Cablegate: Zero Satisfaction From Gob On Soda-Ash Tax Issue

This record is a partial extract of the original cable. The full text of the original cable is not available.

032004Z Sep 04





E.O. 12958: N/A

1. (SBU) On August 18, Itamaraty officials presented us
their official finding that the Rio state tax policy with
regard to soda ash produced by local enterprise ALCALIS does
not illegally discriminate against U.S. soda ash
producers/exporters. Our own scrutiny of the text of the
2001 Rio State decree cited by the Brazilians as the base of
their `finding' makes their argument transparently
inaccurate. From our own tentative computations, it would
seem the volume of potential U.S. soda-ash export sales
affected may have been of the order of USD 20 million in
2003, when U.S. sales to Rio were approximately eight
million dollars out of gross U.S. export sales to Brazil of
over forty million dollars (the rest being to states other
than Rio). Having regularly re-addressed the GoB on this
concern in the more than two years since it first arose,
only to arrive at such a GoB assertion now, Embassy has no
expectation of achieving results via further approaches to
Itamaraty. Text of the Rio State decree in the original
Portuguese and rough Embassy translation included in Paras
10-11 below. Para 9 contains data about the current status
of Brazil's soda-ash market, including U.S. market share.

2. (U) On August 18, EconCouns, Trade Officer and DSCO met
with Director-General of the Economic Department Minister
Piragibe Tarrago and other Itamaraty (Ministry of Foreign
Affairs) specialists again to discuss the soda-ash issue,
among other subjects. This was the fourth meeting Emboffs
have held with senior-level Itamaraty interlocutors over the
last year to request an official response to the USG concern
that the Rio state ICMS tax treatment of domestic and
imported soda ash involves a national-treatment breach under
GATT Article III, in addition to occasions on which the
issue has been raised by, e.g., visiting USDOC A/S Lash and
D/USTR Allgeier.

3. (U) Minister Tarrago informed Emboffs that the MFA had
definitively clarified the Rio ICMS issue in meetings with
CAMEX and the Rio State Finance Ministry. He asserted
categorically that Rio state taxes both domestically-
produced and imported soda ash at the same ICMS rate,
currently 19%. Tarrago proceeded to note that under the
ICMS tax regime purchasers of a product may request a rebate
or credit of the ICMS paid on the input (e.g., soda ash),
from the state tax authority upon sale of their final
product; this credit/rebate is likewise available regardless
of whether the soda ash is imported or domestic. Pressed on
how it might be documented that ALCALIS in fact is subject
to, and pays, the same 19% ICMS on its production as U.S.
soda-ash exporters on their sales, he noted that ALCALIS is
entitled to consider its financial-transaction data
proprietary and not divulge it, but he remarked that the
fact could likely be verified by contacting local soda-ash

4. (U) Tarrago went on to suggest that confusion over the
soda-ash ICMS status might have arisen because of the fact
that Rio state allows ALCALIS the option of paying a flat 2%
tax rate on its gross revenue. This is totally separate
from ICMS tax-regime considerations, he told us. The basis
for Rio allowing this option is that ALCALIS produces salt,
an item within the Brazilian "cesta basica (basic basket)"
of fundamental food items. Under Rio state rules,
allegedly, companies that produce any such items, as whole
or part of their production, may choose either to have their
gross revenue taxed at a flat 2% rate, or submit themselves
to a normal state corporate tax regime, which, depending on
various credits or rebates may or may not result in a higher
taxation rate.

5. (U) Thus, the soda-ash tax issue essentially is a
domestic-tax-regime matter, concluded Tarrago. The
specifics are outlined in Rio State Decree 28104 of April
13, 2001, articles 36-38, and 40. Tarrago also singled out
Article 40 of this decree as containing, in his words
(seconded by one of the Itamaraty specialists also present)
a general statement that it shall not affect the general
application of the tax regime, guaranteeing equal
application of the ICMS tax for domestic producers and

6. (SBU) The Brazilians did not have the text of the 2001
Rio decree at hand; we thus could not go over it jointly at
the August 18 meeting. We ourselves have since re-
scrutinized the same elements of the decree's text cited by
the Brazilians as the basis of their finding. That text
does not in reality give any basis for the latter. Totally
the contrary, and unambiguously so, we judge: the evidence
prima facie does point to a national-treatment issue. In

-- The decree does deal directly with the ICMS regime; the
2% tax rate is not at all an unrelated, separate tax issue.

-- The 2% tax rate on gross revenue ("receita bruta
auferida") for all operations is indeed offered as an
alternative to paying the regular 19% ICMS; and this
alternative is made available to companies which refine salt
for consumption and, very specifically, producers of soda
ash that also market salt (Article 38), but not to the
importer of U.S. soda ash.

-- Article 40, which the Brazilians cited as proving that
the regular application of the ICMS is not affected,
actually seems to require only that the fiscal documents of
taxpayers under this special regime must continue to conform
to normal ICMS regulations. It does not state or mean that
the 19% ICMS tax rate continues to apply.

-- Indeed, Article 42 appears to assume that covered
taxpayers will use the 2% of gross revenue tax, not the 19%
ICMS. They actually have to request an opt-out from the
State NOT to do so. Whether particular companies choose to
opt-out or not, presumably this different tax regime is at
times beneficial -- i.e., gives the option to pay less tax
than under a 19% ICMS.

7. (SBU) Embassy Trade Officer subsequently presented these
considerations over lunch with Tarrago's Market Access
Division subordinate Maria Elisa Maia and her deputy, Felipe
Bandeira de Mello. The latter made three defenses of the
special tax regime. First, they argued that since use of
the 2% tax regime is optional, it does not necessarily
contravene GATT Article III, and further, it is an open
question as to whether or not the company has actually used
the special regime to lower its tax liability. We counter-
argued that, whether or not the company has taken advantage
of the special regime, providing an opportunity to
preferentially lower the domestic company's tax liability
could be inconsistent with Article III.

8. (SBU) Second, the Brazilians claimed that statistics
showing stable then increasing U.S. exports of soda ash to
the State of Rio since 2001 confirms that U.S. exporters
were not prejudiced. We argued that this is inconclusive,
since U.S. exports theoretically could have reached higher
levels still except for the domestic producer's potentially
enhanced competitiveness due to the tax break. Finally, the
Brazilians opined that, even if the domestic producer
lowered its tax liability using the special regime, the
stable market shares for the domestic producer and the
importer in the sale of soda ash in Brazil since 2001
illustrates that the importer has not been prejudiced, since
the domestic producer appears not to have lowered its price
to gain market share. We rejoined that what the domestic
producer chooses to do with the tax windfall - increase
profit or lower prices - is immaterial.

9. (SBU) Mission's research and input from FCS Rio industry
contacts indicates the following as to the current state of
Brazil's soda-ash market. According to ANSAC's Rio-based
agent, with whom FCS Rio met on May 24, the total Brazilian
market for soda ash is 650,000 Metric Tons/Year. ALCALIS,
the Brazilian producer, produces 165,000 MT/Y or 25%. The
balance of Brazil's needs is imported from:

-- ANSAC (U.S.): 300,000 MT/Y. This means ANSAC has 45% of
the Brazilian market and is responsible for 70% of all
Brazilian imports of soda ash.

-- SOLVAY (Belgium): 130,000 MT or 20% of Brazil's imports.
The ANSAC Rio agent noted to us that SOLVAY, although a
Belgian group, has plants in the U.S. and is a member of

-- CHINA: 65,000, or 10% of the Brazilian market.

Preliminary Embassy research of Brazilian government trade
figures indicates the following with regard to U.S. soda-ash
sales to Brazil:

-- U.S. exporters' market share has been stable since 1999:
64%, 64%, 60%, 65% in 2000, 2001, 2002, 2003, respectively.
For the January-July period the figures for 2003 and 2004
were 67% and 66%.

-- The percentage of Brazil's total soda-ash imports that
are bought in Rio state has been constant at roughly one-
fifth since 1998, although for January-June in 2004 the
ratio dropped to 14%, compared to 16% for the same period in

-- U.S. exporters' market share in the Rio state local
market has been 97% to 99% for every year since 1998, but
the January-June figure for 2004 indicates a drop, to 81.6%
compared to 96% for the same period in 2003.

COMMENT: Apparently some two-thirds of Brazil's total soda-
ash market is outside Rio state, mainly in Sao Paulo. The
U.S. exporter has had a long-term monopoly of export sales
into Rio state, something over 60,000 tons in 2003,
according to the GoB figures. This compares to the ALCALIS
production there of 165,000 tons, with Chinese and Belgian
competitors evidently not even on the scene. We do not know
if ALCALIS's entire production is sold and consumed in Rio
state itself, as seems logical, or if some is sold to
customers in other Brazilian states. In any case, depending
on the degree of advantage the Rio 2% tax favor gives
ALCALIS in selling its output, it would seem that sales of
up to that entire output could theoretically be affected.

ALCALIS (located in Arraial do Cabo municipality about three
hours east of Rio de Janeiro city that is said to have
gained independent administrative status solely because of
the presence of the mega-plant itself), currently has a
reported 700 employees, down from the two-thousand range in
the past. It is said to be facing irredeemable problems,
including the failure of its buyers when it was privatized
in the mid-1990s to be current with their payments, and
environmental issues.

10. (U) TEXT OF RIO STATE DECREE 28104 OF APRIL 13, 2001:

DECRETO No. 28.104 DE 10 DE ABRIL DE 2001

Altera o Titulo VI, do Livro V, do Regulamento do ICMS,
aprovado pelo Decreto n 27.427/2000.

atribuicoes constitucionais,


Art. 1. O Titulo VI, do Livro V, do Regulamento do ICMS,
aprovado pelo Decreto no. 27.427, de 17 de novembro de 2000,
passa a vigorar com a seguinte redacao:



"Art. 36. O contribuinte do ICMS que exerca exclusivamente
atividade industrial de refino de sal para alimentacao,
classificada no subgrupamento denominado "refino de sal para
alimentacao", codigo, do Catalogo de Atividades
Economicas, deve calcular o valor do ICMS devido a cada mes
pela aplicacao direta do percentual de 2% (dois por cento)
sobre a receita bruta auferida no periodo, acrescida dos
valores referentes as operacoes de transferencia, excluidos
os valores referentes as operacoes sujeitas ao regime de
substituicao tributaria.

Paragrafo unico - Para os efeitos deste artigo, considera-se
receita bruta o produto da venda de bens e servicos nas
operacoes de conta propria, o preco dos servicos prestados e
o resultado auferido nas operacoes por conta alheia, nao
incluido o Imposto sobre Produtos Industrializados (IPI), as
vendas canceladas e os descontos incondicionais concedidos.

Art. 37. O imposto incidente sobre o fornecimento de gas
natural, utilizado no processo produtivo das industrias a
que se refere o artigo anterior, fica diferido para o
momento em que ocorrer a saida do produto resultante do
processo de industrializacao.

Paragraph 1. O imposto diferido nos termos deste artigo
considera-se incluido na estimativa de que trata o artigo

Paragraph 2. A empresa que efetuar o fornecimento de gas
para os contribuintes a que se refere o artigo anterior
devera excluir do valor da operacao a parcela referente ao
imposto diferido.

Art. 38. As disposicoes dos artigos 36 e 37 tambem se
aplicam ao contribuinte que, cumulativamente com a atividade
economica mencionada no caput do artigo 36, seja produtor de
carbonato de sodio (barrilha) e comercialize sal, salmoura e
demais mercadorias do genero.

Paragrafo unico - Na hipotese deste artigo, o diferimento de
que trata o artigo 37 tambem se estendera, nas mesmas
condicoes nele estabelecidas para o fornecimento de gas
natural, ao fornecimento de energia eletrica e a saida de

Art. 39. O procedimento nos termos dos artigos 36 a 38 veda
o aproveitamento de quaisquer creditos do imposto.

Art. 40. Os documentos fiscais referentes as operacoes
realizadas pelos contribuintes a que se refere este Titulo
serao emitidos segundo as regras comuns de tributacao,
inclusive no que se refere ao destaque do imposto, que
podera ser creditado pelo destinatario, na forma da

Art. 41. Estara automaticamente excluido do regime de
tributacao previsto neste Decreto o contribuinte que nao
estiver em dia com suas obrigacoes tributarias, ressalvadas
as hipoteses de suspensao da exigibilidade do credito
tributario, nos termos do artigo 151, do Codigo Tributario

Paragrafo unico - Na hipotese deste artigo, o contribuinte
devera apurar a diferenca entre o ICMS calculado nos termos
deste Decreto e o apurado segundo as regras comuns de
tributacao, com os acrescimos legais, e, se for o caso,
recolher a diferenca.

Art. 42. O contribuinte pode optar por permanecer no regime
normal de apuracao do ICMS, desde que expressamente o
requeira, na forma que dispuser a Secretaria de Estado de
Fazenda e Controle Geral."

Art. 2. Este Decreto entra em vigor na data de sua
publicacao, revogadas as disposicoes em contrario.
Rio de Janeiro, 10 de abril de 2001



Decree No. 28.104, April 10, 2001

Alters Title VI of Book V of the Regulation of ICMS,
approved by Decree No. 27.427/2000

The Governor of the State of Rio de Janeiro, using
constitutional powers,


Art. 1 of Title VI of Book V of the Regulation of ICMS,
approved by Decree No. 27.427, November 17, 2000, enters
into force with the following revisions:

Title VI


"Art. 36. The ICMS taxpayer that exercises exclusively the
industrial activity of refining salt for consumption,
classified un the subgroup denominated by "refining of salt
for consumption," code, of the Catalog of
Economic Activities, ought to calculate the ICMS value owed
each month by applying directly a percentage of 2 % (two per
cent) to the gross revenues derived in the period, increased
by the values relating to transfer operations, excluding the
values relating to operations subject to the tax
substitution regime.

Sole Paragraph - For the purpose of this article, consider
gross revenues the product of sales of goods and services in
these operations, the price of services rendered and the
result derived in other operations, not including the
Industrialized Products Tax (IPI), cancelled sales, and
unconditional discounts provided.

Art. 37. The incident tax for the supply of natural gas,
utilized in the productive process of industries that are
the subject of the previous article, are deferred until the
moment in the relevant product leaves the production

Paragraph 1. The tax deferred under the terms of this
article is considered within the estimate that is dealt with
in the previous article.

Paragraph 2. The company that provides the gas to taxpayers
that are the subject of the previous article ought to
exclude, out of the operations value, the installment
relating to the deferred tax.

Art. 38. The provisions of articles 36 and 37 also apply to
the taxpayer who, in addition to the economic activity
mentioned in article 36, produces soda ash and markets salt,
brine and other commodities of this nature.

Sole Paragraph - In considering this article, the deferment
that is dealt with in Article 37 also will extend, under the
same conditions as those established for the supply of
natural gas, to the supplier of electric energy and to the
supplier of limestone.

Art. 39. The procedure in terms of Articles 36 to 38
prohibits the use of whatever credit of this tax.

Art. 40. The fiscal documents relating to the operations
performed by taxpayers to which this Title refers are to be
issued according to common tax rules, including those
detailing the tax that can be credited by the purchaser, in
conformance with legislation.

Art. 41. A taxpayer who is delinquent with his tax
obligations will be automatically excluded from the tax
regime provided in this decree, except in the case of
suspension of tax credit requirements, in accordance with
Article 151 of the National Tax Code.

Sole Paragraph - In interpreting this article, the taxpayer
ought to calculate the difference between the ICMS
calculated under the terms of this Decree and that according
to common tax rules, with legal charges, and as necessary,
pay the difference.

Art. 42. The taxpayer can opt to continue in the normal
regime for ICMS collection, making an express request, in
the form determined by the State Secretary of Finance and
Comptroller General.

Art. 43. This Decree enters into force on the date of its
publication, provisions to the contrary hereby being

Rio de Janeiro, 10 April 2001

Anthony Garotinho

(End Unofficial Embassy Translation)


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