WORLD TRADE  
ORGANIZATION  TN/RL/GEN/7 
14 July 2004 
 (04-3030) 
Negotiating Group on Rules Original:   English 
 
  
BENEFIT PASS-THROUGH 
 
Communication from Canada
 
 
 The following communication, dated 21 May 2004, is being circulated at the request of the Delegation of Canada. 
 
 The submitting delegation has requested that this paper, which was submitted to the Rules 
Negotiating Group as an informal document (JOB(04)/55), also be circulated as a formal document. 
 
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I. ISSUE 
1. It is well-established in GATT/WTO jurispr udence that, where the recipient of a financial 
contribution and the alleged recipient of the resulti ng benefit are different entities, the investigating 
authority cannot presume a benefit pass-through, bu t rather, must examine whether, and to what 
extent, the benefit of the financial contribution has actually been passed through to the other entity.
1   
                                                      
 1 In the United States – Pork  panel report (adopted on 11 July 1991), the panel held that, because swine 
producers and pork producers were separate industries operating at arms length, the Department of Commerce 
should have examined whether and to what extent the subsidies bestowed on the upstream producers benefited the downstream producers.  In a somewhat different (i.e. pre-privatization subsidy) context, the panel in US – 
Lead and Bismuth II (WT/DS/138/R) stated that:  “A ‘financial contribution’ does not have to be bestowed 
directly on a company in order to confer a ‘benefit’ on that company.  For example, one company may be found 
to ‘benefit’ from a ‘financial contribution’ conferred on another company.”   The Appellate Body report 
(WT/DS138/AB/R, adopted on 7 June 2000) however went on to clarify that a pre-privatization subsidy cannot 
be deemed to confer a benefit to a successor company.  The panel in United States – Preliminary Determination 
with respect to Certain Softwood Lumber from Canada  (WT/DS236/R, adopted on 1 November 2002) held that:   
An authority may not assume that a subsidy provided to producers of the ‘upstream’ input product 
automatically benefits unrelated producers of downstream products, especially if there is evidence on the 
record of arms-length transactions between the two.  Rather, we consider that in such circumstances the 
investigating authority should examine whether and to what extent the subs idies bestowed on the 
upstream producers benefited the downstream producers.  
Most recently, the panel in United States – Final Countervailing Duty Determination with respect to 
Certain Softwood Lumber from Canada (WT/DS257/R of 29 August 2003) reaffirmed the finding in 
United States – Pork, i.e: 
 
Our analysis is consistent with the findings of the 1990 GATT Panel on US – Canadian Pork… That 
panel found, as we do, that investigating authorities had the affirmative obligation to make a 
determination of subsidization in respect of a product, and could not simply assume such subsidization 
where the subsidies were bestowed in respect of a product (the input product) that was different from the product subject to countervailing duty, and where the input producers were unrelat ed to the producers of 
that subject merchandise.   TN/RL/GEN/7 
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 The current SCM Agreement does not, however, afford any direct guidance on the conduct of pass-
through analyses. 
 
2. In the absence of explicit guidance for the co nduct of pass-through analyses, there is greater 
scope for the authorities of a Member to apply coun tervailing measures on imports of subject goods 
on the basis of a perfunctory or pro forma pass-through analysis.  By the same token, the provision of 
meaningful guidance for the conduct of such analyses  could assist investigating authorities in rooting 
out certain trade-distorting subsidies that might otherwise go undetected and unaddressed. This 
document does not purport to be an exhaustive enumer ation of issues relating to pass-through; it is 
simply intended to promote a technical discussion of  the matter.  In this regard, Canada reserves its 
right to offer additional thoughts.  
II. GENERAL PRINCIPLES 
 3. The conferral of an indirect subsidy via a benefit pass-through can be schematically depicted 
as follows:    
 
 
 
4. Of course, whether or not an upstream recipi ent of a financial contribution appropriates all or 
part of the benefit of that contribution or passe s it through to a downstream enterprise will depend 
upon the particular circumst ances of each case.  It would, however , be useful to include an illustrative       
   
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  
Of course, whether or GOVERNMENT GRANTING AUTHORITY 
SCM Agreement Art. 1.1(a)(1) Financial Contribution 
1.1(a)(1)(i)    Direct Transfer of  
Funds or Potential  
Direct Transfer of  
Funds/Liabilities   
  1.1(a)(1)(ii) Revenue Forgone or 
Not Collected 
  1.1(a)(1)(iii) Provision of Goods/ 
Services (other than 
General Infrastructure) 
or Purchase of Goods   
 
 
 
  1.1(a)(1)(iv)    
 
  
-  or  -   
Entrust/Direct    in respect of  
1.1(a)(1)(i)  –   1.1(a)(1)(iii)    Payment into a  
Funding  
Mechanism    
Private Body    
Art. 1.1(b)  Benefit Conferred 
 DIRECT SUBSIDY TO “A” (Receives a financial 
contribution and a 
benefit) 
  “ A” is found to have passed  
all/part of benefit through to “B”    
     
INDIRECT SUBSIDY    TO “B”    ( Receives a passed through  
benefit )         TN/RL/GEN/7 
 Page 3 
 
 
 list of relevant factors to consider in the SCM Ag reement to guide investigating authorities in the 
conduct of pass-through analyses and to assist dispute settlement panels in the consideration of such 
issues.      
 
III. PROPOSED AMENDMENTS 
 
5. It is proposed that a new footnote be added to current Article 1.1(b) of the SCM Agreement that essentially codifies existing GATT/WTO jurisprudence to the effect that pass-through cannot be 
presumed, but rather, must be demonstrated, i.e:  
 
“Where the recipient of a financial cont ribution and the recipient of the resulting 
benefit operate at arm’s length from one another, the investigating authority shall 
examine whether, and to what extent, the benefit of the financial contribution was 
passed through from the former to the latter, in accordance with the provisions of 
Annex VIII.” 
6. It is also proposed that an Annex VIII be added to the SCM Agreement on “Guidelines for 
Benefit Pass-Through Analyses” , which includes the following elements:  
 
 (a) Presumption : Transactions between entities oper ating at arms length from one 
another shall be subject to a rebuttable pr esumption that the benefit of a financial 
contribution to one entity has not been passed  through, either in whole or in part, to 
the other. 
 
 (b) Relevant Considerations : In determining whether the benefit of a financial 
contribution to one entity has been passed through, either in whole or in part, to 
another entity, the following factors shall be considered:  
 
  - Where the recipient of the government financial contribution provides goods 
or services to, or purchases goods or services from, an arm’s-length entity, 
whether the provision or purchase is for less than adequate remuneration 
determined in relation to prevailing market conditions for such goods or 
services in the country of provision or purchase (including price, quality, 
availability, marketability, transportation and other conditions of purchase or sale); 
 
  - Where the recipient of the government financial contribution provides goods 
or services to, or purchases goods or services from, an arm’s-length entity 
ostensibly for adequate remuneration, whether there existed a compensatory 
arrangement or other collateral agre ement between the entities (i.e. an 
agreement between the two entities on ma tters falling outside the scope of 
what is normally understood to be “conditions of purchase or sale”), or 
whether there was an entrustment or direction by the government granting 
authority to pass the benefit through at the downstream level to the other 
arm’s-length entity;  and 
 
  - The conditions of competition in the market.
2 
 
                                                      
2 The term “conditions of competition” is already used in Article 15.3 of the SCM Agreement.  An 
analysis of the conditions of competition in the context of a pass-through determination would include an 
assessment of the intensity of price competition among the upstream players.  Among the factors that might be 
relevant to such an analysis would be the downstream price-elasticity of demand for the upstream input product.  TN/RL/GEN/7 
Page 4  
 
  (c) Non-Attribution Requirement :  The investigating authority shall also consider whether 
factors other than the pass-through of bene fits have affected the price of goods or 
services and such price effects shall not be a ttributed to the pass-through of benefits.    
 
7. The above does not purport to be an exhaustive enumeration of relevant factors that would 
appear in an Annex VIII. 
 
 
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