The Acting Secretary of State to the Ambassador in Brazil ( Berle )

No. 7571

Sir: Reference is made to previous correspondence with the Embassy relating to the Brazilian consumption tax.

The Embassy on its own initiative, and in accordance with instructions from the Department, has for many months been urging the Brazilian Government to remove all conflicts of the consumption tax with the trade agreement. As applied, the tax contravenes Article VII of the agreement in two respects, as follows:

By the taxation of many imported articles at a higher rate than like domestic articles.
By the imposition on certain articles in Schedule I of taxes not in force on the date of signature of the agreement.

The Department has been reexamining the questions of policy raised by the consumption tax and has reached the conclusion that it would be inadvisable to insist further that Brazil adhere strictly to the letter of Article VII in the agreement. It is proposed to offer the Brazilian Government an exchange of notes which, in effect, would eliminate the requirement contained in paragraph 2 of Article VII. Such a change in that Article would then grant Brazil the right to impose nondiscriminatory internal taxes on any commodities, whether or not they are listed in the Schedules (thereby legally permitting the action mentioned in point (b) above).

The decision to propose such action to the Brazilian Government is based upon the following considerations.

The general policy of this Government with respect to the imposition of internal or compensatory import taxes has for some time been founded upon the principle of national treatment. The Brazilian trade agreement, among the earliest concluded by this Government, is virtually the only trade agreement of the United States still in force that prohibits new or increased internal taxes on scheduled articles. [Page 724] Article II of the Mexican agreement20 is an example of the “standard” provision relating to internal taxes incorporated in our trade agreements:

“Articles the growth, produce or manufacture of the United States of America or the United Mexican States imported into the other country, shall be exempt from all internal taxes, fees, charges or exactions other or higher than those imposed on like articles of national origin.”

There is no provision in the Mexican or other recent agreements which prohibits new or increased internal taxes on articles in the Schedules, as there is in the Brazilian agreement.

Again, with regard to compensatory taxes on imports Article IX of the Mexican agreement is typical:

“The provisions of Article VII and VIII of this Agreement [relating to ordinary customs duties and other taxes or charges on or in connection with importation on articles included in the Schedules] shall not prevent the Government of the United States of America or the Government of the United Mexican States from imposing at any time on the importation of any article a charge equivalent to an internal tax imposed in respect of a like domestic article or in respect of a commodity from which the imported article has been manufactured or produced in whole or in part.”

Such provisions as the above are designed to permit the non-discriminatory application to imported products, whether or not included in the Schedules of the Agreement, of new taxes, and of increases in the rates of existing taxes. In the case of the United States these provisions have applied to the new manufacturers’ and retailers’ excise taxes, and increases in the rates on tobacco products and liquor, and would cover the imposition on imported articles of a general sales tax, if one should be enacted. In the case of Brazil, the addition of such provisions to the agreement would permit the non-discriminatory application of the consumption tax to imports of Schedule I articles from the United States.

From the foregoing it is clear that the provision in the Brazilian agreement prohibiting new or increased internal taxes on articles in the Schedules is not now consistent with the general policy of this Government regarding internal taxes.

In this connection, however, it should be emphasized that no change in policy has been made with regard to discriminatory rates of taxation. The Department continues to oppose the levying by the Brazilian Government of higher internal taxes upon imported goods than upon like domestic articles (in violation of the first paragraph of Article VII in the Brazilian agreement).

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It is felt that it would be desirable to offer immediately to the Brazilian Government an exchange of notes wherein the United States would in effect concede to Brazil the right to levy an internal consumption tax on any commodity. Although not directly linked to such action, the Brazilian Government would be expected, before such an exchange took place, to remove the discriminatory features of the tax law by making the rates on imported goods no higher than on like domestic articles.

Before taking any action in the matter, the Department desires the Embassy’s views regarding the foregoing proposal and, in particular, as to whether the Brazilian Government would agree to equalize the consumption tax rates if it were conceded the right to apply the tax to all commodities.

Very truly yours,

For the Acting Secretary of State:
William L. Clayton
  1. Agreement signed December 23, 1942, Department of State Executive Agreement Series No. 311, or 57 Stat. (pt. 2) 833.