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Cablegate: Key Senator Says Climate Is Right for Bilateral

VZCZCXRO8287
RR RUEHRG
DE RUEHBR #2147/01 3201241
ZNR UUUUU ZZH
R 161241Z NOV 07
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 0453
INFO RUEHAC/AMEMBASSY ASUNCION 6405
RUEHBU/AMEMBASSY BUENOS AIRES 5124
RUEHMN/AMEMBASSY MONTEVIDEO 7098
RUEHSG/AMEMBASSY SANTIAGO 0001
RUEHRG/AMCONSUL RECIFE 7375
RUEHRI/AMCONSUL RIO DE JANEIRO 5440
RUEHSO/AMCONSUL SAO PAULO 1177
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEAIIA/CIA WASHDC
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 02 BRASILIA 002147

SIPDIS

SENSITIVE
SIPDIS

EPSC FOR LISA KUBISKE
TREASURY FOR OASIA - J. HOEK

E.O. 12958: N/A
TAGS: EINV EFIN ECON PREL BR
SUBJECT: KEY SENATOR SAYS CLIMATE IS RIGHT FOR BILATERAL
TAX TREATY

1. (SBU) Summary. Aloizio Mercadante, chairman of the
Senate Economic Affairs Committee, told Ambassador Sobel on
October 18 that the bilateral relationship is at a very
favorable point and the bilateral agenda must be resumed
without delay so as to expand economic relations. He
predicted the Senate would approve the bilateral agreement on
diplomatic properties and that a potential bilateral tax
treaty would be favorably viewed in the Congress. End
summary.

Great Expectations for Expanded Bilateral Trade

2. (SBU) Mercadante told the Ambassador there is a great
expectation in Brazil that trade relations can be expanded,
in view of good bilateral relations, Brazilian economic
growth of about five percent of GDP a year, the fiscal
responsibility of the Lula administration, and high demand
for infrastructure investment and logistics. He said the
U.S. is already Brazil's top trading partner, with U.S.
purchases accounting for 10.8 percent of Brazil's exports,
but the current exchange rate is increasingly a problem for
Brazil.

Public Finance Weakness

3. (SBU) The main problem on the economic horizon at
present is a certain frailty in public finances, coupled with
high taxes, although states and the federal government are
unable to collect some taxes, he said. Firms are to receive
a tax credit under the Kandir Law but do not, which is a
serious problem. On the positive side, Mercadante noted, the
fiscal situation of the states has been improving, although
exports as a percentage of GDP has dropped. If there is tax
relief for exports, Mercadante continued, states will not
receive enough income (presumably federal revenue transfers).

Tax Treaty

4. (SBU) Mercadante said the political atmosphere is very
favorable, particularly in the Senate, for the negotiation of
a bilateral tax treaty. Passage would not be difficult, but
a proposal must address concrete issues, and he urged the USG
to provide a draft to interested senators as soon as
possible. Ambassador Sobel said Jorge Rashid, head of the
Federal Revenue Service, had told him Brazil did not want to
lose revenue. Ambassador also pointed out Brazil is the
biggest country with which the U.S. has no tax treaty.

5. (SBU) Mercadante clearly supports a bilateral tax
treaty. He offered to help reach out to other key senators
and suggested several names for Embassy outreach. When the
Ambassador told him of a U.S. firm doing business in Brazil
that was going to write off USD 500 million in losses because
of a tax problem, Mercadante asked the Ambassador for a list
of non-reimbursed tax credits affecting U.S. companies so he
could look into the matter, and promised to contact the
American Chamber of Commerce in Sao Paulo. He volunteered to
convene a public hearing in the Economic Affairs Committee
with state governors to help clarify the situation, and
suggested the Federation of Industries of Sao Paulo (FIESP)
should survey firms to determine the extent of the problem.

Property Agreement

6. (SBU) Mercadante said the bilateral agreement on buying
and selling diplomatic properties will be easily approved in
the Senate. An adviser to Mercadante told us subsequently
that approval could require a bill to exempt the U.S. Embassy
from the collection of INSS payments (equivalent to social
security) in order to guarantee reciprocity, but it would not
be controversial. (Note: the property agreement was approved
in the Chamber of Deputies on October 31 and sent to the
Senate.)

Participants
------------

7. U.S.

BRASILIA 00002147 002 OF 002


Ambassador Sobel
Tara Erath, economics counselor
Dale Prince, political officer (notetaker)

Brazil

Aloizio Mercadante, Senator (Workers Party, Sao Paulo state)
Marcelo Zero, foreign policy adviser

Sobel

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