Subsidies Agreement : Countervailing Duty Perspective

Approach to subsidisationASCM

Disciplines on flexibility to subsidize Calibrated approach to disciplines against subsidisation

Categorisation
Prohibited Subsidy Art. 3 Actionable subsidies Non-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

Non-actionable subsidy
No action can be taken against subsidies that are non-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

S&D Provisions
Flexibilities for Annex VII countries including India Export subsidies not prohibited (Art 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

Financial 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.

Footnote 1- Important exemption

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 De-facto specific subsidies

Specific Subsidies de-jure

A subsidy is de-jure specific if 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.

De-facto Specificity [2.1(c)]

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 Annex I Remedy through DSU Defaulting member required to withdraw the subsidy or face counter- 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.

Substitution Drawback Schemes

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

Countervailing Duty Investigation

Provisions are in Articles 10-23 of the Subsidies Agreement Basics are similar to those in antidumping investigation. However, pre-initiation consultations with 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 multiyear 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 presumptively 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 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 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

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)

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 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 plus 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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