RESTRICTEDWORLD TRADE
ORGANIZATIONG/SCM/Q2/BRA/8
25 August 1998
(98-3301)
Committee on Subsidies
and Countervailing MeasuresOriginal:  English
SUBSIDIES
Replies to Questions posed by Canada1. the European Community1,
Japan1, Korea1 and the United States1 Regarding the New and
Full Notification of Brazil2
The following notification, dated 11 August 1998, has been received from the Permanent
Mission of Brazil.
_______________
BEFIEX
Question (US)
• Under Special Export Programmes (BEFIEX), the notifications explain that
export incentives are provided by waiving or reducing import duties for various
products. Data provided by Brazil indicate some US$536 million in food
products were exported under this subsidy programme. Could Brazil provide
more detailed information with respect  to what agricultural products, and
export destinations, benefited from this subsidy programme?
Questions (EU)
• What is the value of the outstanding BEFIEX programmes and which are the
main industries concerned?
• What are the contractual obligations of the beneficiaries?
• What are the eligibility criteria?
• Are there any local content or use of domestic goods requirements with regard
to the exported goods?
Answer
BEFIEX was a programme that provided incentives to exports of industrialized goods by
waiving or reducing import duties. It was abolished in 1990 and the remaining benefits refer only to
contracts signed before that period.
Exports of food by firms benefiting from the programme comprehend only processed items,
such as poultry and meat products, albumin, candies and chewing-gum, tea products, fruit juices and
                                                     
1 G/SCM/Q2/BRA/5, G/SCM/Q2/BRA/4, G/ SCM/Q2/BRA/3, G/SCM/Q2/BRA/3/Rev.1,
G/SCM/Q2/BRA/1, G/SCM/Q2/BRA/2, G/SCM/Q2/ BRA/2/Suppl.1 and G/SCM/Q2/BRA/2/Suppl.2.
2 G/SCM/N/3/BRAG/SCM/Q2/BRA/8
Page 2
oils, cocoa products, etc. There are no available detailed data on specific items exported by the 13
food producers still covered by BEFIEX contracts.
There is no statistics on the actual utilization of the tax incentive. For budgetary purposes,
estimates of fiscal foregone are made at each fiscal year. In 1995, figures related to BEFIEXincentives showed an estimated fiscal foregone of R$ 146,5 million.
Sectors that still register firms benefiting from incentives under BEFIEX programmes were
listed in the Brazilian notification, such as: transport equipment, metallurgy, paper and paperboard,
electrical material, processed food, textiles, etc.
The contractual obligations of the beneficiaries are:
− export of an agreed amount of products within the period covered by the programme;
− observation of a minimum positive global balance with regard to currencies, taking into
account currency inflows and outflows of the beneficiary;
− positive currency annual balance with regard to the projects benefiting from exemption;
− benefiting imports limited to an annual amount that corresponds to a maximum of one-third
of the net value of exports during the same period.
Concerning the eligibility criteria, all industrial firms that imported inputs or capital goods
and exported industrialized good were eligible for BEFIEX incentives. There were no local contentrequirements attached to BEFIEX programmes.
The tables attached to the notification concer ning BEFIEX show the total amounts of exports
that correspond to the firms still covered by BEFIEX programmes. There are no detailed data
concerning specific export operations that are directly related to benefiting imports. As said earlier,there are no statistics on actual fiscal foregone and the figures showed in the tables reflect only
estimates made by the Government. The column “Balance” contains figures regarding currency
balance of the firms covered by the programme.
PROEX
Questions (EU)
• Brazil is requested to explain more precisely how the equalization system works,
in particular:
− What are the eligibility criteria?
− What is the distinction between “financing” and “equalization” in the budget and
expenditure tables supplied?
− Are there any local content or use of dome stic goods requirements with regard to the
exported goods?
− What is the justification for the local content requirement in the PROEX scheme?
− Could Brazil provide the timetable for the elimination of the programme?
Questions (CANADA)
• Does Brazil have any plans to phase-out PROEX?
• With regard to PROEX, we note that the number of transactions covered in
1995 was almost three times the number of transactions covered in 1991/1993.
Does this increase reflect an expansion of the products covered by PROEX?
• Are the treasury notes locked in place or non-revocable once they are issued?
• Are the equalization payments separate d from and on top of other financing?G/SCM/Q2/BRA/8
Page 3
• Has Brazil used the PROEX programme to target any particular country in
developing market share?
• Has Brazil any intention of extending PROEX to cover new products?
• Has Brazil any intention of amending PROEX to extend the payment period
(current maximum is ten years) or to finance a larger portion of the purchase
price (current maximum is 85%)?
Questions (KOREA)
• Please provide the international and domestic interest rates as well as the
proposed interest rate for this programme.
• Is export financing granted contingent upon export performance?
Question (JAPAN)
• Is this subsidy a red subsidy stipulated in Article 3 of the SCM Agreement? If
yes, has Brazil notified the subsidies pursuant to Article 28.1 of SCM
Agreement? Until when will “Export Financing Programme” continue to existwhile red subsidies are supposed to be brought into conformity with the
provisions of SCM Agreement within eight years? If no, please explain why the
subsidy is not a red subsidy.
Answers
The Brazilian Export Financing Programme - PROEX was introduced in 1991, aiming at
providing financing for exports of Brazilian goods and services at rates and terms comparable to those
existing in international markets. The programme is administered by Banco do Brasil, which is the
financial agent of the Brazilian Government. PROEX is a programme of general application and is
designed to provide financing for export transactions with medium or long payment terms. Terms and
conditions for financing or equalization are established by PROEX in accordance with internationalpractice. PROEX does not aim at targeting any particular country, sector or market and eligible
products are mainly Brazilian capital and consumer goods as well as services. The coverage of
products is re-assessed on a non-periodical basis and eligibility is basically related to the need of
medium or long term financing.
There are no export performance requirements attached to the system. As PROEX finances or
equalises operations in foreign currency, it provides financing for Brazilian exports and not for sales
in the domestic market.
The 60% local content rule is used to determine the origin of the product to be financed.
Goods with lower rate of content are also eligible for financing or equalization, but the percentage of
the financed value is proportionally lower, following international practice.
PROEX operates two different modalities: financing and equalization. In the first one,
PROEX provides funds for financing 85% of the export value and the conditions (rates, terms,guarantees) are comparable to those experienced in international markets for similar operations.
Interest rates are higher than the costs for obtaining funds and do not confer a benefit. In accordance
with Article 1 of the SCM Agreement, it does not constitute a subsidy.
Equalization applies to operations in which the funding is provided by domestic or foreign
financial institutions. Equalization aims at offsetting or reducing the “Brazilian risk” imbedded in
rates and charges applied in international financing of Brazilian goods and services. As rates andconditions vary from one operation to another, depending on the criteria followed by the financialG/SCM/Q2/BRA/8
Page 4
institution, PROEX legislation just establishes maximum limits of equalization for each term of
financing.
The beneficiary of equalization is the financial institution providing funds for financing the
export operation. Buyer’s and supplier’s credits, at conditions (rates, terms and financed amounts)freely negotiated between the exporter (or the importer) and the financial institution, may benefit from
equalization, which is provided in terms and conditions established by the PROEX legislation. The
total amount to be paid as equalization is converted in non-marketable treasury bonds and, at the dates
scheduled for partial payment of interests, the bonds corresponding to the equalization of each
payment are reconverted to the benefit of the financial institution.
Regardless the terms and conditions agreed between the exporter (or the importer) and the
financial institution, PROEX provides equalization corresponding to 85% of the amount to be
financed and covers terms from one to ten years. These conditions may be extended, in exceptional
circumstances, to meet international market conditions.
In accordance with the SCM Agreement (Article 1.2), the equalization system of PROEX is
not subject to the provisions of Parts II, III or V of the Agreement, because it is not specific: it is not
limited to “certain industries” and it is not prohibited, as it does not provide material advantage, as
described in item (k) of the Illustrative List.
SUDAM/SUDENE
Questions (EU)
• Could Brazil explain the distinction made  between firms that are classified as
being of interest to regional development and firms that meet only the basic
conditions of interest (tax reduction)?
• What are the specific conditions attach ed to the aid that firms must comply
with?
• On what basis (e.g. GDP) were the designated regions selected?
• What is the GDP per capita of each eligible region as a percentage of the
national average?
• Are there any conditions linking investment  to export or use of domestic goods?
• Is eligibility automatic or are there any criteria concerning the selection of
projects or firms?
• Could Brazil provide figures on the taxes foregone in the last few years under
this scheme?
• What economic sectors are the greatest beneficiaries?
• Are there any ceiling or time limits applicable?
Answer
Brazil considers that these programmes are covered by the disciplines of Article 8. Due to the
complexity of the format agreed for notification under Article 8, it has not been possible to provideinformation, in the required format. Regional programmes, such as SUDAM and SUDENE, FINAM
and FINOR, and the constitutional funds are aimed to develop the North and Northeast regions and
consist of fiscal incentives and financial support.
SUDAM/SUDENE: There is a distinction between companies that are eligible for exemption
or reduction of income tax. Exemption applies to two cases: (a) new industrial or agriculturalG/SCM/Q2/BRA/8
Page 5
enterprises, that will start operation in the beneficiary regions until 31 December 2000; and
(b) industrial or agricultural enterprises, already installed in the beneficiary regions, which implement
projects of modernization, enlargement or diversification until 31 December 2000, provided that the
projects are aimed at increasing, in at least 50%, the installed capacity of the enterprises.
The 50% reduction of income tax, until the end of fiscal year of 2001, applies to industrial or
agricultural enterprises that operate in the beneficiary regions. Those companies, which include civil
architecture enterprises, are allowed to deposit 40% of the income tax due in regional official banks
for reinvestment purposes. The percentage is calculated on the basis of the exploitation profits and
regional banks may add an amount correspondent to 50%, resources that are agreed on the basis of
technical and economic projects aiming at moderni zation or acquisition of equipment and machinery,
approved by SUDAM/SUDENE.
Concerning the eligibility criteria, fiscal benefits are conditioned upon compliance with
labour and social legislation and with the environmental regulations, besides the normal requirements
concerning the implementation of the projects.  SUDAM and SUDENE may, at any time, check the
compliance with the conditions established.
Criteria for the selection of beneficiary regions:(a) income levels lower than the ones verified in the South and Southeast regions of Brazil;
(b) high tax de infantile mortality;(c) deficient infra-structure of health and poor sanitary conditions;
(d) high percentage of illiteracy and unemployment; and
(e) low level of development in the industrial and agricultural sectors.
With regard to income levels:(a) Brazilian average of GDP per capita in 1991: US$ 2,920.00;
the North region: US$ 2,088.00 (71.5% of the national average);
the Northeast region: US$ 1,426.00 (48.8%)
(b) Brazilian average of GDP per capita in 1994: US$3,079.00;
the North region: US$2,098.00 (68.1%)
the Northeast region: US$1,490.00 (48.4%)
There are no export performance or local content requirements attached to these
programmes and any productive sector may be eligible, provided that located in the beneficiary
regions.
Statistics on taxes foregone in the last few years: There are no statistics on actual tax
foregone, just estimates for budgetary purposes. In relation to 1995, estimates showed a figure of R$
129 million (exemptions and reductions  for SUDAM and SUDENE combined).
Ceilings are determined by the maximum percentage allowed for exemption or reduction.
There are no additional ceilings for amounts involved.
Time-limits: (a) to exemption: 10 years from the date of the concession; (b) to reduction: until
2001.G/SCM/Q2/BRA/8
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FINAM-FINOR
Questions (EU)
• Could Brazil explain in more detail the financing mechanism through the issue
of debentures?
• What is the relationship between the reinvestment of income tax and the
financing through the issue of debentures?
• What are the eligibility criteria for projects?
• Can benefits be combined with the above-mentioned SUDAM/SUDENE scheme?
• What economic sectors are the greatest beneficiaries?
• Are there any time limits on aid granted?
• What is the GDP per capita of each eligible region as a percentage of the
national average?
Question (US)
• Could Brazil provide data regarding agricultural production, consumption and
exports related to this programme?
Answers
FINAM and FINOR Funds apply their resources only through the subscription of debentures,
convertible or not in shares issued by the companies that are responsible for the approved projects.
Companies choosing the deduction of the income tax for investment in those Funds receive
Certificates of Investment. Companies responsible for the projects receive the resources from the
Funds and issue the debentures (annual rate of 4% plus long term interest rate (TJLP), with grace-
period equal to the maturity period of the projec ts). After the project being operating, between 70%
and 75% of the total of debentures are convertible in preferential, but no voting, share. The rest of the
debentures yield resources for the Funds, with terms of five years (minimum) or eight years(maximum). Owners of the Certificates of Invest ment use them to buy shares resulting from the
conversion of debentures.
Relationship between the reinvestment of income tax due and the financing through the issue
of debentures: companies may choose one or another scheme, or both, in certain cases. Thereinvestment of the income tax applies only to companies that are already installed and operating.
Eligibility criteria: companies shall be established in the North and Northeast regions. The
funds are available to incorporated companies with activities in the industrial or agricultural sectors.
Possibility of combining benefits from these Funds with SUDAM/SUDENE incentives: from
the legal point of view, benefits may be combined. In practice, however, FINOR and FINAM
available resources have already been distributed among approved projects, with validity periods of
14 years or seven 7 years, respectively.
The main beneficiaries are:
FINOR:  industrial sector (74% of th e total invested); agriculture (13%);
FINAM: industrial sector (72%); basic services (infra-structure: 21% of the total invested)
he programmes do not aim at specific sectors nor at export projects. They aim at developing
projects on certain disadvantaged regions of the North and the Northeast of the country. There are noG/SCM/Q2/BRA/8
Page 7
available statistics on production, consumption and exports by firm or region, nor specific data related
to the trade of goods produced by the beneficiaries.
CONSTITUTIONAL FUNDS
Questions from (EC)
• Which are the beneficiary sectors and what is the type of eligible investment?
• What is the relationship between this scheme and the two regional aid schemes
examined above for which a green subsidy claim has been made?
• What are the conditions for the granting of the loans?
• Are the regions the same as those defined under the SUDAM/SUDENE and the
FINAM/FINOR schemes?
Answers
In accordance with Art. 4 of Law 7827/89, beneficiaries are: individual producers and
enterprises, or productive co-operative societies, with activities related to agriculture, minerals,
industrial or agricultural-industrial sectors, within the North, Northeast, and Mid-West regions.
Financing is also available for projects related to economic infrastructure, limited to up to
25% of the total resources destined to the enterprise, in the case of new areas or expansion of the
agriculture frontiers.
Criteria and priorities are defined in the Regional Development Plans, annually elaborated by
regional agencies (SUDAM, SUDENE and the Counci l for the Development of the Mid-West Fund),
in accordance with the social and economic characteristics and needs of each region.
Concerning the relationship between these funds  and the two regional schemes, constitutional
Funds are directed to small and micro-enterprises, which are not adequately assisted by other
schemes.
Conditions for granting loans: Long term interest  rate (TJLP) plus 4% to 6%, with possibility
of discount (charge reductions) to micro-enterprises, depending on the sub-region concerned.
Moreover, micro-enterprises may get some additi onal discount for investing in environmental
protection, energy, water, social welfare, etc.
The regions covered by FNO and FNE are the same as those defined under the SUDAM and
SUDENE, respectively. Mid-West Fund (FCO) covers th e states located in the centre of the country
(Mid-West has a GDP per capita that represents 82.9% of the national average).
STEEL INDUSTRY
Question (EC)
• How and when is IPI normally due?
• Does the scheme also affect exports of steel products?
• Is the subsidy actually a refund of taxes paid or is the tax foregone?
This programme provides for the repayment (refund) of 95% of the tax of industrial products
-IPI paid by steel producers. IPI applies to any good produced by industrial enterprises, at the time
that product leaves the premises of the producer. This is a value-added tax and non-cumulating tax ,G/SCM/Q2/BRA/8
Page 8
i.e., the value of the IPI paid for the product that is  utilized as input in the next productive process is
compensated (rebated, deducted) for purposes of ca lculating the IPI to be paid in relation to the
product that results from the new process.
The 95% reduction applies only to sales in the domestic market. As established by the Federal
Constitution, there is no collection of IPI for exported goods.
QUESTIONS RELATED TO PROGRAMMES THAT HAVE NOT BEEN NOTIFIED
• Programmes listed by the US that are terminated:
(a) Income Tax Exemption for Export Earnings:  Terminated in April 1990 by Law 8.034;
(b) FST loans: non-subsidized loan system, not related to any programme, has already been
terminated;
(c) FUNPAR: terminated in January, 1984, it aimed at lending working capital to finance the
restructuring of liabilities for industrial companies;
(d) Green-yellow drawback: In 1986, the Technical Export Commission, that was responsible
for the administration of the programme, was abolished and, consequently, since 1987, the
Regulation on Green-Yellow Drawback has been considered ineffective;
(e) Reduction of import duties by CDI (Industrial Development Council):  the reduction was
approved in the context of projects submitted to  CDI by interested firms. Most of the projects
are terminated, others will terminate soon and there is no extension possible, as CDI wasabolished in 1990.
With regard to other programmes listed by the US  and the EU, Brazil considers that most of the
following do not meet the criteria for notification under Article 25 of the SCM Agreement:
(a) Banco do Brasil:
Banco do Brasil is a commercial bank and acts as the government financial agent being
responsible for the transfer of resources provided by other banks and institutions.
− EGF loans: programme of credits for financing grain stocks. The programme is administered
by CONAB and loans by Banco do Brasil, as described in the Brazilian notification to theCommittee on Agriculture.
− 
− Preferential Financing: Banco do Brasil has no preferential financing.
(b) Accelerated depreciation for Brazilian made capital goods:
The provision allows for accelerated depreciation for capital goods for purposes of calculating
income tax, There is no discrimination between domestic and foreign products nor local content
requirement attached to this provision and any sector may benefit from it.
(c) FINEP (Research and Development Financing Agency):
FINEP is a governmental agency responsible for the financing of technological research and
development. Brazil considers that programmes under FINEP are covered by the disciplines for
Article 8 of the SCM Agreement. Due to the complexity of the format required for notifications under
Article 8, Brazil has not yet been able to present the notification in such format, but informationG/SCM/Q2/BRA/8
Page 9
concerning FINEP activities has been provided in the updated notification presented by Brazil in
1996.
Generally, FINEP programmes are not specific within the meaning of Article 2 of the SCM
Agreement and are financed by several sources. FINEP operates funds obtained from the Inter-American Development Bank, the International Bank for Reconstruction and Development and the
Multilateral Fund of the Montreal Protocol; FINEP also administers financial resources from different
governmental funds (such as the National Fund for the Scientific and Technological Development -
FNDCT, that has already been notified), as well as its own resources (resulting from administrative
taxes and interest rates related to investment and loans). When not related to projects concerning non-
commercial nor industrial research institutes, grants are subject to interest rates (long term interest rate
plus annual spread), payment in a maximum of ten years, with a maximum grace-period of threeyears.
(d) Praia Mole Port facilities:
Located near the Port of Tubarão, Praia Mole includes a public structure of coast protection
and maritime access, and two private terminals, one for coal and the other for steel products. The coal
terminal belongs to CVRD (Companhia Vale do Rio Doce) and the steel products terminal belongs to
Condomínio AÇOMINAS/CST/USIMINAS. Both term inals started operations in 1983 and handle
cargo of their own or of third companies.
(e) Export Processing Zones:
The Brazilian Programme of Exporting Processing Zones (ZPE), created by Decree
No. 2.452/88 and by Law N. 8.396/92, aims at esta blishing industries that would produce goods
exclusively for exportation. Initially, 16 ZPE’s were envisaged, but no one has been implemented.
(f) Tax and financial incentives for open capital companies:
The Brazilian Government does not grant subsidies to open capital companies. Recently, Law
No. 9.249, dated December 26, 1995, was approved, with a view to eliminating double taxation that
occurred in the past in relation to distributed profits.
(g) Exemption from IPI for microcomputers and computer peripherals:
The exemption from IPI, which is an indirect tax, is not related to export performance or local
content requirements.  Its objective is the technological development of the industry and the
introduction of quality systems based on ISO 9000 regulations. Beneficiaries are requested to invest5% of their total earnings (which includes goods, services and imports) in R&D and training.
(h) BNDES:
BNDES is the only Brazilian financial institution that finances projects with long term loans.
The Bank’s competitors in this market are the inte rnational financial institutions that grant long term
loans, and not the domestic commercial banks that offer only short-term credits for working capital.
So, BNDES’ interest rates differ from the current Brazilian short-term working capital rates, but are
compatible with and usually higher than the rate s charged for long-term loans in the international
market.  BNDES charges positive real interest rates on all loans and, on top of that, spreads andcharges.  Since 1992, BNDES has been showing system atic profits, reflecting the fact that lending
rates surpass the Bank’s borrowing costs to an extent that not only covers its operational costs but also
generates a surplus.G/SCM/Q2/BRA/8
Page 10
BNDES is funded by domestic and external resources.  The international funds are raised
either by issuing bon ds in the international markets or through loans from multilateral organizations
and foreign government agencies.
In recent years, the demand for BNDES’ funds has remained systematically below the supply
of funds. That would have not happened had the Bank been operating with subsidized interest rates.
With respect to FINAMEX, the arguments are similar.  FINAMEX grants loans denominated
in dollars charging Libor plus spread and commission.  Therefore, FINAMEX charges positive real
interest rates that are relatively high and comparable to those charged in international markets.
(i) Export Trade Support Programme:
The Ministry of External Relations has no competence for conceding fiscal or any other kind
of incentive. It does not transfer resources and just provides support to Brazilian through the
commercial sectors of diplomatic missions abroad . It elaborates market studies based on publicly
available information. The structure and the activities of the Department of Trade Promotion arecurrently being reviewed.
(j) Sub-Federal subsidies:
There is no survey available to Federal Government on subsidies granted at sub-Federal level.
In fact, these subsidies are rarely granted within the framework of specific programmes or pieces of
legislation. Therefore, there are considerable difficulties in gathering this information.
In many cases, subsidies are of a fiscal nature, but they tend to be eliminated. The
Constitutional Reform, now in consid eration in Congress, proposes several changes in the fiscal area,
including the elimination of the ability of States to establishing single fiscal exemptions.
(k) Privatization Programmes:
In 1990, the Brazilian Government introduced the National Privatization Plan (PND) which
involves the selling of state concerns in several ac tivities to private entrepreneurs. The companies are
privatized in a public auction, where the final sale  price is determined competitively by the market
itself.
Privatization in Brazil practically does not involve, as in several other countries, sales at fixed
prices. To the contrary, the Government sets only a minimum price, which is the result of market
evaluations done by private consultants hired by BNDES, through auction. The potential buyers then
determine how much to pay for the enterprise.
If any "financial streamlining" had to be unde rtaken prior to the sale, the price obtained in
auction is larger than the one that would be obtain ed in its absence. In addition, when the company is
transferred to the private sector, the State also transf ers its remaining debts, reducing, in this way, the
public sector liabilities.
So, any previous streamlining has given the state the opportunity to recover its credits
converted into shares, through the sale of stock either in the auction of control or in the public offer
that is usually carried after the auction when the enterprise is privatized.
In respect to the fiscal and social debts, any company incorporated under Brazilian Law is
entitled to request, in a regular operation and given impositions by the tax authority, the rescheduling
of the corresponding contributions. Such operations do not involve any sort of subsidy because to theG/SCM/Q2/BRA/8
Page 11
debt in arrears are added interests, penalties and other surcharges, and given to the taxpayer only the
possibility of postponing their payment.
One may conclude, therefore, that no subsidy is involved if any streamlining operation is
undertaken by the state prior to the sale, given that the ex-controlling shareholder (the federalgovernment) converted its credits in the capital account, but, on the other hand, the buyers paid for the
capital increase through a proportional higher price paid for the privatized enterprise.
We would like to draw the attention to Article 27.13 of the Agreement. Brazil has presented a
notification under this Article considering a remark made in the last meeting of the Committee with
regard to this matter.
(l) Incentives for the Automotive sector:
The Provisional Measure (PM) establishing a regime for the automotive sector was notified to
the WTO in 1995, for purposes of transparency. Though pending of approval by the Brazilian
Congress, the PM has been applied since its issuance. The matter has been subject to consultationswith interested countries.
The rules applicable to the Brazilian automotive sector, set forth in the referred PM, will be in
force until 31 December 1999, when they shall be replaced by a Mercosur Common Regime,
currently under negotiation among its members. Spec ific rules apply to companies investing in less
developed regions of Brazil (North, Northeast and Midwest), as per notification
G/SCM/N/16/BRA/Suppl.1, dated 23 January 1997.
__________