Practical Challenges with Free Trade Agreements

1. Practical Challenges with Free Trade Agreements Brazilian Scenario and Challenges Cesar Finotti June 13, 2012

2. Conference Topics • Importing into Brazil – General Procedures and Paperwork • Free Trade Agreements Brazilian Environment • Current Free Trade Agreements • Potential FTAs under Negotiation • Certificate of Origin Applicability • Customs Inspections and Audits • Challenges & Compliance Issues

3. Importing into Brazil • General Procedures and Paperwork • SISCOMEX – Brazilian Foreign Trade Electronic System designed for registering import and export operations, import licenses , collection of import duties and tax, among other features • Paperwork environment – Commercial Invoice, Packing List, Cargo Manifest (B/L – AWB), Certificates of Origin- Preferential / Non-Preferential • Intervention – Brazilian Federal Revenue (“Receita Federal do Brasil”), Foreign Trade authorities and Brazilian Central Bank

4. Brazilian Environment • Brazilian Free Trade Agreements Environment • General Aspects • Regional agreements • Observing Local Content values • None benefiting commodities • Focusing on industrial products • US / EU exporters are not benefiting from any agreement • Neither Asian countries • Controversy • Brazilian benefits from GSP • US authorities periodically review Brazilian benefits from GSP

5. Brazilian Environment • Brazilian Free Trade Agreements Environment (cont.) • Rules of Origin and Certificate of Origin • In general the eligibility for preferences vary depending on HTS Codes assigned • Common Nomenclature of Mercosur - NCM • Applicable rules of origin also vary based on HTS Code • Each Agreement specifies criteria that must be satisfied for imported goods to be eligible to preferential treatment • Originating status regularly stands for minimum regional value content (RVC) of 60% / 40% • Existing HTS Codes that must have tariff shift for complying with rules of origin

6. Brazilian Environment • Brazilian Free Trade Agreements Environment (cont.) • Additional Requirements • Goods must be transported directly from the exporting country to the import market • Transshipment only allowed due to geographical issues • Necessary to present evidence of origin, e.g. Certificate of Origin, Movement Certificate EUR1, Form A, etc. • Certificate of Origin • Valid for 6 months

7. Current Agreements • Brazilian Free Trade and Preferential Agreements • Current Agreements • ACE 02 – Brazil and Uruguay (Vehicles and parts) • ACE 14 – Brazil and Argentina (Vehicles and parts) • ACE 18 – Mercosul (Brazil, Argentina, Paraguay and Uruguay) • ACE 35 – Mercosul and Chile • ACE 36 – Mercosul and Bolivia • ACE 38 – Brazil and Guiana • ACE 41 – Brazil and Suriname • ACE 53 – Brazil and Mexico • ACE 55 – Brazil and Mexico (Vehicles and parts) • ACE 58 – Mercosul and Peru

8. Current Agreements • Brazilian Free Trade and Preferential Agreements (cont.) • Current Agreements (cont.) • ACE 59 – Mercosul and Colombia, Ecuador and Venezuela • ACE 62 – Mercosul and Cuba • Mercosul and India • Mercosul and Israel • GSTP – Global System of Trade Preferences (developing countries) • GSP – General System of Preferences

9. Current Agreements • Brazilian Free Trade and Preferential Agreements (cont.) • ALADI Agreement – Latin American Association for Integration • Includes Brazil, Argentina, Uruguay, Paraguay, Bolivia, Chile, Peru, Colombia, Ecuador, México and Venezuela, offering economic integration and enables regional trade and tariff agreements • Import duties imposed at a reduced rate • Customs procedures are not harmonized among member countries

10. Current Agreements • Brazilian Free Trade and Preferential Agreements (cont.) • Mercosul Agreement – South Cone Market • Includes Brazil, Argentina, Uruguay and Paraguay and aims to establish a perfect Common Market among the member countries, through free circulation of goods, services and production factors • Common Tariff Codes (NCM) and Import duty rates • Fewer products exempted to follow same import duty rates, based upon economic issues • Customs procedures are not harmonized among member countries

11. Potential Agreements • Potential Free Trade and Preferential under negotiation • Mercosul and SACU (South Africa, among other African countries) • Already approved but still pending of formal sanction by each country independently • Mercosul and EU • Commodities / Agricultural products still a huge issue • Mercosul and Egypt • Mercosul and India – extending benefited goods

12. Certificate of Origin Applicability • Certificate of Origin applicability • Physical issuance • Confirms eligibility under trade agreements • Define preferential treatment e.g. reduced / exempted Import duty rates • Among the highest import tax burden worldwide, average import duties and taxes levied upon imports represents 80% of the goods value • Used for determining anti-dumping duty imposition • Used for quota compliant analysis • Brazil has been imposed anti-dumping measures more than any other country worldwide e.g. China, EUA, Mexico, etc.

13. Customs Inspections and Audits • Responsibilities • Importers / Exporters have responsibilities, even after release of merchandise, including Proof of end-use, Closing out temporary imports or exports and other special customs regime in use • Importers / Exporters must file original documentation • Physical Certificate of Origin • Recordkeeping for 6 years (FY + 5) • Customs Inspections and Audits to be performed without prior notice • Two different levels – Federal and State levels • Customs claims • Administrative processes

14. Customs Inspections and Audits • Responsibilities (cont.) • Brazilian Customs authorities have been effectively auditing and verifying Certificates of Origin • Fines and Penalties imposed on import operations are composed of several characteristics and levels through administrative processes and/or customs claims • Free Trade Zones Treatment • “Special” condition, legally some existing FTA’s do not recognize origin for goods produced in the Free Trade Zones • Waiver from both Customs and Government authorities

15. FTA Challenges & Compliance • FTA Challenges & Compliance Initiatives • Eliminate bureaucracy and paperwork environment • Current discussion among Mercosur countries for implementing a common system for issuing certificates of origin electronically • Leveraging preferential treatment to other countries and negotiations globally • Chile has been succeeding in such initiatives • Negotiating Commodities is a MUST will in order to succeed with EU / USA / Asian countries

16. FTA Challenges & Compliance • FTA Challenges & Compliance Initiatives (cont.) • What should be done to overcome hurdles? • Make sure exporter and logistics provider understand Brazilian requirements regarding physical issuance of Certificate of Origin • Preferential / Non-Preferential • Adoption of shipping instructions to be sent to exporter • Make sure errors are corrected before vessel arrives in Brazil • Definition of regional policy for classifying goods • Tariff classification must be accurate – no room or time for corrections • Heavy fines and penalties

17. Contact Information For more information please contact: Cesar Finotti Executive Director - STTAS Brazil International Trade & Customs Advisors Tel: +55 (11) 3045 3080 Ext. 1003 cfinotti@strtrade.com