RESTRICTEDWORLD TRADE
ORGANIZATIONG/ADP/Q1/EEC/18
G/SCM/Q1/EEC/18
29 April 1999
(99-1731)
Committee on Anti-Dumping Practices
Committee on Subsidies and Countervailing MeasuresOriginal:  English
NOTIFICATION OF LAWS AND REGULATIONS UNDER
ARTICLES 18.5 AND 32.6 OF THE AGREEMENTS
Replies to Questions Posed by UNITED STATES1
Regarding the Notification of the EUROPEAN COMMUNITIES2
The following communication, dated 26 April 1999, has been received from the Permanent
Delegation of the European Commission.
_______________
Q1. Please explain the rationale for including an interest component in the calculation of the
benefit from a grant that is expensed during th e investigation period.  On what basis is it
appropriate to assume that the beneficiary would have had to borrow the money at the
beginning of the period and repay it at the end?  Where a subsidy is provided later in the period
rather than earlier, does your calculation still include interest for the entire period?
Reply
Pursuant to Section C (Benefit to the recipient) and Section E(a) (Grants), with regard to
expensed grants, the interest element is added in order to reflect the real benefit to the recipient
obtained by the subsidized firm during the investigation period, not just the face amount of the grant.
In this regard, Article 14 of the Subsidies Agreement makes it clear that the benchmark for the
calculation of a subsidy is the equivalent cost of funds on the commercial market.
Since non-repayable grants are not available commercially, the recipient, in the absence of
such a grant, would have had to raise the equivalent amount from commercial sources and repay it
with interest over a period of time.  It is reasonab le to suppose that in such cases the repayment period
corresponds to the length of the investigation period (normally one year but sometimes less).
Therefore, it is assumed that, whenever the grant is given during the investigation period, the recipientwill incur borrowing costs equivalent to repayment over the whole of the investigation period.
This method achieves consistency by ensuring that identical grants under the same
programme awarded to different companies during the investigation period will be countervailed in
the same amount;  within the investigation period there will be no discrimination due to delays inprocessing applications or to differences in the number of instalments.  In any event, a firm obtaining
a grant towards the end of the investigation peri od may well have known about such an award for
some time and obtained a benefit before it arrives;  it would have expected the grant and thus been
able to reduce its borrowing in the knowledge that a cash injection was on the way.  The method
                                                     
1 G/ADP/Q1/EEC/17-G/SCM/Q1/EEC/17
2 G/SCM/N/1/EEC/2/Suppl.2G/ADP/Q1/EEC/18
G/SCM/Q1/EEC/18
Page 2
followed by the European Community is considered to be the most reasonable way to avoid any
discrimination in the treatment of expensed grants.
Q2. Paragraph E(f)(ii) states that the question of whether a private investor would have put
money into the company in the same situation in which the government provided equity should
be addressed on a case-by-case basis, taking account of the Commission’s practice as regards
State aid policy in this area and the practi ce of the Community’s main trading partners .
Please explain what is your State aid policy in this area and how it might impact your
calculation of the amount of subsidy.  Explain in  general the relationship between your State aid
policy and your countervailing duty policy.
Reply
In Section E(f) paragraphs (i) and (ii) set out the general principles for dealing with the
government provision of equity capital to firms.  Paragraphs (iii) to (vii) give more details on howsuch cases will be examined in practice.
The Commission's state aid practice in this area reflects the provisions of Article 14(a) of the
ASCM.  As regards the government provision of equity capital to either public or private enterprises,
aid exists to the extent that the Government provided such funds on terms more favourable to thosewhich would be acceptable to a private investor providing funds to a comparable private undertaking.
This "market investor" benchmark is used to determine both whether aid is involved and to quantify
it.
The reference to addressing government provision of equity on a case-by-case basis, with
reference to our state aid practice, reflects the fact that the Community has very little experience in
assessing equity infusions in countervailing duty investigations, but a great deal of experience of
doing so in the state aid area.  As and when the issue arises in countervailing cases, we will take
account of expertise as regards methodology built up in the area of state aid to help us assess the
viability of government equity infusions, and dete rmine to what extent the government involved is
acting as a private investor.
As regards the general relationship between state aid and countervailing duty policy, there is
no direct link between the two.  In many cases, th e practice followed under the two policies is very
similar, but their purposes are very different.  State aid policy is intended to discipline aid and prevent
distortions of competition within the Community, according to Articles 92 and 93 of the EC Treaty.
On the other hand, the aim of countervailing duty policy is to give legitimate protection toCommunity industry against subsidized imports, in accordance with its basic instruments,
Regulation 2026/97 and Decision 1889/98, provided that such imports have caused injury and
countervailing measures are in the Community interest.
Q3. For non-recurring subsidies, paragraph F(a)(ii) calls for increasing the amount of the
subsidy by the average amount of interest which the recipient would expect to earn on the non-
depreciated amount of total grant over the whole period of allocation.  This has the effect of
calculating a rate of subsidization which does  not change over the course of the allocation
period.  Given that the recipient receives a great er benefit from having the money at its disposal
earlier in the allocation period rather than later, please explain why it is appropriate to have an
unchanging subsidy rate over the course of the al location period.  On a net present value basis,
how do the amounts countervailed under your methodology compare with the face value of the
original subsidy?G/ADP/Q1/EEC/18
G/SCM/Q1/EEC/18
Page 3
Reply
It is correct to say that in allocating a non-recurring subsidy over time and adding interest to
take account of the time value of money, the Community averages out the total benefit so that theamount attributed to each year of the allocation peri od is the same (see Example 6, page 14).  On a net
present value basis, the total amount countervailed should equal the face amount of the subsidy.  In
practice it is correct that the amount of subsidy changes every year under the time value of money
approach, since the recipient receives a greater benefit from having the money at its disposal earlier in
the allocation period rather than later.  The reas on for apportioning the subsidy over time in equal
amounts is that the Community, imposing duties on a prospective basis for five years, does not carry
out systematic annual reviews to determine the actual  amount of duty payable, as in the case in the
United States.  Since duties are imposed prospectively, it would be both impractical and too
burdensome on the parties concerned to change the amount of duty every year to faithfully reflect the
declining balance amounts of subsidy.  For this reason, the Community has averaged out the total
subsidy over the allocation period, thus capturing the whole amount of the benefit (without exceeding
it on an overall basis), while at the same time minimizing the burden on interested parties.
__________