[Federal Register Volume 63, Number 227 (Wednesday, November 25, 1998)]
[Rules and Regulations]
[Pages 65348-65418]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-30565]
[[Page 65347]]
_______________________________________________________________________
Part III
Department of Commerce
_______________________________________________________________________
International Trade Administration
_______________________________________________________________________
19 CFR Part 351
Countervailing Duties; Final Rule
Federal Register / Vol. 63, No. 227 / Wednesday, November 25, 1998 /
Rules and Regulations
[[Page 65348]]
DEPARTMENT OF COMMERCE
International Trade Administration
19 CFR Part 351
[Docket No. 950306068-8205-05]
RIN 0625-AA45
Countervailing Duties
AGENCY: International Trade Administration, Department of Commerce.
ACTION: Final rule.
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SUMMARY: The Department of Commerce (``the Department'') hereby issues
final countervailing duty regulations to conform to the Uruguay Round
Agreements Act, which implemented the results of the Uruguay Round
multilateral trade negotiations. The Department has sought to issue
regulations that: 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; 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
codify certain administrative practices determined to be appropriate
under the new statute and under the President's Regulatory Reform
Initiative.
DATES: The effective date of this final rule is December 28, 1998,
except that Sec. 351.301(d) is effective on November 25, 1998. See
Sec. 351.702 for applicability dates.
FOR FURTHER INFORMATION CONTACT: Jennifer A. Yeske at (202) 482-1032 or
Jeffrey May at (202) 482-4412.
SUPPLEMENTARY INFORMATION:
Background
The publication of this notice of final rules, which deals with
countervailing duty (``CVD'') methodology, completes a significant
portion of the 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. On February 26, 1997, the
Department published proposed rules dealing with CVD methodology
(``1997 Proposed Regulations''). The Department received over 200
written public comments regarding the 1997 Proposed Regulations. On
October 17, 1997, the Department held a public hearing, and thereafter,
received over 50 additional post-hearing written public comments on the
1997 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 (January 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 (February 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 (February
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); (7)
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); (8) Notice of Proposed Rulemaking and Request for Public
Comment (Countervailing Duties), 62 FR 8818 (February 26, 1997); (9)
Final Rules (Antidumping Duties; Countervailing Duties), 62 FR 27295
(May 19, 1997); (10) Extension of Deadline to File Public Comments
on Proposed Countervailing Duty Regulations, (Countervailing
Duties), 62 FR 19719 (April 23, 1997); (11) Extension of Deadline to
File Public Comments on Proposed Countervailing Duty Regulations,
(Countervailing Duties), 62 FR 25874 (May 12, 1997); (12) Notice of
Public Hearing on Proposed Countervailing Duty Regulations and
Announcement of Opportunity to File Post-Hearing Comments,
(Countervailing Duties), 62 FR 38948 (July 21, 1997); (13) Notice of
Public Hearing on Proposed Countervailing Duty Regulations and
Announcement of Opportunity to File Post-Hearing Comments;
Correction, (Countervailing Duties), 62 FR 41322 (August 1, 1997);
(14) Notice of Postponement of Public Hearing on Proposed
Countervailing Duty Regulations and of Opportunity to File Post-
Hearing Comments, (Countervailing Duties), 62 FR 46451 (September 3,
1997); (15) Interim Final Rules; Request for Comments (Procedures
for Conducting Five-Year (``Sunset'') Reviews of Antidumping and
Countervailing Duty Orders), 63 FR 13516 (March 20, 1998); and (16)
Final Rule; Administrative Protective Order Procedures; Procedures
for Imposing Sanctions for Violation of a Protective Order,
(Antidumping and Countervailing Duty Proceedings), 63 FR 24391 (May
4, 1998).
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In drafting these final rules, the Department has carefully
reviewed and considered each of the comments it received. While we have
not always adopted suggestions made by commenters, we found the
comments to be very useful in helping us to work our way through the
many legal and policy issues addressed in the regulation. Therefore, we
are extremely grateful to those who took the time and trouble to
express their views regarding how the Department should administer the
CVD laws in the future.
In addition, in these final rules, the Department has continued to
be guided by the objectives described in the 1997 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. 911-955
(1994).
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In the case of CVD methodology, the Department previously issued
proposed regulations 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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In an earlier rulemaking (see item 9 in note 1), we 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.
Explanation of the Final Rules
In drafting these Final Regulations, the Department carefully
considered each of the comments received. In addition, we conducted our
own independent review of those provisions of the 1997 Proposed
Regulations that were not the subject of public comments. The following
sections contain a summary of the comments we received and the
Department's responses to those comments. In addition, these sections
contain an explanation of changes the Department has made to the 1997
Proposed Regulations either in response to
[[Page 65349]]
comments or on its own initiative. Finally, these sections contain a
restatement of principles that remain unchanged from the 1997 Proposed
Regulations and that were not the subject of any public comments.
The Department is also hereby issuing interim final rules to set
forth certain procedures for establishing the non-countervailable
status of alleged subsidies or subsidy programs pursuant to section
771(5B) of the Tariff Act of 1930, as amended (``the Act''). Pursuant
to authority at 5 U.S.C. 553(b)(A), the Assistant Secretary for Import
Administration waives the requirement to provide prior notice and an
opportunity for public comment because this action is a rule of agency
procedure. This interim final rule is not subject to the 30-day delay
in its effective date under 5 U.S.C. 553(d) because it is not a
substantive rule. The analytical requirements of the Regulatory
Flexibility Act (5 U.S.C. 601 note) are inapplicable to this rulemaking
because it is not one for which a Notice of Proposed Rulemaking is
required under 5 U.S.C. 553 or any other statute.
Section 351.102
These 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''). We have made some
changes to the definitions contained in the 1997 Proposed Regulations.
While we have not changed the definition of consumed in the
production process, we are clarifying that the definition is not to be
used as a way to expand significantly the rights of countries to apply
border adjustments for a broad range of taxes on energy, particularly
in the developed world. See SAA at 915.
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. For clarification, we have added
``company'' and ``joint venture'' to the entities listed in the
definition in the 1997 Proposed Regulations.
Similarly, the term 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 directly provided by a
government. This definition is unchanged from our 1997 Proposed
Regulations.
As in our 1997 Proposed Regulations, loan is defined to include
forms of debt financing other than what one normally considers to be a
``loan,'' such as bonds or overdrafts. 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 Steel Products
from Austria (General Issues Appendix), 58 FR 37062, 37254 (July 9,
1993) (``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 (CIT 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.
Many commenters proposed definitions of the phrase ``entrusts or
directs'' as it is used in section 771(5)(B)(iii) of the Act, which
deals with ``indirect subsidies.'' Indirect subsidies generally involve
situations where a government provides a financial contribution through
a private body. Under section 771(5)(B)(iii) of the Act, a subsidy
exists when, inter alia, a government ``makes a payment to a funding
mechanism to provide a financial contribution, or entrusts or directs a
private entity to make a financial contribution * * *'' (emphasis
added). In our 1997 Proposed Regulations, we did not address indirect
subsidies in detail. Instead, we noted that the SAA directs the
Department to proceed on a case-by-case basis (see SAA at 925-26), and
we requested comments on the factors we should consider in making our
case-by-case determinations.
One commenter suggested that an indirect subsidy need only be
linked to a government action or program to satisfy the ``entrusts or
directs'' standard. This same commenter asked the Department to include
an illustrative list of situations that would meet the ``entrusts or
directs'' standard. A second commenter believed that the standard is
met when a government takes an action that causes a private party to
confer a benefit. This same commenter asked the Department to clarify
that the term ``private body'' is not limited to a single entity, but
also includes a group of entities or persons. A third commenter
proposed that the ``entrusts or directs'' standard be considered
satisfied whenever a government takes an action that proximately
results in a private entity providing a financial contribution. Certain
commenters also asked the Department to confirm that the standard is no
narrower than the prior U.S. standard for finding an indirect subsidy.
The issue of what ``entrusts or directs'' means was debated
extensively at the Department's hearing on its 1997 Proposed
Regulations. This debate prompted the submission of additional proposed
definitions. Two commenters argued that an indirect subsidy occurs
whenever a government action has the inevitable result of compelling a
private party to provide a benefit. A second commenter proposed a ``but
for'' test, i.e., if the government did not act, the subsidy would not
exist.
As the extensive comments on this issue indicate, the phrase
``entrusts or directs'' could encompass a broad range of meanings. As
such, we do not believe it is appropriate to develop a precise
definition of the phrase for purposes of these regulations. Rather, we
believe that we should follow the guidance provided in the SAA to
examine indirect subsidies on a case-by-case basis. We will, however,
enforce this provision vigorously.
We agree with those commenters who urged the Department to confirm
that the current standard is no narrower than the prior U.S. standard
for finding an indirect subsidy as described in Certain Steel Products
from Korea, 58 FR 37338 (July 9, 1993) and Certain Softwood Lumber
Products from Canada, 57 FR 22570 (May 28, 1992). Also, we believe that
the phrase ``entrusts or directs'' subsumes many elements of the
definitions proposed by commenters. With respect to the suggestion that
we include an illustrative list of situations that would fall under the
``entrusts or directs'' standard, we do not believe this is necessary.
The SAA at 926 lists a number of cases where the Department
[[Page 65350]]
has found indirect subsidies in the past, and these cases serve to
provide examples of situations where we believe the statute would
permit the Department to reach the same result. Similarly, regarding
the request that we define the phrase ``private entity'' to include
groups of entities or persons, the SAA is clear that groups are
included (see SAA at 926). Therefore, we have not promulgated a
regulation with this definition.
Although the indirect subsidies that we have countervailed in the
past have normally taken the form of a foreign government requiring an
intermediate party to provide a benefit to the industry producing the
subject merchandise, often to the detriment of the intermediate party,
indirect subsidies could also take the form of a foreign government
causing an intermediate party to provide a benefit to the industry
producing the subject merchandise in a way that is also in the interest
of the intermediate party. We believe the phrase ``entrusts or
directs'' could encompass government actions that provide inducements,
other than upstream subsidies, to a private party to provide a benefit
to another party.
One commenter argued that the Final Regulations should include a
definition of consultations. Consistent with Article 13 of the SCM
Agreement, section 702(b)(4)(A)(ii) of the Act requires the Department
to provide the government of the exporting country named in a petition
an opportunity for consultations with respect to the petition. This
commenter suggested that the definition of consultations should include
a statement of purpose as articulated in the SCM Agreement (i.e.,
clarifying the allegations in the petition and arriving at a mutually
agreed solution). Furthermore, the commenter argued, in the Final
Regulations the Department should commit to consult with the foreign
government both prior to initiating and during the course of the
investigation. Finally, the commenter proposed that the definition
contain a requirement that all government-to-government exchanges (oral
and written) be placed on the record of the proceeding.
We do not believe that a regulation is required to define
``consultations.'' We agree that, in accordance with Article 13 of the
SCM Agreement, the purpose of consultations is to clarify the
allegations presented in a petition and arrive at a mutually agreed
solution. Section 351.202(h)(2)(i)(2) of Antidumping Duties;
Countervailing Duties; Final rule, 62 FR 27295, 27384 (May 19, 1997)
clearly states that the Department will invite the government of any
exporting country named in a CVD petition to hold consultations with
respect to the petition. Further, consistent with Article 13.2 of the
SCM Agreement, the Department affords foreign governments reasonable
opportunities to consult throughout the period of investigation. In
regard to communications, it is the Department's longstanding practice
that all ex parte communications with Department decisionmakers be
placed on the record of a proceeding through memoranda to the file.
Section 351.501
Section 351.501 restates very generally the subject matter of
subpart E. To be more specific, the arrangement of subpart E is as
follows. After dealing with the specificity of domestic subsidies in
Sec. 351.502 and the concept of ``benefit'' in Sec. 351.503,
Secs. 351.504 through 351.513 deal with the identification and
measurement of various general types of subsidy practices. Sections
351.514 through 351.520 focus on export subsidies, incorporating the
appropriate standards from the Illustrative List of Export Subsidies
contained in Annex I of the SCM Agreement. Sections 351.521 through
351.523 deal with import substitution subsidies (currently designated
as ``Reserved''), green light and green box subsidies, and upstream
subsidies, respectively. Section 351.524 addresses the allocation of
benefits to a particular time period. Section 351.525 sets forth rules
regarding the calculation of an ad valorem subsidy rate and the
attribution of a subsidy to the appropriate sales value of a product.
Finally, Secs. 351.526 and 351.527 contain rules regarding program-wide
changes and transnational subsidies, respectively. The section
numbering in these Final Regulations reflects minor changes from the
1997 Proposed Regulations. As discussed below, we have decided to
codify a final rule on the concept of ``benefit.'' This rule is now
Sec. 351.503. We have also moved the rules regarding the allocation of
benefits, which were included in the section on grants in the 1997
Proposed Regulations to a separate section, Sec. 351.524. Finally, we
have moved Sec. 351.520 of the 1997 Proposed Regulations to
Sec. 351.514(b) because general export promotion activities are more
appropriately addressed as an exception to export subsidies.
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 the General Agreement on Tariffs and Trade 1994 (``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 previously was not directly addressed.
Second, under section 771(5)(B) of the Act and Article 1.1(b) of
the SCM Agreement, the financial contribution (or income or price
support) must confer a benefit. Section 351.503 sets out the principles
we will generally follow in determining whether a benefit has been
conferred.
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 addressed in Sec. 351.502,
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 controversies and volume of
litigation concerning this issue.
In the preamble to our 1997 Proposed Regulations we discussed our
decision not to include two topics in our proposed changes to subpart
E: Indirect subsidies (with the exception of upstream subsidies) and
privatization. The numerous comments regarding our decision not to
promulgate regulations on these two topics are addressed below.
Indirect Subsidies
In our 1997 Proposed Regulations, we discussed only briefly the
topic of indirect subsidies. We received several comments on this
issue. Comments concerning the adoption of a definition of the phrase
``entrusts or directs'' have been addressed previously (see
Sec. 351.102). The remaining comments relating to indirect subsidies
are addressed here.
One commenter asked the Department to codify a rule stating that
indirect subsidies are countervailable. In this commenter's view, this
would eliminate any uncertainty that could become the cause of
litigation. Another commenter requested that the Department include a
[[Page 65351]]
broad definition of indirect subsidies in our regulations.
We have not adopted either suggestion. We believe that section
771(5)(B)(iii) of the Act clearly states that subsidies provided by
governments through private parties are covered by the CVD law.
Additionally, section 771(5)(C) of the Act states that the
determination of whether a subsidy exists shall be made ``without
regard to whether the subsidy is provided directly or indirectly * *
*'' (emphasis added). Therefore, no regulation is needed on this point.
Regarding the second comment, as discussed previously, the phrase
``entrusts or directs'' as used in section 771(5)(B)(iii) of the Act
could encompass a broad range of meanings. As such, we do not believe
it is appropriate to develop a precise definition of the phrase for
purposes of these regulations.
One commenter singled out subsidies involving the provision of
goods and services for less than adequate remuneration and asked the
Department to confirm that indirect subsidies can be conferred through
the provision of goods or services by private parties. This same
commenter also asked the Department to state in the preamble to the
Final Regulations that the new statute will not alter the Department's
practice of finding export restraints to be countervailable. Other
commenters objected to this position. They argued that: (1) The
practices constituting financial contributions under the Act are
payments of cash or cash equivalents, while government regulatory
measures do not entail any financial contribution; (2) export
restraints do not direct private parties to make any type of payment;
they simply limit the parties' ability to export; (3) regulatory
measures that distort trade are separately covered by other World Trade
Organization (``WTO'') Agreements (e.g., GATT 1994 Articles I-V, VII-
IX, Agreement on Sanitary and Phytosanitary Measures, Agreement on
Technical Barriers to Trade, and Agreement on Trade-Related Investment
Measures); and (4) expanding the definition of subsidy to include
regulatory measures would extend that term to absurd dimensions far
beyond the limited scope intended by the SCM Agreement and the Act.
These same commenters urged the Department to issue a regulation which
clarifies what they see as a conflict between the clear language in the
statute (regulatory measures are not financial contributions within the
meaning of the Act and, hence, cannot confer subsidies) and the
language in the SAA at 926 (suggesting that regulatory measures can be
countervailed as indirect subsidies).
Regarding the issue of whether indirect subsidies can arise through
the provision of goods and services, we believe this is clearly
answered by the Act. Section 771(5)(D)(iii) states that financial
contributions include the provision of goods or services. Hence, if a
private entity is entrusted or directed to provide a good or service to
producers of the merchandise under investigation, a financial
contribution exists. With regard to export restraints, while they may
be imposed to limit parties' ability to export, they can also, in
certain circumstances, lead those parties to provide the restrained
good to domestic purchasers for less than adequate remuneration. This
was recognized by the Department in Certain Softwood Lumber Products
from Canada, 57 FR 22570 (May 28, 1992) (``Lumber'') and Leather from
Argentina, 55 FR 40212 (October 2, 1990) (``Leather''). Further, as
indicated by the SAA (at 926), and as we confirm in these Final
Regulations, if the Department were to investigate situations and facts
similar to those examined in Lumber and Leather in the future, the new
statute would permit the Department to reach the same result.
We agree that regulatory measures that distort trade normally may
be subject to the provisions of other WTO Agreements. We do not
believe, however, that this negates our ability to address them through
the application of our CVD law when such measures meet the definition
of a countervailable subsidy. We disagree that countervailing such
measures goes beyond the ambit of the SCM Agreement and the Act. As
discussed above in response to an earlier comment, the SCM Agreement
clearly permits, and the Act clearly requires, that we countervail
subsidies provided through private parties. Also, Article VI of GATT
1994 continues to refer to subsidies provided ``directly or
indirectly'' by a government.
Change in Ownership
The SAA and the House and Senate Reports emphasize the importance
of considering the facts of individual cases to determine whether, and
to what extent, change-in-ownership transactions eliminate previously
conferred countervailable subsidies. In the 1997 Proposed Regulations,
we did not include a provision dealing with change in ownership.
Rather, we invited comment on a broad array of factors concerning this
topic and whether we should promulgate a final rule that integrates
some or all of the factors identified in the preamble.
The comments we received on this issue largely fell along two
lines. On the one hand, several commenters argued that the Department
should promulgate a regulation stating that change-in-ownership
transactions, even if conducted at arm's-length and at fair market
value, have no effect on non-recurring subsidies bestowed prior to the
sale of a firm, and that non-recurring subsidies, in most instances,
pass through in their entirety to the sold or privatized entity.
Conversely, other commenters contended that a change-in-ownership
regulation should establish a rebuttable presumption that, in general,
the sale or change in ownership of a firm at fair market value
eliminates the benefit conferred by prior non-recurring subsidies.
According to the first group of commenters, under section 771(5)(F)
of the Act, the change in ownership of a firm has no effect on the
Department's ability to countervail fully subsidies bestowed prior to
the change in ownership. In fact, in these commenters' view, Congress
expected the Department to continue countervailing prior subsidies,
unless something serves to eliminate those subsidies. The sale of a
firm at fair market value does not serve to eliminate prior subsidies;
thus, after such a sale, prior subsidies would continue to be
countervailed until fully amortized. The only instance where partial
repayment of prior subsidies can exist is where economic resources have
been returned to the government, i.e., where the investor has paid more
than fair market value for a productive unit. The Department should
specify this in its regulations.
These same commenters argued that recent court decisions support
the conclusion that subsidies continue to be countervailable after the
privatization of a firm at fair market value. See, e.g., Saarstahl AG
v. United States, 78 F.3d 1539 (Fed. Cir. 1996); British Steel plc v.
United States, 127 F.3d 1471 (Fed. Cir. 1997). In light of these
decisions, one commenter stated that it would be ironic for the
Department now to conclude under the URAA that subsidies are no longer
countervailable after the sale of a firm at fair market value. This
commenter also claimed that such a conclusion would result in anti-
subsidy practices weaker than those of the European Union (``EU''),
because EU Guidelines on State Aid recognize that the sale of a company
does not extinguish previously bestowed subsidies. Rather, according to
this commenter, the EU requires subsidy recipients to repay illegal
subsidies, including principal and interest, from the time the aid was
disbursed, without
[[Page 65352]]
regard to whether the recipient is later sold or
privatized.4
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\ 4\ In support of this proposition, the commenter cites
Community Guidelines on State Aid for Rescuing and Restructuring
Firms in Difficulty, O.J. Eur. Comm. No. C283/2 at 283/4 (September
19, 1997) (``The assessment of rescue or restructuring aid is not
affected by changes in the ownership of the business aided. Thus, it
will not be possible to evade control by transferring the business
to another legal entity or owner.'')
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These commenters opposed the Department's attempt to develop a
``flexible'' approach toward privatization. They expressed concern that
ascribing any significance to the broad array of factors listed in the
1997 Proposed Regulations may lead to all or some pre-privatization
subsidies being extinguished in a fair market privatization, which
would involve reevaluating the amount, and possibly the existence, of
prior subsidies based on post-bestowal events and conditions. This
would violate the statute's prohibition against considering the effects
of subsidies and the Department's practice of not examining subsequent
events to determine whether the subject merchandise continues to
benefit from subsidies. See section 771(5)(C) of the Act and GIA at
37261. For example, one commenter stated that taking account of current
market conditions, such as global overcapacity, in determining the
extent to which pre-privatization subsidies pass through, is tantamount
to considering effects. Similarly, another commenter rejected the
suggestion that subsidies that reduce excess capacity are not
countervailable because this too depends on an impermissible ``use''
analysis. Whatever the use of the subsidy, these commenters argued, the
benefit from the subsidy continues unabated after privatization.
Finally, this first group of commenters asserted that the
privatization or sale of a productive unit, even at fair market value,
does not result in any partial or full repayment of prior subsidies. To
conclude otherwise would conflict with Congress' mandate that the
Department's privatization methodology be ``consistent with the
principles of the countervailing duty statute.'' S. Rep. No. 103-412,
at 92 (1994). Those principles include prohibitions against (1)
focusing on subsequent events, (2) analyzing alleged effects of
subsidies, (3) granting offsets not included in the exclusive statutory
list, and (4) valuing subsidies based on the cost-to-government
standard. Some in this first group of commenters asserted that the
logical reading of Congress' instruction to evaluate change-in-
ownership transactions on a case-by-case basis is to determine whether
a privatization or sale involving a productive unit elicits some non-
commercial activity, i.e., whether under- or overpayment for the
productive unit has occurred. In the case of underpayment, the
Department should find that additional subsidies have been bestowed; in
the case of overpayment, the Department should find that certain prior
subsidies have been repaid.
In contrast to these arguments, the second group of commenters
asserted that the Department should issue regulations establishing a
rebuttable presumption that the arm's-length sale of a firm, including
a government-owned enterprise, at a price that reflects the current
market value of its assets, in most cases extinguishes any previously
received subsidies. This group argued that Congress' instruction to
examine change-in-ownership transactions on a case-by-case basis
indicates that the URAA contemplates extinguishment of prior subsidies,
at least in certain circumstances. In these commenters' view, the
arm's-length sale of a company at full market value is such a
circumstance, because the market price takes into account prior
subsidies, and the benefit is, therefore, eliminated. However, if the
price paid for the firm does not reflect full market value, the
question of a continuing benefit can reasonably be raised. According to
several of these commenters, any other approach would be
counterproductive, because it would discourage potential buyers from
bidding on subsidized government-owned enterprises about to be
privatized. One commenter further stressed that restructuring of, and
foreign investment in, countries such as those in Eastern Europe, may
be inhibited, which is a concern for U.S. investors and the United
States' wider economic and political interests.
One member of this group of commenters found support for the
proposition that an arm's-length sale at fair market value must
extinguish prior subsidies with the following statutory analysis. The
commenter claimed that the URAA requires the Department to determine
whether and to what extent government financial contributions confer a
benefit on the production or sale of the investigated merchandise in
each CVD proceeding. Such a determination is based on the nature of the
subsidy benefit, which is the artificially reduced cost of an input
used in the production of the merchandise. Thus, where the subsidy is
provided for a specific use, e.g., the acquisition of capital assets,
the continuing subsidy benefit is the reduced cost of that asset
allocated over the useful life of the asset. Where government financial
contributions are not tied to specific applications, as in the case of
an equity infusion, the Department should normally view the money
itself as the continuing subsidy benefit.
In light of this, the commenter contended that the Department's
privatization analysis must first examine what inputs were acquired by
the subsidy recipient at an artificially reduced cost. Then, the
Department must determine whether the cost for those inputs was
artificially reduced for the privatized company as well. According to
this commenter, where the privatization transaction occurs at arm's-
length and at fair market value, the privatized company would not
continue to benefit from the past subsidies. Similarly, where
government financial contributions are not tied to specific
applications, meaning that the money itself is the continuing subsidy
benefit, the Department's focus should be on the price and terms of the
privatization transaction. If the privatization of the company,
including all its physical and financial assets, was at fair market
value, the Department would not find any benefit to have passed
through, because the privatized company would not be operating with any
capital for which it paid less than market value. According to this
commenter, if the privatization of a firm were at full market value,
the new owners of the company have paid for all of the inputs at market
value. Therefore, the privatized firm no longer operates with inputs
acquired at a cost that is less than what would have been paid without
a government financial contribution.
This commenter stressed that there are several possible exceptions
to this rule. For example, where an asset would not have been created
or acquired absent the government financial contribution, and where the
creation or acquisition of the asset was not economically viable, the
Department may conclude that the very existence of the asset is the
continuing benefit and not the reduced costs of the asset. In such an
instance, the benefit could be deemed to continue, even after a full
market privatization. However, this commenter asserted that this would
represent an exception to the general rule.
This commenter rejected the argument that this analysis is
tantamount to an ``effects'' test. If a subsequent event does in fact
eliminate subsidization, limited Departmental resources should not
prevent examination of that event. The commenter stated that, in the
case of
[[Page 65353]]
subsidies not tied to any particular use, the only event that the
Department would need to consider is one which would eliminate the
artificially reduced cost of the company's inputs as a whole. The sale
of an entire company for market value is such an event, in the
commenter's view. Where a subsidy is tied to a particular use, the only
event that the Department would need to consider is one that would
affect or eliminate the benefit arising from that specific use.
Moreover, according to the commenter, in numerous contexts the
Department traces the use of a subsidy. These include instances where
subsidies are provided for certain uses that may be greenlighted or
that may benefit a company over time, i.e., non-recurring subsidies.
Most commenters also found fault with the Department's existing
repayment or reallocation methodology, under which pre-sale subsidies
are partially repaid to the seller as part of the purchase price.
Several commenters argued that the repayment/reallocation methodology
should be abandoned, because it is not defensible, economically or
legally. According to these commenters, the repayment/reallocation
methodology violates the offset provision of the statute (section
771(6) of the Act), because this provision does not include repayment
or reallocation of subsidies in the context of a privatization at fair
market value. Moreover, a fair-market-value privatization does not
offset the distortion caused by government subsidies, a fact recognized
by EU law, according to which subsidy repayment can occur only if the
illegal aid is returned.5 According to these commenters, the
repayment/reallocation methodology is also inconsistent with the
Department's and the Court's ``conceptual model of subsidies,'' which
presumes that subsidies distort market processes and result in a
misallocation of resources (citing Carbon Steel Wire Rod from Poland,
49 FR 19374, 19375 (May 7, 1984), and Georgetown Steel Corp. v. United
States, 801 F.2d 1308, 1315-16 (Fed. Cir. 1986) (``Georgetown Steel'').
Under this model, repayment or reallocation can only occur if an
equivalent ``distortion'' takes place, that is, a return of the
illegally provided resources from the subsidized entity. This does not
occur, the commenters emphasized, in a fair-market privatization.
Further, the repayment/reallocation methodology is inconsistent with
the benefit-to-recipient standard because it is based on the assumption
that the government was paid more money upon privatization than it
would have received absent the subsidy, a fact that is only relevant
under a cost-to-government standard. These commenters stated that while
the cost of the subsidy to the government may be diminished in a fair-
market privatization, the value of the subsidy to the recipient is
unchanged. According to these commenters, by finding that repayment/
reallocation occurs in a fair-market-value transaction, the Department
is encouraging subsidization. This violates the basic purpose of the
CVD law, which is intended to deter subsidization. These commenters
also argued that the Court of International Trade's (``CIT'') decision
in British Steel plc vs. United States, 879 F. Supp. 1254, 1277 (CIT
1995), aff'd in part and rev'd in part, 127 F.3d 1471 (Fed. Cir. 1997),
casts doubt on the permissibility of finding repayment in the context
of a privatization at fair market value. One commenter also argued that
the repayment/reallocation methodology is inconsistent with the URAA
and the SAA's instruction to examine carefully the facts of each case
in determining the effects of privatization on prior subsidies, because
it is an automatic rule that always assumes a portion of the purchase
price represents repayment or reallocation of prior subsidies.
---------------------------------------------------------------------------
\5\ Citing Commission notice pursuant to Article 93(2) of the EC
Treaty to other Member States and interested parties concerning aid
which Germany has granted to Fritz Egger Spanplattenindustrie GmbH &
Co. KG at Brilon, O.J. Eur. Comm. No. C369/6, 369/8-369/9 (1994),
and Agreement Respecting Normal Competitive Conditions in the
Commercial Shipbuilding and Repair Industry, opened for signature
December 21, 1994, art. 8, para. 5.
---------------------------------------------------------------------------
Another commenter asserted that the repayment/reallocation
methodology does not capture the full extent of the benefit bestowed
upon a company because it does not capture the benefit from the
government's assumption of risk. According to this commenter, to
encourage investment in risky industry sectors, governments can assume
some of the risk, for example by providing start-up capital. If the
government privatizes the company, the trade-distorting effect of the
government action continues, and the production of the company
continues to enjoy the benefit of the government subsidy. This
commenter argued that if the Department maintains the repayment/
reallocation methodology, it should also consider whether the industry
could attract private capital at the time the subsidies were provided.
Where an industry could not attract private capital, the Department
should find that all subsidies passed through after privatization.
Alternatively, if the Department finds that privatization can
extinguish or repay a subsidy, this should only be permitted when the
price paid for the privatized company is equal to the net worth of the
firm without the subsidy, plus the residual value of the subsidy. For
example, a firm receives a $1 million countervailable subsidy, which
the Department allocates over 10 years. In year two, the residual value
of the subsidy (for countervailing duty purposes) is $900,000. In that
year, the firm is privatized and its pre-subsidy assets are valued at
$18 million. If the firm is sold for $18.9 million, the subsidy would
be repaid. If it is sold for $18 million, the subsidy would pass
through in its entirety. According to this commenter, this approach
recognizes that the buyer of a firm is paying for the assets as well as
the residual value of the subsidy, while the current repayment/
reallocation approach fails to do this.
Another modification suggested by some commenters to the repayment/
reallocation methodology is to alter the calculation of ``gamma,''
which measures the proportion of the purchase price that the Department
considers to be repaid to the government in a privatization
transaction, or reallocated to the previous owner in a private-to-
private sale. This commenter stated that the gamma ratio should be
calculated using the total remaining value of the subsidies at the time
of the privatization to the company's total net worth in the same year,
rather than using the average of the historical values of the subsidies
to the firm's net worth starting in the years the subsidies were
received. This approach would give more weight to subsidies received
immediately preceding privatization.
Finally, several commenters addressed the issue of whether
subsidies provided in anticipation, or in the process, of privatization
should be given special consideration. On the one hand, one commenter
argued that subsidies provided shortly before, and in preparation for,
the sale, such as debt forgiveness, asset revaluations, tax breaks, and
other measures to ``clean up'' balance sheets, should be considered new
subsidies and not ``pre-privatization'' subsidies. According to this
commenter, under no circumstance should these subsidies be eliminated
as part of the privatization transaction. On the other hand, another
commenter suggested that steps taken by a government just prior to
privatization to make a company more ``saleable,'' such as closing
inefficient operations, should not by themselves be considered
[[Page 65354]]
subsidies that pass through to the privatized company.
Except for the comments on our current repayment/reallocation
methodology and the comments on subsidies given in the process of
privatization, which we address below, the commenters have presented
two general positions with respect to the impact of changes in
ownership on subsidies bestowed prior to the sale: (1) That the arm's-
length sale of a company at fair market value has no effect on the
countervailability of prior subsidies; and (2) that the fair-market
sale of a firm, in general, excuses the purchaser from any CVD
liability for prior subsidies. While the commenters suggest possible
exceptions to these general positions that theoretically would give
effect to the statutory direction to consider the facts of each case,
the exceptions are narrowly defined to fit improbable circumstances. In
most cases, the proposals, with their narrowly defined exceptions,
would lead to either total pass-through or total extinguishment of pre-
sale subsidies.
Although we see merit in some of the arguments presented, we
believe that adopting either of these extreme positions would require a
strained interpretation of the statute. The statute, SAA, and
legislative history plainly state that the arm's-length sale of a firm
does not by itself require a determination that prior subsidies have
been extinguished. See section 771(5)(F), SAA at 928, and S. Rep. No.
103-412, at 92 (1994); see also the discussion in the 1997 Proposed
Regulations at 8821. Moreover, we continue to disagree with the claim
that in order to impose countervailing duties on a privatized or post-
sale firm, the Department must affirmatively demonstrate how subsidies
continue to benefit the subject merchandise after the fair-market sale
of a company. See GIA at 37263. Our refusal to read a continuing
competitive benefit test (sometimes called an ``effects test'') into
the CVD law was upheld by the Federal Circuit in Saarstahl v. United
States, 78 F.3d 1539 (Fed. Cir. 1996) (``Saarstahl'') and British Steel
plc v. United States, 879 F. Supp. 1254 (CIT 1995), aff'd in part and
rev'd in part 127 F.3d 1471 (Fed. Cir. 1997) (``British Steel''). As
the CIT explained in British Steel plc v. United States, ``Commerce has
consistently maintained that it does not measure the effects of
subsidies once they have been determined by Commerce. In other words,
whether subsequent events mitigate these effects is irrelevant. This
Court, for the purposes of this proceeding, has no quarrel with that
practice.'' 879 F. Supp. at 1273. Further, section 771(5)(C) of the Act
specifically states that the Department ``* * * is not required to
consider the effect of the subsidy in determining whether a subsidy
exists * * *'' See also Certain Hot-Rolled Lead and Bismuth Carbon
Steel Products from the United Kingdom, 61 FR 58377, 58379 (November
14, 1996) (1994 Administrative Review UK Lead Bar).
In this regard, it is useful to clarify what we mean in saying that
we would not attempt to determine whether a subsidy had any ``effect''
on the recipient, or whether ``subsequent events'' might have mitigated
or eliminated any potential effects from the subsidy. The term
``effect,'' as used in the statute and SAA, and the term ``subsequent
events,'' as used by the Courts, refer to the question of whether a
subsidy confers a competitive benefit upon the subsidy recipient or its
successor. There is no requirement that the Department determine
whether there is a competitive benefit, as is made clear in the SAA (at
926):
* * * 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.
In the course of the 1993 steel investigations, certain respondents
argued that: (1) A subsidy cannot be countervailed unless it bestows a
``competitive benefit'' on merchandise exported to the United States;
(2) the arm's-length sale of a subsidized company eliminates any
competitive benefit from prior subsidies (because the price paid for
the company includes payment for any continuing value the subsidies
might have); and (3) therefore, the arm's-length sale of a subsidized
company frees the new owner from any countervailing duty liability for
prior subsidies to that company. We rejected this argument (see GIA at
37260-61), explaining that the statute did not require that a subsidy
bestow a competitive benefit on imports to the United States as a
condition of liability for countervailing duties. Just as we would not
attempt to determine whether a subsidy conferred a competitive benefit
on the original recipient in the first place (that is, whether the
subsidy had any effect on the original recipient's subsequent
performance (usually an effect upon its output or prices)), we would
not attempt to determine whether any potential competitive benefit
continued with respect to the new owner in light of a subsequent event
such as a change in ownership. The Federal Circuit upheld this position
in Saarstahl and British Steel. As one commenter noted, the law is
concerned with the benefit originally received, not with what the
recipient does with it.
When we say we do not consider ``subsequent events'' in the
calculation of a subsidy, we generally are referring to events that
arguably affect the subsequent performance (normally in terms of output
or prices) of the subsidy recipient or its successor. We have never
implied, however, that no subsequent event could ever affect the
allocation of a subsidy. The Department may consider whether government
or private actions occurring after the receipt of a subsidy should
result in the reallocation of a subsidy as long as there is no tracing
of the uses of the subsidy or the effect of the subsidy on the output
or price of subject merchandise. Clearly, a post-subsidy change in
ownership is an event that occurs subsequent to the receipt of the
subsidy, and we have reallocated subsidies based on changes in
ownership. It is entirely appropriate and consistent with the statute
to consider whether a change in ownership is an appropriate occasion to
reallocate countervailing duty liability for prior subsidies to the
company that is sold. Section 771(5)(F) of the Act implies that such an
exercise is warranted and, as explained above, a post-subsidy change in
ownership is not the type of subsequent event or effect that is
envisioned in section 771(5)(C).
The language of section 771(5)(F) of the Act purposely leaves much
discretion to the Department with regard to the impact of a change in
ownership on the countervailability of past subsidies. Specifically, a
change in ownership neither requires nor prohibits a determination that
prior subsidies are no longer countervailable. Rather, the Department
is left with the discretion to determine, on a case-by-case basis, the
impact of a change in ownership on the countervailability of past
subsidies. The SAA at 928 specifically states that ``Commerce retain[s]
the discretion to determine whether, and to what extent, the
privatization of a government-owned firm eliminates any previously
conferred countervailable
subsidies. . . .''
The repayment/reallocation methodology that we currently use
achieves this objective. See 1994 Administrative Review UK Lead Bar at
58379-80. Depending on the amount of prior subsidies in relation to the
company's net worth and the amount paid for the company, we might find
that a considerable amount of prior subsidies passes through or that a
[[Page 65355]]
significant amount of subsidies has been repaid to the government or
reallocated to the previous owner. Nonetheless, we are not codifying
the current repayment/reallocation methodology. This methodology has
been heavily criticized by various parties, and we recognize that it
may not provide sufficient flexibility to deal with the ``extremely
complex and multifaceted'' nature of changes in ownership. See SAA at
928. We will address comments related to the calculation of gamma in
the context of specific cases.
While we have developed some expertise on the issue of changes in
ownership over the past five years, and the comments submitted in
response to the 1997 Proposed Regulations have provided us with
additional ideas to consider, we do not think it is appropriate to
promulgate a regulation on this issue at this time. As noted above,
many of the ideas presented by the commenters would move us in the
direction of adopting extreme positions. Another factor weighing
against codification of any privatization methodology at this time is
that the Courts may, in the course of their review of the current
methodology, adopt an interpretation of the law that would either
validate or overturn some of the options that we have considered,
including those proposed by the commenters. Finally, given the rapidly
changing economic conditions around the world, particularly with
respect to the issue of state ownership, we believe we should continue
to develop our policy in this area through the resolution of individual
cases. These changing economic conditions pose additional challenges in
developing a unified framework in which to analyze change-in-ownership
transactions. In the 1997 Proposed Regulations, we identified many of
these additional issues and new challenges that may warrant
consideration in this context and raised questions about them. However,
it is our view that the comments we received did not sufficiently
address many of these concerns.
An additional issue that merits further discussion concerns
subsidies received just prior to, or in conjunction with, the
privatization of a firm. While we have not developed guidelines on how
to treat this category of subsidies, we note a special concern because
this class of subsidies can, in our experience, be considerable and can
have a significant influence on the transaction value, particularly
when a significant amount of debt is forgiven in order to make the
company attractive to prospective buyers. As our thinking on changes in
ownership continues to evolve, we will give careful consideration to
the issue of whether subsidies granted in conjunction with planned
changes in ownership should be given special treatment.
Our decision not to include a provision on changes in ownership in
these Final Regulations does not preclude us from issuing such a
regulation at a later date. We will continue to examine this issue and
consider whether an alternative analytical framework can be developed
that addresses the variety of change-in-ownership scenarios we have
encountered and that, like the present methodology, satisfies
Congressional intent that we examine changes in ownership on a case-by-
case basis. In the interim, we will continue to apply our current
methodology for ongoing CVD cases and carefully examine the facts of
each case. However, we will consider whether modifications to the
methodology may be appropriate.
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. As we noted in the preamble to the 1997 Proposed Regulations,
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 than there were in 1989 and, thus, less need for regulations.
We received numerous comments arguing that we should codify the
policies articulated in the preamble to the 1997 Proposed Regulations,
especially those dealing with sequential analysis, purposeful
government action, characteristics of a ``group,'' and integral
linkage. These commenters claimed that even where the SAA is clear on a
particular point, it is unclear how the Courts will view the SAA. In
their opinion, detailed specificity regulations would prevent costly
litigation of these issues.
We have continued to limit Sec. 351.502 to those aspects of the
specificity test that are not addressed explicitly in the statute or
the SAA. Section 102(d) of the URAA provides that the SAA ``shall be
regarded as an authoritative expression by the United States concerning
the interpretation and application of (the Agreements and the URAA) in
any judicial proceeding in which a question arises concerning such
interpretation or application.'' 19 U.S.C. Sec. 3512(d). Therefore, we
see no need to repeat this principle. However, in reviewing the
comments and the relevant provisions of the statute and the SAA, we
have identified particular issues on which the SAA may usefully be
clarified. In particular, we found that the statute and the SAA do not
fully address sequential analysis and the characteristics of a group.
Accordingly, we have included final regulations on these topics.
Sequential analysis: Paragraph (a) is a new paragraph which
addresses the ``sequential approach'' to specificity. We received
several requests that we codify the sequential approach. Under this
approach, if a subsidy is de jure specific or meets any one of the
enumerated de facto specificity factors, in order of their appearance
in section 771(5A)(D)(iii) of the Act, further analysis is unnecessary
and is not undertaken. In support of their position, these commenters
emphasized the language contained both in 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 exists. See SAA at 931. Furthermore, these
commenters contended, 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 this sequential approach. SAA at 929-31; S. Rep. No. 103-412,
at 93-94 (1994).
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 931. 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.
The apparent disagreement over the interpretation of the SAA
regarding the use of a sequential approach indicates that it is
necessary to clarify our position in a regulation. Therefore,
Sec. 351.502(a) provides that the de facto specificity factors will be
examined in sequence, in order of their appearance in section
771(5A)(D)(iii) of the Act, and that the Department may find a domestic
subsidy to be specific based on the presence of a single de facto
specificity factor. For example, the Department will first look to see
if there is a limited number of users. If the number of users is
limited, we will look
[[Page 65356]]
no further. In accordance with the SAA, the Department will continue
its practice of collecting information regarding each of the four de
facto specificity factors; however, our analysis of the issue will stop
if we determine 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. Moreover, a finding that a certain industry receives
disproportionate amounts under a particular government program, for
example, constitutes positive evidence of specificity even if there are
numerous users of the program and there is little discretion in
awarding benefits.
Discretion: In endorsing the use of a sequential approach in the
preamble to the 1997 Proposed Regulations, we stated, ``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.'' (1997 Proposed Regulations at 8824.)
Certain commenters objected to the exception of the discretion factor,
arguing that the statute accords the exercise of government discretion
equal status with the other de facto specificity factors. They asked
the Department to clarify that the Department may find a subsidy to be
specific solely based on the degree of discretion exercised in the
administration of a subsidy program.
There appears to be a great deal of confusion and controversy over
the role of the fourth factor, discretion, in the finding of de facto
specificity. Based on the comments received and a review of the statute
and SAA, we are elaborating on the statements we made in the preamble
to the 1997 Proposed Regulations. As stated in the 1997 Proposed
Regulations, we do not believe that a finding of specificity may be
based solely on the fact that some measure of discretion may have been
exercised in the administration of a subsidy program. This position is
consistent with the SAA, which states that 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 931.
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 or discretion in evaluating
the facts and merits 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 other de facto factors would be rendered meaningless, because
virtually every subsidy program in the world could be declared specific
on the basis of the discretion factor alone. This is clearly an absurd
result and could not have been the intent of Congress.
Instead, section 771(5A)(D)(iii)(IV) of the Act provides that a
subsidy is specific if:
The manner in which the authority providing the subsidy has
exercised discretion in the decision to grant the subsidy indicates
that an enterprise or industry is favored over others. (Emphasis
added.)
This language does not focus on discretion alone. Rather, it states
that discretion is relevant only to the extent that it is exercised in
a manner that favors one enterprise or industry over others. This
distinction is important because it supports the statements made in the
SAA and the position we are taking in these regulations. Haphazard,
random, or purposeless discretion cannot by itself indicate
specificity. Only discretion that shows favoritism toward some
enterprises or industries over others can inform the question of
specificity. In the Department's experience, favoritism generally will
manifest itself as one of the first three de facto factors: A limited
number of users, dominant users, or one or a few users receiving a
disproportionate amount of the subsidy. For example, administrators of
a program could exercise discretion in selecting some industries
instead of others as beneficiaries. If the selected industries
constituted a limited number of industries, there would be specificity.
Similarly, if benefits were distributed such that there was a
predominant user or such that certain users received disproportionate
benefits, there would be specificity. However, if the selected
industries constituted more than a limited number of industries, if
there were no dominant users or disproportionate benefits to certain
users, or if there were no other indication that one or a group of
enterprises or industries was favored over others, the program would
not be specific.
As indicated in the SAA at 931, the discretion factor is generally
more valuable as an analytical tool that enhances the analysis of the
other de facto specificity factors and criteria. The example given in
the SAA is the case of a new subsidy program for which there have been
few applicants and few recipients. In accordance with section
771(5A)(D)(iii) of the Act, in evaluating the four de facto factors,
the Department must take into account ``* * * the length of time during
which the subsidy program has been in operation.'' In the case of a new
program, the first three factors--limited number of users, dominant
user, or disproportionately large user--may provide little or
misleading indication regarding whether the program is de facto
specific. Therefore, the manner in which authorities have exercised
their discretion in the early days of a new program (e.g., by excluding
certain applicants and limiting the benefit to a particular industry)
might be more useful for the Department in making a specificity
determination. See SAA at 931.
Discretion can also come into play where evidence relating to the
first three factors is inconclusive. As an example, where the number of
users is borderline, discretion may help to inform whether there is
specificity. In this situation, the factors we might consider in
analyzing the relevance of discretion include the number of applicants
that are turned down, the reasons they are turned down, and the reasons
successful applicants are chosen.
Characteristics of a ``group'': New paragraph (b) clarifies the
Department's position regarding whether the Department must examine the
``actual make-up'' of a group of beneficiaries when performing a
specificity analysis. Citing PPG Industries, Inc. v. United States, 978
F.2d 1232, 1240-41 (Fed. Cir. 1992) (``PPG II''), one group of
commenters argued that, to be consistent with judicial precedent, the
Department must undertake such an 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, they argued, 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 argued 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
[[Page 65357]]
purpose of the specificity test as articulated in Carlisle Tire &
Rubber Co. v. United States, 564 F. Supp. 834 (CIT 1983)
(``Carlisle''); 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 maintained that the Department has on several occasions
found subsidy programs specific even when the ``group'' of recipients
has not shared common characteristics. See, e.g., Steel Wheels from
Brazil, 54 FR 15523, 15526 (April 18, 1989) and Cold-Rolled Carbon
Steel Flat-Rolled Products from Korea, 49 FR 47284, 47287 (December 3,
1984).
As noted in the preamble to the 1997 Proposed Regulations, we
disagree with the first set of comments. Section 771(5A)(D) of the Act
provides that a subsidy may be found to be specific if it is limited to
a ``group'' of enterprises or industries. There is no requirement that
the members of a group share similar characteristics. The purpose of
the specificity test is simply to ensure that subsidies that are
distributed very widely throughout an economy are not countervailed.
There is no basis for adding the further requirement that subsidies
that are not widely distributed are also confined to a group of
enterprises or industries that share similar characteristics. See,
e.g., Certain Refrigeration Compressors from the Republic of Singapore,
61 FR 10315 (March 13, 1996).
Assuming, arguendo, that PPG II is relevant under the new law, this
decision upheld the Department's determination that the program in
question was not specific. 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 program
under investigation. Therefore, when looked at in terms of the number
of enterprises, the actual recipient enterprises did not appear to be
limited. However, this conclusion says nothing about whether the number
of industries that received benefits under the program was limited. To
answer this question, the Department (and the Court) correctly focused
on the makeup of the users. If the numerous enterprises that received
benefits had comprised a limited number of industries, then the program
would have been specific. However, because the users represented
numerous and diverse industries, the program was found not to be
specific. There is no basis in PPG II or in the language of section
771(5A)(D) of the Act for concluding that there is a requirement that
the limited users also share similar characteristics. Moreover, such a
requirement would undermine the purpose of the specificity test as
articulated in the SAA.
Several commenters have urged the Department to codify our position
with respect to this issue. Because this issue is not addressed in the
statute or the SAA, we have adopted this suggestion. Accordingly,
Sec. 351.502(b) provides that the Secretary is not required to
determine whether there are shared characteristics among enterprises or
industries that are eligible for, or actually receive, a subsidy in
determining whether that subsidy is specific.
Integral linkage: Paragraph (c) is a new paragraph which sets out
our revised test for considering two or more subsidy programs to be
``integrally linked.'' 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.
In the 1997 Proposed Regulations, we opted not to incorporate
Sec. 355.43(b)(6) into these regulations. We noted that claims of
integral linkage were relatively rare, and that when they did arise, we
did not find the factors set forth in Sec. 355.43(b)(6) particularly
helpful. We did not, however, rule out the possibility of considering
two or more ostensibly separate subsidy programs as constituting a
single program for specificity purposes, and we outlined circumstances
that might lead us to do so.
We received a number of comments requesting that we promulgate a
regulation which allows for integral linkage. Two commenters argued
that, in addition to the factors discussed in the preamble, the
regulation should re-codify certain of the factors found in the 1989
Proposed Regulations. These commenters also suggested that programs
should not be considered to be integrally linked unless they were
linked ``at their inception.'' These commenters asked the Department to
clarify that it will view claims of integral linkage narrowly and that
respondents will be required to establish that the programs are linked
by clear and convincing evidence. Other commenters argued that the
factors enumerated in both the 1989 Proposed Regulations and in the
preamble to the 1997 Proposed Regulations are too restrictive and that
any integral linkage test should not be applied narrowly.
We have given further consideration to our earlier decision not to
codify an integral linkage test. In light of the interest in this
issue, and the fact that we have had experience with a regulation on
this topic, we have concluded that it would be beneficial to parties to
promulgate a rule describing when two or more separate programs may be
integrally linked and treated as one program for specificity purposes.
We have not codified the 1989 rule because, as we stated in the
preamble to our 1997 Proposed Regulations, we did not find the factors
enumerated in that provision to be particularly useful. Instead,
Sec. 351.502(c) provides that integral linkage is possible in
situations where the subsidy programs have the same purpose (e.g., to
promote technological innovation), bestow the same type of benefit
(e.g., long-term loans or tax credits), confer similar levels of
benefits on similarly situated firms, and were linked at their
inception.
We believe these factors are more useful for finding integral
linkage than those contained in the 1989 Proposed Regulations because
they require evidence of similarities in the purposes and
administration of the programs which are more than coincidental. For
example, where a government claims that a program is integrally linked
with another program, Sec. 351.502(c)(4), which calls for the programs
to be linked at inception, requires evidence that, in establishing the
most recent program, the government's clear and express purpose was to
complement the other program.
As stated in the preamble to the 1997 Proposed Regulations, when an
interested party believes that two or more programs should be
considered in combination for purposes of the Department's specificity
analysis, that party will have the burden of identifying the relevant
programs and supporting its contention that the programs are integrally
linked by providing information and documentation regarding the
purpose, type and levels of benefit associated with the programs.
Agricultural subsidies: Paragraph (d) is based on Sec. 355.43(b)(8)
of the 1989 Proposed Regulations and is the same as Sec. 351.502(a) of
the 1997 Proposed Regulations. It provides that the Secretary will not
consider a domestic subsidy to be specific solely 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
[[Page 65358]]
livestock receive disproportionately large amounts of the subsidy. See,
e.g., Lamb Meat from New Zealand, 50 FR 37708, 37711 (September 17,
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 (CIT 1991) (``Roses''). Given the absence of any
indication that Congress intended the ``green box'' rules to change the
Department's practice or to overturn Roses, we are retaining the
special specificity rule for agricultural subsidies.
Subsidies to small- and medium-sized businesses: Paragraph (e) 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 to
be 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. We
received no comments regarding this rule.
Disaster relief: Paragraph (f) 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 (f) has no counterpart in the 1989 Proposed Regulations, the
rule contained in paragraph (f) has been part of the Department's
specificity practice since Certain Steel Products from Italy, 47 FR
39356, 39360 (September 7, 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 (f), 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 (July
9, 1993). We received no comments regarding this rule.
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 only those
foreign subsidies which truly are broadly available and widely used
throughout an economy.'' SAA at 929-30.
In our view, the language from the SAA cited above makes the
purpose of the specificity test abundantly clear. Given the clarity of
the SAA on this point, the authoritative nature of the SAA (see 19
U.S.C. 3512(d)), 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: Some commenters suggested that in applying the
specificity test, the Department should employ certain presumptions.
These commenters maintained that, when investigating a domestic subsidy
program (and when considering whether to initiate an investigation of
such a program), the Department should presume that the foreign
government in question exercises discretion in the administration of
the program, and that the program is specific. These commenters
maintained that, because information regarding applications and
approvals generally is not available to petitioners prior to the filing
of a petition, the burden should be on respondent interested parties to
provide such information and to rebut the presumption of specificity.
One commenter also suggested that the Final Regulations should state
that a previous finding that a subsidy was de facto non-specific should
have no relevance when the same subsidy program is alleged in a new
investigation involving different merchandise and different facts.
Other commenters argued that there is no legal basis for making
presumptions regarding specificity. With respect to de facto
specificity, 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 931. 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 law prior to the URAA, we note that a
petition to initiate an investigation of alleged domestic subsidies
must provide reasonably available information supporting the allegation
that the subsidy is specific. See section 702(b) of the Act. On the
other hand, we recognize that because detailed information regarding
the distribution of program benefits usually either is not published or
is not widely available, information supporting specificity 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 our investigation, we carefully consider the information
the petitioner has put forward, the reasons that 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.
In this regard, we note that when a subsidy program has been
previously investigated and found to be non-specific, it would be a
waste of administrative resources to re-investigate that program
without a reasonable basis to believe that the facts supporting the
previous finding have changed. In situations where a previous finding
may be pertinent to one industry, e.g., that the paper clip industry
did not receive dominant or disproportionate benefits under a
particular program, petitioners seeking investigation of benefits under
that program to the staple industry should allege that the program has
changed or that the situation of the staple industry differs, and they
should support their allegation with reasonably available information.
Where domestic subsidy programs are included in an investigation,
we will not presume such programs are specific. Instead, we will seek
in our questionnaire all of the information
[[Page 65359]]
necessary to apply the specificity test according to section 771(5A)(D)
of the Act. Based on our analysis of the information provided in the
questionnaire responses, verification, and other information that may
be collected, we will make the necessary specificity determination. If
a respondent refuses to provide the information requested by the
Department to conduct its specificity analysis, we may draw adverse
inferences in the application of ``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
of specificity.
Purposeful government action: In our 1997 Proposed Regulations, we
noted that certain commenters, citing such cases as Saudi Iron and
Steel Co. (Hadeed) v. United States, 675 F. Supp. 1362, 1367 (CIT
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. They cited the
statute and its legislative history for the proposition that the
Department should deem irrelevant the fact that program usage may be
limited by the ``inherent characteristics'' of the thing being provided
by the government. SAA at 932; S. Rep. No. 103-412 at 94 (1994).
In the preamble to the 1997 Proposed Regulations, we agreed with
these commenters, stating:
[e]xcept 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.
Several of the same commenters objected to this statement, arguing
that it could be misinterpreted to mean that evidence of purposeful
action is required in some instances. These commenters requested that
the Department clarify, in a regulation, that purposeful government
action is never required.
As we stated in the 1997 Proposed Regulations, the SAA and other
legislative history are clear on this point. The SAA clearly indicates
that the Department does not need to find ``targeting'' or ``purposeful
government action'' to conclude that a domestic subsidy is specific.
See SAA at 932 (``(E)vidence of government intent to target or
otherwise limit benefits would be irrelevant in de facto specificity
analysis''). 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 932; S. Rep. No.
103-412 at 94 (1994). Regarding situations where the Department is
asked to consider the economic diversification in the jurisdiction or
the length of time during which the program has been in operation,
neither purposeful government action nor targeting is required to find
specificity. However, evidence indicating that the government has taken
or will take actions to limit benefits to certain industries would be
sufficient to find specificity.
Universe: One commenter argued that, in determining whether
subsidies are specific, the Department generally should focus on the
level of benefits provided to recipients, rather than the number of
recipients to whom subsidies are provided. This commenter also argued
that, in analyzing the level of benefits provided, the Department's
point of reference should be the economy as a whole, as it was for the
preferential loan programs used by the Korean steel industry in Certain
Steel Products from Korea, 58 FR 37338 (July 9, 1993) (``Korean
Steel''), rather than those enterprises or industries that were
eligible to receive the subsidy.
For the most part, we disagree. The starting point of the
Department's analysis of specificity will always be the number of
users. We normally will not analyze the level of benefits provided
(that is, whether the recipients were dominant or disproportionate
users of the program) unless the subsidy in question was provided to
numerous and diverse industries. Even in that situation, it may be
impracticable or impossible to determine the relative level of
benefits.
Once we have decided to analyze the level of benefits provided, our
point of reference normally will be the enterprises or industries that
received benefits under the program. In other words, we will attempt to
determine whether one or a limited number of the recipient enterprises
or industries were, in fact, dominant or disproportionate users. In
certain limited circumstances, however, it may be appropriate to
determine whether the benefits received by a particular enterprise or
industry or group thereof were disproportionate in relation to the
economy as a whole. The Department employed this approach in Korean
Steel, because the type of subsidy under investigation--governmental
use of the economy-wide banking system to direct credit to steel
producers--required the broader analysis. We consider the Korean
situation to be unusual compared with the majority of cases in which we
have analyzed specificity. In addition, we agree that the analysis of
whether an enterprise or industry or group thereof is a dominant user
of, or has received disproportionate benefits under, a subsidy program
should normally focus on the level of benefits provided rather than on
the number of subsidies given to different industries.
Section 351.503
Section 351.503 deals with the concept of benefit. Under section
771(5)(B) of the Act and Article 1.1(b) of the SCM Agreement, a
government action must confer a benefit in order to be considered a
countervailable subsidy. Hence, the notion of benefit is central to the
administration of the CVD law. In the preamble to the 1997 Proposed
Regulations, we included a lengthy discussion of this topic. We
described a benefit as being conferred when a firm pays less for an
input than it otherwise would pay or receives more revenue than it
otherwise would earn. Given the crucial role that benefit plays in our
analysis of whether a government action confers a countervailable
subsidy, we have decided to codify a final rule regarding benefit that
reflects the principles outlined in the 1997 Proposed Regulations.
Paragraph (a) states that, where a specific rule for the
measurement of a benefit is contained in these regulations, we will
determine the benefit as provided in that rule. Where a government
program is covered by a specific rule contained in these regulations,
such as a program providing grants, loans, equity, direct tax
exemptions, or worker-related subsidies, we will not seek to establish,
nor entertain arguments related to, whether or how that program
comports with the definition of benefit contained in this section.
Paragraph (b) outlines the principles we will follow when dealing
with alleged subsidies for which these regulations do not establish a
specific rule. In such instances, we will normally consider a benefit
to be conferred where a firm pays less for its inputs (e.g., money, a
good, or a service) than it otherwise would pay in the absence of the
government program, or receives more revenues than it otherwise would
earn.
We have adopted this definition because it captures an underlying
theme behind the definition of benefit contained in section 771(5)(E)
of the Act and, in our estimation, reflects the fundamental principles
that we have
[[Page 65360]]
articulated over the years with respect to programs and practices that
we have determined confer either direct or indirect countervailable
subsidies. One common element the four illustrative examples set forth
in the statute share is that, in the overwhelming majority of cases,
the recipient of a government financial contribution, income or price
support, or indirect subsidy, enjoys a reduction in input costs or
revenue enhancement that it would not otherwise have enjoyed absent the
government action. As explained below, we are using the terms ``input''
and ``cost'' broadly.
While we believe that this definition will provide useful guidance,
we recognize that there may be programs or practices not fitting the
input cost reduction or revenue enhancement definition in some economic
or accounting senses that may still give rise to a benefit in the sense
that the program or practice is similar to the illustrative examples
listed in section 771(5)(E) of the Act. For example, without attempting
to create a hypothetical program or practice not yet encountered in our
experience, we would argue that a program that is similar to a
countervailable equity infusion constitutes a reduction in a firm's
cost of capital, or that a program that is similar to a countervailable
provision of a freight forwarding service constitutes a reduction in a
firm's input costs. Since both practices constitute a reduction in the
cost of an input, there would be a benefit. We recognize that some
might take issue with whether equity or a freight forwarding service is
in fact an input into subject merchandise, or whether equity or freight
forwarding constitutes a cost of producing subject merchandise.
Nonetheless, in these and other instances in which a program or
practice contains elements similar to those in the illustrative
examples in the statute, a benefit would still exist. As explained
further below, when we talk about input costs in the context of the
definition of benefit, we are not referring to cost of production in a
strict accounting sense. Nor are we referring exclusively to inputs
into subject merchandise. Instead, we intend the term ``input'' to
extend broadly to any input into a firm that produces subject
merchandise.
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 (e.g., money, a good, or a service), or the
increased revenue it receives as a result of a government action. We
believe that the definition of benefit outlined here is consistent with
the various standards (or ``benchmarks'') used to identify and measure
the benefit from different subsidy programs that are contained in
section 771(5)(E) of the Act and Article 14 of the SCM Agreement. 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
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.
Paragraph (b)(2) cautions that the definition of benefit as an
input cost reduction or revenue enhancement does not limit our ability
to impose countervailing duties when the facts of a particular case
indicate that a financial contribution has conferred a benefit, even if
that benefit does not take the form of a reduction in input costs or an
enhancement of revenues. We will examine the concept of benefit in this
broader sense by looking to see whether the alleged program or practice
contains elements similar to the examples listed in sections
771(5)(E)(i) through (iv) of the Act. We cannot possibly foresee all
the types of government actions we will encounter in administering the
CVD law and, hence, cannot write a definition of benefit that would be
sufficiently broad to capture all possible countervailable subsidies.
In this regard, it is important to note here our practice of not
applying the CVD law to non-market economies. The CAFC upheld this
practice in Georgetown Steel Corp. v. United States, 801 F.2d 1308
(Fed. Cir. 1986). See also GIA at 37261. We intend to continue to
follow this practice. Where the Department determines that a change in
status from non-market to market is warranted, subsidies bestowed by
that country after the change in status would become subject to the CVD
law.
We received several comments regarding the proposed definition of
benefit. Two commenters expressed the opinion that the definition is
too restrictive. These parties identified examples of benefits which
they believed would not be captured under the proposed definition. The
first example is where a domestic purchaser is the only customer for an
input provided by a government entity or where non-domestic purchasers
are not allowed to purchase an input. In these situations, the
commenter maintains that there could be a benefit even though the price
paid is not less than any other domestic price. The second example is
where a transaction is structured so that the firm pays market value
for the input but receives other perquisites, such as a higher-quality
input or additional services or goods as part of a package.
We disagree that our definition of a benefit is not comprehensive
enough to include these types of scenarios. The definition of a benefit
(in the absence of a specific rule for the measurement of the benefit)
does not call for comparisons only to other domestic prices. Rather, it
calls for a determination of whether the input costs were reduced
relative to what they would be in the absence of the financial
contribution. In the first example, a benefit exists to the extent that
the domestic purchaser would have paid more for the input absent the
government provision or absent the restrictions placed on foreign
purchasers. Likewise, in the second example, if the firm would have had
to pay more in order to receive the additional perquisites without the
government assistance, a benefit exists. Section 351.511, governing the
provision of goods and services, contains more detailed guidance on how
such subsidies would be valued.
Another commenter supported the proposed definition, but urged the
Department to leave itself enough flexibility so that we could find a
benefit when government action enables a firm to sell a product that
would not have been created but for the government assistance. For
example, if the government assists in the development of a new product,
this commenter asserted that the benefit is not the reduced development
cost of the new product, but the continuing existence of the product.
We believe that in situations such as that described by the
commenter, the existence of a benefit is directly dependent upon the
nature of the financial contribution. If a financial contribution has
been provided, either directly or indirectly, in a form which is
specifically identified in the statute or regulations (e.g., a loan, a
grant, an equity infusion, etc.), we will identify and measure the
resulting benefit in accordance with the rules contained in the statute
and regulations. If the financial contribution takes a form
[[Page 65361]]
which has not been specifically dealt with in these regulations, we
will identify and measure the benefit in accordance with the definition
of benefit contained in paragraph (b). Moreover, as noted above,
paragraph (b) provides sufficient flexibility to accommodate
circumstances in which the facts of a particular case indicate that a
financial contribution has conferred a benefit, even if the benefit
does not take the form of a reduction in input costs or an enhancement
of revenues.
Finally, one commenter objected to the following statement which
was included in the preamble to the 1997 Proposed Regulations: ``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.'' This commenter argued that we should not define the
types of practices which do not confer benefits as this would invite
the creation and exploitation of loopholes.
We agree that we need only provide a definition of what constitutes
a benefit. We believe we have given ourselves the flexibility to apply
the concept of benefit in such a way that we will be able to find a
benefit in situations in which the regulations do not contain specific
rules for identifying and measuring the benefit from a particular
government program or practice.
We received several comments regarding the extent to which the
Department should consider the overall ``effect'' a government program
has on a firm's behavior in determining whether a benefit exists. One
group of commenters requested an affirmative statement preserving the
Department's discretion to consider ``effects'' in appropriate
circumstances. Another group of commenters urged us to renounce any use
of our discretion and to state that the effects of government actions
are irrelevant to the existence of a countervailable subsidy.
As we explained in the preamble to the 1997 Proposed Regulations,
the determination of whether a benefit is conferred is completely
separate and distinct from an examination of the ``effect'' of a
subsidy. In other words, a determination of whether a firm's costs have
been reduced or revenues have been enhanced bears no relation to the
effect of those cost reductions or revenue enhancements on the firm's
subsequent performance, such as its prices or output. In analyzing
whether a benefit exists, we are concerned with what goes into a
company, such as enhanced revenues and reduced-cost inputs in the broad
sense that we have used the term, not with what the company does with
the subsidy. Our emphasis on reduced-cost inputs and enhanced revenues
is derived from elements contained in the examples of benefits in
section 771(5)(E) of the Act and in Article 14 of the SCM Agreement. In
contrast, the effect of government actions on a firm's subsequent
performance, such as its prices or output, cannot be derived from any
elements common to the examples in section 771(5)(E) of the Act or
Article 14 of the SCM Agreement.
For example, assume that a government puts in place new
environmental restrictions 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--that is, 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) of the Act 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. As another example, if a government
promulgated safety regulations requiring auto makers to install seat
belts in back seats, and then gave the auto makers a subsidy to install
the seat belts, we would draw the same conclusion. In the two examples,
the government action that constitutes the benefit is the subsidy to
install the equipment, because this action represents an input cost
reduction. The government action represented by the requirement to
install the equipment cannot be construed as an offset to the subsidy
provided to reduce the costs of installing the equipment.
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) of the
Act expressly provides that the Department ``is not required to
consider the effect of the subsidy in determining whether a subsidy
exists.'' This message is reinforced by the SAA at 926, 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.''
Paragraph (c) of the new regulation further reinforces this
principle by stating affirmatively that, in determining whether a
benefit is conferred, the Department is not required to consider the
effect of the government action on the firm's performance, including
its prices or output, or how the firm's behavior otherwise is altered.
When we examine indirect subsidies, we are inquiring into whether a
government is entrusting or directing a private entity to provide a
reduced-cost input or enhanced revenue to a firm that produces the
subject merchandise. For example, we have investigated whether below-
market loans or reduced-cost goods have been provided by means of
indirect subsidies. This analysis in no way implies that we are
examining whether the indirect subsidy has an effect on the price or
output of the subject merchandise. It merely means that we are
investigating, in fulfillment of other statutory requirements, whether
loans were provided on non-commercial terms or whether goods were
provided for less than adequate remuneration.
In addition to those comments relating specifically to our proposed
definition of a benefit, we received comments on other topics which we
believe are appropriately addressed in the context of a discussion on
benefits. First, one commenter objected to the absence of a regulation
regarding so-called ``tiered'' programs. Tiered programs are those
programs which provide varying levels of government assistance based
upon differing eligibility criteria. Our longstanding practice
regarding such programs has been to countervail only the difference
between the assistance provided at a
[[Page 65362]]
non-specific level (within the meaning of section 771(5A) of the Act)
and the assistance provided to a specific enterprise or industry (or
group thereof). This practice was reflected in Sec. 355.44(n) of the
1989 Proposed Regulations.
Our omission of a similar rule in this round of regulations was an
oversight. To correct for this, we have added paragraph (d), which
provides that where varying levels of financial contributions are
provided, a benefit will be conferred to the extent that a specific
enterprise or industry or group thereof receives a greater level of
financial contribution than that provided at the non-specific level.
The varying financial contribution levels must be set forth in a
statute, decree, regulation, or other official act, and they must be
clearly delineated and identifiable (e.g., the investment tax credit
program in Certain Fresh Atlantic Groundfish from Canada, 51 FR 10041
(March 24, 1986)). We note, however, that this exception cannot apply
where the statute specifies a commercial test for determining the
benefit, such as with respect to loans and loan guarantees.
Another related topic involves the treatment of taxes on subsidies.
Typically, we have referred to this issue as the ``secondary tax
consequences'' of subsidies. Section 351.527 of the 1997 Proposed
Regulations stated that we would not take account of secondary tax
consequences. For example, if receipt of a grant increases the amount
of income tax paid by a firm, we do not reduce the amount of the
benefit from the grant to reflect the higher taxes paid. In these Final
Regulations, we have retained this rule and have relocated it to
Sec. 351.503(e).
We received two comments expressing support for the 1997 Proposed
Regulations. One of these commenters requested that we include in the
regulation the following corollary, which flows from the same basic
principle: where a subsidy is exempt from income tax, we will treat the
tax exemption as a separate benefit in addition to the benefit from the
original subsidy. An additional commenter requested that the regulation
be expanded to clarify that we will not consider any secondary
consequences or effects of the granting of the subsidy outside the
exclusive list of subsidy offsets designated by the statute. To this
end, this commenter advocated including the list of allowable offsets
in the regulations and stating that we will not consider secondary
consequences of the benefit. We have not added the requested language
because the statute is clear regarding what is considered to be an
allowable offset. Nor have we broadened the regulation as requested by
either commenter. We believe that the impact of the benefit under one
subsidy program should not be considered in calculating the benefit
under a separate program. However, in our experience, this question has
only arisen with respect to the impact of tax programs on other
programs. Therefore, a broader regulation is not necessary.
Section 351.504
Section 351.504 deals with the benefit attributable to the most
basic type of subsidy, a grant. In the 1997 Proposed Regulations,
paragraph (c) of this section (which was then numbered Sec. 351.503)
included our methodology for allocating over time the benefit from a
grant, or the benefit from a subsidy that the Department treated as a
grant. In these Final Regulations, we have broken out the allocation
issues from the grant section and created a separate section
(Sec. 351.524) which deals with the allocation of benefits to a
particular time period. Therefore, Sec. 351.504 now pertains only to
grants.
As in our 1997 Proposed Regulations, paragraph (a) provides that in
the case of a grant, a benefit exists in the amount of the grant.
Paragraph (b) sets forth the rule for determining when a firm is
considered to have received a subsidy provided in the form of a grant.
This paragraph provides that the Secretary will normally consider the
benefit as having been received on the date on which the firm received
the grant. In these Final Regulations, we have added the word
``normally'' for reasons explained in the preamble discussion of
Sec. 351.524. Finally, paragraph (c) provides that the benefit from a
grant will be allocated to a particular time period pursuant to the
methodology set forth in Sec. 351.524.
All the comments that we received regarding grants dealt with the
allocation of benefits. These comments are, therefore, discussed in the
preamble to Sec. 351.524.
Section 351.505
Section 351.505 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 in determining
whether a government-provided loan confers a benefit.
Use of Effective Interest Rates: Paragraph (a)(1) restates the
Department's current practice of normally seeking to compare effective
interest rates rather than nominal rates in making this comparison.
``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, where
effective rates are not available, we 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),
we normally will treat the yield on the bond as the effective interest
rate.
One commenter asked that the regulations clarify that only payments
legitimately made on a loan will be used when calculating the effective
interest rate. The commenter urged the Department to exclude other,
unrelated payments to the government which the borrower might make
along with the loan payments.
We agree with this commenter that payments unrelated to the loan
should not be included when we calculate the effective interest rate,
but we do not believe that the regulation needs to be modified to
address this concern. The preamble clearly describes the types of
payments that would be included in calculating an effective interest
rate. However, we will examine whether there are requirements placed on
either the government loan or the benchmark loan affecting the cost of
borrowing that should be factored into the calculation of the benefit
amount.
Selection of Benchmark Loans and Interest Rates
Paragraphs (a)(2) and (a)(3) elaborate on the criteria for
selecting the benchmark. The criteria contained in these two paragraphs
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 information required in the 1989 Proposed Regulations was
seldom available.
``Comparable commercial loan'' defined: Paragraph (a)(2) sets forth
the criteria the Department normally will consider in selecting a
comparable commercial loan. First, paragraph (a)(2)(i) defines the term
``comparable.'' In the preamble to the 1997 Proposed Regulations, we
stated that in order to be used as a benchmark, a comparable
[[Page 65363]]
commercial loan 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 time. To identify a loan that is comparable
to the government-provided loan, the 1997 Proposed Regulations called
for primary emphasis to be placed on the structure 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.
Several commenters maintained that it is not enough to look at the
structure, maturity, and currency denomination to identify a benchmark
loan that is comparable to the government-provided loan. These
commenters argued that the Department should also consider the level of
risk associated with the loans by comparing the security or collateral
that the borrower is required to provide for each loan. One of the
commenters observed that this approach would be consistent with the
Department's practice in Laminated Hardwood Trailer Flooring from
Canada, 62 FR 5201 (February 4, 1997). This commenter also noted that,
while the risk element was discussed in the preamble of the 1997
Proposed Regulations, it did not appear in the regulation.
In opposition, another commenter argued that a commercial loan
should be considered sufficiently comparable to a government loan when
the structures and maturities of the two loans are identical or similar
and the loans are provided in the same currency. This commenter argued
that in the interest of predictability and uniformity, no further
analysis, particularly with regard to the level of security of a loan,
should be necessary. This commenter asserted that, where these three
criteria are met, the loans would generally require the same level of
security. Comparing the value of different assets securing different
loans would create an unworkable test, according to the commenter, who
suggested that the Department at least make it a rebuttable presumption
that a commercial and a government-provided loan are comparable if the
three criteria listed above match.
We have not adopted the proposals put forward by either set of
commenters. As in the 1997 Proposed Regulations, Sec. 351.505(a)(2)(i)
states that we intend to place primary emphasis on three basic
characteristics in determining whether particular loans are comparable
to a government-provided loan: The structure, maturity, and currency
denomination of the loans. This does not mean, however, that a loan in
the same currency with a similar structure and maturity will always be
found comparable to the government-provided loan. Nor should our
decision to place primary emphasis on these three characteristics be
seen as a rebuttable presumption.
Instead, we recognize that many characteristics could factor into a
decision of whether a loan should be considered comparable to the
government-provided loan. Certainly, as the first set of commenters has
pointed out, the levels of security or collateral on the two loans
could be relevant in determining comparability. Similarly, the amounts
of principal might differ so greatly that the two loans should not be
compared. However, rather than identifying numerous characteristics for
finding loans to be comparable, and thereby limiting our ability to
find benchmarks, we have continued to place primary emphasis on what we
believe to be the three most important characteristics. Regarding other
characteristics that might render particular loans not comparable to
the government-provided loan, such as collateral and size, we will
consider arguments made by the parties based on the facts presented in
their cases.
Paragraph (a)(2)(ii) provides a definition of the term
``commercial.'' The 1997 Proposed Regulations stated that we would
normally treat a loan as ``commercial'' if it were taken out from a
commercial lending institution or if it were a bond issued by the firm
in commercial markets. We also stated that a loan provided under a
government program, even if the program is not specific to an
enterprise or industry, would not be considered a ``commercial'' loan
for benchmark purposes. Finally, the 1997 Proposed Regulations stated
that the Department would treat a loan from a government-owned bank as
a commercial loan, unless there was evidence that the loan was provided
at the direction of the government or with government funds.
We received several comments on this issue, all of which urged us
not to use loans from government-owned banks for benchmark purposes.
One commenter asserted that a loan from a government-owned bank is the
same as a loan from the government, regardless of whether the loan is
provided under a government program, because the actions of a
government-owned bank are presumably consistent with the policies of
its owner, the government. A second commenter maintained that the
distinction between ``a government program'' and ``government control''
is blurred and pointed to the Department's determination in Certain
Steel Products from Korea, 58 FR 37338 (July 9, 1993), where the
Department found that a countervailable benefit was conferred by
government-directed, preferential access to specific sources of credit
offered at favorable terms. Because of the availability of ``directed
credit'' such as that found in the Korean case, this commenter argued
that the Department should not use rates from loans provided by
government-owned banks as benchmark rates. A third commenter argued
that the Department should not use loans from government-owned banks
for benchmark purposes unless the respondent can demonstrate the
commercial nature of such loans. This and other commenters objected to
the burden that the 1997 Proposed Regulations allegedly placed upon a
petitioner to show that a loan from a government-owned bank is provided
at the direction of the government or with government funds. Noting
that the 1989 Proposed Regulations directed the Department to use
financing provided or directed by the government as a benchmark only
under certain exceptional circumstances, several commenters urged the
Department to continue to apply this narrow standard.
We have traditionally recognized that government-owned banks may
operate as commercial banks in some countries. It is not appropriate to
maintain that loans from government-owned banks per se are not
commercial. Therefore, we continue to take the positions that: (1) We
will not consider loans provided under government programs to be
commercial loans, and (2) we will not automatically disqualify loans
from government-owned commercial banks as benchmarks. However, we will
not use loans from government-owned special purpose banks, such as
development banks, as benchmarks because such loans are similar to
loans provided under a government program or at the direction of the
government. Regarding loans from government-owned commercial banks, we
will treat such loans as being commercial and use them as benchmarks
unless they are made on non-commercial terms or are provided at the
direction of the government. We do not believe that this standard
imposes an unreasonable burden on petitioners because this is the type
of information they would routinely provide when alleging that
government-provided loans are countervailable.
Further, regarding the definition of ``commercial,'' where a firm
receives a financing package including loans from both commercial banks
and from the government, we intend to examine the package closely to
determine whether
[[Page 65364]]
the commercial bank loans should in fact be viewed as ``commercial''
for benchmark purposes. In particular, we will look to whether there
are any special features of the package that would lead the commercial
lender to offer lower, more favorable terms than would be offered
absent the government/commercial bank package.
Paragraphs (a)(2)(iii) and (iv) specify the time period from which
the Department will select comparable financing. Paragraph (a)(2)(iii)
addresses long-term loans and is unchanged from the 1997 Proposed
Regulations. This regulation directs us to use a loan whose terms were
established during or immediately before the year in which the terms of
the government-provided loan were established. Paragraph (a)(2)(iv)
addresses short-term loans. In the 1997 Proposed Regulations, we stated
that we would use as the benchmark rate an annual average of the
interest rates on comparable commercial loans taken out during the
period of investigation or review. However, in cases with significantly
fluctuating interest rates, the 1997 Proposed Regulations allowed us to
use ``the most appropriate'' interest rate as the benchmark rate.
We received two comments regarding the benchmark interest rate for
short-term loans. Both commenters argued against using a simple average
of the interest rates on comparable commercial short-term loans
obtained by the respondent. Instead, they asked the Department to
weight the rates by the associated principal amount of each loan in
order to prevent small, one-time loans from distorting the benchmark
calculation. According to the commenters, this change would also
address the Department's concern about significantly fluctuating
interest rates.
We have adopted the commenters' proposal in part and have amended
paragraph (a)(2)(iv) to provide that we will calculate a weighted
rather than a simple average benchmark interest rate for short-term
loans. However, we do not share the commenters' view that this change
addresses situations where the interest rate fluctuates significantly
over the year, e.g., in economies with a high inflation rate. We are,
therefore, retaining the provision that allows us to use benchmarks
other than annual weighted averages in these situations.
We also wish to clarify that we intend to follow our practice of
calculating short-term benchmarks on a calendar year basis. In most
instances, the period of investigation or review is a calendar year, so
the short-term benchmark will be calculated using commercial loans that
were obtained (or could have been obtained) during the period of
investigation or review. In situations where the loans under
investigation span two calendar years, we will calculate two annual
benchmarks corresponding to the two years.
Finally, we received one comment on the selection of benchmark
interest rates to be used in administrative reviews of suspension
agreements. In the preamble to the 1997 Proposed Regulations, we stated
that in administering a suspended investigation, we would monitor
developments in commercial benchmarks outside of the normal
administrative review process and that this monitoring activity should
serve to ensure that the commercial benchmarks used were timely. The
commenter, however, claimed that a special regulation requiring the
Department to monitor commercial benchmark rates is needed because
otherwise there is no guarantee that the Department will do so. In the
commenter's experience, the Department has not always undertaken this
type of monitoring activity. Specifically, pointing to Miniature
Carnations and Roses and Other Fresh Cut Flowers from Colombia, 59 FR
52514 (October 18, 1994), the commenter alleged that the Department set
new benchmarks at the conclusion of each administrative review, with
the result that the interest rates used for purposes of the suspension
agreement always lagged behind the contemporaneous commercial rates.
For short-term loans, the commenter argued, the Department should
monitor commercial interest rates on at least a quarterly basis in
order to keep the suspension agreement current.
We do not agree with the commenter's view that a regulation is
needed on this issue. In the case of suspension agreements, we will
revise the benchmarks for long- and short-term loans whenever
appropriate, regardless of whether we are conducting an administrative
review of the suspension agreement. To ensure that the benchmarks are
kept as current as possible, we intend to review them once a year or
more frequently, if information available to the Department indicates
that a change is necessary.
``Could actually obtain on the market'' defined: In accordance with
section 771(5)(E)(ii) of the Act, 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 our practice
with respect to short-term loans. In the past, we have used national
average interest rates to determine the benefit from government-
provided short-term loans. This practice was codified in
Sec. 355.44(b)(3) of the 1989 Proposed Regulations. However, as early
as 1989, we announced that we 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. Except for a minor clarification (adding ``for
both short- and long-term loans'' to paragraph (a)(3)(i)), these
paragraphs are unchanged from the 1997 Proposed Regulations.
Two commenters warned against using the interest rates on
hypothetical loan offers as benchmark rates. One of the commenters
pointed to a perceived loophole in the preamble to the 1997 Proposed
Regulations, which stated that ``a comparable commercial loan used as a
benchmark should represent a financial instrument * * * that was taken
out (or could have been taken out) at the same point in time.'' Another
commenter suggested that the acceptance of hypothetical loan offers for
benchmark purposes might tempt respondents to manipulate the benchmark
rate by soliciting offers of loans that they do not intend to take.
Both commenters asserted that the interest rates on such hypothetical
loan offers would be very low and that they would, thus, distort the
benchmark rate.
We agree that respondents should not be permitted to submit
hypothetical loans for use as benchmarks. The language in the preamble
cited by the commenter was meant to address another situation: Where
the respondent did not actually take out any commercial loans during
the relevant period and where we, therefore, would use an appropriate
alternative benchmark interest rate * * * such as a national average
interest rate. The national average interest rate is representative of
a loan that ``could have been taken out.''
Benchmark for uncreditworthy companies: Paragraph (a)(3)(iii),
which deals with long-term loans provided to firms considered to be
uncreditworthy, describes our methodology for
[[Page 65365]]
calculating the benchmark that we will use in identifying and measuring
the benefit attributable to a government-provided, long-term loan
received by an uncreditworthy firm. One important aspect of this
methodology has changed from the 1997 Proposed Regulations.
Our methodology 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) addresses the increased probability
of default for an uncreditworthy company by adjusting upward the
interest rate for a creditworthy company in the country in question.
As stated in the 1997 Proposed Regulations, in making this
adjustment, we are 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
we have used since 1984, we will rely on information regarding the U.S.
debt market. In the 1997 Proposed Regulations, we stated that we would
use the weighted average one-year default rate for speculative grade
bonds, as reported by Moody's Investor Service. This weighted average
default rate would be reflected indirectly in our formula for
calculating the benchmark interest rate for uncreditworthy companies,
which is based on the probability that these risky loans will be
repaid.
We received numerous comments on our new methodology. One commenter
expressed support for the methodology, stating that it seemed to
calculate accurately the full benefit of a loan subsidy. Certain other
commenters supported the new methodology as long as it resulted in a
``substantial spread'' between the observed commercial interest rates
in the country under investigation and the benchmark interest rate used
for uncreditworthy companies.
One commenter did not object to the new methodology but argued
that, in calculating the risk premium, the Department should use data
pertaining to the country under investigation, not U.S. data, which
should only be used as facts available.
Another commenter criticized the reliance upon default rates in the
U.S. ``junk'' bond market, arguing that U.S. data do not reflect the
risk of lending to uncreditworthy companies in foreign countries,
especially developing countries where the default rate is likely to be
much higher. This commenter also criticized the use of a one-year
default rate in the calculation of the risk premium, arguing that this
significantly understates the overall default rate because default is
more likely after the first year of the life of a loan. Should the
Department decide to rely on U.S. market data, the commenter asked that
the Department, at a minimum, examine the default rate over 10 years.
Another commenter stated that the Department's new methodology
implies a serious departure from the statutory mandate to determine an
interest rate that the borrower could actually obtain on the market.
First, the commenter argued, a default-based premium does not take into
account all the costs associated with lending to an uncreditworthy
company, e.g., collection costs and lost opportunity costs and, as a
result, the premium is understated. Second, the commenter asserted, the
new methodology treats all uncreditworthy borrowers as if they were
large corporate borrowers able to issue junk bonds of the kind reported
by Moody's. According to this commenter, many companies cannot obtain
long-term loans even at junk bond rates and are forced to rely on
borrowing from the venture capital market at substantially higher
interest rates. In reality, the commenter argued, a private lender
would assess a company's creditworthiness on a case-by-case basis using
the same financial indicators that the Department has relied upon in
the past (see Sec. 355.44(b)(6)(i) of the 1989 Proposed Regulations).
The regulations, therefore, should reflect such private lender behavior
by directing the Department to determine the risk premium on a case-by-
case basis.
Finally, two commenters noted that the European Union (``EU'')
takes a tougher stance on government loans to uncreditworthy borrowers
by treating the entire loan as a grant when the recipient company's
financial position is so weak that it could not have obtained a
commercial loan, and implied that the Department should follow the EU's
example.
As stated in the 1997 Proposed Regulations, we are changing our
methodology because we believe that the new methodology more
appropriately reflects the risk involved in lending to firms with
little or no access to commercial bank loans from conventional sources.
By adjusting upward the interest rate that an average, creditworthy
company would pay to account for the greater likelihood of default by
an uncreditworthy company, we recognize the speculative nature of loans
to uncreditworthy borrowers and the premium they would have to pay the
lender to assume that risk.
We have continued to rely on default information pertaining to the
United States in our formula because we believe it would be difficult
to locate detailed and comprehensive default information for many of
the countries that we investigate. However, if such data do exist and
are brought to our attention in the course of an investigation or
review, and the data indicate that the default experience in the
country in question differs significantly from that in the United
States, we would consider using the default rate from the country under
investigation. Therefore, we have amended the 1997 Proposed Regulation
to say that the Secretary ``normally'' will calculate the benchmark for
uncreditworthy companies using U.S. data.
We have not adopted the suggestion that we follow the EU's practice
of treating loans to uncreditworthy firms as grants. Under our
definition, uncreditworthy firms are those that cannot obtain long-term
loans from conventional commercial sources. This does not mean,
however, that they cannot borrow funds from other sources. Hence, we
would not equate loans to these companies with grants. Instead, the
purpose of our methodology is to capture the increased risk of lending
to these companies.
Regarding the new calculation methodology, we agree that using a
one-year default rate would not accurately reflect the risk that an
uncreditworthy borrower will default on a long-term loan. We have,
therefore, changed this aspect of our methodology and will use the
average cumulative default rate for the number of years corresponding
to the length of the loan, as reported in Moody's study of historical
corporate bond default rates. In other words, we would use a five-year
default rate for a five-year loan, a 15-year default rate for a 15-year
loan, and so forth. We believe that using a default rate that is
directly linked to the term of the loan is a better reflection of the
risk associated with long-term lending to uncreditworthy borrowers.
Our formula for calculating the benchmark interest rate for an
uncreditworthy company is based upon the assumption that a lender's
expected return on all loans should be equal. Under this assumption,
the interest rate differential on loans charged to
[[Page 65366]]
creditworthy and uncreditworthy companies is such that the lender's
expected (total) return on a loan to an uncreditworthy company equals
the expected (total) return on a loan to a creditworthy company, after
accounting for differences in the risk of default. A second assumption
is that, in the event of default, no portion of the principal or
interest is recovered by the lender. The following equation relates the
loan rate to a creditworthy company and the loan rate to an
uncreditworthy company:
(1-qn)(1+if)n = (1-pn)(1 +
ib)n,
Where:
n = the term of the loan;
ib = the benchmark interest rate for uncreditworthy
companies;
if = the long-term interest rate that would be paid by a
creditworthy company;
pn = the probability of default by an uncreditworthy company
within n years; and
qn = the probability of default by a creditworthy company
within n years.
Default means any missed or delayed payment of interest and/or
principal, bankruptcy, receivership, or distressed exchange. For values
of pn, we will normally rely on the average cumulative
default rates reported for the Caa to C-rated categories of companies
in Moody's study of historical default rates of corporate bond issuers.
For values of qn, we will normally rely on the average
cumulative default rates reported for the Aaa to Baa-rated categories
of companies in Moody's study of historical default rates of corporate
bond issuers.
Solving for ib in the above equation yields a formula
for the benchmark interest rate that should be paid by an
uncreditworthy borrower:
ib = [(1-qn)(1+if)n/
(1-pn)]1/n-1.
One commenter urged the Department to apply a risk premium also to
short-term loans taken out by uncreditworthy borrowers. Another
commenter supported this idea, arguing that even though long-term
financing is riskier, a bank's decision on short-term loans is also
based on the overall financial health of the borrower.
The fact that we are using a company-specific benchmark means that
the risk associated with providing a short-term loan to a company will
be reflected without any special adjustment. However, even where a
company-specific benchmark is not available, we do not believe it would
be appropriate to include a risk premium in the short-term benchmark
calculation. Short-term lending is less risky than long-term lending
and the inclusion of a risk premium in the short-term benchmark would
overcompensate for the commercial default risk. The risk of default in
short-term lending is minimal because short-term lending is usually
associated with specific transactions, and these transactions provide
security for the lender (albeit by means of a wide variety of legal
modalities). Thus, we have not adopted this suggestion.
We note that we have identified one situation where it would be
appropriate to include a risk premium in a short-term benchmark. This
would arise if we were forced to use a short-term interest rate as a
benchmark for long-term loans to an uncreditworthy company or as a
discount rate for allocating benefits received by an uncreditworthy
company.
Creditworthiness Analysis
Paragraph (a)(4) sets forth the standard for determining whether a
firm is uncreditworthy. In the 1997 Proposed Regulations, we made
certain modifications to Sec. 355.44(b)(6)(i) of the 1989 Proposed
Regulations to clarify the analysis we intended to undertake in
determining whether a company is creditworthy. Specifically, we adopted
a broader definition of ``uncreditworthiness'' where we would find a
company to be uncreditworthy if information available at the time the
terms of the government-provided loan were agreed upon indicated that
the firm could not have obtained long-term financing from conventional
commercial sources. In this context, the term ``conventional commercial
sources'' referred to bank loans and non-speculative grade bond issues.
Hence, uncreditworthy companies were those that would be forced to
resort to other sources, such as junk bonds, to raise funds. We also
listed factors we would consider in making a creditworthiness
determination. These factors focused on the financial position of the
firm receiving the government financing, without any consideration of
the purpose of the financing or whether different levels of risk might
be associated with different types of projects undertaken by the firm.
We received several comments on our definition of
``uncreditworthiness.'' Certain commenters urged the Department to
retain the definition of uncreditworthiness from the 1989 Proposed
Regulations, arguing that this standard was objective, uncontroversial,
and easy to administer. These commenters maintained that this standard
provided important guidance for petitioners who may have difficulties
obtaining information on the loan options available to respondents. The
commenters also argued that the new regulation would place a nearly
impossible burden of proof on petitioners to demonstrate that a
respondent is uncreditworthy.
We have not adopted this suggestion. As we stated in the preamble
to our 1997 Proposed Regulations, we changed the definition from the
1989 Proposed Regulations because we found that the old definition did
not contain a general principle to guide our determinations of
uncreditworthiness. Instead, the 1989 Proposed Regulation relied on a
formulaic approach to determining creditworthiness that was too
restrictive. We believe that the general principle adopted in these
regulations (i.e., an uncreditworthy firm is one which could not have
obtained long-term financing from conventional sources) will give us
the flexibility to address situations that would not have met the
formulaic approach for finding a company uncreditworthy.
However, although we changed the definition of uncreditworthiness,
we did not intend to change the standard for initiating an
investigation of a company's creditworthiness. Therefore, petitioners
may continue to provide the same type of information we have typically
relied upon.
Another commenter argued that the Department should not limit
itself to examining the creditworthiness of firms as a whole, but
should also give itself the flexibility to examine the creditworthiness
of individual projects. This commenter argued that some foreign
manufacturers, though creditworthy per se, are able to carry out new
development projects only because they obtain government financing. The
commenter argued that these manufacturers would not have been able to
secure financing from commercial sources for their huge development
projects because these projects are not commercially viable and would
be impossible to finance without government subsidies. The commenter
noted that, under the Department's traditional approach, the Department
would analyze the creditworthiness of the company as a whole, not the
creditworthiness of the specific project. Hence, the Department would
be likely to find the foreign manufacturer creditworthy, regardless of
the commercial viability of the project. The commenter argued that, in
this type of situation, the Department should focus on the
creditworthiness of the project, not the firm.
We share this commenter's concern and have amended the 1997
Proposed Regulations to allow for a project-specific analysis in
determining
[[Page 65367]]
creditworthiness. For example, for loans that are provided to fund a
large investment project into new products, processes, or capacity
(e.g., a plant expansion or new model or product line, where repayment
of a loan is contingent upon the success of the particular project
being funded), our traditional analysis focusing primarily on the
creditworthiness of the company as a whole may be inappropriate because
the risk associated with a new project may be much higher or lower than
the average risk of the company's existing operations. In these
situations, we would expect commercial lenders to place greater
emphasis on the expected return and risk of the project because the
success or failure of the project would be the most important indicator
of the borrowing firm's ability to repay the loan. This is not to say
that the financial position of the firm as a whole would be irrelevant
to the lender's decision, only that the primary focus would be on the
project itself. Therefore, paragraph (a)(4) now allows for the
possibility of focusing the creditworthiness analysis on the project
being financed rather than the company as a whole.
Significance of long-term commercial loans: In the 1997 Proposed
Regulations, paragraph (a)(4)(ii) provided that, if a privately-owned
company received long-term commercial loans without a government loan
guarantee, we would consider the presence of such commercial loans as
dispositive evidence that the company was not uncreditworthy.
Two commenters criticized the Department's proposed approach. These
commenters maintained that the presence of a long-term, commercial loan
does not prove that a company is creditworthy. Instead they urged the
Department to examine all the criteria listed in paragraphs (a)(4)(i)
(A), (B), (C), and (D) without treating one of these factors as
dispositive. One of the commenters argued that giving one criterion
dispositive status would constitute abuse of the Department's
discretion to implement the statute. The other commenter argued that
the Department's proposed approach would preclude an in-depth review of
the company as envisioned by the regulations. Both commenters stated
that making the presence of a commercial loan a dispositive indication
of creditworthiness would be particularly inappropriate if the
commercial loan had characteristics different from the government loan
(e.g., different requirements of security).
In general, we believe that if commercial banks are willing to
provide loans to the firm, we should not substitute our judgment and
find the firm to be uncreditworthy. This does not mean, however, that
if the firm has taken out a single commercial bank loan we would find
that loan to be dispositive evidence that the firm was creditworthy.
Instead, the intent of this paragraph is to indicate that, where the
firm has recourse to commercial sources for loans, as made evident by
the receipt of such loans, and the commercial loans are comparable with
the government loan, those loans will be dispositive of the firm's
creditworthiness. However, if, for example, the firm has obtained a
single commercial loan in the year in question for a relatively small
amount, and the loan has a short repayment term (e.g., less than two
years), or has unusual aspects, receipt of that loan will not be
dispositive of the firm's creditworthiness, and we will go on to
examine the other factors listed in paragraph (a)(4)(i) B through D.
We have also made a change from the 1997 Proposed Regulations
regarding the presence of guarantees and the firm's creditworthiness.
We have added ``explicit or implicit'' to modify ``government
guarantee.'' This serves to clarify our position that if either type of
guarantee is present, the commercial loans will not be viewed as
dispositive of the firm's creditworthiness. We may consider a
commercial loan to be covered by an implicit government guarantee where
the loan contributes to the financing of a project that is being
undertaken in conjunction with government loan funds or other types of
government participation such as development grants. In such a
scenario, while no explicit government guarantee is present, we believe
that banks are likely to assume that the government will stand behind
the project and ensure that creditors are repaid.
Finally, we note our longstanding practice that creditworthiness
determinations are made on a year-by-year basis. For example, if we are
trying to determine whether a firm is creditworthy in 1998, we will
look to whether the firm has negotiated commercial loans in 1998.
One commenter suggested that purchases of equity in a company by a
commercial institution should also constitute dispositive evidence of
creditworthiness. The commenter reasoned that a private entity willing
to invest in a company would presumably also be willing to lend money
to that company because investing is riskier than lending.
We have not adopted this suggestion. By its very terms, equity
differs from loans and, hence, the presence of equity investments (even
if made by private investors) is not necessarily indicative of whether
the firm could obtain loans from commercial sources. As an extreme
example, private owners may inject equity into their company because
the debt-to-equity ratio is so high that it has become virtually
impossible for the company to borrow funds. Clearly, in this situation,
the presence of equity purchases by the owners would not be indicative
of the firm's access to commercial loans.
We received two comments regarding the significance of the receipt
of a commercial loan where we are examining the creditworthiness of a
government-owned company. One commenter suggested that paragraph
(a)(4)(ii) should apply also to government-owned firms. Another
commenter took the opposite view, stating that it is not unusual to
find commercial lenders providing loans to government-owned companies
which are otherwise uncreditworthy.
We do not believe that the presence of commercial loans is
dispositive of whether a government-owned firm could have obtained
long-term financing from conventional commercial sources. This is
because, in our view, in the case of a government-owned firm, a bank is
likely to consider that the government will repay the loan in the event
of default. Accordingly, paragraph (a)(4)(ii) provides that the
presence of comparable commercial loans will be dispositive of
creditworthiness only for privately owned companies. For government-
owned firms, we will make our creditworthiness determination by
examining this factor and the other factors listed in paragraph
(a)(4)(i).
Significance of prior subsidies: Paragraph (a)(4)(iii) in the 1997
Proposed Regulations stated that we would ignore current and prior
countervailable subsidies in determining whether a firm is
uncreditworthy. In other words, we would not attempt to adjust a firm's
financial data for current and prior subsidies in making a
creditworthiness determination.
We received three comments on this issue, all of which urged the
Department to change its approach and adjust for prior subsidies when
examining a firm's creditworthiness. One of these commenters requested
that the Department take prior subsidies into account to the same
extent that a reasonable private lender would. This commenter argued
that, by ignoring prior subsidies, the Department is not adhering to
the standards of a reasonable private lender. The commenter maintained
that, if a
[[Page 65368]]
company's financial health is due to government assistance, a private
lender would examine the company's underlying performance independent
of subsidies. The private lender, who would then discover that the
company's financial health was superficial, might not lend money to the
company unless the lender was convinced that the government would
continue to provide subsidies in the future. A second commenter argued
that failure to consider prior subsidies when making a creditworthiness
determination underestimates the benefit received. This commenter urged
the Department to estimate the recipient company's financial situation
without subsidies and base its creditworthiness determination on this
estimate.
We have not adopted this suggestion. Our longstanding practice has
been not to take current or prior subsidies into account when
determining a company's creditworthiness. We believe that trying to
adjust a company's financial ratios for previously received subsidies
would be an extremely difficult and highly speculative exercise.
We have made one small amendment to paragraph (a)(4)(iv) addressing
the discount rate. We have changed ``non-recurring grant'' to ``non-
recurring benefit'' to conform with the new nomenclature used in
Sec. 351.524.
Calculation of Benefit From Long Term Variable Rate Loans
Paragraph (a)(5) deals with long-term variable rate loans and
codifies the methodology set forth in the GIA. Under paragraph
(a)(5)(i), which is unchanged from the 1997 Proposed Regulations, 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) cannot be followed 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.
Allegations
Paragraph (a)(6)(i) deals with the standard for initiating an
investigation of a respondent company's creditworthiness. It is
unchanged from the 1997 Proposed Regulations. In accordance with our
past practice, this paragraph states that the Secretary will normally
require a specific allegation before the Department will consider the
creditworthiness of a firm.
One commenter argued that the Department should not employ a
heightened initiation standard for investigating a company's
creditworthiness. Specifically, this commenter suggested that the
requirement that petitioners supply information ``establishing a
reasonable basis to believe or suspect'' that a company is
uncreditworthy be replaced with information ``reasonably available to
petitioners.''
We have not adopted this suggestion. The requirement that
petitioners establish ``a reasonable basis to believe or suspect''
uncreditworthiness rather than merely provide ``information reasonably
available'' to them dates back to the 1989 Proposed Regulations.
Because of the additional workload involved in investigating and
determining whether a company is uncreditworthy, we continue to believe
that it is appropriate to impose a higher standard for
uncreditworthiness allegations. This does not involve any change in our
past practice--the same types of allegations that we have accepted in
the past will still suffice to start a creditworthiness inquiry.
Paragraph (a)(6)(ii) establishes the evidentiary standard for
investigating loans extended by government-owned banks. In the 1997
Proposed Regulations, we made a distinction between government-owned
banks that are operated to meet special financing needs and government-
owned commercial banks. For special purpose banks (such as national
development banks), we asked that petitioners provide information
reasonably available to them indicating that loans provided by such
banks were specific and that the interest charged was not at commercial
rates. For government-owned commercial banks, we requested that
petitioners also provide information establishing a reasonable basis to
believe or suspect that the loans were something more than mere
commercial loans. In particular, we requested information suggesting
that such loans were provided at the direction of the government or
with funds provided by the government.
Several commenters objected to the higher initiation standard for
loans provided by government-owned commercial banks. They argued that
the additional information required by the Department for initiating an
investigation of loans from this category of banks is not reasonably
available to petitioners. They contended that it should be sufficient
for petitioners to demonstrate that a loan is specific and provided on
terms inconsistent with commercial considerations. They suggested that
the burden of proof be shifted to respondents to show that the loan
involves no government funds or government direction. Another commenter
asserted that the division of government-owned banks into two
categories is a new approach and not part of the Department's past
practice. The same commenter argued that the Department's 1997 Proposed
Regulations would create a loophole because the Department's threshold
for initiating an investigation of loans from government-owned
commercial banks would be higher than for initiating an investigation
of loans from privately-owned banks and government-owned special
purpose banks.
Based on our consideration of these comments, we have decided that
the distinction between government-owned special purpose banks and
government-owned commercial banks may not be helpful in this context
and that it is, therefore, not meaningful to retain different
initiation standards for investigating loans from these two categories
of banks. Paragraph (a)(6)(ii) has, thus, been changed and now provides
that, for loans provided by any government-owned bank, the Secretary
will require petitioners to present information reasonably available to
them indicating that the loans: (1) Are specific in accordance with
section 771(5A) of the Act, and (2) are provided on terms more
favorable than those the recipient would pay on a comparable commercial
loan that the recipient could actually obtain on the market. This
initiation standard is consistent with the initiation standard for most
subsidy allegations, i.e., petitioner must allege (and provide
reasonably available information in support of the allegation) that the
subsidy is specific and that it confers a benefit. We believe that, for
initiation purposes, government ownership is sufficient to indicate
that funds have been provided at the direction of the government.
[[Page 65369]]
One commenter argued that loans provided by special purpose
government-owned banks should be presumed to be specific for purposes
of making a subsidy allegation because such banks promote specific and
narrow objectives. This commenter stated that many petitioners cannot
obtain the information needed to show that a loan is specific. In this
commenter's view, the Department should instead require respondents to
show that the loans are generally available.
We have not adopted this suggestion. With any presumption, there
must be a factual basis for making the presumption, and none exists in
this instance. The fact that special purpose banks may be set up to
achieve certain objectives does not necessarily mean that they provide
funds to a specific group of enterprises or industries. As with any
other domestic program, petitioners must provide information reasonably
available to them indicating that the bank's loans are specific and
that they confer a benefit.
Timing of Receipt of Benefit
Paragraph (b) sets forth a rule regarding the point in time at
which the benefit from a loan arises. The 1997 Proposed Regulations
stated that we would consider the benefit as having been received on
the date on which the firm is due to make a payment on the government-
provided loan. In these Final Regulations, we have amended the
regulation such that we will consider the benefit to have been received
in the year in which the firm otherwise would have had to make a
payment on the comparable commercial loan. The second sentence of
paragraph (b) addresses loans with special characteristics, e.g., loans
with non-commercial grace periods. With these types of loans, we
believe that the benefit stream starts upon the receipt of the loan. It
would not be appropriate to wait until the end of the grace period to
begin assigning the benefit from such loans because the firm would have
had to make loan payments during this period if the loan were provided
on commercial terms.
Allocation Over Time
Paragraph (c) deals with the allocation of the benefits of a
government-provided loan to a particular time period and reflects one
minor change from the 1997 Proposed Regulations.
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. We have added to the paragraph the
same condition that applies to long-term loans, i.e., that the amount
of the subsidy conferred by a government-provided loan can never exceed
the amount that would have been calculated if the loan had been given
as a grant.
Paragraph (c)(2) deals with situations in which the benefit of a
government-provided long-term 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 our long-held principle 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
rate 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, we will calculate
the benefit in a two-step process. First, paragraph (c)(3)(i) directs
us to calculate the present value, in the year in which repayment would
begin on the comparable commercial loan, 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 benchmark loan (this
difference is called ``the grant equivalent''). Second, paragraph
(c)(3)(ii) provides that we allocate this grant equivalent over time by
using the allocation formula in Sec. 351.524(d)(1). We have decided to
eliminate our old loan allocation formula described in the 1989
Proposed Regulations, as part of our effort to streamline
methodologies, where possible. In determining that the benefit from
these types of loans occurs in the year in which the government-
provided loan was received (see Sec. 351.505(b)), the old loan formula
is unnecessary, because its primary purpose was to begin assigning
annual benefit amounts in the year after the receipt of the loan.
We received two comments on this issue. Both commenters objected to
our use of the number of years in the life of the government-provided
loan when allocating the benefit of loans with concessionary grace or
deferral periods. The commenters argued that, because of the
concessionary grace/deferral period, the Department is diluting the
annual benefit by including this period in the allocation period.
Instead, the commenters urged the Department to allocate the benefit
over the length of the benchmark loan. In addition, the commenters
asked the Department to ``add an additional amount to reflect the
present value of the benefit from reduced interest and principal
payments'' due to a deferral of the repayment schedule.
We have not adopted these suggestions. With regard to the former
comment, matching the allocation period with the life of the
government-provided loan is a more predictable, transparent, and
logical methodology. This is because we will be allocating subsidy
benefits as long as the government-provided loan is on the firm's
books. Using a different allocation period, such as the life of the
benchmark loan, could mean that subsidy benefits would end even though
the subsidized loan itself is still outstanding. Moreover, we do not
share the commenters' view that our methodology dilutes the annual
benefit. Although the amounts countervailed each year may be smaller
under our methodology, the benefit stream will correspond to a period
that matches the life of the subsidized loan.
Paragraph (c)(4) sets forth the method of calculating an annual
benefit for government-provided variable-rate loans. No comments were
received on this paragraph.
Contingent Liabilities
Paragraph (d) sets forth the method for calculating the annual
benefit attributable to a long-term interest-free loan, for which the
obligation for repayment is contingent upon the company taking some
future action or achieving some goal in fulfillment of the loan's
requirements, such as the achievement of a particular profit level by
the firm. We have made changes to this paragraph so that our
methodology for these loans conforms to the methodology for tax
deferrals (see, e.g., Sec. 351.509). In the case of tax deferrals, we
recognized that if the event that triggers repayment will not occur for
several years, the deferral should be treated as a long-term loan and
the
[[Page 65370]]
benefit measured using a long-term benchmark. Contingent liability
loans are analogous to tax deferrals. Consequently, our regulation now
states that where the event triggering repayment will occur at a point
in time after one year from receipt of the contingent liability, we
will treat the contingent liability as a long-term loan.
Additionally, paragraph (d)(2) now recognizes that it may be
appropriate in certain circumstances to treat contingent liabilities as
grants. This would occur, if at any point in time, we determine from
record evidence that the event upon which repayment depends is not a
viable contingency. In this instance, we will treat the outstanding
balance of the loan as a grant received in the year in which this
condition manifests itself.
One commenter asked that the regulations clarify that in the event
of forgiveness of a contingent liability, a new subsidy arises whose
benefit is equal to the unpaid principal of the loan.
We will continue our longstanding practice and treat the entire
unpaid principal of a forgiven loan and any accumulated interest,
regardless of whether it is a contingent liability loan or a regular
loan, as a grant bestowed at the time of the forgiveness (see, e.g.,
Certain Hot-Rolled Lead and Bismuth Carbon Steel Products from Germany,
58 FR 6223, 6234-35 (January 27, 1993)).
Section 351.506
Section 351.506 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.
According to this general rule, a benefit exists to the extent that the
total amount a firm pays for a loan with a government-provided loan
guarantee is less than what the firm would have paid for a comparable
commercial loan that the firm could actually obtain on the market
absent the government guarantee. In this context, ``total amount''
includes both the loan guarantee fee and the effective interest paid on
the loan. The terms ``comparable commercial loan'' and ``could actually
obtain on the market'' are defined in Sec. 351.505(a)(2) and (3),
respectively.
One commenter asked the Department to recognize that the very
existence of a government loan guarantee constitutes prima facie
evidence that a countervailable benefit exists because a government
loan guarantee is only necessary when a company cannot obtain a loan
without a loan guarantee and when such a guarantee is not available
from private sources.
We have not adopted this suggestion. As with other forms of
financial contributions, the Department must determine that a benefit
is conferred before we can find a subsidy program to be
countervailable. However, we acknowledge that the presence of a
government loan guarantee may affect other terms of the loan, such as
the interest rate. Therefore, when we are dealing with a government-
guaranteed loan, we will carefully examine all of the terms of both the
government loan and the benchmark loan to ensure that we capture all of
the benefit.
One commenter asked the Department to clarify that the term
``comparable loan'' includes both comparable size and risk level.
Another commenter urged the Department to recognize that the risk to
the lender would be higher without a loan guarantee and that the
borrower, therefore, would have to pay a higher interest rate absent
the guarantee.
We intend to interpret the term ``comparable commercial loan'' as
it affects loan guarantees in the same manner as when we are addressing
loans. The role of relative risk levels is discussed in the preamble to
Sec. 351.505. We agree with the second commenter that a lender faces
greater risk if a loan is not guaranteed. We believe that this
additional risk will be captured in the benefit methodology described
in paragraph (a). This is because the interest rate on the guaranteed
loan will be compared with either (1) the interest rate on a comparable
unguaranteed (and, hence, riskier) loan that was obtained, or could
have been obtained, by the firm; or (2) the interest rate on a
comparable commercially guaranteed loan that was obtained, or could
have been obtained, by the firm. In the latter case, we would expect
that the two guaranteed loans would have similar risk levels and that
the interest rates would be similar, assuming that the loans are
comparable as defined above. Of course, we would also adjust for
differences in guarantee fees as paragraph (a)(1) directs us to do.
Two commenters urged the Department to make sure that we capture
the full benefit conferred by a government loan guarantee by measuring
the difference in loan terms resulting from the government guarantee as
well as the difference in the cost of the guarantees.
We believe that paragraph (a)(1) addresses the commenters'
concerns. By measuring the difference between the total amount that a
firm pays for a loan guaranteed by the government and the amount that
the firm would have paid on a comparable commercial loan (including any
difference in guarantee fees), we are capturing both elements brought
up by the commenters.
Paragraph (a)(2) of the 1997 Proposed Regulations specified that a
government loan guarantee that was 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) would not be
considered countervailable if private owners normally provide
guarantees in the same circumstances. In the preamble of the 1997
Proposed Regulations, we said that if the government directly
guarantees the debt of a company it owns, it would fall upon the
respondent to demonstrate that it is normal commercial practice for
private shareholders in that country to guarantee the debt of the
companies in which they own shares. The preamble further provided that
in a situation 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 that the holding company has sufficient
internally-generated resources to serve as guarantor of the debt.
One commenter maintained that, because of their greater financial
resources and also for social and political reasons, governments have a
greater ability and interest in guaranteeing certain loans than private
shareholders do. Therefore, the commenter argued, in a situation where
a government provides a loan guarantee to a company it owns, the
Department should presume that the guarantee constitutes a
countervailable subsidy unless the respondent can show that the
guarantee was provided on commercial terms. In addition, this commenter
emphasized that the burden should be on the respondent, not on the
Department, to show that it is normal commercial practice in the
country under investigation to provide loan guarantees.
We have not adopted a presumption that government-provided loan
guarantees to government-owned firms are countervailable subsidies. If
the respondent cannot provide evidence showing that it is normal
commercial practice for private owners to give comparable loan
guarantees to firms they own, the Department will determine whether the
government loan guarantee resulted in the borrower
[[Page 65371]]
receiving a loan on terms more favorable than the firm would have
received on a comparable commercial loan. We have modified paragraph
(a)(2) to reflect this burden.
In the preamble to the 1997 Proposed Regulations, we also stated
that where the government or a government-owned holding company
guarantees the debt of an ``uncredit worthy'' company it owns (see
Sec. 351.505(a)(4) regarding uncreditworthy companies), the respondent
must provide evidence that private owners would also guarantee the debt
of uncreditworthy companies they own.
Two commenters argued that in the case of uncreditworthy companies,
the countervailable benefit is equal to the amount of the guaranteed
loan because an uncreditworthy company would not have been able to
obtain any loan at all without government loan guarantees. They urged
the Department to treat the entire amount of a guaranteed loan provided
to an uncreditworthy company as a grant. In addition, one of the
commenters implied that the European Union follows this practice.
We have not adopted this suggestion. Subsidized loan guarantees are
essentially treated as subsidized loans. Therefore, consistent with our
methodology of constructing a benchmark for loans to uncreditworthy
companies (see Sec. 351.505(a)(3)(iii)), we would construct a benchmark
when uncreditworthy companies are given loan guarantees.
Paragraph (b) sets forth a rule regarding the point in time at
which the benefit from a loan guarantee arises. The 1997 Proposed
Regulations stated that we would consider the benefit as having been
received on the date on which the firm is due to make a payment on the
government-guaranteed loan. In these Final Regulations, we have amended
the regulation such that we will consider the benefit to have been
received in the year in which the firm otherwise would have had to make
a payment on the comparable commercial loan.
Paragraph (c) deals with the allocation of the benefit to a
particular time period. It is unchanged from the 1997 Proposed
Regulations.
Section 351.507
Section 351.507 pertains to equity infusions. The methodology
reflected here has changed from that laid out in the 1997 Proposed
Regulations. The changes stem from our consideration of the comments
received and a reevaluation of certain fundamental assumptions
regarding the nature of, and circumstances surrounding, a government's
purchase of shares in a company.
The 1997 Proposed Regulations assigned all equity infusions to one
of two main methodological tracks according to whether or not a market
share price for the company receiving the infusion was available. Where
a market share price was available, we intended to use that price as a
benchmark against which to compare the government purchase price of the
stock. Any premium paid by the government was to be considered a
benefit. While we expressed a preference for the use of a market price
for newly issued shares which were identical or similar to the shares
purchased by the government, we stated that, where such a price was not
available, we would resort to using a market price for similar, pre-
existing shares (i.e., a ``secondary market price'') as the benchmark.
Where secondary market prices were to be used, we proposed using post-
infusion prices to ensure that our analysis captured any ``dilution''
effects (i.e., any effects from the issue of new shares on the value of
existing shares).
Where a market price for the shares purchased by the government was
not available, we explained that we would first conduct our
conventional equityworthiness test. If the company was deemed
equityworthy, i.e., appeared capable of generating a ``reasonable rate
of return within a reasonable period of time,'' and if there were no
special conditions or restrictions attached to the government's shares
rendering their purchase inconsistent with the usual investment
practice of private investors, the equity infusion would not confer a
benefit. A finding that the company was unequityworthy would equate to
a finding that the investment was inconsistent with the usual
investment practice of private investors. To measure the benefit, the
Department would attempt to construct a price that a reasonable private
investor would theoretically have been willing to pay for the shares
(``constructed private investor price'' or ``CPIP''). Any difference
between the government purchase price and the CPIP would be considered
a subsidy. If the information necessary for calculating the CPIP was
not available, the Department would allocate the entire infusion amount
over time, but deduct from the portion allocated to a particular year
the amount of actual returns achieved by the firm in question in that
year.
We received numerous comments regarding many aspects of the
proposed methodology. Several comments focused on the use of private
prices: Some commenters suggested abandoning any reference to market
prices in all cases; some suggested abandoning only any reference to
secondary market prices; and some supported use of private market
prices, but requested that a pre-infusion rather than a post-infusion
price be used.
Some commenters argued that the fact that a company's previously
issued shares are traded in the secondary market is not conclusive
evidence of that company's ability to raise new capital from private
investors. These commenters pointed to the case where an otherwise
financially sound company is contemplating a new expansion project
about which general sentiment among private investors is pessimistic
given the increased risk or low value the expansion is expected to add
to the company as a whole. In this case, private investors would not
likely purchase new shares. These commenters argued that, rather than
using the secondary market shares as a benchmark to measure the
benefit, the Department should move straight to its equityworthiness
analysis as it does when there is no benchmark.
If the Department relies on secondary market prices as a standard
by which to evaluate the reasonableness of the government's equity
investment, however, several commenters argued that post-infusion
prices should not be used. These commenters argued that such prices are
inappropriate because a reasonable private investor could not know at
the time of the purchase of new shares what the subsequent market price
of that stock would be. Pre-infusion, rather than post-infusion, prices
are, therefore, a better standard by which to judge the reasonableness
of a government equity infusion.
The vast majority of equity comments addressed the proposed
methodology for measuring the benefit to unequityworthy companies.
While a few commenters expressed support for the proposed methodology,
many others objected, arguing that a change from the current
methodology (i.e., treating the entire infusion as a benefit) is not
mandated by either the SCM Agreement or the URAA, and that such a
change represents a troublesome weakening of the CVD law. According to
these commenters, the Department's stated legal authorities for the
proposed change are not relevant to this particular issue: the GATT
Panel ruling in the Lead and Bismuth case was rejected by the United
States as inconsistent with U.S. law and the international subsidy
code, and the CIT ruling in AIMCOR dealt only with the case of an
[[Page 65372]]
equityworthy firm (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
(November15, 1994) and AIMCOR, Alabama Silicon, Inc. v. United States,
912 F. Supp. 549, 552-55 (CIT 1995) (``AIMCOR II'')).
The central point of the commenters opposing our proposed
methodology was that, once a company has been deemed unequityworthy,
the full amount of any equity infusion by the government should be
considered a benefit. In other words, because the company would not
have received any new capital absent government involvement, the
benefit to the recipient is equal to the amount of the infusion. In
contrast, the proposed methodology of constructing a private investor
price, and the alternative methodology of adjusting for returns, use a
cost-to-government standard which has been explicitly rejected as
unlawful by the CIT. See British Steel Corp. v. United States, 605 F.
Supp. 286, 295-296 (CIT 1985). These commenters also provided further
theoretical, practical and legal reasons why each of the proposed
methodologies is inappropriate.
First, several commenters maintain that the proposed CPIP
methodology is based on the erroneous assumption that prices of a new
share issue in an unequityworthy firm could be priced low enough to
yield an overall return (dividends plus capital appreciation) to the
new investor comparable to a market return. If the investment in which
the new capital is used is not expected to yield a market return (which
is why the firm is unequityworthy), issuing new shares at a discounted
price would lower the existing shareholders' expected returns by
diluting their claim on the firm's total equity. The existing
shareholders, from the view of a reasonable private investor, have no
incentive to allow this to happen. Hence, there is no price--in theory
or in practice--at which, simultaneously, private investors would be
willing to buy, and current shareholders willing to sell, shares in an
unequityworthy company.
Another problem with the CPIP approach, according to these
commenters, is that it is subject to manipulation in the case of an
equity infusion into a 100 percent government-owned firm. In such a
case, the earnings per share could always be manipulated (by adjusting
the number of shares purchased) to reflect a fabricated per share
``market return'' without any adverse consequences for the government,
which, in any case, would retain its claim on all of the company's
profits.
Finally, as a practical matter, these commenters argue that the
analysis called for under the CPIP approach places a significant burden
on the Department. They argue that calculating the theoretical price a
private investor would have been willing to pay for a stock would
require a considerable level of financial expertise, would prove an
inordinate drain on the Department's resources, and would involve too
much conjecture on the part of the Department in matters of financial
forecasting.
Several commenters also objected to the proposed alternative
methodology of treating the entire infusion as a benefit, but then
adjusting that benefit by actual returns. These commenters likened this
methodology to the rate-of-return-shortfall (``RORS'') approach
rejected by the Department in 1993. In their opinion, the arguments
proffered by the Department for rejecting the RORS approach are equally
valid in this case.
One such argument is that dividends (or actual returns) cannot be
considered a ``repayment'' of the benefit conferred by the government
equity infusion because dividends are, in fact, generated from that
benefit. Nor can the dividends be used to reduce the amount of the
benefit because the CIT has ruled that dividends are not explicitly
included in the statutory list of allowable offsets. British Steel PLC.
v. United States, 879 F. Supp. 1254, 1309 (CIT 1995).
These commenters highlighted several additional arguments,
originally identified by the Department with regard to the RORS
methodology, that explain why it is inappropriate to adjust for actual
returns. First, the actual returns method is a post-hoc valuation of an
investment which measures events subsequent to the equity infusion.
Second, the proposed approach fails to account for later subsidies
which could improve the financial status of the company, improperly
reducing the benefit associated with earlier subsidies. Third, a
company that was performing poorly could have an anomalous profitable
year, allowing it to escape countervailing duties for that year.
Fourth, the proposed approach does not measure the rate of return on
the government's original equity infusion, but rather the rate of
return in the period of investigation or review on the firm's total
equity. Finally, the approach engenders bias in the administration of
the law in that investments in unequityworthy companies will escape
countervailing duties when results are unexpectedly good, but
investments in equityworthy companies will not be countervailed when
the results are unexpectedly bad.
After considering all of the comments, we have decided to revise
the methodology described in the 1997 Proposed Regulations for
analyzing equity infusions. In large measure, we are codifying our
current practice with a number of important modifications. We believe
that the approach detailed below better reflects the principles set
forth in the statute, SAA and the SCM Agreement, and addresses many
commenters' concerns while maintaining, to the extent possible,
continuity with past Department practice.
Consistent with section 771(5)(E)(i) of the Act, paragraph (a)(1)
provides that a benefit is conferred by a government-provided equity
infusion if 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. As in the 1997 Proposed Regulations, our
methodology for identifying and measuring the resulting benefit is
divided into two methodological tracks, with the choice of methodology
dependent upon whether or not actual private investor prices can serve
as a benchmark for the shares purchased by the government. However, for
reasons discussed in greater detail below, we have changed our proposed
methodology for calculating the benefit where there are no private
investor prices and we will not construct the theoretical price a
private investor would pay. Therefore, we have deleted the second
sentence that appeared in paragraph (a)(1) of the 1997 Proposed
Regulations.
Actual Private Investor Prices Available
Paragraph (a)(2) contains rules for analyzing equity infusions when
actual private investor prices (i.e., market prices) are available--the
first methodological track--and has retained only some portions of the
language in the 1997 Proposed Regulations. Under Sec. 351.507(a), the
initial step in analyzing an equity infusion is to determine whether,
at the time of the infusion, there was a market price for newly issued
equity. If so, the Department would consider the equity infusion to
have conferred a benefit if the price paid by the government for the
newly issued equity was more than the price paid by private investors
for the same new issue. For example, if a government pays $10 per share
for newly issued shares in a firm, and private investors pay $8 per
share for shares in the same share issue,
[[Page 65373]]
a benefit exists in the amount of $2 per share ($10-$8=$2).
Paragraph (a)(2)(i) also provides for the use of a ``similar form''
of new, contemporaneously issued shares as the basis for the reasonable
private investor benchmark. As noted in the preamble to the 1997
Proposed Regulations, in the Certain Steel determinations the
Department determined that, in appropriate circumstances, shares with
similar characteristics can be compared, as long as appropriate
adjustments are made. 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. 563,
580 (CIT 1996).
Where similar new, contemporaneously issued shares are used as the
benchmark, paragraph (a)(2)(iv) provides that the Department will make
a price adjustment for differences in the types of shares when it is
appropriate. See, e.g., Certain Fresh Atlantic Groundfish from Canada,
51 FR 10047 (March 24, 1986). Moreover, paragraph (a)(2)(iii) requires
that, where the Department uses the private investor prices, the amount
of shares purchased by private investors must be significant so as to
provide an appropriate benchmark. See, e.g., Small Diameter Circular
Seamless Carbon and Alloy Steel Standard, Line and Pressure Pipe from
Italy, 60 FR 31992, 31994 (June 19, 1995).
An important change to paragraph (a)(2) from the 1997 Proposed
Regulations is that we have eliminated any provision for the use of
secondary-market share prices. As discussed in greater detail below, in
cases where private investor prices for the newly issued shares are not
available, we will proceed directly to an equityworthiness
determination without any reference to secondary market prices.
Although previous Department practice has been to prefer market-
determined share prices (including secondary prices) when available and
useable, we are persuaded that a revision of this practice is now
warranted for the following reasons.
In our view, secondary market prices do not necessarily reflect the
market value of new shares, regardless of the point in time the
comparison is made. Use of secondary market prices before a government
infusion does not account for the dilution of company ownership and
does not take into consideration private investors' perceptions of the
recipient company's intended use of the newly obtained equity capital.
Use of post-infusion secondary market prices may also be problematic.
For example, the fact that the government has made an infusion may
cause investors to bid up the secondary market price of the stock to a
higher level than that warranted by the improved capital position of
the company. The Department cannot reasonably account for such
secondary market phenomena. In sum, secondary market prices are not a
reliable basis for measuring the market value of newly issued equity.
Actual Private Investor Prices Unavailable
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. 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 not
be 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 Final Regulations, we have retained the equityworthy/
unequityworthy distinction. Thus, in paragraph (a)(3), if actual
private investor prices are not available under paragraph (a)(2), the
Secretary will determine whether the firm funded by the government-
provided equity was equityworthy at the time of the equity infusion.
Paragraph (a)(4) sets forth the standard the Secretary will apply in
determining equityworthiness, and broadly follows Sec. 355.44(e)(2) of
the 1989 Proposed Regulations.
Several commenters have argued that, under certain circumstances,
the equityworthiness of the project being financed, rather than the
firm as a whole, should be the focus of the Department's
equityworthiness analysis. This is especially true, according to these
commenters, when the investment contemplated by a firm represents a
significant departure, in terms of its riskiness or expected return,
from the firm's existing operations. These commenters maintain that the
riskiness of a firm's new investment can significantly impede the
firm's ability to raise new capital on equity markets on commercially
available terms.
We received a similar comment with respect to our creditworthiness
determinations. Consistent with the position we have taken regarding
loans and creditworthiness, in the case of equityworthiness
determinations, we recognize the possibility that it may be
appropriate, in certain circumstances, to focus on the risk and
expected return of the project being financed rather than the firm as a
whole. Therefore, we have included a provision that allows the
Secretary to do a project analysis where appropriate, but we are
maintaining the general principle that the focus of an equityworthiness
determination will normally be on the firm as a whole. We will address
issues relating to the appropriateness of a project-specific
equityworthiness analysis in the context of specific cases.
Paragraph (a)(4)(ii) discusses the significance of the analysis
performed prior to a government equity purchase. For every government
equity infusion, we will analyze whether the government's decision to
invest was consistent with ``the usual investment practice of private
investors, including the practice regarding the provision of risk
capital.'' Section 771(5)(E)(i). Obviously, to answer this question,
the basis upon which the government infusion was made must be clear. In
prior CVD proceedings, governments have often failed to provide the
Department any commercial rationale for their investment. This has been
true for even very large infusions. In contrast, prior to making a
significant equity infusion, it is the usual investment practice of a
private investor to evaluate the potential risk versus the expected
return, using the most objective criteria and information available to
the investor. This includes an analysis of information sufficient to
determine the expected risk-adjusted return and how such a return
compares to that of alternative investment opportunities of similar
risk. Absent such an objective analysis--performed prior to the equity
infusion--it is unlikely that we would find that the infusion was in
accordance with the usual investment practice of a private investor,
except where we are satisfied that the lack of such an analysis is
consistent with the actions of a reasonable private investor in the
country.
[[Page 65374]]
Certain commenters have specifically requested that independent
studies commissioned by foreign governments be considered by the
Department in making an equityworthiness determination.
We will closely examine such studies. In order to be considered in
our equityworthiness analysis, any study must have been prepared prior
to the government's approval of the infusion and must be sufficiently
objective and comprehensive. We intend to review such studies carefully
to determine whether the government acted like a reasonable private
investor, subjecting both the assumptions and the analysis to scrutiny.
This will enable us to decide whether the decision to invest was
commercially sound given the information at the disposal of the
government.
Some independent studies commissioned to analyze the merits of a
given investment may present an assessment of the company's expected
returns and risks that is predicated on certain future actions by the
company in question. For instance, a study might conclude that the
investment in a company planning to close one outmoded plant and
construct a new one in a different location is commercially viable so
long as the company also reduces its workforce by half. In this case,
the Department would take into consideration whether the downsizing
will actually occur. If the company has known for a long time that a
reduction in its workforce was a necessary condition for improved
financial performance, but has consistently shown itself unwilling or
incapable of making that reduction, this may prove sufficient cause to
believe that the projected return is unattainable.
Some commenters cautioned the Department about relying too heavily
on independent studies given their inherently speculative and
subjective nature. We are well aware of the potential difficulties in
using independent analyses, not least of which is the fact that
independent experts often fundamentally disagree about the prospects of
a given investment. In other instances, the objectivity of some studies
is called into question. However, private investors are likewise
usually faced with a similar variety of competing views and must
exercise their own judgement with respect to the objectivity of
information before them. When considering the suitability of a
submitted study, we will seek to ensure the study is accurate and
reliable, and exercise our own judgement with respect to a study's
objectivity. Specifically, we will take into consideration the extent
to which the study's premises and conclusions differ from those of
other independent studies, accepted financial analysis principles, or
market sentiment in general (e.g., industry-specific business
publications or general industry market studies).
Paragraph (a)(4)(iii) discusses the significance of prior subsidies
in our equityworthiness determination. As in the 1997 Proposed
Regulations, it states that in determining whether a firm or project
was equityworthy, we will ignore current and prior subsidies received
by the firm. Several commenters objected to this rule, arguing that any
reasonable investor would take into consideration the role that past
subsidies have played in a company's financial performance. These
commenters noted that, while a company might appear to be successful, a
reasonable investor may deem the company unequityworthy if he or she
believes that, when forced to stand on its own (i.e., without
subsidies), the company would not yield a market return.
While we recognize the potential for prior subsidies to affect the
present financial performance of a company, we are continuing with our
practice of not considering the impact of prior subsidies when
conducting an equityworthiness test. We continue to believe that it
would be too difficult and speculative a task to determine what the
company's performance would have been had it not previously benefitted
from a subsidy.
Paragraph (a)(5) pertains to those infusions in which the firm or
project is determined to be equityworthy. In our 1997 Proposed
Regulations, we stated our intent to conduct a further examination of
equityworthy companies to determine whether the particular investment
was consistent with usual investment practice. We adopted this policy
in light of the CIT decision in AIMCOR II, 912 F. Supp. at 552-55, in
which the Court ruled that, because of restrictions imposed on the
shares bought by the government, the government's purchase of those
shares was inconsistent with commercial considerations, notwithstanding
the fact that the firm in question was equityworthy.
Certain commenters objected to this proposal, arguing that if a
firm has been deemed to be equityworthy, any investment in that firm is
per se consistent with usual private investment practices and should
not be countervailed. However, we note that, as the Court pointed out
in a previous determination, ``[w]here a company is equityworthy, as
here, it does not necessarily follow that the purchase of stock from
that company will be consistent with commercial considerations.'' See
AIMCOR v. United States, 871 F. Supp. 447, 454 (CIT 1994) (``AIMCOR
I''). Therefore, as provided in paragraph (a)(5), we will conduct a
further analysis into whether the shares purchased by the government
have special conditions or restrictions attached and, if so, whether
those conditions render the investment inconsistent with usual private
investment practices as stipulated in paragraph (a)(1). Any benefit
found from these types of equity purchases will be determined on a
case-by-case basis. In situations where the shares purchased by the
government in an equityworthy firm are common shares, we will normally
consider the infusion to have been consistent with usual private
investment practice.
In cases where a government equity infusion has been made and the
firm is unequityworthy, paragraph (a)(6) states that the amount of the
benefit will be equal to the amount of the equity infusion. This is a
codification of our current practice which has been in place since the
1993 steel determinations and has been upheld by the CIT in British
Steel plc v. United States, 879 F. Supp. 1254, 1309 (CIT 1995), aff'd
in part and rev'd in part, 127 F.3d 1471 (Fed. Cir. 1997). See, also,
Usinor Sacilor v. United States, 893 F. Supp. 1112, 1125-26 (CIT 1995).
We believe this approach is most appropriate based mainly on the
argument that, because a reasonable private investor could not expect a
reasonable return on the invested capital, no such investor would
provide the infusion. The CPIP approach, which we explored in the 1997
Proposed Regulations, attempted to measure the hypothetical price at
which the investor would provide the funds. In the case of an
unequityworthy firm or project, this hypothetical price would have to
be lower than the price of existing shares. However, as explained in
the summary of comments above, from the perspective of the existing
shareholders of the company that received the infusion, such a lower
price would be unacceptable. These shareholders would generally not
allow the new shares to be issued at a reduced price because this would
simultaneously lower the expected return on their existing investment.
There is, therefore, no mutually acceptable price at which the
transaction would take place between two private investors, and the
investment would not occur.
[[Page 65375]]
Thus, the benefit to the operations of the recipient firm is the
entire amount of the government infusion. That is not to say that the
shares received by the government are worthless; they may have value.
However, the comparison here is what the company actually received with
what the company would have received absent the government
intervention. In the case of an unequityworthy firm, the amount the
company would have received is zero. Thus, although the government
equity infusion is not per se a grant, it is appropriate to consider
the full amount of the infusion as the benefit because the government
provided a sum of money that would not have been provided by a private
investor. This is the fundamental point overlooked by the GATT panel
report. (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 (November 15, 1994)
(unadopted).
Paragraph (a)(7) pertains to allegations regarding equity infusions
and is based on Sec. 355.44(e)(3) of the 1989 Proposed Regulations.
Paragraph (b) provides that the Secretary normally will consider
the benefit from an equity infusion to have been received on the date
on which the firm received the infusion. Paragraph (c) pertains to the
allocation of the benefit to particular years and provides that the
benefit conferred by an equity infusion will be allocated as if it were
a non-recurring subsidy, using the methodology set forth in
Sec. 351.524(d).
Section 351.508
Section 351.508 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 and from Sec. 351.507 of the 1997 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 subsidy for allocation
purposes. However, paragraph (c)(2) provides that, 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 Certain Steel determinations.
Section 351.509
Section 351.509 deals with subsidy programs that provide a benefit
in the form of relief from direct taxes. (``Direct tax'' is defined in
Sec. 351.102.) Such relief includes exemptions, remissions, and
deferrals of direct taxes. 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 at 23372 and
related cases cited.
Paragraph (a)(2) deals with another type of direct tax program: the
deferral of direct taxes owed. Although Sec. 355.44(i)(1) of the 1989
Proposed Regulations 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 by treating deferrals as government-provided loans. We have
normally treated deferrals of one year or less as short-term loans,
while multi-year deferrals have been treated as short-term loans rolled
over on the anniversary date(s) of the deferral.
We received two comments on the deferral of direct taxes. One
commenter maintained that it would be more appropriate to treat multi-
year tax deferrals as long-term loans rather than as a series of
rolled-over short-term loans. The commenter observed that the
Department had not explained why multi-year tax deferrals should be
treated as a series of short-term loans, arguing that this approach
enables the recipient company to receive long-term benefits that are
countervailed using a short-term benchmark interest rate. The commenter
stated that long-term interest rates are typically higher than short-
term rates and that the Department, therefore, should use the long-term
rate as the benchmark rate. The second commenter argued that multi-year
tax deferrals should be treated as long-term loans because such
deferrals are authorized only once for the entire period of deferral.
However, the second commenter stated, even if a multi-year deferral
were authorized annually on a routine basis, the benefit would resemble
a long-term loan and, therefore, a long-term interest rate should be
used as the benchmark rate.
We agree that, in certain circumstances, where it is reasonable to
conclude from the record that a deferral will extend over more than one
year, multi-year deferrals should be viewed as long-term loans. For
example, if the firm knows at the time the taxes would normally be due
that the firm would not become liable for the taxes until five years
later, it would be appropriate to view the deferral as a five-year loan
and to use the appropriate benchmark. Moreover, if it is known at the
time of the deferral that the deferral will be longer than one year,
but the term is indefinite, we will also use a long-term benchmark to
calculate the benefit in each year. However, if the deferral has an
uncertain endpoint, we will examine whether it is appropriate to view
the deferral as a short-term or long-term loan.
As in the past, tax deferrals of one year or less will be treated
as short-term loans, using a short-term interest rate as the benchmark
rate in accordance with Sec. 351.505(a). Similarly, if it is not known
if a tax deferral will extend over more than one year (e.g., if the
firm's payment of taxes is made contingent upon some future event) and
we have no reasonable basis to conclude that the deferral will extend
over more than one year, such tax deferral will be treated as a short-
term loan.
In the 1997 Proposed Regulations, we identified one aspect of
direct tax subsidy programs that might warrant modification. We stated
that, 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. In the 1997 Proposed Regulations,
we discussed 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. However, we stated that we wanted to obtain the
views of the public before changing our methodology.
We received several comments on this issue, all of which contained
objections to our proposed change of methodology. The comments focused
on four areas. First, the commenters characterized our proposed
methodology as speculative because the Department cannot be certain
that the benefits of an
[[Page 65376]]
accelerated depreciation program will be offset by higher taxes in the
future. The commenters pointed to factors such as changes in tax
provisions and government tax policies, the provision of additional
future tax benefits, and the possibility that the recipient company
would incur losses in the future, all of which might prevent higher
taxes from materializing in the future. One commenter pointed to the
Department's findings in Extruded Rubber Thread from Malaysia, 57 FR
38472 (August 25, 1992) (``Malaysian Rubber Thread''), where a
hypothetical tax burden in later years did not prevent the Department
from countervailing tax benefits provided during the period of
investigation. In sum, these commenters argued that the Department
should not give a company credit for a contingent tax liability that we
could not be sure the company ever would incur.
Second, some of the commenters maintained that the Department's
proposed change would be contrary to the central purpose of the CVD
law, i.e., to discourage the provision of subsidies. According to these
commenters, the proposed methodology would encourage foreign
governments to modify their tax programs so that future tax payments
would appear to offset current countervailable tax benefits.
Third, some commenters asserted that it would be unlawful for the
Department to offset countervailable benefits with higher future tax
payments. These commenters pointed to the statutory list of permissible
offsets, which does not include future tax payments. They also argued
that our proposed methodology would be akin to taking secondary tax
effects into account, which would be contrary to Sec. 351.527 of the
1997 Proposed Regulations (this section, which deals with the tax
consequences of benefits, is included in Sec. 351.503(e) of these Final
Regulations).
Fourth, a few commenters pointed to the administrative burden that
the Department would assume if it were to adopt the proposed
methodology. One commenter stated that it would be difficult to track
companies' future tax payments. Another commenter portrayed it as
unlikely that the Department would verify that higher taxes were
actually paid in future years. Finally, one commenter recommended that
the Department adopt a regulation saying that benefits resulting from
accelerated depreciation may not be offset by a potentially higher tax
burden in the future.
Based on the comments we have received, we are not changing our
methodology. We will, therefore, continue our current methodology for
calculating the tax benefits from accelerated depreciation schemes on a
year by year basis.
In the 1997 Proposed Regulations, we also sought public comment on
how we should address tax subsidies when the recipient company is
incurring losses, including loss carryforwards and losses under
accelerated depreciation. We received only a few comments on these
issues. All the commenters agreed that losses should be dealt with
according to the same underlying principle that guides the rest of the
Department's direct tax methodology, i.e., the Department should treat
as a countervailable benefit the difference between the amount of taxes
actually paid and the amount of taxes that would have been paid in the
absence of the countervailable tax benefit. With respect to loss
carryforwards, the commenters outlined two scenarios under which such
carryforwards can convey countervailable benefits: (1) When a company
is allowed to carry forward a greater value of losses from one year to
the next than other companies, and (2) when a company is allowed to
carry forward losses for a longer period of time than other companies.
In both cases, the commenters urged the Department to follow the
underlying principle described above, i.e., to countervail the
difference between the actual taxes paid and the taxes that would have
been paid under normal circumstances. Regarding losses associated with
accelerated depreciation, the commenters requested the Department to
countervail the accelerated depreciation allowance only to the extent
that it results in a reduction of taxes paid.
We agree with the commenters that our guiding principle is to treat
as a countervailable benefit the difference between the taxes a company
actually pays and the taxes it would have paid if it had not incurred a
loss or a diminished profit as a result of accelerated depreciation or
a loss carryforward (provided that these tax benefits are specific). We
intend to follow the approach used in Malaysian Rubber Thread. We do
not see any need to change or to add to our regulations in this
respect.
Paragraph (b) of Sec. 351.509 deals with the question of when the
benefit from a direct tax subsidy is considered to have been received
by a firm. In our 1997 Proposed Regulations, we proposed to consider
the benefit as having been received on the date the firm knew the
amount of its tax liability. However, as stated in the 1989 Proposed
Regulations, the date the firm knows its tax liability normally is the
date on which it files its tax return. In these Final Regulations, we
have decided that, with respect to a full or partial tax exemption or
remission, we will consider the benefit as having been received on the
date on which the recipient firm would otherwise have had to pay the
taxes associated with the exemption or remission, which is usually the
date it files its tax return. This conforms the regulations to our
experience.
With respect to deferrals, under paragraph (b)(2), the Secretary
normally will treat the deferral of a direct tax as a loan, and will
treat the benefit as received, as follows. The Secretary normally will
treat a tax deferral of one year or less as a short-term loan received
on the date the tax originally was due and repaid when the tax was
actually paid. The Secretary normally will consider the benefit from a
multi-year deferral as having been 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 the 1997 Proposed
Regulations, the Department normally will allocate such benefits to the
year in which the benefits are considered to have been received under
paragraph (b).
Finally, the Department will apply Sec. 351.509 consistently with
WTO rules concerning direct tax measures. Thus, for example, in the
case of a foreign tax measure that exempts from taxation (either in
whole or in part) income attributable to economic processes (including
transactions involving exported goods) located outside the territorial
limits of the exporting country, the Department would not consider such
a measure to be an export subsidy, provided that the measure complied
with other relevant WTO rules.
Section 351.510
Section 351.510 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. 351.510 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 351.517 through 519 deal with programs that potentially would
be considered export subsidies under section 771(5A)(B) of the Act
because separate guidelines must be applied when examining export
subsidy programs that involve exemptions or rebates of indirect taxes
or import charges.
[[Page 65377]]
Paragraph (a)(1) of Sec. 351.510 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 the taxes the firm would have
paid in the absence of the program. As in the case of direct taxes
under Sec. 351.509, deferrals of indirect taxes and import charges will
be treated under paragraph (a)(2) as government-provided loans.
Normally, we will use a short-term interest rate as the benchmark for
deferrals of one year or less and a long-term interest rate as the
benchmark for multi-year deferrals. The treatment of multi-year
deferrals represents a change from the 1997 Proposed Regulations and is
discussed in detail in the preamble to Sec. 351.509.
Paragraph (b) of Sec. 351.510 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 on 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 expense the benefits
attributable to the types of subsidy programs covered by Sec. 351.510
in the year of receipt.
Section 351.511
Section 351.511 deals with the provision of goods and services.
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.''
In our 1997 Proposed Regulations, we designated paragraph (a) as
``(reserved),'' stating that we wished to acquire some experience with
the new statutory provision before codifying our methodology in the
form of a regulation. We received several comments expressing
disappointment in the lack of a regulation on this topic. While these
parties recognized that our relative lack of experience with the new
statutory provision made it difficult to promulgate a regulation, they
requested guidance as to how we intend to identify and measure adequate
remuneration.
Several commenters stressed the importance of basing the adequate
remuneration benchmark on market prices that have not been distorted by
the government's involvement in the market. According to these
commenters, where government involvement has distorted prices, the
Department should either adjust the price to account for the distortion
or resort to the use of an alternative price. These commenters also
argued that the benchmark used should include all delivery charges and,
if necessary, import duties.
We also received several comments in response to our stated
intention of continuing to employ a preferentiality type analysis where
the government is the sole provider of goods or services such as
electricity, water, or natural gas. One commenter supported such an
approach and encouraged us to codify it. Other commenters argued that
the preferentiality approach does not sufficiently capture the benefit
mandated by the adequate remuneration standard. That is, it does not
adequately measure the differential between the price paid for the
input and the full market value of the input.
Since issuing the 1997 Proposed Regulations, the Department has
gained some experience in applying the adequate remuneration standard.
See, e.g., Steel Wire Rod from Germany, 62 FR 54990, 54994 (October 22,
1997), Steel Wire Rod from Trinidad and Tobago, 62 FR 55003, 55006-07
(October 22, 1997), and Steel Wire Rod from Venezuela, 62 FR 55014,
55021-22 (October 22, 1997) (``Venezuelan Wire Rod''). Based on our
experience in these cases and on the comments received on this issue,
we are providing guidance on how we intend to apply this new standard.
Accordingly, paragraph (a) outlines the conceptual approach we will
follow to measure the benefit from governmental provision of goods or
services.
Paragraph (a)(1) states that a benefit exists to the extent that
the good or service is provided for less than adequate remuneration.
Paragraph (a)(2)(i) provides that our preference is to compare the
government price to market-determined prices stemming from actual
transactions within the country. Such market-determined prices include
actual sales involving private sellers and actual imports. They may
also include, in certain circumstances, actual sales from government-
run competitive bidding. The circumstances where such prices would be
appropriate are where the government sells a significant portion of the
goods or services through competitive bid procedures that are open to
everyone, that protect confidentiality, and that are based solely on
price. In choosing actual transactions, the Secretary will consider
product similarity, quantities sold or imported, and other factors
affecting comparability.
We normally do not intend to adjust such prices to account for
government distortion of the market. While we recognize that government
involvement in a market may have some impact on the price of the good
or service in that market, such distortion will normally be minimal
unless the government provider constitutes a majority or, in certain
circumstances, a substantial portion of the market. Where it is
reasonable to conclude that actual transaction prices are significantly
distorted as a result of the government's involvement in the market, we
will resort to the next alternative in the hierarchy.
Paragraph (a)(2)(ii) provides that, if there are no useable market-
determined prices stemming from actual transactions, we will turn to
world market prices that would be available to the purchaser. We will
consider whether the market conditions in the country are such that it
is reasonable to conclude that the purchaser could obtain the good or
service on the world market. For example, a European price for
electricity normally would not be an acceptable comparison price for
electricity provided by a Latin American government, because
electricity from Europe in all likelihood would not be available to
consumers in Latin America. However, as another example, the world
market price for commodity products, such as certain metals and ores,
or for certain industrial and electronic goods commonly traded across
borders, could be an acceptable comparison price for a government-
provided good, provided that it is reasonable to conclude from record
evidence that the purchaser would have access to such internationally
traded goods.
Where there is more than one commercially available world market
price to be used as a benchmark, we intend to average these prices to
the extent practicable, with due allowance for factors affecting
comparability. If the
[[Page 65378]]
most appropriate benchmarks are for products that are dumped or
subsidized in the country where the subject merchandise is produced, we
will adjust the benchmarks to reflect the dumping or subsidization.
However, we will only make an adjustment to reflect a determination of
dumping or subsidization made by the importing country with respect to
the input product imported from the country from which the world market
price is derived.
Paragraph (a)(2)(iii) provides that, in situations where the
government is clearly the only source available to consumers in the
country, we normally will assess whether the government price was
established in accordance with market principles. Where the government
is the sole provider of a good or service, and there are no world
market prices available or accessible to the purchaser, we will assess
whether the government price was set in accordance with market
principles through an analysis of such factors as the government's
price-setting philosophy, costs (including rates of return sufficient
to ensure future operations), or possible price discrimination. We are
not putting these factors in any hierarchy, and we may rely on one or
more of these factors in any particular case. In our experience, these
types of analyses may be necessary for such goods or services as
electricity, land leases, or water, and the circumstances of each case
vary widely. See, e.g., Pure Magnesium and Alloy Magnesium from Canada,
57 FR 30946, 30954 (July 13, 1992) and Venezuelan Wire Rod.
We believe that this approach addresses the concerns raised by
commenters about potentially continuing the use of the preferentiality
standard by shifting the focus of our inquiry toward whether the
government employed market principles in setting prices. Although we do
not have enough experience with the adequate remuneration standard to
state when a price discrimination analysis may be appropriate, we
believe there may be instances where government prices are the most
reasonable surrogate for market-determined prices. We would only rely
on a price discrimination analysis if the government good or service is
provided to more than a specific enterprise or industry, or group
thereof.
Paragraph (a)(2)(iv) provides that, in determining the adequacy of
remuneration, the Department will adjust comparison prices to reflect
the price a company would pay if it imported the good or service. This
adjustment will account for delivery charges and import duties. In
addition, if the price of the imported good includes 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 or countervailing duties by the country in
question, however, we would not adjust the import prices to reflect
alleged dumping or subsidies.
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 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 normally will expense the benefit of a government-provided
good or service to the year of receipt. However, benefits conferred by
the provision of non-general infrastructure normally will be allocated
over time.
Paragraph (d) deals with the provision of general infrastructure.
Section 355.43(b)(4) of the 1989 Proposed Regulations contained a
special test for determining whether government-provided infrastructure
was specific and, therefore, countervailable. In our 1997 Proposed
Regulations, we explained that, unlike the pre-URAA statute, section
771(5) of the Act, as amended by the URAA, expressly mentions certain
types of 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. 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.
We noted in our 1997 Proposed Regulations that, in light of the
change in the statute, the countervailability of infrastructure depends
on the definition of ``general infrastructure.'' However, because of
our inexperience in applying this definition and our uncertainty
regarding the extent to which the principles reflected in the 1989
Proposed Regulations remained useful analytical tools for
distinguishing potentially countervailable infrastructure from non-
countervailable general infrastructure, we opted not to issue a
regulation on infrastructure.
We received several comments regarding the definition of general
infrastructure. One commenter argued that the word ``general''
essentially describes types of infrastructure--such as roads, bridges,
railroads, etc.--which would never be countervailable. This commenter
maintained that the word ``general'' should not be interpreted as
relating to the question of specificity and argued that to do so would
be to ignore the plain language of the statute. Several other
commenters argued that the language in the SCM Agreement regarding
general infrastructure was meant to codify the U.S. practice of
countervailing specific infrastructure.
We disagree with the proposition that certain types of
infrastructure automatically constitute general infrastructure and,
thus, are not countervailable. Roads, bridges, and railroads do not
necessarily constitute ``general infrastructure'' and can provide
benefits to particular industries, as in the case where a road or
bridge is built in an industrial park or port facility that is used
only by one industry, or a group of industries. See, e.g., Certain
Steel Products from Korea, 58 FR 37338, (July 9, 1993) (``Korean
Steel''). Therefore, the type of infrastructure per se is not
dispositive of whether the government provision constitutes ``general
infrastructure.'' Rather, the key issue is whether the infrastructure
is developed for the benefit of society as a whole.
Paragraph (d) defines ``general infrastructure'' as infrastructure
that is created for the broad societal welfare of a country, region,
state, or municipality. For example, interstate highways, schools,
health care facilities, sewage systems, or police protection would
constitute general infrastructure if we found that they were provided
for the good of the public and were available to all citizens or to all
members of the public. Because we have no experience with the new
concept of general infrastructure, we are not establishing more precise
criteria at this time. However, we intend to follow these broad
principles in future cases and we may develop more detailed criteria as
we gain more experience.
Any infrastructure that satisfies this public welfare concept is
general infrastructure and therefore, by definition, is not
countervailable and not subject to any specificity analysis. Any
infrastructure that does not satisfy this public welfare concept is not
general infrastructure and is potentially countervailable. The
provision of industrial parks and ports, special purpose roads, and
railroad spur lines, to name some examples (some of which
[[Page 65379]]
we have encountered in our cases), that do not benefit society as a
whole, does not constitute general infrastructure and will be found
countervailable if the infrastructure is provided to a specific
enterprise or industry and confers a benefit. See, e.g., Korean Steel.
Section 351.512
Section 351.512 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 with the provision of goods and
services, our lack of experience in applying the adequate remuneration
standard led us to designate this section ``[reserved]'' in the 1997
Proposed Regulations. Unlike the case with the provision of goods and
services, however, we have not had the opportunity to gain sufficient
experience applying the new standard in the context of government
purchases. In addition, while government procurement potentially was a
countervailable subsidy prior to the URAA, allegations of procurement
subsidies were extremely rare. Thus, we still do not 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 we are not
issuing regulations concerning the government purchase of goods.
Instead, we have continued to designate Sec. 351.512 as ``[reserved].''
One commenter, however, encouraged the Department to provide
further guidance regarding how it intended to apply the adequate
remuneration standard in the context of the government purchase of
goods. In particular, this commenter advocated a definition of adequate
remuneration which focuses on a comparison of comparable prices for the
good or service provided based on prevailing market conditions in the
country subject to investigation or review.
As noted above, we are hesitant to promulgate a regulation dealing
with the purchase of goods by a government because of our relative lack
of experience in this area. However, our intended approach toward the
measurement of the adequacy of remuneration is outlined in detail in
Sec. 351.511 (government provision of goods or services). While we have
not codified this approach with respect to government purchases, we
expect that any analysis of the adequacy of remuneration will follow
the same basic principle, i.e., will focus on what a market-determined
price for the good in question would be.
We also received one comment regarding the threshold for initiating
an investigation into whether government purchases have been made for
more than adequate remuneration. In particular, this commenter argued
for a ``reasonable basis to believe or suspect'' standard. In other
words, a petitioner would be required to allege facts that give the
Department a reasonable basis to believe or suspect that government
purchases have been made for more than adequate remuneration.
We disagree that a heightened initiation threshold should be
employed for this type of subsidy. Because we have virtually no
experience with this type of subsidy, it would be inappropriate to
require petitioners to meet a higher threshold for initiation than that
imposed by the statute. According to section 702(b)(1) of the Act, the
petitioner need only allege the elements necessary for the imposition
of the duty (i.e., the existence of a countervailable subsidy) and
support the allegation with reasonably available information.
One additional commenter stated that the government purchase of
services should be treated similarly to the government purchase of
goods. In the discussion of this point in the preamble to the 1997
Proposed Regulations, we noted that only government purchase of goods
is identified as a financial contribution under section 771(5)(D)(iv)
of the Act and Article 1.1(a)(1)(iii) of the SCM Agreement. This
commenter argued, however, that according to the statute and the SCM
Agreement, a subsidy can exist where there is either a financial
contribution or an income or price support. A governmental purchase of
services, according to this commenter, can be considered an income
support and, therefore, can result in a subsidy.
We have not adopted this suggestion. We believe that if
governmental purchases of services were intended to be treated
similarly to the government purchase of goods, the statute and the SCM
Agreement would specifically mention services as they do with the
government provision of goods and services.
Finally, we received one comment arguing that if we chose to
promulgate a regulation regarding government purchases, we should make
clear that purchases by government monopolies are included. While we
are not issuing a regulation on this subject, we agree that purchases
by government monopolies can constitute subsidies provided there is a
benefit and the benefit is specific.
Section 351.513
Section 351.513 deals with worker-related subsidies. Under
paragraph (a), the Department will identify and measure the benefit of
government-provided assistance to workers based on the extent such
assistance relieves the firm of an obligation it otherwise normally
would incur. The comments we received dealt mainly with the form the
obligation must take in order for worker-related assistance to be
countervailable.
All commenters agreed that the Department should continue its
practice of countervailing worker-related assistance when there is a
pre-existing obligation for the company to provide such assistance.
However, the commenters differed in how they defined the term
``obligation.'' Some commenters asked the Department to adopt a broad
definition of the term ``obligation'' and not limit it to only
contractual or statutory obligations, whereas others argued that an
obligation must be contractual or statutory in order for the Department
to find the assistance to be countervailable.
As in our 1997 Proposed Regulations, we continue to take the
position that ``obligation'' should be interpreted broadly. Even though
an obligation is not binding in a contractual or statutory sense, an
exemption from it may nevertheless provide a benefit to a firm. As an
example, social or political conditions in a country may be such that,
although no legal or contractual obligation exists, it is normal
practice that companies make severance payments to laid-off workers. If
the government decides to shoulder all or part of such payments, then
the government relieves the company of a payment it otherwise would
have incurred. In this situation, we will find that a countervailable
subsidy exists, as long as the government's action is specific.
A related issue arises in situations where a company's obligations
to its workers are negotiated by labor and management with the
knowledge that the government will make a contribution. We encountered
this situation in Certain Steel Products from Germany, 58 FR 38318
(July 9, 1993) (``Certain Steel from Germany''), where we concluded
that the parties'' knowledge of the government's willingness to make a
contribution had an impact on the outcome of the negotiations. In the
absence of the government's payment, the company would likely have
agreed to pay the
[[Page 65380]]
workers more. Because the additional amount would depend upon the
relative negotiating strengths of labor and management, we found it
reasonable to assume that workers and management held approximately
equal negotiating strength. We, therefore, decided to split the
difference and concluded that in the absence of the government's
contribution, the company would have had to pay the workers 50 percent
of the amount paid by the government. As a result, we decided that 50
percent of the government's contribution was countervailable because it
relieved the company of a payment it otherwise would have had to make.
Some commenters asked the Department to continue to apply the
methodology used in Certain Steel from Germany whereas another
commenter maintained that this approach is too generous to respondents
and that the Department should countervail the full amount of the
government's contribution. In opposition, other commenters
characterized the methodology as speculative and urged the Department
not to countervail governmental social aid at all.
As in the 1997 Proposed Regulations, we have declined to codify the
approach used in Certain Steel from Germany. We believe, and the CIT
has found, that where a company's obligations to its workers are
negotiated with the knowledge that the government will make a
contribution, it is reasonable to conclude that the government's
commitment, and the negotiating parties' awareness of the commitment,
have an impact on the outcome of the negotiations (see LTV Steel v.
United States, 985 F. Supp. 95 (1997)). However, we believe it is
necessary to examine the facts in each case before determining whether
it is appropriate to countervail 50 percent of the government's
contribution or some other amount.
Paragraph (b) deals with the form and timing of worker-related
subsidies. Even though we did not receive any comments on these issues,
we are making the following clarifications: Although most worker-
related subsidies are provided in the form of cash payments, we
consider the term ``payment'' in paragraph (b) to include non-cash
benefits. With respect to timing, the Secretary will consider the
subsidy to have been received by the firm on the date on which the
payment is made that relieves the firm of an obligation that it
normally would have incurred.
Paragraph (c) deals with the allocation of worker-related subsidies
to a particular time period. As in the past, these subsidies will
normally be considered to provide recurring benefits and they will be
allocated to the year of receipt (expensed) in accordance with
Sec. 351.524(a).
Section 351.514
Section 351.514 contains the 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,
paragraph (a) of Sec. 351.514 codifies the expansion of the definition
of an export subsidy to include any subsidy that is, in law or in fact,
contingent upon export performance, alone or as one of two or more
conditions. Paragraph (b) has been added, incorporating the previously
separate regulation regarding general export promotion.
We received a number of comments regarding the expanded definition
of export subsidy in the 1997 Proposed Regulations. Several commenters
supported the expanded definition in the 1997 Proposed Regulations but
suggested that language be added to the regulation making it clear that
an export requirement need not be an explicit condition of the program
as long as the facts indicated that the benefits were contingent upon
actual or anticipated exportation. These commenters highlighted several
factual scenarios under which the Department should find an export
subsidy to exist. These include subsidies provided to ``for-export''
industries; subsidies provided in situations where the export market is
the only market for the subject merchandise; and subsidies provided
where a substantial portion of a subsidized project will be devoted to
export production.
Several other commenters were opposed to the expanded definition.
These commenters argued that, if narrowly applied, the definition would
disproportionately penalize exporting countries which may have broad
policy statements referring to exports. With the growing economic
integration of the North American market under the North American Free
Trade Agreement (``NAFTA''), firms in these countries may base their
investment decisions on servicing the NAFTA market rather than a
domestic and export market, and, as such, the assistance is not truly
contingent upon export performance. Further, these commenters argued
that mere consideration of possible exportation as one of the factors
considered by the government in granting the benefit does not mean that
the benefit is ``contingent'' upon export performance. As support, they
cited footnote 4 to Article 3.1(a) of the SCM Agreement which states
that ``the mere fact that a subsidy is granted to enterprises which
export shall not for that reason alone be considered to be an export
subsidy within the meaning of this provision.'' One commenter argued
that ``contingent upon actual or anticipated exportation or export
earnings'' should be limited to situations where the subsidy is
conferred only upon actual exportation or is lost if the recipient is
unable to demonstrate that the goods were exported.
Finally, one commenter suggested that the regulations should
include illustrative (but not all-inclusive) guidance regarding the
factors that the Department will consider in its analysis of de facto
export subsidies. In this commenter's view, the regulations should also
incorporate language that clarifies the distinction between a de jure
and a de facto analysis.
While we have made minor changes to more closely conform the
language of the 1997 Proposed Regulations with the language in the SCM
Agreement and the statute, we have made no changes in response to these
comments. However, in applying the standard contained in Sec. 351.514,
we will distinguish between broad development goals or economic policy,
and specific program objectives and criteria. For purposes of our
analysis, we have developed a list of factors that we may consider.
This list is non-exhaustive and includes: (1) The stated purpose or
purposes of the subsidy as put forth in the governing laws or
regulations; (2) the selection criteria and reasons for approval/
disapproval; (3) application and approval documents, including market
or economic viability studies; (4) the existence and nature of any
monitoring or enforcement mechanism; (5) governmental collection of
data regarding the program recipients' exports (other than the
customary collection of export and import data); (6) the exporting
history of recipient firms or industries; and (7) other evidence that
the Department deems relevant to consider. We need not examine all of
the factors to determine that the program is an export subsidy if our
examination of one or more factors provides sufficient evidence to
determine that the program is a de facto export subsidy.
In situations where the government evaluates multiple criteria
under a program, Sec. 351.514 would require an analysis different from
that described in Extruded Rubber Thread from Malaysia, 57 FR 38472
(August 25, 1992). In that case, the Malaysian Government considered 12
criteria in evaluating
[[Page 65381]]
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 were required to agree to
export commitments. In analyzing the Pioneer program, the Department
examined the 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, we did not consider the award of Pioneer
status to constitute an export subsidy. However, under the new standard
contained in Sec. 351.514, if exportation or anticipated exportation
was either the sole condition or one of several conditions for granting
Pioneer status to a firm, we would consider any benefits provided under
the program to the firm to be export subsidies unless the firm in
question can clearly demonstrate that it had been approved to receive
the benefits solely under non-export-related criteria. In such
situations, we would not treat the subsidy to that firm as an export
subsidy.
We have not adopted the suggestion to limit the interpretation of
the phrase ``contingent upon actual or anticipated export performance''
to situations where the subsidy is conferred only upon actual
exportation or is lost if the recipient is unable to demonstrate that
the goods were exported. Such language would effectively negate the
phrase ``tied to * * * anticipated exportation or export earnings'' and
directly conflicts with the intent of Congress and the language of the
SCM Agreement. The SCM Agreement states that a de facto export subsidy
exists ``when the facts demonstrate that the granting of a subsidy,
without having been made legally contingent upon export performance, is
in fact tied to actual or anticipated exportation or export earnings.''
See Footnote 4 to Article 3.1 of the SCM Agreement (emphasis added).
One commenter protested that the 1997 Proposed Regulations failed
to provide a mechanism for notifying export subsidies discovered during
an investigation to the Office of the U.S. Trade Representative
(``USTR'') for submission to the WTO. We do not believe a regulation is
needed given the clear language of the statute which requires the
Department to notify USTR of any subsidies which are ``prohibited''
under Article 3 of the SCM Agreement. (See section 281(b)(1) of the Act
(19 U.S.C. 3571(b)(1) and (c)(1).)
General Export Promotion: Paragraph (b) contains an exception to
the general rule which codifies the Department's practice with respect
to certain types of government export promotion activities. In the 1997
Proposed Regulations, this paragraph was a separate section (see,
Sec. Section 351.520). However, we have decided it fits more
appropriately as an exception to our discussion of what constitutes an
export subsidy. As we have observed in the past, most countries
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 such activities promote particular
products or provide financial assistance to a firm, a benefit could
exist.
For example, government guides on how to export, overseas marketing
reports, and marketing opportunity bulletins would be considered to be
general promotion activities and, as such, would not be
countervailable. Similarly, certain advocacy efforts, such as country
image events or country product displays, could also be considered to
be general promotion activities. However, image events or product
displays that focus on individual products or which provide financial
assistance to participants would not meet the exception for general
export promotion. See, e.g., the discussion regarding the treatment of
two ProChile trade promotions, ``Event Bon Appetit'' and ``Summer
Harvest'' in Fresh Atlantic Salmon from Chile, 63 FR 31437, 31440 (June
9, 1998).
Two commenters argued that the regulation should be modified first
to identify what constitutes countervailable export promotion
assistance and then to identify the criteria for potentially non-
countervailable export promotion assistance. Another commenter argued
that the regulation should be revised to make it clear that general
export promotion programs never constitute export subsidies because
such programs can never be considered to be contingent upon export
results. According to the commenter, such treatment would be consistent
with the ``green box'' treatment of general marketing and promotional
programs under the WTO Agricultural Agreement. This commenter further
suggested that the focus of the regulation should be on programs rather
than activities. The commenter also argued that even where an export
promotion program confers a benefit, the program should be considered
to be non-countervailable if it is non-specific. Another commenter
argued that even if an export promotion program is superficially
generally available but upon examination is de facto specific, then it
is countervailable.
Having clarified the exception for general export promotion by
incorporating that proposed regulation into the general export
subsidies regulation, we are not adopting the suggested modification
regarding the identification of countervailable export promotion
assistance. We also disagree that the regulation should be revised to
state that general export promotion activities can never be
countervailable because they are never contingent upon export results.
As discussed in response to a similar comment posed by this commenter
with respect to the general definition of an export subsidy contained
in paragraph (a), the phrase ``contingent upon actual or anticipated
export performance'' is not limited to actual exportation. Assistance
to promote exports, even of a general nature, is designed to result in
actual export performance.
With respect to whether the regulation should refer to export
promotion programs rather than export promotion activities, we do not
see the need to make this change. We often examine and make
determinations with respect to certain aspects of, or activities under,
a program, and as a result may find one project or activity under a
program to be countervailable while finding another project or activity
under the same program to be not countervailable.
Finally, with respect to the comments regarding the ``specificity''
of export promotion assistance, we do not need to reach this issue. All
export promotion programs, even those of a general nature, are specific
under section 771(5A)(B) of the Act. However, as noted above, as long
as these programs provide only 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.
Section 351.515
Section 351.515 corresponds to paragraph (c) of the Illustrative
List, and deals with preferential internal transport and freight
charges on export shipments. It is unchanged from the 1997 Proposed
Regulations. 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
[[Page 65382]]
(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 on 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 normally allocate
(expense) the benefit to the year in which the benefit is received.
Section 351.516
Section 351.516 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. 351.516 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. Paragraphs (b) and (c) contain rules regarding the timing of
benefit receipt and the allocation of the benefit to a particular time
period, respectively. As discussed below, one change has been made to
paragraph (a)(1) of the 1997 Proposed Regulations.
As noted in the 1997 Proposed Regulations, 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. As an
example, this commenter cited the European Union 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) applies 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
the1985 administrative review on Certain Iron-Metal Castings from
India, 55 FR 50747, 50748 (December 10, 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. We 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)
(``Creswell''). Therefore, based on the above judicial precedent, we
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.
In the preamble to the 1997 Proposed Regulations, we asked parties
to comment on whether dumped or subsidized prices should be considered
to be commercially available world market prices suitable for use as a
benchmark to determine whether a government is providing price
preferences for inputs used for exports. Several commenters opposed
using dumped or subsidized prices as a benchmark because it would
understate the subsidy, undermine the purpose of the SCM Agreement and
would be inconsistent with our proposed upstream subsidy methodology.
Other commenters argued that subsidized or dumped prices should be
considered as a possible benchmark because they represent
``commercially available'' prices.
Where there is more than one commercially available world market
price to be used as a benchmark, we intend to average these prices to
the extent practicable, making due allowance for factors affecting
comparability. If the most appropriate benchmarks are for products that
are dumped or subsidized in the country where the subject merchandise
is produced, we will adjust the benchmark. However, we will only make
an adjustment to reflect a determination of dumping or subsidization
made by the importing country with respect to the input product
imported from the country from which the world market price is derived.
A number of parties commented on the Department's inclusion of
delivery charges in determining the commercially available world market
price benchmark. While some commenters supported the inclusion of
delivery charges in the benchmark arguing that it more accurately
reflected the price available to exporters in that country, others
disagreed arguing that delivery charges merely reflect the distance the
good is being transported. The difference in delivery costs between a
locally sourced product and an imported product is not due to the
government subsidy; rather it reflects the comparative advantage the
domestic product has over the imported product with respect to
geographic proximity.
Consistent with our past practice in evaluating such subsidies, we
intend to continue to include delivery charges in the commercially
available world market price benchmark used to measure price
preferences for inputs used for exports. Item (d) of the Illustrative
List specifically sets the benchmark as the price ``commercially
available on world markets to their exporters.'' By its very terms, the
price they would pay would include freight.
This practice was upheld by the Federal Circuit in Creswell v. the
United States, 141 F.3d 1471 (Fed. Cir. 1998) (``Creswell II''), a case
which involves IPRS and exporters of iron-metal castings in India.
According to the Court:
[[Page 65383]]
Item (d) thus recognizes that foreign governments may subsidize
their domestic industries to allow them to compete effectively on
the world market as long as the extent of the subsidization is not
more favorable to their exporters than if those exporters had to
participate in the world market without assistance. If the amount of
the subsidization exceeds this point, it is excessive and this
excessive amount is countervailable under Item (d). Accordingly,
Item (d) mandates a comparison between the terms and conditions
under which product was supplied to exporters by their governments
and the terms and conditions to which those exporters would have
been subject had they instead participated in the world market.
The Court explained that:
A castings manufacturer procuring pig iron on the world market
would have to pay the FOB price for the pig iron itself, plus the
cost of shipping that iron to India. Accordingly, the world market
price must include the cost of shipping. To the extent that the
Indian government's world market price did not include oceanic
shipping costs, its world market price was artificially low and its
rebate artificially high by this amount. The price of pig iron that
is not delivered to India cannot be fairly compared with the price
of pig iron that is delivered. Thus, because of the omission of
oceanic shipping costs from the calculation of the world market
price, the IPRS program has in effect provided pig iron to India's
castings manufacturers on terms more favorable than had those
manufacturers actually procured pig iron on the world market.
One commenter stated that, consistent with the SCM Agreement,
Sec. 351.516(a)(1) should be amended to include government-provided
services. We have adopted this suggestion and have amended
Sec. 351.516(a)(1) to include services.
This same commenter also stated that when a foreign government
charges less than the commercially available price on world markets,
the Department should countervail the full amount of the difference
between the price the government charges to domestic producers and that
charged to exporters, not just the difference between the government
price and the delivered commercially available world market price
benchmark. Such an approach would be consistent with the Court's
decision in RSI (India) Pvt., Ltd. v. United States, 687 F. Supp. 605,
611 (CIT 1988) (``RSI'').
We have not adopted this suggestion. Where there is a government-
mandated scheme in place, the benefit to the recipient from price
preferences for inputs used in the production of goods for export is
the difference between what the producer actually pays and what the
producer would otherwise pay (i.e., the commercially available price on
the world market). We disagree that the suggested approach is
consistent with the Federal Circuit's decision in RSI. In RSI, the
Court was addressing a situation where the record was deficient, and it
found that the Department was under no obligation to make calculations
that should have been made by respondents. However, consistent with RSI
and the Federal Circuit's decision in Creswell II, we continue to take
the position that the respondents must provide evidence establishing
that the lower price being charged by the government reflects the price
that is commercially available on world markets.
Section 351.517
Section 351.517 deals with the exemption, remission or rebate upon
export of indirect taxes. (``Indirect tax'' is defined in
Sec. 351.102.) Section 351.517 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. The
regulation has been changed to reflect paragraph (g) of the
Illustrative List by adding that it also applies to the exemption of
indirect taxes, as well as to their remission. Paragraph (g) deals with
indirect taxes on the production or distribution of the exported
merchandise, 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 $7 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
$3. In accordance with paragraph (g), the non-excessive exemption or
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 exemption
or rebate of indirect taxes is deemed to be received on the date of
exportation. Paragraph (c) provides that the Secretary will normally
expense these types of subsidies in the year of receipt.
Section 351.518
While Sec. 351.517 deals with the exemption or remission of
indirect taxes in general, Sec. 351.518 deals with the exemption,
remission, or deferral of prior-stage cumulative indirect taxes and has
been changed from the 1997 Proposed Regulations, as described below.
(``Prior-stage indirect tax'' and ``cumulative indirect tax'' are
defined in Sec. 351.102.) Section 351.518 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 351.518 is
consistent with paragraph (h) and the Guidelines on Consumption of
Inputs in the Production Process (Annex II to the SCM Agreement).
Section 351.518 is drafted to address separately exemptions,
remissions and deferrals of prior stage cumulative indirect taxes.
Paragraph (a) deals with whether a benefit is received and how it is
calculated. 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, as defined in
accordance with the SAA and Annex II to the SCM Agreement, making
normal allowance for waste, or where the exemption covers taxes other
than indirect taxes. (``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.
Paragraph (a)(3) deals with the amount of the benefit attributable
to a deferral of prior-stage cumulative indirect taxes. We have
modified paragraph (a)(3) in response to comments that the regulation
should identify the practice considered countervailable before
addressing the exception. Consistent with footnote 59 to the SCM
Agreement, the first sentence of paragraph (a)(3) provides that a
deferral gives rise to a benefit if the deferral extends to inputs that
are not consumed in the production of the exported product, making
normal allowance for waste, and the government does not charge the
appropriate interest on the taxes deferred.
[[Page 65384]]
Another commenter urged the Department to treat multi-year
deferrals as long-term loans, because using a short-term interest rate
as a benchmark understates the benefit to the recipient. For the
reasons discussed in Sec. 351.509 regarding deferrals of direct taxes,
we have adopted this position. Consequently, Sec. 351.518(a)(3) permits
us to use long-term benchmark rates for determining the benefit
conferred by deferrals of prior stage cumulative indirect taxes, where
appropriate.
We have also modified the exception outlined in paragraph (a)(4) in
response to a comment that the 1997 Proposed Regulations erroneously
applies procedures set out in Annex II to the SCM Agreement only to
remissions of indirect taxes and should apply as well to exemptions and
deferrals. We agree that Annex II to the SCM Agreement applies not only
to remissions but also to exemptions and deferrals. Accordingly,
paragraph (a)(4) has been changed and directs that, based on Annex II
to the SCM Agreement, the Secretary may consider the entire amount of
an exemption, remission or deferral of prior-stage cumulative taxes to
be a benefit if the Secretary determines that the foreign government
has not examined the 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 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). The test has been
modified to conform to the guidelines of Annex II. Under the modified
test, we will first examine whether the exporting government has a
system in place that confirms which inputs are consumed in the
production of the exported product, and in what amounts, and which
taxes are imposed on the inputs consumed in production. Where we find
that such a system is in operation, we will examine the system to
determine whether it is reasonable, effective, and based on generally
accepted commercial practices in the exporting country. Where such a
system is not in operation, or where the system is not reasonable or
effective, the government of the exporting country may examine the
actual inputs involved to demonstrate that the exemption, remission or
deferral of indirect taxes reflects only those inputs consumed in the
production of the exported product, the quantity of those inputs
consumed in production, including a normal allowance for waste, and
only those indirect taxes imposed on the input product.
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 on the date of exportation. 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
and state that the benefit from deferrals of less than one year will be
received on the date the deferred tax becomes due. For multi-year
deferrals, the benefit is received on the anniversary date(s) of the
deferral.
Paragraph (c) deals with the allocation of the benefit to a
particular time period, and provides that the Secretary normally will
allocate (expense) the benefit from an 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).
Two commenters argued that Sec. 351.518(a)(2) should state that the
system, procedure or methodology of examination used by foreign
governments to confirm the consumption of inputs in the production
process is subject to the further examination by the Department,
including verification. We have not adopted the suggested language
regarding verification. We see no need to add this language. As with
any information relied upon by the Department for its determinations,
this information is subject to verification.
Section 351.519
Section 351.519 deals with the remission or drawback of import
charges. The regulation has been changed to clarify that the term
``remission or drawback'' includes full or partial exemptions and
deferrals of import charges. Section 351.519 is generally 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 351.519 is based on 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 paid on imported
inputs consumed in production when the finished product is exported.
However, if the amount remitted or drawn back exceeds the amount of
import charges paid, a benefit exists. In addition, paragraph (a)(1)
now incorporates exemptions and deferrals of import charges on inputs
consumed in the production of exported products.
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 drawn back 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. Paragraph (a)(3)(i) sets forth the rule for calculating the
benefit from an excessive remission or drawback and states that the
amount of the benefit equals the difference between the amount remitted
or drawn back and the amount of import charges paid on the inputs
consumed in production for which the remission or drawback is claimed.
For example, assume that a firm imports a widget which is an input
consumed in the production of a gizmo, and pays $2 in import duties on
the widget. If, when the firm exports the finished gizmo, the firm
receives $5 in drawback, the benefit equals $3 ($5-$2 = $3). Paragraphs
(a)(3) (ii) and (iii) deal with calculation of the benefit from an
exemption or deferral of import charges and parallel the language set
forth in Sec. 351.518.
However, paragraph (a)(4) provides that in certain circumstances,
the Secretary may consider the amount of the benefit to equal the
amount of the exemption, deferral, remission or drawback. Paragraph
(a)(4) provides for a ``linkage'' test, and is essentially identical to
Sec. 351.518(a)(4). See discussion of Sec. 351.518(a)(4), above.
One commenter suggested that language be added to
Sec. 351.519(a)(4) to clarify further the type of system or procedure
referred to by the regulation. This commenter and another commenter
also argued that the Department should state that the system, procedure
or methodology of examination used by foreign governments to confirm
the consumption of inputs in the production process is subject to
further examination by the Department, including verification.
We have not adopted this clarifying language in Sec. 351.519(a)(4).
We believe that clarification regarding the type of system or procedure
is unnecessary because any system, regardless of the
[[Page 65385]]
type, must meet the standards set forth in paragraph (a)(4) in order to
be non-countervailable. We will examine all such systems carefully to
ensure full compliance with these standards. With respect to the
suggested language regarding verification, we have not adopted this
language. As with any information relied upon by the Department for its
determinations, this information is subject to verification.
Paragraph (b) deals with the time of receipt of the benefit.
Paragraph (b)(1) provides that, in the case of remission or drawback,
the Secretary normally will consider the benefit to have been received
as of the date of exportation. Paragraphs (b)(2), (b)(3) and (b)(4)
have been added to reflect the addition of exemptions and deferrals of
import charges to this section. The timing of receipt of the benefit
from an exemption or deferral of import charges parallels Sec. 351.518.
Paragraph (c) provides that the Secretary normally will allocate this
benefit to the year in which the benefits are considered to have been
received under paragraph (b).
Section 351.520
Section 351.520 deals with export insurance and is unchanged from
the 1997 Proposed Regulations. 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)(1) of the 1989 Proposed Regulations 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 within less 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 Israel's Exchange
Rate Risk 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, 36124 (September
14, 1984). Therefore, we did not find a countervailable subsidy despite
losses in the early years of the program. Id. However, after observing
losses for five years, we concluded that the premiums charged were
inadequate, and we determined that the scheme conferred a
countervailable benefit. See Industrial Phosphoric Acid from Israel, 52
FR 25447, 25449-50 (July 7, 1987).
Finally, Sec. 355.44(d)(1) of the 1989 Proposed Regulations stated
that the Department would take into account income from other insurance
programs operated by the entity in question. As discussed in the
Preamble to the 1997 Proposed Regulations, 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.
One commenter suggested that the Department's regulations should
clearly state that the Department's evaluation of whether export
insurance programs are being subsidized will be limited to those
programs and not other insurance programs which may be offered by the
insurer.
Section 351.520(a)(1) states, ``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.'' (Emphasis
added). We do not see a need to clarify the regulation any further.
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. 103-412, at 93 (1994). Under
the new law, import substitution subsidies are automatically considered
to be specific.
In the 1997 Proposed Regulations, we stated that we were not
issuing a regulation on import substitution subsidies due to our lack
of experience in dealing with this new category of subsidies.
One commenter supported the Department's decision not to issue a
regulation on this topic but asked that we explain in these Final
Regulations our reasons for not doing so. This commenter also requested
that we reiterate our view, as expressed in the 1997 Proposed
Regulations, that section 771(5A)(C) of the Act does not limit the
definition of import substitution subsidies to include only de jure
subsidies. Another commenter urged us to issue a regulation to clarify
that both de jure and de facto import substitution subsidies are
countervailable.
Because of our lack of experience in dealing with import
substitution subsidies, we have continued to designate Sec. 351.521 as
``reserved.'' We intend to develop our practice regarding import
substitution subsidies on a case-by-case basis. As we stated in the
1997 Proposed Regulations, the plain language of section 771(5A)(C) of
the Act does not limit the definition of import substitution subsidies
to only those subsidies that are contingent ``in law'' upon the use of
domestic goods. Moreover, the absence of a regulation making explicit
the coverage of de facto import substitution subsidies should not be
construed as an indication that the Department believes that section
771(5A)(C) applies only to de jure import substitution subsidies.
A third commenter contended that investigations of import
substitution subsidies would be very complex and time-consuming and
that they, therefore, would divert attention and resources from the
main countervailing duty investigation. For this reason, the commenter
argued, the Department should not initiate an investigation of import
substitution subsidies absent a specific allegation by petitioners that
gives the Department a reasonable basis to believe or suspect that such
subsidies have been bestowed.
We have not adopted this suggestion. Contrary to the commenter's
view, we believe that investigation of import substitution subsidies
may place less of a burden on the Department and respondents because
import substitution subsidies are per se specific. Consequently, we
would only need to investigate the existence and amount of any benefit.
Therefore, we see no basis for employing a heightened initiation
standard.
A fourth commenter asked that the regulations clarify that the term
``domestic goods'' should also apply to purchases within a customs
union of which the subsidizing country is a member. The commenter
argued that
[[Page 65386]]
this definition of ``domestic'' would be consistent with the definition
of ``country'' in section 771(3) of the Act. The commenter noted that
the Department has countervailed subsidies provided by the European
Union in the past. According to the commenter, a regulation that
includes purchases from within a customs union in the term ``domestic
goods'' would, therefore, be consistent with the Department's past
practice.
Import substitution subsidies generally protect domestic input
producers by imposing requirements or providing incentives for
companies to use these inputs. It seems unlikely that one country would
provide incentives to use inputs from another country, even if the
other country is in the same customs union. However, if the subsidy is
provided by the customs union itself, we can reach that program
directly through the definition of ``country,'' as defined further in
the preamble to Sec. 351.523 on upstream subsidies. Furthermore, we
believe the commenter's analysis of the relationship between ``domestic
goods'' as used in section 771(5A)(C) and ``country'' as used in
section 771(3) may have merit, and we will look carefully at this
suggestion if the situation is presented in a specific case.
Section 351.522
Section 351.522 of the 1997 Proposed Regulations, entitled
``Certain agricultural subsidies,'' codified particular aspects of how
the Department intends to analyze ``green box'' subsidies. We did not
promulgate proposed regulations governing the non-countervailable
status of ``green light'' subsidies because we considered the statute
and the SAA sufficiently clear with respect to these exceptions in the
countervailing duty law. However, based on comments received, as
discussed below, we have codified certain standards concerning our
analysis of green light research and environmental subsidies in
Secs. 351.522(b) and 351.522(c). To reflect these changes from the 1997
Proposed Regulations, we have renamed Sec. 351.522 ``Green Light and
Green Box Subsidies,'' and we have added paragraphs (b) and (c) in
these Final Regulations.
Certain agricultural subsidies: Section 771(5B)(F) of the Act
implements Article 13(a)(i) of the WTO Agreement on Agriculture
regarding the non-countervailable status of certain ``domestic support
measures.'' Under Article (6)(1) of the Agreement on Agriculture,
domestic support measures that meet the policy-specific criteria and
conditions of Annex 2 of the WTO Agreement on Agriculture are exempt
from member countries' commitments to reduce subsidies. In addition,
Article 13(a)(i) of the Agreement on Agriculture directs that these
subsidies, commonly referred to as ``green box'' subsidies, will be
non-countervailable during the nine-year implementation period
described in Article 1(f) of the Agreement on Agriculture.
Consistent with Article 13(a)(i) of the Agreement, section
771(5B)(F) of the Act provides that the Secretary will treat as non-
countervailable domestic support measures that (1) are provided with
respect to products listed in Annex 1 to the Agreement on Agriculture,
and (2) the Secretary ``determines conform fully to the provisions of
Annex 2'' to that Agreement. To implement section 771(5B)(F) of the
Act, Sec. 351.522(a) 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 Department should clarify that, in
order to obtain green box status, a subsidy must truly be designed for
agriculture because the Agreement on Agriculture makes a distinction
between support provided to raw products and support provided to
processed products. Specifically, the Department should make clear that
a grant to upgrade a facility for processing agricultural products,
while technically covered by the Agreement on Agriculture, would not
receive green box treatment.
We have not adopted this proposal because neither Annex 1 nor Annex
2 of the Agreement on Agriculture draws a distinction between raw and
processed agricultural products for purposes of green box treatment.
Annex 1 covers products from HS Chapters 1-24 and various other HS
Codes and Headings. These tariff categories include numerous forms of
both raw and processed agricultural products. The policy-specific
criteria and other conditions set forth in Annex 2 are not product-
specific. Hence, a domestic support measure provided with respect to
the specific agricultural products identified only in Annex 1, whether
raw or processed, may warrant green box treatment as long as the
measure fully conforms to the relevant criteria in Annex 2.
One commenter argued that the regulations should require the
Department 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
non-countervailable 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.
Another commenter disputed the suggestion that the regulations
should include a list of agricultural programs that the Department
automatically would consider as non-countervailable. 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.
We believe 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 in order to receive green box status,
and Sec. 351.522(a) incorporates these criteria. Consistent with
section 771(5B)(F) of the Act and the Agreement on Agriculture,
paragraph (a) of Sec. 351.522 provides that we will treat as non-
countervailable 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
of the Agreement on Agriculture and the relevant policy-specific
criteria and conditions set out in paragraphs 2 through 13 of that
Annex.
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 723-25. 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 exercise due restraint by not self-
initiating CVD
[[Page 65387]]
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. The Department
understands the due restraint requirement to entail a commitment to
refrain from self-initiating CVD investigations with respect to
agricultural subsidies described in Articles 13(b) and (c) during the
implementation period, and the Department will administer the statute
accordingly. See SAA at 937.
Green light subsidies in general: Under section 771(5B) of the Act,
which implements Article 8 of the SCM Agreement, certain domestic
subsidies and domestic subsidy programs that meet all the requirements
may be treated as non-countervailable. 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).
The non-countervailable 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) of the Act
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 benefitting from the
subsidy or subsidy program.
We received one comment on subsidy notifications. The commenter
requested that the Department ensure that public subsidy notifications
under Article 8.3 are made available and are circulated promptly upon
receipt. We have adopted this suggestion. The Subsidies Enforcement
Office within Import Administration intends to promptly add to the
Subsidies Library all derestricted subsidy notifications, including
those reported under Article 8.3. The Subsidies Library can be accessed
via the Internet at http://www.ita.doc.gov/import__admin/records/esel/.
The second method for obtaining green light status involves
situations where a subsidy or 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 non-countervailable 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) of the Act (or a WTO panel determines in a
dispute settlement proceeding that the relevant criteria of Article 8
of the SCM Agreement are met). The Secretary must determine that the
subsidy satisfies all of the relevant criteria before a given subsidy
will be treated as non-countervailable. See section 771(5B)(A) of the
Act; SAA at 936. 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 936. 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 the 1997 Proposed Regulations, we stated that, in accordance
with the Administration's commitment in the SAA, we intend to construe
strictly 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 935. 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 937.
Two commenters argued that the green light provisions should not be
construed more restrictively than other CVD law provisions. Therefore,
these commenters stated that the Department should either eliminate any
references to a strict interpretation of these provisions or explain
why this different treatment is necessary, appropriate, and justified.
We reaffirm our commitment to interpret these provisions strictly
as required by the SAA. The legislative history recognizes that
complete exemption from the CVD law of government programs that meet
the definition of a countervailable subsidy and that cause injury is
extraordinary. Strict interpretation is needed both to prevent
circumvention and to preserve the balance of commitments negotiated in
the SCM Agreement. For these reasons, where there is a question
regarding the green light status of a particular subsidy, we will
ensure that the subsidy clearly qualifies before according it green
light status. Moreover, a determination that a particular subsidy
received by a firm is a green light or green box subsidy would not
necessarily mean that we would find that 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 or the preamble to the 1997 Proposed Regulations.
Another commenter suggested that the Department publish a regulation
stating that green light is set to expire unless extended.
We have not adopted these suggestions. As with other areas of these
regulations, unless we have determined that a particular aspect of our
CVD methodology warrants clarification, we have not repeated language
from the statute or the SAA. In response to the latter comment, the
statute, at section 771(5B)(G), is explicit regarding the provisional
application of the green light provisions.
Investigation of notified subsidies: One commenter, noting the text
of section 771(5B)(E) of the Act, 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.
[[Page 65388]]
We reaffirm our position in the preamble to the 1997 Proposed
Regulations 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, the Department 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, as we explained further in the preamble to the 1997
Proposed Regulations, 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 provided under a program that has been
notified under Article 8.3, pre-initiation consultations may be used to
clarify that a subsidy or subsidy program contained in the petition
was, in fact, notified. If consultations do not resolve the question,
the Department will include the subsidy in a CVD investigation or
review until the party claiming green light status demonstrates that a
subsidy has been notified. If the party fails to establish that the
alleged subsidy or subsidy program has been notified, then we will
analyze the subsidy's eligibility for green light status in the same
manner as for any other non-notified subsidy. To clarify the
Department's procedure for investigating alleged subsidy programs
notified under Article 8.3, as set forth below, we have codified
Sec. 351.301(d)(7) as an interim final rule.
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) of the Act. 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 936.
While we agree with the policy espoused, we do not believe that
this policy must be codified in the regulations. As discussed above,
the SAA is 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 status must provide evidence demonstrating that a
particular subsidy meets all of the relevant criteria for non-
countervailable status.
Another commenter argued that all non-notified programs should be
presumed countervailable. We have not adopted this suggestion. The SCM
Agreement and the URAA make clear that there are two ways to achieve
green light status--WTO notification and pursuant to a CVD
investigation. We see no basis for presuming that a program is
countervailable simply because a foreign government elects not to use
the notification procedures established under Article 8.
Alleged green light subsidies not used during the period of
investigation or review: As we stated in the preamble to the 1997
Proposed Regulations, in an investigation or a review of a CVD order or
suspended investigation, we will 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
will be considered only in an investigation or review of a time period
where the subject merchandise did benefit from the subsidy.
One commenter supported this position and argued that it should be
codified. However, we continue to believe that a regulation is not
needed to clarify this issue.
Research subsidies: Prior to the enactment of the URAA, we treated
assistance provided by a government to finance research and development
(``R&D'') as non-countervailable 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 the Department in
Sec. 355.44(l) of the 1989 Proposed Regulations.
In the 1997 Proposed Regulations, we elected not to retain the
public availability test. We stated that the objectives served by the
public availability test were better met by applying the criteria
listed in section 771(5B)(B) of the Act and Article 8.2(a) of the SCM
Agreement. Two commenters supported our decision not to codify the
public availability test, and two commenters argued that the Department
should reinstate the public availability test. One commenter requested
clarification of whether the public availability test would apply to
the aircraft sector in light of the fact that the R&D green light
provisions of the SCM Agreement do not apply to aircraft. In this
commenter's view, the public availability test should be abandoned
completely.
In these Final Regulations, we confirm our decision not to retain
the public availability test for any sector. We believe the public
availability test is inconsistent with the concept of benefit which
underlies the SCM Agreement and statute, and which we have codified in
Sec. 351.503. According to Sec. 351.503, 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. A research and development subsidy would reduce
the firm's input costs, whether or not the results of the research were
made publicly available. This same rationale applies to the aircraft
industry. Consequently, even though the R&D green light provisions of
the SCM Agreement do not apply to aircraft, we do not intend to apply
the public availability standard to the aircraft sector.
One commenter suggested that the Department should adopt an
assumption that only grants will qualify for green light status under
the R&D provisions; tax breaks and subsidized loans usually will not
qualify. We have not adopted this proposal because neither the statute
nor the SAA limits R&D green light provisions to grants.
One commenter argued that, in determining whether a given research
subsidy falls within the 75 and 50 percent maximums allowed under
section 771(5B)(B) of the Act, 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 were exceeded in the particular
year covered by the 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 maximums
based on the costs already incurred at the time of the relevant
investigation or administrative review, and not on the basis of
expected
[[Page 65389]]
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 936.
We agree 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 specified
statutory thresholds, 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. We recognize that a finding of non-
countervailability may be based on projected or estimated costs. Given
the Agreement's ceilings on government support, we expect that such
projections will have been required by the program's administrators. On
the basis of a reasonably-supported allegation in a subsequent review,
we will revisit this finding to ensure that actual costs expended did
not differ from the estimates upon which an earlier finding of green
light status was based. Changes or amendments to the original project
will be carefully scrutinized to ensure consistency with these
provisions. We agree that, if it becomes clear at any point during the
life of the project that the subsidy will exceed the relevant statutory
threshold, the entire amount of the subsidy would be countervailable,
not merely the excess.
Subsidies to disadvantaged regions: One commenter argued 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 green light category, we 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 934-35. For example, if we were to
investigate a product from Luxembourg, the term ``country'' would refer
to the EU as a whole if the subsidy being investigated were received
under an EU 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.
Other commenters argued that where certain regions receiving
assistance under a program do not meet the criteria for green light
treatment, that should not prejudice the green light treatment of
assistance to regions that do meet the criteria.
Because we have only limited experience in administering the
regional green light provisions, we are not prepared to adopt a formal
policy at this time. However, we find persuasive the argument that some
regions that meet the jurisdiction's general framework of economic
development but do not otherwise meet the green light criteria could
potentially be given aid without automatically disqualifying all
regions from green light treatment.
The language in section 771(5B)(C) of the Act states that a subsidy
provided to a person in a disadvantaged region, ``pursuant to a general
framework of regional development,'' shall be treated as non-
countervailable. This implies that some of the regions within the
general framework may not necessarily meet the statutory criteria to be
considered ``disadvantaged.'' However, if the number of regions that do
not qualify for green light treatment but continue to receive
assistance is significant, this may call into question the basic
principles of the general framework itself and, therefore, the
eligibility for green light treatment of any subsidies provided under
it.
Subsidies for adaptation of existing facilities to new
environmental requirements: Certain commenters 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 non-countervailable those subsidies given to upgrade
existing facilities to environmental standards that are higher than the
minimum standards imposed by law or regulation. According to these
commenters, governments should be allowed to encourage higher
environmental standards than the minimum required by law by sharing the
additional costs of achieving the higher environmental standards.
Moreover, according to these commenters, the language of the statute
does not limit green light treatment to subsidies that allow companies
to meet, rather than exceed, standards. These commenters believe that
the Department should retain the flexibility to find non-
countervailable subsidies that assist in upgrading existing facilities
to higher environmental standards than the minimum imposed by law or
regulation.
Several commenters disputed this suggestion, claiming that section
771(5B)(D)(i) of the Act 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. One commenter further argued that where the environmental
subsidy exceeds the amount necessary to meet the minimum regulatory
requirements of the law, even by a de minimis amount, the Department
should confirm its intent to find countervailable the entire subsidy.
Although we acknowledge that governments have the flexibility to
encourage higher environmental standards, we agree with the latter
commenters. As noted above, section 771(5B)(D)(i) of the Act provides
that non-countervailable 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
[[Page 65390]]
the SAA, ``strict application of these requirements is essential in
order to limit the scope of the provision to only those situations
which clearly warrant non-countervailable treatment.'' SAA at 935.
Given the clear language of the statute and the SAA, we believe that
subsidies given to upgrade existing facilities to environmental
standards in excess of legal requirements are countervailable. In
response to the last comment on subsidies which exceed the amount
necessary to meet the minimum statutory or regulatory requirements, we
agree that the full amount of the subsidy would be countervailable.
One commenter suggested that the regulations should specify that
environmental subsidies will receive green light treatment only if: (1)
Required by law or regulations (administrative practice should not be
sufficient); (2) limited to investments absolutely needed to meet new
requirements; (3) limited to the adaptation of equipment and plant
facilities; and (4) directly linked to the new investment.
Because we have received no green light claims for environmental
subsidies and, therefore, have no experience in administering these
provisions, we are not adopting the proposed criteria. Without
experience, we cannot judge what impact the proposed criteria would
have. Therefore, we are not yet prepared to adopt criteria such as
these at this time. However, we do not rule out the possibility that
such criteria may be adopted at a later time. With respect to the first
proposed criterion (required by law or regulation, as opposed to
practice), section 771(5B)(D)(i) of the Act and the SAA already include
such a limitation.
One commenter argued that when a respondent can show that
environmental assistance is not relieving a company of an obligation
and that the assistance does not benefit the manufacture, production,
or exportation of the subject merchandise, such assistance should not
be countervailable. We disagree with the commenter's attempt to expand
the criteria, which are clearly stated in the SCM Agreement, statute,
and the SAA, under which the Department would find environmental
assistance non-countervailable.
Finally, we have concluded that procedural rules setting forth the
deadlines and obligations for filing green light and green box claims
are necessary to ensure efficient and orderly administration of these
new provisions in the CVD statute. As discussed in the Explanation of
the Final Rules, we are issuing these procedural rules as interim final
rules effective on their date of publication in the Federal Register.
In keeping with our decision to consolidate antidumping and
countervailing duty procedures, these interim final rules amend
Sec. 351.301(d) of the Department's regulations.
Section 351.301(d)(6) sets forth time limits for filing green light
and green box claims. These time limits parallel the deadlines for
filing new countervailable subsidy allegations in investigations and
reviews. Consistent with the evidentiary burden to establish the
validity of such claims, Sec. 351.301(d)(6) also clarifies that all
green light and green box claims must be made by the competent
government with the full participation of the administering authority
of the relevant program. We note that examinations of green light and
green box requests require the full participation of the administering
governments. Section 301(d)(7) clarifies procedures for investigating
subsidies or subsidy programs notified under Article 8.3 of the SCM
Agreement.
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. We have, however, adopted new terminology in
Sec. 351.523(a). Specifically, ``affiliation'' replaces ``control'' as
the standard for when we will have a reasonable basis to believe or
suspect that a competitive benefit is bestowed on the subject
merchandise. This also represents a change from our 1997 Proposed
Regulations, where the standard was ``cross-ownership'' (see discussion
of cross-ownership in preamble to Sec. 351.525 below) . We believe the
new definition of ``affiliated persons'' contained in section 771(33)
of the Act is sufficient to meet the threshold for deciding whether a
competitive benefit is bestowed for purposes of initiating an upstream
subsidy investigation. In addition, because we have changed our
attribution rules regarding cross-owned input and downstream suppliers,
it is no longer appropriate to use the ``cross-ownership'' standard.
With regard to the upstream subsidy provision in general, one
commenter requested that the Department issue a regulation making clear
its ability to apply an upstream subsidy analysis even where the
subsidized input producer is located in a separate country from the
producer of the subject merchandise. We agree that the statute provides
the Department the flexibility to perform such an analysis in two
specific circumstances. First, where two or more foreign countries are
organized as a customs union, section 771A(a) clearly states that the
Department may treat the customs union as a single country in
conducting an upstream subsidy analysis if the countervailable subsidy
is provided by the customs union. In addition, the definition of
``country'' in section 771(3) of the Act does not limit this reading of
``country'' to situations in which the subsidy is provided by the
customs union itself. Second, where an international consortium is
engaged in the production of the subject merchandise, section 701(d) of
the Act allows the Department to cumulate the subsidies provided to
members of the consortium by their respective home countries. We
interpret this provision to include the receipt by members of the
consortium of upstream subsidies provided by the member's own country
or (where appropriate) customs union. Therefore, we see no need to
include a regulation on this issue.
Another commenter suggested that the Final Regulations should
expressly state that the Department is not required to investigate
upstream subsidies further than one stage back in the chain of
production. This commenter cites to legislative history which indicates
Congress' intent to limit the scope of an upstream inquiry to the stage
prior to final manufacture or production, unless information
demonstrates the significance of subsidies at earlier stages. H.R. Rep.
No. 725, 98th Cong., 2d Sess. 33-34 (1984).
We do not believe it is necessary to issue a regulation on this
topic. Section 351.523(a)(iii) already requires a demonstration of the
significance of prior-stage subsidies in order for the Department to
initiate an upstream subsidy investigation. As one moves back in the
chain of commerce, it is less and less likely that the subsidies will
have a significant effect on the cost of manufacturing or producing the
subject merchandise and, therefore, less likely that we would initiate
an upstream subsidy investigation. However, in those circumstances
where a party is able to demonstrate the significance of subsidies at
earlier stages, we will investigate accordingly.
As noted in the 1997 Proposed Regulations, one aspect of these
regulations which differs from the 1989 Proposed Regulations involves
the standard for determining whether a
[[Page 65391]]
competitive benefit exists. In this regard, section 771A(b)(1) of the
Act provides that a competitive benefit has been bestowed 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, we preferred to base our comparisons upon the price
charged for unsubsidized inputs produced by other producers in the same
country as the producer of the subject merchandise. If we had
determined in a prior CVD proceeding that a countervailable subsidy had
been bestowed in the subject country on the comparison input, our next
preferred alternative was to adjust the price of the input product to
reflect the subsidy. As a final alternative, we could select a ``world
market price for the input product.'' We 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,
we 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, 57 FR 42964,
42967-68 (September 17, 1992) (``Venezuelan Steel Pipe'').
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. We will
make due allowance for quantities, physical characteristics, and other
factors that affect comparability. 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. However, we will
examine quantities, physical characteristics, and other factors that
may affect the comparability of the prices.
While several commenters argued against the use of offered prices,
asserting that such prices do not reflect the true cost of alternative
purchases, we have left this provision unchanged. Our preference, of
course, is to use a price resulting from an actual sale; however, a
bona fide price offer made at a time reasonably corresponding to the
time of the purchase of the input does constitute a commercial
alternative to the subsidized input product and, as such, is an
acceptable benchmark.
Other comments concerning the use of actual or offered prices
focused on the extent to which such prices are ``representative.''
Essentially, these commenters defined a ``representative'' price as a
price that is not less than the world market price. Therefore, they
argued that if the actual unsubsidized price is less than the world
market price, the Department should presume that the price is not
representative and use the world market price.
We have not adopted this suggestion. As noted above, an actual
price charged or offered represents the best example of what a
downstream producer would ``otherwise pay'' for the subsidized input
product. However, we are willing to entertain arguments during the
course of a proceeding pertaining to whether an actual price or offer
is anomalous or otherwise not comparable, including arguments that such
price may be dumped or subsidized.
If actual prices or offers for unsubsidized inputs are not
available, we will rely upon a world market price, i.e., generally 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). One commenter objected to the
use of an average price, arguing that it is more reasonable to assume
that the downstream producer would purchase the input product at the
lowest publicly available price. Another commenter supported the use of
an average world market price, but urged the Department to make it a
weighted-average price.
We have made no change in response to these comments. Absent an
actual price or offer for an unsubsidized product, we are in a position
of having to construct the price that a company would ``otherwise
pay.'' We cannot assume that the downstream producer would always be
able to purchase its inputs at the lowest publicly available price.
Such a price might be an anomaly resulting from unusual market
circumstances which may not always be available to the producer in
question. Therefore, it is more appropriate to use an average of the
publicly available prices. The use of weighted-average prices, however,
is impractical because we are unlikely to have the information with
which to weight the publicly available prices. Although we will
generally use an average of available world market prices, we will
consider arguments that certain world market prices may be
inappropriate.
Finally, if there are no prices for unsubsidized inputs available
from any source, we will resort to prices of subsidized input products,
adjusted to reflect the 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), we would use an average price
for the input product from different countries adjusted to reflect the
subsidy or some other adjusted surrogate price. 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), we
may include the price of a subsidized input in our analysis or we may
resort to any other reasonable price. See paragraph (c)(1)(v).
We believe that this new approach for measuring the competitive
benefit 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
[[Page 65392]]
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 support
making adjustments for subsidies 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 our earlier practice See, e.g., Certain
Agricultural Tillage Tools From Brazil, 50 FR 24270, 24273 (June 10,
1985).
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).
As we noted in the 1997 Proposed Regulations, in determining
whether there is a competitive benefit, we will adjust prices upward to
account for delivery charges (e.g., c.& f.). We received a number of
comments concerning this point. Several commenters expressed support of
this policy. One commenter objected, however, arguing that the
inclusion of delivery charges could result in the Department finding a
competitive benefit which results solely from the difference in the
cost of transporting the subsidized versus unsubsidized goods, rather
than from the subsidy to the input product.
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 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, e.g., Venezuelan Steel Pipe.
As the Federal Circuit recently stated in upholding the
Department's inclusion of freight charges in determining the world
price under Item (d) of the Illustrative List of Export Subsidies, ``A
castings manufacturer procuring pig iron on the world market would have
to pay the f.o.b. price for the pig iron itself, plus the cost of
shipping that iron to India. Accordingly, the world market price must
include the cost of shipping.'' Creswell Trading Co. v. United States,
141 F.3d 1471, 1478 (Fed. Cir. 1998). For these reasons, we have not
changed the position taken in the 1997 Proposed Regulations.
Section 351.524
In the 1997 Proposed Regulations, the Department's method for
allocating benefits from subsidies was included in the grant section
(see Sec. 351.503(c) of the 1997 Proposed Regulations). For these Final
Regulations, however, we have decided to issue a separate regulation on
allocation because this issue concerns all types of subsidies, not only
grants. Therefore, unless otherwise specified in Secs. 351.504-523, the
Secretary will allocate benefits to a particular time period in
accordance with this section.
Which Benefits Are Allocated Over Time
Section 351.524 retains the distinction between ``recurring'' and
``non-recurring'' benefits. Although more precise terms might be ``non-
allocable'' and ``allocable,'' we are retaining the terms ``recurring''
and ``non-recurring'' because they are widely understood in the
international trading community. Paragraph (a) provides that the
Secretary will allocate a recurring benefit to the year in which the
subsidy is considered to have been received, a practice usually
referred to as ``expensing.'' Paragraph (b) provides that, with one
exception (discussed as ``the 0.5 percent test'' below), the Secretary
will allocate non-recurring benefits over time.
Paragraph (c) contains a test for distinguishing between recurring
and non-recurring benefits. In the 1997 Proposed Regulations, we
proposed to codify the test applied by the Department in the GIA. Under
the GIA standard, if a benefit is exceptional, i.e., not received on a
regular or predictable basis, or if it requires express government
authorization or approval, the Department will consider it as non-
recurring. Otherwise, the Department will treat it as a recurring
benefit. However, as stated in the preamble to the 1997 Proposed
Regulations, we were considering:
* * * 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 0.5
percent * * * ; and (3) allocating only those grant-like subsidies
that are tied to the purchase of fixed assets.
We received a number of comments on this issue. (Because this and
the other allocation issues discussed below were included in the grant
section of our 1997 Proposed Regulations, the comments consistently
refer to ``grants.'' Our responses, however, are more generally drafted
and refer not only to grants, but also to the allocation of other types
of subsidies.)
One commenter argued that the regulation should include a provision
that there will be a rebuttable presumption that certain grants will be
expensed and others allocated. This commenter supported the option of
developing an illustrative list showing which types of grants will be
expensed and which will be allocated. According to the commenter, this
approach would make the application of the law more predictable and
consistent, and would reduce the administrative burden on the
Department. Another commenter opposed the inclusion of an illustrative
list as a rebuttable presumption, arguing that this would unfairly
benefit respondents who control all information relating to the purpose
and use of a subsidy.
Most commenters asked the Department to retain the GIA test for
determining whether a grant is recurring or non-recurring. They argued
that this methodology is both predictable and flexible and that it has
worked well in the past. One commenter, however, asked the Department
to take into consideration two factors which were included in the
preamble to the Department's 1989 Proposed Regulations, but not in the
GIA: (1) Whether the program is of a longstanding nature, and (2)
whether there is reason to believe that the program will continue in
the future.
Most of the commenters rejected our three suggested alternatives to
the GIA test. They argued that the first option (i.e., to develop a
list of different types of subsidies) would be rigid, unworkable,
inconsistent with commercial reality, and subject to abuse. In
addition, they felt that it would be very difficult for the Department
to compile a binding list, which would not only have to identify and
categorize every type of subsidy we
[[Page 65393]]
have ever encountered, but which would also have to anticipate future
grant programs. However, one commenter suggested that, as an
alternative, the Department could develop a non-binding informative
list, based on previous practice, as a complement to the GIA test.
These commenters agreed that the second option (to allocate all
grants that exceed 0.5 percent ad valorem) would create unnecessary
work since the Department would have to obtain historical information
for all grant programs regardless of their nature and the Department's
past treatment of identical or similar programs. One commenter argued
that the courts are likely to find such a methodology arbitrary, adding
that it was Congress' intent that only non-recurring subsidies be
allocated over time.
The commenters agreed that the third option (i.e., to allocate only
grants that can be tied to the purchase of fixed assets) would be
inconsistent with commercial reality since it would be based upon a
flawed assumption, namely that only fixed assets continue to provide
benefits after the year of receipt. In addition, this methodology would
require the Department to abandon its longstanding practice of not
considering the effect of a subsidy, the commenters stated.
We agree with the commenters that none of the three options listed
in the 1997 Proposed Regulations provides a more reliable basis for
determining whether a subsidy benefit should be treated as recurring or
non-recurring than that in the GIA test. However, we do not think that
the GIA test, on its own, should be the sole basis for determining
whether a subsidy is recurring or non-recurring. If we applied only the
GIA test, we believe we would run the risk of expensing some subsidies
in the year of receipt that are more appropriately allocated over time,
as explained in further detail below. In addition, the GIA test alone
may lead to unnecessary arguments over which subsidies are recurring or
non-recurring. We also do not agree with the commenter who asked us to
modify the GIA test by resurrecting two standards from our 1989
Proposed Regulations (i.e., to examine whether a program is
longstanding and if there is reason to believe that it will continue in
the future). As stated in the GIA, we changed our approach for
distinguishing between recurring and non-recurring benefits in Certain
Hot-Rolled Lead and Bismuth Carbon Steel Products from France, 58 FR
6221 (January 27, 1993). In that determination, we explained that the
two standards from the 1989 Proposed Regulations had not proven helpful
in determining the nature of a benefit and that they had been difficult
to interpret and apply in practice. Nothing in our subsequent
experience has changed our view on this matter.
However, we find persuasive the comment that suggested developing a
non-binding illustrative list as a complement to the GIA test. We
believe that non-binding lists illustrating which types of subsidies we
will normally treat as providing recurring benefits, and which types of
subsidies we will normally treat as providing non-recurring benefits,
would offer valuable guidance on how the Department views different
types of subsidies. Since they are non-binding, the lists do not have
to cover every single type of subsidy that we have encountered in the
past, nor do they have to anticipate all conceivable new subsidies that
we might come across in the future.
Therefore, for illustrative purposes we have added to paragraph (c)
non-binding lists of subsidies which we will normally treat as
providing recurring benefits, and subsidies which we will normally
treat as providing non-recurring benefits. These lists have been
developed based upon our past experience and our findings described in
the GIA. Because these lists are non-binding, paragraph (c) also
provides that parties may argue that the benefit from a subsidy on the
recurring list should be considered non-recurring, or that the benefit
from a subsidy on the non-recurring list should be considered
recurring.
Our determination of whether a recurring subsidy should be treated
as non-recurring, or vice versa, will rely principally on the test set
forth in the GIA. However, because we have decided to codify these
illustrative lists, we have reevaluated the GIA test to ensure that it
covers all of the factors that should be considered in determining
whether a subsidy should be treated as recurring or non-recurring.
Based on this reevaluation, and the comments we received, we have
determined that it is appropriate to expand the criteria that will be
considered in applying the test of whether a subsidy traditionally
considered as recurring should be treated as non-recurring, or whether
a subsidy traditionally considered as non-recurring should be treated
as recurring. Therefore, in addition to examining whether the subsidy
is exceptional, or whether express government authorization or approval
is provided or required, we will also examine whether the subsidy was
provided for, or tied to, the capital structure or capital assets of
the company. In this context, capital structure is considered to be the
combination of common equity (including retained earnings), preferred
stock, and long-term debt that comprises a firm's financial framework.
Capital assets are the plant and equipment which produce other goods,
and include industrial buildings, machinery and equipment. Thus, it is
appropriate to consider the benefit from a subsidy provided for, or
tied to, the capital structure or capital assets of a firm to be non-
recurring because these types of subsidies generally benefit the
creation, expansion, and/or continued existence of a firm.
The addition of this criterion to the GIA test in no way envisions
or requires an examination of the effects or uses of the subsidy.
Rather, we will examine whether, at the point of bestowal, the subsidy
was provided to, or tied to, the company's capital structure or capital
assets. For example, debt forgiveness benefits the capital structure of
a company by reducing long-term liabilities, and thus increasing net
worth. Similarly, a government's coverage of a company's losses
benefits its capital structure because the company need not cover the
losses out of its retained earnings.
If the government provides a grant expressly for the purchase of an
industrial building, the capital assets of the firm are benefitted and,
as such, it is reasonable to conclude that the benefit from the grant
should be considered non-recurring. In the same vein, if the government
provides import duty exemptions tied to major capital equipment
purchases, it may be reasonable to conclude that, because these duty
exemptions are tied to capital assets, the benefits from such duty
exemptions should be considered non-recurring, even though import duty
exemptions are on the list of recurring subsidies.
While we agree with the commenters who argued that one of the
proposed options--allocating only those grant-like subsidies tied to
the purchase of fixed assets--is based on a flawed assumption that only
fixed assets continue to provide benefits after the year of receipt, we
do not consider that our addition to the GIA test in these Final
Regulations reflects the same flawed assumption. By including not only
capital assets, but also capital structure, in our examination of
whether a subsidy is recurring or non-recurring, we will be better able
to identify those subsidies that continue to benefit a company after
the year of receipt.
Under paragraph (c), a party may argue that a subsidy included on
the illustrative list of recurring subsidies be
[[Page 65394]]
treated as non-recurring or that a subsidy on the non-recurring list be
treated as recurring. If such arguments are presented to us and
supported by sufficient information, we will apply the standards set
forth in the regulation. In other words, we will examine whether the
program is exceptional, whether it requires express government
authorization or approval, or whether, at the point of bestowal, the
subsidy was provided for, or was tied to, the capital structure or
capital assets of the company. If a subsidy is not on either list, the
Secretary will apply the standards set forth in the regulation to
determine if it should be treated as recurring or non-recurring.
The 0.5 Percent Test and the Expensing of Small Subsidies
Although we normally will allocate non-recurring benefits over
time, paragraph (b)(2) retains the so-called 0.5 percent test with a
few minor modifications which are discussed below. See
Sec. 355.49(a)(3)(i) of the 1989 Proposed Regulations and the GIA at
37226. Under this test, we will expense non-recurring benefits under a
particular subsidy program in the year of receipt if the total amount
of such benefits is less than 0.5 percent ad valorem, as calculated
under Sec. 351.525.
We consider this test to be an important part of our efforts to
simplify countervailing duty proceedings and to reduce the burdens on
all parties involved. By expensing small non-recurring benefits in the
year of receipt, we avoid the need to: (1) Collect, analyze, and verify
the data needed to allocate such benefits 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.
Since the 1993 Certain Steel investigations, we have performed the
0.5 percent test using the so-called ``program-by-program'' approach.
Under this approach, we add the ad valorem rates for all subsidies
received by a company under a single program in that year. If the
resulting sum is below 0.5 percent, we expense the benefits in the year
of receipt. An alternative approach would be to add the ad valorem
rates for all subsidies approved under all programs for each company in
a given year and examine whether this total rate is below 0.5 percent
(the so-called ``company-by-company'' approach). In the 1997 Proposed
Regulations, we stated that we intended to retain the program-by-
program approach, but that we wanted to preserve ``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.''
We received three comments on the 0.5 percent test, all of which
urged us to administer the test on a company-by-company basis. One
commenter argued that the current program-by-program test could lead to
anomalous results. For example, a company that received several small
non-recurring grants, all below 0.5 percent of the company's total
sales, would face a countervailing duty rate different from a company
that received the same total amount of money in the form of one large
non-recurring grant. Such anomalies would allow foreign governments to
evade the countervailing duty law by providing several small subsidies
instead of one large subsidy, according to the commenter. All three
commenters agreed that the administrative convenience of expensing
small non-recurring grants would be outweighed by the potential for
abuse.
The same commenters also criticized the exception to the 0.5
percent rule as outlined in the 1997 Proposed Regulations, i.e., that
petitioners must show the intent of the foreign government if the
Department is to deviate from the rule. These commenters argued that
the standard imposes an improper burden on petitioners, who cannot be
expected to divine the intent of a foreign government.
As explained above, the administrative burden on the Department to
collect the information necessary to allocate very small non-recurring
benefits over time would be considerable. This burden cannot be
justified given that, after careful consideration, we believe that in
most cases there would be little demonstrable impact in aggregating all
programs on a company-specific basis. However, we agree that some
potential for manipulation exists with the program-by-program approach.
We also agree that petitioners may have difficulty demonstrating the
intent of a foreign government. To address these concerns, we have made
several changes to the 1997 Proposed Regulations.
Paragraph 351.524(b)(2) now states that the Secretary will normally
expense non-recurring benefits in the year of receipt if the total of
the benefits from subsidies approved in each year under a program is
less than 0.5 percent ad valorem of the relevant sales. The relevant
sales that we use to calculate the ad valorem rate are either the
firm's total sales or, if the subsidy is tied, the sales of the
product(s) or the sales to the market to which the subsidy is tied. In
the case of an export subsidy program, we use the firm's export sales.
The new paragraph adds the word ``normally'' and makes clear that we
will apply the 0.5 percent test to all benefits associated with a
particular program, not each individual benefit, if there are more than
one. We have also changed the word ``received'' to ``approved'' with
respect to all benefits associated with a particular program. This is
intended to cover the situation where a government approves a subsidy
in one year but disburses the funds in installments over a period of
years. We will apply the 0.5 percent test to the full amount approved,
not to each individual installment. In our experience, governments
often make one-time approvals for large grants, but disburse the funds
over a period of years. This is often the case in research and
development programs. As such, basing our 0.5 percent test on
disbursements could result in certain large non-recurring subsidies
being expensed rather than allocated. To avoid this, it is more
appropriate to base our determination of whether the subsidy should be
allocated over time on the full amount approved, rather than on
periodic installments. However, we will continue to countervail
according to the amount received by the company in each year. The only
difference is that once the 0.5 percent test has been applied to the
approved amount and the subsidy exceeds 0.5 percent of sales, all
disbursements will be allocated over time.
In addition, we have abandoned the requirement that petitioners
show, in order to convince the Department to abandon the program-by-
program approach, that a government deliberately structured its subsidy
program so as to reduce exposure to countervailing duties. Instead, we
intend to follow the program-by-program method, but we will consider
aggregating all programs on a company-specific basis where the
application of the 0.5 percent rule would have a significant impact on
the results of the investigation or review. Since we have no experience
in determining what constitutes a significant impact, we will examine
this on a case-by-case basis in response to comments or on our own
initiative.
[[Page 65395]]
The Time Period Over Which Non-Recurring Benefits Are Allocated
As described below, we have made changes in the methods used to
determine certain variables included in our formula for allocating non-
recurring benefits over time. In a departure from our current practice
and from the 1997 Proposed Regulations, we have adopted a rebuttable
presumption that non-recurring benefits will be allocated over the
number of years corresponding to the average useful life (``AUL'') of a
firm's renewable physical assets, as set forth for the industry
concerned 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))
(``the IRS tables method''), as updated by the Department of Treasury,
unless the parties establish that the IRS tables do not reasonably
reflect the AUL of a firm's assets. Parties may rebut the presumption
to use the IRS tables by demonstrating either that the company-specific
AUL or country-wide AUL for the industry in the respondent country
differs by one year or more from the AUL in the IRS tables for the
industry under investigation. Before describing the criteria that we
will consider in determining whether the presumption has been rebutted,
we will first explain why we have decided to change the 1997 Proposed
Regulations, which stated that we would use a company-specific AUL.
Selection of AUL Method
Before 1995, we allocated non-recurring benefits over the AUL
listed in the IRS tables in accordance with our 1989 Proposed
Regulations. We believed, and continue to believe, that the IRS tables
method offers consistency and predictability and that it is simple to
administer. However, for purposes of the 1997 Proposed Regulations, we
decided to change our practice due to several CIT decisions which ruled
against our use of the IRS tables method (see, e.g., Ipsco v. United
States, 687 F. Supp. 614, 626 (CIT 1988) (``Ipsco'')). One common theme
of these decisions was that because the IRS tables method was not a
company-specific approach, it failed to reflect adequately the benefit
of a subsidy to a particular firm. Another common theme was that the
IRS tables method could not be affirmed in the absence of a properly
promulgated regulation (see Ipsco). In the 1997 Proposed Regulations,
we also cited the findings in an unadopted GATT panel report (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) (``Leaded Bar'') which
criticized the way in which the Department applied the IRS tables
method.
Although we did not necessarily agree with the reasoning of these
decisions, we decided to develop an alternative method. Among several
options, we chose to allocate non-recurring subsidies over the company-
specific AUL of productive assets because we believed that this
methodology would be more administrable and predictable than the
alternatives and, also, that it would be easily calculable from a
firm's accounting records. Consequently, in the 1997 Proposed
Regulations, we codified our recent practice of allocating non-
recurring benefits over a period corresponding to the company-specific
AUL of productive assets.
We received many comments on the AUL method. Several commenters,
including respondents, urged the Department to return to the use of the
IRS tables or, alternatively, to use the IRS tables as a rebuttable
presumption or a fallback methodology in situations where a company-
specific AUL could not be calculated. These commenters argued that the
main reason for the CIT's rejection of the IRS tables was that the
Department had failed to codify its methodology into a regulation
pursuant to the Administrative Procedure Act. One commenter observed
that the GATT panel report referred to in the 1997 Proposed Regulations
did not find that the Department was barred from using the IRS tables.
Rather, the panel determined that the use of this methodology in Leaded
Bar had not been supported by sufficient reasoning on the record.
The main arguments in favor of codifying the IRS tables methodology
presented by the commenters were that this approach offers consistency
and predictability and that the Department's use of the IRS tables has
not been controversial in the vast majority of cases. In contrast, the
commenters stated, the company-specific AUL methodology would produce
inconsistent and unpredictable results, among other things, due to the
respondents' varying accounting practices. In addition, it would
increase the workload for all parties. Also, it would not be possible
to use the methodology universally, e.g., when respondent companies do
not collect the information needed to calculate the AUL, when they do
not use straight-line depreciation, or when they write down the value
of their assets. Furthermore, one of the commenters pointed to problems
allegedly associated with the Department's calculation of the gross
book value of a firm's assets. The same commenter was also troubled by
the fact that all of a company's assets are included in the asset base,
as opposed to only those assets that are used to produce the subject
merchandise.
We also received comments on our statement in the 1997 Proposed
Regulations that, in certain situations, it might ``be necessary to
make normalizing adjustments for factors that may distort the
calculation of an AUL'' (e.g., adjustments for extraordinary asset
write-downs or hyperinflation). Some commenters expressed misgivings
about such adjustments which, they said, might compromise the
reliability of the data. One commenter also argued that relying on a
company-specific AUL would allow respondents to manipulate the data and
that the methodology, therefore, would lead to more litigation.
Other commenters suggested other approaches. One commenter argued
that the Department should not limit its discretion to use one method
or the other. Rather, the commenter suggested, the Department should
make a case-by-case determination of the appropriate methodology after
requiring respondents to report the average useful life of assets used
in the production of the subject merchandise. In this commenter's view,
the burden should be on respondents to show that their reported data
are superior to the IRS tables.
Another commenter argued that unless challenged by respondents, the
Department should use the AUL of fixed assets alleged in the petition,
which generally would be the number of years set forth in the IRS
tables. This commenter cited the significant burden that would be put
on all parties, particularly respondents, and on the Department if the
company-specific methodology were codified.
One group of commenters urged the Department not to return to the
IRS tables methodology. One of these commenters supported the company-
specific AUL methodology, arguing that this approach is more accurate
than the IRS tables methodology, thus rendering fairer and more
equitable results. The other commenters in this group expressed a
preference for either of the two alternative methods for determining
the allocation period which were outlined in our 1997 Proposed
Regulations (i.e., the company-specific average maturity of long-term
debt and the company-specific weighted-average use of funds). These
commenters' chief arguments against the IRS tables methodology were (1)
that it had been struck down by the CIT and a GATT
[[Page 65396]]
panel, and (2) that it does not accurately reflect the benefit
conferred upon the actual recipient of the subsidy.
Another commenter conveyed general criticism of what it claimed was
the U.S. practice of assessing subsidy benefits over an ``inordinate''
number of years. This commenter stated that countervailing duties are
intended to be remedial, not punitive, and urged the Department to
achieve a fairer, more transparent, and more consistent regime. A
second commenter argued that data from outside a certain country can
never be used to evaluate subsidies within that country except in the
absence of data from the country in question, which seems to suggest
that in this commenter's view, the IRS tables should only be used as
``facts available.''
We have gained some experience with the company-specific AUL method
over the last few years. In some cases, this method has turned out to
be more burdensome than we had envisioned. We have also found that the
method may not be appropriate for companies that have been sold and
that it presents problems when a company revalues its assets, for
example as a result of declaring bankruptcy (see, e.g., Steel Wire Rod
from Germany, 62 FR 54990 (October 22, 1997)). The results we have
obtained using the company-specific AUL method have been mixed: in some
cases, they have been close to the IRS tables, whereas in other cases
we have found anomalies within the same industry.
Taking into account our experience with the use of the company-
specific AUL method and our review of the numerous comments and
concerns raised by both petitioner and respondent parties, we have
decided to codify the IRS tables method as a rebuttable presumption. In
our view, the IRS tables method offers consistency, predictability, and
simplicity, and presents a reasonable substitute for the AUL of assets
in specific industries around the world. Furthermore, we agree with the
comment that one important reason behind the CIT's decisions regarding
the IRS tables method was that it had not been codified into a final
regulation. With respect to the GATT panel report, it is true that the
panel found fault with the way the Department applied the IRS tables
method. However, it is also true, as suggested by one commenter, that
the panel concluded that it was not necessarily inconsistent with
GATT's Guidelines on Amortization and Depreciation (Committee on
Subsidies and Countervailing Measures, April 1985) for a signatory to
apply a standard period as the average useful life of assets in a given
industry, provided that such standard period was not established on an
arbitrary basis and that it was applied with a degree of flexibility,
taking into account the circumstances of a given case.
Therefore, as set forth in paragraph (d)(2), we will use the AUL
listed in the IRS tables for the industry under investigation, unless
parties claim and establish that these tables do not reasonably reflect
the AUL of the renewable physical assets for the firm or industry under
investigation. Since it is quite likely that the IRS tables, which are
based on industry averages, will never exactly match a firm's AUL, we
will not allow parties to claim that the IRS tables do not reflect the
firm's AUL unless they can demonstrate either: (1) That the AUL for the
firm differs by one year or more from the AUL listed for the industry
in the IRS tables, or (2) that the relevant authorities in the
respondent country have in place a system, equivalent to the IRS
tables, for determining the actual AUL of assets in specific
industries, and the respondent country's tables show that the AUL for
the industry under investigation differs by one year or more from the
IRS tables.
By requiring any party objecting to the application of the IRS
tables to show that either the company-specific AUL, or the industry
AUL in that country, differs by one year or more from the IRS tables,
we will reduce the burden on all parties, as well as the Department, in
analyzing, commenting on, and challenging claims that, even if
ultimately accepted, would have relatively little impact on the
calculation.
Although most commenters focused on some variation of the AUL
method as the appropriate period over which to allocate non-recurring
subsidies, one commenter urged the Department to adopt a special rule
for determining the period over which to allocate subsidies that are
tied to the development of a new product or which fund a specific
project. This commenter maintained that the proper allocation period in
cases where a subsidy is provided for the development of a specific
product is the life of the product, and not the life of the renewable
physical assets used to manufacture the product. The commenter stated
that subsidies for the development of a new product continue to benefit
the recipient over the life of the product and have no relationship to
the recipient's AUL.
The same commenter noted that under the Department's methodology,
regardless of whether it uses the IRS tables or the company-specific
AUL, the allocation period begins with the receipt of the subsidy. The
commenter argued that the allocation period should begin with the sale
of the first product that has been developed with the aid of the
subsidy, which may be several years after the initial provision of the
subsidy. In the commenter's view, the Department's standard calculation
methodology severely understates the duration of the benefit.
In our experience, we have found that for most industries and most
types of subsidies, the IRS tables have provided an accurate and fair
approximation of the AUL of assets in the industry in question, and
that the AUL of assets represents a reasonable reflection of the
duration of the benefit from a non-recurring subsidy. We recognize,
however, that for certain types of industries or certain types of
subsidies, the AUL of assets may not represent the best reflection of
the duration of the benefit. In addition, with respect to certain types
of subsidies, even if we were to use the AUL of assets, it is not clear
when the benefit stream should commence.
It is reasonable to assume that the AUL of assets closely
approximates the duration of the benefit in mature or traditional
industries. For example, if a government provides a grant to a chair
producer to purchase electric saws and wood-carving equipment, it is
reasonable to assume that the grant will continue to benefit the chair
producer as long as the equipment lasts. In this instance, the focus of
the government's attention is to provide the means for the company to
produce already developed products, or modest innovations in the
manufacturing process of developed products. Often, both the equipment
and the products made from the equipment have already been developed.
There is usually only a relatively short lead time between receipt of
the subsidy and production. In comparison with the total investment,
research and development and marketing expenses are likely to be
relatively low. In addition, the level of risk associated with the
investment may be lower than that associated with the type of
investment described below.
However, when a government provides a subsidy to fund the
development of certain new technologies, or to fund an extraordinarily
large project for the development of new products that encompasses not
only basic research and development, but also implementation and
commercialization, the duration of the benefit may not necessarily be
related to the AUL of assets in that industry. For one thing, by
definition, estimates of the AUL of
[[Page 65397]]
assets are based on existing equipment used to make existing products.
The assets needed to develop new technologies, or to produce a new
product may not even have been designed yet, and certainly the product
is not yet developed. Often there is a significant lead time between
receipt of the subsidy and development of the product and between the
development of the product and the product's commercialization (e.g.,
the first commercial sale); in some industries, these lead times can be
several years. In these instances, even if we were to rely on the AUL
of assets, there is a question as to when the benefit stream should
begin: at the time the grant is received or at the time the product
reaches commercial production.
For these reasons, we have added an exception to paragraph (d).
Under paragraph (d)(2)(iv), we will consider arguments, with respect to
subsidies to develop certain new technologies, or to fund
extraordinarily large development projects that require extensive
research and development prior to implementation of production, that we
should rely on allocation periods other than AUL, or that the benefit
stream should begin at some time other than the date the subsidy is
received.
Calculation of a Company-Specific AUL
As noted above, in order to rebut the presumption that the IRS
tables reasonably reflect the AUL of assets of the respondent company,
a party must provide information showing either that a company-specific
AUL differs by one year or more from the AUL listed in the IRS tables
for that industry, or that the AUL of the industry in the respondent
country differs by one year or more from the AUL in the IRS tables. The
criteria that the Department will apply in deciding whether the
presumption has been rebutted are discussed below and are set forth in
paragraphs (d)(2)(ii) and (iii).
Because firms usually do not calculate the ``actual'' AUL of assets
in the normal course of business, and requiring firms to calculate this
figure for purposes of a countervailing duty proceeding could pose an
extremely onerous burden on firms with thousands of individual assets,
and on the Department to verify the accuracy of those calculations, we
intend to continue relying on the basic method for calculating company-
specific AUL which has been used by the Department since the remand
determination in the 1993 Certain Steel investigations (see, British
Steel v. United States, 929 F. Supp. 426, 432-34 (CIT 1996)). Under
this method, which is set forth in general terms in paragraph
(d)(2)(iii), a firm calculates an AUL as follows. First, the annual
average gross book value of the firm's depreciable productive fixed
assets (which is usually based on acquisition cost) is cumulated, for a
period considered appropriate by the Department. In the preamble to the
1997 Proposed Regulations, we indicated that we had been requesting 10
years of data to calculate a company-specific AUL; however, we are
still evaluating whether 10 years of data are necessary or appropriate.
Second, the firm's annual charges to accumulated depreciation for the
same time period are summed. Third, the sum of the annual average gross
book values is divided by the sum of annual depreciation charges. The
resulting number is a company-specific AUL. As we gain more experience
in addressing the calculation of AULs under these regulations, we may
make refinements to the approach described above.
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. There may be situations in which the company-
specific AUL calculated in the manner described above is not
representative of the company's actual AUL. 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 is not a reasonable method
of calculating AUL. Similarly, AUL cannot be calculated in this manner
if the firm does not use straight-line depreciation unless additions to
the firm's asset pool are regular and even. In addition, we will not
use a company-specific AUL where we conclude that the company-specific
AUL is aberrational, or in some other way not usable. As noted above,
we have found that company-specific AULs may not be usable in the face
of a recent change in ownership or bankruptcy.
It may also be necessary to make normalizing adjustments for
factors that distort the calculation of an AUL. We are not in a
position at this time to provide additional detail in the regulation
itself on when we will make normalizing adjustments and how such
adjustments will be made because the types of necessary adjustments
will likely 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, or where the economy of the country in
question has experienced persistently high inflation.
If a party can show that a company's AUL meets all of the
requirements set forth in paragraph (d)(2)(iii), and that the company-
specific AUL differs from the IRS tables by one year or more, we will
consider that the presumption has been rebutted and will use the
company's own AUL for purposes of its analysis. Because petitioners may
not have access to translated financial statements (which is where much
of the required information on asset values and depreciation is
reported), petitioners will be allowed to base their arguments that the
IRS tables are not representative of a company's AUL either on the
financial statements they submit in the petition, or on information
submitted by respondents in their initial questionnaire responses. We
recognize that, by waiting until the initial questionnaire response to
examine claims to rebut the IRS tables presumption, we may be faced
with a situation where we will need to collect additional years of
information on the alleged subsidy programs. If that situation arises,
we will determine on a case-by-case basis whether this provides
sufficient reason to declare an investigation extraordinarily
complicated in accordance with section 703(c) of the Act.
In addition to rebutting the presumption to use the IRS tables
through the calculation of a company-specific AUL, we will also permit
the respondent government to demonstrate that it has a system in place
which reasonably reflects the AUL for industries. The government must
demonstrate that the system was set up to determine the AUL of
industries in the country, that it has conducted reliable surveys and/
or studies to gather information from the companies on their AULs, and
that it has ensured the accuracy of any reported information and of any
calculations performed. If the respondent government's system meets
these standards, and the AUL for the industry under investigation
differs by one year or more from the IRS tables, we will consider that
the presumption has been rebutted, and will use the AUL from the
respondent government's system for the industry under investigation.
As is the case for any other information included in a response to
a countervailing duty questionnaire, a firm's calculation of its AUL,
or a government's system for determining the AULs of its industries,
would be subject to verification by the Department and comment by
parties to
[[Page 65398]]
the proceeding. The regulation setting forth the use of the IRS tables
as a rebuttable presumption is in paragraph (d)(2)(i); the standards we
will apply to determine if the presumption has been rebutted are set
forth in paragraphs (d)(2)(ii) and (iii).
Several commenters who objected to the use of a company-specific
AUL also submitted comments on the method for calculating the company-
specific AUL should the Department decide to retain this methodology.
Although we have decided to use the IRS tables as a rebuttable
presumption to determine the allocation period, parties will be able to
use the company-specific AUL method to rebut the presumption. As such,
we address these additional comments below regarding the calculation
and application of a company-specific AUL.
One commenter argued that, in a situation where the petition is
based upon the IRS tables and the company-specific AUL exceeds the AUL
in the IRS tables, the Department must investigate all subsidies
provided during the allocation period, and the petitioners must have a
reasonable amount of time after the Department has made its AUL
determination to allege additional subsidies from earlier years. To
this effect, the commenter suggested that the investigation be declared
extraordinarily complicated in accordance with the Department's
regulations for postponing preliminary and final countervailing duty
determinations when the company-specific AUL exceeds the AUL in the IRS
tables.
In cases where the petition is based upon the AUL listed in the IRS
tables, and where a party rebuts that presumption based on the factors
discussed above, it is our intention to give the parties a reasonable
amount of time to provide information concerning subsidies received in
the earlier period (see the rules regarding the time limits for
submission of factual information in Sec. 351.301(b) of Antidumping
Duties; Countervailing Duties; Final rule, 62 FR 27296 (May 19, 1997)).
We will decide on a case-by-case basis if rebutting the use of the IRS
tables provides sufficient reason to declare an investigation
extraordinarily complicated in accordance with section 703(c) of the
Act.
The same commenter asked that the regulations clearly state that
the company-specific AUL method will be used only if the respondent (1)
bases its depreciation charges on an estimate of the actual useful life
of its productive assets, and (2) employs a straight-line depreciation
methodology. Another commenter argued that there are two circumstances
under which the Department should be precluded from using the company-
specific AUL method: (1) When additions to a firm's asset pool are
irregular and uneven, and (2) when the number of producers and
exporters is so large that the Department uses aggregate data, as was
the case in, e.g., Live Swine from Canada, 62 FR 18087 (April 14,
1997).
As stated in the 1997 Proposed Regulations and reiterated
previously, there are certain situations in which a company cannot
compute its AUL using the methodology described above. For example, if
a firm's depreciation is not based on an estimate of the actual useful
life of its assets, the methodology cannot be used. Similarly, an AUL
cannot be calculated in this manner if the firm does not use straight-
line depreciation and additions to the firm's asset pool are irregular
and uneven. With respect to the last comment about aggregate cases, we
have found that in some aggregate cases it is possible to calculate an
AUL based on combined data from a large number of companies (see, e.g.,
Fresh Atlantic Salmon from Chile, 63 FR 31437 (June 9, 1998)). However,
because we now intend to use the AUL in the IRS tables as a rebuttable
presumption in all investigations, parties in an aggregate case that
wish to rebut the presumption would have to provide the same type of
information outlined above.
One commenter criticized the Department's practice of including
fully depreciated assets that are still in service in the asset base
used to calculate the company-specific AUL. The commenter argued that
the Department would have to assign an actual value to a fully
depreciated asset to be used as a substitute for its acquisition cost
which would involve complicated calculations. The commenter asked that
the Department instead exclude fully depreciated assets from the asset
base for purposes of the AUL calculation.
We note that, in cases where assets are fully depreciated, yet
remain in service, their useful life is simply longer than the
depreciation period used by the respondent for accounting purposes. By
including fully depreciated assets that are still in service, our
calculation more accurately reflects the assets' useful life. With
respect to the commenter's concern that we would have to assign a value
to a fully depreciated asset in lieu of its acquisition cost, this is
simply incorrect. As explained above, one element of our calculation of
the AUL of productive fixed assets is the gross book value of these
assets, which is based on their acquisition cost. We will still use the
gross book value when the asset has been written off, just as we will
use the aggregated depreciation of the asset. Thus, there is no need to
assign a fictional value to a fully depreciated asset that is still in
use for purposes of calculating the company-specific AUL.
The 1997 Proposed Regulations stated that, in administrative
reviews, we would recalculate the AUL for non-recurring subsidies
received after the period of investigation based upon updated
information. One commenter labeled this approach as misguided and
argued that there is no need to undertake such recalculation. Moreover,
the commenter argued, this approach would lead to anomalous results,
e.g., in cases where a company that received two identical subsidies in
two different years might face different countervailing duty rates
based solely upon the company's financial structure and accounting
practices.
We disagree that this approach would lead to anomalous results.
Even if the subsidy amounts are identical, if they are provided in two
different years, they will have different discount rates and,
consequently, different benefit streams regardless of the allocation
period. However, because we have limited experience in this area, we
are continuing to evaluate whether we should recalculate the allocation
period for new subsidies, and we will address this issue in the context
of individual cases.
Calculation of the Benefit Stream
Once we have determined that a benefit is non-recurring and that it
should not be expensed under the 0.5 percent rule under paragraph
(b)(2), we will calculate the amount of the benefit that will be
assigned to a particular year according to the formula described in
paragraph (d)(1).
We noted in the 1997 Proposed Regulations that we had recently
received comments on our allocation formula and that we intended to
address the comments we had received in these Final Regulations. Those
comments and our position follow.
One commenter, who argued that the Department's traditional
calculation methodology is biased in favor of respondents, outlined
four alternatives for determining when a grant is received: (1) In the
beginning of the year of receipt, (2) at the end of the year of
receipt, (3) on the actual date of receipt, or (4) in the middle of the
year of receipt. The commenter maintained that because our traditional
methodology is based on the implicit assumption that grants are
received in the beginning of
[[Page 65399]]
the year of receipt, it favors respondents because it undervalues the
benefit and artificially shortens the amortization period. The
commenter also found our methodology to be inconsistent with commercial
realities and with Sec. 351.503(b) of the 1997 Proposed Regulations.
Regarding the second alternative (i.e., basing the benefit
calculation on the assumption that grants are received at the end of
the year of receipt), the commenter stated that this would also be
inconsistent with commercial realities and would unfairly favor
petitioners. The third alternative (i.e., using the actual date of
receipt) was described as a neutral methodology that would favor
neither petitioners nor respondents. According to the commenter, this
approach is consistent with commercial reality, with the Department's
past practice, and with Sec. 351.503(b) of the 1997 Proposed
Regulations. However, the commenter noted that this methodology would
be burdensome and urged the Department to adopt the fourth alternative,
i.e., the mid-year methodology. The commenter maintained that this
option is neutral, consistent with commercial realities, and would
require only minor changes in the calculation formula. On average, the
mid-year option would produce the same result as the actual date of
receipt alternative and would thus be a fair methodology, according to
the commenter. (A detailed explanation of how to calculate the annual
benefit in accordance with the mid-year approach was also provided.)
A second commenter agreed with the previous argument that the
Department's traditional calculation methodology favors respondents by
undervaluing the benefit and preventing the Department from fully
offsetting the benefit received. However, this commenter argued that
the Department should change its calculation methodology to reflect the
assumption that the benefit is received at the end of the year. The
commenter asked that this underlying assumption should control unless
respondents can establish the actual date of receipt.
We have not adopted any of the proposed alternatives to our current
formula. Our current formula for allocating non-recurring benefits over
time, which is shown in paragraph (d)(1), was developed as a result of
the CIT's examination of our previous allocation method in Michelin
Tire Corp. v. United States, 6 CIT 320 (1983). The formula first
appeared in the Subsidies Appendix to Certain Cold-Rolled Carbon Steel
Flat Products from Argentina, 49 FR 18006 (April 26, 1984) and has
since been part of the Department's longstanding practice. This
methodology has been uncontroversial and has worked well in past cases.
We, therefore, do not see any compelling need to change it. Moreover,
we disagree with the commenters' specific proposals, including the
proposed calculation formula developed by the first commenter. We find
this commenter's methodology unduly complicated because it involves
three different calculation formulas to be used at different times
during the allocation period. Furthermore, the commenter's formula is
not consistent with the declining balance methodology, which has been
an important part of the Department's past practice.
Selection of Discount Rate
Paragraph (d)(3) deals with the selection of a discount rate.
Consistent with the GIA at 37227, paragraph (d)(3)(ii) 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 351.525
Section 351.525 deals with the calculation of the ad valorem
subsidy rate and the attribution of a subsidy to a particular product.
While Sec. 351.525 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 in the period of investigation or review is $100 and the firm's
total sales in that period amount to $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 the 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, we announced that we would begin using
sales values as recorded in a firm's financial statements. We did so
with the belief that this approach would be more accurate, would reduce
the burden on the firms involved, and would allow us 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, we 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
resorted to its traditional f.o.b. (port) methodology.
Because our 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 movement
component of a transaction is subsidized, we 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 movement
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, the
result would be an extremely lengthy set of rules that might prove
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 that parties can
[[Page 65400]]
predict with a reasonable degree of certainty how we will attribute
subsidies to particular products in a given factual scenario. In this
regard, our intent is to apply these rules as harmoniously as possible,
recognizing that unique and unforeseen factual situations may make
complete harmony among these rules impossible.
With respect to the attribution rules themselves, they are
consistent with the concept of ``benefit'' described in Sec. 351.503,
i.e., that a benefit generally 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 are by these rules attributed, to the extent
possible, to the sales for which costs are reduced (or revenues
increased). For example, an export subsidy reduces the costs of a
firm's exports and is, therefore, attributed only to export sales.
Similarly, a subsidy provided by a government for a specific product is
attributed only to sales of that product for which the subsidy was
provided (and any downstream products produced from that product), as
it reduces the costs of a firm's sales of those products. This
attribution principle applies equally to the current benefit from non-
recurring subsidies allocated over time. For example, the current
benefit of an untied subsidy will be attributed to the firm's total
sales, even if the products produced by the firm differ significantly
from the time the subsidy was provided. We will not, therefore, examine
whether product lines have been expanded or terminated, or whether and
to what extent the corporate structure of the firm has changed over
time.
The principle of attributing a subsidy to sales of a particular
product or products 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,
we attribute a subsidy to sales of 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 sales of all products produced by a firm. For
example, we consider certain subsidies, such as payments for plant
closures, equity infusions, debt forgiveness, and debt-to-equity
conversions, to be untied because they benefit all production.
Paragraphs (b)(2) through (b)(7) set forth rules that we 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, limited to exports, paragraph (b)(2)
provides that the Secretary will attribute an export subsidy only to
the sales of products exported by a firm.
As noted above, we intend to apply paragraphs (b)(2) through (b)(7)
consistently with each other, to the extent practicable. As an example,
assume that a government provides an export subsidy on exports of
widgets to Country X. Here, three attribution rules come into play.
Under paragraph (b)(2), the subsidy would be attributed to the export
sales of 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 the firm's export sales of widgets to Country X.
Certain commenters have identified potential scenarios where the
Department should allow itself the flexibility to deviate from these
tying rules (e.g., where subsidies allegedly ``tied'' to non-subject
merchandise or markets are actually meant to benefit the overall
operations of the company).
We recognize that there may be many scenarios where these
attribution rules do not fit precisely the facts of a particular case.
Furthermore, we are extremely sensitive to potential circumvention of
the countervailing duty law. We intend to examine all tying claims
closely to ensure that the attribution rules are not manipulated to
reduce countervailing duties. If the Secretary determines as a factual
matter that a subsidy is tied to a particular product, then the
Secretary will attribute that subsidy to sales of that particular
product, in accordance with paragraph (b)(5). If subsidies allegedly
tied to a particular product are in fact provided to the overall
operations of a company, the Secretary will attribute the subsidy to
sales of all products by the company. This example illustrates that the
rules as proposed, and as finalized here, do serve their intended
purpose, but that the facts of each case must be carefully examined.
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, while following as
closely as possible the rules and principles set forth in paragraphs
(b)(5) and (b)(6).
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 sales of that product. One commenter argued that the
regulations should make clear that where a subsidy is provided to
develop a specific model of a product (or to modernize a particular
production facility), the subsidy should be attributed to sales of that
model (or to production from that facility). We believe that this
commenter's concerns may already be addressed by the proposed product-
tying rule. If subsidies are provided for a specific model, they can be
tied to that model. If a countervailing duty case is brought solely
against that model, the subsidy would be attributed to that model, and
a model-specific rate will, in effect, be calculated. However, if the
case is brought against several models that comprise the subject
merchandise, we would normally blend the model-specific rates to arrive
at a single rate to apply to all merchandise covered by the
countervailing duty order.
Our 1997 Proposed Regulations contained an exception to the general
product tying rule which provided that, if an input product is produced
within the same corporation, subsidies tied to the input product would
be attributed to sales of both the input and the downstream products.
Our stated intention was to limit this exception to situations where
production of the input and downstream product occur within the same
corporation. We took the position that if the input product is produced
by a separately incorporated company, regardless of the level of
affiliation or ``cross-ownership'' (as discussed further below),
subsidies to the input product would only be considered in the context
of an upstream subsidy investigation initiated
[[Page 65401]]
on the basis of a sufficient allegation from the petitioner.
We received numerous comments objecting to such an approach,
arguing that the rule elevates form over substance. These commenters
suggested that the rule creates a loophole whereby vertically
integrated businesses could avoid countervailing duty exposure for
input subsidies simply by separately incorporating the division that
makes the input. In their opinion, where there is cross-ownership
between the input supplier and the downstream product, subsidies to the
input supplier should be automatically attributed to the downstream
product. In situations where the cross-ownership standard is not met,
but the corporations are nonetheless affiliated, the Department should
determine whether to attribute the subsidies between the two companies
according to the particular facts of the case.
Paragraph (b)(5)(ii) of these Final Regulations maintains the
exception to the product tying rule whereby we will attribute a subsidy
tied to the input product to the sales of both the input and downstream
products where the production of the input and downstream products
occurs within the same corporation. However, upon consideration of the
comments received and a careful review of the upstream subsidy
provision of the statute, we have decided to modify our practice
regarding separately incorporated input and downstream producers.
The main concern we have tried to address is the situation where a
subsidy is provided to an input producer whose production is dedicated
almost exclusively to the production of a higher value added product--
the type of input product that is merely a link in the overall
production chain. This was the case with stumpage subsidies on timber
that was primarily dedicated to lumber production and subsidies to
semolina primarily dedicated to pasta production. (See Certain Softwood
Lumber Products from Canada, 57 FR 22570, 22578 (May 28, 1992) and
Certain Pasta from Italy, 61 FR 30287-309 (June 14, 1996).) We believe
that in situations such as these, the purpose of a subsidy provided to
the input producer is to benefit the production of both the input and
downstream products. Accordingly, where the input and downstream
production takes place in separately incorporated companies with cross-
ownership (see discussion below defining cross-ownership) and the
production of the input product is primarily dedicated to the
production of the downstream product, paragraph (b)(6)(iv) requires the
Department to attribute the subsidies received by the input producer to
the combined sales of the input and downstream products (excluding the
sales between the two corporations).
Where we are dealing with input products that are not primarily
dedicated to the downstream products, however, it is not reasonable to
assume that the purpose of a subsidy to the input product is to benefit
the downstream product. For example, it would not be appropriate to
attribute subsidies to a plastics company to the production of cross-
owned corporations producing appliances and automobiles. Where we are
investigating products such as appliances and automobiles, we will rely
on the upstream subsidy provision of the statute to capture any
plastics benefits which are passed to the downstream producer.
Moreover, we believe that the upstream subsidy provision is still
applicable when dealing with lower levels of affiliation. Therefore, if
the relationship between the input and downstream producers meets the
affiliation standard but falls short of cross-ownership, even if the
input product is primarily dedicated to the downstream product, we will
only consider subsidies to the input producer in the context of an
upstream subsidy investigation.
Paragraph (b)(6) deals with situations where cross-ownership exists
between corporations. We have decided to codify the definition of
cross-ownership outlined in the preamble to the 1997 Proposed
Regulations. Accordingly, paragraph (b)(6)(vi) makes clear that the
relationships captured by the cross-ownership definition include those
where the interests of two corporations have merged to such a degree
that one corporation can use or direct the individual assets (or
subsidy benefits) of the other corporation in essentially the same ways
it can use its own assets (or subsidy benefits). 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 majority voting ownership interest between two corporations or
through common ownership of two (or more) corporations. In certain
circumstances, a large minority voting interest (for example, 40
percent) or a ``golden share'' may also result in cross-ownership.
As we noted in the 1997 Proposed Regulations, 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. In response to
this, one commenter protested that reliance upon cross-ownership for
attribution purposes will unlawfully limit the affiliated party
standard as outlined in section 771(33) of the Act. Another commenter
asked the Department to revise the definition of cross-ownership such
that cross-ownership will be found when one ``affiliated'' company
exercises control over another.
We believe that the definition of cross-ownership in these Final
Regulations is a more useful basis than mere affiliation for
identifying the types of relationships where it is reasonable to
presume that subsidies to one corporation could benefit another
corporation. The underlying rationale for attributing subsidies between
two separate corporations is that the interests of those two
corporations have merged to such a degree that one corporation can use
or direct the individual assets (or subsidy benefits) of the other
corporation in essentially the same ways it can use its own assets (or
subsidy benefits). The affiliation standard does not sufficiently limit
the relationships we would examine to those where corporations have
reached such a commonality of interests. Therefore, reliance upon the
affiliated party definition would result in the Department expending
unnecessary resources collecting information from corporations about
subsidies which are not benefitting the production of the subject
merchandise, or diluting subsidies more properly attributed to input
producers by allocating such subsidies over the production of remotely
related and affected downstream producers. In response to the second
comment, we note that varying degrees of control can exist in any
relationship. Therefore, we believe the more precise definition of
cross-ownership that we have adopted in these Final Regulations is more
appropriate.
Contrary to the assertions of the commenters, in limiting our
attribution rules to situations where there is cross-ownership, we are
not reading ``affiliated'' out of the CVD law--we simply do not find
the affiliation standard to be a helpful basis for attributing
subsidies. Nowhere in the statute or the SAA is there any indication
that the affiliated party definition was intended to be used for
subsidy attribution purposes. Rather, it identifies the broadest
category of relationships which might be relevant to either an
antidumping or a countervailing duty analysis. Therefore,
[[Page 65402]]
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 intend to investigate subsidies to
affiliated parties unless cross-ownership exists or other information,
such as a transfer of subsidies, indicates that such subsidies may in
fact benefit the subject merchandise produced by the corporation under
investigation.
Paragraph (b)(6) begins by stating a general rule, which is
followed by four exceptions to that rule deriving from the rationale
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 sales of products produced by corporation A.
However, under paragraph (b)(6)(ii), if two (or more) corporations
with cross-ownership produce the subject 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 on widgets 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 might be attributed to sales of another
corporation with cross-ownership. This is where the subsidy is received
by a holding company. The term ``holding company'' is intended to mean
any company that owns or controls subsidiaries through the ownership of
voting stock or other means. In paragraph (b)(6)(iii) of these Final
Regulations, we have clarified that the term ``holding company''
includes investment companies with no business of their own (commonly
referred to as holding companies) as well as companies with their own
operations (commonly referred to as parent companies). Under paragraph
(b)(6)(iii), subsidies to a holding company will normally be attributed
to the consolidated sales of the holding company (including the sales
of subsidiaries). However, if the Department determines that the
holding company is merely serving as a conduit for government-provided
funds to one (or more) of its subsidiaries, then the subsidy will be
attributed to the production of that subsidiary.
Analogous to the situation of a holding or parent company 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, e.g., Certain Steel
Products from Belgium, 58 FR 37273, 37282 (July 9, 1993) (``Certain
Steel from Belgium'').
Paragraph (b)(6)(iv) incorporates the change in practice with
regard to separately incorporated input producers discussed previously.
This rule allows the Department to attribute the subsidies received by
the input producer to the input and downstream products produced by
both corporations when the input is primarily dedicated to the
production of the downstream product.
Finally, where the exceptions contained in paragraphs (b)(6)(i)-
(iv) have not been met, subsidies received by one corporation may still
be attributed to sales of another corporation with cross-ownership if
the Secretary determines under paragraph (b)(6)(v) that the corporation
receiving the subsidy transfers it to the corporation producing the
subject merchandise. Such a transferral could be shown by some form of
extraordinary transaction between the two companies, e.g., a transfer
of assets, an assumption of debt, or a significant loan. Where we find
such transfer mechanisms, we will attribute the subsidy to the combined
sales of the two corporations.
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. However, given the
complexity and variety of the government-owned corporate structures
that we have encountered, the nature of the allegation may determine
the nature of the analysis and the level at which the analysis should
be applied. The situations where we would normally expect to apply the
cross-ownership rules to common government ownership are: (1)
Government-owned corporations producing the same product (see
Sec. 351.525(b)(6)(ii)) and (2) government-owned corporations producing
different products where the corporations are under the control of the
same ministry or within a corporate group containing producers of
similar products (see Sec. 351.525(b)(6)(v)).
Although the rules described in paragraphs (b)(2)--(b)(7) of
Sec. 351.525 deal with tying, Sec. 351.525 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 (September 7, 1982), we
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 at 23374, we 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 we have
encountered in the past, and are likely to encounter in the future, we
are not promulgating 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. While the preamble to the 1997 Proposed Regulations requested
comments regarding what factors are relevant to the Department's
determination of whether benefits are tied, we received no such
comments. For these reasons, at this time we intend to apply the term
``tied'' on a case-by-case basis, using the guidelines in this section.
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
[[Page 65403]]
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, these
comments are somewhat misplaced. Fungibility has to do with the issue
of whether we could, or should, trace the use of specific funds to
determine whether such funds were used for their stated purpose, or the
purpose that we evince from record evidence. We have generally stated
that we will not trace the use of subsidies through a firm's books and
records. Rather we analyze the purpose of the subsidy based on
information available at the time of bestowal. Once the firm receives
the funds, it does not matter whether the firm used the government
funds, or some of its own funds that were freed up as a result of the
subsidy, for the stated purpose or the purpose that we evince. This is
what we mean when we say that money is fungible. Fungibility does not
mean that we cannot attribute subsidies to particular portions of a
firm's activities. This interpretation of fungibility would undermine
congressional intent to attribute subsidies to the products that
directly benefit from the subsidy. See, e.g., H.R. Rep. No. 96-317, at
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 * * *.'').
For example, if we were to adopt some of the suggestions made by
the commenters, there should be no distinction between export and
domestic subsidies. Yet, this agency's consistent and, for the most
part, non-controversial practice over the past 18 years has been to
attribute export subsidies to the sales value of exported products and
domestic subsidies to all products sold. As additional examples, over
time, we also have adopted the practices of attributing subsidies that
can be tied to particular products to sales of those products and
attributing subsidies that can be tied to particular markets to
products sold to those markets.
Our tying rules recognize that a government subsidy may not benefit
all products or corporate entities equally. At the same time, they
recognize that a subsidy may provide benefits to persons, products, or
entities, not specifically named in a government program. Our tying
rules are an attempt at a simple, rational set of guidelines for
reasonably attributing the benefit from a subsidy based on the stated
purpose of the subsidy or the purpose we evince from record evidence at
the time of bestowal.
Section 351.525(b)(7) addresses the attribution of subsidies
received by companies with multinational production. As we stated in
the 1997 Proposed Regulations, it is 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. 351.525(b)(7) states that
we normally will attribute subsidies to sales of merchandise produced
within the jurisdiction of the granting authority. However, where a
respondent can demonstrate that the purpose of the subsidy was to
benefit more than domestic production (i.e., the subsidy was tied to
more than domestic production), the subsidy will be attributed to
multinational sales.
One commenter argued that it is inappropriate to assume that untied
subsidies received by a multinational holding company benefit only the
national operations of the company because such subsidies release
resources for international as well as domestic operations. This
argument, however, rests on the principle that money is fungible and,
as discussed above, we do not believe that fungibility should be the
guiding principle for attributing subsidies. Moreover, the presumption
that domestic subsidies benefit domestic production has been a well-
established practice since the Certain Steel investigations and has
been upheld by the CIT. See GIA at 37231; see also British Steel plc v.
United States, 929 F. Supp. 426, 453-55 (CIT 1996), appeal pending sub
nom. Inland Steel Industries, Inc. v. United States, Nos. 98-1230, 1259
(Fed. Cir.).
The same commenter objected to the change from the rebuttable
presumption adopted in 1993. We note that under the 1993 practice, a
respondent was required to show that a subsidy was not tied to domestic
production. If a respondent successfully demonstrated this, the subsidy
would be attributed to multinational production. Under the proposed
paragraph (b)(7), however, respondents were required to demonstrate
that the subsidies were tied to foreign production. If we found the
subsidy to be tied to foreign production, it would not be
countervailed. The final rule, which is worded slightly differently,
still requires affirmative evidence that the purpose of the subsidy was
to benefit more than domestic production. We continue to believe that
the 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.
Another commenter, while not objecting to the proposed change in
the formulation of the presumption, objected to our statement that, if
the Department found a subsidy tied to foreign production, it would not
be countervailed. This commenter argued that if the Department
maintains a countervailing duty order covering exports from the country
in which the foreign production occurred, it should countervail those
subsidies.
We have not adopted this suggestion because the statute permits
countervailing subsidies provided by one government for the benefit of
production in another country only in limited circumstances. See
Sec. 351.527 (transnational subsidies). However, this comment did
prompt a closer examination of the proposed rule. Recognizing that
governments are not likely to provide subsidies solely for the benefit
of foreign production, we believe that the purpose, even of subsidies
which may be tied to foreign production, is in fact to benefit
multinational operations, including those in the subsidizing
jurisdiction. Therefore, we have revised the rule so that if a
respondent demonstrates that a subsidy is tied to more than domestic
production, the subsidy will be attributed to multinational sales
including sales in the subsidizing jurisdiction. We will examine such
claims closely to ensure that the subsidy was, in fact, tied to more
than domestic production. Respondents must show that, in the
authorization and/or approval documents, the government explicitly
stated that the subsidy was being provided for more than domestic
production. Simply approving a loan to a company with multinational
production, or providing an equity infusion to the company, is not
sufficient to demonstrate that the subsidy was tied to more than
domestic
[[Page 65404]]
production. The documentation must show that, at the point of bestowal,
one of the express purposes of the subsidy was to provide assistance to
the firm's foreign subsidiaries. Absent such a demonstration, all
subsidies, whether tied or untied, will be attributed to the
appropriate category of domestically-produced sales as mandated by the
rules contained in paragraphs (b)(1) through (b)(6).
We received one comment requesting the Department to include
language in its Final Regulations which would allow the agency to tie
regional subsidies to production in a particular region--essentially to
calculate factory-specific subsidy rates. This commenter points to Live
Swine from Canada, 61 FR 26879 (May 29, 1996) (``Live Swine from
Canada'') in support of this proposal. In that case, the Department
allocated regional benefits over regional production and then
calculated a single country-wide rate based on each region's exports to
the United States.
We have not adopted this suggestion. The calculation methodology
employed in Live Swine from Canada was particular to the facts of that
case `` an aggregate case in which the majority of subsidy programs
examined were regionally provided. If such a methodology were to be
universally applied, foreign companies could easily escape payment of
countervailing duties by selling the production of a subsidized region
domestically, while exporting from a facility in an unsubsidized
region.
Another commenter argued that if it were true that governments
normally will not provide subsidies to firms that refuse to use them as
the government wants, then even ``untied'' subsidies are worth less
than their face value by virtue of the fact that the subsidy is
inherently ``restricted'' in its use. This commenter appears to be
seeking to have the Department reduce the value of the subsidy because
of potential constraints placed on its receipt. We note that such a
reduction is not an allowable offset under the statute.
Finally, we note that we have added a paragraph to this section
which codifies our longstanding practice regarding the attribution of
subsidies to trading companies. See, e.g., Certain Stainless Steel
Cooking Ware from the Republic of Korea, 51 FR 42867 (November 26,
1986) and Certain Steel Wire Nails from Thailand, 52 FR 36987 (October
2, 1987). Although we did not receive any comments on this issue and
our practice has been non-controversial, we believe it is important to
codify those practices that we intend to continue. Therefore, paragraph
(c) has been added which states that benefits from subsidies provided
to trading companies (or any firm that only sells and does not produce
subject merchandise) will be cumulated with benefits from subsidies
provided to the producer of subject merchandise, regardless of whether
the trading company and the producer are affiliated.
Section 351.526
Section 351.526 deals with program-wide changes, and is almost
identical to Sec. 355.50 of the 1989 Proposed Regulations.
One commenter suggested that the Department should add specific
language to the regulation stating that the cash deposit rate will not
be adjusted for a terminated program, unless the respondent has
presented positive evidence demonstrating that no residual benefits
will be bestowed and that no transitional program has been, or will be
enacted. The commenter further suggested that the regulation also
clearly set forth that the Department will not adjust the cash deposit
rate based on mere assertion or announcement of a government's intent
to terminate a program.
We agree with the commenter that program-wide changes must be
documented by the respondent, beyond mere assertion. However, we do not
feel that it is necessary to codify this position through an amended
regulation. Given the general nature of this policy and our current
practice, to which the commenter does not object, there is no reason to
amend the current regulation.
A second commenter argued that Sec. 351.526 should allow for the
possibility that evidence of a program-wide change received subsequent
to the period of investigation or review, but before the preliminary
determination or preliminary results of an administrative review, may
change the final determination or final results of the review. For
example, when a program has been terminated and no residual benefits
exist, the Department's final determination or final results should be
negative (assuming that there is only one program). The commenter
asserted that the 1997 Proposed Regulations, which would require the
Department to render an affirmative determination with a zero cash
deposit rate, is inconsistent with the overall purpose of the U.S.
countervailing duty law. The commenter further argued that the
Department should not have the discretion to determine that a
``substitute program'' continues to provide benefits; a substitute
program must be considered only in a new investigation or upon an
allegation in an administrative review.
We have not adopted the suggested changes of this commenter. It has
been our longstanding practice to impose (or not to impose) a CVD order
based exclusively on the subsidy rate in effect during the period of
investigation. In Pipe and Tube from Malaysia, where the period of
investigation rate was zero, we rendered a negative determination, even
though we knew other benefits existed after the period of
investigation. See, Standard Pipe, Line Pipe, Light-Walled Rectangular
Tubing and Heavy-Walled Rectangular Tubing from Malaysia, 53 FR 46904,
46906 (November 21, 1988). If a subsidy exists during the period of
investigation, we will issue a CVD order (where any required injury
determination is affirmative) regardless of whether the program and the
subsidy are eliminated after the period of investigation, but before
our final determination. In regard to substitute programs, it is our
practice to consider whether such programs exist when adjusting deposit
rates. If we did not have such discretion to determine whether a
substitute program offers the same benefits as a terminated program,
then governments could terminate investigated or reviewed programs and
replace them with other programs to obtain a lower deposit rate.
Section 351.527
Section 351.527, which is based on Sec. 355.44(o) of the 1989
Proposed Regulations, provides that so-called ``transnational
subsidies'' are not countervailable. Subsidies of this type include
situations where the funding for the subsidy is provided (a) by the
government of a country other than the country in which the recipient
firm is located, of (2) by an international lending or development
institution. Except for the addition of the phrase `` * * * supplied in
accordance with, and as part of, a program or project funded,'' which
we discuss below, Sec. 351.527 is the same as the provision in the 1997
Proposed Regulations and Sec. 355.44(o) of the 1989 Proposed
Regulations.
Paragraph (o)(2) of Sec. 355.44(o) of the 1989 Proposed Regulations
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. 351.527 merely references, but does not repeat, section
701(d).
One commenter stated that paragraph (a) in the 1997 Proposed
Regulations should be clarified to apply solely to
[[Page 65405]]
foreign aid; otherwise any subsidy provided by the government of one
country to a recipient located in another country would be not
countervailable. The commenter argued that, as written, the regulation
would prevent the Department from conducting an upstream analysis in a
case where a subsidy is provided by the government of one country to an
input producer in that country, that producer sells the input to a firm
in another country, and this last firm ultimately sells subject
merchandise to the United States. Another commenter stated that the
statutory basis for not countervailing subsidies provided by one
country to an entity producing or manufacturing the subject merchandise
in another country no longer exists following the repeal of section 303
by the URAA and, prior to the URAA, did not exist for Subsidies Code
members covered by section 701, notwithstanding previous assertions by
the Department to the contrary. Therefore this commenter suggests
striking paragraph (a) in its entirety. Both commenters supported
paragraph (b), which addresses subsidies funded by international
lending or development institutions.
Section 351.527 derives from prior section 303(a)(l) of the Act
(now repealed), which stated:
Whenever any country * * * shall pay or bestow, directly or
indirectly, any bounty of grant upon the manufacture or production
or export of any article * * * manufactured or produced in such
country * * * there shall be levied a duty equal to the net amount
of such bounty or grant * * * .
19 U.S.C. section 1303(a)(1)(1994)(emphasis added).
In our view, neither the successorship of section 701 for Subsidies
Code members, nor the repeal of section 303 by the URAA, eliminated the
transnational subsidies rule, and there is no other indication that
Congress intended to eliminate this rule. In addition, Sec. 351.527
does not preclude the Department from conducting an upstream analysis
in a case where a subsidy is provided by the government of one country
to an input producer in that country, that producer sells the input to
a firm in another country, and this last firm ultimately sells subject
merchandise to the United States. As explained in the preamble to
Sec. 351.523, section 701(d), the international consortia provision of
the statute, allows the Department to countervail such subsidies where
both countries are ``members (or other participating entities)'' in an
international consortium and the subsidy on the input product
``assisted, permitted, or otherwise enabled'' the participation of that
producer in the consortium. Furthermore, section 771A, the upstream
subsidies provision of the statute, allows the Department to reach
subsidies provided by one country that is a member in a customs union
to an input produced in that country for incorporation into subject
merchandise produced in another country that is a member of the same
customs union.
With respect to Sec. 351.527(b), we agree with the commenters that
a subsidy does not exist if the funding for the subsidy is provided by
an international lending or development institution. Common examples of
this type of international funding include the construction of a dam, a
hydroelectric plant, or some other large infrastructure project. The
exemption in Sec. 351.527 applies if sufficient evidence is provided
showing that the funding for the subsidy is supplied in accordance
with, and as part of, a program or project funded by another government
or by an international lending or development institution. If, however,
the recipient government decides on its own, outside of such a program
or project, to provide a subsidy, that subsidy will be subject to the
countervailing duty law. At the same time, the provision of
transnational funds to a government does not in and of itself create a
presumption of subsidization. We have amended Sec. 351.527 to reflect
the limited application of this exemption and to clarify that national
government subsidy programs, if they meet the statutory criteria for a
countervailable subsidy, will not escape countervailing duties.
Comments Relating to Procedural Regulations
We received comments arguing that remand determinations, like other
determinations, should be published in the Federal Register. Although
this issue was addressed in Antidumping Duties; Countervailing Duties;
Final rule, 62 FR 27295, 27330 (May 19, 1997) (``Procedural
Regulations''), these commenters assert that the alternatives described
therein do not provide sufficient access to remand determinations. The
commenters argue that the publication of remand determinations is
crucial as they correct previously published determinations found to be
unsupported by substantial evidence or not in accordance with the law.
Moreover, remand decisions often include new analysis or expanded
discussions of the Department's methodology which is not included in
published decisions.
While we understand the concerns of the commenters, given the high
cost of publishing notices in the Federal Register, we do not agree
that remand determinations should be published in the Federal Register.
At this time, we will continue the current plan of posting final remand
determinations on the Import Administration web site (http://
www.ita.doc.gov/import__admin/). After this system has been in place
for a reasonable period of time, we will evaluate whether this system
provides adequate distribution of the determinations, or if another
system would provide better public access.
We also received a comment encouraging the Department to codify and
follow all procedures relating to the issuance of deposit instructions
to Customs. Under Sec. 351.211(b) of the Department's Procedural
Regulations, the Department is obligated to issue deposit instructions
within seven days of a final affirmative ITC determination, and
promptly after final review results. However, the commenter stated that
the Department frequently misses these deadlines, and parties have no
remedy. Also, the commenter noted that the regulations do not address
changes resulting from remands. The commenter stated that in some
cases, deposit rates are not amended until all appeals are exhausted,
and that this harms petitioners. According to the commenter, a fair
rule would be to issue amended deposit rates immediately after the
remand results are approved by the Court, if the amended rate is higher
than the rate calculated in the previous segment. If that higher rate
is eventually determined to be incorrect, then the difference can be
refunded.
We agree that we should issue deposit instructions promptly. With
regard to changes in deposit rates after remand results are affirmed,
our policy has been to follow the decision in Timken v. United States,
893 F.2d 337 (Fed. Cir. 1990). Pursuant to our interpretation of this
case, we do not change deposit instructions following a remand
determination until all appeals are exhausted. If, however, the remand
changes a negative determination to an affirmative determination, we
will instruct Customs to suspend liquidation at a zero rate until all
appeals are exhausted.
Subpart G--Effective Dates
Subpart G currently consists of a single Sec. 351.701, which
established the dates on which the new substantive AD and procedural AD
and CVD regulations published on May 19, 1997, became effective.
Section 701 also explains the extent to which the previous AD and
procedural regulations govern segments of proceedings to which the new
[[Page 65406]]
regulations do not apply and the limited role of the new regulations in
such proceedings.
We are now adding a new Sec. 351.702 to establish effective dates
for the new CVD substantive regulations. Because the procedural
regulations published on May 19, 1997, apply to CVD proceedings, the
effective dates in the substantive CVD regulations are structured as an
exception to the effective dates in the procedural regulations.
Section 351.702(a) provides that the new substantive CVD
regulations will apply to all investigations initiated pursuant to
petitions filed more than 30 days after the date on which they are
published. In addition, Sec. 351.702(a) provides that the new
regulations will apply to all administrative reviews initiated on the
basis of requests filed in the month following the month in which the
date 30 days after publication of this notice falls (in other words,
the month following the month in which the regulations otherwise become
effective). The slight difference in effective dates for requested
administrative reviews is to avoid confusion over whether the new
regulations apply to administrative reviews requested by different
parties on different days during the month in which the new regulations
become effective. Finally Sec. 351.702(a) applies to all investigations
or reviews that the Department self-initiates more than 30 days after
the date on which the new regulations are published.
Section 351.702(b) provides that investigations and reviews to
which the substantive CVD regulations do not apply will continue to be
governed by the Department's previous CVD methodology, except to the
extent that the previous methodology was invalidated by the URAA.
Although there are no previous CVD substantive regulations, the
Department's previous methodology generally is described in the
proposed substantive CVD regulations published May 31, 1989. In
situations where the previous methodology was invalidated by the URAA,
the new regulations will serve as a restatement of the Department's
interpretation of the Act as amended by the URAA. The 1997 Proposed
Regulations have no role as precedent for any CVD determinations.
Classification
E.O. 12866
This final 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 final rule will 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 URAA, the Department
believes that these regulations benefit both petitioners and
respondents without favoring either, and, therefore, would not have a
significant economic effect. 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 final 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 CVD 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 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, 14th Street and Constitution
Avenue, NW, Washington, DC. 20230, or to OMB Desk Officer, New
Executive Office Building, Washington, DC. 20503.
E.O. 12612
This final rule does not contain federalism implications warranting
the preparation of a Federalism Assessment.
List of Subjects
19 CFR Part 351
Administrative practice and procedure, Antidumping, Business and
industry, Cheese, Confidential business information, Countervailing
duties, Investigations, Reporting and recordkeeping requirements.
19 CFR Part 353
Administrative practice and procedure, Antidumping, Business and
industry, Confidential business information, Investigations, Reporting
and recordkeeping requirements.
19 CFR Part 355
Administrative practice and procedure, Business and industry,
Cheese, Confidential business information, Countervailing duties,
Freedom of Information, Investigations, Reporting and recordkeeping
requirements.
Dated: November 10, 1998.
Robert S. LaRussa,
Assistant Secretary for Import Administration.
For the reasons stated, 19 CFR part 351 is amended as follows:
[[Page 65407]]
PART 351--ANTIDUMPING AND COUNTERVAILING DUTIES
The authority citation for part 351 continues to read as follows:
Authority: 5 U.S.C. 301; 19 U.S.C. 1202 note; 19 U.S.C. 1303
note; 19 U.S.C. 1671 et seq. and 19 U.S.C. 3538.
2. Section 351.102 (Definitions) is amended by adding new
definitions to read as follows:
Sec. 351.102 Definitions
* * * * *
(b) * * *
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'' is used to refer to the recipient
of an alleged countervailable subsidy, including any individual,
company, partnership, corporation, joint venture, association,
organization, or other entity.
* * * * *
Government-provided. ``Government-provided'' is a shorthand
expression for 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 Benefit.
351.504 Grants.
351.505 Loans.
351.506 Loan guarantees.
351.507 Equity.
351.508 Debt forgiveness.
351.509 Direct taxes.
351.510 Indirect taxes and import charges (other than export
programs).
351.511 Provision of goods or services.
351.512 Purchase of goods. [Reserved]
351.513 Worker-related subsidies.
351.514 Export subsidies.
351.515 Internal transport and freight charges for export
shipments.
351.516 Price preferences for inputs used in the production of
goods for export.
351.517 Exemption or remission upon export of indirect taxes.
351.518 Exemption, remission, or deferral upon export of prior-
stage cumulative indirect taxes.
351.519 Remission or drawback of import charges upon export.
351.520 Export insurance.
351.521 Import substitution subsidies. [Reserved]
351.522 Green light and green box subsidies.
351.523 Upstream subsidies.
351.524 Allocation of benefit to a particular time period.
351.525 Calculation of ad valorem subsidy rate and attribution of
subsidy to a product.
351.526 Program-wide changes.
351.527 Transnational subsidies.
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) Sequential analysis. In determining whether a subsidy is de
facto specific, the Secretary will examine the factors contained in
section 771(5A)(D)(iii) of the Act sequentially in order of their
appearance. If a single factor warrants a finding of specificity, the
Secretary will not undertake further analysis.
(b) Characteristics of a ``group.'' In determining whether a
subsidy is being provided to a ``group'' of enterprises or industries
within the meaning of section 751(5A)(D) of the Act, the Secretary is
not required to determine whether there are shared characteristics
among the enterprises or industries that are eligible for, or actually
receive, a subsidy.
(c) Integral linkage. Unless the Secretary determines that two or
more programs are integrally linked, the Secretary will determine the
specificity of a program under section 771(5A)(D) of the Act solely on
the basis of the availability and use of the particular program in
question. The Secretary may find two or more programs to be integrally
linked if:
(1) The subsidy programs have the same purpose;
(2) The subsidy programs bestow the same type of benefit;
(3) The subsidy programs confer similar levels of benefits on
similarly situated firms; and
(4) The subsidy programs were linked at inception.
(d) 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).
(e) 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.
(f) Disaster relief. The Secretary will not regard disaster relief
as being specific under section 771(5A)(D) of the
[[Page 65408]]
Act if such relief constitutes general assistance available to anyone
in the area affected by the disaster.
Sec. 351.503 Benefit.
(a) Specific rules. In the case of a government program for which a
specific rule for the measurement of a benefit is contained in this
subpart E, the Secretary will measure the extent to which a financial
contribution (or income or price support) confers a benefit as provided
in that rule. For example, Sec. 351.504(a) prescribes the specific rule
for measurement of the benefit of grants.
(b) Other subsidies.--(1) In general. For other government
programs, the Secretary normally will consider a benefit to be
conferred where a firm pays less for its inputs (e.g., money, a good,
or a service) than it otherwise would pay in the absence of the
government program, or receives more revenues than it otherwise would
earn.
(2) Exception. Paragraph (b)(1) of this section is not intended to
limit the ability of the Secretary to impose countervailing duties when
the facts of a particular case establish that a financial contribution
(or income or price support) has conferred a benefit, even if that
benefit does not take the form of a reduction in input costs or an
enhancement of revenues. When paragraph (b)(1) of this section is not
applicable, the Secretary will determine whether a benefit is conferred
by examining whether the alleged program or practice has common or
similar elements to the four illustrative examples in sections
771(5)(E)(i) through (iv) of the Act.
(c) Distinction from effect of subsidy. In determining whether a
benefit is conferred, the Secretary is not required to consider the
effect of the government action on the firm's performance, including
its prices or output, or how the firm's behavior otherwise is altered.
(d) Varying financial contribution levels.--(1) In general. Where a
government program provides varying levels of financial contributions
based on different eligibility criteria, and one or more of such levels
is not specific within the meaning of Sec. 351.502, a benefit is
conferred to the extent that a firm receives a greater financial
contribution than the financial contributions provided at a non-
specific level under the program. The preceding sentence shall apply
only to the extent the Secretary determines that the varying levels of
financial contributions are set forth in a statute, decree, regulation,
or other official act; that the levels are clearly delineated and
identifiable; and that the firm would have been eligible for the non-
specific level of contributions.
(2) Exception. Paragraph (d)(1) of this section shall not apply
where the statute specifies a commercial test for determining the
benefit.
(e) Tax consequences. In calculating the amount of a benefit, the
Secretary will not consider the tax consequences of the benefit.
Sec. 351.504 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 normally will consider a benefit as having been received on
the date on which the firm received the grant.
(c) Allocation of a grant to a particular time period. The
Secretary will allocate the benefit from a grant to a particular time
period in accordance with Sec. 351.524.
Sec. 351.505 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 structure of the loans (e.g., fixed interest rate
v. variable interest rate), the maturity of the loans (e.g., short-term
v. long-term), and the currency 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 on non-
commercial terms or at the direction of the government. However, the
Secretary will not consider a loan provided under a government program,
or a loan provided by a government-owned special purpose bank, to be a
commercial loan for purposes of selecting a loan to compare with 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 year in
which the government-provided loan was taken out, weighted by the
principal amount of each loan. 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 actually obtain on the market,'' the Secretary normally will
rely on the actual experience of the firm in question in obtaining
comparable commercial loans for both short-term and long-term 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 normally 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:
ib = [(1-qn)(1+if)n/
(1-pn)]1/n-1,
where:
n = the term of the loan;
ib = the benchmark interest rate for uncreditworthy
companies;
if = the long-term interest rate that would be paid by a
creditworthy company;
pn = the probability of default by an uncreditworthy company
within n years; and
qn = the probability of default by a creditworthy company
within n years.
``Default'' means any missed or delayed payment of interest and/or
principal,
[[Page 65409]]
bankruptcy, receivership, or distressed exchange. For values of
pn, the Secretary will normally rely on the average
cumulative default rates reported for the Caa to C-rated category of
companies in Moody's study of historical default rates of corporate
bond issuers. For values of qn, the Secretary will normally
rely on the average cumulative default rates reported for the Aaa to
Baa-rated categories of companies in Moody's study of historical
default rates of corporate bond issuers.
(4) Uncreditworthiness.--(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, in appropriate
circumstances, focus its creditworthiness analysis on the project being
financed rather than the company as a whole. In making the
creditworthiness determination, the Secretary 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
comparable long-term commercial loans, unaccompanied by a government-
provided guarantee, will normally 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
considered in connection with the allocation of non-recurring benefits,
the Secretary will rely on information available in the year in which
the government agreed to provide the subsidy conferring a non-recurring
benefit.
(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 or if the comparison
described in paragraph (a)(5)(i) of this section would yield an
inaccurate measure of the benefit, the Secretary may modify the method
described in paragraph (a)(5)(i) of this section.
(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 bank absent a specific allegation
that is supported by information reasonably available to petitioners
indicating that:
(A) The loan meets the specificity criteria in accordance with
section 771(5A) of the Act; 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 in the year in
which the firm otherwise would have had to make a payment on the
comparable commercial 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. 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.
(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 that
repayment would begin on the comparable commercial loan, 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. 351.524(d)(1)
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),
[[Page 65410]]
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 that repayment would begin
on the comparable commercial loan = 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.--(1) Treatment as
loans. In the case of an interest-free loan, for which the repayment
obligation is contingent upon the company taking some future action or
achieving some goal in fulfillment of the loan's requirements, the
Secretary normally will treat any balance on the loan outstanding
during a year as an interest-free, short-term loan in accordance with
paragraphs (a), (b), and (c)(1) of this section. However, if the event
upon which repayment of the loan depends will occur at a point in time
more than one year after the receipt of the contingent liability loan,
the Secretary will use a long-term interest rate as the benchmark in
accordance with paragraphs (a), (b), and (c)(2) of this section. In no
event may the present value (in the year of receipt of the contingent
liability loan) of the amounts calculated under this paragraph exceed
the principal of the loan.
(2) Treatment as grants. If, at any point in time, the Secretary
determines that the event upon which repayment depends is not a viable
contingency, the Secretary will treat the outstanding balance of the
loan as a grant received in the year in which this condition manifests
itself.
Sec. 351.506 Loan guarantees.
(a) Benefit.--(1) In general. In the case of a loan guarantee, a
benefit exists to the extent that the total amount a firm pays for the
loan with the government-provided guarantee is less than the total
amount the firm would pay for a comparable commercial loan that the
firm could actually obtain on the market absent the government-provided
guarantee, including 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. 351.505(a).
(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 respondent provides
evidence demonstrating that it is 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
in the year in which the firm otherwise would have had to make a
payment on the comparable commercial loan.
(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. 351.505(c) regarding loans.
Sec. 351.507 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.
(2) Private investor prices available.--(i) In general. Except as
provided in paragraph (a)(2)(iii) of this section, 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 shares is greater than the price paid
by private investors for the same (or similar form of) newly issued
shares.
(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 newly issued shares made reasonably concurrently
with the newly issued shares 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 shares are not significant.
(iv) Adjustments for ``similar'' form of equity. Where the
Secretary uses private investor prices for a form of shares that is
similar to the newly issued shares 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
shares.
(3) Actual private investor prices unavailable.--(i) In general. If
actual private investor prices are not available under paragraph (a)(2)
of this section, the Secretary will determine whether the firm funded
by 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 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. The Secretary may, in appropriate
circumstances, focus its equityworthiness analysis on a project rather
than the company as a whole. In making the equityworthiness
determination, the Secretary may examine the following factors, among
others:
(A) Objective analyses of the future financial prospects of the
recipient firm or the project as indicated by, inter alia, market
studies, economic forecasts, and project or loan appraisals prepared
prior to the government-provided equity infusion in question;
(B) Current and past indicators of the recipient firm's financial
health calculated from the firm's statements and accounts, adjusted, if
appropriate, to conform to generally accepted accounting principles;
(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.
[[Page 65411]]
(ii) Significance of a pre-infusion objective analysis. For
purposes of making an equityworthiness determination, the Secretary
will request and normally require from the respondents the information
and analysis completed prior to the infusion, upon which the government
based its decision to provide the equity infusion (see, paragraph
(a)(4)(i)(A) of this section). Absent the existence or provision of an
objective analysis, containing information typically examined by
potential private investors considering an equity investment, the
Secretary will normally determine that the equity infusion received
provides a countervailable benefit within the meaning of paragraph
(a)(1) of this section. The Secretary will not necessarily make such a
determination if the absence of an objective analysis is consistent
with the actions of reasonable private investors in the country in
question.
(iii) 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 where firm is equityworthy. If the Secretary determines
that the firm or project was equityworthy (see paragraph (a)(4) of this
section), the Secretary will examine the terms and the nature of the
equity purchased to determine whether the investment was otherwise
inconsistent with the usual investment practice of private investors.
If the Secretary determines that the investment was inconsistent with
usual private investment practice, the Secretary will determine the
amount of the benefit conferred on a case-by-case basis.
(6) Benefit where firm is unequityworthy. If the Secretary
determines that the firm or project was unequityworthy (see paragraph
(a)(4) of this section), a benefit to the firm exists in the amount of
the equity infusion.
(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)(1) 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 on the date on which the firm received
the equity infusion.
(c) Allocation of benefit to a particular time period. The benefit
conferred by an equity infusion shall be allocated over the same time
period as a non-recurring subsidy. See Sec. 351.524(d).
Sec. 351.508 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 for
eliminating or reducing the firm's debt obligation, the Secretary will
determine the existence of a benefit under Sec. 351.507 (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.--(1) In
general. The Secretary will treat the benefit determined under
paragraph (a) of this section as a non-recurring subsidy, and will
allocate the benefit to a particular year in accordance with
Sec. 351.524(d).
(2) 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. 351.505(c) (loans).
Sec. 351.509 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. 351.505. The Secretary will use a short-term interest rate as the
benchmark for tax deferrals of one year or less. The Secretary will use
a long-term interest rate as the benchmark for tax deferrals of more
than one year.
(b) Time of receipt of benefit.--(1) Exemption or remission of
taxes. 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 on the date on which the recipient firm would otherwise
have had to pay the taxes associated with the exemption or remission.
Normally, this date will be the date on which the firm filed its tax
return.
(2) Deferral of taxes. In the case of a tax deferral of one year or
less, the Secretary normally will consider the benefit as having been
received on 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. 351.510 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. 351.505. The Secretary will use a short-term interest
rate as the benchmark for tax deferrals of one year or less. The
Secretary will use a long-term interest rate as the benchmark for tax
deferrals of more than one year.
(b) Time of receipt of benefit.--(1) Exemption or remission of
taxes. 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
[[Page 65412]]
otherwise would be required to pay the indirect tax or import charge.
(2) Deferral of taxes. 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 on 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 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. 351.511 Provision of goods or services.
(a) Benefit.--(1) In general. In the case where goods or services
are provided, a benefit exists to the extent that such goods or
services are provided for less than adequate remuneration. See section
771(5)(E)(iv) of the Act.
(2) ``Adequate Remuneration'' defined.--(i) In general. The
Secretary will normally seek to measure the adequacy of remuneration by
comparing the government price to a market-determined price for the
good or service resulting from actual transactions in the country in
question. Such a price could include prices stemming from actual
transactions between private parties, actual imports, or, in certain
circumstances, actual sales from competitively run government auctions.
In choosing such transactions or sales, the Secretary will consider
product similarity; quantities sold, imported, or auctioned; and other
factors affecting comparability.
(ii) Actual market-determined price unavailable. If there is no
useable market-determined price with which to make the comparison under
paragraph (a)(2)(i) of this section, the Secretary will seek to measure
the adequacy of remuneration by comparing the government price to a
world market price where it is reasonable to conclude that such price
would be available to purchasers in the country in question. Where
there is more than one commercially available world market price, the
Secretary will average such prices to the extent practicable, making
due allowance for factors affecting comparability.
(iii) World market price unavailable. If there is no world market
price available to purchasers in the country in question, the Secretary
will normally measure the adequacy of remuneration by assessing whether
the government price is consistent with market principles.
(iv) Use of delivered prices. In measuring adequate remuneration
under paragraph (a)(2)(i) or (a)(2)(ii) of this section, the Secretary
will adjust the comparison price to reflect the price that a firm
actually paid or would pay if it imported the product. This adjustment
will include delivery charges and import duties.
(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 normally
allocate (expense) the benefit to the year in which the benefit is
considered to have been received under paragraph (b) of this section.
In the case of the provision of infrastructure, the Secretary will
normally treat the benefit as non-recurring and will allocate the
benefit to a particular year in accordance with Sec. 351.524(d).
(d) Exception for general infrastructure. A financial contribution
does not exist in the case of the government provision of general
infrastructure. General infrastructure is defined as infrastructure
that is created for the broad societal welfare of a country, region,
state or municipality.
Sec. 351.512 Purchase of goods. [Reserved]
Sec. 351.513 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 on 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. 351.514 Export subsidies.
(a) In general. 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 export
performance. In applying this section, the Secretary will consider a
subsidy to be contingent upon export performance if the provision of
the subsidy is, in law or in fact, tied to actual or anticipated
exportation or export earnings, alone or as one of two or more
conditions.
(b) Exception. 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. 351.515 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 on 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. 351.516 Price preferences for inputs used in the production of
goods for export.
(a) Benefit.--(1) In general. In the case of a program involving
the provision by governments or their agencies, either directly or
indirectly through government-mandated schemes, of imported or domestic
products or services for use in the production of exported goods, a
benefit exists to the extent that the Secretary determines that
[[Page 65413]]
the terms or conditions on which the products or services are provided
are more favorable than the terms or conditions applicable to the
provision of like or directly competitive products or services for use
in the production of goods for domestic consumption unless, in the case
of products, such terms or conditions are not more favorable than those
commercially available on world markets to exporters.
(2) Amount of benefit. In the case of products provided under such
schemes, the Secretary will determine the amount of the benefit by
comparing the price of products used in the production of exported
goods to the commercially available world market price of such
products, inclusive of delivery charges.
(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. 351.517 Exemption or remission upon export of indirect taxes.
(a) Benefit. In the case of the exemption or remission upon export
of indirect taxes, a benefit exists to the extent that the Secretary
determines that the amount remitted or exempted 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 exemption or
remission upon export of an indirect tax, 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. Normally,
the Secretary will allocate (expense) the benefit from the exemption or
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. 351.518 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, or if the
exemption covers taxes other than indirect taxes that are imposed on
the input. 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, and the amount of charges other than import
charges covered by the exemption.
(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 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.
(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 exists to the extent
that the deferral extends to inputs that are not consumed in the
production of the exported product, making normal allowance for waste,
and the government does not charge appropriate interest on the taxes
deferred. If the Secretary determines that a benefit exists, the
Secretary will normally treat the deferral as a government-provided
loan in the amount of the tax deferred, according to the methodology
described in Sec. 351.505. The Secretary will use a short-term interest
rate as the benchmark for tax deferrals of one year or less. The
Secretary will use a long-term interest rate as the benchmark for tax
deferrals of more than one year.
(4) Exception. Notwithstanding the provisions in paragraphs (a)(1),
(a)(2), and (a)(3) of this action, the Secretary will consider the
entire amount of the exemption, remission or deferral 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 to confirm which indirect
taxes are imposed on these inputs, 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, if the system or procedure is not reasonable, or if
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, in what amounts, and which indirect taxes are imposed
on the inputs.
(b) Time of receipt of benefit. In the case of the exemption,
remission, or deferral of priorstage 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, on the date the
deferred tax became due; and
(4) In the case of a multi-year deferral, 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 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. 351.519 Remission or drawback of import charges upon export.
(a) Benefit.--(1) In general. The term ``remission or drawback''
includes full or partial exemptions and deferrals of import charges.
(i) Remission or drawback of import charges. In the case of the
remission or
[[Page 65414]]
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 that
are consumed in the production of the exported product, making normal
allowances for waste.
(ii) Exemption of import charges. In the case of an exemption of
import charges upon export, 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 allowances for waste, or if the
exemption covers charges other than import charges that are imposed on
the input.
(iii) Deferral of import charges. In the case of a deferral, a
benefit exists to the extent that the deferral extends to inputs that
are not consumed in the production of the exported product, making
normal allowance for waste, and the government does not charge
appropriate interest on the import charges deferred.
(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 drawn back exceeds the amount of the import charges
levied initially on the imported inputs for which drawback is claimed.
(3) Amount of the benefit.--(i) Remission or drawback of import
charges. 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 drawn back and the
amount paid on imported inputs consumed in production for which
remission or drawback was claimed.
(ii) Exemption of import charges. If the Secretary determines that
the exemption of import charges upon export confers a benefit, the
Secretary normally will consider the amount of the benefit to be the
import charges that otherwise would have been paid on the inputs not
consumed in the production of the exported product, making normal
allowance for waste, and the amount of charges other than import
charges covered by the exemption.
(iii) Deferral of import charges. If the Secretary determines that
the deferral of import charges upon export confers a benefit, the
Secretary will normally treat a deferral as a government-provided loan
in the amount of the import charges deferred on the inputs not consumed
in the production of the exported product, making normal allowance for
waste, according to the methodology described in Sec. 351.505. The
Secretary will use a short-term interest rate as the benchmark for
deferrals of one year or less. The Secretary will use a long-term
interest rate as the benchmark for deferrals of more than one year.
(4) Exception. Notwithstanding paragraph (a)(3) of this section,
the Secretary will consider the entire amount of an exemption,
deferral, remission or drawback 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, if the system or procedure is not reasonable, or if
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, and in what amounts.
(b) Time of receipt of benefit. In the case of the exemption,
deferral, remission or drawback, including substitution drawback, of
import charges, the Secretary normally will consider the benefit as
having been received:
(1) In the case of remission or drawback, as of the date of
exportation;
(2) In the case of an exemption, as of the date of the exportation;
(3) In the case of a deferral of one year or less, on the date the
import charges became due; and (4) In the case of a multi-year
deferral, 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 from the
exemption, deferral, 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. 351.520 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. 351.521 Import substitution subsidies. [Reserved]
Sec. 351.522 Green light and green box subsidies.
(a) Certain agricultural subsidies. The Secretary will treat as
non-countervailable domestic support measures that are provided to
certain agricultural products (i.e., products listed in Annex 1 of the
WTO 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:
(1) Is provided through a publicly-funded government program
(including government revenue foregone) not involving transfers from
consumers;
(2) Does not have the effect of providing a price support to
producers; and (3) Meets the relevant policy-specific criteria and
conditions set out in paragraphs 2 through 13 of Annex 2.
(b) Research subsidies. In accordance with section
771(5B)(B)(iii)(II) of the Act, the Secretary will examine the total
eligible costs to be incurred over the
[[Page 65415]]
duration of a particular project to determine whether a subsidy for
research activities exceeds 75 percent of the costs of industrial
research, 50 percent of the costs of precompetitive development
activity, or 62.5 percent of the costs for a project that includes both
industrial research and precompetitive activity. If the Secretary
determines that, at some point over the life of a particular project,
these relevant thresholds will be exceeded, the Secretary will treat
the entire amount of the subsidy as countervailable.
(c) Subsidies for adaptation of existing facilities to new
environmental requirements. If the Secretary determines that a subsidy
is given to upgrade existing facilities to environmental standards in
excess of minimum statutory or regulatory requirements, the subsidy
will not qualify for non-countervailable treatment under section
771(5B)(D) of the Act and the Secretary will treat the entire amount of
the subsidy as countervailable.
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 exists:
(A) The supplier of the input product and the producer of the
subject merchandise are affiliated;
(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 or any other
surrogate price deemed appropriate by the Secretary.
For purposes of this section, such prices must be reflective of a
time period that reasonably corresponds to the time of the purchase of
the input.
(2) Use of delivered prices. The Secretary will use a delivered
price whenever the Secretary uses the price of an 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 Allocation of benefit to a particular time period.
Unless otherwise specified in Secs. 351.504-351.523, the Secretary
will allocate benefits to a particular time period in accordance with
this section.
(a) Recurring benefits. The Secretary will allocate (expense) a
recurring benefit to the year in which the benefit is received.
(b) Non-recurring benefits. (1) In general. The Secretary will
normally allocate a non-recurring benefit to a firm over the number of
years corresponding to the average useful life (``AUL'') of renewable
physical assets as defined in paragraph (d)(2) of this section.
(2) Exception. The Secretary will normally allocate (expense) non-
recurring benefits provided under a particular subsidy program to the
year in which the benefits are received if the total amount approved
under the subsidy program is less than 0.5 percent of relevant sales
(e.g., total sales, export sales, the sales of a particular product, or
the sales to a particular market) of the firm in question during the
year in which the subsidy was approved.
(c) ``Recurring'' versus ``non-recurring'' benefits.--(1) Non-
binding iIlustrative lists of recurring and non-recurring benefits. The
Secretary normally will treat the following types of subsidies as
providing recurring benefits: Direct tax exemptions and deductions;
exemptions and excessive rebates of indirect taxes or import duties;
provision of goods and services for less than adequate remuneration;
price support payments; discounts on electricity, water, and other
utilities; freight subsidies; export promotion assistance; early
retirement payments; worker assistance; worker training; wage
subsidies; and upstream subsidies. The Secretary normally will treat
the following types of subsidies as providing non-recurring benefits:
equity infusions, grants, plant closure assistance, debt forgiveness,
coverage for operating losses, debt-to-equity conversions, provision of
non-general infrastructure, and provision of plant and equipment.
(2) The test for determining whether a benefit is recurring or non-
recurring. If a subsidy is not on the illustrative lists, or is not
addressed elsewhere in these regulations, or if a party claims that a
subsidy on the recurring list should be treated as non-recurring or a
subsidy on the non-recurring list should be treated as recurring, the
Secretary will consider the following criteria in determining whether
the benefits from the subsidy
[[Page 65416]]
should be considered recurring or non-recurring:
(i) Whether the subsidy is exceptional in the sense that the
recipient cannot expect to receive additional subsidies under the same
program on an ongoing basis from year to year;
(ii) Whether the subsidy required or received the government's
express authorization or approval (i.e., receipt of benefits is not
automatic), or
(iii) Whether the subsidy was provided for, or tied to, the capital
structure or capital assets of the firm.
(d) Process for allocating non-recurring benefits over time.--(1)
In general. For purposes of allocating a non-recurring benefit over
time and determining the annual benefit amount that should be assigned
to a particular year, the Secretary will use the following formula:
[GRAPHIC] [TIFF OMITTED] TR25NO98.006
Where:
Ak = the amount of the benefit allocated to year k,
y = the face value of the subsidy,
n = the AUL (see paragraph (d)(2) of this section),
d = the discount rate (see paragraph (d)(3) of this section), and
k = the year of allocation, where the year of receipt = 1 and 1
k n.
(2) AUL.--(i) In general. The Secretary will presume the allocation
period for non-recurring subsidies to be the AUL of renewable physical
assets for the industry concerned as listed in the Internal Revenue
Service's (``IRS'') 1977 Class Life Asset Depreciation Range System
(Rev. Proc. 77-10, 1977-1, C.B. 548 (RR-38)), as updated by the
Department of Treasury. The presumption will apply unless a party
claims and establishes that the IRS tables do not reasonably reflect
the company-specific AUL or the country-wide AUL for the industry under
investigation, subject to the requirement, in paragraph (d)(2)(ii) of
this section, that the difference between the company-specific AUL or
country-wide AUL for the industry under investigation and the AUL in
the IRS tables is significant. If this is the case, the Secretary will
use company-specific or country-wide AULs to allocate non-recurring
benefits over time (see paragraph (d)(2)(iii) of this section).
(ii) Definition of ``significant.'' For purposes of this paragraph
(d), significant means that a party has demonstrated that the company-
specific AUL or country-wide AUL for the industry differs from AUL in
the IRS tables by one year or more.
(iii) Calculation of a company-specific or country-wide AUL. A
calculation of a company-specific AUL will not be accepted by the
Secretary unless it satisfies the following requirements: the company
must base its depreciation on an estimate of the actual useful lives of
assets and it must use straight-line depreciation or demonstrate that
its calculation is not distorted through irregular or uneven additions
to the pool of fixed assets. A company-specific AUL is calculated by
dividing the aggregate of the annual average gross book values of the
firm's depreciable productive fixed assets by the firm's aggregated
annual charge to accumulated depreciation, for a period considered
appropriate by the Secretary, subject to appropriate normalizing
adjustments. A country-wide AUL for the industry under investigation
will not be accepted by the Secretary unless the respondent government
demonstrates that it has a system in place to calculate AULs for its
industries, and that this system provides a reliable representation of
AUL.
(iv) Exception. Under certain extraordinary circumstances, the
Secretary may consider whether an allocation period other than AUL is
appropriate or whether the benefit stream begins at a date other than
the date the subsidy was bestowed.
(3) Selection of a discount rate. (i) In general. The Secretary
will select a discount rate based upon data for the year in which the
government agreed to provide the subsidy. The Secretary will use as a
discount rate the following, in order of preference:
(A) 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;
(B) The average cost of long-term, fixed-rate loans in the country
in question; or
(C) A rate that the Secretary considers to be most appropriate.
(ii) Exception for uncreditworthy firms. In the case of a firm
considered by the Secretary to be uncreditworthy (see
Sec. 351.505(a)(4)), the Secretary will use as a discount rate the
interest rate described in Sec. 351.505(a)(3)(iii).
Sec. 351.525 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 or products 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
sales value used in the denominator.
(b) Attribution of subsidies. (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. The Secretary will attribute a domestic
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 production of an input
product, then the Secretary will attribute the subsidy to both the
input and downstream products produced by a 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 subject merchandise, the
Secretary will attribute the subsidies received by either or both
corporations to the products produced by both corporations.
(iii) Holding or parent companies. If the firm that received a
subsidy is a holding company, including a parent company with its own
operations, the Secretary will attribute the subsidy to the
consolidated sales of the holding company and its subsidiaries.
However, if the 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.
[[Page 65417]]
(iv) Input suppliers. If there is cross-ownership between an input
supplier and a downstream producer, and production of the input product
is primarily dedicated to production of the downstream product, the
Secretary will attribute subsidies received by the input producer to
the combined sales of the input and downstream products produced by
both corporations (excluding the sales between the two corporations).
(v) Transfer of subsidy between corporations with cross-ownership
producing different products. In situations where paragraphs (b)(6)(i)
through (iv) of this section do not apply, 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.
(vi) Cross-ownership defined. Cross-ownership exists between two or
more corporations where one corporation can use or direct the
individual assets of the other corporation(s) in essentially the same
ways it can use its own assets. Normally, this standard will be met
where there is a majority voting ownership interest between two
corporations or through common ownership of two (or more) corporations.
(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
country of the government that granted the subsidy. However, if it is
demonstrated that the subsidy was tied to more than domestic
production, the Secretary will attribute the subsidy to multinational
production.
(c) Trading companies. Benefits from subsidies provided to a
trading company which exports subject merchandise shall be cumulated
with benefits from subsidies provided to the firm which is producing
subject merchandise that is sold through the trading company,
regardless of whether the trading company and the producing firm are
affiliated.
Sec. 351.526 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 result 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, in an investigation, 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. 351.527 Transnational subsidies.
Except as otherwise provided in section 701(d) of the Act
(subsidies provided to international consortia) and section 771A of the
Act (upstream subsidies), a subsidy does not exist if the Secretary
determines that the funding for the subsidy is supplied in accordance
with, and as part of, a program or project funded:
(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.
4. Section 351.301 of subpart C is amended by adding the following
paragraphs (d)(6) and (7) to read as follows:
Sec. 351.301(d) Time limits for submission of factual information.
* * * * *
(d) * * *
(6) Green light and Green box claims. (i) In general. A claim that
a particular subsidy or subsidy program should be accorded non-
countervailable status under section 771(5B),(C), or (D) of the Act
(``green light subsidies'') or under section 771(5B)(F) of the Act
(``green box subsidies'' must be made by the competent government with
the full participation of the government authority responsible for
funding and/or administering the program. Such claims are due no later
than:
(i) In a countervailing duty investigation, 40 days before the
scheduled date of the preliminary determination, or
(ii) In an administrative review, new shipper review, or changed
circumstance review, 20 days afer all responses to the initial
questionnaires are filed with the Department, unless the Secretary
alters this time limit.
(7) Investigation of notified subsidies. If the Secretary
determines that there is insufficient evidence to demonstrate that an
alleged subsidy or subsidy program has been notified under Article 8.3
of the WTO Subsidies and Countervailing Measures Agreement, the alleged
subsidy or subsidy program will be included in the countervailing duty
investigation or administrative, new shipper, or changed circumstance
review. If the government authority claiming green light status
establishes to the Secretary's satisfaction that the alleged subsidy or
subsidy program has been notified, the Secretary will terminate the
investigation of the notified subsidy.
5. Subpart G (Applicability Dates) is amended by adding the
following Sec. 351.702, to read as follows:
Sec. 351.702 Applicability dates for countervailing duty regulations.
(a) Notwithstanding Sec. 351.701, the regulations in subpart E of
this part apply to:
(1) All CVD investigations initiated on the basis of petitions
filed after December 28, 1998;
(2) All CVD administrative reviews initiated on the basis of
requests filed on
[[Page 65418]]
or after the first day of January 1999; and
(3) To all segments of CVD proceedings self-initiated by the
Department after December 28, 1998.
(b) Segments of CVD proceedings to which subpart E of this part
does not apply will continue to be guided by the Department's previous
methodology (in particular, as described in the 1989 Proposed
Regulations), except to the extent that the previous methodology was
invalidated by the URAA, in which case the Secretary will treat subpart
E of this part as a restatement of the Department's interpretation of
the requirements of the Act as amended by the URAA.
[FR Doc. 98-30565 Filed 11-24-98; 8:45 am]
BILLING CODE 3510-DS-P
