BRAZIL – CERTAIN MEASURES CONCERNING TAXATION AND CHARGES REPORTS OF THE PANEL
Document: Addendum
Date: 30 August 2017
Document codes: WT/DS472/R/Add.1; WT/DS497/R/Add.1; WT/DS472/R; WT/DS497/R.
Complainant: EU
Respondent: Brazil
Third parties: Argentina, Australia, Canada, China, Colombia, India, Japan, South Korea, Russia, South Africa, Taiwan, Turkey, U.S.
Dispute stage: Appellate Body
Agreements cited: Art. I:1, III:2, III:4, III:5  GATT 1994Art. 3.1(b), 3.2, 1.1  Subsidies and Countervailing Measures (SCM)Art. 2.1, 2.2  Trade-Related Investment Measures (TRIMs)

BRAZIL – CERTAIN MEASURES CONCERNING TAXATION AND CHARGES
REPORTS OF THE PANEL
Addendum
This addendum contains Annexes A to C to the Report s of the Panel to be found in documents

 •

LIST OF ANNEXES
ANNEX A
WORKING PROCEDURES OF THE PANEL
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 PARTIES
EUROPEAN UNION
Contents Page
Annex B-1 First part of the executive summary of the arguments of the European Union B-2
Annex B-2 Second part of the executive 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
ANNEX C
ARGUMENTS OF THE THIRD PARTIES
Contents Page
Annex C-1 Executive summary of the arguments of Argentina C-2
Annex C-2 Executive summary of the arguments of Australia C-10
Annex C-3 Executive summary of the arguments of Canada C-11
Annex C-4 Executive summary 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
 •

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ANNEX A
WORKING PROCEDURES OF THE PANEL
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
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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 shall 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 Panel.
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
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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 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 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
submissions 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, including 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 first 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 the 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.

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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
adopted 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.
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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 Panel in its written submissions and oral statements, in accordance with the timetable adopted
by the Panel. These summaries may also include 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 provided 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 accordance 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 confidential 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 shall 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 filed with the DS Registry.
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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 the 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.
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ANNEX A-2
ADDITIONAL WORKING PROCEDURES OF THE PANEL CONCERNING
BUSINESS CONFIDENTIAL INFORMATION
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 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 Panel's Report.
WT/DS472/R/Add.1 • WT/DS497/R/Add.1

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ANNEX A-3
JOINT WORKING PROCEDURES OF THE PANELS
Adopted on 9 October 2015

1.1. Pursuant to Article 9.3 of the DSU, the timetables 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 which 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 its 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 "third 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 proceedings.
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 Panels.
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 party shall submit its respective response to such request within a
time limit specified by the Panel s. Exceptions 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

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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 such 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 Panels and the other parties
promptly and provide a new translation.
1.11. In order to facilitate the work of the Panels, each party and third party is invited to make its
submissions 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 facilitate the maintenance of the record of
the disputes 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 Panels 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 invite 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
Panels 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

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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 Panels.
c. The Panels 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 Panels.
d. Once the questioning has concluded, the Panels 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 Panels 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 provide the Panels 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 as 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 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, 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 Panels.
c. The Panels 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 Panels.
d. Once the questioning has concluded, the Panels 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 substantive 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.
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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 other 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 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 Panels, any questions to a third
party to which it wishes to receive a response in writing.
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 third 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 reports 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 cases.
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 Panels will not summarize in the
descriptive part of its reports, or annex to its reports, 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 aspects of the interim reports. Either party may also request a further meeting with
the Panels 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
panels of the parties' written requests (if any) for review. The exact date will be determined by the
Panels 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 interim reports, as well as the final report prior to their official circulation, shall be kept
strictly confidential and shall not be disclosed.
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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
Panels. 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 disputes.
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 party 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 Panels shall provide the parties with an electronic version 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 disputes.
1.27. The Panel s reserve the right to modify these procedures as necessary, after consultation
with the parties.
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ANNEX A-4
ADDITIONAL JOINT WORKING PROCEDURES OF THE PANELS CONCERNING
BUSINESS CONFIDENTIAL INFORMATION
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 Panels 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 Panels 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.

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ANNEX B
ARGUMENTS OF THE PARTIES
EUROPEAN UNION
Contents Page
Annex B-1 First part of the executive summary of the arguments of the European Union B-2
Annex B-2 Second part of the executive 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
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ANNEX B-1
FIRST PART OF THE EXECUTIVE SUMMARY OF THE 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), Article 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 DISPUTE: 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.
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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 THE 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 various 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 imported 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 competitive 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
TRIMS 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 that 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, because 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.
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3.4. PROHIBITED SUBSIDIES THROUGH FISCAL MEASURES
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 AUTOMOTIVE 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) 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 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
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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 access 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 programme 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 domestic production (Article III:5, second sentence).
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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 under 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
several 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. Finally, 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 obligations 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
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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 through 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 determine 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,
Technology 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
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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 payment 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 CLAIMS
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 product 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 when 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 Brazilian market.
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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 account 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
reimbursement 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 regulation 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 Brazilian 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 applies 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
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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 subsidies.
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 TAX ADVANTAGES TO EXPORTERS
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 order 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 AND PACKAGING MATERIALS
62. Brazil suspends (and ultimately exempts) the application of IPI, PIS/PASEP, PIS/PASEP
Importação, COFINS and COFINS Importação with regard 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.
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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 of 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 REQUEST 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 the 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
Agreement and contingent upon the use of domestic over similar imported
goods;
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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 countries.

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
(Informatics)/ 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.
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ANNEX B-2
SECOND PART OF THE INTEGRATED EXECUTIVE 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 inputs into the production process.
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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
exemption 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 taxes 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 highlights 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
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accrual of the credits. By the same token the simulations provided 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 and 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 or 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 subsidies 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 "domestic" 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
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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 AUTOMOTIVE SECTOR: THE INOVAR-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 definitely 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 INOVAR-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
imported 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 at 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 originate "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
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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 aspects 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
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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 all 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 issue 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
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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 content 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 clarifying 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
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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 RELATING TO ICT, AUTOMATION AND RELATED GOODS
3.1. INFORMATICS PROGRAMME
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 product 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
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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 situation 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 and 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 individual 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 reductions 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 incentivised 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.
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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-Animal 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 that 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 not 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) of 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 resulting 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.
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60. Brazil also argues that several products produced 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, this 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 products, 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 Brazil'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 material 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
countries 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 PROGRAMME
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.
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4. MEASURES PROVIDING T AX ADVANTAGES TO PRE DOMINANTLY EXPORTING
COMPANIES
4.1. CLAIMS RELATING TO THE 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
definition 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 considers 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 contributions 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 that 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
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advance the money when it was due 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 that 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 THE 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 Agreement.

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 company
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
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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 contingent 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 issue 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.
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ANNEX B-3
FIRST PART OF THE EXECUTIVE SUMMARY OF THE ARGUMENTS 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 technology (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
including 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 PEC 6 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 related 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 Agreement.
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 stresses 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 imposed 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 Tecnológico 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.
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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 qualify 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 policy. 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, both 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.
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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, directly 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
industrial 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 motor 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 structured 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;
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(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 Informatics
Programme reduces or eliminates the applicable IPI tax due on domestic ICT products on certain
conditions. 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 supplies 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
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companies produce 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 : t hey 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 Agreement:
(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 products 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
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Article 1.1 of the SCM Agreement that are contingent upon the use of
domestic over 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 in 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 cover 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 they 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 requirements 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. Conclusion
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.
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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 described 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
measure 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.
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41. Starting with INOVAR-AUTO, Brazil characterizes 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 auto 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
alleged 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 serves 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, the 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 defences 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 subsidise 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.
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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 burden 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 percentage . . .". 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 revenues 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 that 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 of 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
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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 to 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-market" 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, offering 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 foregone 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.
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Enabling Clause, it fails to put forward any argument to substantiate its defence. Third, the 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 measures 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.
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ANNEX B-4
SECOND PART OF THE EXECUTIVE SUMMARY OF THE ARGUMENTS OF JAPAN
I. EXECUTIVE SUMMARY OF JAPAN'S SECOND WRITTEN 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 panel 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 specific 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
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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 financial 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 operation, 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
operation 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
paragraph 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 conditions 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
pertaining 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,
regardless of the discriminatory elements that they contain. Rather, all of these provisions can
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cover subsidies to domestic producers or subsidies contingent on domestic performance of certain
production processes, so long as such subsidies involve discrimination 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 production 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 inconsistent 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.
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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. However, 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 direct 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 requirement
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
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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 information 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 Article 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
accreditation 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 provide 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
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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 exception 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 TRIMs 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.
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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 falls 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.
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1. Brazil Fails to Establish that the ICT Measures Do Not Discriminate
Against Imported 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. Certain 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
incorporation 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 received credits that
offset the up-front payments. In 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.
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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 whenever 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 from 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 request for the establishment of a Panel continue to be valid, and Japan requests that the
Panel make findings accordingly.
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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 gradually 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 products.
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 continues 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 Clause.
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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 could 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 PANEL
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 does 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 Article 3.1(b) of the SCM Agreement.
63. In sum, Japan suggests 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.
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ANNEX B-5
FIRST PART OF THE EXECUTIVE SUMMARY OF THE ARGUMENTS OF BRAZIL
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, there 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-discriminatory 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 Brazil 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 program 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.
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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 measure 1, 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 Namely, Processo Produtivo Básico, or PPB
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issue of discrimination between domestic and imported products, in varying language 4. 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 provision 5 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
related 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 either 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
schemes 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 Illustrative
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.
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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 in 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 Article 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.
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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 abstract 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 density 9" 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 products 10 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 automation, 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 workforce 13 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 requirements.
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 Informatics 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 (Exhibit 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
related to R&D doubled from 4,108 to 8,122 jobs. See also Exhibit BRA-107.
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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 such 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 activities 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 upon 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 Agreement.
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 Brasileiro 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 (SDTV) 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 mobile transmissions and reception.
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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 addition 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 PPB 16 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 violates 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 portable 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 TV 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) used 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 activities of design and development of the product and of its
specifications must have taken place in Brazil.
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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 products 20 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 and 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, the INOVAR-AUTO presumed credits are subsidies paid to
accredited producers.
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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 capable 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 development 24 based on a percentage of their total
gross revenue from the sale of goods and services excluding taxes 25; (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 taxes 26; or
(iii) to join the Brazilian Programme of Vehicle Labeling 27 – 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 or 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
Desenvolvimento 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.
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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 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 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.
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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 -Importação 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 accumulation.
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 rather 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. CONCLUSION
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 11,196/2005, 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 (transposing 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.
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ANNEX B-6
SECOND PART OF THE EXECUTIVE SUMMARY OF THE ARGUMENTS 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 product” 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 rules 3. 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 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 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.
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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 Member 4 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 submitted 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
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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
demonstrated 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 established 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.
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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 under 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.
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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 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 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
requirements, 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 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.
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.
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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 operations, 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 the 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 between 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
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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 programmes 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 programme 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 the 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 measures.

12 Articles 3 and 9 of the TM-80
13 JE – 232.
14 EU – SWS, para. 204.
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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 . In 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 violates 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 market, 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 complainants 15 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.

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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 requirement 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 direct 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.
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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 mutatis 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.

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ANNEX C
ARGUMENTS OF THE THIRD PARTIES
Contents Page
Annex C-1 Executive summary of the arguments of Argentina C-2
Annex C-2 Executive summary of the arguments of Australia C-10
Annex C-3 Executive summary of the arguments of Canada C-11
Annex C-4 Executive summary 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
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ANNEX C-1
EXECUTIVE SUMMARY OF THE ARGUMENTS OF ARGENTINA
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
inconsistent 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 product originating in the EU.
II. THE RESPONSIBILITY OF RAISING THE ENABLING 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 Union'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.
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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 opportunity 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 requirements 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 type 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 te rritory 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 Body Report, US – Carbon Steel, para. 126.
11 EC- Tariff Preferences (AB). para 113 (citing Appellate Body Report, Chile – Price Band System,
para. 164).
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.
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IV. THE TREATMENT PROVID ED TO MERCOSUR AND L ATIN-AMERICAN INTEGRATION
ASSOCIATION (LAIA) MEMBERS IS CONSISTENT WITH THE WTO AGREEMENTS
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, among 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 harmonious 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, Argentina
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
progressive establishment of a Latin-American common market.20
V. THE ENABLING CLAUSE IS AN EXCEPTION TO ALL OBLIGATIONS EMBODIED 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
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necessarily be inconsistent with Article I, if assessed on that basis alone, but it would be exempted
from compliance with Article I because it meets the requirements of the Enabling Clause".21
According 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 al l 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 ARGENTINA THIRD PARTY SUBMISSION (DS 497)
VI. JAPAN'S CLAIMS REGAR DING THE INCONSISTEN CY OF THE INOVAR -AUTO
PROGRAMME WITH ARTICLES III.2 AND I.1 OF THE GATT 1994.
1.1. In its First Written Submission Japan argues that INOVAR-AUTO is a tax incentive 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 specifically Japan alleges that INOVAR-AUTO favours 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 Article I:1 of the GATT 1994.27

25 First Written Submission of Japan. para 127..
26 First Written Submission of Japan. para 237.
27 First Written Submission of Japan. para 193.
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VII. THE BURDEN OF RAISING THE ENABLING CLAUSE
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 general.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 challenged 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
Economic 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, in 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 would 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 Submission. 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 (referring 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,
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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 internal 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, Argentina 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 2012 41 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 ALL OBLIGATIONS EMBODIED 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 Agreement, contracting parties may
accord differential and more favourable t reatment 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 First Written Submission. para 654.
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 2012.pp. 40.
44 GATT Document L/4903. December 3, 1979.
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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 GATT 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 AGREEMENTS
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
agreements 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 clearance.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).
47 EC- Tariff Preferences. (AB).para. 110. See also EC- Tariff Preferences (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. para 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.
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complies with the requirements of the Enabling Clause, then it is a justified exception of the MFN
principle that must 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 Members 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 context 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
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ANNEX C-2
EXECUTIVE SUMMARY OF THE ARGUMENTS OF AUSTRALIA
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 imported 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 requirements.

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 programme 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 programme.

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 requires, 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
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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 under 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 intermediate 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
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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.
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ANNEX C-4
EXECUTIVE SUMMARY OF THE ARGUMENTS OF KOREA*
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
producers. 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 exemptions 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 prohibited 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 – tantamount to requiring the use of domestic over imported

* Korea has requested that their oral statement be considered as their executive summary.
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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 incentivizing 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 effectively 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 exporting finished
products; and b. the effects of the measures as they apply to a producer exporting 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
domestic 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 SCM 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.
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ANNEX C-5
EXECUTIVE SUMMARY OF THE ARGUMENTS OF UKRAINE
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 provisions 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". Ukraine 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 favourable 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 automotive 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.
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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 written submission and oral statement.
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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 APPLICATION 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." Based 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.
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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 determines 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 the "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 this 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
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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 off'
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 later. 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.
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17. Article III:2 provides that imported 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 would 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 input 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
downstream 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 of 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
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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 Agreement 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 Article 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."