Illustrative List, which describes a local content requirement.  
33. Moreover, Brazil does not even attempt to justify its assumption that measures relating to 
production cannot, in principle, also relate to trade. Indeed, the opposite is obvious ly true, as is 
clear for example from the text of paragraph 1(a) of the Illustrative List. Accordingly, there is no 
basis for Brazil's assumption that INOVAR -AUTO's relation to production somehow implies that it 
does not also affect trade.  
6. Brazil Fails to Rebut Japan's Demonstration that INOVAR -AUTO Is  
Inconsistent with Articles 3.1(b) and 3.2 of the SCM Agreement  
34. In its first written submission, Japan explained that INOVAR -AUTO confers subsidies related 
to the satisfaction of two types of local content requirements: a minimum manufacturing steps 
requirement that encourages the use of domestically manufactured automotive components 
including engines, gearboxes, transmissions, and steering and suspension system, as well as 
domestic equipment, as a conditio n for accreditation; and a requirement to make expenditures on 
domestic strategic inputs and tooling in order to accrue presumed IPI tax credits that reduce IPI 
taxes on motor vehicles by a maximum of 30  percentage points. Both local content requirements 
constitute contingencies on the use of domestic over imported goods, and accordingly INOVAR -
AUTO is inconsistent with Articles 3.1(b) and 3.2 of the SCM Agreement.  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
- B-44 - 
 
 35. In response, Brazil does not deny that INOVAR -AUTO confers subsidies within the meaning 
of Article 1 of the SCM Agreement. In addition, Brazil does not deny that INOVAR -AUTO contains 
an element of contingency. Rather, Brazil argues only that INOVAR -AUTO does not require the 
"use" of domestic goods within the meaning of Article  3.1(b). Brazil's arg ument seems to be that 
companies could potentially satisfy the local content requirements of INOVAR -AUTO by purchasing 
automotive components or manufacturing equipment and then reselling them to other companies. 
However, Brazil provides no support for this  argument – and in particular, Brazil does not assert 
that brokers or resellers can accrue presumed IPI tax reductions under INOVAR -AUTO through 
expenditures on strategic inputs and tooling on behalf of third parties. In fact, Decree  7,819/2012 
contradicts  Brazil’s argument.  
36. Furthermore, the definitions of "strategic inputs" and "tooling" indicate that for purposes of 
generating presumed IPI tax credits, strategic inputs must be "used in the manufacture and 
physically incorporated into the [covered] vehicle s", and tooling must be used in that 
manufacturing process. This implies that accredited companies cannot claim credits with respect to 
inputs and tooling that they want to resell rather than use in their own manufacturing process. 
Thus, to the extent that  Brazil is arguing that brokers and resellers do not "use" automotive 
components and manufacturing equipment within the meaning of Article 3.1(b), this argument is 
irrelevant.  
7. Brazil Fails to Rebut Japan's Demonstration That INOVAR -AUTO Is 
Inconsistent  with Article I:1 of the GATT 1994  
37. In its first written submission, Japan explained that INOVAR -AUTO provides two types of 
"advantages" to products originating in other Mercosur members and Mexico:  
 A 30 percentage point reduction of IPI tax rates to accred ited domestic manufacturers and 
investors  which import in Brazil motor vehicles of the same brand originating in other Mercosur 
members and Mexico (under Article 21 of Decree 7,819/2012 ); and 
 A 30 percentage point reduction  of IPI tax rates to motor vehicl es imported from Uruguay 
without the pre -condition that the importing company is accredited (under Art. 22(i) of Decree 
7,819/2012 ). 
38. In response, Brazil does not attempt to rebut Japan's demonstration that INOVAR -AUTO is 
inconsistent with Article I:1, nor does Brazil deny that INOVAR -AUTO favours motor vehicles from 
other MERCOSUR countries and Mexico. Brazil also does not invoke the Article XX defence in 
respect of Japan's claims under Article I:1 of the GATT  1994. Rather, Brazil argues that INOVAR -
AUTO fa lls under the Enabling Clause. Japan previously explained that Brazil's attempted defence 
under the Enabling Clause fails, because Paragraph 2(b) of the Enabling Clause does not apply. 
Thus far Brazil has not responded to Japan's arguments regarding the En abling Clause. 
Accordingly, all the previous arguments still stand and indicate that Brazil's Enabling Clause 
defence fails.  
 C. ICT Measures  
39. Japan's first written submission established that the ICT Measures discriminate with respect 
to both final and int ermediate products, and they confer subsidies contingent on the use of 
domestic inputs. Accordingly, the ICT Measures are inconsistent with Brazil's obligations under 
Articles III:2, III:4, and III:5 of the GATT 1994, Article 2  and paragraph  1(a) of the Il lustrative 
List of the TRIMs Agreement, and Articles 3.1(b) and 3.2 of the SCM Agreement.  
40. Brazil makes three factual arguments to support its contention that the ICT Measures are 
supposedly WTO -consistent: (i) the ICT Measures supposedly do not discrimina te on the basis of 
national origin; (ii) in the case of intermediate goods produced by accredited companies, the 
indirect tax suspensions or exemptions applied under the ICT measures supposedly do not 
generate a difference in the effective tax burden due b etween imported and domestic products; 
and (iii) the ICT measures supposedly subsidize domestic producers rather than domestic 
products. Each of these three arguments fails.  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
- B-45 - 
 
 1. Brazil Fails to Establish that the ICT Measures Do Not Discriminate 
Against Imp orted  Final and Intermediate Products  
41. The ICT Measures discriminate against both foreign ICT, automation and related products 
(i.e. collectively "ICT products"), as well as the inputs to such products. In particular, only 
products produced in Brazil – i.e. domestic goods – are eligible to benefit from the ICT Measures. 
In addition, only goods produced in accordance with PPBs (or other types of legal instruments 
containing requirements similar to those in PPBs – which Japan will refer to collectively as PPBs ) 
are eligible to benefit from the ICT Measures, and PPBs require that the specified production steps 
be performed in Brazil. This means that an imported product that has not undergone any 
production step in Brazil cannot benefit from the ICT Measures. Fur ther, PPBs contain the 
requirement that some form of integration or final assembly must take place in Brazil, and this 
integration/final assembly must incorporate other parts or components that are also required to be 
integrated/assembled in Brazil. Certai n PPBs also contain additional requirements which indicate a 
specific percentage of a particular input that must be manufactured in accordance with a PPB. As a 
result, the production steps requirements under PPBs are tantamount to requiring the 
incorporati on of domestic content into the finished product. Accordingly, the ICT Measures are 
inconsistent with Articles  III:2, III:4, and III:5 of the GATT 1994; Article 2  and paragraph 1(a) of 
the Illustrative List of the TRIMs Agreement; and Articles 3.1(b) and 3 .2 of the SCM Agreement.  
2. Brazil Fails to Establish that the ICT Measures Are "Neutral" with 
Respect to "Intermediate" Products  
42. With respect to intermediate products, Brazil argues that the Informatics Programme and 
PADIS are supposedly "neutral in fina ncial terms", because "the amounts not collected would 
otherwise offset the tax debit due at the next step of the productive chain." On this basis, Brazil 
asserts that the Informatics Programme (insofar as it applies to intermediate goods) and PADIS 
are co nsistent with Articles III:2, III:4, and III:5 of the GATT 1994, as well as Article 2 and 
paragraph 1(a) of the Illustrative List of the TRIMs Agreement, and are not subsidies within the 
meaning of Article 1 of the SCM Agreement.  
43. However, Brazil's argument  fails for four reasons. First, Brazil's distinction between 
intermediate and final goods has no basis in the text of the provisions invoked by Japan. Rather, 
these provisions refer to "products" or "goods", without distinguishing between intermediate and 
final goods.  Second , practically, it is often difficult to distinguish products that are "final" from 
those that are "intermediate". The same product may be considered either final or intermediate 
depending on the specific context. Third, Brazil's argument  ignores the time value of money, i.e. 
the cost that companies face in the absence of the ICT measures to pay up -front taxes on 
intermediate products and wait until a subsequent point in time to use the  receive d credits that 
offset the up -front payments. I n particular, with respect to those products that Brazil characterizes 
as intermediate (as well as those that Brazil characterizes as final), companies accredited under 
the ICT Measures do not have to pay up -front taxes that are covered under the relevant 
programme. By contrast, outside the context of these programs, companies must pay the covered 
taxes upon purchase or importation, and then be reimbursed subsequently upon sale of the 
downstream product. Thus, in effect, the ICT Measures result in a deferra l of tax collection, which 
has a significant effect on the economic situation of taxpayers. Fourth , Brazil's argument is not 
valid with respect to manufacturers of intermediate products which participate in the cumulative 
regime of PIS/PASEP and COFINS.  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
- B-46 - 
 
 3. The Fact that the Subsidies Benefit Domestic Producers Should Not 
Shield the ICT Measures from WTO -Legal Scrutiny  
44. Brazil argues that the ICT Measures provide "subsidies to domestic producers" and do not 
discriminate between products, supposedly falling outside the scope of Article III of the GATT 
1994, Article 2  and paragraph 1(a) of the Illustrative List  of the TRIMs Agreement and Article s 
3.1(b)  and 3.2 of the SCM Agreement. However, this argument is premised on the incorrect factual 
assumption that when ever a subsidy is provided to domestic producers, such a subsidy can never 
discriminate between products . Accordingly, Brazil's argument in this regard fails. In other words, 
the fact that the subsidies conferred through the ICT Measures benefit domestic p roducers, should 
not shield them from WTO -legal scrutiny.  
 D. RECAP and PEC  
45. Japan established in its first written submission that both programmes provide financial 
contributions in the form of suspensions and exemptions from the relevant indirect taxes co vered 
by each programme, which constitutes a financial contribution in the form of revenue foregone 
that is otherwise due, thereby conferring a benefit. Thus, both programmes provide subsidies 
within the meaning of Article 1 of the SCM Agreement. Moreover,  Japan explained that the 
subsidies under RECAP and PEC are granted on the condition that recipient companies are deemed 
"predominantly exporting", i.e. exports account for at least 50% of their sales. Accordingly, the 
subsidies are contingent on export pe rformance within the meaning of Article 3.1(a) of the SCM 
Agreement.  
46. In response, Brazil accepts the factual underpinning for Japan's arguments. For example, 
Brazil acknowledges that the suspension of the taxes covered by RECAP and PEC leads to 
exemption f rom having to pay the relevant taxes under certain conditions. Brazil also does not 
disagree with Japan's understanding of the "predominantly exporting company" condition.  
47. Indeed, there is only one legally relevant issue regarding RECAP and PEC where Brazi l 
disagrees with Japan: the proper normative benchmark for assessing whether a financial 
contribution exists. In particular, Brazil argues that the benchmark should be credit -accumulating 
companies rather than companies in general, which are subject to the  IPI, PIS/PASEP, COFINS, 
PIS/PASEP -Importação , and COFINS -Importação . On this basis, Brazil argues that no subsidy and 
no export contingency exist.  
48. However, as Japan discussed in response to Panel question No. 41, Brazil's proposed 
benchmark is invalid. T he benchmark identified by Brazil for both programmes – i.e. the class of 
companies that is "predominantly credit -accumulating" – is unduly narrow. The  correct benchmark 
should include all domestic companies that pay the taxes suspended and/or exempted by these 
programmes, i.e. the IPI, PIS/PASEP, COFINS, PIS/PASEP -Importação  and COFINS -Importação .  
 E. Conclusion  
49. The measures at issue in this dispute discriminate against Japanese and other foreign motor 
vehicles, automotive components and equipment, and IC T products. They also confer prohibited 
export subsidies. They place Japanese and other foreign products at a significant and cross -cutting 
competitive disadvantage in the marketplace. In addition, INOVAR -AUTO in particular denies 
Japanese products the MFN  treatment to which they are entitled.  
50. Brazil has attempted to show that the measures at issue are somehow nonetheless WTO -
consistent. However, the legal theories underpinning Brazil's arguments have no merit. In fact, 
they are extreme, have not been embr aced by prior panel or Appellate Body reports, and if 
accepted would erode the WTO -legal disciplines being invoked in this dispute. Accordingly – and 
given the absence of any significant factual disagreement between the parties – the claims in 
Japan's requ est for the establishment of a Panel continue to be valid, and Japan requests that the 
Panel make findings accordingly.  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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 II. EXECUTIVE SUMMARY OF  JAPAN'S OPENING STAT EMENT AT THE SECOND 
MEETING OF THE PANEL  
51. One constant throughout this dispute has been the theme of discrimination. INOVAR -AUTO 
and the ICT Measures tilt the competitive landscape in favour of domestic products by subjecting 
them to lower rates of taxation, and by imposing local content requirements. RECAP and PEC 
distort trade by providing subs idies to companies deemed "predominantly exporting". The 
underlying facts, which the parties agree on in nearly all relevant respects, have been another 
constant. Indeed, as the proceedings have progressed, the scope of any remaining disputed issues 
has gr adually narrowed, so that today, only seven categories of issues seem to remain.  
52. First, Brazil attempts to defend INOVAR -AUTO and the ICT Measures by advocating for a 
legal principle that no panel or Appellate Body report has embraced: that subsid ies granted to 
domestic producers are automatically WTO -consistent  as long as they are related to a production 
process . This argument is contradicted by the text and context of the specific provisions of the 
WTO Agreement at issue, including Article III of the GAT T 1994  and Article 3.1(b) of  the SCM 
Agreement. While Brazil bases its defence on Article III:8(b) of the GATT 1994, Article III:8(b) 
does not cover the kinds of tax subsidies granted under INOVAR -AUTO or the ICT Measures.  
53. Second, and closely related, acc ording to Brazil, the terms "domestic" and "national" in 
Article III of the GATT 1994 and Article 3.1(b) of the SCM Agreement should be interpreted to 
ensure  that subsidies received by domestic producers are ipso facto  WTO-consistent , regardless of 
whether  such subsidies amount to discrimination between domestic and imported products . 
However, this argument is circular and has no basis in the text of the covered agreements. Instead 
of Brazil's preferred approach, the term "domestic" should be interpreted in  accordance with its 
ordinary meaning  in its context , pursuant to Article 31 of the Vienna Convention on the Law of 
Treaties.  
54. Third, Brazil argues that the benefits available under INOVAR -AUTO and the ICT Measures 
offset the costs associated with complying  with the programmes' requirements and furthering the 
programmes' purported policy objectives. In reality, Brazil has failed to demonstrate that INOVAR -
AUTO and the ICT Measures are structured and designed in such a manner that the recipient 
companies will  allocate the benefits they have received to the achievement of the purported policy 
objectives. Rather, they are structured and designed to allow the recipient companies to use the 
benefits to simply lower their prices in competition with imported product s. 
55. Fourth, Brazil continues to argue that the tax suspensions and exemptions under the ICT 
Measures are "neutral" with respect to intermediate products. However, as a factual matter, there 
is no longer a real disagreement as to whether the ICT measures are  neutral, because Brazil now 
acknowledges that participation in the ICT Measures results in a cash flow -related gain that can 
amount to 1.16% of taxes due.  Nothing in the text of Article III of the GATT 1994, Article 2.1 of 
the TRIMs Agreement, or Article 3.1(b) of the SCM Agreement suggests that a Member may favour 
domestic over imported goods as long as the amount of the benefit does not exceed 1.16% of the 
taxes due.  
56. Fifth, Brazil argues that the less trade -restrictive alternative measures to INOVAR -AUTO  and 
PATVD  proposed by Japan are not reasonably available, because they would not spur the creation 
of a domestic industry. However, there is no genuine relationship between creating a domestic 
industry and the objectives listed in the subparagraphs of Art icle XX. Brazil's argument is 
tantamount to the invention of a new category of exception under Article XX for measures 
necessary for the creation of a domestic industry, which is not a valid basis to reject a proposed 
alternative measure.  
57. Sixth, Brazil con tinues to argue that INOVAR -AUTO's inconsistency with Article  I:1 should be 
excused because of the Enabling Clause. However, Brazil's Enabling Clause argument fails, 
because Brazil has not adhered to the Enabling Clause's procedural requirements; the GATT 1994 
is not itself an "instruments multilaterally negotiated under the auspices of the GATT" within the 
meaning of paragraph 2(b) of the Enabling Clause; and INOVAR -AUTO is not a "non -tariff 
measure[]" within the meaning of paragraph 2(b) of the Enabling C lause.  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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 58. Seventh, Brazil continues to argue that RECAP and PEC are intended to prevent the 
structural accumulation of tax credits, and therefore do not confer subsidies contingent on export 
performance. However, this argument is nothing more than a distracti on. In reality, the 
determination of a subsidy in this case can be based on a straightforward comparison between the 
tax treatment of companies under generally applicable rules of taxation, and the tax treatment of 
companies under RECAP and PEC. Likewise, the finding of export -contingency is easy to reach, 
given that Brazil itself acknowledges that RECAP and PEC contain, in its words, a "50% export 
requirement" in order to receive benefits under the programmes.  
59. If there were a motto for this dispute , it cou ld be the more things change in this dispute, the 
more they stay the same. It is still the case that INOVAR -AUTO and the ICT Measures incentivize 
origin -based discrimination through local production requirements and local content requirements. 
And it is st ill the case that INOVAR -AUTO incentivizes discrimination through an IPI tax reduction 
for motor vehicles originating in other Mercosur countries and Mexico. RECAP and PEC confer 
subsidies contingent on export performance. Japan has stressed these points f rom the beginning, 
and they have not changed.  
60. What has changed are Brazil's attempts to complicate the legal analysis of these measures. 
The seven arguments that Japan discussed at the second substantive meeting  are all that remain 
of these attempts. As Ja pan has demonstrated, each of them is still meritless and should not 
distract the Panel from the core elements of discrimination which are at the very heart of this 
dispute.  
III. EXECUTIVE SUMMARY OF  JAPAN'S CLOSING STAT EMENT AT THE SECOND 
MEETING OF THE P ANEL  
61. Throughout these proceedings, and in particular through t he second substantive meeting, 
the scope of essential disagreements between the complainants and the respondent has been 
gradually narrowing down, and at the end of this substantive meeting, the re seems to be only one 
fundamental disagreement remaining between the parties. This fundamental disagreement 
consists in whether or not Brazil has the right to its industrial policies in the form of what it 
characterizes as "production subsidies".  
62. Japan d oes not deny that Members have their own rights to industrial policies, and that they 
are entitled to adopt certain measures in order to create or foster their industries. However, such 
rights are not limitless – of course, Members are required to comply w ith their obligations under 
the WTO Agreement. While Brazil appears to believe that any production subsidy must be 
permitted under the WTO Agreement, there is no provision in the WTO Agreement which suggests 
that so -called production subsidies should a priori be justified. Rather, production subsides in the 
form of a requirement that certain specified components or goods must be sourced domestically 
will violate Brazil's obligations under Article III of the GATT 1994, Article 2 of the TRIMs 
Agreement, and A rticle 3.1(b) of the SCM Agreement.  
63. In sum, Japan  suggest s that the Panel decide on the consistency or inconsistency of the 
challenged measures not on the basis of the general notion of "production subsidies", which 
actually does not exist in the WTO Agree ment, but rather on the basis of the proper interpretation 
of the specific provisions of WTO Agreement which are at issue in this case.  
 
 
 
 
 
 WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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 ANNEX  B-5 
FIRST PART OF THE EX ECUTIVE SUMMARY OF T HE ARGUMENTS OF BRAZ IL 
A. INTRODUCTION  
1. The promotion of sustain able and inclusive development remains a challenge for many 
developing countries, including Brazil. Addressing and overcoming these difficulties is essential in 
order to ensure that all WTO members are able to achieve the Organization's objectives of raisi ng 
standards of living, ensuring full employment and expanding the production of and the trade in 
goods and services. Over the years, Brazil has adopted different measures to address the distinct 
aspects of its developmental needs. Among these measures, th ere are a number of policies related 
to industrial and technological development, including those challenged in the present dispute.  
2. Each of the questioned measures has been specifically designed in light of Brazil's WTO 
commitment to promote technological  development, job creation, innovation, and production 
investments in their specific fields, in view of Brazil's developmental needs and constraints. The 
programmes' goals and operation are transparent and established in law. Their complexity, when 
present , stems from the complexity of the problems they address.  
3. In Brazil's understanding, WTO rules cannot be read as preventing Members from pursuing 
their legitimate policy objectives through the means they deem most appropriate, including 
through non -discrim inatory and transparent fiscal measures, as long as the instruments adopted 
for that purpose are in conformity with WTO rules. In the present case, the challenged 
programmes do not discriminate on the basis of origin: they do not constitute local content 
requirements, import -substitution subsidies or prohibited export subsidies, and they are not 
applied to afford protection to domestic production. In many circumstances the programmes do 
not even involve tax burden reductions  
4. The measures relating to ICT, au tomation and related sectors challenged by the European 
Union and Japan aim at promoting R&D investments and require the performance of production -
steps in order to foster industrial capacity and skilled labour. In the case of PADIS, the production 
in Braz il of at least a minimal amount of semiconductors is necessary for the development of a 
skilled workforce in a critical industry and to respond to demands for specific uses, including 
government -related uses that the market structure of the sector worldwid e severely constrains. 
PATVD became necessary in light of Brazil's decision to adopt a unique digital television standard. 
When the standard was adopted, it was not certain that foreign suppliers would develop and 
manufacture compatible digital television transmitters. Brazil then decided to facilitate to the 
maximum extent possible the development of the technological and industrial capacity necessary 
to ensure that Brazilians have access to culture and information under the new technological 
paradigm. Fin ally, the Digital Inclusion Programme is meant to provide access to all social 
segments in Brazilian society to the benefits of the information age.  
5.  INOVAR -AUTO establishes a regulatory framework, through a system of environmental and 
R&D requirements and  non-trade distorting economic incentives, directed at  improving the quality 
and the efficiency of cars circulating in Brazil so as to contribute to the achievement of  Brazil's 
sustainable development goals.  
6. Finally, the PEC and RECAP programmes are meas ures adopted to address the problem of tax 
credit accumulation in the export sector, which is a feature of the Brazilian tax system. They do 
not provide a financial contribution, as the taxes not collected were not due in the first place, and 
they do not c onfer a benefit, as the participants are not "better off" in comparison with similarly 
situated taxpayers. Although these programmes are designed to address the situation of 
predominantly exporting companies, they are not an export -contingent subsidy progr am within the 
meaning of the SCM Agreement.  
7. Before commenting on each of the challenged measures, Brazil will address four horizontal 
issues relevant to this dispute.  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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 B. LEGAL ARGUMENT  
The complainants have not established a prima facie  case nor satisfied  the requirements 
for a de jure  claim  
8. Brazil considers important to observe that neither of the complainants has made a de facto  
claim or brought to the record sufficient evidence to support their allegations that the programmes 
are WTO inconsistent. A de jure claim will establish an inconsistency with a WTO obligation on the 
basis of the design, structure and application of a measure. In other words, a violation of a WTO 
commitment will stem from the measure itself. A de jure discrimination or contingency is one 
discerned from the text and structure of the challenged measure, which is not what we have here 
presently. Brazil believes that to preserve the proper balance of rights and obligations reflected in 
the Covered Agreements, compliance with this legal standard must not be assessed conceptually, 
as the claimants have purported to do.  
9. As for the evidentiary burden of a de facto  claim, a measure that, on its face, is not 
inconsistent with WTO rules could be indeed considered to be a de facto  violation if t he "total 
configuration of the facts" leads to that conclusion. In the evaluation of the "total configuration of 
the facts" under scrutiny, two main issues are taken into consideration: the effects and the 
purpose of the measure1, understood to be the actu al effects of the measure; and an objective 
analysis of the justification of the measure, respectively.  
10. This kind of evidence was not submitted in the present dispute. The complainants could have 
attempted to present information regarding actual effects of  the challenged measures in practice 
to demonstrate this point. Conceivably, the complainants could also have argued that t he 
challenged measures are inconsistent with the Covered Agreements by providing sufficient 
evidence establishing that, while they do  not discriminate de jure  based on origin, a de facto  
violation exists. This was not done in the present dispute.  
11. Therefore, it is legitimate to conclude that the complainants have not met their burden of proof 
in making a prima facie  case. They simply di d not produce "[…] evidence sufficient to raise a 
presumption that what is claimed is true […]"2 regarding any of the programmes.  
Local production and R&D requirements are not WTO -inconsistent "local content" 
requirements  
12. Brazil considers that not every me asure relating to the locus of the economic and productive 
activities involves necessarily requirements related to the source of inputs and products used in 
the production process, which could be properly characterized as a "local content requirement". 
Specifically, measures designed to promote local production (or pre -production operations, such as 
investment in R&D and product design) that foresee certain productive steps to take place in a 
given territory are categorically different from those requiring the use of domestic inputs, and 
must not be used interchangeably.  
13. In the case of the measures related to the ICT sector, companies contemplated and accredited 
in those regimes must commit to the performance of a minimum set of operations in Brazil.3 These  
are not concerned with products, but geared towards maximizing production steps made in Brazil 
in order to promote industrialization through the addition of national value in terms of innovation, 
technological and industrial development and skilled labour  force, without any prejudice to 
treatment accorded to imported products. Non -discriminatory value -added requirements through 
processing operations are fully consistent with WTO law. These requirements do not relate to 
products at all, but to production st eps that do not mandate the use of inputs from domestic 
source since they actually make no reference to the source of inputs.  
14. Such alleged "local content requirements" identified by the complainants in  five of the seven 
programmes challenged were raised in connection with different WTO rules, which address the 
                                                
1 Panel Report, Canada – Pharmaceutical Patents, para. 7.101.  
2 Appellate Body Report, US – Shirts and Blouses , p. 14.  
3 Namel y, Processo Produtivo Básico , or PPB  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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 issue of discrimination between domestic and imported products, in varying language4. However, 
none of these rules deal with requirements related to production, localisation of production or to 
investments in R&D and innovation, which is what is at stake here. The challenged programmes, 
once again, do not discriminate against imported products and are not contingent upon the use of 
domestic over imported products. The tax system applicable to the mea sures analysed addresses 
pre-market operations since it is conceived to offset costs related to fulfilling each of the 
programmes specific requirements, adding the needed carrots to the sticks for each of the 
programme.  Brazil does not dispute that a meas ure that addresses pre -market operation could, 
conceivably, affect the conditions of competition between imported and domestic products at the 
market. Brazil does contend however that this is not the rule and should not be presumed.  
15. The nature of the requi rements contained in the language of the five programmes challenged 
is starkly distinct from the scope of the afore -mentioned WTO rules. The first and clearest element 
of Article III is that the all obligations set out in its various paragraphs apply to pr oducts, not to 
production or research and development. Moreover, as Article III.8(b) clearly excludes payments 
to producers from the scope of the obligations contained in Article III, such exemption confirms 
that a measure aimed at producers that does not affect products does not fall within the scope of 
the obligations of Article III.  
16. Production requirements may create, through the development of greater manufacturing 
capabilities and technological skills, a more dynamic economic environment.  Productivit y growth, 
greater manufacturing capabilities and local development are in fact one of the main expected 
results of the challenged measures. Yet, none of this is done with a discriminatory bias towards 
imported products. On the contrary, as Brazil has demon strated productivity growth generated by 
the Programmes translated into more imports, as a large majority of inputs in the production of 
goods covered by these programmes is imported. The complainants, on the other hand, have 
failed to submit evidence that  any discriminatory impact within the meaning of the relevant WTO 
rules have occurred.  
17. As for the claims under the SCM Agreement, Brazil would like to emphasize once again that 
there is a clear distinction between production and products in the Agreement that translates in a 
clear difference between actionable and prohibited subsidies. The relevant provision5 prohibits a 
subsidy "contingent upon the use of domestic over imported goods", without prohibiting production 
requirements. A Member therefore is not  prohibited from conditioning the granting of a subsidy to 
a production requirement or other localization requirements, such as the level of employment or 
investments in R&D and innovation, so long as such requirements do not establish any condition 
relate d to the origin of the products used in the production process.  
18. As the Appellate Body has clarified, even a measure containing, among others, a requirement 
to use domestic over imported goods would not be a prohibited subsidy if the subsidy could be 
received by complying with other requirements6.  
Indirect tax reductions are not per se WTO -inconsistent advantages or subsidies  
19. Another horizontal aspect of the complainants' narrative is that the tax regime under the 
programmes has the purpose and effect of e ither increasing the level of effective border protection 
in Brazil to the detriment of imported products or, in the case of RECAP and PEC, favouring 
exports. This notion is misconceived as it disregards the fact that participation in these taxation 
scheme s is tied to mandatory requirements such as investments in R&D, performance of 
production steps or accumulation of tax credits that result in additional costs to the accredited 
companies.  
20. Fiscal instruments, such as indirect tax breaks, are considered one  of the main tools used by 
governments all over the world for pursuing public policy objectives. Indirect taxation in particular 
is increasingly being used, including in many developed countries, to pursue public objectives that 
generate positive, economic  and social effects for society, such as encouraging savings, 
                                                
4 According to the complainants, the provisions relevant to assess this question are: GATT Articles III:2, III:4 
and III:5, TRIMS Article 2.1, in conjunction with Article 2.2 and paragraph 1(a) of the Agreement's Illust rative 
List, and Articles 3.1(b) and 3.2 of the SCM Agreement  
5 Article 3.1(b) of the SCM Agreement  
6 Appellate Body Report, Canada – Autos , para. 130. WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
- B-52 - 
 
 employment, and strategic economic activities. This kind of tax expenditure have actually become 
an effective substitute to direct spending in many countries as they allow for the financing of 
public policies, operating as shortcut to direct payments in time of growing budgetary constraints.  
21. In the case of Brazil, indirect tax breaks have been central in pursuing long term goals of 
promoting strategic investments in R&D, innovation and skilled la bour. As it is recognized 
worldwide, investments in these areas are crucial to promote sustainable economic growth. 
However, due to the high risks involved, this kind of investment is difficult to fund without proper 
government intervention. Brazil shares the view that a WTO Member cannot use its tax regulations 
to afford protection to domestic products at the expense of imported like products or to promote 
exports. Although the seven programmes challenged in this dispute contemplate reductions of 
indirect tax rates, the assumption that such tax breaks would necessarily constitute a 
discriminatory treatment or a subsidy, amounting to less favourable treatment towards imported 
products, is flawed.  
22. In a system of indirect, non -cumulative taxation (as the one i n Brazil), the effective tax burden 
on the overall production chain and, more specifically, on each stage of the productive chain, is not 
affected by the specific rates charged on each of these stages, because of the off -setting 
mechanisms whereby credit -and debits accumulated at each step compensate each other. Such 
mechanism ensures the neutrality of the taxation process throughout the production chain, without 
any revenue being foregone (considering that the overall tax burden remains the same).  
23. In addi tion, in some instances a tax rate reduction simply reflects a tax administration 
measure, as it is the case with regard to two of the challenged programmes – PEC and RECAP. 
Here, the measure is necessary due to distortions generated by the predominantly e xporting 
character of some companies in relation to indirect non -cumulative taxation. Companies that 
derive most of their revenue from exports would end up accumulating tax credits, because, in 
reality, the government would be collecting taxes from them th at were not due in the first place. 
The complicated solution to this situation would be for the company to file a reimbursement 
request. The logical solution Brazil adopted is to suspend the collection of taxes that, ultimately, 
would not be due, thus simp lifying the tax accounting system and increasing its efficiency. This 
same kind of logic is applied throughout the Brazilian tax system involving many other kinds of 
companies operating in markets where the last -stage tax liability is very low and it is no t therefor 
related to the export character of their activities.  
24. In "US – Large Civil Aircraft  (Second Complaint)", the Appellate Body put forth a three -step 
analysis for identifying whether revenue that is otherwise due is foregone: (1) identifying the ta x 
treatment that applies to the income of the alleged recipients; (2) identifying the appropriate 
benchmark, i. e., the tax treatment of comparable income of comparably situated taxpayers; and 
(3) comparing the reasons for the challenged tax treatment with  the benchmark tax treatment it 
has identified after scrutinizing a Member's tax regime7.We cannot, as the complainants purport to 
do, compare companies that do not tend to accumulate tax credits with companies which do, as 
they are not similarly situated taxpayers. Whereas companies that do not tend to accumulate tax 
credits are able to use their credits and thus recover the funds immediately, companies that do 
accumulate (and are faced with a much higher tax burden) will have a significantly increasing 
amount of money, rightfully theirs, tied up with the tax authorities, without being able to recover.  
Definition of "domestic" under Article 3.1(b) of the SCM Agreement  
25. Brazil would like to call attention to the fact that in the present dispute there are thr ee distinct 
concepts that should not be used interchangeably: (i) product produced according to a PPB; (ii) 
domestic product, within the meaning of Article 3.1(b) of the SCM Agreement; (iii) and product 
originated in Brazil according to the relevant rule o f origin. There may be cases where these three 
concepts apply equally to a same product. There are many cases, however, where these concepts 
do not overlap. Specifically, several products produced according to a PPB are not domestic within 
the meaning of A rticle 3.1(b) of the SCM Agreement.  
26. The key legal matter in this connection is the proper understanding of the term "domestic" in 
Article 3.1(b) of the SCM Agreement, which is not defined in the Covered Agreements. The 
complainants seem to propose a sweep ing theory that "domestic product" is any product that 
                                                
7 US – Large Civil Aircraft (second complaint), para. 812. WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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 "comes into existence within the territory of the country concerned"8. According to the 
complainants' definition, a good would be a "domestic product" for the purposes of Article 3.1(b) of 
the SCM Agre ement, even if the percentage of value added in the territory of the concerned 
country is virtually zero. Brazil disagrees.  
27. To Brazil, the discipline contained in Article 3.1(b) requires a definition of "domestic" that 
makes economic sense. It should not b e confused either with the WTO -law definition of "origin" 
relevant to the Agreement on Rules of Origin or with the Brazilian municipal law definition of 
"product produced in Brazil according to a PPB".  
28. While it may be impossible to determine in the abstra ct the exact percentage of value added in 
the country concerned that is required to characterize a product as "domestic" in all cases, there 
certainly are cases that can be safely excluded – or included – in this definition. A product that has 
most of its value from imported inputs is certainly not domestic within the meaning of Article 
3.1(b) of the SCM.  
C. THE PROGRAMMES   
The Informatics Programme  
29. The Informatics Law was established as part of Brazil's long term strategy, refined over the 
years, of promot ing "technological and productivity density9" and fostering know -how in the 
Brazilian IT sector. From its inception, the goal of the Informatics Law was to progressively 
promote the development of technology -based industries to expand the country's scienti fic 
infrastructure and to leverage high -skilled human resources.  
30. In order to fulfill these objectives, the Informatics Law gives tax incentives to companies that 
develop or produce IT and automation products10 and services, invest in activities of IT resea rch 
and development (R&D)11 and follow the respective PPB in the industrialization of the pertinent IT 
and automation products.12 
31. As a result of this new model, the Brazilian electronic sector, which comprises the segments of 
informatics, industrial automa tion, electric and electronic components, telecommunications, energy 
infrastructure and domestic utilities became more dynamic on account of the creation and 
progressive development of a high -skilled workforce13 and increased productivity in the sector, 
which in turn had a positive impact on imports of ITC inputs.  Subject to the fulfillment of the 
qualifying criteria mentioned above, Brazilian producers are entitled to the tax regime conceived to 
offset the costs related to fulfilling the program requiremen ts. 
32. The Informatics Law does not draw a distinction between domestic and imported products. The 
programme provides tax reductions to domestic producers in order to offset R&D investment and 
production -step requirements in order to foment technology and wor kforce skills development of 
the ICT sector in Brazil. The tax reductions under the Programme are not based on the origin of 
the good and the requirements to benefit from the tax regime are related to production and pre -
market activities which do not affec t products. These requirements do not affect the sale, offering 
for sale, purchase, transportation, distribution or use, nor do they constitute internal quantitative 
regulations requiring the use of products in specified amounts or proportions.  
33. The Informa tics Law provides, in this sense, subsidies to domestic producers within the 
meaning of Article III:8(b). Regarding intermediate products, the tax reductions cannot even be 
                                                
8 EU Oral Statement, paragraph 50.  
9 Japan – FWS, para 283.  
10 A list of the IT and automation products with corresponding NCM codes is found in Annex I of Decree No. 
5.906/2006 (as amended) and a list describing the products that are not considered IT and automation 
products for purposes of the Info rmatics Law is found under Annex II of the same decree Art. 16A of Law No. 
8.248/1991 (Exhibit EU -1) and items V through VII of Decree No. 5.906/2006 (Exhibit EU -7). 
11 Art. 4 of Law No. 8.248/1991, as amended (Exhibit EU -1). 
12 §1°C of Art. 4 of Law No. 8 .248/1991 (Exhibit EU -1) and Art. 1 of Law No. 8.248/1991 (Exhibit EU -1). 
13 Between 2005 and 2014, the number of people working in the sector increased from 133 to 174 thousand. 
Specifically regarding companies accredited under the Informatics Law (Exhibi t BRA -24), the job increase is 
significantly higher. From 2006 to 2013, job creation almost tripled from 55,388 to 134,295 jobs. Higher level 
IT and automation jobs more than doubled in this period, from 13,802 to 31,983 jobs, and positions strictly 
relate d to R&D doubled from 4,108 to 8,122 jobs. See also Exhibit  BRA-107. WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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 legally characterized as subsidies, since they do not constitute a financial contri bution within the 
meaning of the SCM Agreement.  
34. Therefore, the programme is outside the scope of Article III of the GATT 1994, as it does not 
discriminate with regard to tax or regulatory treatment nor does it establish mandatory 
quantitative requirements.  In addition, the Informatics Law is not a trade -related investment 
inconsistent with Article III of the GATT and is not a subsidy prohibited under Article 3.1(b) of the 
SCM Agreement.  
PADIS  
35. PADIS was established by means of Law No. 11.484, of 31 May 2007,  regulated by Decree No. 
6.233, of 11 October 2007 (as amended) and subsequent ordinances. As stated above, the PADIS 
is part of Brazil's PITCE and was created to promote the development of the semiconductor 
industry in Brazil. PADIS was not created in ord er to promote import substitution of 
semiconductors or to try to distort the condition of competition in the semiconductor markets. The 
very specific features of the semiconductor industry make such approach simply unrealistic. The 
resources to attempt suc h a feat or to compete with the few major front end producers at the top 
of the semiconductor chain would be basically prohibitive.  
36. As matter of fact, the implementation and effect of PADIS have not prevented the growth of 
semiconductor imports into Brazil . From 2011 to 2014, imports grew from USD 100 million to 
almost USD 378 million, attesting to the non -protectionist intent of the programme.  
37. The programme applies to companies that invest in R&D and perform in Brazil certain 
development and production act ivities related to semiconductors and displays. PADIS is, therefore, 
related to a mix of different development, production and service provision activities, and do not 
relate to products per se . PADIS also establishes R&D investment requirements of 5% of t he 
beneficiary's gross revenue in the local market after the deduction of taxes levied on the sales of 
semiconductors and displays.  
38. In light of the costs and high risks associated with the development and production of 
semiconductors  and in order to ensur e the fulfillment of the Program's goals, companies 
accredited under PADIS are entitled to a tax regime involving exemption of their IRPJ, CIDE and 
customs duties on their instruments, inputs and software destined to their covered activities. In 
addition, certain PIS/COFINS and IPI rates were reduced to zero. In particular, the programme 
provides subsidies to domestic producers through IRPJ reductions in order to offset R&D 
investment and production -step requirements. The tax exemption is based on a direct tax, and 
therefore not based on goods, and the requirements are related to development and production, 
pre-market activities which do not affect products. As for the zero rates of IPI and PIS/COFINS on 
semiconductors, as they are necessarily intermediate g oods, the exemption is neutral in terms of 
revenue collection.  
39. PADIS, therefore, is outside the scope of Article III of the GATT 1994. The programme 
provides subsidies to domestic producers within the meaning of Article III:8(b), through a tax 
exemption up on a direct tax, aimed at compensating producers for the requirements they have to 
fulfill. These requirements, in turn, do not affect the sale, offering for sale, purchase, 
transportation, distribution or use, nor do they constitute internal quantitative regulations 
requiring the use of products in specified amounts or proportions. Furthermore, PADIS is not a 
trade -related investment inconsistent with the TRIMS Agreement and is not a subsidy prohibited 
within the meaning of Article 3.1(b) of the SCM Agreem ent. 
PATVD  
40. The Brazilian Government decided on the adoption of a specific and unique standard, based 
upon the Japanese model14 but adapted to the Brazilian needs and realities. The implementation of 
the Brazilian Digital Television System ( Sistema Brasilei ro de Televisão Digital - SBTVD ) occurred 
                                                
14 The Japanese Standard for Digital Television (ISDB) operates mainly with High Definition Digital TV (HDTV) 
transmission, but is also capable of operating with Standard Digital TV (SDT V) technology. Set -top-boxes may 
convert digital signals (HDTV and SDTV) into NTSC and S -VHS signals or tune HDTV and SDTV signals and 
send them to video devices similar to what happens with the American standard. The Japanese standard also 
implemented mob ile transmissions and reception.  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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 by means of Decree No. 4.901, of 26 November 2003 From the very beginning, the 
implementation of digital television in Brazil was aimed at stimulating broadcasting, content 
producers and software industry, in addit ion to developing sector research.  
41. The Brazilian system is unique in many ways. Compared to the already existing standards 
(Japanese, European and American), the SBTVD -T adds technological innovations, especially 
regarding video codification H.264 and the  middleware developed in Brazil. The SBTVD -T 
preserved the characteristics of the Brazilian TV, open and free for all, but introduced the 
possibility of being received by portable and mobile receivers, in addition to allowing the 
interactivity of the viewe rs with the program.  In order to qualify to PATVD, producers  must 
commit to invest in R&D and perform activities of development and manufacture of digital 
television (TV) radiofrequency (RF) transmitting equipment, as classified in NCM 8525.50.20,15 
pursuant to the corresponding PPB16 or, alternatively, meet the criteria for products developed in 
Brazil17, as set forth by MCTI Ordinance 950/2006.18. 
42. The required R&D investment under the PATVD is a minimum of 2.5% of the beneficiary's 
gross revenue in Braz il after the deduction of the taxes levied on the sales of digital TV RF 
transmitting equipment and of the cost of acquisition of inputs.  Once accredited, producers are 
entitled to the reduction to zero of the rates of PIS/COFINS, IPI on the purchases of c ertain inputs 
and on their sales.  
43. PATVD is a programme aimed at fomenting and ensuring the proper transition of analog to 
digital television in Brazil with the new system. The programme provides subsidies to domestic 
producers through IPI reductions on tra nsmitters in order to offset R&D investment and 
production -step requirements. The tax reductions are not based on the origin of the good and the 
requirements are related to development and production, pre -market activities which do not affect 
products.  
44. The programme is outside the scope of Article III of the GATT 1994. PATVD provides subsidies 
to domestic producers within the meaning of Article III:8(b), the tax reductions are not based 
upon origin of the goods and are aimed at compensating producers for t he requirements of the 
programme. These requirements, in turn, do not affect the sale, offering for sale, purchase, 
transportation, distribution or use, nor do they constitute internal quantitative regulations 
requiring the use of products in specified amo unts or proportions. Furthermore, PATVD is not a 
trade -related investment measure inconsistent with Article III of the GATT and is not a prohibited 
subsidy within the meaning of Article 3.1(b) of the SCM Agreement. If the panel were to find that 
PATVD viol ates Article III of the GATT, it is justified under Article XX(a) of the GATT 1994 as a 
measure necessary to the protection of public morals.  
45. Arguendo , if the Panel finds that PATVD is not a "payment of subsidies exclusively to domestic 
producers" under th e provisions of Article III:8(b) of the GATT 1994 and that the program is 
inconsistent with any of the provisions of the GATT 1994 invoked by Japan, Brazil submits that any 
such inconsistency would be justified under Article XX(a) of the GATT, as PATVD is part of Brazil's 
comprehensive effort to protect its public morals.  
46. Brazil elected digital television as one of the most efficient ways to promote social inclusion, 
enable a universal network of distance learning, encourage R&D and foster the expansion of 
Brazilian technologies, so as to guarantee access to information at costs compatible with viewers' 
income. Brazil's Digital Television System is to remain open and free for the entire population and 
will introduce the possibility of being received by porta ble and mobile receivers, as well as allowing 
program interactivity.  
                                                
15 Article 13 of Law No. 11.484/2007.  
16 PPB for digital TV transmitting equipment was established by means of Interministerial Ordinance 
MDIC/MCTI No. 62, of 31 March 2014. Exhibit EU -89. 
17 A list describing the digital T V transmitting equipment, with respective NCM code, is found under Annex I of 
Decree No. 6.234/2007. Decree No. 6.234/2007 also provides similar lists for machines, devices, instruments 
and equipment (Annex II), inputs (Annex III) and software (Annex IV) u sed in the manufacture of digital TV 
transmitting equipment. PATVD encompasses only one PPB (Ordinance 62/2014).  
18 §1° of Art. 13 of Law No. 11.484/2007. As explained under the Informatics Law, for a product to be 
considered as developed in Brazil the act ivities of design and development of the product and of its 
specifications must have taken place in Brazil.  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
- B-56 - 
 
 47. Brazil's PATVD program is "necessary" within the meaning of Article XX(a) because (1) the 
interests it protects (public morals) are important to the highest degree, (2) it makes a signifi cant 
contribution to the protection of public morals, (3) it does not restrict trade unjustifiably, and (4) 
there is no reasonably available measure that would secure the same level of protection and that 
is less trade restrictive. The manner in which Braz il applies PATVD constitutes neither (a) a means 
of "arbitrary or unjustifiable discrimination" between countries where the same conditions prevail, 
nor (b) a "disguised restriction on international trade."  
Digital Inclusion Programme  
48. The Digital Inclusion  Programme ( Programa de Inclusão Digital ) is part of this broad effort to 
further digital inclusion in Brazil. The Programme was established by means of Law No. 11.196, of 
21 November 2005, known as Lei do Bem  (Good Law) and regulated by Decree No. 5.602, of 6 
December 2005 (as amended).19  
49. Pursuant to Article 28 of Federal Law 11,196 and to Article 1 of the aforementioned Decree, 
the program aimed at increasing the access of the Brazilian population to low cost computers and 
information technology products  by exempting PIS/COFINS levied on the gross revenue of retail 
sales of certain products20 and providing additional subsides to domestic producers accredited 
under the Informatics Law, in order to secure the development and production in Brazil of low cost  
IT products.  
50. The above mentioned additional subsidies to domestic producers accredited under the 
Informatics Law are provided through IPI reductions on certain low -cost final products in order to 
offset costs related to the compliance with their respectiv e production -step requirements. The tax 
reductions are not based on the origin of the good and the requirements are related to 
development and production, pre -market activities which do not affect products.  
51. Therefore, the programme is outside the scope of Article III of the GATT 1994. The Digital 
Inclusion Programme provides subsidies to domestic producers within the meaning of Article 
III:8(b), as the tax reductions are not based upon origin of the goods and are aimed at 
compensating producers from the req uirements of the programme. Furthermore, the Digital 
Inclusion Programme is not a trade -related investment inconsistent with the TRIMs Agreement and 
is not a subsidy prohibited under Article 3.1(b) of the SCM Agreement.  
INOVAR -AUTO  
52. Over the past years, the  Brazilian Government has endeavored to promote a comprehensive 
qualitative improvement of the vehicles produced and sold in its domestic market, encompassing 
technological and safety aspects of the products, and an overhaul of their energy efficiency and 
gas-emissions levels. This paradigm -shift was conceived in order to benefit Brazilian consumers as 
they will be able to enjoy a market with better, safer and more environmentally friendly vehicles.  
53. In light of these objectives, the Brazilian Government env isaged, among other measures, a 
specific tax regime for the automotive sector in Brazil aiming at supporting technological 
development, innovation, safety, environmental protection, energy efficiency and improvement of 
the quality of cars, trucks, buses an d auto parts.  
54. For these purposes, on April 2012, Brazil issued Provisional Measure No. 563 (MP 563/2012), 
creating the Program of Incentive to the Technological Enhancement and Densification of the 
Automobile Production Chain ( Programa de Incentivo à Inova ção Tecnológica e Adensamento da 
Cadeia Produtiva de Veículos Automotores  – INOVAR -AUTO). MP 563/2012 was implemented by 
Decree No. 7.716 in April 2012 and was converted into Law No. 12.715 in September 2012. 
INOVAR -AUTO is governed by Articles 40 to 44 of  Law 12.715 and creates a so -called "presumed 
IPI credit" scheme21. 
                                                
19 Item II of article 30 of Law No. 11.196, of November 21, 2005.  
20 Art. 28 of Law No. 11.196/2005 and Art. 1 of Decree 5.602/2005.  
21 Brazil notes  that the "presumed IPI credits" provided under INOVAR -AUTO are not value -added tax credits 
related to tax obligations on inputs or capital goods paid at previous steps along the production chain. As 
explained in this section, despite their denomination, t he INOVAR -AUTO presumed credits are subsidies paid to 
accredited producers.  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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 55. INOVAR -AUTO is the latest of a sequence of governmental measures aimed at improving the 
quality of cars circulating in Brazil. Most of this effort was directed at the promotion of cleaner,  
more efficient vehicles through the reduction of CO 2 emissions. INOVAR -AUTO is not only part of 
this effort, but the synthesis of a process to adapt emission reduction goals to the Brazilian 
automobile sector.  
56. The guiding principle of INOVAR -AUTO is to pr omote the sustainable development of the 
automotive market, both through requirements which bring the vehicles produced and sold in 
Brazil to international standards and through the necessary corresponding incentives to make the 
changes effective and capab le of being met.  
57. The energy efficiency goals of INOVAR -AUTO are made clear by its "compulsory habilitation 
goals". Companies that voluntarily exceed the "compulsory habilitation goal" are granted an 
additional IPI reduction of 1% or of 2%. The commitment t o achieve minimum levels of energy 
efficiency is a key aspect of INOVAR -AUTO. Companies which do not meet the compulsory goal are 
subject to progressive fines proportional to the energy consumption in excess of the target22. 
58. More importantly, if all qualif ied companies in the INOVAR -AUTO programme achieve the goal 
of 1.68 MJ/km (equivalent to the IPI bonus of 2 percentage points) by 2017, the energy efficiency 
of the vehicles marketed in Brazil will be close to the energy efficiency of the European vehicles . 
59. Promoting energy efficiency is but one of the goals of the Programme. As already mentioned, 
INOVAR -AUTO ultimately aims to promote comprehensive qualitative improvement of the vehicles 
sold in Brazil and of the automotive sector as a whole. Therefore, in  order to benefit from the 
Programme, companies are subject to a process of accreditation by which they commit to comply 
with several requirements established in light of the goals.  
60. The programme encompasses in a non -discriminatory manner manufactures, dis tributers and 
newcomers to the Brazilian market. Automobile manufacturers must perform a number of 
manufacturing steps in Brazil23 set out in Annex III of Decree  7819/2012, according to the type of 
vehicle produced. They also must choose to perform two of the following three obligations: (i) to 
make expenditures in Brazil on research and development24 based on a percentage of their total 
gross revenue from the sale of goods and services excluding taxes25; (ii) to make expenditures in 
Brazil on engineering, basic industrial technology and supplier capacity -building based on a 
percentage of their total gross revenue from the sale of goods and services excluding taxes26; or 
(iii) to join the Brazilian Programme of Vehicle Labeling27 – Programa Brasileiro de Eti quetagem 
Veicular (PBEV), a labeling programme to classify the fuel -efficiency of light vehicles and inform 
consumers on their products.  
61. In order to attain INOVAR -AUTO's objectives, distributers also have equivalent obligations. 
However, since they do not manufacture goods in Brazil, the productive step requirement cannot 
apply to them. They must, therefore, fulfill the other three (i, ii and iii) previously mentioned 
conditions.  
62. Companies with an investment project for a new plant (new -comers) have a tempo rary 
accreditation, as they will become manufacturers once they conclude their project and start 
producing vehicles. They must present an investment plan, with all of the technical characteristics 
of their products, for each unit they intend to establish. Once they start their manufacturing 
activities, the requirements for manufacturers apply, based on the year previous to their 
accreditation.  
                                                
22 As determined in Article 43 of Law 12.715 (as amended).  
23 Article 40, paragraph 5 of Law 12.715.  
24 The expenditures may be done directly, through contract with a third party o r with a university, learning 
institution, enterprise or inventor under the Lei de Inovação Científica , Law 10.973/2004. The expenditures can 
also be made to the National Fund for the Scientific and Technologic Development – Fundo Nacional de 
Desenvolvimen to Científico e Tecnológico  - FNDCT . These expenditures, in turn, may be used to generate 
presumed IPI credits.  
25 Id. 
26 Id. 
27 For heavy vehicles, since there is no requirement for compulsory reduction goals, the corresponding 
requirement for labeling is  also removed.  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
- B-58 - 
 
 63. Once companies have been accredited, they are eligible to receive presumed IPI credits 
against their contribution t o the programme's goals. Both importers and producers may benefit 
from this provision. The presumed credit is calculated based upon certain expenditures.  
64. Vehicles imported under the framework of the Economic Complementation Agreements 14 and 
55 by accredit ed companies that manufacture vehicles in Brazil or new -comers have a 30 p.p. IPI 
reduction. The specific rules for trade with each of the countries are the relevant agreements and 
their additional protocols and must be followed in order to benefit for the  reductions.  
65. INOVAR -AUTO is outside the scope of Articles III:2, III:4 and III:5, as it is a subsidy paid 
exclusively to domestic producers according to Article III:8(b) of the GATT 1994. Second, even if 
the programme were to be found inconsistent with one  or more than one of these provisions, 
INOVAR -AUTO is a measure justified under Article XX(b) and XX(g) of the GATT 1994.  
66. Brazil would like to underscore that the conditions for accreditation under the INOVAR -AUTO 
and the general requirements that must be fulfilled in order to benefit from the regime are not, as 
a whole, inconsistent with WTO national treatment obligations. Also, the requirements to perform 
certain manufacture steps in Brazil and to invest in R&D and or engineering in Brazil, in order to 
benefit from the tax regime established in the INOVAR -AUTO, are not local content.  
67. If the Panel were to understand that INOVAR -AUTO violates in some aspect one or more 
paragraphs of Article III of the GATT 1994, Brazil submits that the measure is justified u nder 
Articles XX(b) and (g) of GATT 1994, as it is necessary to protect human life and health and 
relates to the conservation of exhaustible natural resources. INOVAR -AUTO is necessary to ensure 
the circulation of environmentally friendly and safe cars, as  well as the provision of their parts in 
Brazil, and is related to the preservation of gasoline and petroleum by fomenting energy efficiency. 
The manner in which Brazil applies PATVD constitutes neither (a) a means of "arbitrary or 
unjustifiable discrimina tion" between countries where the same conditions prevail, nor (b) a 
"disguised restriction on international trade."  
68. Brazil further argues that the tax treatment given to Mexico, Argentina and Uruguay fall under 
the purview of the Enabling Clause as "non -tariff measures" under the LAIA Agreement.  
69. Finally, INOVAR -AUTO does not constitute a trade related investment measure inconsistent 
with the TRIMs Agreement. Also, the programme is not contingent on the use of domestic products 
within the meaning of Article  3.1(b) of the SCM Agreement.  
Programs addressing tax credit Accumulation – PEC and RECAP  
70. Brazil has a system of value -added taxation along the production chain. In the normal course 
of business, companies have more debits than credits and offset them with  adequate regularity. 
There is no cash flow problem, as the credits gained are completely used to offset against debits 
on a monthly basis without any meaningful administrative or legal constraints deriving from the 
system.  
71. In many sectors, however, produc ts are subject to low or no taxation, reflecting the selective 
nature and the extra -fiscal character of indirect taxes in Brazil. These sectors tend to accumulate 
tax credits as the tax debits due are lower than the credits acquired in the previous steps o f 
production. Credits which would otherwise be normally offset are accumulated. As a result, these 
"predominantly credit -accumulating companies" structurally accumulate tax credits in their normal 
course of business. Avoiding this situation is crucial for the Brazilian authorities.  
72. The term "PEC" is being used in this dispute to make reference to a set of rules that provide 
the suspension of IPI, PIS and COFINS on sales of inputs to companies that tend to accumulate tax 
credits, and the suspension of IPI, PIS-importation and COFINS -importation on imports of inputs 
made by such companies. The core legal provisions addressed under the "programme" include 
basically art. 29, of Law No. 10.637/2002 (which provides for the suspension of IPI), and art. 40, 
of Law No. 10.865/2004 (which provides for the suspension of PIS, COFINS, PIS -importation and 
COFINS -importation.  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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 73. The Special Regime for Acquisition of Capital Goods by Exporting Companies - RECAP – 
(Regime Especial de Aquisição de Bens de Capital para Empresas E xportadoras ) is another regime 
aimed at preventing the accumulation of credits in companies which structurally tend to have more 
credits than debits28. Created by Law 11,196 of 2005, RECAP suspends the PIS/Pasep and COFINS 
contributions and PIS/Pasep -Impor tação and COFINS -Importação29 for predominantly exporting 
companies30 in the acquisition of capital goods31. 
74. PEC and RECAP are not inconsistent with the SCM Agreement, as it is a tax administration 
measure which does not provide a financial contribution  and does not confer a benefit . 
Furthermore, even if the Panel understands that there is a subsidy, it is not contingent upon 
export performance as it establishes an objective criterion which is part of a larger framework 
addressing the issue of tax credit ac cumulation.  
75. The Brazilian tax system provides for a method of tax administration to avoid the accumulation 
of tax credits by companies, such as the predominantly exporting companies, related to taxes that 
were never due. By granting tax suspensions or exem ptions in the acquisition of inputs by 
companies whose majority of revenue comes from final products and are subject to low taxation, 
or are exempt from these taxes, such as is the case of predominantly exporting companies, the 
government is not foregoing any revenue. It simply avoids that these companies accrue tax credits 
that would have to be later reimbursed by the government.  
76. The complainants incorrectly compare companies that tend to chronically accumulate credits to 
companies which do not tend to acc umulate credits. The premise of the comparison is wrong as 
the wrong benchmark is used.  
77. The measure essentially equalizes the conditions of competition by making all companies in 
the Brazilian market not credit accumulators. It does not put any Brazilian c ompany in a "better 
off" situation regarding the internal or the international market. In sum, a benefit for the 
companies under PEC cannot be presumed solely from the legal text of the programme.  
78. The progressive reductions accrue from the fiscal reality r ather than from a concentrated effort 
towards exporting. The programme is not contingent in law upon export performance. The criteria 
for accreditation are an objective assessment of the level of tax credit accumulation of companies 
in Brazil.  
D. CONCLUSIO N 
79. In light of the arguments above, Brazil respectfully requests that all of the measures 
challenged by the complainants be found consistent with the relevant WTO provisions and that 
each of their claims be dismissed.  
 
                                                
28 Given the high cost of capital goods, such as new machinery, apparatuses, instruments and equipment, the 
PIS/PASEP and COFINS due on their acquisition gives rise to large amounts of tax credits that predominantly 
exporting companies have difficulties to offset or compensate, considering that export sales are exempted from 
indirect taxes.  
29 It is important to note that IPI does not generate credits, as capital goods are final goods for these 
companies, and would not otherwise generate tax credits. In the case of capital goods, thus, only PIS/Pasep 
and COFINS and PIS/Pasep -Importação  and COFINS -Importação  obligations generate correspondent tax 
credits to be used by the purchaser in its obligations.  
30 Pursuant to Article 13 of Law 11,196/200 5, predominantly exporting companies are companies whose gross 
profit from exports during the preceding calendar year was equal to or greater than 50 percent or who commit 
to export at least 50 percent of their gross turnover for a period of two years. The  required threshold had 
initially been set at 80%. Yet, the tax authorities saw that tax credit accumulation continued to occur. 
Therefore it was later reduced to 70% (or to 60% for companies manufacturing certain products) by Law 
11,774 of 2008 (transposi ng Provisional Measure 428 of 2008), then finally to 50% by Law 12,715 of 2012 
(transposing Provisional Measure 563 of 2012).  
31 For IPI obligations, capital goods are considered final goods, therefore, do not generate credits.  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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 ANNEX B -6 
SECOND PART OF THE E XECUTIV E SUMMARY OF THE ARG UMENTS OF BRAZIL  
I. INTRODUCTION  
1. Throughout these proceedings, Brazil has established that the measures challenged by the 
European Union and Japan are not only consistent with the Covered Agreements, but are 
designed, structured and app lied in a way to promote some of the main objectives of the WTO.  
The Informatics Programme, PADIS, PATVD and the Digital Inclusion Programme do not result in 
discrimination against imports as prohibited by the GATT 1994, the TRIMS Agreement and the 
SCM Ag reement. Likewise, INOVAR -AUTO is a WTO -consistent subsidy programme on the 
production of vehicles in Brazil that is also justified under paragraphs (b) and (g) of Article XX of 
the GATT 1994. Finally, PEC and RECAP are tax administration measures that do not constitute a 
financial contribution, or provide a benefit within the meaning of the SCM Agreement, that are tied 
to the accumulation of tax credits, rather than export performance, and, therefore these measures 
are not export subsidies as argued by the  complainants.   
II. HORIZONTAL LEGAL ISSUES  
2.  In order to demonstrate the consistency of the measures at issue, Brazil considers 
important to address certain systemic legal issues it believes should guide the analysis of the panel 
and the interpretation of  the provisions raised by the complainants.  Firstly, Brazil will address the 
term "domestic" in light of the provisions relevant to the dispute at hand. Secondly, it will further 
elaborate on the payment of subsidies to domestic producers by means of indi rect taxation. 
Finally, Brazil will reiterate its views on the legal standard that should be apply in the analysis of 
the dispute.  
The term "domestic" in Article 3.1(b) of the SCM Agreement and in Article III of 
the GATT 1994  
3. In Brazil´s view, the proper i nterpretation of the term "domestic" in the relevant Covered 
Agreements is critical to the Panel's assessment of the consistency of the challenged measures 
with Brazil's WTO obligations.  The complainants have proposed a sweeping theory that a 
“domestic pr oduct” is any product that “comes into existence within the territory of the country 
concerned”1 or "that has not been imported"2 and, as a consequence, any subsidy related to the 
locus of the productive activity or designed to promote local production wou ld result in a subsidy 
contingent on the use of domestic products inconsistent with WTO rules. Under this assumption, 
the complainants have characterized the production step and the R&D requirements under five of 
the seven challenged programs as a de jure  violation of both Article III of the GATT 1994 and 
Article 3.1(b) of the SCM Agreement.  
4. The sweeping notions raised by the complainants find no ground in WTO rules3. While the 
meaning of “imported” may be much easier to grasp and define (something brought from abroad; 
that crosses the border, etc.); the term “domestic” for purposes of the SCM Agreement and the 
GATT 1994 is not. Brazil understands that a superficial interpretation of the term “domestic” as 
“anything that is not imported” may reduce and disto rt the very concept and spirit of these 
Agreements For Brazil it follows from the structure and logic of the legal text that the proper 
interpretation of what is domestic for the purposes of the disciplines contained in Article 3.1(b) of 
the SCM Agreement and Article  III of the GATT 1994 cannot be determined in abstract. It has to 
                                                
1 EU - Oral Statement, para . 50. The complainants also seem to understand the term “domestic” as 
strictly juxtaposed to “imported”.1 While the meaning of “imported” may be much easier to tangibly grasp 
and define (something brought from abroad; that crosses the border, etc.); the ter m “domestic” for purposes 
of the SCM Agreement and the GATT 1994 is not. Brazil understands that a superficial interpretation of the 
term “domestic” as “anything that is not imported” may reduce and distort the very concept and spirit of 
these Agreements.  
2 EU- First Integrated Executive Summary para 15  
3 Brazil's First Closing Statement, para. 5. WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
- B-61 - 
 
 be established on a case -by-case basis, in light of the object and scope of those provisions and in 
the context of the total configuration of the facts of each situation.  
5. Brazil understands that the term domestic cannot be interpreted in a manner that would 
prevent members to confer subsidies to producers contingent upon the performance of production 
steps of goods in their territory, including those that are meant to be integrate d into a local 
production chain.  Indeed, as WTO Agreements do not prohibit a Member from conditioning a 
subsidy to a production requirement or other localization requirements, such as the level of 
employment or investments in R&D, it would be incongruous to interpret the term “domestic 
product” as encompassing domestic production requirements.   
6.     It must follow therefore that the term "domestic product" has to have an economic 
sense.  In this connection, the definition of a domestic product is a factual  question that must be 
determined by looking at the characteristics of the specific product/sector. While it may not be 
possible to determine precisely the exact percentage of value added required to characterize, in 
each case, a product as domestic, the e conomic dimension must be taken into account. It is not 
merely because a product is made or brought into existence within the territory of a Member4 that 
the product is necessarily or automatically a "domestic product" within the meaning of the relevant 
provisions, as the European Union contended.  
7. Brazil has provided arguments and examples regarding the absurd conclusions that these 
notions would create, such as the situation of a product with only 1% of its value added in a 
Member's territory and that woul d have to be considered a domestic product. Should this notion 
prevail, a Member's ability to grant subsidies to its producers and to foster the integration of a 
production chain in its territory would be severely curtailed, effectively rendering moot Arti cle 
III:8(b) of the GATT.       
The legal standard for subsidies paid to domestic producers through indirect tax 
reductions   
8. Brazil submits that the Covered Agreements cannot be read as precluding a Member from 
using indirect tax reductions to finance its public spending, including the granting of subsidies to 
domestic producers, as long as the tax incentive does not introduce discrimination between foreign 
and domestic products . 
9. As explained at length, the relevant legal issue in assessing the impact of a subsidy 
granted to domestic producer is not whether it was granted through a specific means, but rather 
whether the subsidy entails an illegitimate trade distortive advantage. Therefore, the possibility of 
a Member granting a subsidy to its domestic produc er through indirect tax reductions, an 
instrument increasingly used by governments – especially those of developing countries – as an 
effective substitute of direct payments, cannot be presumptively excluded. There is an intrinsic 
rationality in saving the  government from the task of collecting taxes and then using the money 
derived from those taxes to pay back the same persons.  Assuming ex ante that indirect tax 
reductions cannot legitimately qualify as a subsidy to domestic producers within the meaning o f 
Article III:8(b) would deprive Members of an important tool to pursue its developmental goals and 
policies.  
10. Indirect tax reductions, as any other type of subsidy, may have, of course, adverse effects 
in the marketplace, but this has to be assessed on a c ase-by-case basis. The complainants, 
however, seem to believe that “by definition” a subsidy granted through indirect tax reductions is 
WTO-inconsistent since it would necessarily discriminate against imported products and adversely 
affect the conditions o f competition on the marketplace. As Brazil has demonstrated, this 
assumption is flawed.  
The legal standard for de jure  and de facto  the present dispute  
11. It is not disputed that the complainants made their claims as de jure  claims. They have 
clearly submit ted that the Panel should analyze the challenged programmes at their face value, 
according to their structure and design, as evidenced by their legal text. Brazil understands that, 
                                                
4 European Union Responses  to the Panel para 41  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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 for the complainants, the programmes discriminate between domestic and impo rted products and 
are contingent upon the use of domestic over imported products or contingent upon export 
performance by their very nature as they have not put forth evidence to substantiate their claims 
that these measures are inconsistent with WTO rules  de facto . 
12. Based upon the legal standard applied to assess both de jure  and de facto  cases, Brazil 
submits that the complainants clearly have not been able to establish a prima facie  case with 
regard to their de jure  claims and have not argued, much less p roven that the measures at issue 
violate de facto  the relevant provisions.  
13. While not having to do so, Brazil brought extensive evidence that breaks any presumption 
of a de jure violation or contingency in the challenged programmes. Brazil particularly 
demo nstrated the overwhelming amount of imports in the composition of the products made by 
companies accredited to the programmes and that the costs associated with the programme may 
more than offset the benefits intermediate and for final products. The compla inants have not 
brought evidence proving otherwise. This was not done by accident. The evidence simply is not 
there. The challenged programmes have not restricted trade or discriminated against imported 
products. The numbers, as Brazil extensively pointed out, do not add up.  
14. The ICT programmes and INOVAR -AUTO tax reductions are production subsidies designed 
to foment technology and workforce capacity in strategic sectors of the Brazilian economy. The 
measures were structured, on the one hand, by establishin g R&D investment and production -step 
requirements with which accredited companies must comply and, on the other hand, by providing 
tax incentives to ensure they are able to meet the objectives of the programme The programmes 
are structured so as the requir ed costs/ investments and the tax incentives offset each other 
during the production process. The tax incentives are clearly a production subsidy that  do not 
affect the conditions of competition in the market place From a legal standpoint, this practice i s 
wholly consistent with the covered agreement, as WTO rules do not prevent members to grant 
subsidies through fiscal incentives conditioned upon production requirements or other localization 
requirements such as the level of employment or investments in R &D and innovation, so long the 
requirements do not establish, in law or in fact, any condition related to the origin of the products 
used in the production process or result in discrimination against imported products  
15. As for PEC and RECAP, the tax suspensi ons the complainants unduly read as subsidy, are 
simply a tax administration measure, necessary to avoid structural tax credit accumulation for 
certain types of companies. Here again, no  de jure  violation can be read or implied in the legal 
texts that esta blished the two measures.   
16.  As demonstrated, it is clear from the design and structure of each of the challenged 
programmes, that the programmes at issue are wholly consistent with the provisions of the GATT 
and the SCM Agreement. With regard to TRIMs, Br azil understands that this agreement is 
intrinsically tied to Article III of the GATT. Accordingly, the arguments made under GATT 
throughout this proceeding are equally applicable to TRIMS.  
III. MEASURES RELATING TO THE ICT, AUTOMATION AND RELATED SECTORS   
The Informatics Programme is consistent with the Covered Agreements  
17. The complainants contend that the measures at issue were designed, structured and 
applied not to accomplish the objectives set out in the programs, but rather to develop the 
domestic indu stry to the detriment of imported products.5 There is absolutely no truth in this 
assertion.  
18. The ICT Programs do not aim to replace imports for domestic products, but to promote the 
development of the Brazilian ICT sector and its integration in global supp ly chains, which actually 
has a positive impact on imports. Brazil has provided plenty of data demonstrating that that 
imports of ICT products have increased significantly between 2005 and 2014.6  The European 
Union's attempt to dismiss this evidence by st ating that the “ICT sector grew in the same period”7 
                                                
5 EU Oral Statement – Para. 105; Japan Oral Statement – Paras. 6, 8. 
6 Paras. 112, 115 and 116 of Brazil’s FWS.  
7 Para. 105 of the EU’s Oral Statement.  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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 simply does not hold. Brazil has, in fact, provided data showing how its ICT exports have remained 
constant throughout time and how imports of ICT products have significantly increased, due to the 
impact  of the Informatics Law.8 Moreover, Brazil has shown how jobs in the Brazilian Electronic 
sector have increased and more so those in accredited companies, especially higher level jobs and 
jobs related to R&D.9  
19. The Informatics Programme is a subsidy paid t o domestic producers within the meaning of 
Article III:8(b) of the GATT 1994 to offset R&D and production step requirements with which they 
must comply. The indirect tax reductions for the production of final products are wholly absorbed 
by the costs assoc iated with the compliance with the programme’s requirement and do not result 
in a taxation of imported products “in excess of” domestic products in the sense of Article III:2; 
the requirements do not affect the internal sale, offering for sale, purchase, t ransportation, 
distribution or use of imported products and do not confer less favourable treatment to those 
products, in the sense of Article III:4, and the requirements  are not quantitative regulations 
relating to the mixture processing or use of produc ts “quantitative regulation relating to the 
mixture, processing or use of products in specified amounts or proportions” and do not require 
directly or indirectly, that any specified amount or proportion of any product which is the subject 
of the regulation  must be supplied from domestic sources, in the sense of Article III:5 of the GATT.  
20. With regard to intermediate products, Brazil demonstrated that due to the overall 
functioning of the Brazilian tax system, there is no effective difference in taxation as t he 
suspension or exemption of indirect value -added taxes in the middle of the production chain does 
not affect the tax burden of the final product.  Brazil argues mutatis mutandis for intermediate 
products in the Informatics Law the arguments put forth und er PADIS in this submission.  
21. Furthermore, the Informatics Programme does not constitute a trade related investment 
measure in violation of Article III:4 of the GATT, thus, does not violate Article  2.1 of the TRIMs 
Agreement and is not a subsidy contingent upon the use of domestic over imported products, 
under Article 3.1(b) of the SCM Agreement.  
PADIS is consistent with the Covered Agreements  
22. Like the Informatics Programme, the PADIS Programme is a subsidy paid to domestic 
producers in order to offset R&D a nd production step requirements with which they must comply. 
In this case, however, the benefits are related to reduction of direct taxes and customs duties 
accredited companies must pay. They do not stem from reductions on indirect taxes, as alleged by 
the complainants, as all of the relevant products are intermediate products and, as such, does not 
result in a taxation of imported products “in excess of” domestic products in the sense of Article 
III:2.  
23. Brazil understands that, despite all the evidence in contrary, the complainants insist that 
PADIS would impose a higher tax burden on imported products related to indirect taxation 
adversely affecting the conditions of competition of imported products.  As  Brazil has 
demonstrated throughout this proceeding the PADIS program aims at fostering knowledge, 
innovation and the development of the Brazilian sector of semiconductors and displays by 
promoting investments in R&D.  Its objective is to promote development and assembly of 
semiconductors and displays in Br azil in a holistic manner without any discrimination towards the 
origin of inputs used in the process. To be eligible to benefit from the tax exemption granted under 
PADIS, companies must invest in R&D and perform certain activities related to the developm ent 
and assembly of semiconductors and displays in Brazil.10PADIS was not conceived for and is not 
aimed at replacing imported by domestic products or undermining market competition. In order to 
illustrate that, Brazil prepared Exhibit BRA -109 and explained  during the first substantive meeting 
with the Panel that the exemptions of indirect taxes granted under PADIS do not have any impact 
on the total tax burden of the production chain. In other words, the total tax paid throughout the 
production chain is the  same with or without the exemptions granted under PADIS11  
                                                
8 Paras. 112 -114 of  Brazil’s FWS.  
9 Paras. 112-116 of Brazil’s FWS.  
10 Para. 317 -323 of Brazil’s FWS.  
11 Para. 185 of Brazil’s FWS  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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 24. Furthermore, as it was the case under the Informatics Programme the requirements under 
PADIS do not affect the internal sale, offering for sale, purchase, transportation, distribution or use 
of imp orted products and do not confer less favourable treatment to those products, in the sense 
of Article III:4, and the requirements  are not quantitative regulations relating to the mixture 
processing or use of products “quantitative regulation relating to t he mixture, processing or use of 
products in specified amounts or proportions” and do not require directly or indirectly, that any 
specified amount or proportion of any product which is the subject of the regulation must be 
supplied from domestic sources, in the sense of Article  III:5 of the GATT.  
25. The PADIS Programme does not constitute either a trade related investment measure in 
violation of Article 2.1 of the TRIMs Agreement and is not a subsidy contingent upon the use of 
domestic over imported products,  under Article 3.1(b) of the SCM Agreement.  
26. The complainants take issue with an alleged cash flow that, in their views, would 
necessarily follow an exemption of taxation on intermediate products due to the amount of time 
that runs between the acquisition o f the intermediate product and the sale of the product that 
incorporates that intermediate product, The complainant  
27.   Since the credits accrued from the purchase of inputs do not have to be necessarily 
compensated with debits of the same tax, they do not have necessarily to wait for the sale of the 
final product to be used. Such credits may be compensated even before the debit from the sale of 
the final product is generated.  
28. The complainants fail to account that, in the case at hand, PADIS imposes certain 
requirements for companies to be eligible to receive the tax incentives under the program, such as 
carrying out investments of at least 5% of the beneficiary’s gross revenue in R&D and the 
performance of specific development and/or manufacturing steps, whi ch require that investments 
be made. The investments in R&D and in the development and/or manufacture of intermediate 
products is a major investment incurred by companies, which offsets any possible financial 
contribution that may derive from a company not  bearing the “cost of money” of the payment of 
the relevant indirect tax in that stage of production. Accordingly, the alleged financial contribution 
received under PADIS does not have an impact on the competitive position of goods on the 
market.  
Brazil ha s demonstrated that the PATVD is consistent with the Covered 
Agreements  
29. Brazil has demonstrated throughout these proceedings that, as a subsidy paid to domestic 
producers in order to offset investments in R&D and in the compliance of production step 
requir ements, the tax reductions under the PATVD Programme are fully consistent with WTO rules. 
These indirect tax reductions under the programme are wholly absorbed by the costs associated 
with the compliance with the programme and do not result in a taxation o f imported products “in 
excess of” domestic products in the sense of Article  III:2; the requirements do not affect the 
internal sale, offering for sale, purchase, transportation, distribution or use of imported products 
and do not confer less favourable tr eatment to those products, in the sense of Article III:4, and 
the requirements  are not quantitative regulations relating to the mixture processing or use of 
products “quantitative regulation relating to the mixture, processing or use of products in specif ied 
amounts or proportions” and do not require directly or indirectly, that any specified amount or 
proportion of any product which is the subject of the regulation must be supplied from domestic 
sources, in the sense of Article III:5 of the GATT.  
30. PATVD do es not constitute a trade related investment measure in violation of Article  III:4 
of the GATT, thus, does not violate Article 2.1 of the TRIMs Agreement and is not a subsidy 
contingent upon the use of domestic over imported products, under Article  3.1(b) of the SCM 
Agreement.  
31. Brazil has stated also that, if the panel understands that the PATVD programme violates 
the GATT, it is justified as a measure necessary to protect public morals under Article XX(a) of the 
GATT. In its second submission Brazil will ex plore and counter the complainants' arguments 
related to this latter aspect and their suggestions for less trade restrictive measures below.  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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 Brazil has demonstrated that the Digital Inclusion Programme is consistent with 
the Covered Agreements  
32. As Brazil ha s explained, the Digital Inclusion Programme is a subsidy paid to domestic 
producers accredited under the Informatics Programme, in order to foment the production in Brazil 
of certain low cost ICT consumer products. The programme is fully consistent with B razil´s WTO 
obligations. The indirect tax reductions are wholly absorbed by the costs associated with the 
compliance with the programme and do not result in a taxation of imported products “in excess of” 
domestic products in the sense of Article III:2; the  requirements do not affect the internal sale, 
offering for sale, purchase, transportation, distribution or use of imported products and do not 
confer less favourable treatment to those products, in the sense of Article III:4, and the 
requirements  are not  quantitative regulations relating to the mixture processing or use of 
products “quantitative regulation relating to the mixture, processing or use of products in specified 
amounts or proportions” and do not require directly or indirectly, that any specifi ed amount or 
proportion of any product which is the subject of the regulation must be supplied from domestic 
sources, in the sense of Article  III:5 of the GATT. The Digital Inclusion Programme does not 
constitute a trade related investment measure that vio lates Article 2.1 of the TRIMs Agreement 
and is not a subsidy contingent upon the use of domestic over imported products, under Article 
3.1(b) of the SCM Agreement.  
IV. MEASURES IN THE AUTOMOTIVE SECTOR  
Brazil has demonstrated that INOVAR -AUTO is consiste nt with the Covered 
Agreements  
33. The INOVAR -AUTO Programme is a subsidy paid to domestic producers and importers who 
undertake certain obligations to produce and commercialize safer, more environmentally friendly 
vehicles in Brazil, and make certain expendit ures in Brazil. Accredited companies that fulfill the 
programme's requirements are entitled to benefit from presumed IPI credits that can be used to 
offset tax debits on both imported and domestic vehicles. Since the requirements are all pre -
market operati ons, they do not affect the internal sale, offering for sale, purchase, transportation, 
distribution or use of imported products and do not confer less favourable treatment to those 
products, in the sense of Article III:4.  They do not result in a taxation  of imported products “in 
excess of” domestic products in the sense of Article III:2. The Programme also does not establish 
any quantitative regulations relating to the mixture processing or use of products “quantitative 
regulation relating to the mixture,  processing or use of products in specified amounts or 
proportions” and do not require directly or indirectly, that any specified amount or proportion of 
any product which is the subject of the regulation must be supplied from domestic sources, in the 
sense of Article III:5 of the GATT.  
34. INOVAR -AUTO does not constitute either a trade related investment measure in violation 
of Article 2.1 of the TRIMs Agreement or a subsidy contingent upon the use of domestic over 
imported products, under Article 3.1(b) of th e SCM Agreement.  
35. Brazil submitted also that in any event the tax treatment conferred under the Program 
would be justified under Article XX(b) and XX(g) of the GATT as necessary measures to protect 
human life and health and relating to the conservation of e xhaustible natural resources, and that 
the tax treatment given to certain LAIA countries is justified under the Enabling clause. Brazil will 
further explore these two issues below.  
Brazil has established that INOVAR -AUTO is necessary to protect human life and 
health and is thus justified by Article XX(b) and XX (g) of GATT  
36. Brazil has demonstrated that the tax treatment under INOVAR -AUTO is "necessary" to 
protect human life or health and that, contrary to what the complainants argued, there is a clear 
link b etween the challenged aspects of the programme and the requirements of paragraph (b) of 
Article XX. This contention is wrong.  
37. The INOVAR -AUTO is a shift in paradigm with regard to environmental policy in the 
automotive sector.  As Brazil explained at lengt h the prior traditional approaches to foster the 
sustainable development of the automotive sector in Brazil had run on their course.  In order to WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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 require automobile industry to be more efficient, it becomes imperative to grant specific incentives 
to promot e energy efficiency ant thus, protect human life and health and the environment. 
INOVAR - AUTO is aimed at providing, in and open and effective manner,  the conditions for the 
automotive industry in Brazil, as well as its mains strategic suppliers, to compl y with global 
environmental and security standards, while also providing incentives for importer to 
commercialize energy efficient automobiles in Brazil     
38. The fuel efficiency standards, together with the investments and production steps 
requirements, on the one hand, and the benefit structure, on the other, are beyond doubt a 
measure necessary to promote the quality and the efficiency of the vehicles circulation in Brazil, 
and to reinforce the strategy of petroleum conservation in the country. INOVAR -AUTO ´s particular 
contribution, with its carrot -and stick structure, allows for the overall efficiency improvement of 
the automotive sector in Brazil. Because both domestic manufactures and importers have to 
comply with the same energy conservation/efficiency requirements established in the programme, 
there is a clear "even handedness" in its application.  
39. As a matter of fact, INOVAR -AUTO is structured in an open non -discriminatory manner, 
allowing for the participation of both producers and importers and accom modating different 
situations within its framework in order to avoid any distorting effects on trade. The presumed 
credits on various expenditures made in Brazil were conceived and are calculated to offset the 
costs incurred by the accredited companies in their different capacities in fulfilling the programmes 
requirements. Both the requirements and the type of expenditures foreseen in INOVAR -AUTO 
against which presumed credits are accrued were established in order to maximize their 
contribution to the prog rammes objectives.  
40. It is also noteworthy that in their submissions, the complainants have failed to identify an 
alternative measure to INOVAR -AUTO that would allow Brazil to achieve its chosen level of 
protection.   
The treatment given to certain LAIA coun tries falls under the purview of the 
Enabling Clause  
41. Another important feature of INOVAR -AUTO is its clear contribution to the longstanding 
efforts of Latin American countries to foster regional integration under the auspices of LAIA, and, 
as such, the pro gramme falls squarely within the bounds of the Enabling Clause. The complainants 
have not been able to prove otherwise.  
42. Indeed, the tax treatment afforded to Argentina, Mexico and Uruguay within the 
framework of INOVAR -AUTO is incontestably justified unde r the Enabling Clause.  First, the 
measure is clearly inscribed in the implementation process of the Economic Complementation 
Agreements negotiated under the umbrella of the Treaty of Montevideo -1980 (TM -80) that 
established the LAIA, in order to further t he process of economic integration in Latin America.  The 
fact that INOVAR - AUTO, as Japan has pointed out, is an internal measure does not change this 
feature, as the Treaty of Montevideo itself explicitly encourages its Members to progressively 
eliminate  or reduce all trade barriers, non -tariff measures among them, using all instruments 
capable of consolidating and expanding markets at a regional level, including through unilateral 
measures12. 
43.  Secondly, in Brazil's view, there is no doubt that the non -tariff measures at issue fall 
under the purview of paragraphs 2(b) and 2(c) of the Enabling Clause. The complainants 
themselves did not put forth any credible arguments contradicting this claim. Japan used the 
"Illustrative List of Non -Tariff Measures" in the  document Non -Tariff Measures Affecting Trade of 
Developing Countries13 to argue that internal taxes were not listed as non -tariff measures. That 
document, however, as Brazil demonstrated does list internal taxes as non -tariff measures.  
44. The European Union14, in its turn, gave an interpretation of Article 2(c) which clearly goes 
against the text and the spirit of the provision, essentially rendering it moot, as developing 
countries would not be able to deviate from MFN obligations with respect to non -tariff me asures. 
                                                
12 Articles 3 and  9 of the TM -80  
13 JE – 232. 
14 EU – SWS, para. 204.  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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 An absurd reading of the provision, counter to not only the LAIA, which has been harmoniously 
coexisting with the GATT and the WTO systems since its inception, but to other integration 
processes among developing countries.  
45. Thirdly, contrary to what  has been conveyed by the complainants, all the ECAs negotiated 
under the auspices of LAIA were dutifully and timely notified to the WTO, fully complying with 
paragraph 4 of the Enabling Clause.  Brazil is ready to provide more details on this issue in 
answering the questions posed by the Panel, if necessary, but it worth recalling that, for many 
years now, regional and partial agreements that affect the implementation or the operation of an 
RTA already in force are notified under Section D ("Further notifi cations and reporting") of the 
2006 Transparency Mechanism . I n the case of agreements negotiated under the auspices of LAIA, 
it has been the practice that the Organization itself notifies the WTO on behalf of its members, so 
all WTO Members were dully not ified of the existence and scope of all the arrangements falling 
under paragraph 2 of the Enabling Clause negotiated within the framework of the Treaty of 
Montevideo.  
46. In sum, Brazil has amply demonstrated that the tax treatment accorded to LAIA's Member 
falls within the purview of the Enabling clause and complies with the totality of its requirements 
and that the complainants' objections had no ground.  The complainants, therefore, are not 
discharged of their burden to demonstrate that that INOVAR -AUTO viol ates Article I of GATT.  
V. MEASURES DESIGNED TO PREVENT CREDIT ACCUMULATION  
PEC and RECAP are consistent with the covered agreements  
47.  Contrary to what the complainants have argued that PEC and RECAP are not subsidies at 
all. This can be easily concluded b y properly assessing the manner by which the value added at 
each step of production gets properly taxed in Brazil without double counting through the use of 
tax credits and debits. A central tenet of this system is that tax debits are higher than tax credi ts, 
so that the revenue due is properly collected by the tax authorities and there are no money 
belonging to taxpayers tied up in the Revenue service.  
For companies that mainly sell products with average rates of indirect taxes and mainly to the 
domestic m arket, the tenet holds in the normal course of business. However, for companies that 
mainly sell products with low or no taxation, including by the destination principle, exports, and 
tax credits accrued in previous steps of production will occlude and not  properly flow if there is no 
outside intervention. Taxes must be suspended along the production chain so that the principle of 
debits being greater than credits holds. PEC and RECAP were conceived to tackle this situation. 
They do not qualify as financial  contribution nor constitute a benefit in the sense of the SCM 
Agreement and, as there is no revenue foregone otherwise due, there is no subsidy in the sense of 
Article 1.1(a)(1)(ii) of the SCM Agreement.  
48. The complainants nevertheless insist that there is  an advantage in the form of a tax 
deferral with the suspension of IPI and PIS/COFINS along the production chain.    This could not be 
further from the truth.  
The different types of tax administration do not amount to a tax deferral 
constituting a subsidy within the meaning of the SCM Agreement  
49. It appears that the complainants15  consider that there is a delay in the moment of tax 
collection which amounts to a tax deferral, constituting revenue foregone and a benefit within the 
meaning of the SCM Agreement. Their understanding glosses over the functioning of VAT taxes 
and would amount to impose an absurd and undue burden on credit accumulating companies.  
50. Non-credit -accumulating companies are able, as Brazil demonstrated, to offset the totality 
of their tax cr edits on their monthly payments of IPI and PIS/COFINS. Credit -accumulating 
companies, on the other hand, will tend to accumulate credits indefinitely, the government does 
not suspend indefinitely or even for a long period of time, Brazil simply equates cre dit-
accumulating companies to what non -credit accumulating companies already practice.  
                                                
15 EU – SWS, para.  56.; Japan – SWS, para. 143.  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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 51. Tax credits in Brazil are immediately available to be used by the buyer and, considering 
the general principle that tax debits must be higher than credits, these credit s tend to be used 
immediately. Therefore, tax suspensions alone merely change the taxpayer from the seller to the 
buyer, without necessarily altering the time of the payment of the taxes.  
52. The seller is the one who pays the taxes  and there is no legal requi rement for the seller to 
reduce its price because of a tax suspension. Thus, a reduction in the seller's price depends on a 
negotiation between the seller and the buyer, which hardly results in a price reduction equivalent 
to the total amount of the suspen ded taxes. The result of this negotiation depends, among other 
factors, on the price elasticity of the concerned product. If the price reduction is lower than the 
amount of suspended taxes, the buyer may have a loss.  
53. Moreover depending on the payment terms  negotiated between the seller and the buyer, 
the tax suspension may result in a worse "cash flow" scenario for buyer. This is a consequence of 
the fact that the buyer is entitled to the tax credits immediately after buying the products. 
However, it will o nly disburse the cash to pay for such credits when it actually pays the supplier. 
Therefore, considering, for example, a case in which the supplier grants 90  days for the recipient 
company to pay for the inputs, the tax suspension will worsen the buyer's c ash flow because it will 
not be able to use the tax credits freely for 90 days before paying for them.  
54. The potential benefit that could be identified at the moment of the suspension would have 
to be compared with the long standing operations of the company  in order to determine whether, 
at a present value, there is really a benefit, i.e., whether the company supposedly benefited with 
the tax suspension is indeed in a better off position in relation to the companies to which the tax 
suspension does not apply .   
The exportation threshold was designed to prevent tax credit accumulation  
55. As for the questions regarding the threshold of 50% for both programmes. Brazil has put 
forth evidence to that regard, by means of a study made by the Federal Revenue Service, wh ich 
demonstrates where companies tend to structurally accumulate credits.  
56. As will be further discussed in the questions submitted by the Panel, the table presented 
by Brazil was elaborated by the Federal Revenue Service. The table is the result of the anal ysis of 
the 2013/2014 Tax Return of Legal Entities by the Secretaria da Receita Federal do Brazil. The 
aggregate value was calculated by taking the difference between total gross revenue of companies 
minus the value of acquisition of inputs.  
57. There is a dir ect relationship between PIS/COFINS and exports. As a company increases its 
exports, its PIS/COFINS debit decreases. After group 11 is reached (minimum of 45% export and 
maximum of 50%), there is no PIS/COFINS debit, there is only tax credit. The more a co mpany 
exports the more credit it has and the table demonstrates that. As stated before, the 
predominantly exporting companies (45% or more of export revenue) are the credit accumulating 
companies.   
58. Brazil finds that the complainants' arguments regarding t his point are rather confusing. 
They appear to argue, on the one hand, that the problem with the programme is to suspend 
indirect taxes for sales made in the domestic market, as suspensions for exports are clearly 
covered by the SCM Agreement. On the other , they state that the mere fact that a company that 
exports 49% of its revenue would have an incentive to increase it to 50% would prove the export 
contingency inconsistent with the SCM Agreement.  
59. The rational conclusion from the complainants' arguments, therefore, would be that Brazil 
has a production subsidy disguised as an export subsidy, because once the threshold is met, the 
contingency is to sell in the domestic market. Brazil, as absurd as it sounds, would give a 
prohibited subsidy which functioned,  for all effects and purposes as a domestic sales contingent 
subsidy. This not only does not make sense. It is not true.  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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 Brazil has demonstrated that RECAP is consistent with the Covered Agreements  
60. The suspension of taxes on purchases of capital goods by c ompanies that tend to 
accumulate credits (among which are the predominantly exporting companies) is consistent with 
the SCM Agreement, since it does not characterize a financial contribution from the government or 
confers a benefit to such companies within  the meaning of the SCM Agreement. Furthermore, such 
suspension is not contingent upon export performance but rather upon the accumulation of tax 
credits.  
61. As the nature of RECAP is similar to that of PEC, the arguments submitted in section 6.2 
apply mutat is mutandis  to RECAP and are incorporated by Brazil.  
VI. CONCLUSION  
62. In light of the above, Brazil respectfully requests that all of the measures challenged by 
the complainants be found consistent with the WTO provisions raised and that each of their claims  
be dismissed.   
 
_______________  
 
 
 
 
 
 
 WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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 ANNEX C  
ARGUMENTS OF THE THI RD PARTIES  
Contents  Page  
Annex  C-1 Executive summa ry of the arguments of Argentina  C-2 
Annex  C-2 Executive summa ry of the arguments of Australia  C-10 
Annex  C-3 Executive su mmary of the  arguments of Canada  C-11 
Annex C -4 Executive su mmary of the arguments of Korea  C-13 
Annex C -5 Executive summary of the arguments of Ukraine  C-15 
Annex C -6 Executive summary of the arguments of the United States  C-17 
 
 
 
 
 WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
- C-2 - 
 
 ANNEX C -1 
EXECUTIVE SUMMARY O F THE ARGUMENTS OF A RGENTINA  
I. EUROPEAN UNION'S CLAIMS REGARDING THE INCONSISTENCE OF The INOVAR -
AUTO programme with ARTÍCLES III.2 AND I.1 AND OF THE GATT 1994 . 
In its First Written Submission, the EU submits that the INOVAR -AUTO programme is 
inconsisten t with Article III.2 of the GATT 1994, since pursuant to it, motor vehicles of the 
EU imported into Brazil, are subject to a tax burden regarding the Tax on Industrialized Products 
(hereinafter IPI) in excess of that borne by like domestic products. More s pecifically, the EU 
submits that the INOVAR -Auto programme violates Article III.2 GATT 1994.  
On the other hand the EU also submits that the INOVAR -AUTO programme is inconsistent 
with Article I:1 of the GATT 1994,  because motor vehicles originating in the EU are not 
accorded immediately and unconditionally any advantage, favour, privilege or immunity granted to 
like products originating in other MERCOSUR members and Mexico.1 
Indeed, according to the EU, under the INOVAR -AUTO programme the products at issue 
originating in the other MERCOSUR members, benefit from reduced IPI rates, in particular the 
rates prevailing before the establishment of the INOVAR -AUTO programme.  
Under EU's views the practical effect of the INOVAR -AUTO programme for motor vehicles is to  
maintain the previous to 2011 tax treatment, only for domestic products and for products from 
preferential origins, while increasing the IPI by 30 percentage points for the like products from the 
rest of the World, including the imports of the like produc t originating in the EU.  
II. THE RESPONSIBILITY O F RAISING THE ENABLI NG CLAUSE  
In its First Written Submission the UE argues that pursuant to Article 21 of Decree  7,819/2012 
companies accredited under the INOVAR -AUTO -programme either as domestic manufactur ers or 
as newcomers, are able to import into Brazil, and subsequently sell, motor vehicles originating in 
the other MERCOSUR members at reduced IPI rates, against article I.1 of GATT 1994.2 However, 
the EU further states that Decree 7,819/2012 does not men tion by name the countries benefiting 
of a better treatment, but makes reference to a series of Decrees which concern Brazil's bilateral 
agreements, between Brazil and Argentina,3 and Brazil and Uruguay.4 In particular, and regarding 
Argentina, the EU ment ions the Legislative Decree 350 of 21 November 1991 (Treaty of 
Asuncion),5 and the Decree 6,500 of 2 July 2008 (Economic Complementation Agreement N|°14 
between the Republic of Argentina and the Federative Republic of Brazil (here in after ECA N° 14).6 
In response, Brazil contends that the tax treatment for vehicles of Latin -American Integration 
Association (here in after LAIA) is a measure created to meet Brazil's commitments  undertaken  
as  a  Member of such regional integration association and therefore  it is justified under the 
provisions of the TM 80, that was duly notified according to the Enabling Clause.7  
In view of the foregoing, and having in mind the EU reference to the provisions of the Treaty of 
Asuncion and the ECA N° 14 as the legal context based on which Brazil would had granted benefits 
to certain MERCOSUR 'members states, Argentina considers the Appellate Body's Report in EC – 
Tariff Preferences informative. Indeed, in this dispute, and after highlighting the special status of 
the Enabling  Clause in the WTO system and the particular implications that is has for WTO dispute 
settlement, and, as well as, after qualifying it as an exception to the Most -Favored Nation Clause 
                                                
1 European Union 's First Written Submission. paras.  348 - 365. 
2 European Union 's First Written Sumbission. para 295.  
3 European Union 's First Written Submission  Article 21 of Decree 7,819/2012..  (EXHIBIT EU -132) 
4 European U nion's First Written Submission 22 of Decree 7,819/2012.  (EXHIBIT  EU -132) 
5 European Union 's First Written Submission. para 296. (EXHIBIT EU  - 163).  
6 European Union 's First Written Submission  (EXHIBIT  EU - 165) 
7 Brazil 's First Written Submission.  para. 742. WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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 (here in after MFN Clause) embodied in Article I.1 of the GATT 1994, th e Appellate Body 
subsequently found regarding the legal responsibility for raising the Enabling Clause  that: "(…)  it is 
insufficient in WTO dispute settlement for a complying to allege inconsistency with Article  I:1 of 
the GATT  1994 if the complying seeks also to argue  that the measure is not justified under the 
Enabling Clause.  (…).8 
In that dispute, the Appellate Body also interpreted that: "In the light of the extensive 
requirements set forth in the Enabling Clause, we are of the view that, when a compla ining party 
considers that a preference scheme of another Member does not meet one or more of those 
requirements, the specific provisions of the Enabling Clause with which the scheme allegedly falls 
afoul, form critical components of the "legal basis of th e complaint" and, therefore, of the "matter" 
in dispute.9Accordingly, a complaining party cannot, in good faith, ignore those provisions and 
must, in its request for the establishment of a panel, identify them and thereby "notify the parties 
and third part ies of the nature of its case"10. For the failure of such a complaining party to raise 
the relevant provisions of the Enabling Clause would place an unwarranted burden on the 
responding party. This due process consideration applies equally to the elaborati on of a 
complaining party's case in its written submissions, which must "explicitly" articulate a claim so 
that the panel and all parties to a dispute "understand that a specific claim has been made, [are] 
aware of its dimensions, and have an adequate oppo rtunity to address and respond to it" .11  
In this context, and taking into account that not only the TM 80 but also the Treaty of Asuncion 
were duly notified to WTO under the umbrella of the Enabling Clause, Argentina fails to see which 
are those requireme nts that the INOVAR - AUTO programme does not meet. Argentina understands 
that the EU has not identified them, and consequently its argument does not appear to fulfill the 
standard set forth by the Appellate Body in EC -Tariff Preferences for raising this ty pe of claims.12  
III. OBLIGATIONS UNDER AR TICLE III.2 OF THE G ATT 1994 CLEARLY QUA LIFY AS 
NON-TARIFF MEASURES  
Argentina considers that is well established among all WTO Members, that while Articles I and II 
relate to MFN and tariff measures treatment resp ectively, the provision embodied in Part II of 
GATT 1994, relate to non -tariff measures visions embodied in Artic le III of the GATT 1994 are 
non-tariff measures.   
Consequently, being Article III.2 place in the above mentioned Part of the GATT 1994, and ha ving 
in mind that Article III of GATT 1994 sets out National Treatment obligation for goods once 
internalized in the Member's territory, prohibiting the imposition of internal measures so as to 
discriminate imports and afford protectionism of their domesti c production, Argentina considers it 
is undisputed that matters ruling by Article III.2 are clearly non -tariff measures. Prior WTO case 
law supports this view.13 
In this context, Argentina shares the Brazil's view when it argues: "that internal taxes are applied 
inside a Member's territory on domestic products as well as on foreign products that have 
already been imported for reasons other than customs clearance and not with a view to 
administer international trade. They are, therefore non-tariff measures as they are unrelated to 
tariffs and trade regulation".14 
                                                
8 EC- Tariff Preferences. para 110.  
9 EC- Tariff Preferences (AB), citing Appellate Body Report, US – Carbon Steel , para.  125 (referring to 
Appellate Body Report, Guatemala – Cement  I, paras.  69-76). 
10 EC- Tariff Preferences (AB), citing Appellate Bo dy Report, US – Carbon Steel , para.  126. 
11 EC- Tariff Preferences (AB). para 113 (citing Appellate Body Report, Chile – Price Band System, 
para. 164).  
12 EC- Tariff Preferences (AB). para 113.  
13 Japan — Alcoholic Beverages II  (AB) pp. 16 citing United States - Section 337 of the Tariff Act of 
1930,  para. 5.10 and.  
  Italy — Agricultural Machinery, para. 11. See also Brazil 's First Written Submission. para  714. 
14 Brazil 's First Written Submission. paras. 714 -715. WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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 IV. THE TREATMENT PROVID ED TO MERCOSUR AND L ATIN -AMERICAN INTEGRATION  
ASSOCIATION (LAIA) M EMBERS IS CONSISTENT  WITH THE WTO AGREEME NTS  
Brazil submits that the preferential treatment given to Argenti na, Mexico  and Uruguay in 
INOVAR -AUTO is inscribed in the process of the Economic Complementation Agreements (ECAs) 
negotiated under the auspices of Treaty of Montevideo 1980 (here in after TM 80) in order to 
progressively achieve the reduction and elimina tion of tariff and non -tariff barriers in the 
automotive sector among its Members, in line with LAIA's objectives. Negotiated under TM 80 the 
ECAs at issue themselves, and their implementing measures also fall within the scope the Enabling 
Clause .15  
Brazil further explained that the  TM 1980 was established as an umbrella treaty upon which its 
Members could negotiate specific agreements among them, such as t he ECAs, pursuant  
Article 11 of this Treaty, that establish that such kind of agreements are aimed, a mong other objectives , 
to promote maximum utilization of production factors, stimulate economic complementation, 
ensure equitable conditions for competition, facilitate entry of products into the international 
market, and encourage the balanced and harmoni ous development of member countries.16  
Finally, Brazil argued that the t reatment provided to Argentina and Uruguay under INOVAR-AUTO 
program falls within the scope of the Enabling Clause, since they are Members State of the 
LAIA.17 
In this context, Argent ina agrees with Brazil that the tax treatment conceding on the ground of 
INOVAR -AUTO for Member having signed an ECA under the LAIA system, qualifies as an exception 
to MFN obligations of Article I:1 of the GATT 1994, as a non -tariff measure.18 Indeed, Arg entina 
concurs with Brazil that since the Enabling Clause is an exception to the obligations in article I.1 of 
the GATT 1994 (as interpreted by the Appellate Body in EC Tariff Preferences), and being the 
commitments regarding National Treatment non tariff measures, the concessions provided to 
certain MERCOSUR Members clearly fall under the Enabling Clause. That provision allows under 
Article 2, the concession among developing countries of d ifferential and more favourable 
treatment with respect to the tariff  and non -tariff measures in the context of ECAs agreements 
and regional integration processes.19 This is specially true regarding the LAIA 's purpose to speed 
up their economic and social development process and a long -term objective of gradual and 
progress ive establishment of a Latin -American common market.20  
V. THE ENABLING CLAUSE IS AN EXCEPTION TO A LL OBLIGATIONS EMBOD IED IN THE 
NMF CLAUSE  
In Argentina's view, it flows from Articles 1 and 2.a), b) and c) of the Enabling Clause that WTO 
provisions permit  developing WTO Members to concede each other "differential and more favorable 
treatment" in the context of bilateral an regional agreements regarding tariff and non tariff 
measures (such the one as dispute), since the Enabling Clause provides for a deroga tion of the 
MFN obligations in Article I.1 of the GATT 1994.  
In this regard, Argentina would like to draw the attention to the panel the interpretation made by 
the Appellate Body in the case EC-Tariff Preferences  when stated that: " In our view, the special  
status of the Enabling Clause in the WTO system has particular implications for WTO dispute 
settlement.  As we have explained, paragraph 1 of the Enabling Clause  enhances market access for 
developing countries as a means of improving their economic development by authorizing 
preferential treatment for those countries, 'notwithstanding' the obligations of Article I . It is 
evident that a Member cannot implement a measure authorized by the Enabling Clause without 
according an 'advantage' to a developing country's products over those of a developed country. It 
follows, therefore, that every measure undertaken pursuant to the Enabling Clause would 
                                                
15 Brazil 's First Written Submission. para. 707.  
16 Brazil 's First Written Submission. para. 706.  
17 Brazil 's First Written Submission. para. 710.  
18 Brazil 's First Written Submission. para.  710. 
19 Brazil 's First Written Submission. para  708 
20 Preambule TM 80  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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 necessarily be inconsistent with Article I , if ass essed on that basis alone, but it would be exempted 
from compliance with Article I  because it meets the requirements of the Enabling Clause" .21  
Accor ding to Argentina, the Appellate Body in the EC-Tariff Preferences  clearly supports its legal 
interpretation. Indeed, in the context of this dispute the Appellate Body first found that the 
Enabling Clause actually operates as an " exception " to Article I.1 of the GATT 1994, upholding in 
this way the Panel's finding in this regard.22 Secondly, in the same case the Appellate Body has 
also confirmed the interpretation made by the Panel, in the sense that the term " notwithstanding " 
mentioned in article 1 of the Enabling Clause, makes references to all obligation established and 
measures mentioned in  article I.1 of the GATT 1994, and not to certain of them.23  
In addition, Argentina submits that its legal view that the Enabling Clause represents an exception 
to all the measures embodies in Article I.1 of the GATT 1994, not only flows from the above 
mentioned Panel's and Appellate Body's report in EC -Tariff Preferences, but also from the fact that 
if WTO Members would have pretended to excluded certain measures embo died in the MFN Clause 
of the general application of the exception containing in Article 1 of the Enabling Clause they would 
have done so explicitly.  
Finally Argentina asserts that Argentina's legal view is also confirmed by the Appellate Body in 
EC-Tariff  Preferences.24 
In this legal context, and in case that the Panel found that the INOVA -AUTO programme is 
inconsistent with Article III.2 of the GATT 1994, Argentina submits that an interpretation of the 
Enabling Clause according to its history, objectives and purpose, supportive by the WTO case law 
will necessary lead to conclude that the Enabling Clause allows developing countries to deviate 
from the MFN obligation when exchanging trade concessions and with regards mutual reduction or 
elimination of non -tariff measures, on products imported from one another, like the tax treatment 
conferred in INOVAR -AUTO for certain Members within the LAIA system and MERCOSUR, either in 
the context of bilateral or regional integration agreements.  
EXECUTIVE SUMMARY OF  ARGEN TINA THIRD PARTY SUB MISSION (DS 497)  
VI. JAPAN'S CLAIMS REGAR DING THE INCONSISTEN CY OF THE INOVAR -AUTO 
PROGRAMME WITH ARTIC LES III.2 AND I.1 OF  THE GATT 1994 . 
1.1.  In its First Written Submission Japan argues that INOVAR -AUTO is a tax incentiv e programme 
that imposes a generally applicable 30 percentage point increase in the Tax on Industrialized 
Products  (IPI) for motor vehicles, while also allowing for the possibility of a reduction or exemption 
from this 30 -point increase.25  
More specifical ly Japan alleges that INOVAR -AUTO favo urs domestic motor vehicles with respect to 
the three following circumstances under which companies can benefit from the above mentioned 
tax reduction: i.e. accreditation, the calculation of IPI tax credits, and the us e of IPI tax credits. 
The result is a level of taxation applied to imported motor vehicles that exceeds that applied to 
domestic motor vehicles and that afford protection to domestic pro duction, which violates 
Article  III:2 first and second sentence of the  GATT 1994.26 
On the other hand, Japan submits that INOVAR -AUTO, as a measure that denies motor vehicles 
originating in most WTO Members the same advantages as those granted to motor vehicles 
originating in Mercosur and Mexico, is also inconsistent with Ar ticle I:1 of the GATT  1994.27  
                                                
21 EC- Tariff Preferences. (AB) para. 110.  
22 EC- Tariff Preferences. (AB) para.90. 99.  
23 EC- Tariff Preferences. (AB).para. 110.  
24 EC- Tariff Preferences. (AB) para 101.  
25 First Written Submission of Japan. para 127..  
26 First Written Submission of Japan. para 237.  
27 First Written Submission of Japan. para 193.  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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 VII. THE BURDEN OF RAISIN G THE ENABLING CLAUS E 
In its First Written Submission Japan submits that its is pursuant to Articles 21 and 22 of the 
Decree 7,819, that motor vehicles produced in other Mercosur countries and Mexico,  if imported by 
accredited companies (i.e. domestic manufacturers or investors),  receive an automatic 30 
percentage point reduction in the applicable IPI rate, effectively eliminating the higher IPI rate 
introduced by INOVAR -AUTO for motor vehicles in gene ral.28 
In addition, and regarding the Decree 7,819 Japan argues that: "(…) the legal instruments 
referenced in this provision are treaties between Brazil and Mexico and other Mercosur countries, 
as well as domestic Brazilian legal instruments implementing such treaties. In other words, it 
means that INOVAR –AUTO essentially establishes an automatic exemption of the elevated 30 
percentage point IPI rate for vehicles originating in other Mercosur countries or Mexico".29 
In response, Brazil primarily argues tha t INOVAR -AUTO falls outside the scope of Article III of the 
GATT 1994 and, consequently, it also falls outside the scope of Article I:1. However. Brazil also 
argues that if the Panel finds that INOVAR -AUTO falls within and violates Article I:1 of GATT  1994, 
the treatment afforded by the regime to Argentina, Uruguay and Mexico is justified under the 
Enabling Clause.30 Indeed, Brazil submits that the tax treatment given to Argentina, Uruguay and 
Mexico is a measure created to meet commitments undertaken as a member of the Latin -American 
Integration Association or LAIA's system, and therefore is justified under the provisions of the 
1980 TM. Consequently, since the measure was notified to WTO under the purview of the Enabling 
Clause in 1982, the measure challen ged by Japan qualifies as a legal exception to MFN obligations.  
In this context, and having in mind the Japan states that the Decree 7,819 as the domestic legal 
instrument that implements international treaties, such as the Treaty of Asuncion and the 
Econo mic Complementation Agreements N° 14 (ECA N° 14) are the legal based on which Brazil 
would had granted benefits to certain MERCOSUR and LAIA'members states, Argentina considers 
the Appellate Body's Report in " EC – Tariff Preferences" informative. Indeed, i n this dispute the 
Appellate Body found  that: "(…), we are of the view that a complaining party challenging a 
measure taken pursuant to the Enabling Clause must allege more than mere inconsistency with 
Article  I:1 of the GATT  1994, for to do only that woul d not convey the " legal basis of the complaint 
sufficient to present the problem clearly".31 In other words, it is insufficient in WTO dispute 
settlement for a complying to allege inconsistency with Article  I:1 of the GATT  1994 if the 
complying seeks also to argue  that the measure is not justified under the Enabling Clause.  (…)32  
In that dispute, the Appellate Body also interpreted that: "In the light of the extensive 
requirements set forth in the Enabling Clause, we are of the view that, when a complainin g party 
considers that a preference scheme of another Member does not meet one or more of those 
requirements, the specific provisions of the Enabling Clause with which the scheme allegedly falls 
afoul, form critical components of the "legal basis of the co mplaint" and, therefore, of the "matter" 
in dispute (…).33  
In view of the foregoing, and taking into account that the Treaty of Montevideo (TM 80) was duly 
notified to WTO under the umbrella of the Enabling Clause, Argentina fails to see, which are those 
requirements that the INOVAR -AUTO programme does not meet. In Argentina's view Japan has 
not even made any reference to the Enabling Clause. Consequently, Japan's argument does not 
appear to fulfill the standard set forth by the Appellate Body in EC -Tariff Preferences for raising 
this type of claims.34  
                                                
28 First Written Submission of Japan. para 177 - 178. 
29 First Written Submission of Japan. para 181.  
30 Brazil 's First Written S ubmission. para 633.  
31 EC- Tariff Preferences (AB), citing Appellate Body Report, Korea – Dairy , paras.  120, 124, and 127.  
32 EC- Tariff Preferences. para 110.  
33 EC- Tariff Preferences (AB), citing Appellate Body Report, US – Carbon Steel , para.  125 (ref erring to 
Appellate  Body Report, Guatemala – Cement  I, paras.  69-76). EC - Tariff Preferences (AB), citing Appellate Body 
Report, US – Carbon Steel , para.  126. EC - Tariff Preferences (AB). para 113 (citing Appellate Body Report, 
Chile – Price Band System, p ara. 164).  
34 EC- Tariff Preferences (AB). para 113.  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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 VIII.  OBLIGATIONS UNDER AR TICLE III OF THE GAT T 1994 QUALIFY AS NO N-TARIFF 
MEASURES  
In its First Written Submission Brazil alleges that the structure of the articles and obligations of the 
GATT makes a clear  distinction between tariff measures and non -tariff measures in the first three 
and most fundamental articles of the Agreement. According to Brazil this distinction appears on 
Article I GATT 1994, in defining the scope of the Most Favored Nation Clause (MF N)35 Brazil further 
submits that these distinctions are also mirrored in the Enabling Clause Decision. 36  
Secondly, Brazil argues that the term " tariff measures " relates to customs duties, while the term 
"non tariff measures" covers the definition of inte rnal taxes.37 Indeed, in Brazil's views, Article II of 
GATT relates to tariff measures because it rules the application of customs duties by WTO 
Members,38 while Article III relates to non -tariff measures (NTMs), that is, measures that are not 
applied at t he border in order to regulate trade,39 this is so because Article III establishes 
obligations that apply once goods have cleared customs and have already fulfilled tariff measures 
at the border or related to the importation of goods.40 
In this regard, Arg entina concurs with Brazil  that is well established among all WTO Members, that 
while Articles I and II relate to MFN and tariff measures treatment respectively, the provisions 
embodied in Part II of GATT 1994 relate to non -tariff measures.  
In Argentina's  views the World Trade Report 201241 and prior WTO case law clearly supports this 
interpretation advanced by Brazil and Argentina in the present dispute also supports this legal 
interpretation.42  
With this legal framework in mind, Argentina contends that considering that Article III is placed in 
the above mentioned Part of the GATT 1994, and also that Article III of GATT 1994 sets out 
National Treatment obligation for goods once internalized to the Member's territory, it is 
undisputed that matters ruled by  Article III are clearly non -tariff measures.43 
IX. THE ENABLING CLAUSE IS AN EXCEPTION TO A LL OBLIGATIONS EMBOD IED IN THE 
NMF CLAUSE  
At the outset, Argentina would like to recall that Article 1 of the Enabling Clause establish an 
exception to the obligati on in Article I.1 of GATT 1994 since the provision states:  "1. 
Notwithstanding  the provisions  of Article I of the General Agreeme nt, contracting parties  may 
accord  differential and more favourable treatment to developing countries, without according 
such treatment to other contracting parties."44 
On the other hand Paragraph  2 of the Enabling Clause identifies the different types of measures to 
which the authorization of paragraph  1 applies: (a) Preferential tariff treatment, (b) Differential 
and more fa vourable treatment with respect to the provisions of the General Agreement 
concerning non -tariff measures governed by the provisions of instruments multilaterally negotiated 
under the auspices of the GATT, and c) Differential and more favourable treatment in the context 
                                                
35 Brazil 's First Written Submission. para 648.  
36 Brazil 's First Written Submission. para 643. 
37 Brazil 's First Written Submission. para 643. 
38 Brazil 's First Written Submission. para  653. 
39 Brazil 's First Written Submission. para  659. See also the World Trade Report 2012. Trade and public 
policies: A   closer look at non -tariff measures in the 21st century. Published by World Trade Organization 
2012.pp. 38.  
40 Brazil 's Firs t Written Submission. para 6 54. 
41 World Trade Report 2012. Trade and public policies: A closer look at non -tariff measures in the 21st 
century. Published by World Trade Organization 2012.pp 47.  
42 Japan — Alcoholic Beverages II  (AB) pp. 16 citing United States - Section 337 of the Tariff Act of 
1930,  para. 5.10 and  
Italy — Agricultural Machinery, para. 11. See also Brazil 's First Written Submission. para 714.  
43 World Trade Report 201 2.pp. 40.  
44 GATT Document L/4903. December 3, 1979.  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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 of Regional or global arrangements entered into amongst less -developed contracting parties for 
the mutual reduction or elimination of tariffs.45 
Secondly, Argentina considers that the Appellate Body reasoning in the " EC-Tariff Preferences"  
clearly supports its legal interpretation. Indeed, in the context of that dispute the Appellate Body 
first found that the Enabling Clause actually operates as an " exception " to Article I.1 of the 
GATT  1994, upholding in this way the Panel's finding in this regard.46 Then, the Appellate Body 
also confirmed the interpretation of the Panel that the term " notwithstanding " mentioned in 
article  1 of the Enabling Clause, makes references to all obligation established and measures 
mentioned in  article I.1 of the GAT T 1994, and not to certain of them.47  
In addition, is the Argentina's legal view that if the Enabling Clause represents an exception to all 
the measures encompass in Article I.1 of the GATT 1994 , including those covered by Article III.2 
and III.4, if WTO Members would have pretended to excluded such measures of the general 
application from the exception in Article 1 of the Enabling Clause, they would have done so 
explicitly.  
In view of the foregoing, Argentina agrees with Brazil that Article I:1 explicitl y extends the MFN 
obligation to "all matters referred to in paragraphs 2 and 4 of Article III" and that therefore, 
internal taxes are subject to MFN obligations.48 
Argentina further submits that, in case that the Panel found that the INOVAR -AUTO programme 
is inconsistent with Article III of the GATT 1994, an interpretation of the Enabling Clause 
according to its text, objectives and purpose as well as to its history, will necessary lead to 
conclude that the Enabling Clause allows developing countries to dev iate from the MFN obligation 
when exchanging trade concessions and regarding mutual reduction or elimination of non -tariff 
measures (such as the measure at issue), on products imported from one another, like the tax 
treatment conferred in INOVAR -AUTO for c ertain Members within the LAIA system and 
MERCOSUR, either in the context of bilateral or regional integration agreements.  
X. THE TREATMENT PROVID ED TO MERCOSUR AND L AIA MEMBERS IS CONSI STENT 
WITH THE WTO AGREEME NTS 
Brazil submits that: "Vehicles imported under the framework of the Economic Complementation 
Agreements 14 and 55 by accredited companies that manufacture vehicles in Brazil or new -comers 
have a 30 p.p. IPI reduction. The specific rules for trade with each of the countries are the relevant 
agreem ents and their additional protocols and must be followed in order to benefit for the 
reductions".49  
Brazil contends that the tax treatment for vehicles originating from members of the LAIA system 
are an exception to the MFN treatment since it falls within  the scope of Paragraph 2(b) of the 
Enabling Clause, for being a measure governed by the TM 80. Brazil further states that it is a non -
tariff measure since it is applied on products that have already been imported and for reasons 
other than customs clearan ce.50 
Firstly and foremost Argentina shares that legal view and in this respect also considers it relevant 
to recall that as stated by the Appellate Body in "EC – Tariff preferences"51, the Enabling Clause 
is considered lex specialis as far as the Most Fav ored Nation rule is concerned. As a consequence, 
the challenged measure needs to be analyzed in the light of both provisions. If the measure 
                                                
45 Enabling Clause. Article 2 a), b) and c).  
46 EC- Tariff Preferences. (AB) para.90. 99. EC - Tariff Preferences. (AB)  para. 110. 
47 EC- Tariff Preferences. (AB).para. 110. See also EC - Tariff Preference s (AB). para 101 citing Appellate 
Body Report, Canada – Autos , para.  69. See also, Appellate Body Report, US – Section 211 Appropriations 
Act, para. 297. 
48 Brazil 's First Written Submission. p ara 661.  
49 Brazil 's First Written Submission. para 470.  
50 Brazil's First Written Submission. para 664.  
51 See Appellate Body Report, EC – Tariff Preferences , para. 101 and 102.  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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 complies with the requirements of the Enabling Clause, then it is a justified exception of the MFN 
principle that m ust prevail over Article I:1.52 
In this context, Argentina agrees with Brazil that the tax  treatment conceded on the ground of 
INOVAR -AUTO  to certain Mercosur and LAIA Members is inscribed in the process of the ECAs 
negotiated under the auspices of TM 80 i n order to progressively achieve the reduction and 
elimination of tariff and non -tariff barriers in the automotive sector among its Members, in line 
with LAIA's objectives.  
As a consequence, Argentina submits that since the Enabling Clause is an exception  to all the 
obligations embodied in article I.1 of the GATT 1994  (as interpreted by the Appellate Body in EC 
Tariff Preferences), and being the commitments regarding National Treatment non tariff measures, 
the concessions provided to certain MERCOSUR Membe rs clearly fall under the Enabling Clause. As 
already submitted, that provision allows under Article 2, the concession among developing 
countries of d ifferential and more favourable treatment with respect to the tariff and non -tariff 
measures in the contex t of ECAs agreements and regional integration processes.53 
 
                                                
52 Brazil 's First Written Submission. para 632  
53 Brazil 's First Written Submission. para  708. 
See also Preambule TM 80  
 WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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 ANNEX C -2 
EXECUTIVE SUMMARY OF  THE ARGUMENTS OF AUS TRALIA  
I. ARTICLE III:4 of GATT 1994  
 
1. Australia contends that Brazil's INOVAR -AUTO program is in breach of III:4 of the General 
Agreement on Tariffs and Trade 1994 (GATT) due to less favourable treatment to imported goods 
which impacts on competitive conditions so as to afford protection to domestic production.  
 
2. Australia submits that in assessing Brazil's compliance with Article III:4 of GA TT 1994, the 
Panel should have regard to the test for "less favourable treatment" used by the Appellate Body in 
Korea – Various Measures on Beef, that is, whether a measure modifies the conditions of 
competition in the relevant market to the detriment of i mported like products.1  
 
3. In addition, the Panel should note the jurisprudence provided by the Appellate Body in EC – 
Bananas III that Article III:4 of GATT 1994 does not require a separate examination of whether a 
measure affords protection to domestic  production.2  
 
4. We note that a wide interpretation of "affecting" was found to be appropriate by the Panel in 
Canada – Autos and covers: "...any laws or regulations which might adversely modify the 
conditions of competition between domestic and imported  products".3 This finding was not 
reviewed by the Appellate Body.  
 
5. Given the jurisprudence supporting a broad interpretation of "affecting", and the broad and 
encompassing nature of Brazil's measures, in Australia's view, it is likely that Brazil's mea sures 
adversely "affect" the conditions of competition in the market.  
 
II. ARTICLE III:5 of GATT 1994  
 
6. The first sentence of Article III:5 disciplines the application of quantitative regulation, and is, 
in Australia's view a prohibition on local conte nt requirements. It provides that, any internal 
regulation which requires the mixture, processing or use of products based on domestically 
sourced products is inconsistent with Article III:5 of GATT 1994.  
 
7. The reference in Article III:5 of GATT 1994 to  processing does not mean that, when read 
with Article III:8(b) of GATT 1994, a Member may not subsidise processing activities within its 
territory. Rather, in Australia's view, the first sentence of Article III:5 of GATT 1994 means that 
where a Member pro vides subsidies designed to encourage manufacturing activities within its 
territory, including for specific industry sectors, it must do so consistent with Article III:5 of 
GATT  1994, that is, it must not directly or indirectly require the use of domestic products.  
 
8. Australia contends that a distinction needs to be made between the payment of subsidies 
which encourage manufacturing activities as opposed to the payment of subsidies to 
manufacturing activities where there are effectively local content requ irements.  
 
9. Australia notes the number of "processing or production steps" required by Brazil which 
must be increased over time in order to qualify under the program. In particular Australia notes 
the European Union's concerns that the INOVAR -AUTO progr amme by setting a minimum number 
of processing steps to be performed in Brazil, may be in fact defining in a quantitative manner the 
minimum threshold of local content for a product to be eligible and retain the tax incentives under 
the INOVAR -AUTO program me. 
 
10. In carrying out its examination, an issue the Panel may wish to examine is whether requiring 
a minimum number of processing activities be carried out in Brazil in order to receive a tax credit 
amounts to an internal quantitative regulation which r equires, directly or indirectly, a specified 
amount or proportion of any product be supplied from domestic sources.
                                                
1 Appellate Body Report,  Korea — Various measures on Beef , para.  137 
2 Appellate Body Report,  EC — Bananas III , para. 216  
3 Panel report Canada – Autos,  para. 6.256  WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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  ANNEX  C-3 
EXECUTIVE SUMMARY OF  THE ARGUMENTS OF CANADA  
1. The findings of the Panel in this dispute will have important consequences for the wa y in 
which the Agreement on Subsidies and Countervailing Measures (SCM Agreement) is interpreted 
and applied in future disputes. Canada therefore welcomes the opportunity to present its views to 
the Panel. Canada's submission addresses the issue of prohibi ted import -substitution subsidies 
under Article 3.1(b) of the SCM Agreement.  
2. The European Union claims that Brazilian subsidies in the form of tax benefits to domestic 
producers under five incentive programs covering key sectors of the Brazilian economy ar e 
contingent upon the use of domestic over imported goods in violation of Article 3.1(b) of the 
SCM Agreement.  
3. Canada agrees with the European Union that a subsidy contingent on the purchase of 
domestic goods constitutes an import -substitution subsidy unde r Article 3.1(b).  
4. However, Canada disagrees with what appears to be an interpretation of Article 3.1(b) which 
would improperly extend the provision to cover situations where subsidy recipients are required to 
produce goods. The European Union appears to be  arguing that a subsidy is contingent on the use 
of domestic over imported goods where the producer of a final good is required to produce certain 
components of that good in order to receive the subsidy.  
5. Canada considers that a WTO Member is not prohibited  from providing subsidies to its 
domestic producers, including where the subsidy to the producer of a final good is contingent on 
the production of an intermediate good by that same producer.  
6. Nothing in the General Agreement on Tariffs and Trade (GATT) or the Agreement on 
Subsidies and Countervailing Measures (SCM Agreement) prohibits a subsidizing Member from 
making the granting of a subsidy contingent on a recipient producing goods in its territory. In fact, 
GATT Article III:8(b) explicitly allows WTO Mem bers to provide subsidies to their domestic 
producers. A producer of a final good that is required to produce an intermediate good is obviously 
also a producer of the intermediate good. Therefore, a subsidy can be made contingent on the 
production of an in termediate as well as a final good.  
7. Neither the GATT nor the SCM Agreement limit a subsidizing Member's ability to define the 
level of production required for subsidy eligibility purposes. As part of this discretion, a Member 
may explicitly require the pro duction of an intermediate good. A Member's ability to condition the 
provision of a subsidy on a production requirement would be significantly curtailed if a Member 
could not require the production of an intermediate good. A production requirement would th en 
have to be limited to simple assembly operations.  
8. This position is supported by the Appellate Body's report in Canada – Autos. In that dispute, 
the Appellate Body assessed whether a measure providing Canadian automobile manufacturers 
with an import duty  exemption contingent, inter alia, on satisfaction of a Canadian value -added 
(CVA) requirement, was inconsistent with Article 3.1(b) of the SCM Agreement. Under the 
measure, a manufacturer could meet the CVA requirement by disclosing the aggregate of certa in 
costs of producing vehicles in Canada listed in the definition of "Canadian value added". A number 
of costs were included in the definition of CVA. The most relevant for the Appellate Body's analysis 
were (1) the cost of domestic goods, that is, those d omestic parts and materials purchased by the 
manufacturer for use in the production of its motor vehicles, and (2) the cost of domestic labour, 
that is, the cost of all labour reasonably attributable to the production of vehicles. The latter would 
include the cost of labour used to produce intermediate goods.  
9. In analyzing whether the CVA requirement was inconsistent with Article 3.1(b), the 
Appellate Body in Canada - Autos distinguished between the cost of labour and the cost of 
domestic goods. It found tha t the CVA requirement would violate Article 3.1(b) only if it required WT/DS472/ R/Add.1 • WT/DS497/ R/Add.1  
 
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  the manufacturer to use domestic goods. However, it did not consider that a requirement to use 
domestic labour, regardless of whether that requirement may imply the production of interm ediate 
goods, would violate Article 3.1(b).  
10. The European Union's interpretation would nullify the right of a WTO Member to require a 
subsidy recipient to produce goods, as defined by the Member, in its territory, in order to receive a 
subsidy. This has no basis in law, and would have considerable, negative consequences for 
industry given that most manufacturers produce intermediate goods as part of the production of 
their final goods. As such, and for the reasons set out above, the Panel should reject the 
interpretation advanced by the European Union.  
 WT/DS472/R/Add.1 • WT/DS497/R/Add.1  
 
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  ANNEX C -4 
EXECUTIVE SUMMARY OF  THE ARGUMENTS OF KOR EA* 
1. Korea thanks the Panel for this opportunity to present its views in th ese proceedings. Korea 
has systemic interest with respect to some key issues in this dispute, including the appropriate 
interpretation of the relevant provisions of the GATT 1994 and SCM Agreements.  Today, Korea 
would like to comment on these issues and request the Panel's clear guidance.  
2. First, we turn to whether Article III:8(b ) of the GATT 1994 justifies a possible breach of 
Articles III:2, III:4 and III:5 of the GATT 1994, as Brazil claims. Article III:8(b) stipulates  that the 
provisions of Article III shall not prevent  the payment  of subsidies exclusively to domestic 
producer s. But like all provisions in the WTO agreements, Article III:8(b) does not exist in isolation 
and should be read in conjunction with other relevant  provisions.   
3. In this case, we find the Panel ruling in Indonesia – Autos  to be instructional. That Pane l 
ruled that "the purpose of Article III:8(b) is to confirm that subsidies to producers do not violate 
Article III, so long as they do not have any component that introduces discrimination between 
imported and domestic products. " (However, Korea notes that  in EC-Commercial Vessels , the 
Panel ruled that even when the subsidy may adversely affect the conditions of competition 
between domestic and imported products, Art.III:8(b) may be applicable. We hope that the Panel 
will clarify the seemingly contradictory  rulings in the two disputes.)  
4. The objective of Article III:8(b) is to allow members to develop their economies through the 
granting of subsidies to domestic producers. But Korea believes, and as the Panel ruling in 
Indonesia – Autos  clearly notes, this  right of members is not without limits. Article III:8(b) is 
applicable so long as it is applied in a manner that is consistent with the other provisions of 
Article  III.   
5. Some of these other provisions stipulate the national treatment principle, a fund amental 
pillar of the WTO system. A complete and contextual reading of Article III would thus affirm that 
while payment of subsidies to domestic producers is indeed permitted under Article III:8(b), this is 
only to the extent that the non -discrimination principle  set forth in the other paragraphs  of the  
same article are not in violation.  
6. We would guard against an excessively narrow interpretation of Article III:8(b) that would 
render the provision inutile, thereby nullifying the right of members to provi de subsidies to 
domestic producers. However, in order for B razil's measures to be justified under Article III:8(b), 
the Panel would need to find that Brazil 's tax benefits do not explicitly discriminate  imported 
products as compared to domestic products. T he Panel would also need to find that the structure 
and design of the measures is such that the competitive opportunities for imported products in the 
Brazilian market are not adversely affected.  
7. Next, Korea turns to the issue of whether Brazil 's tax e xemptions and suspensions constitute 
subsidies prohibited by Articles 3.1(b) and 3.2 of the SCM Agreement.  
8. We believe that the provisions of the SCM Agreement should be interpreted strictly . We also 
note that the burden of proving the existence  of proh ibited subsidies rests with the claimants.  In 
this regard , we support Canada 's interpretation of Article 3.1(b), outlined in its third party 
submission, that Articles 3.1(b) and 3.2 should not be inappropriately expanded to cover situations 
where producer s are required to simply produce goods domestically in order to qualify for 
subsidies.   
9. Nothing in Article 3.1(b) places restrictions on where a member produces goods. The only 
instance that is regulated  by the provision is when the contested measure p rovides that subsidies 
be contingent "upon the use of domestic over imported goods. " Korea is not convinced that 
requiring a producer to manufacture locally as a condition for receiving subsidies is – in and of 
itself and without further analysis – tantamo unt to requiring the use of domestic over imported 
                                                
* Korea has requested that their oral statement be considered as their executive summary.  WT/DS472/R/Add.1 • WT/DS497/R/Add.1  
 
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  goods. A rather extreme example that can underscore this point would be a hypothetical measure 
that provides subsidies on the condition that the producer produce domestically, but using only 
imported conte nts. Such a measure would not be in breach of Article 3.1(b) of the 
SCM Agreement.  
10. The key question in this dispute is whether Brazil 's measures which contain requirements to 
produce locally do in fact take the prohibited additional step of requiring o r incentiviz ing usage of 
domestic contents over imports as condition for receiving subsidies. To answer, the Panel would 
need to assess how Brazil 's measures are designed and structured. It would need to determine 
whether Brazil's contested programs effect ively limit benefits to goods of Brazilian origin.  
11. In this regard, Korea would suggest that the Panel review what manufacturing steps are 
required to be undertaken domestically under Brazil 's measures . Here, we would make a 
distinction between: a. the effects of the measures as they apply to a producer export ing finished  
products; and b. the effects of the measures as they apply to a producer export ing components or 
inputs. Exporters of finished products by definition could not possibly meet domestic 
manufacturing requirements. In the present  case, while Brazil claims that its measures  relate only 
to production and have no bearing on products, such requirements would close off opportunities 
for exporters of finished products to benefit from Brazil's tax programs that are available to 
domestic producers.  
12. On the other hand, a member 's requirement that certain manufacturing and processing 
operations take place domestically may not necessarily disadvantage producers who export 
components to that member. A  domestic producer can, in theory, just as easily benefit from tax 
breaks when using imported products as when using domestic products – if that is how the 
measure  is structured or designed.  
13. However, depending on how a measure is structured or designe d, even producers exporting 
components or parts can be placed at a comparative disadvantage vis-à-vis domestic producers.  A 
measure may be designed to explicitly  contain specific local content requirements.  But a 
requirement that parts and components be produced locally in accordance with certain production 
steps may have the same end result as specific local content requirements. As the United States 
points out in its submission, if Brazil requires the use of inputs that themselves must conform to 
domest ic production requirements in order for producers to benefit from certain  programs, it is not 
difficult to envision  producers in Brazil choosing domestic over imports.  
14. In sum, regarding the first point we touched upon, namely the relationship between t he 
national treatment provisions of Article III and Article III:8(b) of the GATT 1994, Korea is mindful 
that the WTO Agreements permit the use of subsidies as a legitimate policy tool of members. At 
the same time, we recognize that non -discrimination is a bedrock principle  of the WTO that must 
be guarded vigorously and that this principle delineates the operational boundaries of Article III's 
other provisions. Regarding our second point on Article 3.1(b), we would be wary of a loose 
interpretation of the SC M Agreement, especially since certain carefully defined subsidies have been 
designated as prohibited subsidies. Nevertheless, we do not believe that a strict interpretation  of 
the SCM Agreement should prevent the Panel from considering the structure and de sign of a 
measure in an effort to accurately assess its effects in the market place.  
15. This concludes Korea 's oral statement . Thank you.  
 WT/DS472/R/Add.1 • WT/DS497/R/Add.1  
 
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  ANNEX C -5 
EXECUTIVE SUMMARY OF  THE ARGUMENTS OF UKR AINE 
1. Ukraine has joined as a third party in the dispute between Brazil and Japan on Certain 
Measures Concerning Taxation and Charges to provide its views on a number of fundamental 
issues relating to the interpretation of the Article I:1, III:2, III:4, III:5 of the General Agreement 
on Tariffs and Trade 1994 (GATT 1994 ), Article 2.1 of the Agreement on Trade -Related Investment 
Measures (TRIMs) and Articles 3.1(b) and 3.2 of the Agreement on Subsidies and Countervailing 
Measures (SCM) because of its systemic interest in the correct and consistent interpretation and 
application of the referred provisions.  
2. Ukraine agrees that preferential treatment conferred to Argentina, Mexico and Uruguay 
under INOVAR -AUTO can be justified under Paragraph 2(b) of the Enabling Clause and cannot be 
qualified as violation of MFN principle ac cording to the Article I:1 of the GATT 1994. Thus, Brazil 
was required to follow procedures prescribed by the Transparency Mechanism for Preferential 
Trade Arrangements before granting preferential treatment to Argentina, Mexico and Uruguay. 
Moreover Ukrai ne takes notice that proving of the compliance with the requirements of the 
Enabling Clause remains on the responding party invoking the Enabling Clause as a defence.  
3. In its First Written Submission Brazil claims that programmes at issue including the 
Informatics Programme, PADIS, PATVD, INOVAR -AUTO are not a subject of requirements of 
Article  III as they constitute a subsidy pursuant to Article III:8 (b) of the GATT 1994.  
4. Ukraine considers that exemption under Article III:8(b) should not be applicable in t he 
present dispute because programmes at issue including the Informatics Programme, PADIS, 
PATVD, and INOVAR -AUTO do not involve a payment of subsidies, in particular a government 
expenditure, which should prevent Brazil from relying on this exemption. The refore, programmes 
at issue should be considered within the requirements of Article III of the GATT 1994.  
5. Ukraine also holds the view that the WTO Members can provide to their domestic producers 
only those subsidies which are not prohibited by the provisio ns of the SCM Agreement.  
6. As explained by the Panel in Canada — Aircraft , a legitimate mandate to support and 
develop trade does not "amount to a mandate to grant subsidies, since such support and 
development could be provided in a broad variety of ways". U kraine understand Brazil's intentions, 
but still wants to notice that such legitimate objectives may not justify a violation of SCM or 
GATT  1994 if the Panel finds one in the present case.  
7. According to the Illustrative list of the TRIMs local content requi rement refers to the 
prohibited TRIMs, it requires the purchase or use by a foreign enterprise of products of domestic 
origin or domestic source. Such requirement is inconsistent with Article III:4 of GATT 1994 and 
subjects the imported products to less fa vourable conditions than domestic ones.  
8. Ukraine is of the view that Brazil's measures can be qualified as TRIMs recalling the China – 
Publications and Audiovisual Products  Appellate Body Report which referred to the illustrative list in 
the Annex to the TR IMs Agreement and observed that "measures that did not directly regulate 
goods, or the importation of goods, have nonetheless been found to contravene GATT obligations". 
In this context the measures related to research, development and production that rest rict the 
rights of traders may violate obligations under GATT and the TRIMs with respect to trade in goods.  
9. Moreover, within the scope of the paragraph 1(a) of the Annex to the TRIMs Agreement the 
Informatics Programme, PADIS, PATVD, and INOVAR -AUTO progra mme, Digital Inclusion 
Programme , may be considered as a trade -related investment measures, because Brazil's national 
treatment provided for in paragraph 4 of Article III of GATT 1994 include requirements of the 
purchase or use of products (including autom otive components and/or tooling, Brazilian inputs and 
manufacturing equipment) from domestic sources in order to obtain tax advantages. Such 
measures may put domestic companies in a more privileged position as they are not required to 
fulfil any additional  requirements as importers do.  WT/DS472/R/Add.1 • WT/DS497/R/Add.1  
 
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  10. Ukraine thanks the Panel for this opportunity to express the foregoing comments and for the 
reasons stated above, requests the Panel, in deciding the dispute, to take into account 
observations and comments stated in its writt en submission and oral statement.  
 WT/DS472/R/Add.1 • WT/DS497/R/Add.1  
 
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  ANNEX C -6 
EXECUTIVE SUMMARY OF  THE ARGUMENTS OF THE  UNITED STATES  
EXECUTIVE SUMMARY OF THE U.S. THIRD PARTY WRITTEN SUBMISSION  
I. INTERPRETATION AND APPLICATION OF ARTICLE III:2  OF THE GATT  1994  
1. The European Union and  Japan assert that the disputed programs result in imported ICT 
products being taxed in excess of domestic ICT products, contrary to the first sentence of 
Article  III:2 of the GATT 1994 . Brazil claims that any differences in taxation between imported and 
domestic goods resulting from the disputed  programs "do not relate to the origin of the goods, but 
rather to the participation of the producing company" in the programs.  
2. However, if the Panel agrees with the facts as presented by complainants, the requir ements 
imposed by the disputed programs would appear to limit the benefits of the programs to goods of 
Brazilian  origin. For example, the programs at issue condition certain tax benefits on the sale of 
products that conform to a Brazilian Productive Proces s ("PPB"). Brazil does not dispute that these 
PPBs require that a number of manufacturing steps take place in Brazil, including manufacturing of 
intermediate components and the assembly of various components into a final product. For 
example, the main PPB for IT products requires the following production steps take place in Brazil: 
(1) "assembly and soldering of all components on the printed circuit boards"; (2) "assembly of the 
electrical and mechanical parts, totally separated, at a basic component level" ; and (3) 
"integration of the printed circuit boards and the remaining electrical and mechanical parts in the 
formation of the final product".  If the Panel finds that the facts are as presented by the 
complainants, it would appear that the number and type of manufacturing steps required to 
comply with such PPBs would lead to the resultant products being of Brazilian origin. It would not 
appear that imported products could meet the domestic manufacturing requirements of PPBs, and 
therefore imported products could not receive the same tax benefits that are available to domestic 
goods that comply with PPBs. Thus, only Brazilian products would be able to comply with a PPB 
and receive preferential tax treatment under these programs.  
II. INTERPRETATION AND APPLICA TION OF ARTICLE III:4  OF THE GATT  1994  
3. The European Union and Japan assert that the disputed programs result in imported ICT 
products being accorded less favorable treatment than domestic ICT products contrary to 
Article  III:4 of the GATT 1994, because they provide tax benefits for domestic ICT products that 
are unavailable to imported  ICT products and because, in certain instances, they incentivize the 
purchase and use of domestic inputs over imported inputs. Brazil claims that the requirements of 
the d isputed programs do not affect products in the marketplace, but instead "deal with 
pre-market  activities," and are therefore outside the scope of Article III:4.  
4. The distinction that Brazil attempts to draw between measures that deal with "pre -market 
activities" and measures  that affect "products" is not a useful one, nor is it a distinction that is 
found in the text of Article III:4. Simply because a measure imposes a so -called "pre -market" 
requirement does not mean it does not affect  the " internal sale , offering for sale, purchase, 
transportation, distribution or use"  of a product. As the Appellate Body has noted, "[t]he ordinary 
meaning of the word 'affecting' implies a measure that has 'an effect on', which indicates a broad 
scope of application." Bas ed in part on the breadth of this definition, panels and the Appellate Body 
have interpreted the scope of Article III:4 to "go[] beyond laws and regulations which directly 
govern the conditions of sale or purchase to cover also any laws or regulations whic h might 
adversely modify the conditions of competition between domestic and imported products." 
Measures that otherwise fall within this scope should not be excluded simply because they impose 
requirements on production or development. To the extent that a ny such measures "affect" the  
"internal sale, offering for sale, purchase, transportation, distribution or use" of products, the text 
of Article III:4 clearly would cover those measures.  
5. In this case, for example, PPBs require that a number of productio n steps take place in 
Brazil, including intermediate manufacturing steps and final assembly. Although Brazil claims that 
PPBs "are not related to the product, but to production," PPBs do appear to relate to products. WT/DS472/R/Add.1 • WT/DS49 7/R/Add.1  
 
- C-18 - 
 
  Specifically, PPBs define the "minimum set of operations performed at a manufacturing facility that 
characterises the actual industrialisation of a given product ." Under the disputed programs, such 
products may be exempt from certain taxes when they are sold, thereby modifying the conditions 
of competition in the marketplace to the benefit of covered products and to the detriment of 
non-covered products. Moreover, since companies cannot obtain these tax advantages until the 
product is sold on the market, Brazil's characterization of the disputed  measures as strictly 
"pre-market" would not seem to be accurate.  
6. The disputed programs also affect the purchase and use of inputs that are used in the 
production of certain covered products. As all the parties agree, certain PPBs require the use of 
inputs that themselves conform to another PPB. As discussed above, if the Panel finds that the 
facts are as presented by the complainants, foreign inputs would not appear to be able to satisfy 
the relevant PPBs, because they would not have been produced and a ssembled in Brazil. By 
providing tax benefits for products that are manufactured according to these "nested" PPBs, the 
disputed programs incentivize the purchase and use of products made in Brazil as inputs into the 
production process, thereby modifying th e conditions of competition to the detriment of imported 
inputs.  
III. INTERPRETATION AND APPLICATION OF ARTICLE III:5  OF THE GATT  1994  
7. The European Union and Japan assert that the disputed programs violate Article III:5 of the 
GATT 1994 . If the Panel de termines that the programs at issue violate Articles III:2 and III:4, the 
United States does not see the value of addressing additional claims under Article III:5. That said, 
the United States notes that Article III:5 prohibits regulations that relate to t he "use of products in 
specified amounts or proportions" and require "that any specified amount or proportion of any 
product which is the subject of the regulation must be supplied from domestic sources." As 
discussed above, certain PPBs require the use of  a specified proportion of inputs that themselves 
conform to a PPB.  If the Panel finds that goods produced in accordance with a PPB are necessarily 
domestic products, and insofar as these programs condition preferential tax treatment on 
compliance with suc h PPBs, the disputed programs would appear to require the use of specified 
amounts or proportions of domestic products.  
IV.  Interpretation and Application of Article XX(a) of the Gatt 1994  
8. Brazil asserts that PATVD is necessary to protect public morals  because it provides access to 
culture, information, and education through digital television in Brazil, and is thus justified by the 
exception under paragraph (a) of Article XX of the GATT 1994.  
9. In considering whether a GATT -inconsistent measure is pro visionally justified under 
Article  XX(a), a panel must determine whether a measure contributes to a covered objective and, 
if so, whether that contribution is such that the measure is "necessary" to achieving the objective. 
The analysis may also entail con sideration of whether a complaining party has identified a 
reasonably available, less trade -restrictive alternative.  
10. Objective . Without directly addressing whether the provision of information and education 
via digital television falls within the scope  of a measure to protect public morals under 
Article  XX(a), the United States notes that a certain degree of deference must be given to WTO 
Members with respect to determining  what constitutes public morals and measures to protect 
same. As the Colombia – Textiles  panel explained: "[T]he term 'public morals' denotes standards 
of right and wrong conduct maintained by or on behalf of a community or nation, and its content 
may vary in time and space, depending on the prevailing factors. Members have the right t o 
determine the level of protection that they consider appropriate and some scope to define and 
apply for themselves the concept of 'public morals' in their respective territories, according to their 
own systems and scales of values."  
11. Necessity.  In thi s case, Brazil's stated objective with respect to protecting public morals is to 
ensure "proper and timely access of the Brazilian population to information and education" via 
digital television. However, Brazil fails to explain why digital TV transmitters  must be developed 
and manufactured  in Brazil  in order to accomplish the objective of providing access to information 
and education via digital television. Making sure digital TV transmitters are available to Brazilians 
may be relevant to this objective, b ut there would not seem to be any reason why those WT/DS472/R/Add.1 • WT/DS497/R/Add.1  
 
- C-19 - 
 
  transmitters must be developed or made in Brazil to provide such access. The public would have 
as much access to information and education if it were conveyed by imported transmitters as by 
domestic transm itters. Thus, there does not appear to be a genuine relationship between the 
provision of tax benefits to domestic producers of digital TV transmitters via PATVD and the goal of 
making digital television accessible in Brazil.  
12. Less trade -restrictive alt ernative.  As noted above, it is for the complainants to identify a 
reasonably available, less trade -restrictive alternative measure.  As a general matter, there would 
appear to be a number of reasonably available alternative measures that would achieve the same 
end of ensuring access to digital television, while being less trade restrictive than the PATVD 
program. For example, Brazil could provide tax exemptions for sales of all digital TV transmitters 
that comply with Brazil's digital TV standards, regardle ss of whether they are imported or 
domestically produced. Alternatively, Brazil could eliminate tariffs on the importation of digital TV 
transmitters, or provide subsidies for producers of digital TV transmitters. Each of these measures 
would provide the B razilian population with access to digital television, while avoiding the 
trade -restrictive impact of the PATVD program.  
V. Interpretation and Application of Articles 1.1(a)(1)(ii) and 1.1(b) of the 
SCM Agreement  
13. The European Union and Japan assert tha t the tax exemptions and suspensions provided by 
the disputed programs constitute subsidies "contingent... upon the use of domestic over imported 
goods,"  contrary to Article 3.1(b) of the SCM Agreement. In determining whether a subsidy exists, 
the Appellate  Body has identified two distinct elements: (1) a financial contribution by a 
government, which may be met if government revenue that is otherwise due is foregone or not 
collected; and (2) the financial contribution must confer a benefit.  
14. Government  revenue otherwise due is foregone or not collected.  With respect to this 
element, the Appellate Body stated in US – Large Civil Aircraft (2nd complaint)  that "the foregoing 
of revenue otherwise due implies that less revenue has been raised by the government than would 
have been raised in a different situation," and that "the word 'foregone' suggests that the 
government has given up an entitlement to raise revenue that it could 'otherwise' have raised." 
The United States notes that insofar as the disputed prog rams exempt  taxes that would otherwise 
have to be paid but for the program, a financial contribution has been provided: government 
revenue, otherwise due, is clearly foregone. In addition, to the extent the disputed programs 
suspend  taxes that are later pa id further down the production chain, a financial contribution has 
still been provided: at the moment in which government revenue would otherwise be due, it is 
foregone (albeit temporarily). Moreover, given the time -value of money, suspending the collectio n 
of a tax may also result in less revenue being raised.  
15. A benefit is thereby conferred.  As the Appellate Body explained in Canada – Aircraft , "there 
can be no 'benefit' to the recipient unless the 'financial contribution' makes the recipient 'better o ff' 
than it would otherwise have been, absent that contribution." Under the programs at issue, 
producers whose goods are tax -exempt  are clearly better off than those who must pay taxes. A 
producer that does not have to pay a tax may be able to charge less,  or earn a greater profit, for 
the same goods when compared with a producer whose goods are not tax -exempt. This is true 
even in the case of intermediate goods —while taxes might be charged later in the production 
chain, the intermediate producer still rece ives the benefit of an exemption on its own sales. 
Moreover, there is a benefit even in the case of tax suspensions . A producer whose payment of 
taxes is suspended is better off than one who must pay the taxes, but receives a credit that can be 
redeemed la ter. In particular, funds that would otherwise be tied up by the payment of taxes are 
instead available for use and reinvestment.  
EXECUTIVE SUMMARY OF U.S. THIRD PARTY ORAL STATEMENT  
I. INTERPRETATION AND APPLICATION OF ARTICLE III:2  OF THE GATT  1994  
16. The complaining parties assert that the disputed programs result in imported ICT products 
being taxed in excess of domestic ICT products, in a manner inconsistent with the first sentence of 
Article III:2 of the GATT 1994.  WT/DS472/R/Add.1 • WT/DS49 7/R/Add.1  
 
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  17. Article III:2 provides that imp orted products shall not be subject to internal taxes "in excess 
of" those applied to like domestic products. The programs at issue in this dispute condition certain 
tax benefits on the sale of products that conform to a Brazilian Productive Process, or "P PB." PPBs 
require that a number of manufacturing steps take place in Brazil, including manufacturing of 
intermediate components and the assembly of various components into a final product. Based on 
the facts presented by the complaining parties , it would a ppear that complying with a PPB would 
necessarily result in a domestic product benefitting from a lower tax on its sale . An imported 
product could not meet the domestic manufacturing requirements of a PPB, and therefore could 
not receive the same tax benef its that are available to a domestic product that complies with a 
PPB. 
18. The United States therefore agrees that insofar as the disputed programs result in a tax 
applied to products manufactured in Brazil in conformance with a PPB lower than the tax for like 
imported products, these programs would appear to tax imported products "in excess of" like 
domestic products.  
II. INTERPRETATION AND APPLICATION OF ARTICLE III:4  OF THE GATT  1994  
19. The complaining parties assert that the disputed programs provide t ax benefits for domestic 
ICT products that are unavailable to imported ICT products and, in certain instances, incentivize 
the purchase and use of domestic inputs over imported inputs. The complaining parties allege that 
this situation results in imported products being accorded less favorable treatment than domestic 
products contrary to Article III:4.  
20. Article III:4 provides that imported products "shall be accorded treatment no less 
favourable" than like domestic products with respect to "all laws, reg ulations and requirements 
affecting their internal sale, offering for sale, purchase, transportation, distribution or use." Panels 
and the Appellate Body have interpreted the scope of Article III:4 to include "any laws or 
regulations which might adversely modify the conditions of competition between domestic and 
imported products." Under the disputed programs, products that are manufactured in Brazil in 
conformance with a PPB may be exempt from certain taxes when they are sold, whereas imported 
products wou ld not receive such an exemption. Therefore, insofar as the programs at issue exempt 
domestic products from taxes that would otherwise be due upon sale, but do not provide the same 
exemption for like imported products, these programs would appear to "affec t[] the internal sale, 
offering for sale, purchase, transportation, distribution, or use of the imported and domestic like 
products" by adversely modifying the conditions of competition for imported products compared to 
like domestic products.  
21. For the subset of PPBs that require the use of input products that themselves conform to 
another PPB, a different analysis applies. For example, the PPB for "Tablet PCs with a Touch 
Screen" requires that 90 percent of the "motherboards" used during production of " tablet PCs with 
a touch screen" comply with the PPB for printed circuit boards. To obtain tax benefits under the 
disputed programs, companies seeking to comply with these "nested" PPBs must therefore 
purchase and use the required amount of PPB -compliant in put products. Input products produced 
in accordance with a PPB would be domestic products; imported input products cannot be 
produced in accordance with a PPB. Therefore, the requirement to use input products that conform 
to a PPB necessarily requires the use of domestic products. The United States therefore agrees 
that by providing tax benefits for products manufactured using input products meeting "nested" 
PPBs, the disputed programs incentivize the purchase and use of domestic products as inputs by 
downs tream producers, thereby modifying the conditions of competition for those input products 
to the detriment of imports.  
III. INTERPRETATION AND APPLICATION OF ARTICLE III:5  OF THE GATT  19944  
22. The complaining parties also assert that the disputed program s are inconsistent with 
Article  III:5, which prohibits regulations that relate to the " use of products in specified amounts or 
proportions" and "require[], directly or indirectly, that any specified amount or proportion of any 
product which is the subject o f the regulation must be supplied from domestic sources."  
23. If the Panel determines that the disputed programs are inconsistent with Articles III:2 and 
III:4, there would not seem to be value in addressing additional claims under Article III:5. That 
said, "nested" PPBs specifically require the use of a specified amount or percentage of inputs that WT/DS472/R/Add.1 • WT/DS497/R/Add.1  
 
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  are domestic goods produced in accordance with a PPB. The United States therefore agrees that 
insofar as the disputed programs condition preferential tax treatm ent on compliance with such 
PPBs, the programs would appear to require the use of "specified amounts or proportions" of 
products "from domestic sources."  
IV. INTERPRETATION AND APPLICATION OF ARTICLE 3.1( B) OF THE SCM  AGREEMENT  
24. The complaining parties assert that the tax exemptions and suspensions available under the 
disputed programs are contingent on "the use of domestic over imported goods" in part because 
PPBs may require  the producer of the final product to produce certain components of that produc t 
domestically. As noted in Canada's third -party submission, interpreting Article 3.1(b) to cover 
situations in which subsidy recipients are required to produce goods domestically would be an 
improper expansion of the scope of that provision. The SCM Agree ment does not prohibit Members 
from granting subsidies that are contingent on the recipient producing goods domestically. Rather, 
Article 3.1(b) is directed to conditioning a subsidy on "use" of a domestic over an imported good.  
25. Moreover, GATT 1994 Art icle III:8(b), which the Appellate Body has noted provides relevant 
context for the interpretation of Article 3.1(b) of the SCM Agreement, expressly permits the 
payment of subsidies exclusively to domestic producers. By necessity, the derogation in 
Article  III:8(b) extends to subsidies to the productive activities or manufacturing steps that make 
the recipient a domestic producer. To the extent that these encompass the production of what 
might be considered intermediate components, a Member remains free to define the domestic 
producers receiving subsidies as those recipients also producing those components.  
26. The United States therefore disagrees with the complaining parties to the extent they claim 
that a requirement to engage in specified production step s leading to the production of a finished 
good in the territory of a Member is a subsidy contingent on "the use of domestic over imported 
goods."  
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