Your Taxes: Trading with Mercosur

The Israel-Mercosur free-trade agreement is the first signed by Mercosur with any country outside Latin America.

mercosur 88 (photo credit: Courtesy)
mercosur 88
(photo credit: Courtesy)
Last December 18, Israel signed a free-trade agreement with the South American common market Mercosur - a Spanish acronym for "Mercado Común del Sur," or "Southern Common Market." Mercosur was created by Argentina, Brazil, Paraguay and Uruguay in March, 1991, with the signing of the Treaty of Asuncion. These countries are full members of Mercosur; Brazil is the biggest by far. Bolivia, Chile, Colombia, Ecuador and Peru have associate member status. Venezuela signed a membership agreement on June 17, 2006, but is waiting for ratification to become a full member. Mercosur was originally set up with the goal of creating a common market/customs union among the participating countries on the basis of various forms of economic cooperation that had been taking place between Argentina and Brazil since 1986. The Treaty of Ouro Preto in 1994 added much to the institutional structure of Mercosur and initiated a new phase in the relationship between the countries. The Israel-Mercosur free-trade agreement is the first signed by Mercosur with any country outside Latin America. This gives Israeli exporters a significant advantage. Israel's trade with the Mercosur member countries is about $240 million. Only some 36 percent of Israeli exports are exempt from customs duties in these countries, while 86% of Mercosur exports to Israel are exempt from Israeli customs duties, according to the Industry, Trade and Labor Ministry. Israel has a long tradition of free-trade agreements and openness in its economy. It already has agreements with the US and the EU, among others. Approximately 70% of Israel's foreign trade is exempt from custom duties. Aside from Mercosur, agreements with India and Russia are in the planning stages. The Mercosur-Israel agreement will be implemented gradually. Once it takes effect, 50% of Israeli exports will enjoy a complete reduction; after four years, 70% will be fully exempt; after eight years, 85% will be fully exempt; after 10 years it rises to 99%. Only a small number of chemical products will remain subject to customs duties in Argentina. The free-trade agreement will be ratified and take effect separately in each of the four Mercosur countries. A product will be considered "Israeli source" and covered by the free-trade agreement if at least no more than 50% of the "factory-gate price" consists of foreign raw materials, or there is a change in the customs-code classification at the four-digit level. A protective import levy may only be imposed if it emerges that the customs duty reduction led to a sharp rise in the import of a particular product, causing serious harm to the local industry of a country. To sum up, check the expected customs-duty benefits of the Israel-Mercosur free-trade agreement if your company exports products to Argentina, Brazil, Paraguay or Uruguay. If you are a member of a multinational group, perhaps Israel would serve well as a trade bridge with these countries, especially if production in Israel is eligible for "privileged enterprise" or "approved enterprise" income tax breaks for two to 15 years for Israeli tax purposes. As always, consult experienced tax advisors in each country at an early stage in specific cases. [email protected] Leon Harris is an international tax partner at Ernst & Young Israel.