WORLD TRADE  
ORGANIZATION  TN/RL/GEN/17 
15 September 2004 
 (04-3852) 
Negotiating Group on Rules Original:   English 
  
 
EXPENSING VERSUS ALLOCATING SUBSIDY BENEFITS
1 
 
Communication from the United States  
 
 
 The following communication, dated 13 September 2004, is being circulated at the request of 
the Delegation of the United States.   The submitting delegation has requested that th is paper, which was submitted to the Rules 
Negotiating Group as an informal document (JOB(04)/ 122), also be circulated as a formal document. 
 
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ISSUE 
 
 As the United States has previously noted, although it is generally accepted that the benefit 
from certain types of subsidies should be allo cated over time, the Agreement on Subsidies and 
Countervailing Measures (SCM Agreement) does not specify how or when such allocation should 
occur.  It is important for the Rules Negotiating Gr oup to clarify and improve the multilateral rules in 
this area and, ideally, reach consensus on a common methodology, given that different methodologies can result in significant differences in the subsid y benefit attributable to a particular year.
2   
 
 In our first paper on subsidy allocation, we e xplored some of the issues relating to how to 
allocate subsidy benefits over time and reviewed the US approach for calculating the amount of 
subsidy benefit allocable to a particular year.3  In a subsequent paper, we  considered how to determine 
an appropriate allocation period, viz, the period over which the benefit of an allocable subsidy should 
be spread.4  In this paper, we will address the threshol d matter of when such a methodology should be 
invoked, by distinguishing between subsidies that should be “allocated” ( i.e., spread over a period of 
several years according to a commonly accepted standard , such as the average useful life of the assets) 
and subsidies that should be “expensed” ( i.e., attributed entirely to a single year).  As in the case of 
the previously discussed allocati on issues, the United States has a well-developed practice in the 
context of conducting countervailing duty investig ations, which is described below and which we 
believe can serve as a good basis for discussion.   
 
DISCUSSION 
 
 We begin by recalling three overarching pr inciples discussed in our previous paper on 
average useful life (AUL) of assets that are also releva nt here.  These are:  (1) the allocation period for 
                                                      
1 The United States initially raised the issue of how and when to allocate subsidy benefits over time in 
TN/RL/W/78, Subsidies Disciplines Requiring Clarification and Improvement , 19 March 2003, page 6. Other 
Members have also raised this as an issue for consideration by this Group, e.g. TN/RL/W/19, 7 October 2002. 
2 TN/RL/W/148, 22 April 2004. 
3 TN/RL/W/157, 4 June 2004. 
4 See G/SCM/W/415/Rev.2, 15 May 1998, page 3. TN/RL/GEN/17 
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 a subsidy is only an approximation of the actual du ration of the subsidy benefit;  (2) any allocation 
methodology must strike a practical and reasona ble balance among the goa ls of consistency, 
predictability, accuracy, transparency, and administ rability;  and (3) determ ining the duration of a 
subsidy benefit is purely a technical matter, with no particular approach being inherently more or less 
advantageous to a party in the context of a c ountervailing duty proceeding or dispute settlement 
proceeding.   
 
 Following the entry into force of the SCM Agreement, the Committee on Subsidies and 
Countervailing Measures established an Inform al Group of Experts (IGE) to develop 
recommendations for clarifying the provisions of A nnex IV to the Agreement.  Among other issues, 
the IGE considered the question of “alloca ting versus expensing”  subsidy benefits.
5  Although 
Annex IV, and therefore the IGE’s work, specifically related to the valuation of subsidies under the 
now lapsed Article 6.1(a) provision based on a cost-to-government approach, many of the key conclusions and recommendations of the IGE are in structive for purposes of this discussion.  Among 
those conclusions are:  (1) that not all subsidies should be allocated over time ( viz., certain subsidies 
should be expensed)
6;  (2) whether a subsidy should be allocated or expensed may depend on the 
particular circumstances of the subsidy, including its type ( i.e., form), size, frequency, purpose, and 
the manner in which it is recorded;  and (3) that it  may be helpful to develop an illustrative list of 
those subsidies that would usua lly be allocated or expensed. 
  The United States’ methodology for distingu ishing between allocable and expensable 
subsidies in the context of conducting countervaili ng duty investigations is similar in many 
fundamental respects to the general approach recommended by the Informal Group.
7  Central to our 
methodology is a distinction between “r ecurring” and “non-recurring” subsidies8, where non-recurring 
subsidies are allocated over the AUL of the firm’s  assets and recurring subsidies are expensed in full 
in the year of receipt.9  We do this for both theoretical and practical reasons.  The theory behind 
distinguishing and allocating non-recurring subsidies is that these types of subsidies, by their nature, 
generally are infrequent, exceptional and linked more directly to the longer term financial structure 
(i.e., debt and equity) and fixed assets ( e.g., plant and equipment) of the firm and, therefore, continue 
to benefit the firm beyond the year of receipt.  Recurring subsidy benefits, on the other hand, are 
normally related to or consumed in a firm’s regular/ongoing production and sales activity.  For example, where the government provides a grant to purchase machinery and equipment, the firm will 
continue to benefit from the use of this equipment throughout that asset’s useful life.  In contrast, 
ongoing corporate income tax exemptions mainly impact annual after-tax profits and are not a 
primary factor in the firm’s longer-term productive capability.     From a practical point of view, since non -recurring subsidies are generally (though not 
necessarily) larger in size than recurring subsidies, it may be inappropriate to concentrate the entire 
                                                     
 
 
6 This point is also at least implicitly recognized in the April 1985 report of the GATT Committee on 
Subsidies and Countervailing Measures entitled, Guidelines on Amortization and Depreciation (SCM/64; BISD 
32S/154), which began with the statement, “ Certain  subsidies exist which should be spread over time”. 
(Emphasis added). 
7 The US methodology is detailed in full in the following Federal Register notice: Countervailing 
Duties; Final Rule , 63 Fed. Reg. 65348, 65392 (25 November 1998), available on the US Department of 
Commerce web site at http://www .ia.ita.doc.gov/regs/index.html . 
8 The distinction between recurring and non-recurring subsidies has also been recognized under WTO 
jurisprudence.  See, e.g., Appellate Body Report, United States – Imposition of Countervailing Duties on 
Certain Hot-Rolled Lead and Bismuth Carbon Steel Products Originating in the United Kingdom, 
WT/DS138/AB/R, adopted June 2000, para. 62; Appellate Body Report, United States – Countervailing 
Measures Concerning Certain Products from the European Communities, WT/DS212/AB/R, paras. 84, 158. 
9 An exception to this rule is th at we will expense in the year of receipt non-recurring subsidies whose 
value is less than 0.5 per cent of the firm’s sales.  TN/RL/GEN/17 
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 amount of the countervailable subsidy in just one year.  Furthermore, expensing small, recurring 
subsidies reduces the burden on subsidy recipients invol ved in countervailing duty proceedings in that 
they do not have to track and report numerous small, ongoing subsidies dating several years prior to the period being investigated.     
 To facilitate consistency and predictability in the administ ration of countervailing duty 
proceedings, the United States has adopted illustrative  lists of types of subsidies that, based on our 
past experience, should generally be characterized as recurring or non-recurring.  In our experience, 
subsidies that would normally be considered as providing recurring benefits include: direct tax 
exemptions and deductions; exemptions from and excessi ve rebates of indirect taxes or import duties; 
provision of goods and services for less than ad equate remuneration; price support payments; 
discounts on electricity, water, and other utilities; fre ight subsidies; export promotion assistance; early 
retirement payments; worker assistance; worker trai ning; wage subsidies; and upstream subsidies.  
Subsidies that we would normally consider as pr oviding non-recurring benefits include: equity 
infusions, grants, plant closure assistance, debt forgiveness, coverage for operating losses, debt-to-
equity conversions, provision of non-general infrastru cture, and provision of plant and equipment.   
  Although we have found these lists generally to be useful and accurate, they remain 
illustrative only.  Parties to a US countervailing duty proceeding can demo nstrate that the unique 
factual circumstances of a particular case indicate that a program of a type that is normally considered to be recurring should be found to be nonrecurring, or vice versa .  When considering parties’ 
arguments in this regard, we make our ultimate de termination of whether a particular subsidy is 
appropriately classified as recurring or non-recurring  with reference to the following three criteria, 
reflecting the theoretical and practical considera tions noted above:  (1) whether the subsidy is 
exceptional in the sense that the recipient cannot e xpect to receive additional subsidies under the same 
program on an ongoing basis from year to year;  (2) whether the subsidy required or received the 
government’s express authorization or approval ( i.e., receipt of benefits is not automatic);  or (3) 
whether the subsidy was provided for, or tied to, th e capital structure or capital assets of the firm.  
  The aforementioned criteria and their theoreti cal underpinnings notwithstanding, in applying 
our methodology, we are careful not to place too much emphasis or reliance on determining whether or not a subsidy is “tied” to capita l assets.  When taken to an extrem e, such a rule can result in the 
need to trace precisely how a subsidy was used, which in many instances is difficult, if not 
impossible.  With this in mind, the US appr oach for distinguishing recurring from non-recurring 
subsidies is best viewed as a straightforward rule of reason, whose primary purpose is to foster consistency, predictability, transparency, and ad ministrability while also reflecting an overall 
theoretical coherence.   
 
CONCLUSION 
 
 We recognize that our approach for distinguish ing between subsidies that should be allocated 
versus expensed may not be the only reasonable one .  However, as we have previously noted, the 
continued absence of rules in this area will result in disparate treatment of simi larly situated exporters.  
Preferably, the Group would reach a consensus on  a single methodology or set of guidelines for 
dispute settlement panels and Members to use in determining both how and when to allocate 
subsidies.  Devising an illustrative list -- such as  the one recommended by the IGE or used by the 
United States -- may also be helpful in this rega rd.  At a minimum, Members should be required to 
notify the methodology they use in countervailing du ty proceedings and, if the notified methodology 
is not used in a particular case, the Member shoul d be obligated to explain the methodology it used 
and the reason for doing so, including an explanation of the facts and reasoning that led it to conclude that the normal methodology was not appropriate.   
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