New and Full Notification Pursuant to Article XVI:1 Of

G/SCM/N/123/BRA
Page 1

subsidies

New and Full Notification Pursuant to Article XVI:1 of

the GATT 1994 and Article 25 of the Agreement

on Subsidies and Countervailing Measures

BRAZIL

The following communication, dated 18 October2005, is being circulated at the request of the Delegation of Brazil.

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The following notification provides details on federal programmes for fiscal years of 2003/2004.

This notification does not prejudge the nature of the programmes herein with respect to Articles1 and 2 of the Agreement on Subsidies. Data may reflect approximations, estimates, or preliminary information. Technical or legal inaccuracies may have been inadvertently introduced in the text given the attempt to make the description of the programmes sufficiently illustrative, but also straightforward and concise. This notification may be supplemented, in due time, to incorporate further elements or clarifications.

TABLE OF CONTENTS

I.INDUSTRIAL PROGRAMMES...... 3

• CAPACITY-BUILDING AND COMPETITIVITY OF

INFORMATICS AND AUTOMATION SECTORS...... 3

• INDUSTRIAL TECHNOLOGY DEVELOPMENT PROGRAMME...... 4

II.REGIONAL INCENTIVES...... 5

• ADA AND ADENE (FORMER SUDAM AND SUDENE)...... 5

• FINAM/FINOR...... 7

• FNE/FNO/FCO...... 9

I.INDUSTRIAL PROGRAMMES

• CAPACITY-BUILDING AND COMPETITIVITY OF INFORMATICS AND AUTOMATION SECTORS

1. Title of the subsidy programme if relevant or brief description or subsidy identification:

Capacity-building and competitivity of informatics and automation sectors.

2.Period covered by the notification:

From January 2002 to December 2004

3.Policy objective and/or purpose of subsidy:

To encourage enterprises that make informatics and automation goods to invest in Research and Development activities, create new products and improve the country’s competitiveness.

4.Subsidy background and authority (including identification of the legislation under which it is granted):

Law 8248/91, firstly modified by Law 10176/01 and more recently modified by Law 11077/04.

The Ministry of Science and Technology, the Ministry of Development, Industry and Foreign Commerce and the Ministry of Economy themselves, observing their respective areas of responsibility, manage the provision of benefits such as partial tax exemption and the follow-up of the execution of research and development programmes carried out as counterparts.

5. Form of subsidy (i.e. grant, loan, concession):

Partial exemption of the Tax on Industrialized Products (IPI) for informatics and automation goods. Partial exemption of IPI for raw materials, intermediate goods and material from used packages.

As a condition for eligibility, enterprises must invest 5% of their royalties into research and development activities.

6.To whom and how the subsidy is provided (whether to producers, to exporters, or others; through what mechanisms: whether a fixed or fluctuating amount per unit; if the latter, how determined):

-Industrial enterprises, through credit provided by the Federal Government at the amount of due deductive taxes.

-Research Institutes, Centers and Laboratories, through financial support from industrial enterprises which chose to outsource the execution of their R&D projects.

7.Subsidy per unit in cases where this is not possible, the total amount at the annual amount budgeted for that subsidy (indicating, if possible, the average subsidy per unit in the previous year). Where provision of per unit subsidy information (for the year covered by the notification, for the previous year, or both) is not possible, a full explanation:

2002 – R$ 747 million;

2003 – R$ 962 million;

2004 – R$ 957 million (estimate).

8.Duration of subsidy and/or any other time limits attached to it, including date of inception/commencement:

Beginning in 2005, subsidies will be progressively diminished, in order to be phased out by the year 2019.

9.Statistical data permitting as assessment of the trade effects of the subsidy. The specific and scope of such statistics is left to the judgment of the notifying Member. To the extent possible, relevant and/or determinable, however, it is desirable that such information includes statistics of production, consumption, imports and exports of the subsidized product (s) or sector (s):

N. A.

• INDUSTRIAL TECHNOLOGY DEVELOPMENT PROGRAMME

1.Title of the subsidy programme if relevant or brief description or subsidy identification:

Industrial Technology Development Programme (PDTI) and Agriculture/Cattle Breeding Technology Development Programme (PDTA). The objective is to provide incentive for research and development in those areas.

2.Period covered by the notification:

From January 2003 to December 2004

3.Policy objective and/or purpose of subsidy:

To foster technological improvement for industrial and agricultural/cattle breeding enterprises, through research and development initiatives, in order to create projects processes or improving existing projects, as well as promoting industrial and agricultural training. It also includes the building up of partnership between research centers and universities, institutes and enterprises managed by the enterprises thought a permanent infrastructure of technological management.

4.Subsidy background and authority (including identification of the legislation under which it is granted):

The Programme was established by Law Nº 8.661, of 2 June 1993, regulated by Decree 949, of 5 October 1993. The Ministry of Science and Technology is responsible for the incentive administration.

In 1997 benefits granted to Brazilian enterprises research and development programmes were reduced by Law 9532, of 10 December 1997, resulting the enterprises slowdown in research and development programmes.

5. Form of subsidy (i.e. grant, loan, concession):

Deductions of income tax due on the sum of the expenses in technological research and development activities and of IPI (Tax on Industrialized Products) due on equipment, machinery and devices directly allocated to research and technological development and also on instruments, accessories and tools associated with those goods.

6.To whom and how the subsidy is provided (whether to producers, to exporters, or others; through what mechanisms: whether a fixed or fluctuating amount per unit; if the latter, how determined):

The beneficiaries are industrial and agricultural/cattle breeding enterprises. The amount of the subsidy is contingent upon the value of the expenses on research and development. For instance, the amount of IPI tax break depends on the value of machinery and equipment acquired for research and development purposes.

7.Subsidy per unit in cases where this is not possible, the total amount at the annual amount budgeted for that subsidy (indicating, if possible, the average subsidy per unit in the previous year). Where provision of per unit subsidy information (for the year covered by the notification, for the previous year, or both) is not possible, a full explanation:

Total subsidization under PDTA/PDTI´s amounted R$ 20 million (previously estimated at R$88 million), in 2002, R$ 7,9 million, in 2003, and R$ 7,4 million, until June 2004.

8.Duration of subsidy and/or any other time limits attached to it, including date of inception/commencement:

The programme was stated by Decree 949, of 5 October 1993. It does not have a pre-established time limit. Subsidies will solely benefit enterprises that are engaged in a PDTI or a PDTA project. The maximum time for executing a project is five years.

9.Statistical data permitting as assessment of the trade effects of the subsidy. The specific and scope of such statistics is left to the judgment of the notifying Member. To the extent possible, relevant and/or determinable, however, it is desirable that such information includes statistics of production, consumption, imports and exports of the subsidized product (s) or sector (s):

N. A.

II.REGIONAL INCENTIVES

• ADA AND ADENE (FORMER SUDAM AND SUDENE)

“Superintendência para o Desenvolvimento da Amazônia” (SUDAM), the Amazon Region Development Authority, was established by Law 5174, dated 27 October 1966. “Superintendência para o Desenvolvimento do Nordeste” (SUDENE), the Northeast Region Development Authority, was established by Law 3692, dated 15 December 1959. Provisional Measures 2156-5 and 2157-5, of August 2001, extinguished SUDAM and SUDENE and the programmes they administered. However, contractual obligations incurred prior to those measures will be upheld and disbursements be made until 2013 by the development agencies which replaced both SUDAM and SUDENE (“Agência do Desenvolvimento da Amazônia – ADA” and “Agência de Desenvolvimento do Nordeste – ADENE”).

1.Title of the subsidy[1] programme if relevant or brief description or identification of the subsidy:

Former SUDAM and SUDENE programmes provide assistance to the economically disadvantaged Amazon and Northeast Regions by means of tax breaks.

2.Period covered by the notification:

January 2003 to December 2004.

3. Policy objective and/or purpose of the subsidy:

To reduce economic and social imbalances among the Brazilian regions by means of compensatory mechanisms for the development of the North and Northeast Regions.

The area covered by SUDAM/ADA is denominated Legal Amazonia, or the Amazon Region, and encompasses the States of Acre, Amapá, Amazonas, Mato Grosso, Pará, Rondônia, Roraima, Tocantins and part of Maranhão. The Amazon Region is an area of continental dimensions covering 5,046,143 square kilometers and corresponding to 59 per cent of the nation’s territory and approximately 70per cent of the so-called Pan-Amazon or Continental Amazon, which has a population of approximately 22 million inhabitants heavily concentrated in urban areas and scattered widely across a vast rural area. The jurisdiction of SUDENE/ADENE encompasses the federal states of Maranhão, Piauí, Ceará, RioGrande do Norte, Paraíba, Pernambuco, Alagoas, Sergipe and Bahia, in addition to an area of the State of Minas Gerais included in the socalled “polígono das secas” (drought area in Northeastern Brazil).

4.Background and authority for the subsidy (including identification of the legislation under which it is granted):

Programmes, formerly administered by SUDAM and SUDENE, are now under the responsibility of the Ministry if National Integration until they completely phase-out. Law 9532/97 has regulated the tax exemptions and reductions. Provisional Measure 2199/01 is the most recent regulation on the matter.

5. Form of the subsidy (i.e. grant. loan. tax concession):

Income tax exemptions and reductions.

6.To whom and how the subsidy is provided (whether to producers, to exporters, or others: through what mechanisms: whether a fixed or fluctuating amount per unit: if the latter, how determined):

Beneficiaries are industrial and agricultural enterprises with undertakings in the Amazon or Northeast Regions.

7. Subsidy per unit, or in cases where this is not possible, the total amount or the annual amount budgeted for that subsidy (indicating, if possible, the average subsidy per unit in the previous year). Where provision of per unit subsidy information (for the year covered by the notification, for the previous year, or both) is not possible, a full explanation:

Tax Exemption/Reduction (R$ thousand)

Source: National Treasury Secretariat

8. Duration of the subsidy and/or any other time limits attached to it, including data of inception/ commencement:

As of 2003, credit terms of subsidies granted by former SUDAM and SUDENE will be adjusted to comply with the deadline of December 2013 established by law.

9.Statistical data permitting an assessment of the trade effects of the subsidy. The specific and scope of such statistics is left to the judgment of the notifying Member. To the extent possible, relevant an/or determinable, however, it is desirable that such information include statistics of production, consumption, imports and exports of the subsidized product (s) or sector (s):

Not available.

• FINAM/FINOR

1. Title of the subsidy programme if relevant or brief description or identification of the subsidy:

“Fundo de Investimento da Amazônia” (FINAM) and “Fundo de Investimento do Nordeste” (FINOR) - Financial support for the development of the Amazon and Northeast Regions.

2. Period covered by the notification:

January 2003 to December 2004

3. Policy objective and/or purpose of the subsidy:

To reduce economic and social imbalances among the Brazilian regions by means of compensatory mechanisms for the development of the North and Northeast Regions.

4. Background and authority for the subsidy (including identification of the legislation under which it is granted):

The Secretariat of Federal Revenue and the National Treasury Secretariat of the Ministry of Finance are charged with the funding mechanisms of resources of FINAM and FINOR. Programmes previously administered by SUDAM and SUDENE are now under the responsibility of the Ministry of National Integration - MI.

Banco da Amazônia (BASA) and Banco do Nordeste do Brasil (BNB) are the financial agents of FINAM and FINOR.

The main legislation is the following: Laws 8167, dated 16 January 1991; 9532, dated 10December 1997, and 9808, dated 20 July 1999.

5. Form of the subsidy (i.e. grant. loan. tax concession):

Risk capital investments through primary subscription of debentures convertible into stock, at a ratio of 70 per cent in convertible debentures and 30 per cent in nonconvertible debentures. In 2000, Provisional Measure 2058 extinguished nonconvertible debentures.

6. To whom and how the subsidy is provided (whether to producers, to exporters, or others: through what mechanisms: whether a fixed or fluctuating amount per unit: if the latter, how determined):

The beneficiaries are legal entities that receive incentives to implement a project considered to be relevant to the region. The project, in order to be implemented with FINAM and FINOR financial assistance, should involve activities that foster regional development.

7. Subsidy per unit, or in cases where this is not possible, the total amount or the annual amount budgeted for that subsidy (indicating, if possible, the average subsidy per unit in the previous year). Where provision of per unit subsidy information (for the year covered by the notification, for the previous year, or both) is not possible, a full explanation:

FINOR/FINAM – Fiscal benefits (in lending)

(R$ thousand)

Source: National Treasury Secretariat

8.Duration of the subsidy and/or any other time limits attached to it, including data of inception/ commencement:

Expiration is scheduled for December 2013 (Law 9532/97).

9. Statistical data permitting an assessment of the trade effects of the subsidy. The specific and scope of such statistics is left to the judgment of the notifying Member. To the extent possible, relevant an/or determinable, however, it is desirable that such information include statistics of production, consumption, imports and exports of the subsidized product (s) or sector (s):

Not available.

• FNE/FNO/FCO

Constitutional Funds for the Financing of the Northeast, the North and the Midwest Regions

1. Title of the subsidy programme if relevant or brief description or identification of the subsidy:

“Fundos Constitucionais de Financiamento do Nordeste, do Norte e do Centro-Oeste” (FNE/FNO/FCO): Constitutional Funds for the Financing of the North, Northeast and Midwest Regions.

2.Period covered by the notification:

January 2003 to December 2004.

3. Policy objective and/or purpose of the subsidy:

To reduce economic and social imbalances among the Brazilian regions by means of compensatory mechanisms for the development of the North, Northeast and Midwest Regions.

4. Background and authority for the subsidy (including identification of the legislation under which it is granted):

The Ministry of National Integration and the Deliberative Council of the Development Authorities of the North, Northeast Regions and the Deliberative Council of the Central-West Constitutional Financing Fund are the authorities.

The relevant legislation is the following (art. 14 of Law 7827/89, as amended by Law 10177, dated 12 January 2001).

Banco da Amazônia S.A. (BASA), Banco do Nordeste do Brasil S.A (BNB) and Banco do Brasil S.A. are the financial agents of the Funds.

5. Form of the subsidy (i.e. grant. loan. tax concession):

Loans.

6.To whom and how the subsidy is provided (whether to producers, to exporters, or others; through what mechanisms; whether a fixed or fluctuating amount per unit; if the latter, how determined):

According to the terms of art. 4 of Law 7,827 of 27 September 1989, as amended by Law nº10,177 of 12 January 2001, the beneficiaries of loans backed by Constitutional Fund resources are producers and companies, whether individual persons or legal entities, as well as production cooperatives, that carry out productive activities in the crop/livestock, mineral, industrial and agro-industrial, tourism, infra-structure, commerce and service sectors of the North, Northeast and Central-West Regions.

7.Subsidy per unit, or in cases where this is not possible, the total amount or the annual amount budgeted for that subsidy (indicating, if possible, the average subsidy per unit in the previous year). Where provision of per unit subsidy information (for the year covered by the notification, for the previous year, or both) is not possible, a full explanation:

Contracted loans

(R$ thousand)

Source: Ministry of National Integration

8. Duration of the subsidy and/or any other time limits attached to it, including data of inception/ commencement:

Loans backed by Constitutional Financing Fund resources have been granted since September1989.

9.Statistical data permitting an assessment of the trade effects of the subsidy. The specific and scope of such statistics is left to the judgment of the notifying Member. To the extent possible, relevant an/or determinable, however, it is desirable that such information include statistics of production, consumption, imports and exports of the subsidized product(s) or sector(s):

N.A.

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[1]The Constitution of Brazil, in its article 3, item III of Title I, regarding the Fundamental Principles, considers that "the fundamental objectives of the Federative Republic of Brazil are to eradicate poverty and substandard living conditions and to reduce social and regional inequalities". In Section IV (article 43, paragraph 2, item III) of Chapter VII, Title III, which refers to the Organization of the State considers that "the regional incentives shall include, besides others, as prescribed by law, exemptions, reductions or temporary deferment of federal taxes owed by individuals or by legal entities". In article 151, item I, Section II of Title VI, regarding Taxation and Budget considers that "it is forbidden for the Union: to institute a tribute which is not uniform throughout the entire national territory (...), it being allowed to grant tax incentives for the purposes of promoting the balanced social and economic development of the various regions of the country". In article 165, paragraphs 6 and 7, Section II of Chapter II, Public Finances, of the previous Title, considers that "the budget bill shall be accompanied by a regionalized statement on the effect on revenues and expenses, deriving from exemptions, amnesties, remissions, subsidies and benefits of a financial, tributary and credit nature (§ 6). The budget set forth (...) in consistence with the pluriannual plan, shall include the functions of reducing interregional inequalities, according to population criteria (§ 7).