WORLD TRADE  
ORGANIZATION  G/SCM/Q2/BRA/21 
21 April 2008 
 (08-1841) 
Committee on Subsidies and 
Countervailing Measures Original:   English 
 
 
 
SUBSIDIES  
 
Replies to Questions Posed by the UNITED STATES Regarding1  
the New and Full Notification of BRAZIL2 
 
  The following communication, dated 18 April 2008,  is being circulated at the request of the 
Delegation of Brazil.    
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Amazon Development Authority and Northeast Region Development Authority (SUDAM and 
SUDENE)  
 
Question 1 
  Brazil states that in August 2001, SUDAM and SUDENE were extinguished and 
replaced by Agência do Desenvilv imento da Amazônia (ADA) a nd Agência de Desenvolvimento 
do Nordeste (ADENE).  It is our understanding that on January 3, 2007, SUDAM and SUDENE 
authorities were re-established.  Can you please explain if the programmes under the re-
established SUDAM and SUDENE authorities provide different types of incentives which were not available before?  If so, please pr ovide details of those incentives.   
 
Reply
 
 
 In effect, "Superintendência para o Desenvolvimento da Amazônia" (SUDAM) and 
"Superintendência de Desenvolvimento do Nordest e" (SUDENE) were extinguished in August 2001 
by Provisional Measures Nr. 2.156-5/2001, and Nr. 2.157-5/2001, respectively.  The same Provisional 
Measures replaced those agencies by ADA and ADENE.  On 3 January 2007, ADA and ADENE were extinguished by Supplementary Laws Nr. 124/2007, and Nr. 125/2007, respectively, being 
replaced by SUDAM and SUDENE.  The changes in troduced by Supplementary Laws Nr. 124/2007 
and Nr. 125/2007 are mainly related to the legal stru cture and legal nature of those authorities.  They 
do not provide for incentives not previously available under ADA and ADENE.     
Question 2 
 
 Could you also please explain whether the ADA and ADENA authorities and 
programmes they administered have been extinguish ed or do they continue to exist?  To the 
extent that ADA and ADENE provide different incentives than SUDAM and SUDENE, please 
provide the details.   
                                                     
 
1 G/SCM/Q2/BRA/18.   
2 G/SCM/N/155/BRA.   G/SCM/Q2/BRA/21 
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  Reply
 
  The programmes administered by former ADA and ADENE continue to exist.  The legal 
responsibility for the administration of such pr ogrammes was transferred to SUDAM and SUDENE, 
from 3 January 2007.   
 
Programme for Diesel Oil Support
 
 Question 3  
 Can Brazil provide further details on how this program works, including how the 
subsidy benefits are applied, determined and disbursed?    
Reply
 
 
 The programme allows for qualifying fishing boa t operators and owners to request a partial 
refund for amounts actually paid for diesel fuel.  The refunds are only provided upon duly documented requests, usually on a monthly basis.  The Special Secretaria t for Aquaculture and 
Fisheries (SEAP) is the competent authority in Brazil for administering the programme.   
 
Decree No. 28.104/2001
 
 
 Responding to earlier questions from the United States, in G/SCM/Q2/BRA/16 
(27 September 2006), Brazil previous ly provided information on the State of Rio de Janeiro's 
Decree No. 28.104/2001.  We a ppreciate the information provided by Brazil on Decree No. 
28.104/2001.  We would, howev er, appreciate further clarificat ion on the following questions 
regarding this decree.   
 Question 4   Please explain whether this law remained in  effect during the current reporting period 
of fiscal years 2005 through 2006.    
Reply
 
 
 Decree No. 28.104/2001 enacted by the State of Rio de Janeiro remained in force during the 
reporting period 2005-2006.   
 
Question 5 
 
In its September 27, 2006 response, Brazil explained that this law established a different 
tax regime for ICMS for all producers and retailers of  table salt in the Rio de Janeiro, including 
those which also produce soda ash.  However, it  is the United States' understanding that while 
this decree provides for a 2 percent ICMS rate  calculated against "gross revenues", soda ash 
producers also have the option of alternativel y calculating their ICMS obligations under the 
"normal" ICMS regime, at a rate of 18 per cent (intrastate) or 12 per cent (interstate) 
calculated against value added.  As such, it appe ars that this provision could provide a financial 
contribution as well as a benefit that is specific to  this industry to the extent that it allows the 
qualifying domestic producer the option of paying the lesser of two tax amounts calculated under different methodologies.  Please provide information regarding these different tax regimes for table salt and soda ash producers.   
  G/SCM/Q2/BRA/21 
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  Reply  
  Presently, there is no soda ash production in the State of Rio de Janeiro.  As mentioned previously, table salt producers are subject to a di fferential ICMS rate of 2 per cent levied on the 
firm's gross revenue, without the possibility for comp ensation of ICMS tax credits accumulated by the 
firm on the production and commercialisation chain.   
 
Law 11.196 and Law 11.529
 
 
Question 6  
 
 Responding to earlier questions from the United States, in G/SCM/Q2/BRA/16 
(27 September 2006) Brazil previously provided in formation on the "MP do Bem" provisional 
measure, that was subsequently converted into Law 11.196.  We would like to thank Brazil for 
the information provided above regarding Law 11. 196.  We would, however, appreciate further 
clarification on the following questions regarding this Law:   
 
Question 7  
 
 Please explain whether this law remained in effect during the current reporting period 
of fiscal years 2005 through 2006.   
 Reply
 
  The Provisional Measure referred as "MP do Bem", was published in the Brazilian official gazette (Diário Oficial da Uniã o) on 16 June 2005.  It remained in force until 13 October 2005, 
according Act nº 38/2005 of the Brazilian Nationa l Congress.  On 21 November 2005, the National 
Congress approved Law Nr. 11.196/2005.     The majority of the measures introduced by that  Law, however, took effect during 2006, since 
the implementation of some m easures depended on the adoption of corresponding implementing 
regulation, which was subsequently enacted by gover nmental decree.  For instance, the decree that 
regulated RECAP was published in the official g azette on 29 December 2005 and it has been applied 
since its publication.    
Question 8 
 
 Public information indicates that this law may have been modified by subsequent 
Law 11.529?  Would Brazil please confirm whether th is is the case.  If so, could Brazil please 
explain any changes in the Brazilian tax code as a result of Law 11.529.    
Reply
 
 
 Law Nr. 11.529/2007 did not modify Law Nr. 11.196/2005.    Question 9 
 
 In its 27 September 2006 reply, Brazil stated that Law 11.196 does not confer any 
benefit within the meaning of Article 1 of th e Subsidies Agreement beca use it "merely removes 
an inherent disadvantage that export orient ed firms had under the previous tax regime".  
However, publically available information ( e.g., Banco Central do Brasil's June 17, 2005 
publication entitled "Government Measures to Stimulate Investment") indicates that Brazil's 
Ministry of Finance has estimated the "reduction in tax revenues" (i.e., revenue foregone) G/SCM/Q2/BRA/21 
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  under this program to be $R 263 million in 2005 and $R 300 million in 2006.  Please explain how 
this figure was developed and what it represents.  In view of this estimate by the Ministry of Finance, please explain further Brazil's view that there is no revenue foregone under this 
program.    
Reply
 
 
 At the outset, it should be noted that PIS and COFINS are indirect taxes that work following the value added tax (VAT) principles.  They are no t levied on income or profits, rather their tax 
burden is borne by the final consumer.  Following the international trend, in line with WTO rules, PIS 
and COFINS are not levied on exported products.   
  As a general rule, companies may keep cred its related to PIS and COFINS paid in the 
previous stage of the production chain (credits), re lated to the acquisition of raw materials, inputs and 
capital goods, in order to offset PIS and COFI NS due on domestic sales of goods and services 
(debits).  The final value of PIS and COFINS due by a company is calculated by offsetting values 
corresponding to tax debits and credits.  If the difference between the values related to PIS and 
COFINS debits and credits result in a positive bala nce (credit), companies may use this amount as a 
tax rebate, when determining th e amount of PIS and COFINS due in the subsequent months.  
Companies may also apply for compensation with ot her federal taxes due or request a tax refund in 
cash.   
 
 Before the adoption of RECAP, export-oriented companies were not able to fully offset PIS 
and COFINS credits with debits, since PIS and COFI NS are not levied on exports.  The company had 
to systematically apply for compensation of accumu lated PIS and COFINS credits with other federal 
taxes due or request a refund in cash.   
 
 As mentioned previously (G/SCM/Q2/BRA/16) , the RECAP legislation merely suspends 
the PIS and COFINS levied on the acquisition of capital goods acquired on the domestic market or 
imported by export-oriented firms.  At the same time, it does not allow thes e companies to use or 
maintain any PIS and COFINS credits related to the acquisition of capital goods made under the 
programme.  Thus, RECAP is aimed at reducin g the bureaucratic burden and simplifying the 
administrative procedures related to the compensat ion and refund process that those firms had to 
apply systematically.     With regards to the amounts mentioned in  the publication "Government Measures to 
Stimulate Investment" (dated 17 June 2005) as so- called expected reductions in tax revenues, it 
should be clarified that the information does not re flect the terms, concepts and content embodied in 
the RECAP legislation.  In effect, the amounts me ntioned represent the estimated value of PIS and 
COFINS expected to be suspended in relation to the acquisition of capital goods made by export-
oriented firms, under RECAP in 2005 and 2006.  The estimated amounts also correspond to the value 
of PIS and COFINS credit that those companies would, otherwise, accumulate in the same period related to the acquisition of those capital goods.  Before the RECAP legislation was adopted, export-
oriented companies had the right to apply for co mpensation of the value of the credit resulting from 
the application of PIS and COFINS system with ot her federal taxes due or request a tax refund in 
cash.     Therefore, RECAP does not represent revenue forgone nor does it constitute a benefit, as 
defined under article I of the Subsidies Agreement.   
  
  G/SCM/Q2/BRA/21 
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  Question 10  
 
 Under Law 11.196, Brazilian companies whose ex ports constitute at least 80 per cent of 
total revenues may take advantage of the PIS/Pasep and COFINS tax exemption.  Once a 
company qualifies for the exemption, however, it appears that the PIS/Pasep and COFINS 
exemption applies to all purchases by the comp any of new machinery and equipment, even 
machinery and equipment used to produce the up to 20 per cent of revenues derived from 
domestic sales.  Would Brazil please explain how this export-contingent exemption from an 
indirect tax on domestic sales is consistent  with Brazil's obligations under the Subsidies 
Agreement?  (We note that the publicly available information seems to indicate that the 80 per 
cent export threshold for eligibility has since been  lowered under Law 11.529 to as low as 60 per 
cent.)    
Reply
 
 
 As stated above, Law Nr. 11.529/2007 did not introduce any changes in RECAP, including 
the definition of export-oriented firms.     All goods and services sold on the domestic mark et by companies, including the sales made 
by export-oriented firms under RECAP on the domestic  market, are subject to PIS and COFINS, since 
the tax burden of those taxes is supported by final consumers.  The RECAP legislation suspends PIS 
and COFINS levied on the acquisition of capital goods by eligible companies, not the PIS and 
COFINS levied on their domestic sales.  Companie s eligible for RECAP are not allowed to maintain 
any credit of PIS and COFINS related to the acquisition of such capital goods.   
  It should be recalled that the economic effect s resulting from the PIS and COFINS legislation 
are identical to the effects produced by laws in countries that adopt a value added tax.   
  The main objective of RECAP is to avoid administrative procedures regarding compensation and refunds in cash of the value credit of PIS and COFINS previously accumulated by export-oriented 
firms and reduce the administrative burden to the Brazilian Tax Administration, thus improving the 
application of PIS and COFINS legislation.   
 
 
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