EU Complaint Over Brazil Import Taxes Headed to WTO

BRUSSELS – Brazil’s taxes on imported products, meant to encourage domestic production, have curbed imports of motor vehicles from the European Union and in some cases even moved research and engineering jobs from Europe to the South American country.

To reverse the negative trend, the EU took Brazil to the World Trade Organization in December, accusing it of violating international trade rules.

Imports of  EU-made motor vehicles dropped from 857,900 units in 2011, when the first version of the Inovar Auto tax measure was introduced, to 788,100 in 2012 and to 639,700 between January and November 2013, the EU official, who asked not to be named, tells WardsAuto.com.

“In order to get around the tax, several European companies have set up factories in Brazil to replace exports from factories in Europe,” the official says, adding some automakers have transferred research and engineering activities to Brazil to comply with the country’s spending targets.

Daimler, for instance, announced in October 2013 it was opening a Mercedes-Benz production plant near Sao Paulo. Its retail car sales fell 35% in 2012 compared to 2011 after Brazil imposed an additional tax of 30%.

Daimler’s car sales recovered last year after Brazil introduced an annual import quota allowing the sale of 4,800 passenger vehicles tax-free and another 4,800 imported units if foreign automakers launched or planned local car production. Mercedes delivered about 10,000 cars in 2013 and saw its sales return to 2011 levels, a Daimler spokeswoman tells WardsAuto.

The Brazilian tax also has affected European auto-parts producers. “Indeed, the Brazilian automotive program is not only aimed at curbing imports of motor vehicles, but also at pushing domestic manufacturers to increasingly rely on domestically produced components, since the tax benefits are directly linked to the use of such domestic inputs,” the official says.

According to an analysis by the European Association of Automotive Suppliers, the Brazilian measures create overall insecurity over suppliers’ investments in Brazil and a high risk for existing businesses which depend on exports, especially of small volumes or optional equipment.

“This runs the risk of losing orders and suppliers’ cost-efficiency,” says Eleri Wessman, CLEPA director of trade and legal affairs.

These developments are expected to worsen as the Brazilian measures run until 2017, the EU source says, noting, “The focus is not the losses for the European economy up to now, but the longer-term effects of the discriminatory tax practices.”

The view in Brazil is different. Stephan Keese, head of automotive practice for management consultants Roland Berger Brazil and South America, argues in effect there are no actual new taxes on auto imports. The Inovar Auto program raises taxes for everyone and provides a release for those companies that comply with local-content rules.

Although the implicit consequence is a higher tax on imported cars, the difference may be technical but essential, “because Brazil thus does not directly violate WTO rules, only indirectly, which will be more difficult to rule against,” Keese says.

He argues Brazil must continue the tax to maintain its national industry.

“Due to the advantages of other countries regarding factory costs and better-hidden subsidies, the Brazilian production was under severe pressure from imports,” Keese says. “The easiest way to protect the national automotive industry, which accounts for more than 20% of the industrial (gross domestic product), from imports is through additional importation tax.”

Brazil’s additional tax is targeted more toward Asian imports, not so much premium European models, according to Keese. He is surprised the EU decided to take its case against Brazil to the WTO.

“Many of the OEMs most benefiting from the importation tax are of European origin, like (Volkswagen Group), Fiat, PSA (Peugeot Citroen), Renault, Audi, BMW, Daimler and (Jaguar) Land Rover,” Keese says, “or have installations in Europe – like (General Motors) and Ford  – that are indirectly positively affected through the importation tax protecting component supply and sharing platforms.”

The analyst does not expect a quick response by Brazil to the EU case: “My personal belief is that they will wait it out. The WTO is known to take a few years to reach a decision.”

 – with Pacifica Goddard in Pau, France