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

No. 2264

Subject: Possible Exemption of Government Agencies from Payment of Brazil’s Consumption Tax.

Sir: I have the honor to refer to the Department’s instruction no. 7310 of July 228 and Embassy despatch no. 1833 of June 25, 1945, on the above-mentioned subject.

[Here follows listing of enclosures, none printed.]

It will be noted from enclosure 429 that it is intended to request the Embassy to enter a claim for refund of all sums paid under the title of consumption tax. Unless the further opinion requested from the Treasury by the Department, mentioned in instruction no. 7310, indicates grounds for doing so on a reciprocal basis, the Embassy would hardly be in a position to press this matter further, as can readily be seen from the following recapitulation of all available information.

1) In the official ruling rendered by Dr. Ovidio Paulo de Menezes Gil and enclosed with despatch no. 1833 of June 25, 1945, the Ministry of Finance maintained that the consumption tax is an indirect tax on the consumer, paid by the manufacturer; that United States military establishments in Brazil are exempt from all direct taxes, but not from indirect taxes paid by manufacturers; and that therefore United States military establishments in Brazil are not exempt from the tax.

2) The opinion rendered by the Acting Secretary of the Treasury, enclosed with instruction no. 7310 of July 2, concerning the position of the United States Government respecting the granting of exemptions from Federal excise taxes to foreign governmental agencies, is identical to that of the Brazilian authorities, in that it states:

“If the legal incidence does not fall upon the Naval Operating Base, but instead the burden of the tax is merely passed on to such agency as part of the cost of the taxable article, such tax would be similar to the manufacturers’ and retailers’ excise taxes for which no exemption is accorded agencies or commissions of foreign governments by M.T. 7.”

The opinion concludes with the statement that the Treasury Department is unable to ascertain the nature of the Brazilian consumption tax and the person upon whom the legal incidence of the tax is imposed.

[Page 731]

3) In a memorandum to Dr. Ovidio Gil the Embassy had also questioned the legal incidence of the tax in view of the following wording of articles 2 and 99 of the new consumption tax law:

“Art. 2. The tax is to be paid by the taxpayers indicated in this law before the products leave the factories, commercial establishments, customs houses and customs agencies, and the amount of the tax should be included in the value of the product and charged to the consumer, in accordance with the provisions that follow.

Art. 99. When the tax is ad valorem it must be shown as a separate item on the ‘Fiscal Note’ and will be collected from the first buyer by the manufacturer from which time it will be incorporated in the price of the product.”

In the reply to this memorandum (enclosures nos. 3 and 4) Dr. Ovidio Gil states that the consumption tax is always paid by the manufacturer, who is responsible to the fiscal authorities; through incorporation in the sales price of the product, without being felt it is collected from the first purchaser, who in turn collects it from the consumer. Through this transfer of onus comes its classification as an indirect tax. Decree-law no. 7404, of 1945, did not, nor could it, alter the nature of the tax; only, to facilitate control, the cited art. 99 established the obligation to show the ad valorem tax separately on the “fiscal note”.

An examination of the correspondence reveals that Brigadier General B. E. Gates based his decision to permit payment of the tax, subject to a claim for refund by the Embassy, on information in his possession on June 28, 1945. Obviously he did not yet have the data communicated by the Embassy to the United States military establishments in Brazil on July 7 (copy enclosed with despatch no. 1973 of July 730), and July 13, 1945 (enclosure no. 1) nor of the further official ruling of the Ministry of Finance (inclosures nos. 3 and 4) now being communicated to those organizations. The additional information might serve to alter his attitude, but the situation as of today is submitted for any comments the Department may wish to offer.

Respectfully yours,

For the Ambassador:
DuWayne G. Clark

Commercial Attaché
  1. Not printed.
  2. This enclosure included a United States Army memorandum authorizing payment of the consumption tax and providing for a record of such payments to permit entry of a claim for refund by the Embassy.
  3. Not printed.