WORLD TRADE  
ORGANIZATION   
TN/RL/GEN/4 
TN/RL/W/148/Rev.1 14 July 2004 
 
(04-3022) 
Negotiating Group on Rules Original:   English 
  
 
ALLOCATION OF SUBSIDY BENEFITS OVER TIME  
 
Communication from the United States 
  
The following communication, dated 8 April 2004, is being circulated at the request of the 
Delegation of the United States.
1 
 
_______________ 
  
In our general subsidies paper, we raised th e issue of when and how to allocate subsidy 
benefits over time.
2  This paper does not address the issue of when  subsidy benefits should be 
allocated over time but rather provides an overv iew of the issues that arise in determining how to 
allocate subsidy benefits over time. 
 
It is generally accepted by Members that have conducted countervailing duty investigations 
that the benefit from certain types of subsidies should be allocated over time, rather than attributed or 
“expensed” entirely to the year of receipt.3  The principle that certain subsidies should be allocated 
over time has also been recognized, implicitly, by the Appellate Body4 and, explicitly, by the Informal 
Group of Experts.5  Although the principle is widely r ecognized and accepted, the Agreement on 
Subsidies and Countervailing Measures does not provide for a specific methodology by which to 
allocate subsidy benefits over time.  Because different methodologies can result in significant 
differences in the subsidy benefit attributable to  a particular year, it is important for the Rules 
Negotiating Group to clarify and improve the rules in this area.  
This paper is divided into three parts.  The fi rst part covers some basic issues related to the 
allocation of benefits over time.  The second part describes the particular allocation formula used by 
the United States.  The last section discusses the “lead and bismuth carbon steel” GATT panel report, which examined the allocation issue, genera lly, and the US formula, specifically.   
 
                                                      
1 The Delegation of the United States has requested that this paper, which was submitted to the Rules 
Negotiating Group as an informal document (JOB(04)/45), also be circulated as a formal document. 
2 TN/RL/W/78, Subsidies Disciplines Requiring Clarification and Improvement , 19 March 2003, p. 6.   
3 For example, a $20 million grant will benefit a comp any for many years.  Therefore, it is reasonable 
to allocate the subsidy benefit over a similar time period.   
4 See, for example, WT/DS212/AB/R, United States – Countervailing Measures Concerning Certain 
Products From the European Communities , 9 December 2002; WT/DS138/AB/R, United States – Imposition of 
Countervailing Duties on Certain Hot-Rolled Lead and Bismuth Carbon Steel Products , 10 May 2000.       
5 The Informal Group of Experts (IGE) was creat ed by the WTO Subsidies Committee pursuant to 
footnote 62 of the Subsidies Agreement.  The cite for the IGE’s report is:  G/SCM/W/415/Rev.2, 15 May 1998, 
p. 3. TN/RL/GEN/4 
TN/RL/W/148/Rev.1 Page 2 
 
 
 Basic Principles  
 
To begin, it is helpful to visualize the various  allocation issues by picturing the stream of 
allocated benefits as a line on a graph.  The x-axis of the graph represents each allocation year and the 
y-axis represents the corresponding annual allocated benefits.  Any method of allocated benefits over 
time must deal with three issues: the shape of the benefit stream, the length of the benefit stream and 
the discount rate.  
The shape of the benefit stream, or the slope of  the line on the graph referred to above, can be 
flat, upward sloping or downward sloping.  If the line is flat, the assumption is that the subsidy 
recipient is receiving benefits over time in equa l increments.  If the line is upward sloping, the 
assumption is that the recipient receives greater benefits in the later years of the allocation period.  If the line is downward sloping, the level of benefits is assumed to be declining over time.  Different 
arguments can be made as to what slope the line s hould take.  The US model assumes that the subsidy 
recipient receives greater benefits in the early  years and thus has a downward sloping line. 
 
The length of the benefit stream depends on the period over which benefits are to be 
allocated.  The allocation period used by the United States is the average useful life of assets.  This 
issue has already been raised in the Group.
6  However, this is a distinct issue and will not be discussed 
further in this paper. 
 
The final issue to resolve when allocating the benefits over time is the selection of the 
discount rate.  The effect of choosing a discount rate is  to set the height of the flat benefit stream or 
the slope of the slanted stream of benefits.  Once it is accepted that the benefit from a subsidy should 
be allocated over time, use of a discount rate is  necessary to take into account the time value of 
money.   
 
As is generally accepted, the real value of $1,000 received today is greater than the value of 
$1,000 received one year or five years from today,  even though the nominal amount (or face value) 
would be the same.  Once a time element is in troduced into any measurement of value, nominal 
values must be converted into real (i.e. present) values for such a measure ment to be meaningful. 
 
Use of the discount rate ensures that the net pres ent value of the benefits spread over time are 
equal to the subsidy provided in the initial year.  The result is that the real benefit provided by the 
original grant is determined, in constant grant- year dollars, regardless of the period over which the 
benefit is allocated. 
 
US Grant Allocation Formula  
 
 The formula used by the United States to allocat e the benefit from a grant is given below.  It 
is known as the declining balance formula because the a llocated benefits are highest in the first year 
and decline over the allocation period.  The discoun t rate used by the United States is the subsidy 
recipient’s long-term borrowing rate. 
 
                                                      
6 TN/RL/W/19, Countervailing Measures: Illustrative Major Issues , 7 October 2002.  TN/RL/GEN/4 
 TN/RL/W/148/Rev.1 
 Page 3 
 
 
  
Ak  = y/n + [y - (y / n) (k - 1)] d 
 ___________________________ 
    1  +  d  
 
Where: 
 
Ak  =  the amount countervailed in year k 
y  = the face value of the grant 
n  = the average useful life of the assets in the 
industry being investigated 
d  = the discount rate, and k  = the year of allocation, where the year of 
receipt = 1 (If the grant was given in 1990 and n = 5, we 
would allocate a benefit from 1990 through 1994.) 
 
Although seemingly complex, the formula is relativ ely easy to understand if it is broken into 
three parts, where:        
 
   y/n       = the annual nominal benefit 
  [ y - (y/n) (k-1) ] d  = the interest on the declining balance of the 
face value of the grant (as k increases, y decreases by the 
annual nominal allotment (y/n)) 
1 + d  = the factor that discounts the cash flow back 
to day one of the year of allocation  
 
At this point, an example would be helpful.  Assume the benefit will be allocated over five 
years (n = 5).  In year one, (k - 1) equals zero.  Therefore, multiplying (y/n) by (k - 1) equals zero.  The equation then becomes:    
Year 1  y/n + (y) (d) 
     1 + d  
 Numerator The numerator can be viewed as cons isting of a principal and interest component, 
where y/n  is “principal” allocated in year one added to (y) (d), which is the “interest” 
on the principal in that year.  To earn inte rest, time has to be a component.  On day 
one, the benefit is y/n and on day 364 of year one, the benefit is y/n + (y) (d) 
 Denominator The function of the denominator is to bring the benefit back to day one dollars.  In 
other words, it discounts the benefit on the 364th day back to day one of the year to 
which you are allocating. 
 
In the second year, k equals 2 and (k - 1) equals 1.  The equation then becomes: 
 
Year 2  y/n + [y - (y/n)]d 
           1 + d 
 
Numerator The numerator still consists of a prin cipal and interest component, where y/n is the 
nominal amount of the benefit allocated in year two added to the interest earned on TN/RL/GEN/4 
TN/RL/W/148/Rev.1 Page 4 
 
 
 the outstanding principal in that year.  Since we have already allocated one portion of 
the principal in year one, there is no interest component on that portion in year two.  So we first subtract y/n from the face value of the grant y before we derive the interest.  Once again, to earn interest, tim e has to be a component.  Therefore, on day 
one of year two, the benefit is still y/n and on day 364 of year two the benefit is y/n + 
[y - (y/n)]d. 
 Denominator As in year one, the function of the de nominator is to bring th e benefit back to year 
two, day one’s dollar terms.  In othe r words, it discounts the benefit on the 364th day 
of year two back to day one of year two. 
 In years three, four and five the annual a llotted benefit amount, y/n, stays the same.  The 
interest component, [y - (y/n)(k -1)]d, declines as por tions of the benefit allocated to previous years 
are taken out.  The discounting factor, (1 + d), discounts the benefit on the 364
th day of years three, 
four and five back to day one of each respective year. 
 
If the benefits received by a company as calcula ted above were put on a graph, the line would 
slope downwards.  It does so because the inter est component decreases each year as the annual 
allotted benefit is deducted from the face amount of the grant. 
 The GATT Panel Report  
 
The US allocation formula was examined in the Lead and Bismuth Steel GATT panel report.
7  
While the panel report involved the old subsidies c ode, the decision is instructive because it shows 
that the time value of money is not an unfathomab le principle of financial analysis but also has 
intuitive appeal. 
 
The Lead and Bismuth Steel panel first pointed out that the basic legal question before it was 
not the declining balance formula per se , but rather whether it was improper to apply a discount rate 
to the allocation of subsidies over time to take into  account the time value of money, regardless of the 
method of amortization that was followed (page 177, paragraph 655). 
 
The panel went on to state:  
In the panel’s view, because value could be af fected by time, it could not be said that 
when a signatory allocated a subsidy over time and in doing so used the net present 
value concept to ensure that the present va lue of the amounts of the subsidy allocated 
over time equalled the subsidy found to exist, the countervailing duty imposed as a 
result of such allocation was necessarily in excess of the value, significance or 
quantity of the subsidy found to exist . . .  
(page 178, paragraph 661).  Simply stated, the panel recognized the time value of money principle 
when allocating subsidy benefits over time.   
 
Following its recognition of the time value of money principle, the next question the panel 
addressed was whether the “time element” involved in  the allocation of a subsidy provided a rational 
basis to apply the principle to equate the amount s allocated over time and the face amount of the 
subsidy provided (page 178,  paragraph 661).  In th is regard, the panel noted that the argument had 
been made that the time value of money concept was inapplicable to the allocation over time of 
                                                      
7 SCM/185, United States – Imposition of Countervailing Duties on Certain Lead and Bismuth Steel 
Products Originating in France, Germany and the United Kingdom , 15 November 1994.  TN/RL/GEN/4 
 TN/RL/W/148/Rev.1 
 Page 5 
 
 
 subsidies because a subsidy in the form of a gran t did not actually involve money received over time 
(page 178, paragraph  662).  
Relying on the Guidelines on Amortization and Depreciation,
8 which compared the benefit 
from a grant to the elimination of financial obliga tions the recipient company would otherwise incur, 
the panel stated that “such a benefit could be concep tualized, for instance, in terms of a loan on which 
the repayment of principal and interest was waived ” (page 179, paragraph 663).  If so conceptualized, 
“the time value of money provided a rational basi s to argue that the sum of the nominal amounts 
allocated to different years was not equivalent in value, quantity or significance to the amount of the 
subsidy found to exist” (page 180, paragraph 666). 
 
Conclusion  
 
While the United States recognizes that its methodology may not be the only reasonable 
approach, because the subsidy allocation met hodology employed by Members can result in 
significantly different results, it is an important is sue for this Group to discuss.  Ideally, the Group 
would reach a consensus on a single methodology to be employed by all Members.  At a minimum, Members should be required to notify the me thodology they will use in a countervailing duty 
investigation and if the notified methodology is not used in a particular ca se, the Member should be 
obligated to explain the facts and logic which led it to conclude that the normal methodology was not 
appropriate.   
 
__________ 
 
 
  
 
                                                      
8 These guidelines were adopted by the Committee on Subsidies and Countervailing Measures in 
April 1985; BISD 32S/154.