WORLD TRADE  
ORGANIZATION  G/SCM/Q2/BRA/16 
27 September 2006 
 (06-4616) 
Committee on Subsidies and 
Countervailing Measures Original:   English 
 
 
 
SUBSIDIES  
 
Replies to Questions from the UNITED STATES1 
Regarding the New and Full Notification of BRAZIL2 
 
  The following communication, dated 25 September 2006, is being circulated at the request of the Delegation of Brazil.  
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"Fundos Constitucionais de Financiamento do  Nordeste, do Norte e do Centro-Oeste" 
(FNE/FNO/FCO)  
 
Q1. Please list the industries that benefit fr om aid through the FNE/FNO/FCO programme 
as well as the eligibility requirements, apart from  those stated in this document, for companies 
to receive aid through these programmes. 
 Reply:
 
 
The “Fundos Constitucionais de Financiament o do Nordeste, do Norte e do Centro-Oeste” 
(FNE/FNO/FCO) provide financing to projects in the agricultural, cattle raising, mining, 
manufacturing and retail sectors, as well as in the services, tourism and infrastructure sectors in the North East (FNE), North (FNO) and Central West (FCO) regions of Brazil, respectively.  The eligibility for finance from the FNE/FNO/FCO is not restricted by sector or enterprise. New or 
expanding businesses belonging to any sector can qualify to participate and receive funds from the 
“Fundos Constitucionais de Financiamento”.  Nonetheless, there are a number of restrictions rela ted to specific activities, such as:  public sector 
projects; gambling; arms manufacturing and sales; tobacco sales; and financial intermediation. Complete lists of such restrictions are  availabl e in the Annual Financing Agenda of each the three 
programmes (web site: http://www.integracao. gov.br/fundos/fundos_constitu cionais/index.asp). 
 
Q2. Based on information from pubic sources, it appears that financing through the FCO 
could be limited to products made in Brazil.  Pl ease explain how this program is consistent with 
Article 3(b) of the Subsidies Agreement. 
 
                                                     
 
1 G/SCM/Q2/15 
2 G/SCM/N/123/BRA G/SCM/Q2/BRA/16 
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  Reply:
 
 Financing through the FCO is not limited to products  made in Brazil. The FCO finances all goods and 
services necessary for the implementation, expansion, modernisation or relocation of businesses in the agricultural, cattle raising, mining, manufacturing a nd retail sectors, as well as in the services, tourism 
and infrastructure sectors in the Central West region of Brazil.  
 
General Questions
 
 
 In the last set of questions from the United States regarding Brazil’s 2003 subsidy 
notification (document G/SCM/Q2/BRA/11) we  noted that Brazil’s FINAME program provides 
capital financing to companies located in Brazil for the acquisition or leasing of new machinery 
and equipment.  Q3. Please specify the requirements for compan ies to receive assistance through the "old" 
(i.e., pre-1997) and "new (i.e., 1997 onward) FINAME programs.  In particular, please highlight 
any differences in the eligibility criteria between the two programs. 
 
Reply
 
 The FINAME programme provides financing for the ac quisition of machines and equipment, be they 
made in Brazil or imported. The key change in  the programme in 1997 was the inception of a 
progressive widening in the list of its possible beneficiaries.  
 We note Brazil’s statement that "both exporting and non-exporting companies have 
access to the FINAME program" (See document G/SCM/Q2/BRA/12).  However, our questions 
pertain to whether this is an import-substitution subsidy under Article 3.1(b) of the Subsidies 
Agreement, not whether this is an export subsidy. 
 
Q4. Please discuss why you do not believe this pr ogram to be an import-substitution subsidy. 
 
Reply
 
 
As mentioned above (Question 3), the FINAME prog ramme provides financing for the acquisition of 
machines and equipment, be they made in Brazil or imported (see also G/SCM/Q2/BRA/12). It is, therefore, consistent with Article 3.1(b) of the ASCM.   It is our understanding that in April 2001, Brazil’s State of Rio de Janeiro granted local producers of soda ash a preferential rate for the Merchandise and Service Circulation Tax 
(ICMS), which is applied to both imports a nd domestic products (See Decree No. 28.104, 
April 10, 2001).  Specifically, an alternative ICMS  rate of 2% was created for local salt refiners 
and soda ash producers, while the ICMS tax ra te for all other soda ash producers is 19%. 
It appears that this tax break may provide a financial contribution in the form of revenue 
forgone to the extent that the alternative tax ra te of 2% reduces the amount of taxes that local 
soda ash producers would otherwise pay.  This appears to be de jure specific.  Q5. Please explain how this tax exemption wo rks in practice and why the program does not 
qualify as notifiable under Article 25 of the Subsidies Agreement. 
 
Reply
 
 The Merchandise and Service Circulation Tax (ICMS) is a State (sub-federal level) indirect tax, 
administered by each of the 27 Brazilian States and Fe deral District Tax Authorities. It is levied on  G/SCM/Q2/BRA/16 
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  the circulation of goods, as well as on transpor t and communication services. ICMS rates vary 
significantly from one Brazilian State to another and within a State, among products and sectors of the 
economy. Presently, the maximum ICMS rate is 18%.  The Decree No. 28.104/2001, of Brazil's Rio de Janeir o State, established a di fferential tax regime of 
ICMS for all producers and retailers of table salt in the State, including those which also produce soda 
ash. The regime establishes an ICMS rate of 2%  levied on the firm's gr oss revenue, without the 
possibility for compensation of ICMS tax credits accumulated by the firm on the production and commercialisation chain. The regime app lies to both imports and domestic products. 
 
Different tax rates and regimes applying to differe nt products or services do not qualify as revenue 
forgone. In this case, the State is not giving up re venues, but simply applying distinct levels of 
taxation. Therefore, the ICMS tax regime and the Decree No. 28.104/2001 do not provide a tax exemption and do not qualify as notifiable under article 25 of the Subsidies Agreement.  
 
At the moment, according to information received fr om the State of Rio de Janeiro, only producers 
and retailers of table salt are utilising in prac tice the regime under the Decree No. 28.104/2001 in 
Rio de Janeiro State.  
 In June 2005, the Brazilian government presented a Provisional Measure (the so-called 
"MP do Bem") for congressional approval.  This le gislation is aimed primarily at stimulating 
investment and reducing the tax burden on the productive sector.  The Provisional Measure 
(PM) includes, among other things, tax exemptio ns for capital goods investment by exporters 
(including exporters of software and informatio n technology), incentives for the construction 
industry and the real estate market, tax benefits  for companies that invest in technological 
innovation, and incentives for new development pr ojects in the North and Northeast of Brazil. 
 
 One of the provisions included in the PM creates a special tax regime called the "Recap", which will suspend the PIS/Pasep (Social Integration Program) and Cofins 
(Contribution to Social Security Financing)  taxes on the sales and importation of new 
machinery and equipment for all firms of which 80% or more of revenues are export-related.  
Another special tax regime called the "Repes " will be created to exempt software and 
IT exporters from paying the PIS/Pasep and Co fins taxes on purchases of goods and services.  
The PM will also extend indefinitely the ability  of firms to request the compensation of 
PIS/Cofins taxes on capital goods acquisitions over a 24-month period, and will also extend 
from end-2005 to end-2006 the use of CSLL (Social Contribution on Net Profits) compensation.  
Q6. To the extent that the benefits provided under Brazil’ PM are contingent upon exports, 
this program could constitute a prohibited subs idy. Please explain how this program conforms 
with Article 3 of the Subsidies Agreement.  
Reply:
 
 
The Provisional Measure mentioned above was approved and converted into Law 11.196, in 
November 2005.  As a general practice, in Brazil tax credits accumulated by firms on the production and commercialization chain can be compensated by tax obligations from the PIS/Pasep and COFINS 
(indirect taxes). Consistent with WTO rules, how ever, the PIS/Pasep and COFINS are not levied on 
exported products.  Before RECAP and REPES, Brazilian export oriented  firms would frequently not be able to fully 
compensate the tax credits and would systematically  need to ask for refunds to the Brazilian Tax G/SCM/Q2/BRA/16 
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  Administration. To obtain a tax refund, a firm needs to present specific repayment requests to the Tax 
Administration, which generates extra administrati ve costs to the firm in question and to the 
Government.  Other Brazilian firms would compensate such tax cr edits with tax obligations from the PIS/Pasep and 
COFINS levied on their products. 
 Therefore, in practice, the procedures introdu ced by RECAP and REPES reduce the bureaucratic 
burden faced by firms with significant export related re venues, to a level similar or equivalent to that 
experienced by other Brazilian firms. Namely , the PIS/Pasep and COFINS provisions on the 
acquisition of new machinery and equipment, provided in the RECAP and REPES programmes, 
exempts the payment of taxes that would in an y case be refunded by the Tax Administration.  
 Thus, the Law does not confer any benefit within  the meaning of Article 1 of the Subsidies 
Agreement. It merely removes an inherent disa dvantage that export oriented firms had under the 
previous tax regime. 
 Furthermore, it should be noted that REPES be nefits only services providers (software and 
information technology), which are not covered by the Subsidies Agreement. 
 The end of the deadline for firms to request the compensation of PIS/Pasep and COFINS tax credits 
on capital goods acquisitions – limite d to a given 24 month period – is not tied to RECAP or REPES. 
The compensation of PIS/Pasep and COFINS indir ect taxes on capital goods acquisitions is allowed 
to any firm which pays its taxes based on “effective profit” methodology.  The same applies to the extension of the time fr ame for the use of CSLL (Social Contribution on Net 
Profits) compensation from the end of 2005 to the e nd of 2006. The mechanism is generally available 
and does not have any relation with  the RECAP and REPES programmes. 
 
 
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