[Federal Register Volume 62, Number 38 (Wednesday, February 26, 1997)]
[Proposed Rules]
[Pages 8818-8856]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-4538]
[[Page 8817]]
_______________________________________________________________________
Part II
Department of Commerce
_______________________________________________________________________
International Trade Administration
_______________________________________________________________________
19 CFR Part 351
Countervailing Duties; Proposed Rule
Federal Register / Vol. 62, No. 38 / Wednesday, February 26, 1997 /
Proposed Rules
[[Page 8818]]
DEPARTMENT OF COMMERCE
International Trade Administration
19 CFR Part 351
[Docket No. 950306068-6185-03]
RIN 0625-AA45
Countervailing Duties
AGENCY: International Trade Administration, Department of Commerce.
ACTION: Notice of proposed rulemaking and request for public comments.
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SUMMARY: The Department of Commerce (``the Department'') proposes to
establish regulations to conform the Department's existing
countervailing duty regulations to the Uruguay Round Agreements Act,
which implemented the results of the Uruguay Round multilateral trade
negotiations. In addition to conforming changes, the Department has
sought to issue regulations that: (1) Where appropriate and feasible,
translate the principles of the implementing legislation into specific
and predictable rules, thereby facilitating the administration of these
laws and providing greater predictability for private parties affected
by these laws; (2) simplify and streamline the Department's
administration of countervailing duty proceedings in a manner
consistent with the purpose of the statute and the President's
regulatory principles; and (3) codify certain administrative practices
determined to be appropriate under the new statute and under the
President's Regulatory Reform Initiative.
DATES: Written comments will be due on April 28, 1997.
ADDRESSES: Address written comments to Robert S. LaRussa, Acting
Assistant Secretary for Import Administration, Central Records Unit,
Room 1870, U.S. Department of Commerce, Pennsylvania Avenue and 14th
Street, NW, Washington, DC 20230. Comments should be addressed:
Attention: Proposed Regulations/Uruguay Round Agreements Act--
Countervailing Duties. Each person submitting a comment is requested to
include his or her name and address, and give reasons for any
recommendation.
FOR FURTHER INFORMATION CONTACT: Jennifer A. Yeske at (202) 482-0189 or
Penelope Naas at (202) 482-3534.
SUPPLEMENTARY INFORMATION:
Background
This notice, which deals with countervailing duty (``CVD'')
methodology, constitutes part of a larger process of developing
regulations under the Uruguay Round Agreements Act (``URAA''). The
process began when the Department took the unusual step of requesting
advance public comments in order to ensure that, at the earliest
possible stage, we could consider and take into account the views of
the private sector entities that are affected by the antidumping
(``AD'') and CVD laws. Following an extension of the comment period, on
May 11, 1995, the Department published interim-final rules that dealt
with a limited number of new or revised procedures resulting from the
URAA. On February 8, 1996, the Department published proposed rules
(``APO Regulations'') that, among other things, revised procedures
relating to administrative protective orders in AD and CVD proceedings.
Finally, on February 27, 1996, the Department published proposed rules
dealing with AD and CVD procedures and AD methodology (``AD Proposed
Regulations'').\1\
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\1\ The prior notices published by the Department as part of its
URAA rulemaking activity are: (1) Advance Notice of Proposed
Rulemaking and Request for Public Comments (Antidumping Duties;
Countervailing Duties; Article 1904 of the North American Free Trade
Agreement), 60 FR 80 (Jan. 3, 1995); (2) Advance Notice of Proposed
Rulemaking; Extension of Comment Period (Antidumping Duties;
Countervailing Duties; Article 1904 of the North American Free Trade
Agreement), 60 FR 9802 (Feb. 22, 1995); (3) Interim Regulations;
Request for Comments ((Antidumping and Countervailing Duties), 60 FR
25130 (May 11, 1995); (4) Proposed Rule; Request for Comments
(Antidumping and Countervailing Duty Proceedings; Administrative
Protective Order Procedures; Procedures for Imposing Sanctions for
Violation of a Protective Order), 61 FR 4826 (Feb. 8, 1996); (5)
Notice of Proposed Rulemaking and Request for Public Comments
(Antidumping Duties; Countervailing Duties), 61 FR 7308 (February
27, 1996); (6) Extension of Deadline to File Public Comments on
Proposed Antidumping and Countervailing Duty Regulations and
Announcement of Public Hearing (Antidumping Duties; Countervailing
Duties), 61 FR 18122 (April 24, 1996); and Announcement of
Opportunity to File Public Comments on the Public Hearing of
Proposed Antidumping and Countervailing Duty Regulations
(Antidumping Duties; Countervailing Duties), 61 FR 28821 (June 6,
1996).
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In these proposed regulations, the Department has continued to be
guided by the objectives described in the AD Proposed Regulations.
Specifically, these objectives are: (1) Conformity with the statutory
amendments made by the URAA; (2) the elaboration through regulation of
certain statements contained in the Statement of Administrative Action
(``SAA''); \2\ and (3) consistency with President Clinton's Regulatory
Reform Initiative and his directive to identify and eliminate obsolete
and burdensome regulations.
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\2\ See, Statement of Administrative Action accompanying H.R.
5110 (H.R. Doc. No. 316, Vol. 1, 103d Cong., 2d Sess. (1994)).
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In the case of CVD methodology, the Department's existing
``regulations'' consist largely of the proposed regulations published
in 1989 (``1989 Proposed Regulations'').\3\ Because the Department
never issued final rules, the 1989 Proposed Regulations were not
binding on the Department or private parties. Nevertheless, to some
extent both the Department and private parties relied on the 1989
Proposed Regulations as a restatement of the Department's CVD
methodology as it existed at the time. Thus, notwithstanding statutory
amendments made by the URAA and subsequent developments in the
Department's administrative practice, the 1989 Proposed Regulations
still serve as a point of departure for any new regulations dealing
with CVD methodology.
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\3\ See Notice of Proposed Rulemaking and Request for Public
Comments (Countervailing Duties), 54 FR 23366 (May 31, 1989).
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As described in the AD Proposed Regulations, we have consolidated
the AD and CVD regulations into a single part 351. For the most part,
the regulations contained in this notice constitute subpart E of part
351. We anticipate that the consolidation of the AD and CVD regulations
will make the regulations easier to use and, by reducing their sheer
size, will make the regulations more accessible to the non-expert.
Comments--In General
The Department wishes to emphasize that the regulations contained
in this notice are proposed regulations only. While they reflect our
best judgment at this time regarding the appropriate style and content
of regulations dealing with CVD methodology, we remain open-minded on
the various issues raised herein. Therefore, we are very interested in
receiving public comment on these proposed regulations. We have found
the dialogue that commenced with the advance notice to be extremely
useful, and we hope and expect that it will continue.
Comments--Format and Number of Copies
Each person submitting a comment should include his or her name and
address, and give reasons for any recommendation. To facilitate their
consideration by the Department, comments regarding these proposed
regulations should be submitted in the following format: (1) Identify
each comment by reference to the section and/or paragraph of these
proposed
[[Page 8819]]
regulations to which the comment pertains; \4\ (2) begin each comment
on a separate page; (3) concisely state the issue identified and
discussed in the comment; and (4) provide a brief summary of the
comment (a maximum of 3 sentences) and label this section ``summary of
the comment.''
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\4\ If a comment does not pertain to a particular proposed
regulation, please clearly identify the comment as ``Other,''
followed by a brief description of the issue to which the comment
pertains; e.g., ``Other--Infrastructure.''
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To help simplify the processing and distribution of comments, the
Department encourages the submission of documents in electronic form
accompanied by an original and two copies in paper form. We request
that documents filed in electronic form be on DOS formatted 3.5''
diskettes and prepared in either WordPerfect format or a format that
the WordPerfect program can convert and import into WordPerfect. Please
submit comments on a separate file on the diskette and identify each
comment in the manner described in the preceding paragraph.
Comments received on diskette will be made available to the public
on the Internet at the following address: http://www.ita.doc.gov/
import__admin/records/.
In addition, the Department will make comments available to the
public on 3.5'' diskettes, with specific instructions for accessing
compressed data, at cost, and paper copies will be available for
reading and photocopying in Room B-099 of the Central Records Unit. Any
questions concerning file formatting, document conversion, access on
the Internet, or other file requirements should be addressed to Andrew
Lee Beller, Director of Central Records, (202) 482-0866.
Explanation of the Proposed Rules
Section 351.102
These proposed regulations add several definitions to Sec. 351.102.
Many of these definitions are identical (or virtually identical) to
definitions contained in Sec. 355.41 of the 1989 Proposed Regulations,
and some are based on definitions contained in the Illustrative List of
Export Subsidies (``Illustrative List'') annexed to the Agreement on
Subsidies and Countervailing Measures (``SCM Agreement''). However, a
few definitions warrant comment.
The definition of firm is based on Sec. 355.41(a) of the 1989
Proposed Regulations, but an additional clause has been added to
clarify that the purpose of this term is to serve as a shorthand
expression for the recipient of an alleged subsidy. While other terms
could be used, the use of the term ``firm'' in this manner has become
an accepted part of CVD nomenclature.
Similarly, government-provided is used as a shorthand adjective to
distinguish the act or practice being analyzed as a possible
countervailable subsidy from the act or practice being used as a
benchmark. As made clear in the regulation, the use of ``government-
provided'' does not mean that a subsidy must be provided directly by a
government.
Loan is defined to include forms of debt financing other than what
one normally considers as a ``loan,'' such as bonds, overdrafts, etc.
Again, this definition is intended as a shorthand expression in order
to avoid repetitive use of more cumbersome phrases, such as ``loans or
other debt instruments.''
In this regard, the Department considered codifying its approach
with respect to so-called ``hybrid instruments,'' financial instruments
that do not readily fall into the basic categories of grant, loan, or
equity. In the 1993 steel determinations, see Certain Cold-Rolled
Carbon Steel Flat Products from Austria (General Issues Appendix), 58
FR 37062, 37254 (``GIA''), the Department developed a hierarchical
approach for categorizing hybrid instruments, an approach that was
sustained in Geneva Steel v. United States, 914 F. Supp. 563 (Ct. Int'l
Trade 1996). However, notwithstanding this judicial imprimatur, the
Department has relatively little experience with hybrid instruments.
Therefore, although the Department has no present intention of
deviating from the approach set forth in the GIA, the codification of
this approach in the form of a regulation would be premature at this
time.
Section 351.501
Section 351.501 restates very generally the subject matter of
subpart E. To be a bit more specific, the arrangement of subpart E is
as follows. After dealing with the specificity of domestic subsidies in
Sec. 351.502, Secs. 351.503 through 351.512 deal with the
identification and measurement of various general types of subsidy
practices. Sections 351.513 through 351.519 focus on export subsidies,
incorporating the appropriate standards from the Illustrative List.
Section 351.520 deals with general export promotion activities of
governments. Sections 351.521 through 351.523 deal with import
substitution subsidies (currently designated as ``Reserved''), certain
agricultural subsidies, and upstream subsidies, respectively. Section
351.524 sets forth rules regarding the calculation of an ad valorem
subsidy rate and the attribution of a subsidy to a product. Finally,
Secs. 351.525 through 351.527 contain rules regarding program-wide
changes, transnational subsidies, and the tax consequences of benefits,
respectively.
The last sentence of Sec. 351.501 acknowledges that subpart E does
not address every possible type of subsidy practice. However, the same
sentence provides that in dealing with alleged subsidies that are not
expressly covered by these regulations, the Secretary will be guided by
the underlying principles of the Act and subpart E.
In this regard, the Act and the SCM Agreement serve to eliminate
much of the confusion and controversy surrounding the necessary
elements of a countervailable subsidy. First, under section 771(5)(B)
of the Act and Article 1.1(a) (1) and (2) of the SCM Agreement, there
must be a financial contribution that a government provides either
directly or indirectly, or an income or price support in the sense of
Article XVI of GATT 1994. Although the precise parameters will have to
be determined on a case-by-case basis, this element provides a
framework for analysis that was previously missing.
Second, under section 771(5)(B) and Article 1.1(b) of the SCM
Agreement, the financial contribution (or income or price support) must
confer a benefit. Although the concept of a ``benefit to the
recipient'' is not new to U.S. CVD law, in some cases the meaning of
this concept had become obscured. The new law clarifies this concept
and eliminates any possibility of confusing the ``benefit'' of a
subsidy with the ``effect'' of a subsidy. In particular, section
771(5)(E) of the Act and Article 14 of the SCM Agreement, through their
description of the various standards (or ``benchmarks'') used to
identify and measure the benefits attributable to different types of
subsidy practices, make clear that a benefit is conferred when a firm
pays less for its ``inputs'' than it otherwise would pay in the absence
of the government-provided input or earns more than it otherwise would
earn. For example, when the amount that a firm pays on a government-
provided loan is less than what the firm ``would pay on a comparable
commercial loan that the (firm) could actually obtain on the market,''
the firm's cost of borrowing money is reduced. See section
771(5)(E)(ii) of the Act. Similarly, when a firm sells its goods to the
government and ``such goods are purchased for more than adequate
remuneration,'' the firm's revenues are increased beyond what it would
otherwise earn. See section
[[Page 8820]]
771(5)(E)(iv) of the Act. In neither instance need the Department do
more than apply the test enumerated by the statute in order to find
that a benefit has been conferred.
In this regard, when we talk about a firm paying less for its
inputs than it otherwise would pay (or receiving more revenues than it
otherwise would earn), we are referring to the lower price it pays to
acquire the thing provided by the government, i.e., money, a good, or a
service. We do not mean to suggest, as has sometimes been argued, that
one must consider the overall impact of government actions on a firm in
determining whether a particular government action confers a benefit.
Neither the statute nor the SCM Agreement supports such an analysis.
For example, assume that a government puts in place new
environmental requirements that require a firm to purchase new
equipment to adapt its facilities. Assume also that the government
provides the firm with subsidies to purchase that new equipment, but
the subsidies do not fully offset the total increase in the firm's
costs; i.e., the net effect of the new environmental requirements and
the subsidies leaves the firm with costs that are higher than they
previously were.
In this situation, section 771(5B)(D) of the Act, which deals with
one form of non-countervailable subsidy, makes clear that a subsidy
exists. Section 771(5B)(D) treats the imposition of new environmental
requirements and the subsidization of compliance with those
requirements as two separate actions. A subsidy that reduces a firm's
cost of compliance remains a subsidy (subject, of course, to the
statute's remaining tests for countervailability), even though the
overall effect of the two government actions, taken together, may leave
the firm with higher costs.
Thus, if there is a financial contribution and a firm pays less for
an input than it otherwise would pay in the absence of that financial
contribution (or receives revenues beyond the amount it otherwise would
earn), that is the end of the inquiry insofar as the benefit element is
concerned. The Department need not consider how a firm's behavior is
altered when it receives a financial contribution that lowers its input
costs or increases its revenues.
If there were any doubt on this score, section 771(5)(C) of the Act
eliminates it by clarifying that the ``benefit'' and the ``effect'' of
a subsidy are two different things. While, as stated above, there must
be a benefit in order for a subsidy to exist, section 771(5)(C)
expressly provides that the Department ``is not required to consider
the effect of a subsidy in determining whether a subsidy exists.'' This
message is driven home by the SAA at 256, which states that ``the new
definition of subsidy does not require that Commerce consider or
analyze the effect (including whether there is any effect at all) of a
government action on the price or output of the class or kind of
merchandise under investigation or review.''
As stated above, a benefit exists where a firm pays less for an
input than it otherwise would pay in the absence of the financial
contribution (or receives revenues beyond the amount it otherwise would
earn). By the same token, where a firm does not pay less for an input
than it otherwise would pay (or its revenues are not increased) as a
result of a financial contribution, it would be very difficult to
contend that a benefit exists. However, we have not closed our minds
here and we would welcome comment on this issue.
Finally, under section 771(5)(A) of the Act and Article 1.2 of the
SCM Agreement, a subsidy must be specific in order to be
countervailable. The ``specificity test'' is discussed in more detail
below, but we note here that by clarifying the purpose of the
specificity test and the manner in which it is to be applied, the URAA,
the SAA and the SCM Agreement should serve to reduce the volume of
litigation concerning this heavily litigated issue.
Regarding the coverage of subpart E, we should note two topics that
are not addressed by these regulations: indirect subsidies (with the
exception of upstream subsidies) and privatization. The topic of
``indirect subsidies'' refers generally to situations where a
government provides a financial contribution through a private body,
and involves the application of section 771(5)(B)(iii) of the Act.
Several comments were received on this topic, including particular
suggestions regarding the possible contents of a regulation. Although
the issues raised by the commenters are important ones, we are not
addressing them at this time. We note that the legislative history
clearly calls for the Department to proceed on a case-by-case basis.
See SAA at 255-56. Our decision not to address these comments serves,
in part, to preserve this flexibility and discretion, and allows us the
opportunity to request comments specifically pertaining to the factors
we should consider in making our case-by-case determinations.
The topic of privatization typically involves situations where
ownership of a government-owned firm is transferred to a private
entity. Privatization raises the question of the extent to which
previously bestowed subsidies which are allocated over time remain
countervailable after the privatization, and involves the application
of section 771(5)(F) of the Act, the new section in the URAA addressing
this subject.
In these proposed regulations, we have not included a provision
dealing with privatization. However, we are evaluating whether a
regulation on this topic is appropriate. Therefore, in the discussion
that follows, we describe and discuss certain issues that we believe
are raised by section 771(5)(F). We begin with a review of the methods
we have used to date for addressing prior subsidies and privatization.
We then turn to the new legislation.
Agency Practice
Although there were earlier administrative precedents, the recent
history of the privatization issue began in January 1993, with the
Department's final CVD determinations in the Lead and Bismuth cases
(see, in particular, Certain Hot-rolled Lead and Bismuth Carbon Steel
Products from the United Kingdom, 58 FR 6237). In those determinations,
the Department ruled that the sale of a firm (or a ``productive unit''
of a firm), even if at arm's length, does not alter the
countervailability of previously bestowed subsidies. The Department
reasoned that it ``does not examine the impact of subsidies on
particular assets or tie the benefit level of subsidies to changes in
the company under investigation. Therefore, it follows that when a
company sells a productive unit, the sale does nothing to alter the
subsidies enjoyed by that productive unit.'' Id., at 6240.
In the July 1993 final CVD determinations in the Certain Steel
cases, the Department modified the approach taken in the Lead and
Bismuth cases. The Department concluded that once a subsidy is
bestowed, the Act precludes a reevaluation of the amount or
countervailability of a subsidy based on subsequent events, such as a
change in the ownership of a firm. The Department stated:
``Accordingly, whether subsidies convey a demonstrable competitive
benefit upon recipients, in the year of receipt or any subsequent year,
is irrelevant--the statute embodies the irrebutable presumption that
subsidies confer a countervailable benefit upon goods produced by their
recipients.'' The Department further ruled that ``a private party
purchasing all or part of a government-owned company (e.g., a
productive unit) can repay prior subsidies on behalf of the company as
[[Page 8821]]
part or all of the sales price.'' GIA at 37262. Put differently, a
portion of previously bestowed subsidies might not ``travel to a new
home'' depending on the price paid for a firm by the buyer.
To determine the amount of previously bestowed subsidies that pass
through to the privatized firm, the Department developed a repayment
method. Under that method, the Department determines the amount of
subsidies repaid based on a ratio of the privatized firm's subsidies to
the firm's net worth over a period of time. Subsidies that are not
repaid continue to benefit the merchandise produced by the privatized
firm. Id., at 37263. Only non-recurring subsidies (i.e., subsidies
allocated over time) are included in the pass through and repayment
calculations.
New Law
In June, 1994, the U.S. Court of International Trade (``CIT'')
overturned the Department's determinations in the Lead and Bismuth
cases. In Inland Steel Bar Co. v. United States, 858 F. Supp. 179,
rev'd, 86 F.3d 1174 (Fed. Cir. 1996) (``Inland''), and Saarstahl AG v.
United States, 858 F. Supp. 187, rev'd, 78 F.3d 1539 (Fed. Cir. 1996)
(``Saarstahl''), the CIT declared the Department's privatization
methodology to be unlawful ``to the extent it states previously
bestowed subsidies are passed through to a successor company sold in an
arm's length transaction.'' This decision meant that if a firm is
privatized in an arm's length transaction, previously bestowed
subsidies are extinguished.
When the CIT issued its decisions in Inland and Saarstahl, the
Administration and Congress were in the process of drafting, under
``fast track'' procedures, H.R. 5110, the bill that ultimately would
become the URAA. As of June 1994, the draft CVD legislation did not
contain any provisions that dealt expressly with the issue of
privatization, and no such provisions were contemplated. However,
following the CIT's decisions, a new provision was added that became
section 771(5)(F) of the Act.
As enacted, section 771(5)(F) provides as follows:
Change in ownership.--A change in the ownership of all or part
of a foreign enterprise or the productive assets of a foreign
enterprise does not by itself require a determination by the
(Department) that a past countervailable subsidy received by the
enterprise no longer continues to be countervailable, even if the
change in ownership is accomplished through an arm's length
transaction.
The SAA at 928 offered the following explanation of section
771(5)(F):
Section 771(5)(F) provides that a change in the ownership of
``all or part of a foreign enterprise'' (i.e., a firm or a division
of a firm) or the productive assets of a firm, even if accomplished
through an arm's-length transaction, does not by itself require
Commerce to find that past countervailable subsidies received by the
firm no longer continue to be countervailable. For purposes of
section 771(5)(F), the term ``arm's-length transaction'' means a
transaction negotiated between unrelated parties, each acting in its
own interest, or between related parties such that the terms of the
transaction are those that would exist if the transaction had been
negotiated between unrelated parties.
Section 771(5)(F) is being added to clarify that the sale of a
firm at arm's length does not automatically, and in all cases,
extinguish any prior subsidies conferred. Absent this clarification,
some might argue that all that would be required to eliminate any
countervailing duty liability would be to sell subsidized productive
assets to an unrelated party. Consequently, it is imperative that
the implementing bill correct and prevent such an extreme
interpretation.
The issue of the privatization of a state-owned firm can be
extremely complex and multifaceted. While it is the Administration's
intent that Commerce retain the discretion to determine whether, and
to what extent, the privatization of a government-owned firm
eliminates any previously conferred countervailable subsidies,
Commerce must exercise this discretion carefully through its
consideration of the facts of each case and its determination of the
appropriate methodology to be applied.
In addition to this passage in the SAA, the Senate Report on the
URAA stated as follows:
The Committee believes that this provision serves the important
purpose of making clear that the sale of a firm at ``arm's length''
does not automatically extinguish any previously-conferred
subsidies. New section 771(5)(F) stands in contrast to such an
interpretation, which would result in an end to the
countervailability of prior subsidies otherwise allocable to the
merchandise. The sale of subsidized goods or assets to an unrelated
party should not in and of itself permit the avoidance of duties.
The Commerce Department should continue to have the discretion to
determine whether, and to what extent (if any), actions such as the
``privatization'' of a government-owned company actually serve to
eliminate such subsidies. It is the Committee's expectation that
Commerce will exercise this discretion carefully and make its
determination based on the facts of each case, developing a
methodology consistent with the principles of the countervailing
duty statute.
S. Rep. No. 412, 103d Cong., 2d Sess. 92 (1994).
Approach Under the New Law
Based on our reading of section 771(5)(F) and the legislative
history of that provision, we believe that the new law overturns the
approach adopted by the CIT in Inland and Saarstahl, i.e., that an
arm's length transaction, in and of itself, is sufficient to extinguish
prior subsidies. We would further note that in March, 1996, the Court
of Appeals for the Federal Circuit reversed the CIT's decision, holding
that ``the [CIT] erred in holding that as a matter of law a subsidy
cannot be passed through during an arm's length transaction''
(Saarstahl, AG v. United States, 78 F.3d 1539, 1544). Hence, under the
pre- and post-URAA statute, the Department's position is that even if a
privatization is accomplished by means of an arm's length transaction,
previously bestowed subsidies are not automatically, and in all cases,
extinguished.
By the same token, it has been suggested that the language in the
SAA and the Senate Report directing Commerce to consider ``the facts of
each case'' in determining whether and to what extent privatization of
a government-owned firm eliminates any previously conferred subsidies
may preclude an approach whereby all prior subsidies would
automatically, and in all cases, be passed through to the privatized
company.
Instead of establishing automatic rules in determining the extent
to which prior subsidies pass through or are extinguished by
privatization, a more flexible approach would be to examine a broad
array of factors specific to the individual case. This may include
examining the circumstances surrounding the privatization transaction,
as well as the impact of prior subsidies on current market conditions.
Having said this, however, we do not believe that Congress intended
that the Department's privatization determinations be made on an ad hoc
basis. As stated in the Senate Report, it was expected that the
Department would develop ``a methodology consistent with the principles
of the countervailing duty statute.'' S. Rep. No. 412, 103d Cong., 2d
Sess. 92 (1994). Thus, the question to which we now turn is what facts
would be relevant to determining the effect that a change in ownership
has on previously bestowed subsidies.
One starting point for consideration of the appropriate approach
under the new law is the method previously adopted by the Department.
As discussed above, we have recognized that privatization has some
impact on previously bestowed subsidies and have employed a repayment
formula to determine the extent to which those subsidies pass through
to the privatized firm. We have indicated in recent cases our position
[[Page 8822]]
that the repayment method is permissible under the new law (see, in
particular, Certain Hot-rolled Lead and Bismuth Carbon Steel Products
from the United Kingdom; Final Results of Countervailing Duty
Administrative Review, 61 FR 58377, 58379. Some have questioned the
Department's method for calculating the amount of repayment. For
example, in computing the share of the sales price that repays past
subsidies, the Department averages several years data on subsidies and
the net worth of the firm.
Should this average be weighted to give greater weight to
the years immediately preceding the privatization? Or, should the
average be abandoned and replaced with information on subsidies and net
worth at the time of privatization?
Are there other ways of determining whether repayment has
occurred (e.g., whether repayment must be made by the firm as opposed
to the purchasers of the firm) and are there more accurate means of
calculating such repayment?
Besides the facts that are relevant to the repayment method
discussed above, there may be a number of considerations that should be
evaluated in determining the extent to which previously bestowed
subsidies are extinguished or passed through by means of privatization.
For example, while the new statutory provision rules out the
possibility that an arm's length transaction, in and of itself, is
sufficient to extinguish past subsidies in all cases, it leaves open
the question of what importance (if any) we should assign to the fact
that a privatization does or does not occur at arm's length.
Should the arm's length criterion alter the extent to
which the Department considers previously bestowed subsidies to be
countervailable with respect to merchandise produced by the privatized
firm? Under the methodology currently applied by the Department, the
presence or absence of an arm's length transaction does not affect our
repayment calculation.
In situations where the privatization transaction is not
an arm's length transaction, is it more likely that prior subsidies
pass through to the privatized company, or that a larger amount of the
prior subsidies pass through? What factors would determine the extent,
if any, to which prior subsidies pass through?
Is it necessary for a privatization to be an arm's length
transaction before the Department could even consider that previously
bestowed subsidies are extinguished by the privatization? Conversely,
if the privatization transaction is not at arm's length, should the
Department even consider that any previously bestowed subsidies could
have been extinguished?
Under what circumstances and what privatization techniques
does the transaction give rise to new subsidies to the purchasers?
Would these new subsidies be in addition to any prior subsidies that
pass through to the purchaser?
In addition to considering whether the privatization is an arm's
length transaction, there may be other circumstances of the
privatization transaction relevant to determining the extent to which
previously bestowed subsidies pass through to the privatized firm. For
example, it has been argued that when the privatization process occurs
in a competitive market setting, the purchasers may be paying the full
value of the company, including the current value of any previously
bestowed subsidies.
Can a competitive market setting, in and of itself,
extinguish past subsidies? Under what circumstances would this occur?
What elements might give rise to a competitive market
setting and what is the relevance of those elements in determining the
extent to which prior subsidies are passed through.
Is it important to look at the nature of the auction,
public stock offering, or other type of sale of the firm, including the
number of bidders? Where there are few bidders, would it be important
to consider whether the privatizing government placed restriction on
who could purchase the company (e.g., whether certain classes of buyers
were precluded from participating)?
Is it important that the privatization be carried out in
an open, transparent manner? What elements might be important to this
consideration?
What role should independent valuations of the firm (e.g.,
valuations by independent auditors) play? What if the winning bid for
the firm being privatized was less than the value established in
independent assessments?
Given that equity markets may be more advanced in some
countries than in others, should the Department account for the effect
of the state of market development on the competitive bid process?
Does the method of payment matter? For example, if the
seller accepts debt or vouchers as payment for the privatized firm,
should that be viewed differently than accepting cash?
Beyond these circumstances relating to the mechanics of the
privatization transaction are events leading up to the privatization.
These might include actions taken by the government to make the firm
more attractive to potential purchasers. For example, the government
might forgive debt owed to it by the firm in order to ``clean up the
balance sheet.'' Or, the government may undertake the expense of
closing certain inefficient operations and sell off only the more
modern plants.
Are these types of actions taken in anticipation of
privatization relevant to a determination of whether subsidies pass
through to the privatized firm?
Should such actions be separated from what would otherwise
be considered ``prior'' subsidies in determining the extent to which
subsidies pass through or are extinguished?
Similarly, the government may impose post-privatization
restrictions on the privatized firm. For example, the new owners may be
required to produce particular goods or services, to operate in
particular locations, to purchase particular supplies from particular
suppliers, to retain a certain number of workers or to undertake a
certain level of investment in the privatized firm. Or, government
restrictions on the privatized firm may take the form of a ``golden
share'' whereby the government retains the right to make decisions
about the certain specified operations of the firm, although ownership
and control has otherwise passed to the new owners.
Should these types of conditions on the sale be considered
in determining whether, and the extent to which, prior subsidies pass
through?
It has also been argued that certain government-owned companies
benefit from government preferences, be it through low, government-
guaranteed input prices or preferential access to government-controlled
credit.
Should the Department be concerned with whether the
privatized firm will continue to benefit from such preferences? Or,
would it be necessary for the government to eliminate the preferences
before privatization?
Finally, the issue has been raised that in the privatization
scenarios typically encountered by the Department, excess global
capacity exists because one or more foreign governments have created or
maintained productive assets that would not exist in the absence of
government subsidization. Because of this, some would argue, even if
the buyer of a firm pays a market price, the prior subsidies to the
privatized company result in an unfairly low price being received for
the firm.
In a situation where subsidies have led to the creation of
excess capacity (thereby lowering the market price for
[[Page 8823]]
the firm being privatized), are those facts relevant to determining
whether and to what extent the prior subsidies pass through to the
privatized firm?
How would the Department determine that excess global
capacity has been created? How would excess capacity be defined and
measured?
It has also been argued that if excess capacity created by
subsidies is relevant to the issue of privatization, then reductions to
capacity made possible by subsidies should also be relevant. What
relevance should the nature of the subsidy (i.e., whether it
contributes to or reduces capacity) have in determining whether and to
what extent prior subsidies pass through to the privatized firm?
Conclusion
These lines of inquiry are consistent with section 771(5)(F) and
with the recognition in the SAA, at 928, that the privatization issue
``can be extremely complex and multifaceted.''
In addition, it is consistent with the emphasis in both the SAA and
the Senate Report on the importance of considering the facts of
individual cases. We wish to emphasize that our list is not meant to be
all-inclusive and we invite commenters to offer their views on other
factors they consider to be relevant. Also, commenters should explain
how these factors would be incorporated into a framework for analyzing
privatizations and calculating subsidies to privatized firms.
We further invite comment on whether we should attempt to
promulgate a final rule on the topic of privatization and what that
rule might look like. Regarding the latter question, commenters are
invited to address whether precise formulae should be used to determine
the extent to which, if any, prior subsidies pass through or whether a
case-by-case approach integrating some or all of the considerations
identified in this preamble should be adopted. Commenters may want to
address whether a formulaic approach could be developed that would be
sufficiently comprehensive to account for special circumstances, or
whether a formulaic approach would be undesirably rigid. Commenters may
also want to address the consequences of the uncertainty resulting from
a case-by-case approach.
In conclusion, we would like to repeat that the Department is
carefully considering whether to issue a final regulation on the
subject of privatization. To that end, the foregoing discussion is
intended to stimulate, rather than foreclose, further thinking on this
topic. We appreciate the comments that have been submitted on this
topic thus far, and the fact that we may not have identified a
particular suggestion should not be construed as an indication that we
have rejected the suggestion.
Section 351.502
Section 351.502 deals with the ``specificity'' of domestic
subsidies. Unlike its predecessor, Sec. 355.43 of the 1989 Proposed
Regulations, Sec. 351.502 does not contain a ``general'' specificity
test. This is due to the fact that section 771(5A) of the Act and the
SAA provide much more detail and clarity regarding the application of
the ``specificity test'' than did the prior statute and its legislative
history. Thus, on the subject of specificity, there are far fewer
interpretative gaps for the Department to fill in than there were in
1989, and, thus, less need for regulations. Accordingly, Sec. 351.502
deals with certain aspects of the specificity test that are not
addressed expressly in the statute or the SAA.
Paragraph (a) is based on Sec. 355.43(b)(8) of the 1989 Proposed
Regulations, and continues to provide that the Secretary will not
consider a subsidy as being specific merely because it is limited to
the agricultural sector. Instead, as under prior practice, the
Secretary will find an agricultural subsidy to be countervailable only
if it is specific within the agricultural sector; e.g., a subsidy is
limited to livestock, or livestock receives disproportionately large
amounts of the subsidy. See Lamb Meat from New Zealand, 50 FR 37708,
37711 (1985).
One commenter suggested that the Department should abandon the
special specificity rule for agricultural subsidies, citing the fact
that under section 771(5B)(F) of the Act and Article 13(a) of the WTO
Agreement on Agriculture, so-called ``green box'' agricultural
subsidies are non-countervailable. With respect to this comment, we
note that the Department's application of the specificity test to
agricultural subsidies was upheld in Roses, Inc. v. United States, 774
F. Supp. 1376 (Ct. Int'l Trade 1991). In light of this judicial
affirmance, and given the absence of any indication that Congress
intended to change the Department's practice or overturn Roses, we are
retaining the special specificity rule for agricultural subsidies.
Paragraph (b) is based on Sec. 355.43(b)(7) of the 1989 Proposed
Regulations, and continues to provide that the Secretary will not
consider a subsidy as being specific merely because it is limited to
small or small-and medium-sized firms. Instead, as under prior
practice, the Secretary will find such a subsidy to be countervailable
if, either on a de jure or a de facto basis, the subsidy is limited to
certain small or small-and medium-sized firms. As in the case of the
special specificity rule for agricultural subsidies, there is no
indication that Congress intended to alter this aspect of the
Department's specificity practice.
Paragraph (c) provides that the Secretary will not regard disaster
relief as a specific subsidy if the relief constitutes general
assistance available to anyone in the affected area. Although paragraph
(c) has no counterpart in the 1989 Proposed Regulations, the rule
contained in paragraph (c) has been part of the Department's
specificity practice since Certain Steel Products from Italy, 47 FR
39356, 39360 (1982), in which the Department stated that ``[d]isaster
relief is not selective in the same manner as other regional programs
since there is no predetermination of eligible areas and no part of the
country, and no industry, is excluded from eligibility in principle.''
However, before declaring a subsidy to be non-specific under paragraph
(c), the Department would have to be satisfied that the subsidy in
question was, in fact, bona fide disaster relief. See Certain Steel
Products from Italy, 58 FR 37327, 37332 (1993).
The Department received several comments regarding the issue of
specificity, most of which had to do with the specificity of domestic
subsidies. For ease of discussion, we have divided these comments up by
sub-issue.
Purpose of the specificity test
Some commenters requested that the Department restate in the
regulations the policy rationale behind the specificity test. According
to these commenters, the underlying purpose of the specificity test is
to identify those domestic subsidies that confer a competitive
advantage and thereby distort international trade. Other commenters
pointed out that the new statute expressly states that the Department
is not required to examine the effects of a subsidy or establish that
the subsidy has any effect at all. These commenters, citing the
reference to the Carlisle decision in the SAA, maintain that the sole
purpose of the specificity test is to ``winnow out those foreign
subsidies which are truly broadly available and widely used throughout
the economy.'' SAA at 259-260, citing Carlisle Tire & Rubber Co. versus
United States, 564 F. Supp. 834 (Ct. Int'l Trade 1983).
In our view, the language from the SAA cited above makes the
purpose of
[[Page 8824]]
the specificity test abundantly clear. Given the clarity of the SAA on
this point, the authoritative nature of the SAA (see section 102(d) of
the URAA), and our general reluctance to issue regulations that merely
repeat the statute or the SAA, we do not consider it appropriate to
issue a regulation that restates the purpose of the specificity test.
Use of Presumptions
Two commenters suggested that in applying the specificity test, the
Department should employ certain presumptions. One commenter maintained
that the Department should presume that domestic subsidy programs are
specific, and that the burden should be on respondent interested
parties to prove otherwise. The second commenter stated that, for each
domestic subsidy program under investigation, the Department should
request information concerning applications and approvals made since
the inception of the program. In the absence of such information,
according to this commenter, the Department should presume that the
foreign government in question exercises discretion in the
administration of the program, and that the program is specific.
Similarly, when the Department is analyzing newly instituted programs
with few users, it should employ a rebuttable presumption that the
program is specific. Both commenters made the point that information
regarding the distribution of program benefits normally is not
available to a petitioner prior to the filing of a petition.
Other commenters argued that there is no legal basis for making
such presumptions. With respect to de facto specificity, for example,
the SAA states that the Department is obligated to ``seek and
consider'' information relevant to each of the four factors listed in
section 771(5A)(D)(iii) of the Act. SAA at 261. One of these commenters
also asserted that a petitioner alleging that a subsidy is specific
should be required to provide a reasonable amount of information
supporting the allegation.
As was true under the old law, a petitioner that includes a
domestic subsidy in a petition must provide reasonably available
information supporting the specificity allegation. See section 702(c)
of the Act. On the other hand, the Department recognizes that because
detailed information regarding the distribution of program benefits
usually is either not published or is not widely available, it often is
not reasonably available to a petitioner at the time a petition is
filed. Therefore, in deciding whether to include alleged domestic
subsidies in its investigation, the Department carefully considers the
information the petitioner has put forward, the reasons why more
information may not be available, and any arguments the petitioner
makes regarding the specificity of the program. Because the types of
allegations and information available will vary from case-to-case, it
is not possible to state a general rule for accepting or rejecting
specificity allegations. However, we believe that the threshold we have
used in the past for including alleged subsidies in CVD investigations
has been sufficient to ensure that all potentially countervailable
subsidies are investigated. We intend to continue employing this
initiation threshold.
Where domestic subsidy programs are included in an investigation,
the Department will not presume the program is specific. Instead, the
Department will seek in its questionnaire all of the information
necessary to apply the specificity test according to section 771(5A)(D)
of the Act. Based on its analysis of the information provided in the
questionnaire responses, verification, and other information that may
be collected, the Department will make the necessary specificity
determination. If a respondent refuses to provide the information
requested by the Department to conduct its specificity analysis, the
Department may draw adverse inferences in the application of the
``facts available.'' See section 776(b) of the Act. However, the use of
an adverse inference in these situations is not the same thing as
relying on a rebuttable presumption.
Sequential Analysis
Some commenters argued that the Department should codify the
``sequential approach'' to specificity. Under the sequential approach,
as reflected in the 1989 Proposed Regulations, if a subsidy was de jure
specific or met any one of the enumerated de facto specificity factors,
further analysis was unnecessary and was not undertaken. In support of
their position, these commenters emphasized the language contained in
both section 771(5A)(D)(iii) of the Act and the SAA that a subsidy will
be considered specific ``if one or more'' of the factors exist. SAA at
261. Furthermore, these commenters noted, the SAA and the legislative
history of the URAA make clear that the specificity test was intended
to be generally consistent with the Department's previous practice, a
practice that included the sequential approach. SAA at 259; S. Rep. No.
412, 103d Cong., 2d Sess. 93-94 (1994). Finally, these commenters cited
the legislative history of the North American Free Trade Agreement
(NAFTA) as endorsing the sequential approach.
In opposition to this view, other commenters maintained that the
sequential approach contradicts the SAA, because the SAA states that
the Department will ``seek and consider information relevant'' to all
four of the de facto specificity factors. SAA at 261. Moreover, these
commenters maintained, the language in the SCM Agreement requires that
all of the de facto specificity factors be considered and that any
specificity determination ``shall be clearly substantiated on the basis
of positive evidence.'' Articles 2.1(c) and 2.4 of the SCM Agreement.
We believe that the Act and the SAA are sufficiently clear that,
with the exception of the government discretion factor, the Department
may find a domestic subsidy to be specific based on the presence of a
single de facto specificity factor. Therefore, while the Department
will continue its practice of collecting information regarding each of
the four de facto specificity factors, our analysis of the issue will
stop if the Secretary determines that a single factor justifies a
finding of specificity. As for the SCM Agreement, none of the
provisions cited precludes a finding of specificity based on the
presence of a single factor.
In this regard, however, the Department does not agree that a
finding of specificity automatically may be based solely on the fact
that some measure of discretion may have been exercised in the
administration of a subsidy program. Indeed, such an approach would be
inconsistent with the purpose of the specificity test, as articulated
in Carlisle. If a subsidy program is broadly available and widely used
and there is no evidence of dominant or disproportionate use, the mere
fact that government officials may have exercised discretion in
administering the program is insufficient to justify a finding of
specificity. SAA at 261.
Based on our experience in administering the CVD law, some measure
of administrative discretion exists in the operation of almost every
alleged subsidy program. At the most basic level, an administrator of a
program typically must exercise judgment (i.e., discretion) in
evaluating the facts of an application for a subsidy to determine
whether the applicant qualifies for the subsidy. If we were to find
specificity based simply on the exercise of this type of discretion,
the
[[Page 8825]]
other de facto factors would become practically meaningless, because
virtually every subsidy program in the world could be declared specific
on the basis of the discretion factor alone. This would produce the
very sort of absurd results warned against in Carlisle.
As indicated in the SAA at 261, the discretion factor is generally
more valuable as an analytical tool that enhances the analysis of the
other de facto specificity factors and criteria. For example, in the
case of a new subsidy program for which there have been few applicants
and few recipients, the Department must make a judgment as to the
likely future distribution of benefits under the program. The manner in
which authorities have exercised their discretion in the early days of
a new program would inform the Department in making this type of
judgment. See SAA at 261.
Purposeful Government Action
Some commenters, citing such cases as Saudi Iron and Steel Co.
(Hadeed) v. United States, 675 F. Supp. 1362, 1367 (Ct Int'l Trade
1987), maintained that a finding of specificity does not require a
finding of targeting or some other sort of purposeful government action
that limits the number of subsidy program beneficiaries. In a similar
vein, they cited the statute and its legislative history for the
proposition that the fact that program usage may be limited by the
``inherent characteristics'' of the thing being provided by the
government should be deemed irrelevant. SAA at 262; S. Rep. No. 412,
103d Cong., 2d Sess. 94 (1994). Finally, these same commenters argued
that the Department should analyze the availability and use of a
subsidy in the context of the economy as a whole and not in the context
of the universe of potential subsidy recipients.
Other commenters insisted that the Department must look behind the
distribution of subsidy benefits and explore the reasons why the use of
a subsidy may be limited. According to these commenters, ``purposeful
government action'' should be critical to a finding of specificity.
In our view, the SAA and other legislative history make it very
clear that the Department does not need to find ``targeting'' or
``purposeful government action'' to conclude that a domestic subsidy is
specific. See SAA at 262 (``[E]vidence of government intent to target
or otherwise limit benefits would be irrelevant in a de facto
specificity analysis.''). Except in the special circumstances described
in section 771(5A), i.e., where respondents request the Department to
take into account the extent of economic diversification in the
jurisdiction of the granting authority or the length of time during
which the program has been in operation, the Department is not required
to explain why the users of a subsidy may be limited in number. Thus,
for example, the fact that users may be limited due to the inherent
characteristics of what is being offered would not be a basis for
finding the subsidy non-specific. SAA at 262; S. Rep. No. 412, 103d
Cong., 2d Sess. 94 (1994).
Characteristics of a ``Group''
Citing PPG Industries, Inc. v. United States, 978 F.2d 1232, 1240-
41 (Fed. Cir. 1992) (``PPG II''), several commenters argued that to be
consistent with judicial precedent, the Department must examine the
``actual make-up'' of a group of beneficiaries when performing a
specificity analysis. According to these commenters, if a group of
recipients does not share similar characteristics, but, instead,
consists of companies in a variety of industries, the Department cannot
conclude that the subsidy in question is limited to a ``group of
industries.'' Moreover, nothing in the Act or the SAA requires the
Department to ignore the characteristics of the group receiving the
benefits from an alleged subsidy program.
Other commenters argue that the Department can identify a ``group''
of subsidy recipients without regard to any shared characteristics of
the individual group members. According to these commenters, a proper
understanding of what may constitute a specific ``group of industries''
flows directly from the Carlisle purpose of the specificity test;
namely, that subsidy recipients should be considered a specific group
unless the recipient industries are numerous and distributed very
broadly throughout the economy. Moreover, these commenters maintain
that the Department has on several occasions found subsidy programs
specific even when the ``group'' of recipients have not shared common
characteristics. Steel Wheels from Brazil 54 FR 15523, 15526 (1989);
Cold-Rolled Carbon steel Flat-Rolled Products from Korea, 49 FR 47284,
47287 (1984).
We disagree with the first set of comments. In determining whether
a subsidy is de jure or de facto specific, the Department is not
required to evaluate the actual make-up of those firms that are
eligible for, or actually receive, a subsidy.
With respect to PPG II, assuming arguendo that it is relevant under
the new law, we note that the decision upheld the Department's
determination of the non-specificity of a program. To put PPG II in its
proper context, it is necessary to understand the facts presented in
the underlying CVD case. In that case, there were numerous enterprises
that used the FICORCA program being investigated. Therefore, when
looked at in terms of the number of enterprises, the actual recipients
were not limited. However, this conclusion says nothing as to whether
the number of industries that received FICORCA benefits was limited. To
answer this question, the Department (and the court) correctly focussed
on the makeup of the users. If the numerous enterprises that received
benefits had comprised a limited number of industries, then FICORCA
would have been specific. However, because the users represented
numerous and diverse industries, FICORCA was found not to be specific.
We see no basis in PPG II or in the language of section 771(5A)(D) of
the Act for imposing a requirement that the limited users also share
similar characteristics. Moreover, we believe that such a requirement
would undermine the purpose of the specificity test as articulated in
the SAA.
Integral Linkage
Section 355.43(b)(6) of the 1989 Proposed Regulations provided
that, for purposes of applying the specificity test, the Department
would consider two or more subsidy programs as a single program if the
Secretary determined that the programs were ``integrally linked.''
Section 355.43(b)(6) also set forth factors to be considered in making
this determination.
Although the Department did not receive any comments, pro or con,
regarding the integral linkage test, we have decided not to incorporate
Sec. 355.43(b)(6) into these regulations. Questions of integral linkage
were relatively rare, and when they did arise, we did not find the
factors set forth in Sec. 355.43(b)(6) particularly helpful.
However, the fact that we are not recodifying Sec. 355.43(b)(6)
does not mean that we never would consider two or more ostensibly
separate subsidy programs as constituting a single program for
specificity purposes, although we anticipate that the circumstances
leading to such a combination of programs will seldom arise. In
situations where the subsidy programs have the same particular purpose
(e.g., to promote technological innovation), bestow the same type of
benefits (e.g., long-term loans or tax credits), and confer similar
levels of benefits on similarly situated firms, treating the programs
as a single
[[Page 8826]]
program may be appropriate. However, when an interested party believes
that two or more programs should be considered in combination for
purposes of the Department's specificity analysis, it will have the
burden of identifying the relevant programs and providing information
and documentation regarding their purposes and types and levels of
benefit.
Section 351.503
Section 351.503 deals with the benefit attributable to the most
basic type of subsidy, a grant. Paragraph (a), which is based on
Sec. 355.44(a) of the 1989 Proposed Regulations, provides that in the
case of a grant, a benefit exists in the amount of a grant. Paragraph
(b), which is based on Sec. 355.48(b)(1) of the 1989 Proposed
Regulations, sets forth the rule for determining when a firm is
considered to have received a subsidy provided in the form of a grant.
Paragraph (c) deals with the allocation of the benefit to a
particular time period. Although paragraph (c) is based on Sec. 355.49
of the 1989 Proposed Regulations, it also contains certain changes in
approach that merit comment.
Which Grants Are Allocated Over Time
Paragraph (c) retains the distinction between ``recurring'' and
``non-recurring'' grants. See Sec. 355.49(a) of the 1989 Proposed
Regulations. Paragraph (c)(1) provides that the Secretary will allocate
a recurring grant to the year in which the subsidy is considered as
having been received, a practice usually referred to as ``expensing.''
Paragraph (c)(2) provides that, with one exception (discussed below),
the Secretary will allocate non-recurring grants over time.
Paragraph (c)(3) contains a test for distinguishing between
recurring and non-recurring grants, and is based on the standard
applied by the Department in the GIA. Under this standard, if a benefit
is exceptional or requires express government approval, the Department
will consider it as non-recurring. As explained in the GIA:
Under the modified test, we are attempting to analyze the
frequency and ``automaticity'' with which a benefit is provided.
``Exceptional'' benefits are those types of benefits which are not
received on a regular and predictable basis; the recipient cannot
expect to receive the benefits on an ongoing basis from review
period to review period. The element of ``government approval''
relates to the issue of whether the program provides benefits
automatically, essentially as an entitlement, or whether it requires
a formal application and/or specific government approval prior to
the provision of each yearly benefit. The approval of benefits under
the latter type of program cannot be assumed and is not automatic.
The receipt of a benefit after merely filling out the appropriate
forms (e.g., tax benefits) or, after initial qualification for
yearly benefits under a program (e.g., some types of price support
programs), would meet the automaticity part of the test.
Id. If a grant is not non-recurring under this standard, the Department
will treat it as a recurring grant.
In these proposed regulations, we have codified the standard
contained in the GIA for distinguishing between recurring and non-
recurring benefits. However, we continue to consider whether there
might be a better standard for distinguishing between these two types
of benefits. An important purpose of the recurring/non-recurring test
is to reduce the burden on the Department and interested parties by
limiting the amount of information requested on subsidies bestowed
prior to the period of investigation or review. However, the Department
is increasingly facing arguments regarding its application of the
standard described in the GIA. At some point, the burden of applying
the GIA standard may well outweigh the benefits. Therefore, we
particularly invite comments on this issue. We note that the Department
has considered other options in the past including: (1) Developing a
list of the types of subsidies that would be allocated and those that
would be expensed; (2) allocating any grant-like benefit that exceeds
0.50 percent (discussed below); and (3) allocating only those grant-
like subsidies that are tied to the purchase of fixed assets. See
Memorandum from Staff to Joseph Spetrini, Acting Assistant Secretary
for Import Administrations and Barbara R. Stafford, Deputy Assistant
Secretary for Investigations, dated May 17, 1993, regarding
Countervailing Duty Investigations of Certain Steel Products, How to
Make the Expense vs. Allocate Decision; Investigations, C-100-004,
Public Document. Regarding the first option, i.e., development of a
list of the types of subsidies that would be allocated and those that
would be expensed, the Department has given examples of the two types
of subsidies in the preamble to Sec. 355.49(a)(2) of the 1989 Proposed
Regulations and in the GIA at 37226.
The 0.50 Percent Test and the Expensing of Small Grants
Although the Department normally will allocate non-recurring grants
over time, paragraph (c)(2)(ii) retains (with some stylistic changes)
the so-called 0.50 percent test. See Sec. 355.49(a)(3)(i) of the 1989
Proposed Regulations; GIA at 37226. Under this test, the Department
will expense non-recurring grants received under a particular subsidy
program to the year of receipt if the total amount of such grants is
less than 0.50 percent ad valorem, as calculated under Sec. 351.525.
The Department considers this test to be an important part of its
efforts to simplify CVD proceedings and to reduce the burdens on all
parties involved. By expensing small non-recurring grants to the year
of receipt, the Department avoids the need to: (1) Collect, analyze,
and verify the data needed to allocate such grants over time; and (2)
keep track of the allocation calculations for minuscule subsidies from
year to year. If considered only in the context of a single case, the
burdens imposed by this activity may not appear to be particularly
onerous. However, when considered across all investigations and
administrative reviews, the cumulative burden becomes considerable.
Certain commenters have argued that the 0.5 test should be applied
on an aggregated basis; i.e., that non-recurring subsidies should be
expensed only when the total of benefits under all programs is less
than 0.5 percent. In their view, this would prevent foreign governments
from evading countervailing duties by awarding ``small'' benefits under
numerous programs.
To address this concern, we have written Sec. 351.503(c)(2)(ii) to
say that the Secretary will ``normally'' expense non-recurring grants
received under a program if the grants are less than 0.5 percent. Thus,
although we intend to continue to apply the 0.5 percent rule on a
program basis, we have given ourselves the flexibility to take a
different approach in situations where petitioners are able to point to
clear evidence that the foreign government has deliberately structured
its subsidy programs so as to reduce the exposure of its exporters to
countervailing duties.
The Time Period Over Which Non-Recurring Grants Are Allocated
Once the Department has determined that a grant is non-recurring,
it will calculate the amount of subsidy to be assigned to a particular
year according to the formula described in paragraph (c)(4). The
formula is the same one that appeared in Sec. 355.49(b)(1) of the 1989
Proposed Regulations. We note that comments were received recently on
this formula. We have not addressed those comments here, but intend to
do so for the final regulations.
As described below, we have made changes in the methods used to
determine certain variables used in the formula. In a departure from
past
[[Page 8827]]
practice, paragraph (c)(2) provides that the Secretary will allocate a
non-recurring grant over the number of years corresponding to a firm's
AUL, a term that is defined in paragraph (c)(4)(ii) as the average
useful life of a firm's productive assets. Before describing how the
Department will calculate a firm-specific AUL, we first should discuss
why we are changing our practice.
Selection of the AUL Method
It has often been suggested that there is no single correct method
for determining the number of years over which a subsidy should be
allocated. For example, in paragraph 2 of its Guidelines on
Amortization and Depreciation, BISD 32S/154 (1984-85) (``Guidelines''),
the Tokyo Round Committee on Subsidies and Countervailing Measures
stated: ``Financial and accounting theory and practice do not provide
any single acceptable method of determining the appropriate time-period
over which subsidies should be allocated.'' Similarly, in the Subsidies
Appendix annexed to Cold-Rolled Carbon Steel Flat-Rolled Products from
Argentina, 49 FR 18016, 18018 (1984), the Department stated that
``[t]here are no economic or financial rules that mandate the choice of
an allocation period.''
In addition, there has been little guidance from Congress on this
issue. The legislative history of the Trade Agreements Act of 1979
refers to the selection of ``a reasonable period based on the
commercial and competitive benefit to the recipient as a result of the
subsidy,'' S. Rep. No. 249, 96th Cong., 1st Sess. 86-87 (1979), and
reliance on ``generally accepted accounting principles.'' H.R. Rep. No.
317, 96th Cong., 1st Sess. 74-75 (1979); H.R. Doc. No. 153, Pt. II,
96th Cong., 1st Sess. 433 (1979). However, this advice does not of
itself supply concrete answers, particularly in light of the fact that,
as suggested above, generally accepted accounting principles do not
provide rules for allocating subsidies over time.
Against this conceptual and legal background, in the Subsidies
Appendix, the Department chose the so-called ``IRS tables method'' of
selecting an allocation period. Under this method, the Department
allocated a subsidy over the number of years corresponding to the
average useful life of a firm's renewable physical assets (equipment),
as set forth in the U.S. Internal Revenue Service's 1977 Class Life
Asset Depreciation Range System (Rev. Proc. 77-10, 1977-1, C.B. 548
(RR-38). Subsequently, the Department codified this method in
Sec. 355.49(b)(3) of the 1989 Proposed Regulations. At the time, the
Department believed that the IRS tables method offered ``consistency
and predictability,'' although the Department expressed a willingness
to consider other approaches. See 54 FR at 23376-77.
The IRS tables method has not been a subject of controversy in the
vast majority of CVD proceedings in which the Department has used that
method. However, in those proceedings where one or more parties did
challenge the IRS tables method, the Department has been unable to
successfully defend that method in court. Beginning with British Steel
Corp. v. United States, 632 F. Supp. 59, 68 (1986), and continuing up
to Usinor Sacilor v. United States, 893 F. Supp. 1112 (1995), the CIT
repeatedly has struck down the use of the IRS tables method. In
addition, in United States--Imposition of Countervailing Duties on
Certain Hot-Rolled Lead and Bismuth Carbon Steel Products Originating
in France, Germany and the United Kingdom, SCM/185, Nov. 15 1994
(Unadopted), a panel convened pursuant to the Tokyo Round Subsidies
Code found fault with the IRS tables method as applied by the
Department. The common theme of these adverse decisions appears to be
that because the IRS tables method is not a company-specific approach,
it fails to adequately reflect the benefit of a subsidy to a particular
firm.
While we do not necessarily agree with the reasoning of these
decisions, the inability of the IRS tables method to pass judicial
muster undermines the consistency and predictability that are the most
attractive features of that method. Pending a resolution of this issue
by the U.S. Court of Appeals for the Federal Circuit, which could be a
long time in coming, every determination by the Department relying on
the IRS tables method would be vulnerable to litigation, a process that
is expensive and time-consuming not only for the Department, but also
for the private parties that the CVD law is intended to serve.
Accordingly, the Department has determined to abandon the IRS
tables method. In identifying a replacement method, one obvious
consideration is that the method must relate sufficiently to the
``commercial and competitive benefit to the recipient as a result of
the subsidy,'' the phrase from the legislative history to which the
courts, rightly or wrongly, have assigned great significance. It is
also important that the method must be sufficiently administrable so as
not to impose undue burdens on private parties and the Department.
With these criteria in mind, we have considered alternatives to the
IRS tables method that have been suggested in comments submitted as
part of this rulemaking, as well as in past and pending litigation.
See, e.g., Final Results of Redetermination Pursuant to Court Remand on
General Issue of Allocation in British Steel plc. v. United States,
Consol. Ct. No. 93-09-00550-CVD (Ct. Int'l Trade June 30, 1995)
(``British Steel Remand''). The principal alternatives are: (1)
Company-specific average useful life of productive assets; (2) company-
specific average maturity of long-term debt; (3) company-specific
weighted-average use of funds; and (4) the IRS tables as a rebuttable
presumption.
We have chosen the first alternative, the company-specific average
useful life of productive assets, or ``AUL.'' First, we believe that
the AUL method will be more administrable and predictable than the
other alternatives, because, as discussed in more detail below, it
should be easily calculable from a firm's accounting records. With
respect to the long-term debt alternative, based on our experience,
many of the firms that we investigate do not have access to long-term
debt financing (except possibly as a result of government support).
Therefore, as a practical matter, this alternative would frequently
lead us to use non-company-specific, surrogate measures of life of
debt. With respect to the use of funds alternative, this alternative
appears unduly complicated, requiring both private parties and the
Department to calculate multiple allocation periods, including a
company-specific AUL, and then take a weighted-average of those
figures. Finally, with respect to using the IRS tables as a rebuttable
presumption, this alternative likely would waste the time of private
parties and the Department in arguments over whether or not the
allocation period called for by the IRS tables had been effectively
``rebutted'' by a firm's own AUL.
Second, the AUL method has been recognized internationally as a
reasonable method of determining the appropriate time period over which
subsidies should be allocated. As stated in para. 5.1 of the
Guidelines, ``[w]hile the benefit of a grant (that is, elimination of
financial obligations the recipient company would otherwise incur) has
no exact correlation to the life of any assets purchased with the
grant, allocating the grant over the average life of renewable physical
assets is one generally practical, fair, and consistent method of
allocation.'' Although the Guidelines are no longer in effect due to
the termination of the Tokyo Round
[[Page 8828]]
Subsidies Code, we consider it significant that the United States and
its major trading partners went on record as endorsing the AUL method
as an acceptable method of determining an allocation period for
subsidies.
Finally, we note that the Department's use of company-specific AUL
was recently affirmed in British Steel PLC v. United States, 929 F.
Supp. 426 (Ct. Int'l Trade 1996).
Calculation of a Company-Specific AUL
Paragraph (c)(4)(ii) describes the manner in which the Department
will calculate a company-specific AUL. Normally, firms will not
calculate their ``actual'' AUL in the normal course of business, and
requiring firms to calculate this figure for purposes of a CVD
proceeding could pose an extremely onerous burden on firms with
thousands of individual assets. Therefore, what is needed is a
calculation method that results in reasonable reporting requirements,
while at the same time produces a reasonable estimate of a firm's
actual AUL.
We believe that paragraph (c)(4)(ii) achieves these dual
objectives. Under paragraph (c)(4)(ii), a firm's AUL will be calculated
by dividing the firm's depreciable productive assets by the firm's
average annual charge to accumulated depreciation. As indicated in the
second sentence of paragraph (c)(4)(ii), this calculation will be based
on data covering a period considered appropriate by the Secretary.
Because this is a new method with which the Department has little
experience, we are reluctant to provide more detail at this time in the
form of a regulation. Instead, we intend to include detailed
instructions in our CVD questionnaires concerning the calculation of an
AUL. Once we have gained more experience with this method, we may add
additional detail to the regulation.
We should note, however, that we currently intend to include in our
initial CVD questionnaires a request that a firm calculate its average
AUL over a period of ten years, a period that would include the period
of investigation and the nine preceding years. Based on the results of
this calculation, the firm then would provide information on its non-
recurring subsidies for a time period corresponding to the average AUL
it calculated. For example, if a firm calculated that its average AUL
for the ten-year period described above was 15 years, the firm would
provide data on its subsidies for the period of investigation and the
14 preceding years. If the investigation results in a CVD order, the
AUL will be recalculated for non-recurring subsidies received after the
period on investigation (``POI'') based on updated information. For
example, if a non-recurring grant is received in the third year after
the original POI, the allocation period for that subsidy would be the
average AUL for the year that subsidy is received and the nine previous
years.
As in the case of any other piece of data included in a response to
a CVD questionnaire, a firm's calculation of its AUL would be subject
to verification by the Department and comment by parties to the
proceeding.
As set forth in the third sentence of paragraph (c)(4)(ii), the
Secretary will attempt to exclude fixed assets that are not depreciable
(such as land or construction in progress) and assets that have been
fully depreciated and that are no longer in service. However, assets
that are in service would be included even if they have been fully
depreciated.
In addition, it may be necessary to make normalizing adjustments
for factors that may distort the calculation of an AUL. Again, we are
not in a position at this time to provide additional detail in the
regulation itself, because the types of adjustments necessary likely
will vary based on the facts of a particular case. However, certain
obvious normalizing adjustments that come to mind are situations in
which a firm may have charged an extraordinary write-down of fixed
assets to depreciation due, or where the economy of the country in
question can be characterized as hyperinflationary.
Finally, there may be situations in which an AUL cannot be
calculated in the manner described above (assets divided by
depreciation). For example, if a firm's depreciation is not based on an
estimate of the actual useful life of its assets, the calculation
described above would not be a reasonable method of calculating AUL.
Similarly, AUL could not be calculated in this manner if the firm does
not use straightline depreciation and additions to the firm's asset
pool are irregular and uneven. Indeed, there may be cases where there
is no reasonable method of calculating a company-specific AUL. In such
cases, the Department will consider, among other things, any
alternative calculation methods for AUL offered by parties to the
proceeding, including the IRS table method previously used by the
Department. Such alternative methods will not be limited to those that
are company-specific.
In addition, we should note that because petitioners may not be in
a position to calculate a potential respondent's AUL at the time a
petition is filed, petitioners may not know how many years back they
can go in alleging countervailable subsidies. To provide more certainty
to petitioners, the Department will accept the period specified in the
IRS tables for purposes of making subsidy allegations in a petition.
Calculation of the Benefit Stream
Paragraph (c)(4)(iii) deals with the selection of a discount rate.
Consistent with the GIA at 37227, paragraph (c)(4)(iii)(B) provides
that, in the case of an uncreditworthy firm, the Secretary will use as
a discount rate an interest rate with a ``risk premium'' included.
Section 351.504
Section 351.504 deals with loans and other forms of debt financing.
Paragraph (a) deals with the identification and measurement of the
benefit attributable to a loan. Paragraph (a)(1) tracks the general
standard set forth in section 771(5)(E)(ii) of the Act, which directs
the Department to use a ``comparable commercial loan that the recipient
could actually obtain on the market'' as the benchmark for determining
whether a government-provided loan confers a benefit. Additionally,
paragraph (a)(1) restates the Department's current practice, as
reflected in Sec. 355.44(b)(8) of the 1989 Proposed Regulations, that
in making this comparison the Secretary normally will seek to compare
effective interest rates rather than nominal rates. ``Effective
interest rates'' are intended to take account of the actual cost of the
loan, including the amount of any fees, commissions, compensating
balances, government charges (such as stamp taxes) or penalties paid in
addition to the ``nominal'' interest. However, the Department intends
that, if effective rates are not available, the Secretary will compare
nominal rates or, as a last resort, nominal to effective rates, as
under current practice. If the ``loan'' is a bond (see definition of
``loan'' in Sec. 351.102), the Department normally will treat the yield
on the bond as the effective interest rate.
Paragraphs (a)(2) and (a)(3) elaborate on the criteria for
selecting the benchmark. As the reader quickly will ascertain, the
criteria contained in paragraphs (a)(2) and (a)(3) are much more
general (and, thus, much more flexible) than the detailed hierarchies
contained in Sec. 355.44(b) of the 1989 Proposed Regulations. The
Department seldom used these hierarchies, because, in practice, the
required information was seldom available.
Paragraph (a)(2) sets out the criteria the Department will normally
consider
[[Page 8829]]
in selecting a comparable commercial loan. We received the following
comments relating to this issue: (1) If the Department modifies its
current benchmark hierarchies, any new hierarchies or benchmark
selection criteria should take account of the maturity and
corresponding level of risk associated with the government-provided
loan being analyzed; (2) requiring identical financing is impractical
and undermines the Department's discretion; (3) in the case of foreign
currency loans, which typically are long-term in nature, the
Department's selection of a comparable loan should be based explicitly
on the comparable currency, and should only be based on the domestic
currency in certain unique situations; and (4) the Department should
make clear its policy of selecting as its benchmark a loan that was
taken out (or could have been taken out) at the same point in time as
the government-provided loan.
With respect to these comments, we agree that a comparable
commercial loan used as a benchmark should represent a financial
instrument that is similar to the government-provided loan and that was
taken out (or could have been taken out) at the same point in time. We
believe that this type of approach will ensure a reasonable comparison,
because the comparable loan will exhibit the same basic characteristics
of maturity, risk, and currency denomination that are embodied in the
allegedly subsidized financing. In addition, we agree with the
commenter that recommended that the Department specify the time period
from which it will select comparable financing. See paragraphs
(a)(2)(iii) and (a)(2)(iv). With respect to those comments suggesting
refinements to the benchmark hierarchies contained in the 1989 Proposed
Regulations, as explained above, we have discarded those hierarchies in
favor of a more flexible approach. However, we believe that our new
approach is consistent with the objectives underlying the comments.
Several commenters suggested that loans under a government program,
even if the program is not specific, should not be considered
``commercial'' loans. We agree with these commenters, and have
incorporated their suggestion into paragraph (a)(2)(ii). We note,
however, that we do not equate a ``loan provided under a government
program'' with a ``loan from a government-owned bank.'' Consistent with
Sec. 355.44(b)(9) of the 1989 Proposed Regulations, which is discussed
further below in connection with paragraph(a)(6)(ii), the Secretary
normally will consider loans from government-owned banks as commercial
loans.
The commenters disagreed over the selection of a comparable
commercial loan in the case of a suspension agreement, some commenters
arguing that special rules should be used in the case of a suspension
agreement, because: (1) a suspension agreement is forward-looking, and
(2) the use of a retrospective benchmark undermines the utility of a
suspension agreement.
We agree that a suspension agreement is forward-looking, but we do
not believe that this fact requires special rules governing the
selection of comparable commercial loans. Typically, in its
administration of a suspended investigation, the Department will
monitor developments in commercial benchmarks outside of the normal
administrative review process. This monitoring activity ensures that
the commercial benchmarks used are timely. See Roses and Other Cut
Flowers From Colombia; Miniature Carnations From Colombia, 61 FR 9429
(March 8, 1996).
Paragraph (a)(3) addresses the requirement that the comparable loan
be one that the firm ``could actually obtain on the market,'' and
reflects a change in practice for short-term loans. As described in
Sec. 355.44(b)(3) of the 1989 Proposed Regulations, the Department has
used national average interest rates to determine the benefit from
government-provided short-term loans. However, at the time the 1989
Proposed Regulations were promulgated, the Department announced that it
would consider using company-specific benchmarks for short-term loans.
Based upon our experience in the interim, and especially because of the
ability to computerize our loan calculations, we have concluded that we
have the capability to use company-specific benchmarks. Moreover, we
believe that company-specific benchmarks provide a more accurate
measure of the benefit, if any, to a recipient of a government-provided
short-term loan. Therefore, paragraph (a)(3)(i) states a preference for
using company-specific benchmarks for both short-and long-term loans.
Under paragraph (a)(3)(ii), we normally would use national averages
only in the event that the firm did not take out any comparable
commercial loans during the relevant period.
One commenter argued that a benchmark hierarchy for short-term
loans should emphasize company-specific rates and should rely on
country-wide rates only as a last resort. In response to these
comments, another commenter argued that mandating the use of company-
specific rates has no basis in the statute and may be inappropriate in
cases involving a large number of companies.
We disagree that there is no basis in the statute for using
company-specific benchmarks for short-term loans. To the contrary, we
see the use of company-specific benchmarks as being more consistent
with the requirement that the benefit be determined by looking at a
loan (or loans) the firm actually could obtain. In large cases, e.g.,
cases with numerous respondents, it may become necessary to use a
national average rate. If so, paragraph (a)(3)(i) provides sufficient
flexibility to do so.
Paragraph (a)(3)(iii) deals with the long-term loans to firms
considered to be uncreditworthy. In a change from the practice
described in Sec. 355.44(b)(6)(iv) of the 1989 Proposed Regulations,
paragraph (a)(3)(iii) describes a new method for calculating the
benchmark the Department will use in identifying and measuring the
benefit attributable to a government-provided long-term loan received
by an uncreditworthy firm.
The new method is based explicitly on the notion that when a lender
makes a loan to a company that is considered to be uncreditworthy (as
opposed to a safer, creditworthy company) the lender faces a higher
probability that the borrower will default on repayment of the loan. As
a consequence of this higher probability of default, the lender will
charge a higher interest rate. The calculation described in paragraph
(a)(3)(iii) captures the increased probability of default by adjusting
upward the rate of interest a creditworthy company would pay in the
country in question.
In making this adjustment, the Department is not proposing to
calculate the probability that a particular uncreditworthy firm will
default on a particular loan. Such a calculation would require
extensive data and analysis, and any conclusion would be highly
speculative. Instead, similar to the method the Department has used
since 1984, we are proposing to rely on information regarding the U.S.
debt market. In particular, we have used the weighted average one-year
default rate for speculative grade bonds between 1970 and 1994, as
reported by Moody's Investor Service. This average default rate is 4.3
percent. This rate is reflected indirectly in the formula, which is
based on the probability that these risky loans will be repaid (i.e.,
1--.043 = .957).
Although the uncreditworthy benchmark we adopted in 1984 and
included in the 1989 Proposed Regulations has not been controversial,
we believe that the method we are
[[Page 8830]]
proposing here offers a more accurate measure of risk involved in
lending to firms with little or no access to commercial bank loans. By
adjusting the interest rate that a healthy, low-risk company would pay
in the country in question upward to account for the greater likelihood
of default by an uncreditworthy borrower, we capture more precisely the
speculative nature of loans to uncreditworthy companies and the premium
they would have to pay the lender to assume that risk.
Paragraph (a)(4) sets forth the standard for determining when a
firm is uncreditworthy. Paragraph (a)(4)(i) is based on
Sec. 355.44(b)(6)(i) of the 1989 Proposed Regulations, but has been
modified to clarify the analysis the Department intends to undertake in
determining whether a company is creditworthy. In Sec. 355.44(b)(6)(i)
of the 1989 Proposed Regulations we stated that the Secretary would
deem a firm uncreditworthy if that ``firm did not have sufficient
revenues or resources to meet its costs and fixed financial obligations
in the three years prior to the year in which the firm and the
government agreed upon the terms of the loan.'' We have replaced this
statement with an explanation of what we mean by
``uncreditworthiness.'' Specifically, we will find a company to be
uncreditworthy if information available at the time the government-
provided loan is made indicates that the firm could not have obtained
long-term financing from conventional commercial sources. In this
context, ``conventional commercial sources'' is meant to refer to bank
loans and non-speculative grade bond issues. Hence, uncreditworthy
companies are those that would be forced to resort to other sources,
such as junk bonds, to raise funds. The Department will make its
creditworthiness finding based on the information described in
paragraphs (a)(5)(ii) (A), (B), (C), and (D), which are unchanged from
the comparable paragraphs in Sec. 355.44(b)(6) of the 1989 Proposed
Regulations.
Paragraph (a)(4)(ii) is based on the last sentence of
Sec. 355.44(b)(6)(i) of the 1989 Proposed Regulations. However, the
word ``normally'' has been replaced by the phrase ``In the case of
firms not owned by the government * * * .'' Also, the term
``government-provided guarantee'' replaces ``explicit government
guarantee.'' With respect to the first change, the deletion of ``normal
ly'' reflects the Department's consistent practice considering
commercial financing to a firm to be dispositive evidence of a firm's
creditworthiness only if the firm is privately-owned. With respect to
the second change, this is intended to indicate that the Department
will consider the circumstances surrounding the financing as a whole,
instead of relying on one factor in determining whether the financing
shows that the firm is creditworthy.
Paragraphs (a)(4)(iii) and (a)(6)(i) are based on
Secs. 355.44(b)(6) (ii) and (iii) of the 1989 Proposed Regulations.
Paragraph (a)(4)(iii) states that the Secretary will ignore current and
prior countervailable subsidies in determining whether a firm is
uncreditworthy. In other words, the Secretary will not attempt to
adjust a firm's financial data for current and prior subsidies in
making a creditworthiness determination. Paragraph (a)(6)(i) continues
to require a specific allegation before the Secretary will consider the
uncreditworthiness of a firm.
Paragraph (a)(5) deals with long-term variable rate loans, and
codifies a methodology set forth in the GIA. Under paragraph (a)(5)(i),
the year in which the terms of the government-provided loan are set
establishes the reference point for comparing the government-provided
variable-rate loan with the comparable commercial variable-rate loan.
If the interest rate on the government-provided loan is lower than the
interest rate on the comparable commercial loan, a benefit exists. If
the interest rate on the government-provided loan is the same or
higher, no benefit exists. The rationale for basing the decision on the
first-year interest rate differential is that the interest rate spread,
if any, in that year generally will apply throughout the life of the
loan. Paragraph (a)(5)(ii) recognizes that there may be situations
where the method described in paragraph (a)(5)(i) is not appropriate
and provides the Department with the discretion to modify that method.
For example, there may be no comparable commercial variable-rate loan
to use for comparison purposes or the repayment structure of the
government-provided variable-rate loan may be such that the simple
interest rate comparison described in paragraph (a)(5)(i) would not
yield an accurate measure of the benefit.
Paragraph (a)(6)(ii) establishes an evidentiary standard for
investigations of loans extended by government-owned banks, and is
based on Sec. 355.44(b)(9) of the 1989 Proposed Regulations. See also
paragraph (a)(2)(ii), discussed above. In this regard, some commenters
argued that the Department should investigate all loans from
government-owned, or government-supported, banks, and that the
Department should abandon its requirement that evidence be presented
that such loans were provided under a specific government program.
According to the commenters, because this type of information is not
reasonably available to petitioners, the burden of proving that a
company has not received subsidized loans from a government-owned bank
should be shifted to respondent interested parties. In addition, these
commenters argued that the Department should consider financing
provided by a bank that is partially funded by the government to be
countervailable even in the absence of a particular government program.
In response, one commenter argued that the Department should
continue to require reasonable evidence that loans from government-
owned banks are provided at government direction or from government
funds and on subsidized terms. According to this commenter, the
adoption of a looser approach would create a per se rule that the
lending practices of government-owned banks are in and of themselves
suspect. Additionally, shifting the burden of proof to respondents to
show that such loans are not countervailable would be a violation of
the ``positive evidence'' approach outlined in Article 2.4 of the SCM
Agreement and the ``substantial evidence'' requirement of section
516A(b)(1)(B) of the Act.
Under our past practice, we have distinguished between government-
owned banks that are operated to meet special financing needs and
commercial banks that are government-owned. For the former (i.e.,
special purpose banks such as national development banks), petitioners
are asked to provide information reasonably available to them to show
that loans being provided by such banks are specific and that the
interest being charged is not at commercial rates. For the latter
(i.e., commercial banks that are government-owned), we have
additionally requested that petitioners provide reasonably available
information that the loans in question are something more than mere
commercial loans. In particular, we request information suggesting that
such loans are being provided at the direction of the government or
with funds provided by the government.
We believe this approach is appropriate because we have no basis to
presume that loans given under the commercial operations of government-
owned banks confer a subsidy. Moreover, we do not believe that our
request for this additional information places an unreasonable burden
on petitioners; they need only provide reasonably available information
that the government-owned bank, for example, administers government
loan
[[Page 8831]]
programs that could be the source of the loan in question.
Thus, with the exception of special purpose banks (as discussed
above), we agree with the commenters who argued that the Department
should investigate loans from a government-owned bank only when a
petitioner provides information suggesting that such loans are being
provided at the direction of the government or with funds provided by
the government. Accordingly, paragraph (a)(6)(ii) reaffirms the
Department's prior approach with respect to government-owned banks.
Paragraph (b) sets forth a rule regarding the point in time at
which the benefit from a loan arises, and is based on Sec. 355.48(b)(3)
of the 1989 Proposed Regulations. The second sentence of paragraph (b)
addresses loans with special characteristics, such as loans with
preferential grace periods. In the case of these types of loans, we do
not believe that it is appropriate to wait until the end of the grace
period to begin assigning subsidy amounts, because the longer the grace
period, the greater the subsidy benefit and the greater the time before
countervailing duties can be assessed.
Paragraph (c) deals with the allocation of the benefits of a
government-provided loan to a particular time period. While paragraph
(c) is based, in part, on Sec. 355.49 of the 1989 Proposed Regulations,
it contains several changes.
Paragraph (c)(1) provides that the benefit of a short-term loan
will be allocated (expensed) to the year(s) in which the firm is due to
make interest payments on the loan. This approach, which essentially
treats short-term loans as recurring subsidies, is consistent with
longstanding Department practice.
Paragraph (c)(2) deals with situations in which the benefit of a
government-provided loan stems solely from the concessionary interest
rate of the loan, not from any differences in repayment terms. Where
this is the case, there is no need to engage in the complicated
calculations called for by Sec. 355.49(c) of the 1989 Proposed
Regulations. Instead, as paragraph (c)(2) provides, the annual benefit
can be determined by simply calculating, for each year in which the
loan is outstanding, the difference in interest payments between the
government-provided loan and the comparison loan. The last sentence of
paragraph (c)(2) restates the principle reflected in Sec. 355.49(c)(2)
of the 1989 Proposed Regulations that the amount of the subsidy
conferred by a government-provided loan never can exceed the amount
that would have been calculated if the loan had been given as a grant.
Paragraph (c)(3) deals with situations where both the government-
provided loan and the comparison loan are long-term, fixed-interest
loans, but where the two loans have dissimilar grace periods or
maturities, or where the repayment schedules have different shapes
(e.g., declining balance versus annuity style). Because a firm may
derive a benefit from special repayment terms, in addition to any
benefit derived from a concessional interest rate, for these loans we
will continue to calculate what was described as the ``grant
equivalent'' in Sec. 355.49(c) of the 1989 Proposed Regulations.
However, instead of adopting the loan allocation formula from the 1989
Proposed Regulations, we intend to use the grant allocation formula
described in Sec. 351.503(c) (except that the allocation period will be
the life of the government-provided loan). The elimination of the old
loan formula reflects our desire to streamline methodologies, where
possible. Moreover, by timing the receipt of the benefit from these
types of loans to the year in which the government-provided loan was
received (see Sec. 351.504(b)), the old loan formula becomes
unnecessary, because its primary purpose was to begin assigning annual
subsidy amounts in the year after the receipt of the loan.
Paragraph (c)(4) sets forth the method of calculating an annual
benefit for government-provided variable-rate loans, and is little
changed from Sec. 355.49(d) of the 1989 Proposed Regulations.
Several commenters suggested that instead of using the life of the
loan as the allocation period for long-term loans, the Department
should use the same allocation period as used for other types of non-
recurring subsidies. Given that, as discussed above, the Department has
adopted the AUL method for non-recurring grants, if the Department were
to adopt this suggestion it would mean allocating the benefit of a
long-term loan over the average useful life of a firm's renewable
assets.
For the following reasons, we have not adopted this suggestion.
First, as part of our streamlining effort, we are not, as a general
matter, calculating grant equivalents. Therefore, our new methodology
does not lend itself to allocating loan subsidies over any period other
than the life of the loan. Moreover, while para. 4.2 of the Guidelines
recognizes that the allocation of the benefit of a long-term loan over
the life of assets is a reasonable method, para. 4.1 recognizes that
allocation over the life of the loan is also a reasonable method. In
addition, the life-of-the-loan method imposes less of a burden on
private parties and Department staff than other alternatives, because
it is a comparatively easy matter to determine the life of a loan. The
Department's longstanding practice of allocating a long-term loan
benefit over the life of the loan has been relatively non-controversial
and litigation-free, and we are reluctant to change this practice
absent a persuasive demonstration that an alternative method is
superior to existing practice. In this instance, we do not believe that
such a demonstration has been made.
Paragraph (d) sets forth a method for calculating the annual
benefit attributable to a long-term interest-free loan, the obligation
for repayment of which is contingent upon subsequent events, such as
the achievement of a particular profit level by the firm. Paragraph (d)
is based on Sec. 355.49(f) of the 1989 Proposed Regulations, and
continues to provide that the Secretary will treat any outstanding
balance on one of these types of loans as an interest-free, short-term
loan (using a short-term loan benchmark), and will expense any
benefit(s) to the year(s) in which interest would have been paid on the
short-term loan.
Section 351.505
Section 351.505 deals with loan guarantees. Paragraph (a)(1) sets
forth the general rule for identifying and measuring the benefit
attributable to a government-provided loan guarantee, and conforms to
the new standard contained in section 771(5)(E)(iii) of the Act.
One commenter argued that in choosing a comparable commercial loan
by which to identify and measure the benefit attributable to a
government-provided loan guarantee, the Department should use a loan
with a comparable commercial guarantee. This same commenter also
recommended that the Department continue the approach described in
Sec. 355.44(c)(2) of the 1989 Proposed Regulations. Under this
practice, if the government was the owner of the firm and it was normal
commercial practice in the country for owners or shareholders to
provide loan guarantees comparable to the government-provided
guarantee, the Department did not consider the government-provided
guarantee as giving rise to a benefit. In response, one commenter
argued that the Department's practice in this regard is inconsistent
with the government's involvement in the transaction in that, unless a
subsidy was being provided, the firm would have obtained the loan
through a commercial guarantor.
We agree that in determining whether a government-provided loan
guarantee
[[Page 8832]]
confers a benefit, the Department should determine whether it is a
normal commercial practice in the country in question for a private
owner, or parent company, to guarantee a loan. We have drafted
paragraph (a)(2) accordingly. A government-provided guarantee should
not be considered countervailable if it is given by the government in
its capacity as owner (i.e., not under a government guarantee program
used by government-owned and privately-owned companies) and if private
owners normally provide guarantees in the same circumstances. For
example, if the government directly guaranteed the debt of a company it
owned, it would fall upon the respondent to demonstrate that private
shareholders in that country also would normally guarantee the debt of
the companies in which they own shares. Where a government-owned
holding company guarantees the debt of its subsidiaries, the respondent
would need to show that it is normal commercial practice for non-
government-owned corporations to guarantee the debt of their
subsidiaries. In addition, the respondent would need to demonstrate
sufficient internally-generated resources to serve as guarantor of the
debt. Where the government or a government-owned holding company
guaranteed the debt of an ``uncreditworthy'' company it owned (see
Sec. 351.504(a)(4) regarding uncreditworthy companies), the respondent
would need to provide evidence that private owners would also guarantee
the debt of uncreditworthy companies they own.
The Department normally will not consider whether the behavior of a
government owner/guarantor represents normal commercial practice unless
a respondent provides adequate supporting information. Such information
can include statements by independent sources such as financial or
banking experts, tax experts or academics in the field of business.
Absent such a demonstration, the Department will identify and measure
the benefit from a government-provided loan guarantee by comparing the
guaranteed loan to a comparable commercial loan in the same manner as
under Sec. 351.504. In addition, to conform to new section
771(5)(E)(iii) of the Act, paragraph (a)(1) provides that the
Department will adjust for any difference in the guarantee fees.
Therefore, we do not agree with the first comment that we should decide
which loans are comparable on the basis of the comparability of the
loan guarantees.
Paragraphs (b) and (c) deal, respectively, with the time at which
the benefit from a loan guarantee is considered to have been received
and the allocation of the benefit to a particular time period. Both
paragraphs essentially apply the methodology for loans set forth in
paragraphs (b) and (c) of Sec. 351.504.
Section 351.506
Section 351.506 deals with equity infusions. Paragraph (a) deals
with the identification and measurement of the benefit attributable to
a government-provided equity infusion. Like Sec. 355.44(e) of the 1989
Proposed Regulations, paragraph (a) is divided into two methodological
tracks, the choice of methodology depending on whether or not there are
actual private investor prices to serve as a benchmark for shares of a
firm purchased by a government. However, paragraph (a)(1) retains the
existing preference for private investor prices as a benchmark.
Actual Private Investor Prices Available
Paragraph (a)(2) contains rules for analyzing equity infusions when
actual private investor prices are available, the first methodological
track, and is largely based on Sec. 355.44(e)(1) of the 1989 Proposed
Regulations. Under Sec. 355.44(e)(1), the first question in analyzing
an equity infusion was whether, at the time of the infusion, there was
a market price for newly-issued equity. If so, and if the shares
purchased on the market were in the same form as the shares purchased
by the government, the Department determined the amount of the benefit
by comparing the price paid by government for its shares with the
market price. In an exceptional situation, however, the Department
could find the volume of a firm's traded shares to be so low as to
preclude the use of those shares as a benchmark.
Paragraph (a)(2) is not intended to alter any of these basic
principles. It does, however, elaborate on them in two respects. First,
it addresses the use of prices of shares that are not in the same form
as the shares provided to the government as benchmarks. Second, it
permits the Department to use as a benchmark the market price of
publicly-traded shares that the firm had previously issued.
The Department considered these last two issues in the 1993 steel
determinations. With regard to the use of shares that are not identical
to the shares being purchased by the government, the Department
determined that in appropriate circumstances, shares with similar
characteristics can be compared. See GIA at 37252. The CIT subsequently
upheld the principle of relying on a similar form of equity where the
same form of equity does not exist. Geneva Steel v. United States, 914
F. Supp. at 580 (1996).
With respect to secondary market shares, in the GIA at 37250, the
Department explained that its practice was to ``resort to the use of
secondary market share prices in instances where private investors did
not purchase new shares from the firm at the same time they were issued
to the government.'' The Department reaffirmed this practice, holding
that, ``(a)s long as the market price benchmark at the time of the
infusion has not been shown to be deficient or tainted * * * a
government equity infusion must be determined to be made on an
equityworthy basis whenever the government purchases shares at (the
secondary market) price.'' Id. at 37251. This practice, too, has been
sustained by the courts. Geneva Steel v. United States, 914 F. Supp. at
581 (1996).
The URAA did not modify these general principles. Section
771(5)(E)(i) states that a benefit shall normally be treated as
conferred if, in the case of an equity infusion, ``the investment
decision is inconsistent with the usual investment practice of private
investors, including the practice regarding the provision of risk
capital, in the country in which the equity infusion is made.'' Market-
determined share prices, when available and useable, provide the best
gauge as to the usual investment practice of private investors,
including practices regarding the provision of risk capital.
Therefore, under paragraph (a)(2)(i)(A), an equity infusion confers
a benefit if the price paid by the government for newly-issued equity
is more than the price paid by private investors for newly-issued
equity of the same (or similar) form. For example, if a government pays
$10 per share for newly-issued shares in a firm, and private investors
pay $5 per share for the same shares, a benefit exists in the amount of
$5 per share ($10 - $5 = $5).
If there is no private investor price for newly-issued equity,
under paragraph (a)(2)(i)(B), an equity infusion confers a benefit if
the price paid by the government for newly-issued equity is less than
the market-determined price, at such time as permits a reasonable
comparison, of previously issued publicly-traded shares of the same (or
similar) form. We continue to believe that market prices should be
preferred as benchmarks, because such prices incorporate private
investors' perceptions of a firm's future earning potential and worth.
In this regard, however, we intend that in applying this private
investor standard, the amount of shares
[[Page 8833]]
purchased by private investors must be sufficiently significant so as
to provide an appropriate benchmark. See paragraph (a)(2)(iii). For an
example of a situation where the Department found sufficient private
participation to warrant use of the prices paid by private investors as
the benchmark, see Small Diameter Circular Seamless Carbon and Alloy
Steel Standard, Line and Pressure Pipe from Italy, 60 FR 31922, 31994
(1995). Also, the use of a ``similar'' share as the basis of the
benchmark neither precludes nor requires a price adjustment for
differences in the types of shares. However, under paragraph
(a)(2)(iv), the Department intends to make the adjustment when it is
appropriate and reasonably quantifiable. For an example of an
adjustment to account for differences in the types of shares, see
Certain Atlantic Groundfish from Canada, 51 FR 10047 (1986).
Two commenters, citing AIMCOR v. United States, 871 F. Supp. 447
(Ct. Int'l Trade 1994) (``AIMCOR I''), stated that the Department
should ``clarify'' its equity methodology so as to preclude the use of
previously issued, publicly-traded shares as benchmarks. These
commenters claim that merely because a company has previously issued
publicly-traded shares does not imply that the company could obtain
fresh equity capital on the same terms from reasonable private
investors. They claim that the Department's use of the price of
outstanding shares is flawed because it recognizes neither the concept
of earnings dilution (i.e., the fact that newly-issued shares dilute
the claims attributable to previously issued shares) nor the difference
between replacement cost and market value. Finally, they argue that the
Department's current methodology does not take into account differences
between ``hybrid'' equity-like instruments issued to the government and
previously issued equity instruments that do not have ``hybrid''
features.
With respect to these comments, paragraph (a)(2)(i) reflects a
distinction between the AIMCOR I problem, where the ownership rights
conferred upon the private shareholders differed from the ownership
rights conferred upon the government, and the question of whether the
publicly-traded price of previously issued shares is an adequate proxy
for the price of newly-issued shares. Paragraph (a)(2)(i) recognizes
the AIMCOR I problem by requiring that the Department use the same or
``similar'' shares for its benchmark, and by permitting the Department
to make an adjustment for differences between the shares used as the
benchmark and the government-provided equity.
As for the use of secondary market prices, the Department believes
that it can improve the accuracy of the secondary market price
benchmark by altering the timing of the calculation. In particular, we
are proposing to use secondary market prices in the period immediately
following a government equity infusion. We believe use of these prices
will allow us to capture private investors' perceptions as to what the
newly infused capital will allow the firm to achieve, and also will
enable us to measure any dilution of ownership. In our view, paragraph
(a)(2)(iv) is sufficiently flexible so as to permit the Department to
calculate a benchmark based on prices paid during a time period that
will permit a reasonable comparison with the government equity
infusion. However, we are particularly interested in public comments on
this issue.
Actual Private Investor Price Not Available
One of the most difficult methodological problems confronted by the
Department in its administration of the CVD law involves the analysis
of government-provided equity infusions in situations where there is no
market benchmark price. This problem typically arises in the case of
firms that are wholly owned by the government. Since 1982, the
Department has dealt with this problem by categorizing firms as either
``equityworthy'' or ``unequityworthy.'' As set forth in
Sec. 355.44(e)(2) of the 1989 Proposed Regulations, an equityworthy
firm was one that showed ``an ability to generate a reasonable rate of
return within a reasonable period of time.'' An unequityworthy firm did
not show such an ability. If the Department found that a firm was
equityworthy, the Department would declare a government-provided equity
infusion in the firm to be not countervailable. The Department would
not consider whether, notwithstanding the general financial health of a
firm, an excessive price was paid for government-provided equity.
Conversely, if the Department found a firm to be unequityworthy, the
Department would declare a government-provided equity infusion in the
firm to be countervailable without further analysis.
In these regulations, we have retained the equityworthy/
unequityworthy distinction. Thus, under paragraph (a)(3), if actual
private investor prices are not available under paragraph (a)(2), the
Secretary will determine whether the firm in question was equityworthy.
Paragraph (a)(4) sets forth the standard the Secretary will apply in
determining equityworthiness, and is virtually identical to
Sec. 355.44(e)(2) of the 1989 Proposed Regulations.
This distinction between equityworthy and unequityworthy firms has
certain administrative advantages. However, as applied by the
Department in the past, it was, to some extent, a rather simplistic
approach to a complex problem. This point was driven home by the
decision in AIMCOR, Alabama Silicon, Inc. v. United States, 912 F.
Supp. 549 (Ct. Int'l Trade 1995) (``AIMCOR II''), in which the court
ruled that, because of restrictions imposed on certain ``Class E''
shares, the government's purchase of those shares was inconsistent with
commercial considerations, notwithstanding the fact that the firm in
question was equityworthy. As stated previously by the court in AIMCOR
I, ``[w]here a company is equity-worthy, as here, it does not
necessarily follow that the purchase of stock from that company will be
consistent with commercial considerations.'' 871 F. Supp. at 454.
While we do not necessarily agree with the court's resolution of
the factual issue in AIMCOR II (i.e., whether the purchase of Class E
shares was inconsistent with commercial considerations), we do agree
with the basic principle articulated by the court. Put in terms of the
new statute, where a company is equityworthy, it does not necessarily
follow that the purchase of stock from that company will be consistent
with the usual investment practice of private investors. Accordingly,
paragraph (a)(5) provides that if the Secretary finds a firm to be
equityworthy, the Secretary will conduct a further examination to
determine whether the particular investment was consistent with usual
investment practice. Our intent here is not to conduct a further
analysis if the government has purchased common shares in a firm.
Instead, we will conduct a further analysis in situations, like AIMCOR
I, in which the government has purchased shares to which special
conditions or restrictions are attached.
Thus far, we have been discussing firms determined by the
Department to be equityworthy. However, unequityworthy firms present
the same problem: just as the Department's practice has oversimplified
government-provided equity to equityworthy companies, it has also
oversimplified government-provided equity to unequityworthy companies
because it assumes that the shares purchased by the government are
worthless. We have reconsidered this practice, adopted in the 1993
steel determinations, and have
[[Page 8834]]
proposed in these regulations an approach that is consistent with our
general rule for equity which directs that consistency with the usual
investment practice will normally be determined by reference to the
price a private investor would pay for the shares.
This new approach, reflected in paragraph (a)(6)(i), provides that
if the Secretary determines that a firm is unequity-worthy, the
Secretary normally will measure the benefit conferred by a government
equity infusion by estimating the price that a reasonable private
investor would have paid for the shares purchased by the government. If
the price paid by the government exceeds this estimated price, the
amount of the benefit will be the difference between the two prices. In
estimating the price that a reasonable private investor would have
paid, the Secretary will rely only on information and analysis that
existed at the time of the equity infusion, because this is the
information that would have been available to a reasonable private
investor.
At this time, we have not been able to develop a method for
calculating the price that a reasonable private investor would have
paid for the shares purchased by the government. Among the methods we
have considered is an options pricing model, in which possible future
returns would be valued using a standard pricing formula for equity
call options. To use such a model, we would need to develop estimates
for the underlying value of the option and the volatility of expected
returns. We would especially welcome comments on the use of such a
model for estimating share prices or any alternative methods.
It has long been recognized that the ideal approach to equity
infusions in unequityworthy firms would be to estimate the price that a
private investor would have paid for shares purchased by the
government. See Holmer et al., Identifying and Measuring Subsidies
Under the Countervailing Duty Law: An Attempt at Synthesis, in The
Commerce Department Speaks on Import Administration and Export
Administration 1984 (Practising Law Institute 1984), at 444. This
approach, which we will refer to as the ``constructed private investor
price'' method (``CPIP'), corresponds most closely to the preferred
methodology. However, in the past, the CPIP method has been rejected as
impractical. Id.
Upon further consideration, we have concluded that before rejecting
the CPIP method as impractical, we first should attempt to use it in
actual cases. Our conclusion is reinforced by the fact that while our
prior practice may not be unreasonable as a legal matter, it is even
more reasonable to rely on a methodology that recognizes that, at least
in some cases, shares of an unequityworthy firm may have some value.
We recognize that there may be instances in which the information
necessary to estimate what a reasonable private investor would have
paid simply does not exist or does not provide an appropriate basis for
making such an estimate. Therefore, paragraph (a)(6)(ii) provides an
alternative method for measuring the benefit conferred by an equity
infusion in an unequityworthy firm. Under this alternative method, the
Secretary would allocate the equity infusion to two or more years in
accordance with paragraph (c)(2) (discussed below), and would adjust
the amount allocated to a particular year by the amount of subsequent
after-tax returns achieved in that year by the firm in question. The
reason for accounting for subsequent returns is that under our
preferred methodology, we are attempting to account for the reasonable
private investor's expectations, at the time of the equity infusion in
question, regarding a firm's future returns. If available information
does not allow us to estimate those expected returns, the best proxy is
the actual return earned on the investment. While this approach lacks
the conceptual purity of the CPIP method, we believe it is preferable
to the grant methodology, which treats all equity infusions in all
unequityworthy firms as automatically worthless.
Although several comments were filed on our methodology for
government-provided equity in unequityworthy companies, they fell into
one of two camps. One group called for the Department to codify the
grant methodology adopted in the 1993 steel cases. These commenters
pointed to the fact that the grant methodology has been upheld by the
CIT in British Steel plc v. United States, 879 F.Supp. 1254, 1309 (Ct.
Int'l Trade 1995). See also, Usinor Sacilor v. United States, 893
F.Supp. 1112, 1125-26 (Ct. Int'l Trade 1995). They further maintained
that this practice is consistent with the new law.
The other group of commenters urged the Department to return to the
methodology it employed prior to the 1993 steel investigations, the so-
called ``rate of return shortfall'' (``RORS'') methodology. In their
view, the RORS methodology offers the best proxy for determining the
amount by which the government overpaid for its shares. These
commenters also cited to a GATT Panel Report that, in their view,
squarely rejected the grant methodology. (See United States--Imposition
of Countervailing Duties on Certain Hot-rolled Lead and Bismuth Carbon
Steel Products Originating in France, Germany and the United Kingdom,
SCM/185 (Nov.15, 1994) (unadopted).
Although the CIT has upheld the grant methodology for government-
provided equity to unequityworthy firms, AIMCOR I led us to review our
equity methodology in its entirety. We concluded that a finding of
``equityworthiness'' or ``unequityworthiness'' is not by itself a
sufficient basis for measuring the benefit conferred by government-
provided equity. Specifically, a finding that a firm is equityworthy
does not mean that the government paid the price a private investor
would have paid for the particular shares in question. Similarly, a
finding that a firm is unequityworthy does not mean that a private
investor would have paid nothing for the shares purchased by the
government. Merely because the government could not expect a reasonable
rate of return given the price it paid for its shares, it does not
follow that the expected return on the investment is zero. In this
respect, we believe that the grant methodology, like the RORS
methodology it replaced, does not adequately account for the
expectation held by the reasonable private investor, at the time of the
infusion, of the company's future rate of return.
The methodology we have proposed in these regulations for both
equityworthy and unequityworthy firms reflects our goal of determining
the price a private investor would have paid in either an equityworthy
or unequityworthy situation. We believe this approach is preferable to
RORS because it attempts to use information available at the time of
the government's equity purchase regarding the firm's expected return
to calculate the price the government should have paid for the shares
it purchased. Moreover, where a CPIP cannot be determined, we believe
that the alternative methodology proposed in paragraph (a)(6)(ii) is a
better reflection of the benefit conferred on an unhealthy (i.e.,
unequityworthy) firm receiving government-provided equity than the RORS
methodology. This is because, given our finding that the firm is
unequityworthy, the best prediction we can make is that the value of
the shares is zero. Our prediction may be wrong, and paragraph
(a)(6)(ii) allows us to take into account the return we were not able
to predict, but the prediction we make of a zero-share price is the
best estimate we can make based on information that would have been
[[Page 8835]]
available to investors at the time the government made its equity
purchase. Moreover, we believe that our willingness to take into
account the return actually earned by the government addresses the
concern raised by the GATT Panel.
Paragraph (a)(7) deals with allegations regarding equity infusions,
and is based on Sec. 355.44(e)(3) of the 1989 Proposed Regulations. In
our view, Sec. 355.44(e)(3) has not posed an undue burden on
petitioners nor prevented the filing of meritorious allegations.
However, it does ensure that allegations will consist of something more
than a mere statement that a government owns a firm in whole or in
part.
Paragraph (b) provides that the Secretary normally will consider
the benefit from an equity infusion to have been received as of the
date on which the firm received the infusion.
Paragraph (c) deals with the allocation of the benefit to
particular years and provides in (c)(1) a general rule that the
Secretary will normally allocate the benefit of an equity infusion over
the same allocation period that would be used for a non-recurring
grant. Paragraph (c)(2) provides that where the Secretary has measured
the benefit by reference to actual or constructed private investor
prices (and, thus, has calculated a premium that can be viewed as a
grant), the Secretary will allocate the benefit as if it were a non-
recurring grant, using the methodology set forth for such grants in
Sec. 351.503(c)(2). This approach is consistent with
Sec. 355.49(a)(3)(i) of the 1989 Proposed Regulations, which also
required that equity infusions be treated as grants if a market-
determined price was used to identify and measure the benefit.
Paragraph (c)(3) applies to equity infusions in unequityworthy
firms in situations where the Secretary cannot use the CPIP method
under paragraph (a)(6)(i). Paragraph (c)(2) also provides for the
allocation of the equity infusion as if it were a non-recurring grant,
but references the fact that the Secretary will adjust the allocated
amount in accordance with paragraph (a)(6)(ii).
Section 351.507
Section 351.507 deals with assumptions or forgiveness of debt.
Paragraph (a), which deals with the identification and measurement of
the benefit attributable to government-provided debt assumptions or
forgiveness, is little changed from Sec. 355.44(k) of the 1989 Proposed
Regulations. Paragraph (b) describes when the benefit from debt
assumption or forgiveness will be deemed to have been received.
Paragraph (c) provides that the Secretary will normally treat the
benefit from debt assumption or forgiveness as a non-recurring grant
for allocation purposes. However, where the government is assuming
interest under certain narrowly-drawn circumstances, the interest
assumption will be treated as a reduced-interest loan and allocated
according to the loan allocation rules. Although it has undergone some
refinement, this exception is consistent with the policy articulated by
the Department in the 1993 steel determinations.
Section 351.508
Section 351.508 deals with subsidy programs that provide a benefit
in the form of relief from direct taxes. (``Direct tax'' is defined in
Sec. 351.102.) The most common form of a direct tax is an income tax,
and the subsidy programs most frequently encountered are those that
provide special income tax exemptions, deductions or credits. With
respect to the benefit provided by these types of programs, paragraph
(a)(1) of Sec. 351.509 retains the standard set forth in
Sec. 355.44(i)(1) of the 1989 Proposed Regulations; i.e., a benefit
exists to the extent that the taxes paid by a firm as the result of a
program are less than the taxes the firm would have paid in the absence
of the program. See 1989 Proposed Regulations, 54 FR at 23372, and
cases cited therein.
Another type of direct tax program is the deferral of direct taxes
owed. Although Sec. 355.44(i)(1) included tax deferrals with exemptions
and remissions of direct taxes, the Department has consistently used a
different methodology for identifying and measuring the benefits of
deferrals, treating deferrals as government-provided loans. Therefore,
consistent with our practice, paragraph (a)(2) directs that the loan
methodology described in Sec. 351.504 will be applied to direct tax
deferrals. Normally, deferrals of one year or less will be treated as
short-term loans, while multi-year deferrals will be treated as short-
term loans rolled over on the anniversary date(s) of the deferral.
Although the Department did not receive any private sector comments
regarding direct tax subsidy programs, the Department has identified
one aspect of its practice that might warrant modification. In the case
of special accelerated depreciation allowances, a firm typically
experiences tax savings in the early years of an asset's life and tax
increases in the latter years of the asset's life. In the past, the
Department has focused on the tax savings, but has not acknowledged the
later tax increases. The Department is considering adopting a
methodology that accounts for both the early tax savings and the later
tax increases by calculating the net present value of the expected tax
savings at the outset of the accelerated depreciation period. Before
doing so, however, the Department would like to obtain the views of the
private sector. We are also seeking private sector views on how the
direct tax methodology should address losses, including loss
carryforwards and treatment of losses under accelerated depreciation.
Therefore, on these matters in particular, we encourage public comment.
Paragraph (b) of Sec. 351.508 deals with the question of when the
benefit from a direct tax subsidy is considered to have been received
by a firm, and is based on Sec. 355.48(b)(4) of the 1989 Proposed
Regulations. As under current practice, the Secretary will consider the
benefit from a tax exemption, deduction, or credit to have been
received as of the date when the recipient firm can calculate the
amount of the benefit, which normally will be when the firm files its
tax return. In the case of a tax deferral of one year or less, the
Secretary normally will consider the benefit to have been received when
the deferred tax becomes due. For a multi-year deferral, the benefit is
received on the anniversary date(s) of the deferral.
Paragraph (c) deals with the allocation of the benefits of direct
tax subsidies to particular time periods. As under current practice,
the Department normally will allocate such benefits to the year in
which the benefits are considered to have been received under paragraph
(b).
Section 351.509
Section 351.509 deals with programs that provide full or partial
exemptions from, and deferrals of, indirect taxes or import charges.
(``Indirect tax'' and ``Import charge'' are defined in Sec. 351.102).
However, Sec. 351.509 deals only with programs that potentially would
be considered import substitution subsidies or domestic subsidies under
section 771(5A)(C) or section 771(5A)(D) of the Act, respectively.
Sections 351.516-518 deal with programs that potentially would be
considered export subsidies under section 771(5A)(B) of the Act because
they provide for an exemption or rebate of indirect taxes or import
charges when a product is exported.
Paragraph (a)(1) of Sec. 351.509 is based on Sec. 355.44(i)(2) of
the 1989 Proposed Regulations, and continues to provide that a benefit
exists to the extent that the taxes or import charges paid by a firm as
the result of a program are less than
[[Page 8836]]
the taxes the firm would have paid in the absence of the program. As in
the case of direct taxes under Sec. 351.508, deferrals of indirect
taxes and import charges will be treated under paragraph (a)(2) as
government-provided loans. Normally, deferrals of one year or less will
be treated as short-term loans, while multi-year deferrals will be
treated as short-term loans rolled over on the anniversary date(s) of
the deferral.
Paragraph (b) of Sec. 351.509 is based on Sec. 355.48(b)(6) of the
1989 Proposed Regulations, and continues to provide that the Secretary
will consider the benefit from a full or partial exemption of indirect
taxes or import charges to have been received as of the date when the
recipient firm otherwise would have had to pay the tax or charge. In
the case of deferrals of one year or less, the Secretary normally will
consider the benefit to have been received when the deferred amount
becomes due. For multi-year deferrals, the benefit is received on the
anniversary date(s) of the deferral.
Paragraph (c) deals with allocation to a particular time period,
and provides that the Secretary normally will allocate (expense) to the
year of receipt the benefits attributable to the types of subsidy
programs covered by Sec. 351.509.
Section 351.510
Section 351.510 deals with the provision of goods and services. As
explained below, we have designated paragraph (a) as ``[Reserved]'' in
order to first acquire some experience with the relevant statutory
provision before codifying our methodology in the form of regulations.
Paragraph (b) is based on Sec. 355.48(b)(2) of the 1989 Proposed
Regulations, and continues to provide that the benefit from a
government-provided good or service is considered to be received when
the firm pays, or is due to pay, for the good or service. Paragraph
(c), which also is consistent with existing practice, provides that the
Secretary will expense the benefit of a government-provided good or
service to the year of receipt.
Adequate Remuneration
Prior to the URAA, section 771(5)(A)(ii)(II) of the Act provided
that the provision of goods or services constituted a subsidy if such
provision was ``at preferential rates.'' Now, under section
771(5)(E)(iv) of the Act, a subsidy exists if such provision is ``for
less than adequate remuneration.'' Under section 771(5)(E) of the Act,
the adequacy of remuneration is to be determined
* * * in relation to prevailing market conditions for the good
or service being provided * * * in the country which is subject to
the investigation or review. Prevailing market conditions include
price, quality, availability, marketability, transportation, and
other conditions of purchase or sale.
One commenter suggested that we provide guidance in the regulations
concerning how the Department intends to identify and measure adequate
remuneration. Other commenters debated whether the Department is
required to define adequate remuneration as the price that would exist
absent government intervention in the marketplace. At this time,
however, we are reluctant to go beyond the terms of the statute and the
SAA. Instead, we intend to apply this new standard on a case-by-case
basis. Once we have gained sufficient experience in actual cases, a
codification of methodology may be appropriate. However, for the time
being, we have designated paragraph (a) as ``[Reserved].''
We should note, however, that while ``adequate remuneration'' has
replaced ``preferential'' as the standard, we do not believe this
precludes us from continuing to apply certain preferentiality-based
analyses we have used in the past. See Pure Magnesium and Alloy
Magnesium from Canada, 57 FR 30946, 30949 (1992); and Certain Fresh Cut
Flowers from the Netherlands, 52 FR 3301, 3302 (1987). There is no
indication that Congress intended to change our practice with respect
to government-provided goods and services such as electricity, water,
or natural gas; i.e., goods and services provided to a wide variety of
users by a government-owned company that is usually the sole provider
of the good or service.
We note further that where adequate remuneration is being
ascertained by reference to the prices of goods (or services) imported
into the country in question, we would propose to use the amount
actually paid for the import. Hence, if the price of the imported good
included antidumping or countervailing duties imposed by the country in
question, we would use the price inclusive of those duties for
comparison purposes. Absent the imposition of antidumping/
countervailing duties by the country in question, however, we would not
adjust the import prices to reflect alleged subsidies or dumping.
Infrastructure
We received several comments regarding the special specificity test
for government-provided infrastructure set forth in Sec. 355.43(b)(4)
of the 1989 Proposed Regulations. Although the commenters suggested
different modifications to this test, they all used Sec. 355.43(b)(4)
as a starting point.
Unlike the prior statute, section 771(5) of the Act, as amended by
the URAA, expressly mentions government-provided infrastructure.
However, it does so not in the context of specificity, but in the
context of ``financial contribution,'' one of the prerequisites for a
subsidy. Specifically, section 771(5)(D)(iii) of the Act, which
implements Article 1.1(a)(1)(iii) of the SCM Agreement, provides that
the term ``financial contribution'' includes the provision of ``goods
or services, other than general infrastructure.'' In other words, the
provision of ``general infrastructure'' does not constitute a
``financial contribution,'' and, thus, does not constitute a subsidy.
In light of the change in the statute, the countervailability of
infrastructure depends on the definition of ``general infrastructure.''
However, we have no experience in applying this definition, and we are
uncertain regarding the extent to which the principles reflected in
Sec. 355.43(b)(4) remain useful analytical tools for distinguishing
potentially countervailable ``infrastructure'' from non-countervailable
``general infrastructure.'' Therefore, we are not issuing regulations
on infrastructure at this time. Instead, we will apply the statutory
definition on a case-by-case basis.
Section 351.511
Section 351.511 deals with the purchase of goods. Section
771(5)(E)(iv) of the Act provides that the purchase of goods by a
government can confer a benefit if the goods are purchased ``for more
than adequate remuneration.'' As discussed above in connection with the
provisions of goods or services, the Department does not have any
experience in applying an adequate remuneration standard. In addition,
while government procurement was potentially a countervailable subsidy
prior to the URAA, allegations of procurement subsidies were extremely
rare. Thus, we do not even have experience on such matters as the
``timing'' of procurement subsidies or the allocation of such subsidies
to a particular time period.
Therefore, given our lack of experience with procurement subsidies
in general, and the adequate remuneration standard in particular, we
are not issuing regulations concerning the government purchase of
goods. Instead, we have designated Section 351.511 as ``[Reserved].''
[[Page 8837]]
In this regard, however, one commenter that suggested a regulation
regarding government procurement stated that any such regulation should
cover the government procurement of services. Although, for the reasons
stated above, we are not promulgating a regulation on government
procurement at this time, we should note that under section
771(5)(D)(iv) of the Act and Article 1.1(a)(1)(iii) of the SCM
Agreement, only government procurement of goods is identified as a
financial contribution.
Section 351.512
Section 351.512 deals with worker-related subsidies. Under
paragraph (a), which is based on Sec. 355.44(j) of the 1989 Proposed
Regulations, the Department will continue to identify and measure the
benefit of government-provided assistance to workers based on the
extent to which such assistance relieves a firm of an obligation it
otherwise normally would incur.
One commenter argued that the Department should clarify that worker
assistance is countervailable only when the assistance relieves a firm
of an existing contractual or statutory obligation. Such a
clarification would prevent what this commenter considered to be an
erroneous determination in Certain Steel Products from Germany, 58 FR
38318 (1993); GIA at 37256-57. In that case, the Department
countervailed the Member State-funded portion of Article 56(2)(b) early
retirement aid based on its conclusion that the government's
contribution was likely to have an effect on the outcome of labor
negotiations between steel producers and their workers. A different
commenter, however, endorsed the Department's determination and the
method used by the Department to measure the amount of the subsidy.
The Department disagrees with the proposal of the first commenter,
because, in certain circumstances, the relief from an obligation that
is not ``binding'' in a contractual or statutory sense nonetheless may
provide a benefit to a firm that is readily identifiable and
measurable. On the other hand, the Department is not prepared to codify
the particular approach used in Certain Steel Products from Germany.
Given the limited alternatives available in that case, we consider the
approach used therein to be reasonable. At the same time, we
acknowledged in the determination that the approach used was somewhat
speculative, and we stated that we would consider further refinements
in the future, particularly as part of any administrative review
requested. However, because no such review was requested, we have not
had the benefit of private sector comments, other than the two comments
described above. Moreover, the determination remains the subject of
litigation.
Nevertheless, we may deal with this issue in more detail in the
final regulations. Therefore, we invite public comment on this issue in
particular.
Paragraph (b) deals with the timing of worker-related subsidies.
Most subsidies of this type are provided in the form of cash payments
(grants), and paragraph (b) provides that the Secretary will consider
the subsidy to have been received by the firm as of the date on which
the payment is made that relieves the firm of the obligation it
normally would incur. Paragraph (c) deals with the allocation of
worker-related subsidies to a particular time period, and essentially
treats these types of subsidies as recurring grants to be allocated
(expensed) to the year of receipt.
Section 351.513
Section 351.513 contains a standard for determining when a subsidy
is an export subsidy, as opposed to a domestic or import substitution
subsidy. Consistent with section 771(5A)(B) of the Act, Sec. 351.513
expands the definition of an export subsidy.
In particular, Sec. 351.513 would overturn the practice described
in Extruded Rubber Thread from Malaysia, 57 FR 38472 (1992). In that
case, the Malaysian Government considered 12 criteria in evaluating
whether a particular company should receive ``pioneer'' status. Two of
these criteria addressed the export potential of a product or activity.
In addition, in certain situations, companies had to agree to export
commitments. In analyzing this program, the Department examined the
number of criteria being applied with respect to a particular company.
If one or more of the criteria applied by the Government included
favorable prospects for export, but the export criteria did not carry
preponderant weight, the Department did not consider the award of
pioneer status to constitute an export subsidy. However, under the new
standard contained in Sec. 351.513, if exportation or anticipated
exportation was either the sole or one of several criteria for granting
pioneer status to a firm, we would consider any benefits provided under
the program to the firm to be export subsidies.
This expanded definition of export subsidy is not intended to
include situations where exportation or anticipated exportation is one
of many criteria for awarding benefits under a program, but the firm in
question has qualified to receive the benefits under non-export-related
criteria. In these circumstances, the Department would not treat the
subsidy to that firm as an export subsidy.
Section 351.514
Section 351.514 corresponds to paragraph (c) of the Illustrative
List, and deals with preferential internal transport and freight
charges on export shipments. Paragraph (a)(1) restates the general
principle that a benefit exists to the extent that a firm pays less for
the transport of goods destined for export than it would for the
transport of goods destined for domestic consumption. In addition,
paragraph (a)(2), which is based on Sec. 355.44(g)(2) of the 1989
Proposed Regulations, provides that the Secretary will not consider a
benefit to exist if differences in charges are the result of an arm's
length transaction or are commercially justified.
Paragraph (b) provides that the Secretary will consider the benefit
to have been received as of the date on which the firm pays or, in the
absence of payment, was due to pay the transport or freight charges.
Paragraph (c) provides that the Secretary will allocate (expense) the
benefit to the year in which the benefit is received.
Section 351.515
Section 351.515 deals with the government provision of goods or
services on favorable terms or conditions to exporters. Like its
predecessor, Sec. 355.44(h) of the 1989 Proposed Regulations,
Sec. 351.515 is based on paragraph (d) of the Illustrative List, and
reflects the changes to paragraph (d) made as part of the Uruguay
Round. Paragraph (a) contains the standard for determining the
existence and amount of the benefit attributable to these types of
subsidy programs. As paragraph (a)(2) makes clear, in determining
whether the domestically sourced input is being provided on more
favorable terms than are commercially available on world markets, the
Department will add to the world market price delivery charges to the
country in question. In our view, delivered prices offer the best
measure of prices that are commercially available to exporters in that
country. Furthermore, it has been suggested that commercially available
prices in world markets may include dumped or subsidized prices and we
invite comment on this issue. Paragraphs (b) and (c) contain rules
regarding the timing of benefit receipt and the
[[Page 8838]]
allocation of the benefit to a particular time period, respectively.
One commenter argued that the Department should provide that all
export subsidy payments are prohibited per se under the SCM Agreement
and U.S. law, and that nothing in paragraph (d) permits them. According
to this commenter, in the past, foreign governments have claimed an
exception to paragraph (d) for practices that protect domestic markets
while promoting subsidized exports of agricultural and manufactured
goods. The example cited was the European Community (``EC'') program
providing ``export restitution'' payments or ``export refunds'' on
durum wheat, the primary agricultural product used in the production of
pasta. The commenter stated that these refunds were prohibited because
paragraph (d) applied only to the ``provision'' of goods and/or
services, not export payments, and that the Department's regulations
should clearly prohibit export ``payments.''
This argument is identical to one put forth by petitioners in the
1985 administrative review on Iron Construction Castings from India, 55
FR 50747, 50748 (1990). In that case, India's International Price
Reimbursement Scheme (``IPRS'') provided payments to castings
exporters, refunding the difference between the price of raw materials
purchased domestically and the price exporters otherwise would have
paid on the world market. The Department refused to examine whether the
IPRS met the criteria for non-countervailability under the exception in
item (d) and countervailed the IPRS payments in their entirety.
Exporters and importers challenged the Department's determination,
and, in its decision in Creswell Trading Co. v. United States, 783 F.
Supp. 1418 (1992), the CIT remanded the case to the Department with
instructions to analyze the consistency of the IPRS with item (d). The
Federal Circuit discussed this decision with approval in connection
with an appeal from a second CIT decision in this same case. See
Creswell Trading Co. v. United States, 15 F. 3d 1054 (1994). Therefore,
based on the above judicial precedent, we must disagree with the
commenter that paragraph (d) does not apply to programs where a
government reimburses an exporter for the difference between a higher
domestic price for an input and a lower price that the exporter would
have paid on the world market, as opposed to providing the input
itself.
Also consistent with the Federal Circuit's decision in Creswell,
where a program exists that provides inputs for exported goods at a
lower price than is available for inputs for use in the production of
goods for domestic consumption, the burden will be on respondents to
provide evidence that the lower price reflects the price that is
commercially available on world markets.
Section 351.516
Section 351.516 deals with the remission or rebate upon export of
indirect taxes. (``Indirect tax'' is defined in Sec. 351.102.) Section
351.516 is consistent with longstanding U.S. practice, see Zenith Radio
Corp. v. United States, 437 U.S. 443 (1978), and is based on paragraph
(g) of the Illustrative List. Paragraph (g) deals with indirect taxes,
such as value added taxes, and provides that the remission or rebate of
such taxes constitutes an export subsidy only if the amount of the
remittance or rebate is excessive; i.e., if it exceeds the amount of
indirect taxes levied on like products sold for domestic consumption.
For example, if a government imposes a $5 tax on a widget sold for
domestic consumption and provides a $10 rebate if the same type of
widget is exported, an export subsidy exists in the amount of $5.
However, a corollary of paragraph (g) is that the exemption or non-
excessive remission upon export of indirect taxes does not constitute a
subsidy. See note 1 of the SCM Agreement.
Paragraph (b) provides that the benefit from an excessive rebate of
indirect taxes is deemed to be received on the date of exportation.
Paragraph (c) provides that the Secretary will expense these types of
subsidies to the year of receipt.
Section 351.517
While Sec. 351.516 deals with the exemption or remission of
indirect taxes in general, Sec. 351.517 deals with the exemption,
remission, or deferral of prior-stage cumulative indirect taxes.
(``Prior-stage indirect tax'' and ``cumulative indirect tax'' are
defined in Sec. 351.102.) Section 351.517 is based on paragraph (h) of
the Illustrative List, and reflects certain changes made to paragraph
(h) as part of the Uruguay Round negotiations. Section 351.517 is
intended to be consistent with paragraph (h) and the Guidelines on
Consumption of Inputs in the Production Process (Annex II to the SCM
Agreement).
Section 351.17 is drafted to address separately exemptions,
remissions and deferrals of prior stage cumulative indirect taxes.
Paragraph (a)(1) deals with exemptions and states that where inputs are
exempt from prior stage cumulative indirect taxes, a benefit exists to
the extent that the exemption extends to inputs not consumed in the
production of the exported product, making normal allowance for waste.
(``Consumed in the production process'' is defined in Sec. 351.102.)
Where a benefit exists, it is equal to the amount of the taxes the firm
would otherwise pay on inputs not consumed in the production of the
exported product.
Paragraph (a)(2) addresses remissions of indirect taxes and states
that a benefit exists to the extent that the amount remitted exceeds
the amount of prior stage cumulative indirect taxes paid on inputs that
are consumed in the production of the exported product, making normal
allowance for waste. Where a benefit exists, paragraph (a)(2) sets
forth a general rule to the effect that the amount of the benefit
normally will equal the difference between the amount remitted and the
amount of prior stage cumulative indirect taxes on inputs that are
consumed in the production of the exported product. However, paragraph
(a)(2) further directs, based on Annex II to the SCM Agreement, that
the Secretary may consider the entire amount of a remission of prior-
stage cumulative taxes to be a benefit if the Secretary determines that
the foreign government has not examined the actual inputs in order to
confirm which inputs are consumed in the production of exported
products and in what amounts, and the taxes that are imposed and paid
on those inputs. This qualification is essentially a modified version
of the Department's ``linkage test,'' a test upheld in Industrial
Fasteners Group, American Importers Ass'n v. United States, 710 F.2d
1576 (Fed. Cir. 1983).
Paragraph (a)(3) deals with the amount of the benefit attributable
to a deferral of prior-stage cumulative indirect taxes. Consistent with
footnote 59 to the SCM Agreement, the first sentence of paragraph
(a)(3) provides that a deferral does not give rise to a benefit if the
government charges appropriate interest on the taxes deferred.
Otherwise, the second sentence of paragraph (a)(3) provides that the
Secretary will determine the amount of benefit by treating the tax
deferral as if it were a government-provided loan in the amount of the
taxes deferred. Normally, deferrals of one year or less will be treated
as short-term loans, while multi-year deferrals will be treated as
short-term loans rolled over on the anniversary date(s) of the
deferral.
[[Page 8839]]
Paragraph (b) deals with the time of receipt of the benefit.
Paragraph (b)(1) provides that in the case of a tax exemption, the
benefit is received as of the date on which the tax otherwise would
have been due. Paragraph (b)(2) provides that in the case of a tax
remission, the benefit arises as of the date of exportation. Paragraphs
(b)(3) and (b)(4) address deferrals, stating that the Secretary will
normally treat the benefit as having been received when the tax would
otherwise be due, for a deferral of one year or less, or on the
anniversary date(s) of the deferral for multi-year deferrals. Paragraph
(c) deals with the allocation of the benefit to a particular time
period, and provides that the Secretary will allocate (expense) the
benefit from an exemption, remission, or deferral of prior-stage
cumulative indirect taxes to the year of receipt.
Section 351.518
Section 351.518 deals with the remission or drawback of import
charges. Section 351.518 generally is consistent with prior Department
practice, but contains some revisions to reflect changes made to
paragraph (i) of the Illustrative List during the Uruguay Round
negotiations. Section 351.518 is intended to be consistent with
paragraph (i), the Guidelines on Consumption of Inputs in the
Production Process, and the Guidelines in the Determination of
Substitution Drawback Systems as Export Subsidies (Annex III to the SCM
Agreement).
Paragraph (a)(1) reflects the longstanding principle that
governments may remit or drawback import charges levied on imported
inputs when the finished product is exported. However, if the amount
remitted or drawnback exceeds the amount of import charges levied, a
benefit exists.
Paragraph (a)(2) deals with so-called ``substitution drawback.''
Under a substitution drawback system, a firm may substitute domestic
inputs for imported inputs without losing its eligibility for drawback.
However, a benefit exists if the amount drawnback exceeds the amount of
import charges levied on imported inputs, or if the export of the
finished product does not occur within a reasonable time (not to exceed
two years) of the import of the inputs.
Paragraph (a)(3) deals with the calculation of the amount of
benefit attributable to an excessive remission or drawback of import
charges. Paragraph (a)(3)(i) sets forth the general rule that the
amount of the benefit equals the difference between the amount remitted
or drawnback and the amount of import charges levied initially on the
imported inputs for which the remission or drawback is claimed. For
example, assume that a firm imports widgets to produce gizmos, and pays
$2 in import duties per widget. If, when the firm exports finished
gizmos, the firm receives $5 in drawback, the benefit equals $3
($5-$2=$3).
However, paragraph (a)(3)(ii) provides that in certain
circumstances, the Secretary may consider the amount of the benefit to
equal the amount of the remission or drawback. Paragraph (a)(3)(ii)
provides for a ``linkage'' test, and is essentially identical to
Sec. 351.517(a)(2)(ii). See discussion of Sec. 351.517(a)(2)(ii),
above.
Paragraph (b) provides that the Secretary normally will consider
the benefit to have been received as of the date of exportation.
Paragraph (c) provides that the Secretary normally will allocate this
benefit to the year in which it is received.
Section 351.519
Section 351.519 deals with export insurance. Paragraph (a), which
deals with the benefit attributable to export insurance, is based on
paragraph (j) of the Illustrative List. Paragraph (a) differs from the
section of the 1989 Proposed Regulations dealing with export insurance,
Sec. 355.44(d). First, to reflect changes made to the Illustrative List
during the Uruguay Round, the word ``manifestly'' has been deleted.
Second, Sec. 355.44(d) required that an export insurance program
must have exhibited losses for a five-year period before the Secretary
would consider the program a countervailable subsidy. We have not
included the five-year loss requirement in these regulations, because,
depending on how an export insurance program is structured, it may be
evident earlier than five years that premiums will be inadequate to
cover the long-term operating costs and losses of the program. On the
other hand, where the program is structured in such a way that expected
premiums can cover expected long-term operating costs and losses, we
anticipate that we will continue to apply the five-year rule. For
example, we would continue to apply the five-year rule to programs like
the Israeli Exchange Insurance Scheme. With respect to this program, we
originally determined that it was structured so as to be self-balancing
in the sense that it could reasonably be expected to break even over
the long term. See Potassium Chloride from Israel, 49 FR 36122, 36214
(1984). Therefore, we did not find a countervailable subsidy despite
losses in the early years of the program. However, after observing
losses for five years, we concluded that the premiums charges were
inadequate, and we determined that the scheme conferred a
countervailable benefit.
Finally, Sec. 355.44(d)(1) stated that the Department would take
into account income from other insurance programs operated by the
entity in question. We have reconsidered this policy, and, although we
do not have much experience in this regard, have concluded that this
requirement may be overly restrictive. For example, there may be
instances where the insuring entity operates on a commercial basis,
except for the export insurance function that may be specifically
underwritten by the government. In such a situation, it would be
inappropriate to take into account the insuring company's income from
other insurance programs.
Section 351.520
Section 351.520 continues and codifies the Department's practice
with respect to certain types of government export promotion
activities. As the Department has observed in the past, most countries,
including the United States, maintain general export promotion
programs. As long as these programs provide only general information
services, such as information concerning export opportunities or
government advocacy efforts on behalf of a country's exporters, they do
not confer a benefit for purposes of the CVD law. However, if, for
example, such activities promoted a specific product or provided
financial assistance to a firm, a benefit could exist under one of the
other provisions of subpart E.
Section 351.521
Section 771(5A)(C) of the Act defines an ``import substitution
subsidy'' as ``a subsidy that is contingent upon the use of domestic
goods over imported goods, alone or as 1 of 2 or more conditions.'' As
stated in the Senate Report, ``the category of import substitution
subsidies is a new one that is neither part of the 1979 Subsidies Code
nor included in current law.'' S. Rep. No. 412, 103rd Cong., 2d Sess.
93 (1994). Under the new law, import substitution subsidies are
automatically considered to be specific.
Two domestic parties commented that the Department should state in
its regulations that import substitution subsidies include subsidies
that are contingent ``in law or in fact'' upon the use of domestic over
imported goods. The quoted language is included in the export subsidy
definition in section 771(5A)(B) of the Act, but does not
[[Page 8840]]
appear in the import substitution subsidy definition in section
771(5A)(C) of the Act. One of the parties argued that similar language
should be included in a regulatory definition of import substitution
subsidy to avoid a ``potential loophole'' for de facto import
substitution subsidies.
We agree with these commenters that the statute does not expressly
state that import substitution subsidies include those that are
contingent ``in law or in fact'' upon the use of domestic over imported
goods. On the other hand, however, the plain language of section
771(5A)(C) does not limit the definition of import substitution
subsidies to only those subsidies that are contingent ``in law'' upon
the use of domestic goods.
Because of the Department's lack of experience in dealing with this
new category of subsidies, we are not issuing a regulation at this time
on this particular point. Instead, we intend to develop our practice
regarding import substitution subsidies on a case-by-case basis.
However, the omission at this time of explicit ``in law or in fact''
language from these regulations should not be construed as an
indication that the Department believes that section 771(5A)(C) applies
only to de jure import substitution measures.
Section 351.522
Certain Agricultural Subsidies
Section 771(5B)(F) of the Act implements provisions of the WTO
Agreement on Agriculture regarding the noncountervailable status of
certain ``domestic support measures.'' Under Annex 2 of the Agreement
on Agriculture, domestic support measures that meet the policy-specific
criteria and conditions of Annex 2 are exempt from Member countries'
commitments to reduce subsidies. In addition, Article 13(a) of the
Agreement on Agriculture directs that these subsidies, commonly
referred to as ``green box'' subsidies, will be noncountervailable
during the nine-year implementation period described in Article 1(f) of
the Agreement on Agriculture.
In accordance with section 13(a) of the Agreement, section
771(5B)(F) of the Act provides that the Secretary will treat as
noncountervailable domestic support measures that (1) are provided with
respect to products listed in Annex 1 of the Agreement on Agriculture,
and (2) that the Secretary ``determines conform fully to the provisions
of Annex 2'' of that Agreement. To implement section 771(5B)(F),
Sec. 351.522 sets out the criteria the Secretary will consider in
determining whether a particular domestic support measure conforms
fully to the provisions of Annex 2.
One commenter argued that the regulations should require the
Secretary to consider whether or not an alleged green box subsidy has
trade distorting effects. Further, the commenter noted that the SAA
enumerates certain U.S. programs that meet the green box criteria.
According to the commenter, the regulations should explicitly treat as
noncountervailable a foreign program that is similar to an enumerated
U.S. program. This same commenter also argued that the list of eight
types of direct payments to producers included in Annex 2 is
illustrative, not exclusive. The commenter stated that the regulations
should provide ``precise, objective and even-handed'' criteria for
determining whether a particular subsidy is a green box subsidy. A
second commenter disputed the suggestion that the regulations should
include a list of agricultural programs that the Secretary
automatically would consider as noncountervailable. According to this
commenter, there is no basis in the statute for automatically exempting
particular programs from the CVD law. Instead, this commenter argued,
the Department should assess whether particular programs meet the green
box criteria on a case-by-case basis.
The Department believes there is little to be gained from
enumerating in the regulations specific types of programs that would
qualify automatically as green box subsidies. Annex 2 of the Agreement
provides explicit criteria that a program must meet to receive green
box status, and Sec. 351.522 reflects the plain language of these
criteria. Consistent with section 771(5B)(F) of the Act and the
Agreement on Agriculture, paragraph (a) of Sec. 351.522 provides that
the Secretary will treat as noncountervailable a subsidy provided to an
agricultural product listed in Annex 1 of the Agreement if the subsidy
fully conforms to both the basic criteria of subparagraphs (a) and (b)
of paragraph 1 of Annex 2 and the relevant policy-specific criteria and
conditions set out in paragraphs 2 through 13 of that Annex.
In this regard, we received two comments concerning the so-called
``peace clause'' in the Agreement on Agriculture. Specifically,
Articles 13 (b) and (c) of that Agreement require WTO Member countries
to exercise ``due restraint'' in initiating CVD proceedings on
agricultural subsidies provided by a Member whose total non-green box
agricultural subsidies (both domestic and export) are within that
Member's reduction commitments. See SAA at 67-69. The obligation to
exercise ``due restraint'' exists only during the ``implementation
period,'' defined in Article 1(f) of the Agreement on Agriculture.
One commenter argued that the Department's regulations should
ensure that the Department exercises due restraint by not self-
initiating CVD investigations on products that benefit from subsidies
described in Articles 13 (b) and (c). A second commenter argued that
the Department should interpret the due restraint clause narrowly.
We do not believe that a regulation is necessary on this particular
point. The Department understands the due restraint requirement to
entail a commitment to refrain from self-initiating CVD investigations,
and the Department will administer the statute accordingly.
Green Light Subsidies in General
Under section 771(5B), which implements Article 8 of the SCM
Agreement, certain domestic subsidies and domestic subsidy programs are
treated as noncountervailable, notwithstanding the fact that they are
specific under section 771(5A)(D) of the Act. There are three
categories of these so-called ``Green Light'' subsidies: (1) Research
subsidies (see section 771(5B)(B) of the Act); (2) subsidies to
disadvantaged regions (see section 771(5B)(C) of the Act); and (3)
subsidies for adaptation of existing facilities to new environmental
requirements (see section 771(5B)(D) of the Act). Although at this time
we are not promulgating regulations regarding Green Light subsidies, we
received many comments concerning this category of subsidies, and we
address those comments here.
The noncountervailable status of these Green Light subsidies can be
established in two ways. First, a WTO Member country can notify a
subsidy program to the WTO SCM Committee in accordance with Article 8.3
of the SCM Agreement. Once notified, section 771(5B)(E) provides that a
Green Light subsidy program ``shall not be subject to investigation or
review'' by the Department. However, an exception to this rule exists
in situations where a member country has successfully challenged in the
WTO a claim for Green Light status. In the event of a successful
challenge, section 751(g) and section 775 of the Act establish
mechanisms for promptly including the subsidy or subsidy program in an
existing CVD proceeding should there be reason to believe that
merchandise subject to the proceeding may be benefiting from the
subsidy or subsidy program.
[[Page 8841]]
The second method for obtaining Green Light status involves
situations where a subsidy program has not been notified to the SCM
Committee. In the case of a subsidy given under a non-notified program,
the subsidy is noncountervailable if the Secretary determines in a CVD
investigation or review that the subsidy satisfies the relevant Green
Light criteria contained in subparagraphs (B), (C) or (D) of section
771(5B). However, the Secretary must determine that the subsidy
satisfies all of the relevant criteria before a given subsidy will be
treated as noncountervailable. See section 771(5B)(A) of the Act; SAA
at 266. Moreover, as discussed in the SAA, in investigations and
reviews of non-notified subsidies, the burden will be on the party
claiming Green Light status to present evidence demonstrating that a
particular subsidy meets all of the relevant criteria. SAA at 266. In
addition, under section 771(5B)(A) of the Act, Green Light status may
be claimed only in proceedings involving merchandise imported from a
WTO Member country.
In accordance with the Administration's commitment in the SAA, the
Department intends to strictly construe the various Green Light
provisions to ``limit the scope of the provision(s) to only those
situations which clearly warrant non-countervailable treatment.'' SAA
at 265. Thus, the Department ``will not limit its analysis * * * to a
narrow review of the technical criteria of Article 8 of the SCM
Agreement, but will analyze all aspects of the subsidy program and its
implementation to ensure that the purposes and terms of Article 8 have
been respected.'' SAA at 267.
Under the transition rules set forth in section 291 of the URAA,
the new law applies to investigations and administrative reviews
initiated on the basis of post-January 1, 1995 requests. As with other
issues that arise in such investigations and reviews, the Department
will consider claims for Green Light treatment as parties present such
claims to the Department. A Department determination that a particular
subsidy received by a firm is a Green Light subsidy would not
necessarily mean that the Department would find the entire program
under which the subsidy is provided satisfies all of the applicable
Green Light criteria in all cases.
Certain commenters suggested that the Department ``incorporate
fully'' in the regulations the discussion of Green Light subsidies
contained in the SAA. We do not believe this is necessary. As discussed
above, our general approach to the drafting of these regulations has
been to avoid simply repeating the language of the statute and/or the
SAA.
Investigation of Notified Subsidies
One commenter, noting the text of section 771(5B)(E), suggested
that the Department should refrain from investigating notified subsidy
programs. According to the commenter, a failure to ``screen out''
notified subsidies prior to the initiation of an investigation would
result in a waste of Departmental resources and unnecessary burdens on
foreign governments.
In response, several commenters argued that if there is any
ambiguity regarding whether a subsidy alleged by a petitioner does, in
fact, qualify as a notified Green Light subsidy, the Department should
include the subsidy in its CVD investigation or review to determine
whether it qualifies for a Green Light exemption. One example given by
these commenters is a situation where a petitioner presents evidence
that a subsidy program has been modified subsequent to its notification
to the SCM Committee. These commenters also suggested that it may
simply be unclear whether an alleged subsidy is the same as the
notified subsidy, in which case the Department should include the
alleged subsidy in the investigation to make this determination.
In replying to these comments, we note that section 771(5B)(E) of
the Act and the SAA make clear that if a subsidy program has been
notified under Article 8.3 of the SCM Agreement, any challenge
regarding its eligibility for Green Light treatment, whether due to
later modification or otherwise, must be made through the review
procedures under the WTO rather than in the context of a CVD
proceeding. As described above, Commerce may not initiate a CVD
investigation or review of a notified subsidy program (which appears to
benefit subject merchandise) unless informed by USTR that a violation
has been determined under the procedures of Article 8.
However, the identity of a subsidy is a different matter. If there
is a legitimate question as to whether a subsidy alleged in a petition
is, in fact, a subsidy that has been notified under Article 8.3, the
Department will include the subsidy in a CVD investigation or review in
order to resolve the identity of the subsidy in question. If a party
claiming Green Light status demonstrated that the alleged subsidy had
been notified, that would be the end of the analysis, and the
Department would not inquire further as to the subsidy's conformance
with the applicable Green Light criteria. If the party failed to
establish that the alleged subsidy program had been notified, then the
Department would analyze the subsidy's eligibility for Green Light
status in the same manner as for any other non-notified subsidy.
Nevertheless, the Department is not promulgating a regulation
concerning this issue at this time. While the manner in which the
Department would proceed in the situation described appears fairly
straightforward, our lack of experience in administering the new Green
Light provisions leaves open the possibility that questions of
interpretation will arise that cannot be foreseen at this time.
Policy for Investigating Non-Notified Subsidies
One commenter argued that the Department should adopt a regulation
providing that, whenever a petition includes a potential Green Light
subsidy that has not been notified under Article 8.3, the Department
will conduct a full investigation to determine whether the subsidy
meets the relevant requirements of section 771(5B). This commenter and
others emphasized that the regulations also should include the SAA's
express requirement that the party claiming Green Light status has the
burden of presenting evidence demonstrating compliance with all of the
relevant criteria for any particular subsidy category. See SAA at 266.
While we do not disagree with the policy espoused, we do not
believe that this policy must be codified in the regulations. As
discussed above, the statute and the SAA are clear that in
investigations and reviews of subsidies that have not been notified
under Article 8.3 of the SCM Agreement, the party claiming Green Light
status has the burden of presenting evidence demonstrating that a
particular subsidy meets all of the relevant criteria for
noncountervailable status.
Alleged Green Light Subsidies not Used During the Period of
Investigation or Review
Although this issue was not raised by any of the commenters, the
Department believes that, in an investigation or a review of a CVD
order or suspended investigation, the Department should not consider
claims for Green Light status if the subject merchandise did not
benefit from the subsidy during the period of investigation or review.
Instead, consistent with the Department's existing practice, the Green
Light status of a subsidy should be considered only in an investigation
or review of a time period where the
[[Page 8842]]
subject merchandise did receive a benefit from the subsidy. However,
the Department does not believe that a regulation is needed to clarify
this issue.
Research Subsidies
Prior to the enactment of the URAA, the Department treated
assistance provided by a government to finance research and development
(``R&D'') as noncountervailable if the R&D results were (or would be)
made available to the public, including the U.S. competitors of the
recipient of the assistance. This policy, sometimes referred to as the
public availability test, was described by Commerce in Sec. 355.44(l)
of the 1989 Proposed Regulations. One commenter argued that the
Department should reaffirm the public availability test.
The Department has not retained the public availability test in
these regulations. We believe that the objectives served by the public
availability test are better met by applying the criteria listed in
section 771(5B)(B) of the Act and Article 8.2(a) of the SCM Agreement.
Another commenter argued that, in determining whether a given
research subsidy falls within the 75 and 50 percent maximum allowed
under section 771(5B)(B), the Department should base its analysis on
the total costs incurred over the duration of the project in question.
Under this reasoning, the Department would not countervail a subsidy if
the 75 or 50 percent maximum was exceeded during the year under
investigation or review, provided that the applicable threshold ``is
not exceeded over the life of the project.'' This commenter further
argued that, if the Department determined that the applicable threshold
was exceeded over the life of the project, only the amount of subsidy
in excess of the relevant ``maximum'' should be countervailed.
Several commenters challenged these arguments. First, they argued
that the Department should evaluate the 75 and 50 percent maxima based
on the costs already incurred at the time of the relevant investigation
or administrative review, and not on the basis of expected costs over
the lifetime of the project. Second, these commenters argued that, if
the Department determined that the applicable threshold had been
exceeded, the entire benefit--not just the excess over the relevant
threshold--should be countervailed. According to these commenters, the
SAA states clearly that all of the relevant criteria must be met for a
given program to receive Green Light status, and that a failure to meet
all relevant criteria would result in the ``entire subsidy'' being
countervailable in full. See SAA at 266.
The Department agrees in part with the first commenter, and in part
with the latter commenters. With respect to the proper frame of
reference for determining whether a given research subsidy has exceeded
the 75 or 50 percent maximum, section 771(5B)(B)(iii)(II) of the Act
instructs the Department to base its analysis on ``the total eligible
costs incurred over the duration of a particular project.'' Thus, it
would be improper for the Department to limit its analysis to only
those costs incurred as of the time period covered by an investigation
or administrative review. The Department agrees, however, that if, over
the duration of a project, the subsidy exceeds the 75 or 50 percent
threshold, the entire amount of the subsidy is countervailable, not
merely the excess. Also, if it is indisputable at the outset of the
project that the relevant threshold will be exceeded, the entire amount
of the subsidy is countervailable.
Subsidies to Disadvantaged Regions
One commenter suggested that the Department should clarify that the
Green Light category regarding subsidies to disadvantaged regions is
not limited to subsidies provided by national governments, but also
includes subsidies granted by subnational levels of government, such as
states or provinces. This commenter further argued that, in determining
whether a subsidy provided by a state or province to a disadvantaged
region meets the criteria of section 771(5B)(C) of the Act, the
Department should assess the criteria within the framework of the
subnational government's jurisdiction.
In response, other commenters argued that the Department should
assess the Green Light criteria in relation to the investigated country
as a whole, not just in relation to the jurisdiction of the subsidizing
government if that government is at the subnational level. According to
these commenters, the statute and the SAA instruct the Department to
evaluate the relevant Green Light criteria in relation to the ``average
for the country subject to investigation or review.''
We agree with the first commenter that the Green Light categories
include subsidies granted by governments at the subnational level, and
that, in the case of the regional category, the Department should
assess the relevant criteria in relation to the jurisdiction of the
granting authority. In discussing the language in section
771(5B)(C)(ii) of the Act regarding the ``average for the country
subject to investigation or review,'' the SAA explains that, where a
CVD proceeding involves a member of a customs union, the term
``country'' shall be defined in accordance with the structure of the
regional assistance program. SAA at 264. For example, if the Department
were to investigate a product from Luxembourg, the term ``country''
would refer to the EC as a whole if the subsidy being investigated was
received under an EC regional assistance program. Thus, the SAA
indicates that the Department should make its determinations based on
averages for the jurisdiction granting the regional assistance subsidy.
Although the Department is not promulgating a regulation on this point,
the Department intends to adopt this approach as a matter of practice.
Subsidies for Adaptation of Existing Facilities to New Environmental
Requirements
One commenter argued that, with respect to the Department's
criteria for Green Light environmental subsidies described in section
771(5B)(D) of the Act, the Department should treat as
noncountervailable those subsidies given to upgrade existing facilities
to environmental standards that are higher than the minimum standards
imposed by law or regulation. According to this commenter,
``[g]overnments should be allowed the flexibility to encourage higher
environmental standards than the minimum required by law when
government shares the additional costs of achieving the higher
environmental standards.''
Several commenters dispute this suggestion, claiming that section
771(5B)(D)(i) specifically limits Green Light status for environmental
subsidies to those that are ``provided to promote the adaptation of
existing facilities to new environmental requirements * * * .''
According to these commenters, the Department has no authority to
broaden the scope of environmental subsidies eligible for Green Light
treatment.
Although we acknowledge that governments should have the
flexibility to encourage higher environmental standards, the Department
agrees with the latter commenters. As noted above, section
771(5B)(D)(i) provides that noncountervailable environmental subsidies
are those that are ``provided to promote the adaptation of existing
facilities to new environmental requirements that are imposed by
statute or by regulation * * * .'' According to the SAA, ``strict
application of these requirements is essential in order to limit the
scope of the provision to only those situations
[[Page 8843]]
which clearly warrant non-countervailable treatment.'' SAA at 267.
Given the clear language of the statute and the SAA, the Department
believes that subsidies given to upgrade existing facilities to
environmental standards in excess of legal requirements are
countervailable.
Section 351.523
Section 351.523 deals with the identification and measurement of
upstream subsidies. Because the URAA did not significantly amend the
corresponding statutory provision, section 771A of the Act,
Sec. 351.523 is based largely on Sec. 355.45 of the 1989 Proposed
Regulations, except for the deletion of language that merely repeats
the statute. However, we have made one change that reflects a change in
practice regarding the identification and measurement of the
competitive benefit bestowed by an upstream subsidy. Before turning to
that change, we note that we have adopted certain new terminology in
Sec. 351.523(a). Specifically, we have replaced ``control'' with
``cross ownership.'' See Sec. 351.524(b)(6) for an explanation of
``cross ownership.''
Regarding ``competitive benefit'' and upstream subsidies,
Sec. 351.523 sets forth the standard for determining whether a
competitive benefit exists. In this regard, section 771A(b)(1) of the
Act provides that a competitive benefit exists when
* * * the price for the (subsidized) input product is lower than
the price that the manufacturer or producer of merchandise which is
the subject of a countervailing duty proceeding would otherwise pay
for the product in obtaining it from another seller in an arms-
length transaction.
In addition, section 771A(b)(2) of the Act provides that when the
Secretary has determined in a previous proceeding that a
countervailable subsidy is paid or bestowed on the comparison input
product, the Department ``may (A) where appropriate, adjust the price
that the manufacturer or producer of merchandise which is the subject
of such proceeding would otherwise pay for the product to reflect the
effects of the countervailable subsidy, or (B) select in lieu of that
price a price from another source.''
In the past, as reflected in Sec. 355.45(d) of the 1989 Proposed
Regulations, the Department preferred to base its comparisons upon the
price charged for unsubsidized inputs produced by other producers in
the same country as the producer of the subject merchandise. If the
Department had determined in a prior CVD proceeding that a
countervailable subsidy had been bestowed in the subject country on the
comparison input, the Department's next preferred alternative was to
adjust the price of the input product to reflect the subsidy. As a
final alternative, the Department could select a ``world market price
for the input product.'' The Department interpreted the phrase ``world
market price'' broadly to include (1) actual prices charged for the
input product by producers located in other countries, and (2) average
import prices. Additionally, because the statute did not preclude, for
comparison purposes, the use of prices of subsidized, imported inputs,
the Department had determined that it would be ``inappropriate to
exclude all subsidized producers, even assuming that we could identify
them.'' Circular Welded Non-Alloy Steel Pipe From Venezuela; Final
Determination, 57 FR 42964, 42967-68 (1992).
We have revised our approach regarding ``competitive benefit'' in
the following manner. Under paragraph (c)(1)(i), we will rely first
upon the actual price charged or offered for an unsubsidized input
product, regardless of whether the producer of that input is located in
the same country as the producer of the subject merchandise. Upon
further reflection, we see no justification for distinguishing between
input products based on the country of production. Section 771A(b)(1)
of the Act merely requires the Department to compare the price paid for
the subsidized input product to the price that the producer ``would
otherwise pay for the product in obtaining it from another seller in an
arms-length transaction.'' The price that the producer ``would
otherwise pay'' could include the actual price paid by the producer of
subject merchandise to an unrelated supplier or a bid offered by an
unrelated supplier, regardless of the location of that supplier.
If actual prices or offers for unsubsidized inputs are not
available, we have concluded that it is preferable to rely upon an
average of publicly available prices for unsubsidized inputs from
different countries or some other surrogate price deemed appropriate by
the Department. See paragraph (c)(1)(ii). Only if there are no prices
for unsubsidized inputs available from any source will we adjust the
price of the comparison input product to reflect a countervailable
subsidy. In such a case, under paragraph (c)(1)(iii), we first will
rely upon the actual price that the producer of the subject merchandise
otherwise would pay for the input product adjusted to reflect the
subsidy, regardless of the country in which the input product is
produced. If such a price is not available, under paragraph (c)(1)(iv),
the Department would use an average price for the input product from
different countries adjusted to reflect the subsidy or some other
adjusted surrogate price. Only when no adjustable price is available
(e.g., the only available price is a published price reflecting an
average of both subsidized and non-subsidized prices), would we rely
upon the price of a subsidized input. See paragraph (c)(1)(v).
We believe that the approach described in the preceding paragraph
better reflects the overall purpose of the upstream subsidies
provision, which is to account, when appropriate, for upstream
subsidies provided on input products used in the production or
manufacture of subject merchandise. The language of section 771A itself
does not express a preference regarding the selection of a comparison
input price, and grants the Department wide latitude in determining
when to adjust the price of the comparison product to reflect known
countervailable subsidies. However, parts of the legislative history
underlying the Trade and Tariff Act of 1984, which added section 771A
to the Act, support a preference for using the price of an unsubsidized
input, and that the Department should make adjustments for subsidies
only when there is no price for unsubsidized inputs. See, e.g., 130
Cong. Rec. S13970 (daily ed. Oct. 9, 1984) (statement of Sen. Dole).
Although, as described above, we are revising our practice regarding
the identification and measurement of a competitive benefit, the
preference for using the price of unsubsidized inputs also was
reflected in the Department's earlier practice. See, e.g., Agricultural
Tillage Tools from Brazil, 50 FR 24270, 24273 (1985).
In the hierarchy described above for selecting the price that the
producer otherwise would pay for the input, we intend to use subsidized
prices only when unsubsidized prices are not available. In determining
whether a price is subsidized, we will rely primarily on CVD findings
made by the United States or the investigating authorities of other
countries in the recent past (i.e., within the past five years).
One other clarification in paragraph (c) is that in determining
whether there is a competitive benefit, the Department will adjust
prices upward to account for delivery charges (i.e., c.i.f.). Although
the statute does not specify the precise basis for calculating a
benchmark price for the input product, section 771A(b)(1) does require
the use of the price that the manufacturer or producer of the subject
merchandise ``would otherwise pay.'' In
[[Page 8844]]
our view, this requires the use of a price that represents a commercial
alternative to the producer of the subject merchandise, and f.o.b.
prices do not provide a measurement of the commercial alternative to
the downstream producer. See Non-Alloy Steel Pipe from Venezuela, 57 FR
at 42967 (1992).
Several outside parties commented on the upstream subsidies
provision. One commenter argued that when using a world market price as
a benchmark, the Department should rely upon an average of all publicly
available export prices, including U.S. export prices. In response,
several domestic parties argued that the world market price should
equal the weighted-average landed price of the input product within the
country under investigation. These commenters added that the price
should also include all delivery expenses. Finally, other domestic
parties suggested a hierarchy that would apparently not include any
averaged prices from the world market, but instead would be limited to
(1) actual prices paid by the producer of the subject merchandise to
domestic or third-country suppliers, or (2) information regarding
prices from such suppliers. We believe the above explanation adequately
addresses the concerns raised by these comments.
Section 351.524
Section 351.524 deals with the calculation of the ad valorem
subsidy rate and the attribution of a subsidy to a particular product.
While Sec. 351.524 is based roughly on Sec. 355.47 of the 1989 Proposed
Regulations, it contains changes that reflect further refinements in
the Department's practice since 1989.
Paragraph (a) deals with the calculation of the ad valorem subsidy
rate, and continues to provide that the Secretary will calculate the
rate by dividing the amount of the subsidy benefit by the sales value
of the product or products to which the subsidy is attributed. For
example, if a firm receives an untied domestic subsidy for which the
benefit is $100 and the firm's total sales were $1,000, the ad valorem
subsidy rate would be 10 percent ($100 $1,000 = 10 percent).
The second and third sentences of paragraph (a) deal with the basis
on which the Secretary will determine the sales value of a product. The
Department's longstanding practice has been to determine sales value
for products that are exported on an F.O.B. (port) basis in order to
correspond to the basis on which the Customs Service assesses duties.
However, in the GIA, the Department announced that it would begin using
sales values as recorded in a firm's financial statements. The
Department did so in the belief that this approach would be more
accurate, would reduce the burden on the firms involved, and would
allow the Department to account for the fact that shipping expenses
might be subsidized. However, in order to ensure that the Customs
Service collected the correct amount of duties based on an F.O.B.
(port) basis, the Department found it necessary to adjust the
calculated ad valorem subsidy rate based on a ratio of the invoice
value of exports to the United States to the F.O.B. value of exports to
the United States. In the end, only one of the respondents in the 1993
steel investigations had the information needed to calculate this
ratio. Therefore, for all other firms in those cases, the Department
wound up using its traditional F.O.B. (port) methodology.
Because the Department's experiment with a different basis was not
successful, in the second sentence of paragraph (a) we have reverted to
our standard practice of determining sales value on an F.O.B. (port)
basis in the case of products that are exported. In the case of
products that are sold for domestic consumption, we would determine
sales value on an F.O.B. factory basis. While this method imposes a bit
more work on firms than does a method that relies on booked values, we
believe that the burden can be mitigated by relying on aggregate
figures and reasonable allocations of those figures across markets
(e.g., subtracting total freight and insurance expenses, expenses that
usually are maintained in ledgers that are separate from sales
information).
In addition, there is no compelling reason for allocating subsidy
benefits over sales values that include freight and other shipping
costs. Although there may be rare instances where the ``shipping''
component of a transaction is subsidized, the Department can deal with
those instances on a case-by-case basis. Accordingly, the third
sentence of paragraph (a) provides that the Secretary may make
appropriate adjustments to the ad valorem subsidy rate to account for
``shipping'' subsidies.
Paragraph (b) deals with the attribution of a subsidy to a
particular product. Paragraphs (b)(2) through (b)(7) set forth general
rules of attribution that the Secretary will apply to a given factual
situation. We have taken this approach because, depending on the facts,
several of the different rules may come into play at the same time. If
we tried to account for all the possible permutations in advance, we
would wind up with an extremely lengthy set of rules that might prove
to be unduly rigid.
On the other hand, we appreciate that there needs to be a certain
degree of predictability as to how the Department will attribute
subsidies. We believe that the rules set forth in paragraph (b) are
sufficiently precise so that parties can predict with a reasonable
degree of certainty how the Department will attribute subsidies to
particular products in a given factual scenario. In this regard, the
Department's intent is to apply these rules in an harmonious manner.
With respect to the attribution rules themselves, they are
consistent with the concept of ``benefit'' described in Sec. 351.501,
i.e., that a benefit is conferred when a firm pays less than it
otherwise would pay in the absence of the government-provided input or
when a firm receives more revenue than it otherwise would earn. In
light of this, subsidies should be attributed, to the extent possible,
to those products for which costs are reduced (or revenues increased).
See, e.g., H.R. Rep. No. 317, 96th Cong., 1st Sess. 74-75 (1979)
(``[W]ith regard to subsidies which provide an enterprise with capital
equipment or a plant * * * the net amount of the subsidy should be * *
* assessed in relation to the products produced with such equipment or
plant. * * *.'').
This principle of attributing a subsidy to an affected cost (or
revenue) center is embodied in the Department's longstanding practice
concerning the ``tying'' of subsidies. See, e.g., Sec. 355.47 of the
1989 Proposed Regulations. As discussed below, there are various ways
in which a subsidy can be tied. However, regardless of the method, the
Department attributes a subsidy to the product or products to which it
is tied. In this regard, one can view an ``untied'' subsidy as a
subsidy that is tied to all products produced by a firm.
Paragraphs (b)(2) through (b)(7) set forth rules that the
Department will apply to different types of tying situations. For
example, paragraph (b)(2) contains an attribution rule regarding export
subsidies. Because an export subsidy is, by definition, tied to the
exportation, paragraph (b)(2) provides that the Secretary will
attribute an export subsidy only to products exported by a firm.
As noted above, the Department intends to apply paragraphs (b)(2)
through (b)(7) consistently with each other. As an example, assume that
a government provides an export subsidy on exports of widgets to
Country X. Here, three attribution rules come into
[[Page 8845]]
play. Under paragraph (b)(2), the subsidy would be attributed to
products exported by a firm. Under paragraph (b)(4), the subsidy would
be attributed to products sold by a firm to Country X. Under paragraph
(b)(5), the subsidy would be attributed to widgets sold by a firm.
Putting the three rules together, the subsidy in this example would be
attributed to a firm's exports of widgets to Country X.
The rules set forth in paragraphs (b)(5) and (b)(6) warrant
additional explanation because of the special nomenclature that is
being used. In all other sections of these regulations, the term
``firm'' is used to describe the recipient of the subsidy. See
Sec. 351.102. However, for purposes of certain attribution rules, where
we are describing how subsidies will be attributed within firms,
``firm'' is too broad. Therefore, for purposes of paragraphs (b)(5) and
(b)(6), we are using the term ``corporation.'' In so doing, we are not
intending to limit the application of these rules to firms that are
organized as corporations. However, based on our experience, most of
the firms we investigate are organized as corporations. Therefore, our
use of the term ``corporation'' makes these attribution rules as clear
as possible. If a respondent is not organized as a corporation, we will
address any attribution issues covered by the rules in paragraphs
(b)(5) and (b)(6) based on the facts of that case.
Paragraph (b)(5) sets out our rules regarding product tying.
Paragraph (b)(5)(i) states our longstanding general rule that where a
subsidy is tied to production of a particular product, the subsidy will
be attributed to that product. Paragraph (b)(5)(ii) provides an
exception to this general rule, which is also consistent with our past
practice. Under this exception, if an input product is produced within
the same corporation, subsidies tied to the input product will be
attributed to sales of both the input and the downstream products. It
is important to note that the Department intends to limit this
exception to situations where production of the input and downstream
product occur within the same corporation. If they are produced by
companies that are separately incorporated--even if there is ``cross
ownership'' between those separately incorporated companies (as
discussed further below)--the Department will follow the general tying
rule in paragraph (b)(5)(i). Consequently, petitioners alleging that
subsidies to a separately incorporated input producer also benefit the
downstream product should file their allegation in accordance with
Sec. 351.523(a) (upstream subsidies).
Paragraph (b)(6) deals with situations where cross ownership exists
between corporations. For example, cross ownership exists where
corporation A owns corporation B (or vice versa), or where A and B are
both owned by corporation C. Cross ownership does not require one
corporation to own 100 percent of the other corporation. Normally,
cross ownership will exist where there is a controlling ownership
interest (i.e., majority voting ownership) between two corporations or
through common ownership of two (or more) corporations. In certain
circumstances, a large minority voting interest (for example, 40
percent) may also result in cross ownership. Specifically, if the
remaining shares are widely held, then a large minority voting interest
interest would be sufficient to find cross ownership. (Situations where
cross ownership exists by virtue of common government ownership are
addressed further below.)
The term ``cross ownership'' as it is used here clearly differs
from ``affiliation,'' as that term is defined in section 771(33) of the
Act. ``Affiliation'' describes a wide range of business relationships,
while cross ownership describes a much narrower range of relationships.
In limiting our attribution rules to situations where there is cross
ownership, we are not reading ``affiliated'' out of the CVD law.
Indeed, we intend to include in our questionnaires a request for
respondents to identify all affiliated parties. Also, persons
affiliated with companies that shipped during the period of
investigation will not be entitled to request a new shipper review
under section 751(a)(2)(B) of the Act. However, we do not believe that
affiliation alone provides a sufficient basis for attributing subsidies
received by one corporation to products produced and sold by another
affiliated corporation. Instead, we have chosen to focus on cross
ownership, as described above, because where cross ownership exists one
corporation can use or direct the individual assets of the other
corporation in essentially the same ways it can use its own assets.
Where the interests of the two parties have merged to this degree, we
believe it is reasonable to presume that subsidies to one corporation
may also benefit another corporation. Paragraph (b)(6) reflects this.
However, where cross ownership does not exist, we will not make this
presumption. Nor do we intend to investigate subsidies to affiliated
parties unless cross ownership exists or other information indicates
that such subsidies may indeed benefit the merchandise being produced
by the corporation being investigated.
Paragraph (b)(6) begins by stating a general rule, which is
followed by three exceptions to that rule deriving from the presumption
described above. Paragraph (b)(6)(i) states that the Secretary will
normally attribute a subsidy received by a corporation to the products
produced by that corporation. Hence, for example, if corporation A
receives a subsidy, then that subsidy will normally be attributed to
the production of corporation A.
However, under paragraph (b)(6)(ii), if two (or more) corporations
with cross ownership produce the same merchandise, then subsidies
received by either or both of those corporations will be attributed to
the combined sales of the two corporations. Thus, for example, if
corporation A and corporation B are both owned by corporation C and
both A and B produce widgets, benefits to A and B will be combined to
determine the subsidy and the subsidy will be attributed to the
combined production of A and B.
Paragraph (b)(6)(iii) addresses a second instance where subsidies
received by one corporation are attributed to sales of another
corporation with cross ownership. This is where the subsidy is received
by a holding company. Under paragraph (b)(6)(iii), such subsidies will
normally be attributed to the consolidated sales of the holding
company. However, if the Department determines that the holding company
is merely serving as a conduit for government-provided funds to one (or
more) of the holding company's subsidiaries, then the subsidy will be
attributed to the production of that subsidiary. Analogous to this
situation is the situation where a government provides a subsidy to a
non-producing subsidiary (e.g., a financial subsidiary) and there are
no conditions on how the money is to be used. Consistent with our
treatment of subsidies to holding companies, we would attribute a
subsidy to a non-producing subsidiary to the consolidated sales of the
corporate group that includes the non-producing subsidiary. See Certain
Steel from Belgium, 58 FR 37273, 37282 (1993).
Finally, paragraph (b)(6)(iv) addresses situations where a
corporation producing another product receives subsidies. In this
instance, the Department will determine whether the corporation
receiving the subsidy transfers it to the corporation producing the
subject merchandise. For example, subsidies may be transferred between
corporations with cross ownership through loans or other financial
[[Page 8846]]
transactions. However, as discussed above, where the subsidies are
allegedly transferred through the purchase of inputs from an input
supplier with cross ownership, that situation will be addressed under
Sec. 351.523 (upstream subsidies).
Although cross ownership is broadly defined, permitting us to
include corporations under common government ownership, we expect that
common government ownership will not normally be viewed as cross
ownership. Instead, we intend to continue our longstanding practice of
treating most government-owned corporations as the government itself,
and not as corporations that transfer subsidies received from the
government to other government-owned corporations through loans or
other financial transactions. For example, where a government-owned
corporation producing the product under investigation purchases
electricity from a government-owned utility, a subsidy is conferred if
the utility does not receive adequate remuneration. Nothing in
paragraph (b)(6)(iv) is meant to require the Department to determine
that the government-owned utility is receiving subsidies which it then
transfers to the producer of the product under investigation. The
situations where we would normally expect to treat common government
ownership as cross ownership are: (1) Upstream subsidy allegations (see
Sec. 351.523(a)(1)(ii)(A)); (2) government-owned corporations producing
the same product (see Sec. 351.524(b)(6)(ii)); and (3) government-owned
corporations producing different products (see Sec. 351.524(b)(6)(iv))
where the corporations are under the control of the same ministry or
within a corporate group containing producers of similar products.
Although the rules described in paragraphs (b)(2)-(b)(7) of
Sec. 351.524 deal with tying, Sec. 351.524 does not contain a
definition of ``tied.'' In the past, the Department has described this
concept in a variety of ways. For example, in Appendix 2 to Certain
Steel Products from Belgium, 47 FR 39304, 39317 (1982), the Department
stated that ``a grant is `tied' when the intended use is known to the
subsidy giver and so acknowledged prior to or concurrent with the
bestowal of the subsidy.'' In the preamble to the 1989 Proposed
Regulations, 54 FR at 23374, the Department stated that a ``tied''
subsidy benefit is ``e.g., a benefit bestowed specifically to promote
the production of a particular product.''
Given the wide variety of factual scenarios that the Department has
encountered in the past, and is likely to encounter in the future, we
are reluctant to promulgate an all-encompassing definition of ``tied.''
Moreover, the absence of a definition of ``tied'' has not proven to be
a problem in practice, and Annex IV to the SCM Agreement, which refers
to ``tied'' subsidies in paragraph 3, also lacks a definition of this
term. Therefore, for the present time, we intend to apply the term
``tied'' on a case-by-case basis. We would, however, welcome comments
regarding what factors are relevant to the Department's determination
of whether benefits are tied.
Virtually every comment submitted on attribution-related issues
included a reference to the fungibility of money. Certain commenters
argued that because money is fungible, the Department should not allow
subsidies to be tied to particular products or to particular export
markets. In their view, the only distinction that should be made is
between export and domestic subsidies. Other commenters invoked the
fungibility principle in support of their position that untied capital
infusions to companies with multinational production should be
attributed to worldwide sales of the firm.
While we agree with these commenters that money is fungible, we do
not believe that the fungibility principle is useful for purposes of
attributing subsidies. For example, according to the fungibility
principle, there should be no distinction between export and domestic
subsidies. Yet, this agency's consistent and non-controversial practice
over the past 16 years has been to attribute export subsidies to
exported products and domestic subsidies to all products sold. Over
time, we also have adopted the practices of attributing: (1) Subsidies
that can be tied to particular markets to products sold to those
markets; (2) subsidies that can be tied to particular products to those
products; (3) subsidies to companies with multinational production to
production occurring in the jurisdiction of the subsidizing government;
and (4) subsidies to corporate entities to the specific entities that
receive the subsidies, absent a showing that the subsidies are
transferred elsewhere within the corporate family. While we have
characterized these as exceptions to the principle of the fungibility
of money, the exceptions have become more prevalent than the rule
insofar as attribution of subsidies is concerned. Therefore, while we
do not reject fungibility, we do not believe that it should guide our
attribution decisions.
This having been said, we would note that the rules we have
proposed are entirely consistent with the court ruling most often cited
in connection with the fungibility principle, British Steel Corp. v.
U.S., 605 F. Supp. 286, 293-96 (Ct. Int'l Trade 1985) (``British
Steel''). In British Steel, the issue being addressed by the court was
whether funds provided by the government to cover redundancy and
closure costs of British Steel Corporation conferred a benefit on the
company's ongoing production:
In plaintiffs' view, funds provided to shut down excess capacity
and eliminate unnecessary jobs are for purposes that are the very
antithesis of ``manufacture, production or export,'' and thus are
not countervailable under any circumstances.
Id. Commerce had taken a position contrary to this view, stating that
the government's payments made ``the recipient more efficient and
relieve[d] it of significant financial burdens.''
Presented with the same facts and arguments today, we would take
the same position. The fact that the funds were given for the purpose
of closing down facilities would not render the funds non-
countervailable. This is because the costs that are affected when the
government provides funds to close down facilities are the input costs
of the ongoing operation, the operation that would bear those costs in
the absence of the government payments. Hence, consistent with the
attribution principles described above, those subsidies would properly
be attributed to the ongoing production and sales of the recipient and
not to the activities that had been closed down.
The court also addressed the Department's practice of attributing
the benefit of untied subsidies (i.e., the same redundancy and closure
payments) to all merchandise produced by the recipient. Plaintiffs had
characterized this practice as being based on the fungibility
principle, and argued that application of the fungibility principle did
not yield an accurate measure of the subsidy conferred on the subject
merchandise. The court upheld Commerce's practice that untied subsidies
benefit all products on a pro rata basis. This same practice is
reflected in Sec. 351.524(b)(3) of these regulations.
Therefore, we see the attribution rules we have proposed as being
consistent with past practice, even where fungibility has been at
issue. Moreover, we believe that these rules provide the best measure
of the level of countervailable subsidies being conferred on the
subject merchandise, because they match the subsidy with the
[[Page 8847]]
activity or cost center experiencing the cost saving (or revenue
increase).
Regarding the attribution of capital infusions received by
companies with multinational production, certain commenters urged the
Department to return to its pre-1993 policy of treating such subsidies
as benefitting all of the recipient's sales. Other commenters sought
codification of the 1993 policy, which established a rebuttable
presumption that domestic subsidies are tied to domestic production.
Section 351.524(b)(7) reflects our continued position, based upon
our past administrative experience, that
* * * the government of a country normally provides subsidies
for the general purpose of promoting the economic and social health
of that country and its people, and for the specific purposes of
supporting, assisting or encouraging domestic manufacturing or
production and related activities (including, for example, social
policy activities such as the employment of its people).
GIA at 37231. Moreover, a government normally will not provide
subsidies to firms that refuse to use them as the government wants, and
firms receiving subsidies will not use them in a way that would
contravene the government's purposes, as they otherwise risk losing
future subsidies. Consistent with this, Sec. 351.524(b)(7) states that
we normally will attribute subsidies to merchandise produced within the
jurisdiction of the granting authority. However, where a respondent can
demonstrate that the subsidy is tied to foreign production, the subsidy
will be attributed to merchandise produced by the foreign facility.
Although the proposed rule is similar to the practice the
Department adopted in 1993, there are some differences. First, the rule
is not stated as a rebuttable presumption. Instead of showing that
subsidies are not tied to domestic production, respondents will instead
have to demonstrate that the subsidies are tied to foreign production.
We believe that this shift in emphasis will bring our practice with
respect to multinational companies more in line with the other
attribution rules that require evidence of tying, as opposed to
evidence that a subsidy is not tied. Second, where a respondent can
demonstrate that a subsidy is tied to foreign-produced merchandise, the
subsidy will not be countervailable. See Sec. 351.526 (transnational
subsidies). This result is similar to the result under the practice
adopted in 1993; i.e., subsidies that were found not tied to domestic
production were attributed to worldwide sales. By using worldwide
sales, the CVD rate was reduced just as it will be reduced when
subsidies are tied to foreign production and foreign production is not
included in the denominator used to calculate the ad valorem CVD rate.
Finally, we note that nothing in paragraph (b)(7) is intended to
imply that the Department is considering calculating regional subsidy
rates; i.e., different CVD rates for imports originating in different
subnational jurisdictions.
Section 351.525
Section 351.525 deals with program-wide changes, and is almost
identical to Sec. 355.50 of the 1989 Proposed Regulations.
Section 351.526
Section 351.526 is based on Sec. 355.44(o) of the 1989 Proposed
Regulations, and provides that so-called ``transnational subsidies''
are not countervailable. Subsidies of this type include situations
where (1) The government of one country provides foreign aid that
ultimately is received by a firm located in the donee country, or (2)
funds are provided by an international lending or development
institution, such as the World Bank.
Section 355.44(o) contained a paragraph (o)(2) which essentially
duplicated what is now section 701(d) of the Act, a provision that
deals with subsidies to international consortia. In light of our
decision to avoid regulations that merely repeat the statute,
Sec. 351.526 merely references, but does not repeat, section 701(d).
Section 351.527
Section 351.527 is based on Sec. 355.46(b) of the 1989 Proposed
Regulations, and provides that the Secretary will ignore the secondary
tax consequences of a subsidy. For example, the Secretary would not
reduce the benefit of a countervailable grant because the grant is
treated as revenue for income tax purposes.
Classification
E.O. 12866
This proposed rule has been determined to be significant under E.O.
12866.
Regulatory Flexibility Act
The Assistant General Counsel for Legislation and Regulation of the
Department of Commerce certified to the Chief Counsel for Advocacy of
the Small Business Administration that this proposed rule, if
promulgated as final, would not have a significant economic impact on a
substantial number of small entities. The Department does not believe
that there will be any substantive effect on the outcome of AD and CVD
proceedings as a result of the streamlining and simplification of their
administration. With respect to the substantive amendments implementing
the Uruguay Round Agreements Act, the Department believes that these
regulations benefit both petitioners and respondents without favoring
either, and, therefore, would not have a significant economic effects.
As such, an initial regulatory flexibility analysis was not prepared.
Paperwork Reduction Act
Notwithstanding any other provision of law, no person is required
to respond to nor shall a person be subject to a penalty for failure to
comply with a collection of information subject to the requirements of
the Paperwork Reduction Act unless that collection of information
displays a currently valid OMB Control Number. This proposed rule does
not contain any new reporting or recording requirements subject to the
Paperwork Reduction Act.
There are three separate collections of information contained in
this rule. Each is currently approved by the Office of Management and
Budget. The Petition Format for Requesting Relief Under U.S.
Antidumping Laws, OMB Control No. 0625-0105, is estimated to impose an
average public reporting burden of 40 hours. The information submitted
is used to assess the petitioner's allegations of unfair trade
practices and to determine whether an investigation is warranted. The
information requested relates to the existence of sales at less than
fair value and injury to the affected U.S. industry. Second, the Format
for Petition Requesting Relief Under the Countervailing Duty Law is
approved under OMB Control No. 0625-0148. This format is used to elicit
the information required by the Tariff Act of 1930, as amended, and its
implementing regulations, for the initiation of a countervailing duty
investigation. Specifically, the Format requests information about the
imported product, a description of the alleged subsidies to the
imported product, and the extent to which the domestic industry is
being injured by the imported product. Finally, OMB Control No. 0625-
0200, Antidumping and Countervailing Duties, Procedures for Initiation
of Downstream Product Monitoring, provides for the filing of a petition
requesting the review of a ``downstream'' product. A downstream product
is one that has incorporated as a component part, a part that is
covered by a U.S. antidumping or countervailing duty finding. To be
eligible to file a
[[Page 8848]]
petition, the petitioner must produce a product like the component part
or the downstream product. It is estimated to require 15 hours per
petition.
These estimates include the time for reviewing instructions,
searching existing data sources, gathering and maintaining the data
needed, and completing and reviewing the collections of information.
Send comments regarding these burden estimates or any other aspect of
these collections of information, including suggestions for reducing
the burden, to the Department of Commerce (see ADDRESSES) or to OMB
Desk Officer, New Executive Office Building, Washington, DC. 20503.
E.O. 12612
This proposed rule does not contain federalism implications
warranting the preparation of a Federalism Assessment.
List of Subjects in 19 CFR Part 351
Administrative practice and procedure, Antidumping, Business and
industry, Cheese, Confidential business information, Countervailing
duties, Investigations, Reporting and recordkeeping requirements.
Dated: February 18, 1997.
Robert S. LaRussa
Acting Assistant Secretary for Import Administration.
For the reasons stated, it is proposed that the proposed rule
published at 61 FR 7308 on February 27, 1996, adding a new 19 CFR part
351, is further amended as follows:
PART 351--COUNTERVAILING AND ANTIDUMPING DUTIES
1. The authority citation for part 351 is proposed to continue to
read as follows:
Authority: 5 U.S.C. 301; 19 U.S.C. 1202 note, 1303 note, 1671
et. seq., and 3538.
Sec. 351.102 [Amended]
2. Section 351.102 (Definitions) is amended by adding the following
definitions in alphabetical order to read as follows:
* * * * *
Consumed in the production process. Inputs ``consumed in the
production process'' are inputs physically incorporated, energy, fuels
and oil used in the production process and catalysts which are consumed
in the course of their use to obtain the product.
Cumulative indirect tax. ``Cumulative indirect tax'' means a multi-
staged tax levied where there is no mechanism for subsequent crediting
of the tax if the goods or services subject to tax at one stage of
production are used in a succeeding stage of production.
* * * * *
Direct tax. ``Direct tax'' means a tax on wages, profits,
interests, rents, royalties, and all other forms of income, a tax on
the ownership of real property, or a social welfare charge.
* * * * *
Export insurance. ``Export insurance'' includes, but is not limited
to, insurance against increases in the cost of exported products,
nonpayment by the customer, inflation, or exchange rate risks.
Firm. For purposes of subpart E (Identification and Measurement of
Countervailable Subsidies), ``firm'' means any individual, partnership,
corporation, association, organization, or other entity, and is used to
refer to the recipient of an alleged countervailable subsidy.
Government-provided. ``Government-provided'' is used as a shorthand
expression to refer to an act or practice that is alleged to be a
countervailable subsidy. The use of the term ``government-provided'' is
not intended to preclude the possibility that a government may provide
a countervailable subsidy indirectly in a manner described in section
771(5)(B)(iii) of the Act (indirect financial contribution).
Import charge. ``Import charge'' means a tariff, duty, or other
fiscal charge that is levied on imports, other than an indirect tax.
* * * * *
Indirect tax. ``Indirect tax'' means a sales, excise, turnover,
value added, franchise, stamp, transfer, inventory, or equipment tax, a
border tax, or any other tax other than a direct tax or an import
charge.
Loan. ``Loan'' means a loan or other form of debt financing, such
as a bond.
Long-term loan. ``Long-term loan'' means a loan, the terms of
repayment for which are greater than one year.
* * * * *
Prior-stage indirect tax. ``Prior-stage indirect tax'' means an
indirect tax levied on goods or services used directly or indirectly in
making a product.
* * * * *
Short-term loan. ``Short-term loan'' means a loan, the terms of
repayment for which are one year or less.
3. A new subpart E is added to 19 CFR part 351, to read as follows:
Subpart E--Identification and Measurement of Countervailable
Subsidies
Sec.
351.501 Scope.
351.502 Specificity of domestic subsidies.
351.503 Grants.
351.504 Loans.
351.505 Loan guarantees.
351.506 Equity.
351.507 Debt forgiveness.
351.508 Direct taxes.
351.509 Indirect taxes and import charges (other than export
programs).
351.510 Provision of goods or services.
351.511 Purchase of goods. [Reserved]
351.512 Worker-related subsidies.
351.513 Export subsidies.
351.514 Internal transport and freight charges for export shipments
351.515 Price preferences for inputs used in the production of
goods for export.
351.516 Remission upon export of indirect taxes.
351.517 Exemption, remission or deferral upon export of prior-stage
cumulative indirect taxes.
351.518 Remission or drawback of import charges upon export.
351.519 Export insurance.
351.520 General export promotion.
351.521 Import substitution subsidies. [Reserved]
351.522 Certain agricultural subsidies.
351.523 Upstream subsidies.
351.524 Calculation of ad valorem subsidy rate and attribution of
subsidy to a product.
351.525 Program-wide changes.
351.526 Transnational subsidies.
351.527 Tax consequences of benefits.
Subpart E--Identification and Measurement of Countervailable
Subsidies
Sec. 351.501 Scope.
The provisions of this subpart E set forth rules regarding the
identification and measurement of countervailable subsidies. Where this
subpart E does not expressly deal with a particular type of alleged
subsidy, the Secretary will identify and measure the subsidy, if any,
in accordance with the underlying principles of the Act and this
subpart E.
Sec. 351.502 Specificity of domestic subsidies.
(a) Agricultural subsidies. The Secretary will not regard a subsidy
as being specific under section 771(5A)(D) of the Act solely because
the subsidy is limited to the agricultural sector (domestic subsidy).
(b) Subsidies to small- and medium-sized businesses. The Secretary
will not regard a subsidy as being specific under section 771(5A)(D) of
the Act solely because the subsidy is limited to small firms or small-
and medium-sized firms.
(c) Disaster relief. The Secretary will not regard disaster relief
as being specific under section 771(5A)(D) of the Act if such relief
constitutes general assistance available to anyone in the area affected
by the disaster.
[[Page 8849]]
Sec. 351.503 Grants.
(a) Benefit. In the case of a grant, a benefit exists in the amount
of the grant.
(b) Time of receipt of benefit. In the case of a grant, the
Secretary will consider a benefit as having been received as of the
date on which the firm received the grant.
(c) Allocation of benefit to a particular time period.--(1)
Recurring grants. The Secretary will allocate (expense) a recurring
grant to the year in which the subsidy is received (see paragraph (b)
of this section).
(2) Non-recurring grants.--(i) In general. The Secretary will
allocate a non-recurring grant over the number of years corresponding
to a firm's AUL (see paragraph (c)(4) of this section).
(ii) Exception. The Secretary will normally allocate (expense) non-
recurring grants received under a particular subsidy program to the
year in which the subsidies are received if the total amount of such
grants is less than 0.50 percent of all sales of the firm in question
during the same year, or, in the case of an export subsidy program,
0.50 percent of the export sales of the firm in question during the
same year.
(3) ``Recurring'' versus ``non-recurring.'' The Secretary will
consider a grant as ``non-recurring'' if the grant is exceptional in
the sense that the recipient of the grant cannot expect to receive
additional grants under the same subsidy program on an ongoing basis
from year to year; or the government must approve the provision of the
grant each year. If a grant does not satisfy the standard for a non-
recurring grant under the preceding sentence, the Secretary will
consider the grant as ``recurring.'
(4) Process for allocating non-recurring grants over time.--(i) In
general. For purposes of allocating a non-recurring grant over time and
determining the annual subsidy amount that should be assigned to a
particular year, the Secretary will use the following formula:
[GRAPHIC] [TIFF OMITTED] TP26FE97.000
Where
Ak=the amount of the benefit allocated to year k,
y=the face value of the grant (see paragraph (a) of this section,
n=the AUL (see paragraph (c)(4)(ii) of this section),
d=the discount rate (see paragraph (c)(4)(iii) of this section, and
k=the year of allocation, where the year of receipt=1 and 1 < k="">< n.="" (ii)="" aul.="" the="" term="" ``aul''="" means="" the="" average="" useful="" life="" of="" a="" firm's="" productive="" assets.="" normally,="" the="" secretary="" will="" calculate="" a="" firm's="" aul="" by="" dividing="" the="" average="" gross="" book="" value="" of="" the="" firm's="" depreciable="" productive="" fixed="" assets="" (for="" a="" period="" considered="" appropriate="" by="" the="" secretary)="" by="" the="" firm's="" average="" annual="" charge="" to="" accumulated="" depreciation.="" in="" calculating="" a="" firm's="" aul,="" the="" secretary="" will="" attempt="" to="" exclude="" fixed="" assets="" that="" are="" not="" depreciable="" (e.g.,="" land="" or="" construction="" in="" progress)="" and="" assets="" that="" have="" been="" fully="" depreciated="" and="" are="" no="" longer="" in="" service.="" in="" addition,="" the="" secretary="" may="" make="" a="" normalizing="" adjustment="" to="" account="" for="" such="" factors="" as="" an="" extraordinary="" write-down="" in="" the="" value="" of="" fixed="" assets="" or="" hyperinflation.="" (iii)="" selection="" of="" a="" discount="" rate.--(a)="" in="" general.="" the="" secretary="" will="" select="" a="" discount="" rate="" based="" upon="" data="" for="" the="" year="" in="" which="" the="" government="" and="" the="" firm="" agreed="" on="" the="" terms="" for="" receiving="" the="" grant.="" the="" secretary="" will="" use="" as="" a="" discount="" rate="" the="" following,="" in="" order="" of="" preference:="" (1)="" the="" cost="" of="" long-term,="" fixed-rate="" loans="" of="" the="" firm="" in="" question,="" excluding="" any="" loans="" that="" the="" secretary="" has="" determined="" to="" be="" countervailable="" subsidies;="" (2)="" the="" average="" cost="" of="" long-term,="" fixed-rate="" loans="" in="" the="" country="" in="" question;="" or="" (3)="" a="" rate="" that="" the="" secretary="" considers="" to="" be="" most="" appropriate.="" (b)="" exception="" for="" uncreditworthy="" firms.="" in="" the="" case="" of="" a="" firm="" considered="" by="" the="" secretary="" to="" be="" uncreditworthy="" (see="" sec.="" 351.504(a)(4)),="" the="" secretary="" will="" use="" as="" a="" discount="" rate="" the="" interest="" rate="" described="" in="" sec.="" 351.504(a)(3)(iii).="" sec.="" 351.504="" loans.="" (a)="" benefit.--(1)="" in="" general.="" in="" the="" case="" of="" a="" loan,="" a="" benefit="" exists="" to="" the="" extent="" that="" the="" amount="" a="" firm="" pays="" on="" the="" government-="" provided="" loan="" is="" less="" than="" the="" amount="" the="" firm="" would="" pay="" on="" a="" comparable="" commercial="" loan(s)="" that="" the="" firm="" could="" actually="" obtain="" on="" the="" market.="" see="" section="" 771(5)(e)(ii)="" of="" the="" act.="" in="" making="" the="" comparison="" called="" for="" in="" the="" preceding="" sentence,="" the="" secretary="" normally="" will="" rely="" on="" effective="" interest="" rates.="" (2)="" ``comparable="" commercial="" loan''="" defined.--(i)="" ``comparable''="" defined.="" in="" selecting="" a="" loan="" that="" is="" ``comparable''="" to="" the="" government-="" provided="" loan,="" the="" secretary="" normally="" will="" place="" primary="" emphasis="" on="" similarities="" in="" the="" structures="" of="" the="" loans="" (e.g.,="" fixed="" interest="" rate="" v.="" variable="" interest="" rate),="" the="" maturities="" of="" the="" loans="" (e.g.,="" short-="" term="" v.="" long-term),="" and="" the="" currencies="" in="" which="" the="" loans="" are="" denominated.="" (ii)="" ``commercial''="" defined.="" in="" selecting="" a="" ``commercial''="" loan,="" the="" secretary="" normally="" will="" use="" a="" loan="" taken="" out="" by="" the="" firm="" from="" a="" commercial="" lending="" institution="" or="" a="" debt="" instrument="" issued="" by="" the="" firm="" in="" a="" commercial="" market.="" also,="" the="" secretary="" will="" treat="" a="" loan="" from="" a="" government-owned="" bank="" as="" a="" commercial="" loan,="" unless="" there="" is="" evidence="" that="" the="" loan="" from="" a="" government-owned="" bank="" is="" provided="" at="" the="" direction="" of="" the="" government="" or="" with="" funds="" provided="" by="" the="" government.="" however,="" the="" secretary="" normally="" will="" not="" consider="" a="" loan="" provided="" under="" a="" government="" program="" to="" be="" a="" commercial="" loan="" for="" purposes="" of="" selecting="" a="" loan="" to="" compare="" to="" a="" government-provided="" loan.="" (iii)="" long-term="" loans.="" in="" selecting="" a="" comparable="" loan,="" if="" the="" government-provided="" loan="" is="" a="" long-term="" loan,="" the="" secretary="" normally="" will="" use="" a="" loan="" the="" terms="" of="" which="" were="" established="" during,="" or="" immediately="" before,="" the="" year="" in="" which="" the="" terms="" of="" the="" government-="" provided="" loan="" were="" established.="" (iv)="" short-term="" loans.="" in="" making="" the="" comparison="" required="" under="" paragraph="" (a)(1)="" of="" this="" section,="" if="" the="" government-provided="" loan="" is="" a="" short-term="" loan,="" the="" secretary="" normally="" will="" use="" an="" annual="" average="" of="" the="" interest="" rates="" on="" comparable="" commercial="" loans="" during="" the="" period="" of="" investigation="" or="" review.="" however,="" if="" the="" secretary="" finds="" that="" interest="" rates="" fluctuated="" significantly="" during="" the="" period="" of="" investigation="" or="" review,="" the="" secretary="" will="" use="" the="" most="" appropriate="" interest="" rate="" based="" on="" the="" circumstances="" presented.="" (3)="" ``could="" actually="" obtain="" on="" the="" market''="" defined.--(i)="" in="" general.="" in="" selecting="" a="" comparable="" commercial="" loan="" that="" the="" recipient="" ``could="" otherwise="" obtain="" on="" the="" market,''="" the="" secretary="" normally="" will="" rely="" on="" the="" actual="" experience="" of="" the="" firm="" in="" question="" in="" obtaining="" comparable="" commercial="" loans.="" (ii)="" where="" the="" firm="" has="" no="" comparable="" commercial="" loans.="" if="" the="" firm="" did="" not="" take="" out="" any="" comparable="" commercial="" loans="" during="" the="" period="" referred="" to="" in="" paragraph="" (a)(2)(iii)="" or="" (a)(2)(iv)="" of="" this="" section,="" the="" secretary="" may="" use="" a="" national="" average="" interest="" rate="" for="" comparable="" commercial="" loans.="" (iii)="" exception="" for="" uncreditworthy="" companies.="" if="" the="" secretary="" finds="" that="" a="" firm="" that="" received="" a="" government-provided="" long-term="" loan="" was="" uncreditworthy,="" as="" defined="" in="" paragraph="" (a)(4)="" of="" this="" section,="" the="" secretary="" will="" calculate="" the="" interest="" rate="" to="" be="" used="" in="" making="" the="" comparison="" called="" for="" by="" paragraph="" (a)(1)="" of="" this="" section="" according="" to="" the="" following="" formula:="">b=[(1+if)/0.957]-1
Where
ib=the benchmark interest rate for uncreditworthy companies;
if=the long-term interest rate that would be paid by creditworthy
companies.
[[Page 8850]]
(4) Uncreditworthiness defined.--(i) In general. The Secretary will
consider a firm to be uncreditworthy if the Secretary determines that,
based on information available at the time of the government-provided
loan, the firm could not have obtained long-term loans from
conventional commercial sources. The Secretary will determine
uncreditworthiness on a case-by-case basis, and may examine, among
other factors, the following:
(A) The receipt by the firm of comparable commercial long-term
loans;
(B) The present and past financial health of the firm, as reflected
in various financial indicators calculated from the firm's financial
statements and accounts;
(C) The firm's recent past and present ability to meet its costs
and fixed financial obligations with its cash flow; and
(D) Evidence of the firm's future financial position, such as
market studies, country and industry economic forecasts, and project
and loan appraisals prepared prior to the agreement between the lender
and the firm on the terms of the loan.
(ii) Significance of long-term commercial loans. In the case of
firms not owned by the government, the receipt by the firm of long-term
commercial loans, unaccompanied by a government-provided guarantee,
will constitute dispositive evidence that the firm is not
uncreditworthy.
(iii) Significance of prior subsidies. In determining whether a
firm is uncreditworthy, the Secretary will ignore current and prior
subsidies received by the firm.
(iv) Discount Rate. When the creditworthiness of a firm is being
considered in connection with the allocation of non-recurring grants
(or benefits treated as non-recurring grants (e.g., equity)), the
Secretary will rely on information available in the year in which the
government agrees to provide the grant.
(5) Long-term variable rate loans.--(i) In general. In the case of
a long-term variable rate loan, the Secretary normally will make the
comparison called for by paragraph (a)(1) of this section by relying on
a comparable commercial loan with a variable interest rate. The
Secretary then will compare the variable interest rates on the
comparable commercial loan and the government-provided loan for the
year in which the terms of the government-provided loan were
established. If the comparison shows that the interest rate on the
government-provided loan was equal to or higher than the interest rate
on the comparable commercial loan, the Secretary will not consider the
government-provided loan as having conferred a benefit. If the
comparison shows that the interest rate on the government-provided loan
was lower, the Secretary will consider the government-provided loan as
having conferred a benefit, and, if the other criteria for a
countervailable subsidy are satisfied, will calculate the amount of the
benefit in accordance with paragraph (c)(4) of this section.
(ii) Exception. If the Secretary is unable to make the comparison
described in paragraph (a)(5)(i) of this section, the Secretary may
modify the method described in that paragraph.
(6) Allegations.--(i) Allegation of uncreditworthiness required.
Normally, the Secretary will not consider the uncreditworthiness of a
firm absent a specific allegation by the petitioner that is supported
by information establishing a reasonable basis to believe or suspect
that the firm is uncreditworthy.
(ii) Government-owned banks. The Secretary will not investigate a
loan provided by a government-owned commercial bank absent a specific
allegation that is supported by information establishing a reasonable
basis to believe or suspect that:
(A) The government-owned bank provided the loan at the direction of
the government or with funds provided by the government; and
(B) A benefit exists within the meaning of paragraph (a)(1) of this
section.
(b) Time of receipt of benefit. In the case of loans described in
paragraphs (c)(1), (c)(2), and (c)(4) of this section, the Secretary
normally will consider a benefit as having been received as of the date
on which the firm is due to make a payment on the government-provided
loan. In the case of a loan described in paragraph (c)(3) of this
section, the Secretary normally will consider the benefit as having
been received in the year in which the firm receives the proceeds of
the loan.
(c) Allocation of benefit to a particular time period.--(1) Short-
term loans. The Secretary will allocate (expense) the benefit from a
short-term loan to the year(s) in which the firm is due to make
interest payments on the loan.
(2) Long-term fixed-rate loans with concessionary interest rates.
Except as provided in paragraph (c)(3) of this section, the Secretary
normally will calculate the subsidy amount to be assigned to a
particular year by calculating the difference in interest payments for
that year; i.e., the difference between the interest paid by the firm
in that year on the government-provided loan and the interest the firm
would have paid on the comparison loan. However, in no event may the
present value (in the year of receipt of the loan) of the amounts
calculated under the preceding sentence exceed the principal of the
loan.
(3) Long-term fixed-rate loans with different repayment
schedules.--(i) Calculation of present value of benefit. Where the
government-provided loan and the loan to which it is compared under
paragraph (a) of this section are both long-term, fixed-interest rate
loans, but have different grace periods or maturities, or where the
shapes of the repayment schedules differ, the Secretary will determine
the total benefit by calculating the present value, in the year in
which the loan was received, of the difference between the amount that
the firm is to pay on the government-provided loan and the amount that
the firm would have paid on the comparison loan. In no event may the
total benefit calculated under the preceding sentence exceed the
principal of the loan.
(ii) Calculation of annual benefit. With respect to the benefit
calculated under paragraph (c)(3)(i) of this section, the Secretary
will determine the portion of that benefit to be assigned to a
particular year by using the formula set forth in Sec. 351.503(c)(4)(i)
(grants) and the following parameters:
Ak=the amount countervailed in year k,
y=the present value of the benefit (see paragraph (c)(3)(i) of this
section),
n=the number of years in the life of the loan,
d=the interest rate on the comparison loan selected under paragraph (a)
of this section, and
k=the year of allocation, where the year of receipt=1.
(4) Long-term variable interest rate loans. In the case of a
government-provided long-term variable-rate loan, the Secretary
normally will determine the amount of the benefit attributable to a
particular year by calculating the difference in payments for that
year; i.e., the difference between the amount paid by the firm in that
year on the government-provided loan and the amount the firm would have
paid on the comparison loan. However, in no event may the present value
(in the year of receipt of the loan) of the amounts calculated under
the preceding sentence exceed the principal of the loan.
(d) Contingent liability interest-free loans. In the case of a
long-term, interest-free loan, the obligation for repayment of which is
contingent upon subsequent events, the Secretary
[[Page 8851]]
normally will treat any balance on the loan outstanding during a year
as an interest-free, short-term loan in accordance with paragraphs
(a)(4), (b), and (c)(1) of this section.
Sec. 351.505 Loan guarantees.
(a) Benefit.--(1) In general. In the case of a loan guarantee, a
benefit exists to the extent that the amount a firm pays on the loan
with the government-provided guarantee is less than the amount the firm
would pay on a comparable commercial loan absent the government-
provided guarantee, after adjusting for any difference in guarantee
fees. See section 771(5)(E)(iii) of the Act. The Secretary will select
a comparable commercial loan in accordance with Sec. 351.504(a)
(loans).
(2) Government acting as owner. In situations where a government,
acting as the owner of a firm, provides a loan guarantee to that firm,
the guarantee does not confer a benefit if the Secretary finds that it
is a normal commercial practice in the country in question for
shareholders to provide guarantees to their firms under similar
circumstances and on comparable terms.
(b) Time of receipt of benefit. In the case of a loan guarantee,
the Secretary normally will consider a benefit as having been received
as of the date on which the firm is due to make a payment on the loan
subject to the government-provided loan guarantee.
(c) Allocation of benefit to a particular time period. In
allocating the benefit from a government-provided loan guarantee to a
particular time period, the Secretary will use the methods set forth in
Sec. 351.504(c) regarding loans.
Sec. 351.506 Equity.
(a) Benefit.--(1) In general. In the case of a government-provided
equity infusion, a benefit exists to the extent that the investment
decision is inconsistent with the usual investment practice of private
investors, including the practice regarding the provision of risk
capital, in the country in which the equity infusion is made. See
section 771(5)(E)(i) of the Act. In determining whether an investment
decision is inconsistent with usual investment practice, the Secretary
normally will compare the price paid by the government for the equity
it purchased to the price that a private investor in the country would
pay for the same (or similar) form of equity.
(2) Private investor prices available. (i) In general. The
Secretary will consider an equity infusion as being inconsistent with
usual investment practice (see paragraph (a)(1) of this section) if the
price paid by the government for newly-issued equity is greater than,
in order of preference:
(A) The price paid by private investors for the same (or similar)
form of newly-issued equity; or
(B) The publicly-traded market price for previously issued equity
of the same (or similar) form as the newly-issued equity.
(ii) Timing of private investor prices. In selecting a private
investor price under paragraph (a)(2)(i) of this section, the Secretary
will rely on sales of equity made at such time as, in the Secretary's
judgment, permits a reasonable comparison to the newly-issued equity
purchased by the government.
(iii) Significant private sector participation required. The
Secretary will not use private investor prices under paragraph
(a)(2)(i) of this section if the Secretary concludes that private
investor purchases of newly-issued equity, or private investor trading
in previously issued equity, is not significant.
(iv) Adjustments for ``similar'' form of equity. Where the
Secretary uses private investor prices for a form of equity that is
similar to the newly-issued equity purchased by the government (see
paragraph (a)(2)(i) of this section), the Secretary, where appropriate,
will adjust the prices to reflect the differences in the forms of
equity.
(3) Private investor prices unavailable. If private investor prices
are not available under paragraph (a)(2) of this section, the Secretary
will determine whether the firm that received the government-provided
equity was equityworthy or unequityworthy at the time of the equity
infusion (see paragraph (a)(4) of this section). If the Secretary
determines that the firm was equityworthy, the Secretary will apply
paragraph (a)(5) of this section to determine whether the equity
infusion was inconsistent with the usual investment practice of private
investors. A determination by the Secretary that the firm was
unequityworthy will constitute a determination that the equity infusion
was inconsistent with usual investment practice of private investors,
and the Secretary will apply paragraph (a)(6) of this section to
measure the benefit, if any, attributable to the equity infusion.
(4) Equityworthiness.--(i) In general. The Secretary will consider
a firm to have been equityworthy if the Secretary determines that, from
the perspective of a reasonable private investor examining the firm at
the time the government-provided equity infusion was made, the firm
showed an ability to generate a reasonable rate of return within a
reasonable period of time. In making this determination, the Secretary
may examine the following factors, among others:
(A) Current and past indicators of the firm's financial health
calculated from the firm's statements and accounts, adjusted, if
appropriate, to conform to generally accepted accounting principles;
(B) Future financial prospects of the firm, including market
studies, economic forecasts, and project or loan appraisals prepared at
the time of, or prior to, the government-provided equity infusion in
question;
(C) Rates of return on equity in the three years prior to the
government equity infusion; and
(D) Equity investment in the firm by private investors.
(ii) Significance of prior subsidies. In determining whether a firm
was equityworthy, the Secretary will ignore current and prior subsidies
received by the firm.
(5) Benefit to equityworthy firm. If the Secretary determines that
a firm was equityworthy, the Secretary will examine the details of the
particular equity infusion in question to determine whether the
investment was inconsistent with usual investment practice of private
investors. If the Secretary determines that the investment was
inconsistent with usual investment practice, the Secretary will
determine the amount of the benefit conferred on a case-by-case basis.
(6) Benefit to unequityworthy firm.--(i) Constructed private
investor price. If the Secretary determines that a firm was
unequityworthy, the Secretary normally will measure the benefit
conferred by a government-provided equity infusion by estimating, based
on information and analysis available at the time of the equity
infusion, the price that a reasonable private investor would have paid
for the equity purchased by the government. If the price paid by the
government for newly-issued equity was greater than this price, the
benefit will be based on the difference between the two prices.
(ii) Constructed private investor price unavailable. If the
Secretary determines that information is not available, or does not
provide an appropriate basis, for calculating the price that a
reasonable private investor would have paid (see paragraph (a)(6)(i) of
this section), the Secretary will measure the benefit conferred by an
equity infusion in an unequityworthy firm by adjusting the amount of
the infusion allocated to a particular year under paragraph (c)(3) of
this section by the amount of
[[Page 8852]]
subsequent after-tax returns achieved in that year.
(7) Allegations. The Secretary will not investigate an equity
infusion in a firm absent a specific allegation by the petitioner which
is supported by information establishing a reasonable basis to believe
or suspect that the firm received an equity infusion that provides a
countervailable benefit within the meaning of paragraph (a) of this
section.
(b) Time of receipt of benefit. In the case of a government-
provided equity infusion, the Secretary normally will consider the
benefit to have been received as of the date on which the firm received
the equity infusion.
(c) Allocation of benefit to a particular time period.--(1) In
general. The benefit conferred by an equity infusion shall be allocated
over the same time period as a non-recurring grant. See
Sec. 351.503(c)(2).
(2) Allocation where private investor prices used. Where the
Secretary determines the amount of the benefit conferred by an equity
infusion by using private investor prices (see paragraph (a)(2) of this
section) or the price that a reasonable private investor would have
paid (see paragraph (a)(6)(i) of this section), the Secretary will
allocate the benefit as if it were a non-recurring grant (see
Sec. 351.503(c)(2)).
(3) Allocation where private investor prices not used. Where the
Secretary is unable to use private investor prices (see paragraph
(a)(2) of this section) or the price that a reasonable private investor
would have paid (see paragraph (a)(6)(i) of this section), the
Secretary will allocate the full amount of the equity infusion as if it
were a non-recurring grant (see Sec. 351.503(c)(2)). The amount so
allocated to a particular year will be subject to adjustment under
paragraph (a)(6)(ii) of this section.
Sec. 351.507 Debt forgiveness.
(a) Benefit. In the case of an assumption or forgiveness of a
firm's debt obligation, a benefit exists equal to the amount of the
principal and/or interest (including accrued, unpaid interest) that the
government has assumed or forgiven. In situations where the entity
assuming or forgiving the debt receives shares in a firm in return
eliminating or reducing the firm's debt obligation, the Secretary will
determine the existence of a benefit under Sec. 351.506 (equity
infusions).
(b) Time of receipt of benefit. In the case of a debt or interest
assumption or forgiveness, the Secretary normally will consider the
benefit as having been received as of the date on which the debt or
interest was assumed or forgiven.
(c) Allocation of benefit to a particular time period.--(i) In
general. The Secretary will treat the benefit determined under
paragraph (a) of this section as a non-recurring grant, and will
allocate the benefit to a particular year in accordance with
Sec. 351.503(c)(2)(grants).
(ii) Exception. Where an interest assumption is tied to a
particular loan and where a firm can reasonably expect to receive the
interest assumption at the time it applies for the loan, the Secretary
will normally treat the interest assumption as a reduced-interest loan
and allocate the benefit to a particular year in accordance with
Sec. 351.504(c)(loans).
Sec. 351.508 Direct taxes.
(a) Benefit.--(1) Exemption or remission of taxes. In the case of a
program that provides for a full or partial exemption or remission of a
direct tax (e.g., an income tax), or a reduction in the base used to
calculate a direct tax, a benefit exists to the extent that the tax
paid by a firm as a result of the program is less than the tax the firm
would have paid in the absence of the program.
(2) Deferral of taxes. In the case of a program that provides for a
deferral of direct taxes, a benefit exists to the extent that
appropriate interest charges are not collected. Normally, a deferral of
direct taxes will be treated as a government-provided loan in the
amount of the tax deferred, according to the methodology described in
Sec. 351.504.
(b) Time of receipt of benefit. In the case of a full or partial
exemption or remission of a direct tax, the Secretary normally will
consider the benefit as having been received as of the date on which
the recipient firm became capable of calculating the amount of the
benefit. Normally, this date will be the date on which the firm filed
its tax return. In the case of a tax deferral of one year or less, the
Secretary normally will consider the benefit as having been received as
of the date on which the deferred tax becomes due. In the case of a
multi-year deferral, the Secretary normally will consider the benefit
as having been received on the anniversary date(s) of the deferral.
(c) Allocation of benefit to a particular time period. The
Secretary normally will allocate (expense) the benefit of a full or
partial exemption, remission, or deferral of a direct tax to the year
in which the benefit is considered to have been received under
paragraph (b) of this section.
Sec. 351.509 Indirect taxes and import charges (other than export
programs).
(a) Benefit.--(1) Exemption or remission of taxes. In the case of a
program, other than an export program, that provides for the full or
partial exemption or remission of an indirect tax or an import charge,
a benefit exists to the extent that the taxes or import charges paid by
a firm as a result of the program are less than the taxes the firm
would have paid in the absence of the program.
(2) Deferral of taxes. In the case of a program, other than an
export program, that provides for a deferral of indirect taxes or
import charges, a benefit exists to the extent that appropriate
interest charges are not collected. Normally, a deferral of indirect
taxes or import charges will be treated as a government-provided loan
in the amount of the taxes deferred, according to the methodology
described in Sec. 351.504.
(b) Time of receipt of benefit. In the case of a full or partial
exemption or remission of an indirect tax or import charge, the
Secretary normally will consider the benefit as having been received at
the time the recipient firm otherwise would be required to pay the
indirect tax or import charge. In the case of the deferral of an
indirect tax or import charge of one year or less, the Secretary
normally will consider the benefit as having been received as of the
date the deferred tax becomes due. In the case of a multi-year
deferral, the Secretary normally will consider the benefit as having
been received on the anniversary date(s) of the deferral.
(c) Allocation of benefit to a particular time period. The
Secretary normally will allocate (expense) the benefit of a full or
partial exemption, remission, or deferral described in paragraph (a) of
this section to the year in which the benefit is considered to have
been received under paragraph (b) of this section.
Sec. 351.510 Provision of goods or services.
(a) Benefit. [Reserved]
(b) Time of receipt of benefit. In the case of the provision of a
good or service, the Secretary normally will consider a benefit as
having been received as of the date on which the firm pays, or in the
absence of payment was due to pay, for the government-provided good or
service.
(c) Allocation of benefit to a particular time period. In the case
of the provision of a good or service, the Secretary will allocate
(expense) the benefit to the year in which the benefit is considered to
have been received under paragraph (b) of this section.
[[Page 8853]]
Sec. 351.511 Purchase of goods. [Reserved]
Sec. 351.512 Worker-related subsidies.
(a) Benefit. In the case of a program that provides assistance to
workers, a benefit exists to the extent that the assistance relieves a
firm of an obligation that it normally would incur.
(b) Time of receipt of benefit. In the case of assistance provided
to workers, the Secretary normally will consider the benefit as having
been received by the firm as of the date on which the payment is made
that relieves the firm of the relevant obligation.
(c) Allocation of benefit to a particular time period. Normally,
the Secretary will allocate (expense) the benefit from assistance
provided to workers to the year in which the benefit is considered to
have been received under paragraph (b) of this section.
Sec. 351.513 Export subsidies.
The Secretary will consider a subsidy to be an export subsidy if
the Secretary determines that eligibility for, approval of, or the
amount of, a subsidy is contingent upon actual or anticipated
exportation or export earnings. In applying this section, the Secretary
will consider a subsidy to be contingent upon actual or anticipated
exportation or export earnings if receipt of the subsidy is, in law or
in fact, tied to actual or anticipated export performance, alone or as
one of two or more factors.
Sec. 351.514 Internal transport and freight charges for export
shipments.
(a) Benefit.--(1) In general. In the case of internal transport and
freight charges on export shipments, a benefit exists to the extent
that the charges paid by a firm for transport or freight with respect
to goods destined for export are less than what the firm would have
paid if the goods were destined for domestic consumption. The Secretary
will consider the amount of the benefit to equal the difference in
amounts paid.
(2) Exception. For purposes of paragraph (a)(1) of this section, a
benefit does not exist if the Secretary determines that:
(i) Any difference in charges is the result of an arm's length
transaction between the supplier and the user of the transport or
freight service; or
(ii) The difference in charges is commercially justified.
(b) Time of receipt of benefit. In the case of internal transport
and freight charges for export shipments, the Secretary normally will
consider the benefit as having been received by the firm as of the date
on which the firm paid, or in the absence of payment was due to pay,
the charges.
(c) Allocation of benefit to a particular time period. Normally,
the Secretary will allocate (expense) the benefit from internal
transport and freight charges for export shipments to the year in which
the benefit is considered to have been received under paragraph (b) of
this section.
Sec. 351.515 Price preferences for inputs used in the production of
goods for export.
(a) Benefit. (1) In general. In the case of the provision by
governments or their agencies, either directly or indirectly through
government-mandated schemes, of imported or domestic products for use
in the production of exported goods, a benefit exists to the extent
that the Secretary determines that the terms or conditions on which the
products are provided are more favorable than the terms or conditions
applicable to the provision of like or directly competitive products
for use in the production of goods for domestic consumption. The amount
of the benefit will equal the difference between the amount that a firm
paid for inputs used in the production of export products and the
amount the firm would have paid for like or directly competitive
products for use in the production of goods for domestic consumption.
(2) Exception. A benefit will not exist under paragraph (a)(1) of
this section if the Secretary determines that the terms or conditions
relating to the provision of products for use in the production of
exported goods are not more favorable than those commercially available
on world markets to exporters in the country in question. For purposes
of the preceding sentence, the Secretary normally will compare the
price charged for the domestically sourced input to the delivered price
of the imported input in order to determine whether the domestically
sourced input is being provided on more favorable terms or conditions
than those available on world markets.
(3) Commercially available. For purposes of paragraph (a)(2) of
this section, ``commercially available'' means that the choice between
domestic and imported products is unrestricted and depends only on
commercial considerations.
(b) Time of receipt of benefit. In the case of a benefit described
in paragraph (a)(1) of this section, the Secretary normally will
consider the benefit to have been received as of the date on which the
firm paid, or in the absence of payment was due to pay, for the
product.
(c) Allocation of benefit to a particular time period. Normally,
the Secretary will allocate (expense) benefits described in paragraph
(a)(1) of this section to the year in which the benefit is considered
to have been received under paragraph (b) of this section.
Sec. 351.516 Remission upon export of indirect taxes.
(a) Benefit. In the case of the remission upon export of indirect
taxes, a benefit exists to the extent that the Secretary determines
that the amount remitted exceeds the amount levied with respect to the
production and distribution of like products when sold for domestic
consumption.
(b) Time of receipt of benefit. In the case of the remission upon
export of an indirect tax, the Secretary will consider the benefit as
having been received as of the date of exportation.
(c) Allocation of benefit to a particular time period. Normally,
the Secretary will allocate (expense) the benefit from the remission
upon export of indirect taxes to the year in which the benefit is
considered to have been received under paragraph (b) of this section.
Sec. 351.517 Exemption, remission or deferral upon export of prior-
stage cumulative indirect taxes.
(a) Benefit.--(1) Exemption of prior-stage cumulative indirect
taxes. In the case of a program that provides for the exemption of
prior-stage cumulative indirect taxes on inputs used in the production
of an exported product, a benefit exists to the extent that the
exemption extends to inputs that are not consumed in the production of
the exported product, making normal allowance for waste. If the
Secretary determines that the exemption of prior-stage cumulative
indirect taxes confers a benefit, the Secretary normally will consider
the amount of the benefit to be the prior-stage cumulative indirect
taxes that otherwise would have been paid on the inputs not consumed in
the production of the exported product, making normal allowance for
waste.
(2) Remission of prior-stage cumulative indirect taxes. In the case
of a program that provides for the remission of prior-stage cumulative
indirect taxes on inputs used in the production of an exported product,
a benefit exists to the extent that the amount remitted exceeds the
amount of prior-stage cumulative indirect taxes paid on inputs that are
consumed in the production of the exported product, making normal
allowance for waste. If the Secretary determines that the remission of
prior-stage cumulative indirect taxes confers a benefit, the Secretary
normally will consider the
[[Page 8854]]
amount of the benefit to be the difference between the amount remitted
and the amount of the prior-stage cumulative indirect taxes on inputs
that are consumed in the production of the export product, making
normal allowance for waste. Notwithstanding the preceding sentence, the
Secretary will consider the entire amount of the remittance to confer a
benefit, unless the Secretary determines that:
(i) The government in question has in place and applies a system or
procedure to confirm which inputs are consumed in the production of the
exported products and in what amounts, and the system or procedure is
reasonable, effective for the purposes intended, and is based on
generally accepted commercial practices in the country of export; or
(ii) If the government in question does not have a system or
procedure in place, where the system or procedure is not reasonable, or
where the system or procedure is instituted and considered reasonable,
but is found not to be applied or not to be applied effectively, the
government in question has carried out an examination of actual inputs
involved to confirm which inputs are consumed in the production of the
exported product.
(3) Deferral of prior-stage cumulative indirect taxes. In the case
of a program that provides for a deferral of prior-stage cumulative
indirect taxes on an exported product, a benefit does not exist if the
government charges appropriate interest on the taxes deferred. If the
Secretary determines that a benefit exists, the Secretary normally will
treat the deferral as if it were a government-provided loan in the
amount of the tax deferred, according to the methodology described in
Sec. 351.504.
(b) Time of receipt of benefit. In the case of the exemption,
remission, or deferral of prior-stage cumulative indirect taxes, the
Secretary normally will consider the benefit as having been received:
(1) In the case of an exemption, as of the date of exportation;
(2) In the case of a remission, as of the date of exportation;
(3) In the case of a deferral of one year or less, as of the date
on which the deferred tax was due; and
(4) In the case of a multi-year deferral, as of the anniversary
date(s) of the deferral.
(c) Allocation of benefit to a particular time period. The
Secretary normally will allocate (expense) the benefit of the
exemption, remission, or deferral of prior-stage cumulative indirect
taxes to the year in which the benefit is considered to have been
received under paragraph (b) of this section.
Sec. 351.518 Remission or drawback of import charges upon export.
(a) Benefit.--(1) In general. In the case of the remission or
drawback of import charges upon export, a benefit exists to the extent
that the Secretary determines that the amount of the remission or
drawback exceeds the amount of import charges on imported inputs
consumed in the production of the exported product, making normal
allowances for waste.
(2) Substitution drawback. ``Substitution drawback'' involves a
situation in which a firm uses a quantity of home market inputs equal
to, and having the same quality and characteristics as, the imported
inputs as a substitute for them. Substitution drawback does not
necessarily result in the conferral of a benefit. However, a benefit
exists if the Secretary determines that:
(i) The import and the corresponding export operations both did not
occur within a reasonable time period, not to exceed two years; or
(ii) The amount drawnback exceeds the amount of the import charges
levied initially on the imported inputs for which drawback is claimed.
(3) Amount of the benefit from remission or drawback--(i) In
general. If the Secretary determines that the remission or drawback,
including substitution drawback, of import charges confers a benefit
under paragraph (a)(1) or (a)(2) of this section, the Secretary
normally will consider the amount of the benefit to be the difference
between the amount of import charges remitted or drawnback and the
amount levied initially on the imported inputs for which remission or
drawback was claimed.
(ii) Exception. Notwithstanding paragraph (a)(3)(i) of this
section, the Secretary will consider the entire amount of a remission
or drawback to confer a benefit, unless the Secretary determines that:
(A) The government in question has in place and applies a system or
procedure to confirm which inputs are consumed in the production of the
exported products and in what amounts, and the system or procedure is
reasonable, effective for the purposes intended, and is based on
generally accepted commercial practices in the country of export; or
(B) If the government in question does not have a system or
procedure in place, where the system or procedure is not reasonable, or
where the system or procedure is instituted and considered reasonable,
but is found not to be applied or not to be applied effectively, the
government in question has carried out an examination of actual inputs
involved to confirm which inputs are consumed in the production of the
exported product.
(b) Time of receipt of benefit. In the case of the remission or
drawback of import charges, the Secretary normally will consider the
benefit as having been received as of the date of exportation.
(c) Allocation of benefit to a particular time period. The
Secretary normally will allocate (expense) the benefit of the remission
or drawback of import charges to the year in which the benefit is
considered to have been received under paragraph (b) of this section.
Sec. 351.519 Export insurance.
(a) Benefit--(1) In general. In the case of export insurance, a
benefit exists if the premium rates charged are inadequate to cover the
long-term operating costs and losses of the program.
(2) Amount of the benefit. If the Secretary determines under
paragraph (a)(1) of this section that premium rates are inadequate, the
Secretary normally will calculate the amount of the benefit as the
difference between the amount of premiums paid by the firm and the
amount received by the firm under the insurance program during the
period of investigation or review.
(b) Time of receipt of benefit. In the case of export insurance,
the Secretary normally will consider the benefit as having been
received in the year in which the difference described in paragraph
(a)(2) of this section occurs.
(c) Allocation of benefit to a particular time period. The
Secretary normally will allocate (expense) the benefit from export
insurance to the year in which the benefit is considered to have been
received under paragraph (b) of this section.
Sec. 351.520 General export promotion.
In the case of export promotion activities of a government, a
benefit does not exist if the Secretary determines that the activities
consist of general informational activities that do not promote
particular products over others.
Sec. 351.521 Import substitution subsidies. [Reserved]
Sec. 351.522 Certain agricultural subsidies.
The Secretary will treat as noncountervailable domestic support
measures that are provided to certain agricultural products (i.e.,
products listed in Annex 1 of the WTO
[[Page 8855]]
Agreement on Agriculture) and that the Secretary determines conform to
the criteria of Annex 2 of the WTO Agreement on Agriculture. See
section 771(5B)(F) of the Act. The Secretary will determine that a
particular domestic support measure conforms fully to the provisions of
Annex 2 if the Secretary finds that the measure:
(a) Is provided through a publicly-funded government program
(including government revenue foregone) not involving transfers from
consumers;
(b) Does not have the effect of providing price support to
producers; and
(c) Meets the relevant policy-specific criteria and conditions set
out in paragraphs 2 through 13 of Annex 2.
Sec. 351.523 Upstream subsidies.
(a) Investigation of upstream subsidies--(1) In general. Before
investigating the existence of an upstream subsidy (see section 771A of
the Act), the Secretary must have a reasonable basis to believe or
suspect that all of the following elements exist:
(i) A countervailable subsidy, other than an export subsidy, is
provided with respect to an input product;
(ii) One of the following conditions exist:
(A) There is cross ownership between the supplier of the input
product and the producer of the subject merchandise;
(B) The price for the subsidized input product is lower than the
price that the producer of the subject merchandise otherwise would pay
another seller in an arm's length transaction for an unsubsidized input
product; or
(C) The government sets the price of the input product so as to
guarantee that the benefit provided with respect to the input product
is passed through to producers of the subject merchandise; and
(iii) The ad valorem countervailable subsidy rate on the input
product, multiplied by the proportion of the total production costs of
the subject merchandise accounted for by the input product, is equal
to, or greater than, one percent.
(b) Input product. For purposes of this section, ``input product''
means any product used in the production of the subject merchandise.
(c) Competitive benefit--(1) In general. In evaluating whether a
competitive benefit exists under section 771A(b) of the Act, the
Secretary will determine whether the price for the subsidized input
product is lower than the benchmark input price. For purposes of this
section, the Secretary will use as a benchmark input price the
following, in order of preference:
(i) The actual price paid by, or offered to, the producer of the
subject merchandise for an unsubsidized input product, including an
imported input product;
(ii) An average price for an unsubsidized input product, including
an imported input product, based upon publicly available data;
(iii) The actual price paid by, or offered to, the producer of the
subject merchandise for a subsidized input product, including an
imported input product, that is adjusted to account for the
countervailable subsidy;
(iv) An average price for a subsidized input product, including an
imported input product, based upon publicly available data, that is
adjusted to account for the countervailable subsidy; or
(v) An unadjusted price for a subsidized input product.
(2) Use of delivered prices. The Secretary will use a delivered
(e.g., c.i.f.) price whenever the Secretary uses the price of an
imported input product under paragraph (c)(1) of this section.
(d) Significant effect--(1) Presumptions. In evaluating whether an
upstream subsidy has a significant effect on the cost of manufacturing
or producing the subject merchandise (see section 771A(a)(3) of the
Act), the Secretary will multiply the ad valorem countervailable
subsidy rate on the input product by the proportion of the total
production cost of the subject merchandise that is accounted for by the
input product. If the product of that multiplication exceeds five
percent, the Secretary will presume the existence of a significant
effect. If the product is less than one percent, the Secretary will
presume the absence of a significant effect. If the product is between
one and five percent, there will be no presumption.
(2) Rebuttal of presumptions. A party to the proceeding may present
information to rebut these presumptions. In evaluating such
information, the Secretary will consider the extent to which factors
other than price, such as quality differences, are important
determinants of demand for the subject merchandise.
Sec. 351.524 Calculation of ad valorem subsidy rate and attribution of
subsidy to a product.
(a) Calculation of ad valorem subsidy rate. The Secretary will
calculate an ad valorem subsidy rate by dividing the amount of the
benefit allocated to the period of investigation or review by the sales
value during the same period of the product to which the Secretary
attributes the subsidy under paragraph (b) of this section. Normally,
the Secretary will determine the sales value of a product on an F.O.B.
(port) basis (if the product is exported) or on an F.O.B. (factory)
basis (if the product is sold for domestic consumption). However, if
the Secretary determines that countervailable subsidies are provided
with respect to the movement of a product from the port or factory to
the place of destination (e.g., freight or insurance costs are
subsidized), the Secretary may make appropriate adjustments to the ad
valorem subsidy rate to account for such subsidies.
(b) Attribution of a subsidy to a product--(1) In general. In
attributing a subsidy to one or more products, the Secretary will apply
the rules set forth in paragraphs (b)(2) through (b)(7) of this
section.
(2) Export subsidies. The Secretary will attribute an export
subsidy only to products exported by a firm.
(3) Domestic subsidies and import substitution subsidies. The
Secretary will attribute a domestic subsidy or an import substitution
subsidy to all products sold by a firm, including products that are
exported.
(4) Subsidies tied to a particular market. If a subsidy is tied to
sales to a particular market, the Secretary will attribute the subsidy
only to products sold by the firm to that market.
(5) Subsidies tied to a particular product.--(i) In general. If a
subsidy is tied to the production or sale of a particular product, the
Secretary will attribute the subsidy only to that product.
(ii) Exception. If a subsidy is tied to the production or sale of
an input product produced within the same corporation that produces the
downstream product, then a subsidy which is tied to the input product
will be attributed to the input and downstream products produced by
that corporation.
(6) Corporations with Cross Ownership.--(i) In general. The
Secretary normally will attribute a subsidy to the products produced by
the corporation that received the subsidy.
(ii) Corporations producing the same product. If two (or more)
corporations with cross ownership produce the same product, the
Secretary will attribute the subsidies received by either or both
corporations to the products produced by both corporations.
(iii) Holding companies. If the firm that received a subsidy is a
holding company, the Secretary will attribute the subsidy to the
consolidated sales of the holding company. However, if the
[[Page 8856]]
Secretary finds that the holding company merely served as a conduit for
the transfer of the subsidy from the government to a subsidiary of the
holding company, the Secretary will attribute the subsidy to products
sold by the subsidiary.
(iv) Transfer of subsidy between corporations with cross ownership
producing different products. If a corporation producing non-subject
merchandise received a subsidy and transferred the subsidy to a
corporation with cross ownership, the Secretary will attribute the
subsidy to products sold by the recipient of the transferred subsidy.
(7) Multinational firms. If the firm that received a subsidy has
production facilities in two or more countries, the Secretary will
attribute the subsidy to products produced by the firm within the
jurisdiction of the government that granted the subsidy. However, if
the subsidy is tied to production by a facility outside of that
jurisdiction, the Secretary will attribute the subsidy to products
produced by that facility.
Sec. 351.525 Program-wide changes.
(a) In general. The Secretary may take a program-wide change into
account in establishing the estimated countervailing duty cash deposit
rate if:
(1) The Secretary determines that subsequent to the period of
investigation or review, but before a preliminary determination in an
investigation (see Sec. 351.205) or a preliminary results of an
administrative review or a new shipper review (see Secs. 351.213 and
351.214), a program-wide change has occurred; and
(2) The Secretary is able to measure the change in the amount of
countervailable subsidies provided under the program in question.
(b) Definition of program-wide change. For purposes of this
section, ``program-wide change'' means a change that:
(1) Is not limited to an individual firm or firms; and
(2) Is effectuated by an official act, such as the enactment of a
statute, regulation, or decree, or contained in the schedule of an
existing statute, regulation, or decree.
(c) Effect limited to cash deposit rate.--(1) In general. The
application of paragraph (a) of this section will not result in
changing an affirmative determination to a negative determination or a
negative determination to an affirmative determination.
(2) Example. In a countervailing duty investigation, the Secretary
determines that during the period of investigation a countervailable
subsidy existed in the amount of 10 percent ad valorem. Subsequent to
the period of investigation, but before the preliminary determination,
the foreign government in question enacts a change to the program that
reduces the amount of the subsidy to a de minimis level. In a final
determination, the Secretary would issue an affirmative determination,
but would establish a cash deposit rate of zero.
(d) Terminated programs. The Secretary will not adjust the cash
deposit rate under paragraph (a) of this section if the program-wide
change consists of the termination of a program and:
(1) The Secretary determines that residual benefits may continue to
be bestowed under the terminated program; or
(2) The Secretary determines that a substitute program for the
terminated program has been introduced and the Secretary is not able to
measure the amount of countervailable subsidies provided under the
substitute program.
Sec. 351.526 Transnational subsidies.
Except as otherwise provided in section 701(d) of the Act
(subsidies provided to international consortia), a subsidy does not
exist if the Secretary determines that the funding for the subsidy is
provided:
(a) By a government of a country other than the country in which
the recipient firm is located, or
(b) By an international lending or development institution.
Sec. 351.527 Tax consequences of benefits.
In calculating the amount of a benefit, the Secretary will not
consider the secondary tax consequences of the benefit.
[FR Doc. 97-4538 Filed 2-25-97; 8:45 am]
BILLING CODE 3510-25-P
