RESTRICTED
WORLD TRADE G/SCM/Q2/CRI/5
17December 1997
ORGANIZATION(97-5531)
Original: Spanish Committee onSubsidies and
Countervailing Measures
SUBSIDIES
Replies toQuestions Posed byCanada1,theEC2,Japan3andThailand4
Regarding theNewandFullNotification ofCosta Rica5
Thefollowing communication, dated 21October 1997, hasbeenreceived fromthePermanent
Mission ofCosta Rica.
_______________
CONTENTS
Page
Replies toquestions posed byCanada ..........................1
Replies toquestions posed bytheEC..........................3
Replies toquestions posed byJapan ...........................5
Replies toquestions posed byThailand .........................8
REPLIES TOQUESTIONS POSED BYCANADA
I. EXEMPTION FROM COMPANY TAX
Q.1. Istheprogramme offered toalleconomic sectors including agriculture?
Reply
Allcompanies thatsigned anexport contract before 3April 1992areentitled totheexemption
fromcompany tax.Thistypeofexport contract could havebeensigned byanyperson, whether natural
orlegal, national orforeign, whohadundertaken toproduce non-traditional goods and/or export them
tothirdmarkets. Thecriterion foraccording theexemption fromcompany taxisnotwhether companies
produce primary ornon-primary products, butwhether theyproduce "non-traditional exports", and
whether these exports aredestined to"third markets". "Non-traditional exports" means allexports,
bothagricultural andmanufactured goods, thatarenottraditional products. Thefollowing aretraditional
products:
- Coffee (excepting roasted, ground andpackaged coffee, inbagsortinswithanetweight
notexceeding 5kilograms perunit);
1G/SCM/Q2/CRI/4,2G/SCM/Q2/CRI/3,3G/SCM/Q2/CRI/2+Rev.1,4G/SCM/Q2/CRI/1.
5G/SCM/N/3/CRI.G/SCM/Q2/CRI/5
Page2
- fresh bananas;
- cocoa beans;
- refined canesugar;
- paddy andhulled rice;
- beans;
- maize;
- sorghum;
- unmanufactured tobacco, including tobacco refuse;
- untanned skins andhides, including parings oftanned hides;
- meatofbovine animals, fresh, chilled orfrozen, excepting veal;
- logsandsawn wood;
- unprocessed mineral products;
- livebovine animals, excepting thoroughbreds;
- liveswine, excepting thoroughbreds;
- livehorses, excepting thoroughbreds;
- cotton;
- unprocessed non-metallic minerals, excepting coal,petroleum, fertilizer andprecious
stones;
- ironoreandconcentrates;
- scraps ofironandsteel;
- common non-ferrous metal oresandtheirconcentrates;
- non-ferrous metal scraps;
- silver andplatinum ores;
- coalandbriquettes;
- coke;
- coins.
Inshort, although theexemption fromcompany taxisnotapplicable toallsectors, itmaybe
granted toagricultural products thatmeettheabove-mentioned criteria.G/SCM/Q2/CRI/5
Page3
II. GRANTING OFTAX CREDIT CERTIFICATES (CATS)
Q.2. Istheprogramme offered toalleconomic sectors including agriculture?
Reply
TheTaxCredit Certificate (CAT) isasubsidy included inallexport contracts signed before
2December 1992. Asinthereply toquestion 1above, thebenefit isgranted fornon-traditional exports
tothirdmarkets, andnotdepending onwhether theproducts aremanufactures orprimary products.
Therefore, although CATs arenotapplicable toallsectors, theymaybeaccorded toagricultural exports
thatmeettherequirements described above.
REPLIES TOQUESTIONS POSED BYTHE EUROPEAN COMMUNITY
Q.1 Exemption from company tax
Thisscheme provides foranexemption from company taxforenterprises thatsigned an
export contract before 3April 1992. These companies are100percentexempted from taxon
thenetprofits earned ontheexport ofproducts. Theprogramme aims topromote exports of
non-traditional products andtoattract foreign investment. Theprogramme isadministered by
theNational Council forInvestment andExport Promotion.
Theexport contract maybesigned byanynational orforeign natural orlegalperson who
undertook toexport non-traditional goods tothird markets providing theexport market does
notliewithin acountry where Costa Ricahasafreetrade agreement. Costa Rica claims that
there isnoinformation regarding theeffects ofthesubsidy.
Thisscheme seems tobecontingent upon export performance since theexemption from
company taxisonlygranted forcompanies thathavesigned anexport contract. TheCommunity
would likeCosta Rica tocomment onthecompatibility oftheprogramme withitsobligations
under theSubsidies Agreement, andtoindicate whether there areanyplans tophase outthis
subsidy.
Reply
Costa Ricaiscomplying withallitscommitments under theAgreement onSubsidies ofthe
WTO. Even though theexemption fromcompany taxcould havebeenconsidered anexport subsidy
asitiscontingent upon thesigning ofanexport contract, itshould bepointed outthatCosta Rica
undertook todismantle thispractice under theterms ofArticle 27oftheAgreement onSubsidies and
Countervailing Measures oftheWTO. Inthisconnection, Article 27.2(b) provides asfollows:
"The prohibition ofparagraph 1(a)ofArticle 3shallnotapply to:...(b)other developing
country Members foraperiod ofeight years from thedateofentry intoforce oftheWTO
Agreement, subject tocompliance withtheprovisions inparagraph 4."
Theabove-mentioned paragraph 4provides asfollows:
"27.4 Anydeveloping country Member referred toinparagraph 2(b)shallphase outitsexport
subsidies within theeight-year period, preferably inaprogressive manner. However, a
developing country Member shall notincrease thelevel ofitsexport subsidies, andshall
eliminate them within aperiod shorter thanthatprovided forinthisparagraph when theuse
ofsuchexport subsidies isinconsistent withitsdevelopment needs ..."G/SCM/Q2/CRI/5
Page4
Intheparticular caseoftheexemption from company tax,thatsubsidy wasstarted in1984,
when itwasdecided thatitwould remain inforce for12years. Therefore, asof1October 1996,
thefirstdayofthe1997fiscal year, theexemption wasnolonger inforce. Itselimination onthedate
mentioned isproof ofCosta Rica'sendeavours notonlytoabide bytherules anddisciplines ofthe
Agreement onSubsidies, butalsotodismantle suchpractices within aperiod shorter thanthatenvisaged
intheAgreement inquestion.
Q.2. TaxCredit Certificates (CATs)
CATs constitute asubsidy included inallexport contracts signed before 2December 1992.
These certificates areissued bytheCentral Bank ofCosta Rica andareused topaydirect or
indirect taxes. Thegranting oftheCAT depends onwhether theexporting enterprise thathas
signed theExport Contract hasaspecific percentage ofnational content intheexported product.
Thesystem works according totheprinciple "thehigher thenational content, thehigher theamount
ofCAT"(expressed asapercentage off.o.b.). According toCosta Rica, thescheme isgeneral
depending ontheonecriterion e.g.thesigning ofanexport contract.
TheCommunity further examined thisscheme andfound thatthemajority ofthesubsidies
aredestined foragriculture. Thetotal amount ofCAT subsidies wasaccording toCENPRO
approximately $67.2 million. Therepartition isasfollows: 33percentforagriculture, 28.28
percentagro-industry, 27.3percentindustry, 6percenttextiles and4.9percentother. In
addition, thefollowing benefits areprocured totheexporting enterprises: preferential harbour
expense rates, accelerated depreciation andpreferential short-term bank loans. Itisclear that
theprogramme iscontingent upon local content. TheCommunity requests more detailed
information onthisprogramme anditstrade effects. Inaddition, theCommunity would like
Costa Ricatocomment onthecompatibility ofthescheme withitsliabilities under theSubsidies
Agreement, andtoindicate whether there areanyplans tophase outthissubsidy.
Withregard tothecompatibility ofCATs withtheobligations contained intheAgreement on
Subsidies, asinthecaseexplained inthepreceding reply, Costa Ricaiscomplying withallitsobligations
under theaforementioned Agreement. Although itistruethatthegranting ofaCATdepends onwhether
theexporting enterprise thathassigned anexport contract hasaspecific percentage ofnational content
intheexported product, itmust benoted thatCosta Ricahascommitted itself todismantling these
practices inaccordance withArticle 27oftheAgreement onSubsidies andCountervailing Measures
oftheWTO. Inthisregard, Article 27.3ofsaidAgreement provides:
"27.3 Theprohibition ofparagraph 1(b)ofArticle 3shallnotapply todeveloping country
Members foraperiod offiveyears, andshallnotapply toleast-developed country Members
foraperiod ofeight years, from thedateofentry intoforce oftheWTO Agreement."
Onthatbasis, Costa Ricamusteliminate allsubsidies thatarecontingent upontheuseofnational
rather thanimported products by1January 2000. Intheparticular caseofCATs, theyarealready
being dismantled inagradual process which willculminate in1999, thatis,before theexpiry ofthe
period prescribed bytheWTO Agreement onSubsidies. Forthesakeofclarity, anexplanation of
theprocedure fordismantling thisincentive follows.
CATs began tobeissued in1988 when theCompany TaxActNo.7092 wasenacted. CATs
arenotgranted tocompanies thatsigned export contracts after2December 1992, since itwasdecided
toabolish thesubsidy asofthatdate. Nevertheless, contracts signed before thatdatewere eligible
forCATs upto1996, asexpressly provided under theAct.Thisnotwithstanding, asof7January 1992,
companies thathavesigned export contracts andapplied fortheCAThavehadtheoption ofprolonging
until1999theperiod ofeligibility forCATs, iftheyaccept undertakings toreduce theamounts oftheG/SCM/Q2/CRI/5
Page5
certificates. Inother words, atanytimebefore 1996, ifacompany wanted toobtain aCAT upto
1999, itcould doso,buttheamount ofthecertificate, calculated asapercentage ofthef.o.b. value
oftheexports, would bereduced by30percent, andbesides, thecompany would alsohavetopay
the5percenttaxdifferential ofthefullCAT ascompared withthereduced CAT.
Asindicated above, thereisnoprovision fortheprolongation ofexport contracts orofCATs
beyond thelastdayofthefinancial year1999, which is30September 1999. Onthatdate,allcontracts
withrelated benefits thatwere eligible forprolongation asexplained above willexpire definitively.
Allother contracts expired onthelastdayofthe1996 fiscal year, thatis,on30September ofthis
year.
Noinformation isasyetavailable onthetrade effects ofthissubsidy. Itwillbesubmitted
assoonasitbecomes available.
REPLIES TOQUESTIONS POSED BYJAPAN
Q. A. Exemption from company tax
Paragraph 6ofthenotification states thatallenterprises thatsigned anexport contract
before 3April 1992 were entitled toexemption from company taxandthatanexport contract
mayhavebeensigned byanynational orforeign natural/legal person whoundertook toproduce
and/or export non-traditional goods tothird markets (markets incountries withwhich there are
noagreements granting freetrade treatment withregard totheexported goods). Inthisconnection,
please answer thefollowing questions.
1. Does thisprogramme constitute anexport subsidy?
Reply
Havingbeengrantedaspartofanexportcontract,theexemptionfromcompanytaxdidconstitute
anexport subsidy.
2. HasCostaRicaalreadynotifiedthisprogrammeunderArticle28.1oftheSCMAgreement?
Reply
Costa Ricahasnotnotified thisprogramme under Article 28,butunder Article 25.2ofthe
Agreement onSubsidies. Article 28oftheAgreement would notbeapplicable inthiscase,for,under
paragraph 28.1, thatArticle applies to:
"Subsidy programmes which havebeenestablished intheterritory ofanyMember before the
dateonwhich suchaMember signed theWTO Agreement andwhich areinconsistent with
theprovisions ofthisAgreement ..."(emphasis added).
Inthespecific caseofexemption fromcompany taxaspartofexport contracts inCosta Rica-
anincentive which, asexplained above, isnolonger inforce -theexemption wasnever incompatible
withtheprovisions oftheAgreement onSubsidies, andtherefore didnotneedtobenotified under
Article 28.
Asalready discussed, Article 27.2(b) provides aperiod ofeightyears asfromthedateofentry
intoforce oftheWTO Agreement fordeveloping countries suchasCosta Ricatodismantle export
subsidies. Inprinciple therefore, Costa Ricamust dismantle thisprogramme by1January 2003.G/SCM/Q2/CRI/5
Page6
Nevertheless, asindicated above, on1October 1996, thefirstdayofthe1997 financial year, these
exemptions ceased toexist. Thisisevidence oftheeffort being made byCosta Ricanotonlytoabide
bytherulesanddisciplines oftheAgreement onSubsidies, butalsotodismantle thispractice within
aperiod shorter thanthatprovided forunder theaforementioned Agreement.
3. WillCosta Ricaphase outthisprogramme within eight years?
Reply
Asalready stated, thisexemption ceased toexistasfrom1October 1996, thefirstdayofthe
1997 financial year.
B. Granting ofTaxCredit Certificates (CATs)
Paragraph 6ofthenotification states thefollowing:
Criterion forallocating CATs isthatthebeneficiary signed anexport contract.
Anynational orforeign natural/legal person engaged inexporting products withaspecific
national content ratecansignanexport contract withtheState ofCosta Rica; and
Ifitwassigned before 2December 1992, itwasissued withaCAT asanincentive. In
thisconnection, please answer thefollowing questions:
- What does"aspecific national content" mean?
Reply
Theconcept of"national content" istaken tomean thesumofcostsorexpenditures generated
inthecountry aspartoftheprocess ofproducing goods andservices.6Theconcept of"national content"
isusedtocalculate national value added, which serves asaguideline forcalculating theapplicable
amount ofaCAT. Theformula usedisthefollowing:
PERCENTAGE NATIONAL VALUE ADDED = NATIONAL CONTENT
TOTALCOSTOFPRODUCTION7
6National content isunderstood asthesumof:wages andsalaries paid, social benefits, rentpaidforland
andbuildings, interest andcommissions, depreciation ofassets, indirect taxes (national, municipal), exchange
ratedifferentials onaccount ofinterest payments toforeign entities, thevalue ofdomestic rawmaterials used,
domestic containers andpackaging, fuelsandlubricants used, thevalue ofelectricity andofservices bought from
otherdomesticcompanies(expensesfortelephone,telex,domestictransport,officesupplies,stationery,publicity,
general supplies, postal services, water, maintenance, laboratories, repairs, insurance, professional services,
rents orother expenses).
Resolution oftheNational Council forInvestments, Rules onProfits, Time-Limits andConditions ofExport
Contracts, Resolution published inOfficial Gazette No.229of1December 1994.
7Theconcept oftotalproduction costisdefined asthesumofalldomestic orforeign costs andexpenditures,
involved intheprocess ofproducing goods andservices, including wages andsalaries, social benefits, rents paid,
interest andcommissions, electricity, rawmaterials consumed, spare parts andother expenditures.G/SCM/Q2/CRI/5
Page7
Does thisprogramme constitute anexport subsidy?
Reply
CATs constitute anexport subsidy which is,however, being dismantled inkeeping withthe
obligations under theAgreement onSubsidies.
HasCosta Ricaalready notified thisprogramme under Article 28.1?
Reply
Costa Ricahasnotnotified thisprogramme under Article 28,butunder Article 25.2ofthe
Agreement onSubsidies. Article 28oftheAgreement would notbeapplicable inthiscase, because,
asparagraph 28.1states, thatArticle applies to:
"Subsidy programmes which havebeenestablished intheterritory ofanyMember before the
dateonwhich suchaMember signed theWTO Agreement andwhich areinconsistent with
theprovisions ofthisAgreement ..."(emphasis added).
Inthisspecific caseofCATs issued aspartofexport contracts signed before 2December 1992,
these cannot beconsidered asinconsistent withtheAgreement onSubsidies, anditwastherefore not
necessary tonotify them under Article 28.Itshould bepointed outthatCosta Ricaundertook to
dismantle thispractice inaccordance withArticle 27oftheAgreement onSubsidies andCountervailing
Measures oftheWTO. Inthatconnection, Article 27.3ofsaidAgreement provides:
"Theprohibition ofparagraph 1(b)ofArticle 3shallnotapply todeveloping country Members
foraperiod offiveyears, andshallnotapply toleast-developed country Members foraperiod
ofeight years, from thedateofentry intoforce oftheWTO Agreement".
Onthatbasis,CostaRicamustdismantleallsubsidiesthatarecontingentupontheuseofnational
rather thanimported products by1January 2000. Intheparticular caseofCATs, theyarealready
being dismantled inagradual process which willculminate in1999, thatis,before theexpiry ofthe
period allowed under theAgreement onSubsidies oftheWTO. Asexplained above, Article 27.2(b)
provides foraperiod ofeight years asfrom thedateofentry intoforce oftheWTO Agreement for
developingcountriessuchasCostaRicatodismantleexportsubsidies.Inprincipletherefore,CostaRica
mustdismantlethisprogrammeby1January2003.Nevertheless,asindicatedabove,on1October1996,
thefirstdayofthe1997 financial year, these exemptions ceased toexist. Thisisevidence ofCosta
Rica'sendeavours notonlytoabide bytherules anddisciplines oftheAgreement onSubsidies, but
alsotodismantle these practices ahead oftheperiod allowed under theaforementioned Agreement.
WillCosta Ricaphase outthisprogramme within eight years?
Reply
Inthiscasethereply isnegative for,asexplained inthepreceding reply, Costa Ricawillphase
outtheprogramme within aperiod oflessthanthefiveyears stipulated inArticle 27.3oftheAgreement
onSubsidies.G/SCM/Q2/CRI/5
Page8
REPLIES TOQUESTIONS POSED BYTHAILAND
A. Exemption from company tax
Q.1. What types ofproducts areclassified asnon-traditional exports?
Reply
"Non-traditional exports" means allexports thatarenottraditional products. Forfurther details,
please seethereply toquestion 1asked byCanada.
Q.2. Does thecompany which hassigned theexport contract before 3April 1992 stillgeta
benefit ofcompany taxexemption? Ifyes,when willthisincentive beterminated?
Reply
Aswasalready indicated, on1October 1996, thefirstdayofthe1997fiscal year,thisexemption
ceased toexist. Forfurther details, please refer tothereply toquestion 1posed bytheEuropean
Community.
Q.3. Arethere anyother incentives, besides company taxexemption, given toexporters who
signed anexport contract? Please givedetails.
Reply
Article 66oftheCompany TaxAct,Act7092 of21April 1988 andtheamendments thereto
describe other incentives suchasthesimplification ofprocedures, TaxCredit Certificates -under the
conditions already discussed -technical assistance andhuman resource training forenterprises.
Q.4. What isthetrade effect ofthesubsidy?
Reply
Noinformationisavailableonthetradeeffectofthesubsidy.Thatinformationwillbesubmitted
assoonasitbecomes available.
B. Granting ofTaxCredit Certificates (CATs)
Q.1. What isthetrade effect ofthesubsidy?
Reply
Noinformationisavailableonthetradeeffectofthissubsidy.Thatinformationwillbesubmitted
assoonasitbecomes available.
Q.2. CanCosta Ricaconfirm thatthenational content requirement forCATs willbeterminated
after 1999?
Reply
Asalreadyexplained,CATsarealreadybeingabolishedinagradualprocesswhichwillculminate
in1999. Forfurther details, please seethereply toquestion 2asked bytheEuropean Community.