Subsidies Agreement : Countervailing Duty Perspective

Approach to subsidisationsubsidisationASCM

 Disciplines on flexibility to subsidize  Calibrated approach to disciplines against subsidisation

Categorisation
Prohibited Subsidy Art. 3 Actionable subsidies NonNon-actionable subsidies

Actionable subsidy
 Specific subsidies causing adverse effects (injury, serious prejudice, nullification and impairment) are actionable  Action and DSU panel process in all cases and through countervailing duty investigation for imports  Remedy is removal of adverse effects of the subsidy or imposition of countervailing duty on imports

NonNon-actionable subsidy
 No action can be taken against subsidies that are nonnon-specific - determined on the basis of  Eligibility based on objective criteria or conditions  Eligibility automatic, criteria strictly adhered to  Criteria are neutral, economic in nature and horizontal in application  No predominant use by certain enterprises  Up to 1999 specific given for R &D, assistance to disadvantaged regions and for environmental purposes were non-actionable. Now lapsed non-actionable.

S&D Provisions
 Flexibilities for Annex VII countries including India  Export subsidies not prohibited (Art 27. 27.2(a)) subject to reaching export competitiveness  Enhanced subsidy margin of 3% and volume of subsidized imports of 4% / 9% not subject to countervailing duties

What is relevant for Countervailing duty Investigation

Definition of subsidy Understanding specificity Quantification of the subsidy Calculation of the duty Injury and Causality

When Does Subsidy Exist- Art 1 ExistFinancial contribution  Direct / potential direct transfer of funds  Revenue otherwise due foregone  Provision of goods or services excluding general infrastructure  Entrustment by Government of above functions Or Income / price support AND Benefit thereby conferred. conferred.

Footnote 1- Important exemption 1 Exemption of an exported product  From duties or taxes borne by a like product destined for domestic consumption  Not deemed a subsidy

Specific Subsidies
         Article 1.2 provides that a subsidy shall be countervailable only if such a subsidy is specific Criteria for specificity Prohibited subsidies Enterprise specificity Industry specificity Regional specificity Two broad categories in Article 2 De jure specific subsidies DeDe-facto specific subsidies

Specific Subsidies de-jure de A subsidy is de-jure specific if de Access to the subsidy explicitly limited to certain enterprises. If access is limited based on objective criteria then it would not be a specific subsidy  Prohibited subsidies are deemed specific  To be determined with reference to the jurisdiction of the granting authority.

DeDe-facto Specificity [2.1(c)]

non Notwithstanding any appearance of nonspecificity, the subsidy may in fact be specific. Following factors may be considered  Use by a limited number of enterprises  Predominant use by certain enterprises  Granting of disproportionately large amounts to certain enterprises  Manner in which discretion has been exercised.

Prohibited Subsidies
 Local content subsidies  Export subsidies-Illustrative List in subsidiesAnnex I  Remedy through DSU  Defaulting member required to withdraw the subsidy or face countercounter- measures

Certain Exceptions from Prohibition in Annex I

 Exemption or remission of indirect taxes on export products  RED of prior stage cumulative indirect taxes on inputs used in production of the exported product provided this does not exceed corresponding RED on inputs used in the production of domestically sold like products item (h)  RED on prior stage cumulative indirect taxes on inputs consumed in production of the exported product. To be interpreted in accordance with guidelines in Annex II item (h)  Remission or drawback of import charges on imported inputs consumed in the production of the exported product. Substitution drawback schemes are permitted in accordance with guidelines in Annex III item (i)

Conditions for RED of Cumulative Indirect Taxes

 Inputs must have been consumed in the production process Physically incorporated inputs Energy, fuel, oil and catalysts  There must be a reasonable and effective verification system in place to confirm which inputs are consumed and in what amounts. amounts.

Substitution Drawback Schemes

 Home market inputs of same quality and characteristics as imported product are used in the production process. process.  Corresponding imports are made subsequently  The total period between export and import is not more than 2 years. years.

Countervailing Duty Investigation

 Provisions are in Articles 10-23 of 10the Subsidies Agreement  Basics are similar to those in antiantidumping investigation.  However, pre-initiation consultations prewith the exporting country provided for in Article 9  Govt. of the exporting country actively involved

Investigation - Main Requirements

Establishing specificity of the subsidies Calculating amount of subsidy per unit during the POI Establishing injury and causality due to subsidised imports

Calculation of the Amount of Subsidy

 Two broad approaches Cost to the government Benefit to the recipient  Article 14 specifies that for purposes of countervailing duty Benefit to the recipient approach to be followed

Benefit to Recipient Article 14

 Method to calculate benefit to recipient shall be provided for in national legislation or implementing regulation.  Any such method shall be consistent with the guidelines in Article 14

Pass through of benefit

 The benefit of a subsidy may pass through from the recipient of the financial contribution to other entities.  Even if the ultimate recipient of benefit has not received the financial contribution, a subsidy would exist if in fact some one has received it  Recipient of financial contribution and recipient of benefit could be different.  Establish pass through before countervailing indirect subsidies

Steps in Calculating the Subsidy

 Calculation should reflect the amount of subsidy found to exist during the period of investigation and not simply the face value of the financial contribution.  Check whether benefit is expensed during period of investigation. Else allocate  Calculate per unit subsidy (Article 19.4) during the period of investigation for each scheme  Arrive at the total per unit subsidy for all schemes.

Expense Vs. Allocation

 Under what circumstances should subsidies be allocated over some multimultiyear period, versus expensed during a single year?  In absence of allocation  A large subsidy would have no effects beyond the year in which granted  Subsidization amount would be overstated in certain cases.

Three presumptions for Allocation

 Subsidies linked to purchase of fixed assets to be allocated.  R&D subsidies to be presumptively allocated except, when demonstrated that doing so is inappropriate.  Non-recurring subsidies should be Nonpresumptively allocated, except when demonstrated that doing so is inappropriate.

General Principles for Allocation

 Affirmative answers to any one of the following would normally point towards allocation  Whether the purpose of the subsidy was for purchase of fixed assets  Whether non-recurring and / or large non Whether oriented towards future production  Whether consisting of equity infusion  Whether carried forward in recipients accounting records.

Allocation Vs. Expense Table

 Distribution of the table  General discussion

Calculation of Certain Types of Subsidy

 Grant  Loans  Loan guarantees  Provisions of goods and services by the government  Purchase of goods by government  Provision of equity capital

Grants
 Direct Transfer of funds :Amount received  Tax exemption: Amount of tax payable at applicable rate  Tax reduction: Amount of tax payable at applicable rate tax paid  Accelerated depreciation: Amount of tax payable under normal depreciation schedule amount actually paid  Interest rate subsidies: Amount of interest saved by the recipient  In all above cases add an amount for interest during period of investigation.

Loans from the Government Art 14 (b)

 Subsidy = Interest normally payable on comparable commercial loan during period of investigation amount of interest paid  Comparable commercial loan:a loan of a similar loan: amount with similar repayment period obtainable by the recipient from a representative private bank operating on the domestic market  Commercial interest rate  Preferably established on the basis of the rate actually paid by the concerned company on comparable loan from private bank.  If not, then interest paid on comparable loans to companies in similar financial situation in the same sector/in any sector sector/in

Loans Special Cases

 Tax deferrals, deferral of any other financial obligations treat as interest free loans  Reimbursable grants treat as interest free loans till reimbursed  Contingent liability loans at preferential interest rate treat as loans till determined that it would not be repaid.

Loan Guarantee [Art. 14 (c)]

 If not guarantee paid  Subsidy= amount of interest payable for comparable loan in absence of government guarantee amount of interest paid on the guaranteed loan.  If guarantee fee paid  No subsidy if fee is sufficient to enable the guarantee program to cover all its costs and earn a reasonable profit margin  If fee is not sufficient to enable operation on a commercial basis then treat as if no guarantee fee paid.

Provision of Goods and Services by the Government- Art. 14(d) Government Subsidy = Adequate remuneration for the product/service in relation to prevailing market conditions in the domestic market price paid by the firm  Adequacy of remuneration  Establish that same goods/services provided both by government and private operation  Subsidy = price charged by government price charged by private operators for comparable purchase to i) concerned company; else ii) comparable companies in the same sector; else iii) in the economy as a whole

Provisions of Goods or Services Government Monopoly

 Goods or services provided for less than adequate remuneration if certain enterprises benefit from preferential rate.  Amount of subsidy = normal price preferential price.  If normal price is insufficient to cover the suppliers average total costs plus a reasonable profit margin then,  Subsidy = Price which would cover total average costs plus a reasonable profit preferential price.

Adequacy of Remuneration Benchmarks

 Normally the prices at which the same or similar goods are sold by private suppliers in arms length transactions in the country of provision  In following situations prices other than private prices may be used  Monopoly supply by government  Government administratively controls the prices for the goods concerned  Private prices are distorted due to governments predominant role as a provider of the goods  In the above 3 situations any proxy price/constructed price may be used, ensuring that it relates to the prevailing market situation in the country of provision

Purchase of Goods by Government

 Subsidy = Price paid for the like product by government highest price offered for a comparable purchase of the same goods by the private sector  If concerned company makes no comparable sales to private operators, then  Subsidy = Price paid for the like product by government price paid by private operators to comparable companies in the same sector / in the economy as a whole

Government Monopoly in Purchase of Goods

 Subsidy = Amount paid by government for the goods adequate remuneration  Adequate remuneration = average cost incurred by the firm selling the product during POI plus reasonable amount of profit.

Government Provision of Equity Capital

 Not a subsidy unless investment decision is inconsistent with usual investment practice of private investors in the exporting country.  Subsidy = Price paid by the government for the shares normal market price for the shares  If no market is freely traded shares exists, scrutinize governments expectation of a return on price paid for equity

Expense Vs Allocation
 Two broad exercises required for allocation Attribution to the POI of a portion of subsidies granted before the POI but whose effects extend over a number of years Allocation of the subsidy amount attributed to POI to per unit of the like product.

Attribution of subsidies to POI

 For non-recurring subsidies non Linked for acquisition of fixed assets  Value of subsidy to be spread over normal life of the assets  Based on schedule of depreciation of assets in the industry involved  Use of straight line method common  If asset has life of 5 years then 20% of the subsidy attributed to POI.

Allocation of Subsidy to per unit of Like Product

 If export subsidies, then amount attributed to POI may be divided by export volume during POI  For non-export subsidies domestic nonplus export sales in POI to be used as denominator  If benefit of subsidy not limited to a particular product, total recipient sales to be used as denomenator.

Deduction from Amount of subsidy

 Following may be deducted from amount of subsidy  Application fee / other costs necessarily incurred to qualify for or obtain the subsidy  Must be shown that above payment compulsory to receive the subsidy. Payment should be to government.  Payment to private parties e.g. lawyers, accountants etc. for obtaining subsidy not deducted  Export taxes may be deducted if these continue to be levied at the time when duty is recommended.

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