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Cablegate: Brazil: Ceo Forum April 28 Scenesetter

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

UNCLAS SECTION 01 OF 05 BRASILIA 000551

SIPDIS

DEPT PASS USTR FOR KATE DUCKWORTH
DEPT PASS DOC/ITA/MAC/WH/OLAC ANNE DRISCOLL
DEPT PASS TREASURY IA LUYEN TRAN
DEPT PASS NSC GARY TOMASULO AND MIKE SMART

SENSITIVE
SIPDIS

E.O. 12958:N/A
TAGS: EINV ETRD ECON EFIN CVIS BR
SUBJECT: Brazil: CEO Forum April 28 Scenesetter

Ref a) Brasilia 196 - PAC cable
Ref b) Brasilia 288 - CEOs with Rousseff cable
Ref c) 4/16 erath/DOS-DOC-Treas-NSC e-mail Brazil CEOS with
Rousseff
Ref d) Brasilia 289 - investment consolidation cable
Ref e) 4/11 erath/DOS-DOC-Treas-NSC e-mail congress lunch
Ref f) Brasilia 129 - aviation negotiations readout

1. (U) This message is sensitive but unclassified, please treat
accordingly.

2. (U) Summary: The relationship between the United States and
Brazil is as productive and broad-based as it as ever been, with an
excellent relationship between President Bush and President Luiz
Inacio Lula da Silva and new cooperation mechanisms on private
sector priorities (CEO Forum), economic policy matters (Economic
Partnership Dialogue) and biofuels (March 7 2007 MOU). Regarding
CEO Forum priorities, USG and Brazil have had Bilateral Tax Treaty
discussions, continued discussions on bilateral investment issues
and advanced visa cooperation. USG has also supported workforce
development initiatives and other exchanges, helped organize venture
capital events, and advanced infrastructure cooperation with Brazil.
The CEOs jointly issued a helpful letter urging a "commercially
meaningful conclusion" to the WTO Round this year and have worked
together on Corporate Social Responsibility initiatives. The April
28 CEO Forum in Washington provides an excellent opportunity for the
two governments to showcase our efforts to respond to business
priorities and to receive private sector feedback on next steps and
new priorities. End Summary.

---------------
Brazil Overview
---------------

3. (SBU) With a 67 percent approval rating, President Lula is more
popular than at any other point since he took office in 2003.
Continuity and legacy guide the policies of Lula's second term.
Lula continues to shape his legacy as a friend of the poor and
builder of a foundation for prosperity for the lower and middle
classes through broad social welfare programs and a vast, new
economic growth program of public works and growth incentives (ref
A). At the same time, needed reforms to abolish a political culture
of corruption, clientelism, and spoils are lacking. Although a
seemingly endless series of corruption scandals has not dented his
personal popularity or that of his government, these scandals have
felled political allies, including cabinet ministers, in recent
years.

4. (U) President Lula and his economic team's prudent fiscal and
monetary policies and reform efforts are a major reason for his
popularity. Brazil is now the tenth largest economy, with a
(diminishing) trade surplus and BB-plus credit rating. Annual GDP
growth was 5.4 percent in 2007, with about 4 percent inflation. The
currency, the Real, has appreciated against the US dollar by 22
percent since 2006, which has had a dampening effect on Brazilian
exports. The strong currency, however, has permitted Brazilian
companies to ramp up investment in capital equipment. Foreign
Direct Investment in Brazil is increasing, with net flow USD 34.6
billion in 2007 (versus USD 18.8 in 2006). Of total gross inflow of
USD 34.3 billion in 2007, USD 6.1 billion came from the United
States (number two behind the Netherlands). Brazilian investment in
the United States almost tripled between 2001 (USD 1.4 billion) and
2006 (USD 3.9 billion). However, there are major structural
challenges to long term growth. Real (as opposed to nominal)
interest rates are the highest in the world at 7.1 percent (well
ahead of Turkey at 5.6 percent and Australia at 4.6 percent) after
Brazil raised its nominal benchmark interest rate from 11.25 percent
to 11.75 percent to control inflation. The informal sector
constitutes an estimated 40 percent of the economy, in part due to
the tax burden (36 percent in 2007), one of the highest among large
developing economies. Brazil's opaque and onerous regulatory and
legal system, as well as poor transport and other infrastructure,
continue to constrain growth.

--------------------
CEO FORUM PRIORITIES
--------------------

5. (SBU) TAX TREATY - Information exchange under a BTT continues to
be a challenge, both in terms of Brazil's willingness or ability to
provide information where there is no Brazilian domestic tax
interest and also in terms of the extent of the types of information
Brazil would be willing to provide under a treaty. Discussions in
Brasilia in March between US and Brazil negotiators indicated that,

BRASILIA 00000551 002 OF 005


until the Brazilian Supreme Court rules on the constitutionality of
information collection under Brazilian complementary law 105,
discussions on expanding information collection further to include
in cases where no Brazilian domestic tax interest exists can not
proceed. A ruling could come in 2008, but is not guaranteed. The
OAB (ABA-equivalent) head of the Constitutional Rights Commission
believes the Supreme Court will likely rule to permit the current
parameters of information collection by Brazil's federal tax
authorities, although the head of OAB overall has publicly stated he
believes the Supreme Court should rule to constrain information
collection for privacy reasons. Within the business community,
congress, and even among ministries' officials, ambivalence exists
on this issue. Distrust in Receita Federal's ability to safeguard
information and suspicions among some that tax authorities
mis-collect and mis-use information (fueled by long memories here of
scandals past) may impact willingness to press for further
information exchange, depending on the types of information
requested.

6. (U) In the March session, negotiators had a substantive
technical discussion on transfer pricing that increased mutual
understanding of each other's systems. The United States side
reviewed what USG seeks to achieve in BTTs on limitation of
benefits. The Brazilian side expressed conceptual comfort with USG
goals in this area. In addition, issues such as tax sparing, taxing
source versus recipient, and arbitration also require further
discussion. We understand Treasury has invited Receita Federal to
Washington for further talks. GOB interlocutors, including Casa
Civil, Finance, MDIC and Receita Federal consistently advocate the
US take a "step-by-step" approach (as was done with the TIEA) to
make incremental progress toward a BTT and to build confidence to
make a BTT eventually possible. In the March discussions, both
sides agreed to make clear in discussions with the business
community that we want to see the TIEA ratified as quickly as
possible, but that conclusion of a BTT in the short-term is
unrealistic.

7. (SBU) BILATERAL INVESTMENT TREATY - It remains unclear that
Brazil would be willing to commit to binding arbitration at the
federal, state or municipal level for investor-state disputes. Casa
Civil (Dilma Rousseff) to date believes contract provisions can
govern dispute resolution and that an international arbitration
mechanism is unnecessary (ref B and C). Discussions with Casa
Civil, MRE, Finance, MDIC and CAMEX consistently indicate that, for
strategic reasons to increase GoB and congressional confidence in
negotiating investment agreements, Brazil prefers to start
discussions first with a regional counterpart (ref D and
conversations since). In a recent meeting, Finance confirmed Brazil
will begin an investment agreement dialogue with Argentina (MRE had
wanted to start with a smaller country). Brazilian companies have
major investments in Argentina and have experienced significant
investment problems, according to our interlocutors. While
ministries confirm that the CAMEX-agreed framework that Brazil will
use to start its conversation with Argentina does not currently
contain any reference to investor-state dispute settlement, some
interlocutors are hopeful this element could be introduced over time
into this dialogue. We view willingness to engage with Argentina as
a positive sign that GoB is beginning to tackle investment agreement
conversations; however, we believe both Brazilian and US business as
well as USG will need to continue to press in order to convince GoB
to engage substantively with us on the provisions of a bilateral
investment treaty in the near term.

8. (U) In discussions with key members of the Brazilian Congress,
including among others House President Chinaglia, Senator Jereissati
(key on tax issues), Senator Maciel (Chair of Senate Constitution
and Justice committee; also wrote the 1996 arbitration law), and
Senator Fortes (Chair of Senate Foreign Relations), members have
indicated openness to further consideration of elements of both
investment and tax treaties with the United States, provided that
these agreements contain reciprocal commitments and demonstrate
clearly the benefits to Brazil (ref E).

9. (U) VISAs - We have proposed to Itamaraty that we drop all visa
fees (excepting a uniform processing fee). This will allow us not
only to lessen charges on Brazilians, but also to issue combined
business/tourist visas as we do in much of the world, saving
applicants possible return trips if they apply for one and then find
they need the other. We have also proposed that our visa validities
for business and tourist be extended to 10 years from five years,
which will both benefit our citizens and our visa operations. We
are prepared to move on our side. We can drop our fees immediately
upon Brazil agreeing to do so. Visa validity extension requires
some inter-agency consultation in our government, but no legislative

BRASILIA 00000551 003 OF 005


action. MRE's legislative proposal to update Brazilian immigration
law currently awaits Casa Civil approval and transmission to
congress for consideration. If passed as proposed, the legislation
would permit Brazil to offer 10 year visas, eliminate the
requirement that Brazilian visas must be used within 90 days of
issuance, and give MRE more control of its visa processing fees
(including the $60 fee on business visas) (ref B). However, given
the slow process on the bill, the MRE recently proposed to the
Embassy that we come to a separate agreement covering fees and
validity. Such an agreement would still require legislative
approval on their side, but MRE officials believe this could be done
more quickly than getting the immigration bill approved.

10. (U) Backlogs are still very high, but we have added the first of
seven new consular officers and expect all to be in place by July.
State Department inspectors recently recommended we add an
additional six consular officers to Mission Brazil and we intend to
press hard for implementation of that recommendation. We also hope
Brazil will be selected to participate in a pilot program to draw on
the resources of our Eligible Family Member community to provide
more assistance in the consular section. Until we see the effect of
the seven new officers and know whether we can add another six and
participate in the EFM pilot, it is difficult to predict exactly how
much time before we see significant reductions in the backlog.

11. (U) INFRASTRUCTURE - The USTDA Regional Director for Latin
America and the Caribbean recently had an excellent series of
meetings in Brasilia, Sao Paulo and Rio with Casa Civil, BNDES
(Brazil's National Development Bank), state governments and other
interlocutors. USTDA is developing a preliminary list of possible
projects with potential for American investment and/or participation
(ideas could include areas like port dredging, oil platform water
discharge, urban waste management, transportation projects -
depending on mutual interest). USTDA has proposed a draft model
framework with Casa Civil to structure our cooperation (based on our
agreement with India). We expect USTDA will make another visit in
the near future to continue this dialogue on possible projects and
we are also pursuing the possibility of adding a permanent USTDA
person in Brazil. In additional, the Treasury DAS for Latin America
visited Brazil to continue dialogue with Casa Civil, Planning
Ministry and BNDES officials on how best to structure infrastructure
cooperation.

12. (U) VENTURE CAPITAL - We've been actively involved over the past
12 months. Activities have included the Institutional Investor
Learning Journey (IILJ) in September 2007 where we organized a visit
of representatives of 13 US Pension Funds and University Endowments
to better understand the Brazilian Economy and its Private Equity
and Venture Capital Opportunities; we organized, with ABDI support,
the first meeting of the U.S. - Brazil Venture Capital Task Force
in March 2008; and we set up two Venture Capital and
Entrepreneurship Forums in March 2008, with support from the
Kauffman Foundation and ABDI and co-organized by FGV-SP and by
PUC-RJ. Planned activities include: FINEP and ABDI are working to
select and finance four Brazilian ventures to participate in LARTA's
Life Sciences Venture Capital Forum on May 30, 2008 (ABDI has yet to
finalize the agreement); and Commerce has proposed that the second
meeting of the U.S.-Brazil Venture Capital Task Force take place on
August 17, 2008 in Atlanta, to coincide with the second annual
Americas Competitiveness Forum (ACF), with ABDI agreement to this in
principle.

EXCHANGES AND PROFESSIONAL DEVELOPMENT -

13. (U) SCIENTISTS - Brazil has first class scientists and
facilities in a number of areas. The U.S. Government (USG) has
well-developed scientific cooperative arrangements in two areas with
Brazilian counterparts: the Agriculture Research Service of the
U.S. Department of Agriculture (USDA/ARS) with EMBRAPA of the
Ministry of Agriculture (this includes long-term exchanges of
researchers); and the National Institutes of Health wit the Ministry
of Health, FIOCRUZ (an institution that works with vaccines), and
other health institutions. In addition, the National Science
Foundation (NSF) and a variety of other U.S. agencies have modest or
limited collaborative scientific activities with Brazilian
counterparts. Many elements of the U.S. private sector, academia
and non-governmental organizations (NGOs) have established
scientific ties with Brazilian counterparts. Brazil has
demonstrated remarkable scientific and technological prowess in a
number of areas, most notably with deep sea oil and gas exploration
by PETROBRAS, aviation technology with EMBRAER, and information
technology.

14. (SBU) TECHNOLOGY EXCHANGE - During Minister of Defense Jobim's

BRASILIA 00000551 004 OF 005


visit to Washington, the Defense Department proposed a Defense
Technology Security Dialogue -an annual meeting between Defense
Department and Ministry of Defense experts on technology security
issues. The Dialogue would facilitate closer defense cooperation
between our countries by creating greater transparency on our
countries' technology security policies, procedures and decisions.
The Dialogue will enable both sides to exchange information, and to
troubleshoot problem issues.

15. (U) ENGLISH LANGUAGE STUDY PROGRAM - During Secretary Rice's
visit in March to USAID's Enter Jovem program in Salvador, Bahia,
Governor Jacques Wagner asked Secretary Rice to help him expand
opportunities for youth, particularly through English language
instruction, that would help open doors for young people in growing
industries. Secretary Rice expressed support for Governor Wagner's
initiative. USAID has established a model called the Challenge
Fund, whereby USG and private companies can jointly contribute to a
development program. A Challenge Fund for English will build upon
the success of Enter Jovem in reaching thousands of young people
with employment training and subsequent jobs. We have experienced
in Brazil that USAID seed money can leverage very significant
amounts of corporate funds, and can also attract support from local
governments.

16. (U) WORKFORCE DEVELOPMENT AND EDUCATION - Motorola announced
recently a $100,000 grant to USAID's Enter Jovem program, to expand
digital inclusion and training to public schools in Bahia. USAID
will match the Motorola donation, allowing the program to also
expand in Pernambuco, where strong state government support offers
the potential to reach many schools and students. Motorola and
Enter Jovem will present this model at a Mais Unidos workshop in Sao
Paulo on May 12, for the over 60 U.S. companies in our CRS network.

---------------------
UPDATE ON OTHER AREAS
---------------------

--------------------------------
Biofuels and other Energy Issues
--------------------------------

17. (U) Since the last CEO Forum, under the March 7, 2007 MOU, NIST,
IMMETRO and CEN (the standards bodies for the US, Brazil, and the EU
respectively) have issued a joint report laying the foundation for
work on biofuels commoditization standards. The Biofuels Steering
Committee, with participation of the private sector Advisory Group,
met March 3 in Washington. We expect scientists from the United
States (including private sector researchers) to come to Brazil this
spring, reciprocating Brazilian scientists' September trip to the
United States. We have continued cooperative efforts to aid Haiti,
El Salvador, St. Kitts and Nevis, and the Dominican Republic in
developing their own biofuels capacity. The GOB and USG are
pursuing cooperative scientific activities to develop the next
generation of biofuels. The more numerous and often better-funded
U.S. scientists and laboratories can benefit greatly from this
cooperation with Brazil's world-class cadre of scientists and
laboratories, which have established an impressive record over the
last 30 years.

18. (SBU) We anticipate a visit by Energy Secretary Bodman in May
and hope to use the opportunity to broaden our energy cooperation
beyond biofuels to other areas for expanded collaboration. Brazil
hopes to become a leading oil exporter with the development of the
recently discovered deep water reserves in the Santos basin, near
Sao Paulo. Petrobras, which has been working in the Gulf of Mexico
as the world's leader in deep water technology, hopes to capitalize
on this find; an interest that has led to worries on the part of
U.S. and international oil companies that the government may be
trying to set up the parastatal Petrobras to have, if not exclusive,
at least primary rights to these new finds. This concern was
amplified by the withdrawal of the auction blocks for exploration
rights related to this area just before the auction was to take
place. Brazil has been a gas importer from Bolivia, a relationship
was has been complicated by Morales' unilateral renegotiating of
contracts with Petrobras. Brazil also has an unfulfilled contract
for gas imports from Argentina, shares its largest hydroelectric dam
with Paraguay, and has ongoing conversations with Venezuela's Chavez
over a possible gas pipeline and a cooperative oil refinery near
Recife, for which despite rhetoric, Petrobras continues to bear the
financial costs. Judging by recent talks with GOB officials, more
energy cooperation with the U.S. would be welcome.

--------------
Civil Aviation

BRASILIA 00000551 005 OF 005


--------------

19. (U) US and Brazilian negotiating teams met, for the first time
in ten years, in Rio in December. We hope the Sao Paulo parking
issue will be favorably resolved by end-May, allowing us to schedule
another negotiating round in the latter half of 2008. Increased
frequencies, expanded code-share and cargo rights are all issues of
importance to the US aviation community (ref F).

SOBEL

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