RESTRICTED
WORLD TRADE S/WPGR/W/25
26January 1998
ORGANIZATION
(98-0286)
Working Party onGATS Rules
SUBSIDIES FOR SERVICES SECTORS
INFORMATION CONTAINED INWTO TRADE POLICY REVIEWS
Background Note bytheSecretariat
I. INTRODUCTION
1. Government assistance forindividual economic activities maybegranted inmany different
forms andforavariety ofpurposes. Responding toarequest bytheWorking Party onGATS Rules
(WPGR), thisNotepresents some empirical evidence, based on31WTO Trade Policy Reviews, of
subsidy programmes forservices sectors.1TheNotethusfocuses onaparticular policy instrument -
financial support -whose usemaybeaccompanied byavariety ofother measures, suchasregulated
prices andaccess conditions.
2. Given thedearth ofempirical information, TPRreports havenotalways beenabletoidentify
theinteraction ofsuchmeasures inindividual cases orgauge theirrelative importance. Similarly, it
hasproven difficult todetail theunderlying objectives ofvarious programmes which, forinstance,
maybesocial innature orbeinformed byindustrial policy considerations. (Aparticular support scheme
maybeintended mainly toimprove consumer welfare, upgrade sectoral performance, enhance overall
economic efficiency, orsimply shield vulnerable domestic suppliers fromimport competition.) Given
theinfrastructural importance ofmany services sectors andtheirrôleasgenerally available inputs,
itcould bemisleading inindividual casestoequate therecipients, e.g.railways, withactual beneficiaries
which mayinclude anysocial oreconomic group relying onrailtransport.
3. Although thisNoteisbased onallTrade Policy Reviews conducted since1995under theaegis
oftheWTO, itcannot claim togivearepresentative picture. First, theselection ofcountries forreview
doesnotreflect anyanalytical purposes, butthecountry schedule established bytheTrade Policy Review
Body. Second, coverage andcontent ofreports arelargely determined bytheavailability ofdata,which
inturndepends ongovernment co-operation, aswellastheSecretariat 'sassessment ofcountry-specific
review priorities atthetimeofdrafting. Thefactthatsome reports donotinclude subsidy-related
information, therefore, doesnotnecessarily point totheabsence ofsuchschemes inthecountries
concerned. Nevertheless, theTPRreports canbeconsidered areasonably comprehensive source of
information inthisarea. They normally takeintoaccount notonlymaterial provided bynational
governments, butanyadditional information deemed relevant, including reports byinternational
organizations oracademic research papers. Thefactual accuracy oftheindividual reports hasbeen
checked bythecountry under review. TheSecretariat isnotaware ofanyother mechanism which
would subject asimilarly wide range ofcountries, regardless ofgeographic location andlevel of
development, toindependent review.
1Pursuant totheTPR'smandate, thefourlargest entities inworld trade aretobereviewed every twoyears.
TheEuropean Union wasthuscovered twice during therelevant period.S/WPGR/W/25
Page2
II. CONCEPTS AND DEFINITIONS
4. Thesubsidy definition generally usedforTrade Policy Reviews isbased onthedefinition
established bytheWTO Agreement onSubsidies andCountervailing Measures. Accordingly, subsidies
aredeemed toinvolve afinancial contribution bygovernments orpublic bodies which confers abenefit.
TheTPRreports thuscover assistance granted intheformofdirect transfers offunds, including grants,
loans andequity infusions; potential direct transfers offunds orliabilities, e.g.loanguarantees;
government revenue foregone; supply ofgoods andservices otherthangeneral infrastructure; purchase
ofgoods; payments tofunding mechanisms; orincome andprice support.
5. Theapplication ofthisdefinition toservices producers hasnotappeared toposeproblems in
principle. However, itmayprove difficult inmany services areas toidentify theultimate beneficiary
ofasubsidy, given thatsupport mayhavebeendestined fordownstream users rather thantheimmediate
recipient. Moreover, some measures mayhavebeenintended primarily topromote public policy or
infrastructural objectives.2Theresulting ambiguities, inturn,could affect cross-country comparability.
III. POLICY PATTERNS
6. Available evidence suggests thatWTO Members tendtoconcentrate theirservices-related
subsidies onfoursectors: audiovisual services, airandmaritime transport, tourism, andbanking.
Ofthe44countries (including theindividual EUmember States) which havebeenreviewed under WTO
provisions, atleast17haveaided theiraudiovisual industries; 14havesought topromote investment
intheirhotel andtourism sector; 13havesupported theirnational airlines andalarge number seems
tohavesubsidized maritime transport (Table). Atleast10Members haveassisted theiroffshore banking
sector orrescued ailing domestic banks. Itisworth recalling, however, thatthese findings maybe
influenced bythereports 'focus onsectors where politically oreconomically important developments
areunder way.3
7. Acloser lookattheTable alsoreveals certain country-sector clusters. While thedevelopment
ofaudiovisual industries hasproved animportant concern forseveral industrial countries (including
Canada andEUMember States), programmes forhotel andother tourism sectors arebeing operated
mainly indeveloping countries. Possibly reflecting fiscal constraints, these programmes relymainly
ontaxholidays andother fiscal advantages anddonotnormally provide foractual disbursements.
8. Support schemes fortransport andfinancial services seem toexistacross thefullspectrum
ofWTO members. Anumber ofinitiatives mayhavebeenadhocinnature, driven bytheperceived
needtoprevent theimminent collapse oflarge banks, rather thantheresult oflonger-term policy
planning. Reflecting theemergency character ofmany aidpackages forbanks, governments have
frequently resorted toequity injections and,atleastonatemporary basis, acquired shares. Bycontrast,
support policies favouring national airlines orshipping companies have more often relied ontax
incentives.
2Forexample, theprovision ofbasic health services maybeensured through: (a)cost-free treatment in
state-ownedhospitals;(b)theextensionofpublicfundstocommer ciallyindependenthospitals;or(c)government-
sponsored premiums forbasic health insurance. While conferring thesame benefits tothesame target group,
suchmeasures might bedefined, respectively, astheprovision ofinfrastructural services, subsidies forthehealth
sector, social transfers and/or subsidies forinsurers.
3Asageneral feature, itappears thatareas suchastelecommunications, financial oraudiovisual services
have been reviewed inmore detail than, forexample, railorroadtransport andprofessional services.S/WPGR/W/25
Page3
Subsidies forindividual services sectors -information from TPR Reports, 1995 to1997
MEASURE Direct
grantsPreferential
credit &
guaranteesEquity
injections1Tax
incentivesDuty-free
inputs &
freezonesOther &
unspecified
measuresNumber
of
countriesSECTOR
Professional services Czech R. Cyprus 2
Telecommunication Domin. R.
Paraguay
UgandaCyprus 4
Audiovisual services Canada
Norway
AllEUMSAllEUMS 3
(17)3
Distribution Paraguay Cyprus Korea 3
Educational services Paraguay Bénin 2
Banking Brazil
Norway
Venezuela
Mexico
Paraguay
EU(France)Uganda Morocco
Cyprus
Mauritius10
Other financial
servicesParaguay Malaysia
MauritiusCyprus 4
Health services Czech R. Paraguay Bénin 3
Tourism (hotels) Morocco
Cyprus
FijiColombia
Japan
Venezuela
Zambia
Fiji
Malaysia
Costa Rica
Côted'Iv.
Uganda
Thailand
SriLanka
MauritiusColombia
Morocco
Fiji14
Recreation, culture
&sportsCanada Paraguay Cyprus 3
Maritime transport2Chile Norway
Cyprus
Malaysia
Fiji
Costa Rica
Thailand
MauritiusCyprus EUMS 10
(ca.20)3
Airtransport Czech R.
EUMS4Singapore
Costa Rica
Thailand
Mauritius6
(13)3
Railtransport Czech R.
NZealand
Mexico3
Road transport Czech R.
ChileUganda
Costa R.Zambia 5
Other &unspecified
sectorsUganda
Thailand
MauritiusBénin EUMS 5
(6-20)3
Number ofcases 14
(35)33 7 39
(53)316 2
(13-22)3
1 Includes capital injections intoailing banks. 2 Includescoastaltransport(Chile)andinter-islandtransport(Fiji).
3 Counting EUMember States individually. 4 Belgium,France,Germany,Greece,Ireland,Italy,Portugal,Spain.S/WPGR/W/25
Page4
ANNEX
Content ofIndividual Trade Policy Reviews
Thecontent ofthisAnnex isdirectly taken, withsome minor editing, from individual TPR
reports published since January 1995. Allreferences dealwithsubsidy programmes, pastorpresent,
forindividual services sectors. Notincluded isinformation ongenerally available subsidies, forexample
inthecontextofregionaldevelopmentorresearchprogrammes,andcompany-internalcross-subsidization
between monopoly andmarket-oriented activities insectors suchastelecommunications.
(i) Costa Rica(1995)
Since 1985 fiscal incentives, available tohotels, airandwater transport, tourist agencies
andcarrental companies, have been granted. Theextent oftheincentives depends onthe
balance-of-payments situation, theutilization ofdomestic inputs, theimpact onemployment andregional
development, etc.
Since1985,incentivesfortouristdevelopmenthavebeengrantedonthebasisoftourismcontracts
between theCosta Rican Tourist Institute andinterested companies. These mustbeengaged intourism-
related activities andmeetspecific criteria ...In1992, thefiscal incentive consisting ofthededuction
fromtherevenue taxuptoanamount equivalent to50percentofthesuminvested inshares ofany
company having concluded atourism contract, wassuppressed. Atpresent firms engaged hotelservices,
water andairtransport oftourists, tourism activities andcarhireandwhich haveconcluded atourism
contract benefit todifferent extends fromcertain permanent incentives which include tariffandinternal
taxconcessions, reductions onequipment andparts, andaccelerated depreciation ofassets.
(ii) Côted'Ivoire (1995)
Since 1959, theInvestment Code had...granted hotel companies particularly advantageous
taxconditions.
(iii) Mauritius (1995)
Likeother industries eligible fortaxincentives, hotels benefit from a15percentcorporate
taxrateanddividends aretaxfreefortenyears from thestartofoperations. Aone-time exemption
ofcustoms duties ontheimportation ofapproved equipment ispermitted toholders ofhoteldevelopment
certificates. ...Tour operators andcarrental agencies aregranted a60percentdutyconcession on
air-conditioned buses. TheDevelopment Bank ofMauritius offers concessional interest ratesonloans
fortheconstruction orupgrading ofhotel facilities. Shipping companies areexempt fromcorporate
tax;thecrewpaysnoincome taxandthereisnoimport dutyonthepurchase ofships. TheMauritius
Shipping Corporation hasreserved freight andpassenger shipping between Mauritius andRodrigues
toaState-owned ship; ratesaresubsidized toensure thatprices ofgoods destined forRodrigues are
notinflated byhightransport costs.
Offshore banks ,forwhich legislation came intoforce on1January 1989, arenotsubject to
Mauritian Export Service Zone enterprises, which musthave70percentlocalparticipation, include
suchservices asaccountancy, law,medicine, international marketing, quality control, preshipment
services, civilengineering, re-insurance, trans-shipment andentrepôt trade. Theincentives mainly
consist ofdutyexemptions onimported equipment, ...
Aspartofitsdiversification strategy Mauritius hasalsodeveloped alegal andregulatory
infrastructure foroffshore activities, defined asthose thatdobusiness withnon-residents andinforeign
currencies. These include offshore banking andother financial services ,e.g.insurance, fund
management ,[aircraft] leasing andinternational dataprocessing ....Offshore businesses paynoS/WPGR/W/25
Page5
taxes, although theymayelecttodoso,andtheirnon-resident staffareentitled toa50percentincome
taxcredit. Office equipment maybeimported dutyfree.
(iv) SriLanka (1995)
Ample incentives areavailable tofirms exporting amajority share, typically 90percent, of
theirproduction. Thesectoral focus isonareassuchastourism andotherservices industries ...Specific
incentives such asincome-tax concessions areavailable inselected sectors, subject tominimum
commitments.
(v) Thailand (1995)
TheinvestmentincentivesofferedbytheBoardofInvestment(BOI)areapplicabletoasignificant
number ofservices activities, including aspects oftourism andtransport services. BOIinvestment
incentives areoffered tothetourism industry forhotel projects with100ormore rooms, provided
theyarelocated inZone 2or3,andsuchtourist promotion services asocean marinas andtourboats.
BOIinvestmentincentivesarealsoavailableforsuchtransport-relatedactivitiesasinternationalmaritime
transportation,airtransportationservicesandpipelinetransport.[AnAnnexTableliststhefollowing
servicesaseligibleforinvestmentpromotion:Masstransitsystems;communicationservicesviasatellite;
telephone services; pipeline transport, cable carservices; international maritime transportation;
loading/unloadingfacilitiesforseatransport;ferryboatorhigh-poweredshipservices;touristpromotion
services; airtransportation services; hotels; disinfection services forproducts orproduce; refuse,
industrialwaste,orwaterdisposalservices;transportationofhazardouschemicals;educationalinstitutes
orvocational training centres; hospitals; Thaimotion picture production orrelated services.]
(vi) Uganda (1995)
Transportation,construction,telecommunications,bankingandtourismarelistedaspriority
areas under theInvestment Code [foreign investments inthese sectors areeligible fortaxholidays,
dutydrawbacks andthefreetransfer offunds.]
(vii) Brazil (1996)
AParticipation Scheme operated bytheNational Development Bank (BNDESPAR) hasthe
basic function toprovide financial resources, through equity participation, topriority projects agreed
withenterprises. Itsequity participation isdeemed tobetemporary andinallcases tocover onlya
minority share. InMay1996, BNDESPAR 'sportfolio wasestimated atUS$7 billion, covering more
than162enterprises mainly inelectricity, petrochemicals, pulpandpaper, commercial banks and
mining. There areindividual programmes for...development ofcapital markets ,commerce ....
(viii) Canada (1996)
Financial support forcultural services :...grants provided byfederal andprovincial
governments amounting toCan$5.8 billion, orslightly lessthan1percentofGDP, infiscal year
1993/94. Over halfoftotalfederal spending onculture isdestined forbroadcasting, benefiting in
particular the59radio and31television stations operated bytheCanadian Broadcasting Corporation
(CBC). TheFederal Government alsofunds Telefilm Canada andtheNational FilmBoard, twoState-
owned institutions mandated topromote production anddistribution ofCanadian films.S/WPGR/W/25
Page6
Government spending onculture andnational heritage, FY1993-94
(Can$ '000)
Federal Provincial Municipal Total
Librariesa47,452 754,618 1,052,965 1,855,035
Broadcasting 1,509,358 217,179 ... 1,724,537
Heritage institutions 434,612 367,288 49,377 851,277
Other activitiesb94,329 124,069 249,195 467,593
Performing arts 114,586 140,584 61,925 317,095
Filmandvideo 240,438 76,651 ... 317,089
Nature parks 190,016 67,225 ... 257,241
Literary arts 167,533 21,291 ... 188,824
Artseducation 4,402 80,585 ... 84,987
Visual artsandcrafts 13,227 40,629 ... 53,856
Multiculturalismc6,601 39,957 ... 46,018
Sound recording 5,526 3,629 ... 9,155
Total Expenditure 2,827,539d1,933,705 1,413,462 6,174,706e
Note: Figures maynotadduptototals duetorounding. ... Notavailable.
a Includes estimated expenditure ofschool libraries.
b Includes expenditure thatcannot bebroken down byfunction, suchasfinancial support forcultural facilities, centres, festivals,
municipalities, cultural exchange programmes andartsorganizations.
c Includes expenditure related toheritage cultures.
d Includes onlygrants andcontributions byHuman Resources Development Canada related directly totraining andemployment
development inthecultural sector.
e Includes inter-governmental transfers ofabout Can$351 million.
(ix) Colombia (1996)
TheForeign Trade Bank ofColombia (BANCOLDEX) provides credit facilities, inpesos or
U.S. dollars, onpreferential terms forfirms operating inthefreezones, including tourism zones.
These credits areintended tocover fixedinvestment, technology orinfrastructure projects. Theamount
ofcredit canbeasmuch asthenetvalue ofexports foraperiod notexceeding 10years. Grace periods
varyfrom2to5years. Interest forloans inpesos issetattheprevailing rateforfixed-term deposits.
Anewtourism lawisunder preparation. ...Thisprogramme istoinclude theestablishment
ofaTourism Promotion Fund, fiscal incentives, etc.aswellastheopening ofpromotion offices abroad.
Since 1994 tourism-related freezones havebeencreated asanincentive toattract investment tothe
sector.
(x) Czech Republic (1996)
Support intheform ofgrants andinterest subsidies isgiven bytheEnergy Agency, acting
ontheauthorization oftheMinistry ofIndustry andTrade, for...energy advisory services .
Thecentral Government provides grants andinterest subsidies fortheoperating losses ofthe
State railway ,subsidies tobuscompanies inrespect ofconcessionary fareschemes, andsubsidies
tothenational airline covering interest costs oftheleasing oftechnical equipment. These subsidies
amounted toKc5.77billion forrailtransport, Kc1.24billion forroadtransport andKc0.16billion
forairtransport. Some ofthese subsidies willbegradually eliminated, inaccordance withprice
deregulation, andtheairtransport subsidies areexpected tobeeliminated attheendof1997.
Revenue fromprivatization isusedtosubsidize interest onloans fortheprivatization ofhealth
carefacilities (except pharmacies). "Health" loans aregranted atinterest ratessome sixpercentage
points below thecommercial rate,andforaneight-year termrather thanthefour-year termcommon
inCzech commercial lending.S/WPGR/W/25
Page7
(xi) Dominican Republic (1996)
Since thestructural reform programme began in1990, there havebeennospecific sectoral
incentivesforenterprisesintheservicessector,exceptthat,underspecialcontractswiththeGovernment,
enterprises providing telecommunication services areexempt from taxonprofits.
(xii) ElSalvador (1996)
Noreference togovernment assistance forservices sectors.
(xiii) Republic ofKorea (1996)
TheSmall Business Administration (SBA), established inFebruary 1996, provides technical
advice, assists inlabour supply, grants financial support, aidsrural SMEs andhelps tomodernize
distribution .
(xiv) Morocco (1996)
According toseveral publications, the[investment] codes grant exemptions fromcustoms and
taxes onimported capital goods, loans onpreferential terms andspecial advantages fortheacquisition
oflandfortheconstruction ofhotels .Ithasalsobeendecided recently toreschedule thedebtofhoteliers
andreduce VAT inthesector. TheGovernment grants areduction ofinterest ratesoncertain credits
forinvestment inthesector andspends approximately 150million dirhams yearly inpromoting tourism.
Anoffshore finance market hasbeenestablished inTangier forbanks andcompanies dealing
inportfolio management andacquisition ofholdings. ...Offshore banks areexempt fromregistration
feesandstamp dutyontheofficial documents establishing their charters, increase incapital and
acquisition ofbusiness premises. They arealsoexempt from VAT oncapital goods andequipment
necessary fortheiractivities andfromimport duties andtaxes onequipment, moveable property and
capital goods needed fortheiroperations. Dividends distributed toshareholders, interest oncustomer
deposits andinvestments, andinterest onloans fromoffshore banks arealsoexempt fromallcharges.
(xv) NewZealand (1996)
TheGovernmenthasassumedresponsibilityforthatportionofthedebtresultingfromrefinancing
oftheNZRailways Corporation (NZRC) ...In1990, theCrown accepted responsibility forloans
totalling $1.1billion; NZRC, which ownsleases forrailway tracks andisnotengaged inrailoperations,
remains under Crown ownership.
Traditionally, theGovernment wasdirectly involved inmostareasofinsurance ,oftenthrough
government-backed mutual andlifeinsurance funds.
(xvi) Norway (1996)
In1991,tostemthe[banking]crisis,theGovernmentestablishedtheGovernmentBankInsurance
Fund and,through successive capital injections fromthisandtheGovernment Bank Investment Fund,
became soleormajority shareholder inthethreelargest commercial banks ....Thetotalvalue ofbank
support during theperiod 1989to1993amounted tosomeNKr30billion, orsomewhat under 5percent
ofannual GDP; capital injections during theperiod 1991-93 fromtheInsurance Fund alone totalled
some NKr16.2billion. Theauthorities estimate thattheywillbeabletorecover atleastthemajor
partofthepublic support byre-privatization ofthebanks temporarily taken overbytheState, and
fromtheproceeds oftheassets absorbed. [Wilse (1995) notes that"TheGovernment andtheStorting
havestated thattheactivities of[theInsurance Fund] shallbeoflimited duration. TheFund'svarying
participation inthebanks either directly orthrough thebanks 'ownguarantee funds mustbegraduallyS/WPGR/W/25
Page8
phased outoncethebanking crisis isbehind usanddeposit insurance canagain bebased oncapital
generated bythebanks."]
Inorder tofacilitate therecruitment totheNorwegian fleet, ataxreimbursement scheme was
introduced in1993. Parliament allocated NKr340million tothescheme for1995. Thescheme is
subject toanumber ofconstraints, themainonebeing thattheshipping industry should alsocontribute
anequivalent amount. Thetaxreimbursement scheme applies toseafarers employed onshipsregistered
intheordinaryNorwegianregister,NOR,andwhoareliabletoNorwegiantaxation.Italsoencompasses
seafarers onships intheNISregister iftheentire mandatory crewissubject toNorwegian taxation.
Theprincipal subsidy schemes tosupport Norwegian culture intheaudiovisual sector are
subsidies fortheproduction offilms andtelevision programmes andlicence feestotheNorwegian
Broadcasting Corporation, themain public service broadcaster. ...Subsidies tofilms areawarded
intheformofgrants, onthebasis ofapplications. Grants areprimarily intended fortheproduction
offeature length filmsanddocumentaries ofspecial value. Inprinciple, onlyindependent filmproducers
maysubmitapplicationsforgrants.Theproducermustfinanceatleast10percentofthetotalproduction
costs. Thetotalsumgranted in1995 wasNKr160million. ...Thetwoother modes ofsupport for
Norwegian feature filmareproduction support andboxoffice bonuses. Production support isawarded
selectively andisintended principally toprovide asource offunding forfilms ofartistic aspiration.
(xvii) Singapore (1996)
TheApproved Aircraft Leasing Scheme administered bytheTrade andDevelopment Board,
wasintroduced in1995 toencourage aircraft operating lessors toestablish anoperations basein
Singapore. Under theScheme, approved companies enjoy aconcessionary taxrateof10percenton
income derived from offshore leasing operations. Theconcession isforafive-year period andmay
beextended thereafter.
(xviii) Switzerland (1996)
Agriculture andsome monopoly suppliers ofinfrastructural services havelongbenefited from
highsubsidization....Apartfromtheseareas,however,thereisnoevidenceofsignificantsector-specific
assistance.
(xix) United States (1996)
Noreference togovernment assistance forservices sectors.
(xx) Venezuela (1996)
TheIncomeTaxLawof1994grantsnewinvestorsin...tourismanincometaxrebateequivalent
to20percentofnewinvestment, excluding land, undertaken within fiveyears following theentry
inforce ofthelaw.
TheLawofTourism grants authorized operators certain fiscal advantages andpreferential rates
forpublic services. Entitlement tosuchbenefits requires thepayment ofafeetosupport theTourist
Capacitation andPromotion Fund; theFund alsoreceives ashare oftherevenue fromprivatization.
[TheFund ....ischarged, among other things, withtraining tourist professionals andthepromotion
ofthesector, bothinVenezuela andabroad.]
Amajor crisis finally erupted in1994, when theauthorities werecompelled tonationalize or
close about one-third ofthe47banks inoperation ...Thedirect fiscal costinterms ofspending to
recapitalize orsupport ailing institutions ortopaydepositors hasbeenestimated atsome US$9 -
11billion, orsome 13percentofGDP.S/WPGR/W/25
Page9
(xxi) Zambia (1996)
There aredeductible allowance for"wear andtear"ofbuildings andequipment inthefarming,
manufacturing andtourism sectors. ...Zambia alsoreceives some funding from theEUforthe
development oftourism, asanon-traditional export, under theExport Development Programme.
FollowingtheliquidationoftheUnitedBusCompany,aState-ownedenterprise,theGovernment
suspended thecustoms dutyonimported buses from 1994 to1995.
(xxii) Benin (1997)
TheInvestment Code ...provides forthreepreferential regimes, A,BandC,aspecial regime,
andanordinary lawregime. ...Thespecial regime isaccorded toenterprises providing services in
thefields ofhealth ,education andpublic works, andtocottage industries. Itgrants certain tariff
reductions, but(inprinciple) doesnotentail taxexemptions.
(xxiii) Chile (1997)
In1994, theGovernment implemented another programme topromote development inthe
Province ofArauco andthecommunes ofLotaandCoronel which belong totheProvince ofConcepción.
Thisprogramme includes fourdistinct schemes. ...Thefourth scheme promotes ...tourism ,...
Ingeneral, nosubsidies aregranted toenterprises thatsupply transport services. Subsidies
areonlygranted totransportation services operate inisolated areas, where theStatehasaresponsibility
toprovide public transportation. ...Maritime transportation services arenotsubsidized, withthe
exception ofcoastal transportation toisolated areas where there isnotenough demand tojustify the
existence ofaregular shipping service. Insuch cases theGovernment ensures theprovision of
transportation atasubsidized rate. Subsidies areallocated bytherelevant ministry through apublic
bid,andareadministered bytheauthorities oftheregion concerned.
(xxiv) Cyprus (1997)
InJuly1996, theGovernment announced athree-year plantoupgrade thetourism industry,
including interest subsidies forimprovements inexisting establishments, encouragement ofinvestment
ininfrastructure, andexemptions from import duties onhotel equipment forrenovation.
Theterm"offshore enterprises" refers toanylegal entity whose beneficial ownership and
business activities lieoutside thecountry ofregistration. Suchenterprises canonlyderive income from
abroad. ...Profits onoffshore business managed from Cyprus aretaxed at4.25percent; those
controlled from abroad arecompletely taxexempt. ...Since theintroduction ofthefirstincentives
in1975, aimed atincreasing foreign demand forbanking ,legal,accounting andtelecommunications
services,over26,000offshoreenterpriseshaveregisteredinCyprus.Themostimportantsuchactivities,
asmeasured byemployment, aretrade, marketing anddistribution ;shipmanagement andmaritime
services ;business andengineering consultancy ;publishing ;banking ;insurance andfinancial
services .
Incentives toregister ships inCyprus include lowregistration feesandacompletely tax-free
status forshipping companies. Thisincludes exemption from taxonprofits anddividends, capital
gains taxonthesaleofshiporshares, income taxoncrew wages, stamp dutyondeeds andestate
duty. Domestic shipping companies areeligible forpreferential taxtreatment through a30percent
reduction oftheannual tonnage taxiftheships areoperated byaCypriot shipmanagement company.
Additional refunds ofthistaxarepaidrelative tolength ofemployment ofCypriot nationals onthe
vessels.S/WPGR/W/25
Page10
(xxv/xxvi) European Union (1995 AND 1997)
1995 REVIEW
TheCommission 's1993 Competition Report notes that"theliberalization offinancial and
postal services continued togenerate complaints from private competitors ofstate-owned banks and
postal administrations", concerning, among other issues, injections ofpublics funds inthecontext of
privatizations. Arecent rescue operation bytheFrench Government ofCredit Lyonnais highlights
theproblems involved.
Various member States grant assistance toshipping linesestablished intheirterritories and
flying thenational flag...Thesupport schemes aregenerally intended tocompensate thecostdifferential
associated withnational registration. ...Theguidelines arecurrently being revised withaview to
theirstrengthening.
1997 REVIEW
Certainservicessectors,inparticularthosewhereStateinvolvementandsupporthastraditionally
beenhigh, aresubject tospecific guidelines. TheCommission putinplace asetofrules forair
transport services in1994, following thereport ofagroup of"wise men" in1992 andtheinjection
oflarge subsidies insome mainEuropean carriers intheperiod 1991-94. [Large Statesubsidies were
granted from1991to1994toSabena, AirFrance, Olympic Airways, TAP, AirLingus andLufthansa.]
Under thenewguidelines in1996, theCommission cleared aPtas87billion rescue planforIberia,
butrejected aproposed Lit1,500 billion capital injection intoAlitalia. Commission guidelines for
theexamination ofState aidtoCommunity shipping lineshaverecently beenadopted.
TheCommunity framework onState aidtothetransport sector hascome under criticism in
recent years. Inviewoftheincreasing levelofmarket deregulation (inparticular, inairtransport),
market participants havevoiced concerns about thepotentially negative effects ofState aidforthe
growing number ofcompetitors. Inspite ofthe"one time, lasttime" principle, theycriticize the
persistence ofStateaidawarded tovarious airlines (Iberia, AerLingus, AirFrance, Olympic, Alitalia).
In1995-96, more than100cases ofStateaidwereexamined bytheCommission inthetransport sector.
Public support totheaudiovisual sector ...isprovided intheform ofdirect subsidies,
reimbursable loans, taxincentives andlocal-content requirements. Policy attheEUlevelisaimed
atproviding support totheindustry, encouraging private investment, andthebroadcast ofEuropean
works.
TheCommunity provides financial support forthedevelopment anddistribution ofEuropean
audiovisual workthrough theMedia IIprogramme (ECU 265million overaperiod offiveyears, starting
in1996). Overthesame period, Media IIwillalsoprovide training foraudiovisual professionals with
support ofaround ECU 45million from theEuropean Commission. Inorder toincrease private
participation inthesector, theCommission hasproposed establishing afive-year ECU 60million,
European Guarantee Fund, which would provide aguarantee forinvestors incinema andtelevision
production. Theproposal isbased ontheexperiences ofseveral Member States thatprovide similar
national guarantee instruments. TheGuarantee Fund would complement theMedia IIprogramme by
focusing primarily onthefinancing ofEuropean cinema andtelevision films.
(xxvii) Fiji(1997)
TheFijiDevelopment Bank, which wasestablished in1967, provides long-term finance to
theprivate sector atpreferential rates. ...Loans totheindustrial andcommercial sector totalled F$173.4
million, withmanufacturing andtourism holding 24.5percentand17.8percentoftheamount,
respectively.S/WPGR/W/25
Page11
Projects forapproved hotel buildings orexpansion maybeentitled under theHotels AidAct
toreceive aninvestment allowance, from theMinistry ofTourism andCivil Aviation. Inaddition
tonormal depreciation, 55percentofapproved capital expenditure (excluding costofland) maybe
set-off against thehotel owners 'taxable income. Acostwrite-off of55percentmaybeallowed by
theMinister ofTourism andCivil Aviation toataxpayer forsupport-projects inthetourism sector
suchastourist vessels. Allcontributions topromotion andmarketing activities thatareorganized and/or
approved bytheFVB aregiven a150percenttaxallowance. Ifapproved bytheFijiTrade and
Investment Board andtheMinistry ofTourism andCivil Aviation, theFijiDevelopment Bank may
grant preferential rateloans uptoF$200,000 toindigenous Fijians inthetourism sector. TheFive
StarHotel Incentives, forwhich ahotel musthaveatleast200rooms andaminimum investment of
F$40 million, include thefollowing: a20-year taxholiday period; losses tobecarried forward to
sixyears; duty-free entry ofallcapital equipment, plantandmachinery; anda100percentwrite-off
onallcapital expenditure inanyoneyearduring aperiod ofeight years. Since January 1996, the
Government hasprovided concessionary fiscal duties toassist inter-island shipping ,fishing andtourist
vessels ...
(xxviii) Malaysia (1997)
Oneofthemoststriking features ofMalaysia 'sindustrial policy isthepervasiveness ofvarious
incentives, particularly taxincentives, aimed atthe[...]andtourism sectors. ...Furthermore, ina
move topromote exports ofservices fromMalaysia through thefacilitation ofaregional headquarters
function, "approved operational headquarters" aresubject toastatutory corporate taxrateof10per
centinstead ofthenormal rateof30percent.
Inaddition toincentives topromote Malaysian ownership, taxincentives areavailable tothe
insurance sector .["Tax reductions andexemptions werealsoprovided toencourage thedevelopment
oftheinsurance industry which hasthepotential tocontribute togrowth andmobilise long-term savings
tosupport thenation 'sindustrialisation drive". (Bank Negara Malaysia, 1996b.)] Some ofthese
incentives areconditional uponlocalownership ofthecompanies. ...Since the1994yearofassessment,
adouble deduction hadbeengranted forfreight charges paidtoaMalaysian incorporated shipping
company fortransportation onboard a"Malaysian ship". Thisdouble deduction hasbeenwithdrawn
effective 1January 1997 (year ofassessment 1998). Theincome ofashipping company, derived or
deemed tobederived fromtheoperations ofMalaysian ships, isexempt fromincome tax.Dividends
distributed from theincome ofashipping enterprise toshareholders arealsoexempt from tax.The
shipping industry isalsoassisted through theShipping Fund. [TheMalaysian Shipping Finance Fund
wasestablished on30October 1992 toincrease shipping capacity andtocarry Malaysia 'scargo, as
ameasure toovercome theproblem ofadeficit intheservices account ofMalaysia 'scurrent account.
TheFund consist ofaRM500million ShipFinancing Facility andaRM200million Shipping Venture
Facility which arebothallocated through theoffices oftheBank Negara Malaysia. Anadditional
RM300million isprovided bytheprivate sector.]
InvestorscanapplyfortaxincentivesthroughtheofficesoftheMalaysianIndustrialDevelopment
Agency. [Establishment, expansion andmodernization ofhotels andtourist projects designated by
theMalaysian Industrial Development Agency aspromoted activities areeligible forconsideration of
pioneer status andinvestment taxallowance under thePromotion ofInvestment Act1986. Other tax
incentives forthetourism industry ...include aninitial industrial building allowance of10percent
andasubsequent annual allowance of2percent,plusadouble deduction fortraining andpromotional
expenditure. ...Inaddition, localcompanies organizing conferences bringing inatleast500foreign
participants arealsotobegiven income taxexemptions uptotheyear2000.] Furthermore, aSpecial
Fund forTourism isadministered bytheBank Negara Malaysia; applications aretobemade through
commercial banks.S/WPGR/W/25
Page12
(xxix) Mexico (1997)
Assistance isusedtosupport thedevelopment ofpriority activities ofgeneral interest, andto
provide basic goods andservices atprices below theirmarket levelorproduction cost. Government
assistance amounted tosome 30.1billion pesos (about US$3.9 billion) during 1996; themainsupport
wasprovided through [...][and] thenational railway company, which wasgranted 2,073 million pesos
tocover itsoperational deficits.
TheGovernment acted swiftly withanumber ofmeasures toavoid acollapse ofthebanking
sector. Asanimmediate short-term measure, theGovernment announced inJanuary 1995 ascheme
torecapitalize banks withcapital ratios below the8percentstipulated minimum. Since thenseveral
programmes tosupport debtors andbanks havebeenprovided: restructuring ofloanswhich arebasically
sound (UDI scheme) ...;debtrelief tovarious small debtors ....intheformofinterest subsidy and
thepossibility ofrestructuring under theUDIscheme; reduction ofthefinancial burden ofmortgage
debtors intheform ofadditional resources forrestructuring under theUDIscheme ...;assistance
toprivate tollroadconcessionaries whofaced financial problems duetosubstantive decline inhighway
traffic aswellasincreased costofdebtservice intheformofdebtrestructuring andinterest rateswap
arrangements; ...;programmes tosupport banks: acapitalization programme withtheaimofraising
thecapitalization levelofbanks through ...assistance indomestic currency tobanks andsmall financial
institutions toaddress solvency andliquidity problems.
(xxx) Paraguay (1997)
Since 1989 aregime ofinvestment incentives hasbeenoperated bytheMinistry ofIndustry
andTrade. These incentives, ...were extended in1994 tocover transport, warehousing, health,
mass media, telecommunications andtourism-related construction projects (mainly hotels and
shopping centres/malls) and,mostrecently, in1996toinclude educational projects .Incentives, valid
foraperiod offiveyears, include exemptions from taxes forthecreation ofenterprises; tariffs on
importsofcapitalgoods,rawmaterialsandinputsanticipatedintheinvestmentproject;taxesandcharges
onforeign loans; atemporary exemption of95percentofthecorporate earnings tax;andtaxexemptions
onrents, royalties, patents, etc.These incentives canbeextended uptotenyears where investment
isduetorepatriationofcapitalordestinedtoregionsdeterminedbytheTechnicalSecretariatforPlanning
...Between 1989and1996, these incentives wereusedby3,195 enterprises, creating 76,206 jobsand
generated totalinvestments ofaround US$2 billion (G/4.1trillion), athird ofwhich wasforeign
investment. Most oftheinvestment tookplace inmanufacturing (food, tobacco, textiles, chemicals)
andservices (warehouses, construction, transportation).
InMay1995, theCentral BankofParaguay (BCP) hadtointervene intheoperations ofseveral
financial institutions including fourcommercial banks, tenfinance houses, twosavings andloan
associations andtwoprivate pension schemes which were undergoing aliquidity crisis. Ingeneral,
BCP'sintervention consisted of:taking overthemanagement ofinstitutions withproblems; providing
financial resources forthecontinuation oftheiroperations; ...Financial assistance tofourbanks led
tothelargest monetary expansion inthehistory ofParaguay, equivalent to4percentofGNP. ...
between mid-1995 andMarch 1996, emergency measures, comprising a15-year loanofupto
US$100 million, deferred interest payments andtaxholidays, wereeffected torescue thefourbanks
whose operating licences were finally withdrawn. ByFebruary 1996, theBCPhadprovided credit
ofUS$391 million, 80percentofwhich hadbeenchannelled totheabove-mentioned fourbanks to
repay depositors andforeign debts. ....Inearly 1997, plans were being made torescue fourmore
banks using deposit funds from theState-owned Institute ofSocial Security.
(xxxi) Japan (1997/98)
Hotels registered under theLawtoMaintain International Tourist Hotels mayreceive tax
preferences tomaintain theirfacilities.
___________________