The Secretary of State to the Ambassador in Brazil (Gibson)
Sir: With reference to the Embassy’s telegram No. 122, May 10, 4 p.m., and No. 125, May 13, 1 p.m., and to previous correspondence between the Department and the Embassy in regard to the new social welfare tax imposed in Brazil, the following comments may be helpful to the Embassy.
The source of the misapprehension in regard to the applicability of Article VII of the trade agreement to the tax in question appears to have been the failure to distinguish between the purpose of the tax and its scope and manner of collection. The tax levied on domestic sales to finance the quota de previdencia apparently was an internal tax within the meaning of Article VII of the trade agreement. The new social welfare tax is of a different nature, being imposed only on imported products, at the time of their importation. It is not, therefore, an internal tax within the meaning of Article VII. In this connection your attention is invited to the words “after importation [Page 309] into” in that Article. In further explanation of the line of cleavage between an import duty and an internal tax, it may be pointed out that in Brown v. Maryland, 12 Wheat. 419, a charge for a license to engage in the business of importing foreign goods was held to be an import duty; that in Batjer and Company v. United States, 11 Ct. Cust. App. 60, an additional tax levied on certain wines, cordials, et cetera, at the time of their removal from the custom-house or bonded premises for sale or consumption was held to be an import duty and not an internal tax; that in Faber, Coe and Gregg v. United States, 19 C. C. P. A. 8, a levy on cigars and cigarettes manufactured in or imported into the United States sold by the manufacturer or importer, or removed for consumption or sale, was held to be an import duty and not an internal tax in respect of imported cigars and cigarettes; and that in United States v. Shallus and Company, 9 Ct. Cust. App. 168, an additional levy on imported distilled liquor was held to be an import duty and not an internal tax. In this latter case, the Court stated that “when provision is made for a tax on an import, it unquestionably provides for a duty. The definition of a duty is a tax on imports, excise or customs due. When a tax is imposed upon an importation while it is still in customs custody, it is to be inferred that it is intended as duty on imports.”
That part of the so-called consumption tax which is collected at the time of importation on imported tobacco, liquor, et cetera, is not an internal tax within the meaning of Article VII. If any product subject to this tax had been included in Schedule I of the agreement, the amount of the charge on such product imported from the United States would have been bound by Article III of the agreement. Superficially it may appear that Article VII would lose its significance as a safeguard if it did not prevent changing the form of a tax from an internal tax to a custom duty. Actually, however, it gives the valuable assurance that whatever difference in treatment there may be between imported and like national products will be made at the time of importation of the imported products. After importation, the imported products may not be taxed more heavily than the like national products. This assurance, together with most-favored-nation treatment, is all that Article VII was intended to provide. With reference to charges on or in connection with importation of products from the United States the agreement provides: (1) [in Article III]56 that the ordinary customs duties on products listed in Schedule I shall not be higher than those specified in that Schedule and that all other charges on or in connection with the importation of those products only shall not be higher than those imposed on the day of signature of the agreement or required to be imposed thereafter under laws [Page 310] in effect on that day; (2) that unconditional most-favored-nation treatment shall be accorded to all products; and (3) in effect, that assurances in respect of products not listed in Schedule I are restricted to the pledge of most-favored-nation treatment.
In the case of products in Schedule I, Article VII provides in the second paragraph that charges imposed after importation shall not be increased except as required by laws in force on the day of signature of the agreement. Thus, as regards products in Schedule I, protection is provided against increases in charges of any kind either on importation or after importation. As regards products not in Schedule I, the agreement provides only for most-favored-nation treatment in respect of charges on importation and for national and most-favored-nation treatment only, in respect of charges imposed after importation.
It seems quite probable that the representations of other governments, mentioned in the Embassy’s telegram No. 122, have been based upon the general ground that any such tax will tend to restrict importations or, as in the case of Argentina, that ft conflicts with a temporary tariff truce commitment pending the negotiation or ratification of a commercial agreement. Naturally, the Department does not view with pleasure the imposition of additional customs duties on products of the United States not listed in Schedule I, but there is no legal basis for objecting to them, just as the Brazilian Government would have no legal basis for objecting to duty increases in this country on products of Brazil other than those listed in Schedule II. Although it might be held that the tax in question is not in accord with the spirit of the agreement, it clearly does not violate the letter of the agreement. It is realized that surprise and possibly resentment may have been caused in certain quarters by your explanation of the mistake in basing representations on specific provisions of the trade agreement. Nevertheless, this Government could not permit itself to be placed in the position of making representations not based upon sound premises.
At the time the Embassy’s telegram No. 125, May 13, was received, it was planned to send the Embassy a telegram in the sense of the foregoing and authorizing the Embassy to point out to the appropriate Brazilian authorities that although no legal basis exists for making representations against the imposition of the tax on products of the United States other than those listed in Schedule I of the trade agreement, the tax constitutes an additional obstacle to the importation of such products at a time when the two governments have but recently placed in force an agreement designed to facilitate trade between the two countries. In view of the understanding reported in the last paragraph of the Embassy’s telegram under reference, you may not [Page 311] regard it as appropriate to make this observation to the Brazilian authorities. However, you may use your discretion in this regard.
If you have any further questions in regard to the interpretation of Article VII of the trade agreement in connection with the tax under reference or in general, or would like to have additional explanatory material in regard to any other provisions of the trade agreement, we would be glad to answer any such questions or to supply such material.57
Very truly yours,