RESTRICTED
WORLD TRADE G/SCM/Q2/KOR/4
1October 1996
ORGANIZATION(96-3925)
Original: English Committee onSubsidies andCountervailing Measures
SUBSIDIES
Questions from theEUROPEAN COMMUNITY Regarding theNew
andFullNotification ofKOREA1
Thefollowing communication, dated 19September 1996, hasbeenreceived fromthePermanent
Delegation oftheEuropean Community.
_______________
Korea submitted on25April 1996itsnotification ofsubsidy programmes totheWTO pursuant
toArticle XVI:1 GATT 1994 andArticle 25oftheWTO Subsidies Agreement. Inthisrespect, the
European Communities would liketoobtain clarification onanumber ofissues onthenotified schemes
asdescribed below.
Moreover, theCommunity hasobtained information ondifferent subsidy schemes which were
notnotified totheWTO although theirnotification appears toberequired pursuant toArticle 25.2
oftheSubsidies Agreement.
Furthermore, theCommunity would likeKorea tocomment foreachspecific programme on
howitwillimplement oriscurrently implementing itsobligations under theSubsidies Agreement.
I. NOTIFIED SUBSIDY PROGRAMMES
(a) Reserves forexport losses
- Could Korea provide more detailed information onthesectors which havebenefited
from thistaxconcession?
- Korea states thattheprogramme willendon31December 1998. However, since this
programme wasnotnotified under Article 28oftheWTO Subsidies Agreement, it
seems clearly incompatible withArticle 3.1oftheSubsidies Agreement. CanKorea
explain whythisprogramme isstillinforce?
- Could Korea provide amore detailed analysis ofthecalculation ofthetaxconcession,
inparticular howthe"reserves asloss" areoffset totaxable income?
1G/SCM/N/3/KOR+Rev.1.G/SCM/Q2/KOR/4
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(b) Reserves foroverseas market development
- CanKorea elaborate ontheeligibility criteria?
- What ismeant witha"business earning foreign currency"? Isthisequivalent toexport
activity?
- Could Korea provide amore detailed analysis ofthecalculation ofthetaxconcession,
inparticular howthe"reserves asloss" areoffset totaxable income?
- Korea states thattheprogramme willendon31December 1998. However, since this
programme wasnotnotified under Article 28oftheWTO Subsidies Agreement, it
seems clearly incompatible withArticle 3.1oftheSubsidies Agreement. CanKorea
explain whythisprogramme isstillinforce?
(c) Facility investment loans
- Could Korea provide thecriteria foreligibility? Isexport activity theonlycriterion?
- Korea states thattheprogramme hasnodateofexpiration. However, since this
programme wasnotnotified under Article 28oftheWTO Subsidies Agreement, it
seems clearly incompatible withArticle 3.1oftheSubsidies Agreement. CanKorea
explain whythisprogramme isstillinforce?
(d) Taxcredit forinvestment infacilities
- Could Korea clarify whether thesixforms oftaxcredits canbecumulatively granted
toaneligible company?
- Isexport activity acriterion foroneofthesixcategories oftaxcredit?
(e) Assistance programme topromote thespread ofdomestically produced mini-computer
- Could Korea provide thecriteria foreligibility?
- This programme aims topromote theuseofthedomestically manufactured
mini-computer. Itseems toconfer abenefit fortheuseofdomestic overimported
computers andisconsequently prohibited byArticle 3.1(b) oftheWTO Subsidies
Agreement. Could Korea comment onthisissue?
II. SUBSIDY PROGRAMMES NOT NOTIFIED TOWTO
TheCommunity examined thedifferent policies oftheKorean authorities withrespect to
incentives tothelocalindustry. Inthisrespect, thefollowing programme isavailable inKorea and
wasnotnotified totheWTO.
(a) Deferred export financing fund
TheExport-Import Bank ofKorea manages thedeferred export financing fund. This
bankisapublic corporation dealing mainly withpreferential loans forexports, imports and
overseas investments. Thefundprovides bridge financing forexporters foraperiod of
sixmonths totenyears. Exceptions areforeseen forspecific sectors. Thelending rateswill
be8percentforforeign currency loans and10percentforWonloans.G/SCM/Q2/KOR/4
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Theproductsorprojectseligibleforthisfinancingareindustrialfacilities,ships,railway
equipment, rawmaterials, machinery, steel, copper andallexports where payment isreceived
more thansixmonths aftershipment.
(b) Incentives forstrategic items
TheMinistry ofFinance andEconomy hasdeveloped aprogramme where 105strategic
items willbepromoted through favourable loans fromtheIndustrial Development Fund. These
105items havebeenidentified bytheKorean Government asbeing ofinterest forlocalization
ofproduction.
For1995 thetotalbudget oftheprogramme wasW75 billion. Thebenefit forthe
eligible companies consist ofatwo-year grace period andthree-year repayment ata6.5per
centinterest rate. Themaximum loanamount isW0.5 billion perproject. The105items
which aretobepromoted canbedivided intoseven main categories: general machinery,
precision machinery (e.g. measuring apparatus), transportation machinery (e.g. bearings,
injection systems forcars), electronics andelectronic goods (e.g.electronic control devices
forcars), ironandsteel, fabrics (yarns) andchemical goods (e.g.adhesives, copper).
(c) Freeexport zoneprogramme
Companies located infreeexport zonereceive exemption fromcorporate, residence,
defence andproperty taxes. Korea isrequested togivethelocation ofthese zones andthe
main industries established inthem.
(d) Accelerated depreciation
TheActconcerningtheRegulationofTaxReductionandExemption(Article25)permits
corporations earning morethan50percentoftheirtotalturnover inforeign exchange toincrease
theirnormal depreciation by30percent.
(e) High technology financing
Korea established aprogramme providing aidtocompanies andinstitutions forthe
development ofhightechnological products. Eligible projects canobtain upto50percent
financing fromtheKorean authorities. Thefinancing isalsoapplicable tothecommercialization
oftheproducts concerned.
KoreacreatedtheKoreaTechnologyBankingCorporationwhichisexclusivelycompetent
fortheselection andfinancing ofprojects. Thefinancing includes subsidized loans, capital
participation orestablishment ofproduction facilities.
(f) Interest subsidies
Korea 'smonetary policy andartificially highinterest ratelevel aimtoconfer an
important benefit tothedomestic industry. Thecommercial market interest ratesarearound
18-19 percent.TheBankofKorea (through commercial banks) setspreferential ratesforexport
activity anddomestic activity. Commercial bankinterest ratesforindustry arecurrently down
to13percentfornormal bankloans, 10percentforpolicy loans and7percentforforeign
exchange loans.G/SCM/Q2/KOR/4
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TheCommunity considers thatthedifference ininterest rates effectively constitute
asubsidy, sincethedepression ofpreferential ratesmustinvolve afinancial contribution from
thegovernment. Theinterest ratedifferentials described above giveaclearbenefit toexporting
industries; thebenefit becomes especially transparent when leadtimes arelongandprices
aredenominated instrong currencies.
(g) Industrial Rationalization Fund
TheIRFwasestablished forreplacing worn-out facilities ofsmall- andmedium-sized
manufacturing companies.
Thisfundgives loans atpreferential ratestosmall andmedium sized enterprises. In
theperiod 1989-1992 theFund gaveW118.2 million inloans atpreferential rates(7percent).
TheCommunity requests, ifappropriate, foreachofthese programmes anotification
using thequestionnaire format.