Originally published in the November 25 edition of World Tax Daily (Copyrights Tax Analysts)
Brazil is preparing a law project to apply trade sanctions against the U.S. These sanctions could include new or increased taxes on intellectual property.
In August the WTO authorized Brazil to retaliate against U.S. cotton subsidies. The WTO allowed Brazil in some circumstances to “cross-retaliate” against goods other than cotton, or even against services or intellectual property.
The new law project is being finalized to enable Brazil to adopt the sanctions, estimated at $350 million for 2010, early next year. According to Carlos Cozendey, director of the economic department of Brazil’s Foreign Affairs Ministry, the new law would provide legal support to trade sanctions against the U.S. and, eventually, against other countries, as Brazil currently has no such legislation.
Brazil’s Ministry of Foreign Affairs still hopes the U.S. will soon eliminate the cotton subsidies so that Brazil does not have to impose the sanctions considered in the law project. However, the ministry says the U.S. since 2005 has promised to end the subsidies but has not adopted any practical measures.
The adoption of a new tax or tax increase on royalty payments based on a WTO dispute would be unprecedented in Brazil. The country currently taxes royalties at two levels: a 15 percent withholding tax and a 10 percent royalty tax, the latter paid by the Brazilian payer with its own resources. If the tax sanction against the U.S. is ever adopted, Brazil may either increase the 15 percent withholding tax or create a new tax especially designed for WTO sanctions.
Brazil’s Constitution mandates that any law that creates or increases taxes must be approved in the year preceding that when the tax is supposed to be increased or created. Therefore, the government must hurry to approve the law project before year-end, or tax sanctions against the U.S. could be delayed until 2011.
The law project also considers other nontax sanctions that could be applied, in this case, against U.S. companies. The first is the possibility to suspend intellectual property rights (such as patents, trademarks, and copyrights) of foreign companies during the retaliation period. Regarding the U.S. cotton issue, the sanctions would last until the U.S. eliminates the cotton subsidies ruled illegal by the WTO. Another nontax option is the suspension of royalty payments.
David Roberto R. Soares da Silva