RESTRICTED  WORLD TRADE  
ORGANIZATION  G/SCM/W/415/Rev.2* 
15 May 1998 
 (98-1936) 
Committee on Subsidies 
and Countervailing Measures  
 
  
REPORT BY THE INFORMAL GROUP OF EXPERTS 
TO THE COMMITTEE ON SUBSIDIES AND COUNTERVAILING MEASURES 
 
Note from the Informal Group of Experts
 
 
Revision  
 
 
 The attached report is submitted by the In formal Group of Experts to the Committee on 
Subsidies and Countervailing Measures ("the Comm ittee").  As reflected in document G/SCM/5, the 
Informal Group of Experts was created by a decision of the Committee, at its meeting of 13 June 1995, with the following terms of reference: 
 
"To examine matters which are not specified in Annex IV to the Agreement or which 
need further clarification for the purposes of paragraph 1(a) of Article 6, and to report 
to the Committee such recommendations as the Group considers could assist the Committee in the development of an understanding among Members, as necessary, regarding such matters." 
 
 In accordance with these terms of reference, the Informal Group of Experts' report contains a 
number of recommendations with respect to particul ar calculation issues arising under Annex IV to 
the Agreement on Subsidies and Countervailing Measures ("the Agreement").  In addition, it reports 
on the Group's discussions of all issues that it considered.  An outline of the issues discussed by the 
Group was circulated in G/SCM/W/413.  The report is organized such that its main body describes the 
Group's discussions and recommendations, by topic.  Following this, the texts of all of the Group's recommendations are appended separately.  Also appended is the full text of Annex IV of the 
Agreement.   The Committee decided that the Informal Group would be composed of experts nominated by 
Members and by countries eligible to become orig inal Members of the WTO, and that the experts 
would serve in their personal capacities rather th an as representatives of governments.  The 
Committee further decided that the members of th e Group should have substantive expertise in 
subsidy calculation methodology and be able to contri bute actively, both orally and in writing, to the 
work of the Informal Group.  The members of the Informal Group of Experts are: Mr. Robert Arnott, 
succeeded by Mr. David Sprott (Australia); Mr. Stephen Gospage (EC); Mr. Takuya Ishikawa, 
succeeded by Mr. Jo Okumura (Japan); Mr. Ju-Y oung Lim (Korea); Mr. Roy A. Malmrose (US); 
Mr. Alberto Lerín Mestas (Mexico); Mr. Wayne Neamtz, succeeded by Mr. Andre Moncion (Canada); and Ms. Vera Thorstensen (Brazil).  Mr. Vi ctor do Prado (Brazil) served as Chairman of the 
Group, and Ms. Clarisse Morgan (WTO Secretariat) as Secretary of the Group. 
 
                                                     
 
* This document  cancels and replaces document G/SCM/W/415/Rev.2 dated 15 May 1998 in English only. G/SCM/W/415/Rev.2 
Page 2  
 
 The Group thus far has held ten meetings, on the following dates:  1 November 1995, 
13 December 1995, 29 February 1996, 26 April 1996, 18-19 July 1996, 7-8 October 1996, 
25-26 November 1996, 5-6 February 1997, 8-10  April 1997, and 21-22 May 1997.  The Group 
expects to continue meeting to try to resolve issu es where to date no cons ensus has been reached, 
which include accelerated depreciation, upstream subs idies, equity infusions, royalty-based financing, 
sales denominator for export subsidies, and expected cost/risk of ad hoc loan guarantees.   
 
 The Group wishes to emphasize the following substantive points with respect to the report.  
First, as required by paragraph 1 of Annex IV , all of the Group's discussions were held and 
recommendations formulated from the point of view of cost to government.  Second, the Group's recommendations in the context of Article 6.1( a) and Annex IV of the Agreement are made 
exclusively with respect to that context, and are without prejudice to any other area (such as 
countervailing measures).  Third, it is implicit throug hout the report that only measures that constitute 
specific subsidies within the meaning of Articles 1 and 2 of the Agreement, to which Article 6.1(a) 
applies per the Agreement - in whatever form (i.e.,  grants, loans, etc.) - are covered by the Group's 
recommendations.  As such, any subsidy exempted by the Agreement from the application of Article 6.1(a) is not covered by the report or recommendations.  Fourth, the Group does not view the 
report as exhaustive of every potentially relevant issue under Article 6.1(a) and Annex IV.   Thus, the 
fact that the report may not refer to a given issue or given measure is not meant to imply that such an 
issue is irrelevant in this context, or that such  a measure should not be included in any calculation 
under Article 6.1(a) and Annex IV.     Finally, the Group recognizes that, in the interests of transparen cy, predictability and 
administrability, its recommendations should be as simple as possible.  For this reason, for certain 
questions which were discussed but were found to be  excessively difficult to administer and/or to 
have at most a small impact on the final results of any given calculation, the Group does not 
recommend any adjustments in the calculations of cost to government or ad valorem  subsidization.  
As an example, the question of flotation costs of bonds was discussed, as were administrative costs 
associated with the provision of subsidies.  While  these costs arguably should be included in any 
Article 6.1(a) calculation, the Group believes that the effort to measure these costs would outweigh 
any marginal increase in the accuracy of the subsidy calculations that might result.   
 
 This revised version of the report takes in to account comments and suggestions made by 
Members in the context of Committee informal consultations regarding the report. 
  
  G/SCM/W/415/Rev.2 
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REPORT BY THE INFORMAL GROUP OF EXPERTS 
TO THE COMMITTEE ON SUBSIDIES AND COUNTERVAILING MEASURES 
 
Introduction  
 
 The Informal Group of Experts conceived its basic task, pursuant to the mandate assigned to 
it by the Committee, as formulating recommendations on how to calculate the cost to government of, 
and the ad valorem  subsidization from, particular types of subsidies.  In preparing this report, the 
Group recognized that a number of issues that it had discussed were issues that might potentially 
affect more than one type of subsidy, and decided that, for ease of reading and logic of presentation, the report should discuss such cross-cutting issues firs t.  The issues of this type that were discussed 
are:  expensing versus allocation of subsidy benef its; allocation period; government cost of funds and 
time value of money; adjustments for inflation an d interest; inflationary economy countries; sales 
denominator; and start-up situations.  These issues are presented in Sections I through VII, 
respectively.  Section VIII then addresses the individual types of subsidies discussed by the Group:  
grants, loans, interest rate subs idies, debt forgiveness, loss coverage, tax concessions, equity 
infusions, loan/credit guarantees, government provision of goods and/or services, assumption of legal 
obligations, export-related subsidies, upstream su bsidies, multiple exchan ge rate programmes, 
research and development subsidies, and worker training.  The text of the report presents summaries 
of the Group's discussions on each point, and summaries of its recommendations.  Separately appended to the report are the texts of all of th e Group's recommendations.  Regarding the measures 
identified, only measures that constitute specific su bsidies within the meaning of Articles 1 and 2 of 
the Agreement, to which Article 6.1(a) applies pe r the Agreement, are covered by the report and 
recommendations.  As such, any subsidy exempted by the Agreement from the application of 
Article 6.1(a) is not covered by the report or recommendations.       
 
 I. EXPENSING VERSUS ALLOCATI ON OF SUBSIDY BENEFITS   
A. I
MPLICATIONS FOR DETERMINATION OF SERIOUS PREJUDICE BASED ON 5 PER CENT 
THRESHOLD  
1. The question of whether and under what circumstances subsidies should be allocated over 
some multi-year period, versus attributed to a single  year (i.e., "expensed") was extensively discussed.  
In particular, it was noted that a lthough the payment of a subsidy generally would occur at a single 
moment in time, it might not be appropriate in the co ntext of Article 6.1(a) to attribute that subsidy 
(i.e., the presumption of serious prejudice based on more than 5 per cent ad valorem  subsidization of a 
product) exclusively to a single year.  If this were done, even a very large subsidy would have no 
effects, for purposes of Article 6.1(a), beyond the year in which it was granted.  That is, regardless of 
its size, the impact of any given subsidy would vanish, for purposes of Article 6.1(a), as of the end of 
the year in which it was granted.  In addition, if the possibility of allocation did not exist, the ad 
valorem  subsidization during the year in which the subsidy was granted could be overstated. 
2.  Such an outcome was deemed inappropriate unde r Article 6.1(a) for a number of reasons.  
First, if the presumption of serious prejudice could never last beyond a single year, this might make implementation of an appropriate remedy (i.e., removal of the adverse effects of the subsidy or withdrawal of the subsidy) difficult where serious  prejudice under Article 6.1(a) was found.  For 
example, by the time a remedy was obtained, the "adverse effects" of the subsidy purportedly would 
have vanished of their own accord.  Second, if expensing resulted in overstatement of the ad valorem  
subsidization for the year in which the subsidy was granted, this could give rise to an unjustified 
presumption of serious prejudice for that year.  Mor eover, paragraph 7 of Annex IV, by referring to 
pre-WTO subsidies whose benefits were allocated to  future production, suggests that allocation of 
subsidy benefits is foreseen in the context of calculating 5 per cent ad valorem  subsidization of a 
product.  If there were no possibility of allocat ing any post-WTO subsidies, this would create an 
inconsistency between the allowed treatment of pr e- and post-WTO subsidies in the context of 
Article 6.1(a).   G/SCM/W/415/Rev.2 
Page 4  
 
3. On the other hand, allocating all subsidies, regardless of their nature, would seem 
inappropriate if their impact upon the recipient was limited and of short duration.  Moreover, if all 
subsidies were allocated, the duration of the presumption of serious prejudice might be 
inappropriately lengthened.  Thus, it was concluded that not all subsidies should be allocated.   
4. It thus was necessary to identify under what circumstances subsidies of various kinds should 
be allocated versus expensed.  The Group developed recommendations in this regard, in the form of 
an illustrative table of subsidies that should be allocated versus expensed, along with a cover note 
explaining the underlying principles for such a categorization.  It was felt that such a table would 
create the most transparency and predictability for a ll concerned.  The illustrati ve table and cover note 
are presented in Recommendation 1.   
B. I
LLUSTRATIVE TABLE AND GENERAL PRINCIPLES  (Recommendation 1) 
5. The illustrative table reflects the Group's conclusi ons regarding a number of  points.  First, the 
table indicates that certain types of subsidies (e.g., grants) may be either expensed or allocated, 
depending on the circumstances.  Where a given type of subsidy could be either expensed or allocated 
depending on the circumstances, it is shown straddling the two columns.  Other types of subsidies generally would be either always expensed or always allocated.  Certain considerations relevant to the 
question of expensing or allocating different types of subsidies also are reflected in the table.  
6. The table and cover note reflect certain additional recommendations, as well.  The first of 
these is that research subsidies be presumptively allocated, unless expensing is demonstrated to be 
more appropriate in a given case.  Similarly, it is recommended that non-recurring and/or large 
subsidies be presumptively allocated, unless expensing is demonstrated to be more appropriate in a 
given case.  Further, it was deemed appropriate, primarily from the standpoint of administrative 
convenience, that very small subsidies be expensed re gardless of type or other considerations.  A level 
of less than 0.5 per cent of sales for any individual subsidy is recommended for this threshold.  
Finally, the cover note indicates that the inclusion of any given type of measure in the table is not 
intended to imply that such a measure in all cases wo uld be relevant in the context of Article 6.1(a).   
Rather, only measures meeting the Agreement's defi nitions of "subsidy" and "specificity" would be 
considered in this context. 
7. The table includes a category for export-related subsidies, notwithstanding that the relevance 
of the question of expensing versus allocating in the context of such subsidies might be limited, at 
least with respect to those export-related subsidies that are export subsidies in the sense of the 
Agreement.  That is, the prohibition on export subsid ies, and the non-applicability to such subsidies of 
the presumption of serious prejudice where transition periods apply, could mean that subsidies of this 
type might only rarely be at issue under Article  6.1(a).  On the other hand, where the prohibition 
applies, the Agreement does not appear to force a Me mber to allege that a subsidy is prohibited, and 
therefore to seek a remedy only under Article 4.   Thus it was deemed appropriate to include a 
reference to these subsidies in the table.   
8. The table also reflects discussions as to wh ether subsidies for debt forgiveness and loss 
coverage should be allocated or expensed in the context of Annex IV calculations, or whether they 
should be considered at all, given that such subsid ies would give rise to a separate presumption of 
serious prejudice.  For the reasons discussed in Se ctions VIII.D and E, it was deemed appropriate to 
include such subsidies in the expense/allocate table, without prejudice to the ex istence of any separate 
presumptions of serious prejudice under Article 6.1(b), (c) or (d). 
9. Regarding the subsidies in the table that are shown as sometimes being expensed and 
sometimes allocated, the discussion focused on further elaborating the criteria that might be applied in 
making such a determination in any given case.  The following general prin ciples were identified, 
affirmative answers to one or more of which norm ally would point toward allocating, rather than 
expensing, a given subsidy:  
 1. Whether the purpose of the subsidy was for the purchase of fixed assets  G/SCM/W/415/Rev.2 
 Page 5 
 
 
 
 2. Whether non-recurring and/or large  
 
 3. Whether oriented toward future production 
 
 4. Whether consisting of equity 
 
 5. Whether carried forward in recipient's accounting records 
 
These principles also generally underlie the reco mmendations as to expensing or allocating the 
remaining types of subsidies shown in the table.    
10. The purpose of a subsidy, in particular whet her it is used for acquisition of assets, was 
deemed relevant by the Group.  The Group noted that as a general principle, subsidies for asset 
acquisition should be allocated over time, while recu rring subsidies to cover operating costs or other 
subsidies for non-asset purposes might in  many circumstances be expensed.   
11. The frequency and size of a subsidy were deemed relevant to the question of expensing versus 
allocating.  Just as it is recomm ended that recurring and/or small subsidies be expensed, so is it 
recommended that non-recurring and/or large subsid ies generally be allocated.  One consideration in 
this context is that it might be illogical to expens e very large subsidies due to the likely substantial 
impact that such subsidies would have on the recipient companies beyond the year in which they were received. For example, it is likely that non-recurring large subsidies would be used to purchase fixed assets, or even if not so used, would free up a comparable amount of company funds for this purpose.  
By contrast, recurring subsidies are more likely to be  relatively small, are more likely to be used for 
non-asset purposes, are more likely to be oriented toward present rather than future production, are 
less likely to consist of equity, and are less likely to be carried forward in the recipient's accounts, 
than are non-recurring subsidies.   
12. The remaining general principles are essentia lly self-explanatory.  Whether a subsidy is 
oriented toward production in future periods, consists  of equity, or is carried forward in the recipient's 
accounts were viewed as related to the question of whether its benefits persist beyond a single period, 
and hence whether it should be a llocated to future periods.   
 
 
II. ALLOCATION PERIOD  (Recommendation 2) 
13. For those subsidies that will be allocated, it was recognized that guidance would be useful as 
to how to determine the allocation period.  As a general matter, it is recommended that the average 
useful life of all of the recipient's physical deprec iable assets should be used as the allocation period 
for all types of subsidies except long term loans, and possibly equity infusions, depending on the circumstances.  It is further recommended that the average useful life of assets be calculated as the 
ratio of the total average book value of  operational assets to the average annual depreciation expense. 
14. The recommendations establish a hierarchy of data sources for calculating the average useful 
life of assets in a given situation.  The preferred so urce (from the standpoint of accuracy) is deemed to 
be the overall information for the firm or firms recei ving the subsidy.  If such data cannot be obtained 
or are not reasonable, data for other firms producing the product in the same country could be 
considered, or failing that, data for firms in the sa me business sector in that country (defined as the 
next largest category in the International Standa rd Industrial Classification ("ISIC") or similar 
nomenclature system).  If this is not possible or feasible, data for firms producing the product outside 
that country could be used.  Issues that could affect  the suitability of a given firm's data could include 
the calculation of depreciation expens e on some basis other than the useful life of assets, the use of a 
depreciation method other than straight line, and/or ir regular changes to the asset pool.  Regardless of 
the data source, the Group recommends the method for calculating the useful life of assets that is 
described in paragraph 13 and Recommendation 2.  G/SCM/W/415/Rev.2 
Page 6  
 
15. The most recent relevant multi-year period wh ich is representative of normal operations 
should be chosen for calculating the necessary averag es, to prevent potential extraordinary events in a 
single year from distorting the calculation.  Normaliz ing adjustments may be necessary if assets have 
undergone extraordinary revaluations, or in the case  of hyperinflation.  Moreover, accounting data 
should be preferred to tax depreciation data in selecting a data source for the calculations, as the 
former are the more likely to reflect the true economic lifespan of assets. 
16. For subsidies from long-term loans, it is recomm ended that the allocation period be the life of 
the loan.  For equity infusions, if the amount of the subsidy can be calculated as a grant (i.e., if there is 
a market price for the equity (see Section VIII.G) the allocation period would be the useful life of 
assets, calculated as described.  If there is no su ch market price, however, and some other method is 
used to determine the amount of any subsidy, another basis for determining the allocation period 
might be more appropriate.  For example, the period during which an investor might "reasonably" 
expect a return on an investment could be used, or it could be assumed that a cost to government 
potentially could arise during the entire period in which the government held the equity.  
 
 
III. GOVERNMENT COST OF FUNDS AND TIME VALUE OF MONEY 
17. It was recognized that the cost to government  approach mandated in paragraph 1 of Annex IV 
raises the question, affecting all types of subsidies, of  how a government's cost of funds should be 
measured.  That is, governments raise funds in two ways, taxation and borrowing, each of which 
carries some cost.  Some Group members viewed these costs as limited to the observable 
("monetary") costs associated with raising the fund s.  Others believed that these costs also include 
certain non-observable costs, in particular the op portunity cost to the government associated with 
using such funds, and potential indirect costs of taxation.  The issue discussed was the extent to which 
some or all of these costs should be reflecte d in Article 6.1(a)/Annex IV calculations.   
18. With respect to loans, as set forth in the rele vant section of this report, the Group recommends 
using an appropriate government borrowing rate (i.e., a bond rate) as a proxy for the government's cost of funds.  Thus, the discussion in this sec tion of the government's cost of funds applies to 
allocated subsidies other than loans.  
19. Regarding the observable  monetary component of a government's cost of funds, the Group 
generally agreed that this is comprised of the admini strative costs incurred in raising taxes, as well as 
the interest cost incurred on government borrowing.  The amounts of such costs in principle can be 
directly derived from government accounts.  
20. In this context, some Group members took the view that a weighted average monetary cost of 
funds should be calculated, and attributed to every subsidy provided.  Thus, under this approach, the 
same underlying (average) monetary cost of funds w ould be attributed to all subsidies.  That is, no 
attempt would be made to identify particular subs idies with particular sources of funds.  The 
reasoning behind this proposed approach was that government funds from all sources most often are 
commingled in a general revenue account, making it  impossible in most cases to identify particular 
government expenditures (including subsidies) w ith particular sources of funds (borrowing or 
taxation).  
21. The Group noted that to calculate such a weighted average monetary cost in a relatively 
precise way, detailed data would be needed on the government's monetary costs incurred in raising tax 
revenue, as well as on the different rates of interest paid by the government on its various outstanding 
debt instruments.  Also necessary would be information on the relative proportions of total 
government revenues accounted for by borrowed  funds and tax revenues, respectively.   
22. Although some members of the Group found the concept of the weighted average monetary 
cost of funds useful, the Group nevertheless concluded that trying to apply it in 
Article 6.1(a)/Annex IV calculations might prove not to  be feasible.  Of particular concern in this  G/SCM/W/415/Rev.2 
 Page 7 
 
 
regard would be data availability (especially where several levels of government might be involved), 
as well as practical difficulties of collecting and analysing the data.   
23. In addition, some Group members found the concept of the weighted average monetary cost 
of funds incomplete, in part because it would not reflect in any way the potential indirect cost of 
taxation, which in their view is quite high.  These Group members pointed to many governments’ 
heavy reliance on borrowing as evidence of the extent of this cost. In the view of these Group 
members, if there were no cost to taxation be yond its small monetary administrative cost, 
governments would tax more heavily and rely less on borrowing than is in fact the case.   These 
Group members suggested that the long-term government borrowing rate represents the most accurate 
measure of the potential indirect cost of taxation, in the sense of representing the amount that governments are willing to pay to avoid resorting to additional taxation.   
24. Some Group members also felt that governme nts incur opportunity costs in using funds to 
provide subsidies, and that such costs would not be reflected if calculations were limited to monetary 
costs.  According to this point of view, imputation of an opportunity cost in the Article 6.1(a) context 
would not imply holding the government to a profit- maximization standard with respect to the use of 
its funds.  Rather, such an opportunity cost could be conceptualized as the opportunity cost to the 
government that arises when government resources are employed for a given purpose, thereby 
becoming unavailable for any of the other possible purposes to which they could have been put.  In 
the subsidy context, a relatively st raightforward example of such a cost would be that, by virtue of 
providing a subsidy, a government would forego the opportunity to reduce its interest expenses by 
retiring some of its debt (e.g., by buying back out standing bonds).  (Or, conversely, to finance a 
subsidy, the government would need to issue a bond, on which it would incur interest expenses.)  In 
either case, the opportunity cost to the government could be measured as the interest expense that the 
government would incur on those bonds.  
25. A somewhat overlapping concept, which was disc ussed extensively in the context of allocated 
subsidies, is time value of money.  In the view of Group members favouring incorporation of time value of money where subsidies are allocated, su ch adjustments are purely technical in nature, 
allowing amounts of money at different points in time to be compared in real (rather than nominal) 
terms.  A simple example of a time value of money question would be to calculate the amount of 
money at some future date that would be equivalent to a given sum today.  In this case, the answer 
would be found by applying an appropriate interest (or "discount") rate to the present-day sum for the 
relevant period.  The basic argument raised in favour of including the time value of money was that allocating a subsidy constitutes a movement of  money through time, and that money cannot 
meaningfully be moved through time without taking into account its time value.  That is, if a subsidy 
is divided into equal nominal annual increments, th e real value of the last increment will be smaller 
than the real values of those that precede it, meaning that the total real amount of subsidization over 
the period would be understated. The Group recognize d that, depending on the discount rate used, 
adjusting for time value of money also might take into account the concepts of opportunity cost to 
government of the funds provided as subsidies, and/or of the potential indirect cost of taxation.  No 
consensus was reached as to whether such concepts should be reflected in Article 6.1(a)/Annex IV 
subsidy calculations.      
26. There also was considerable discussion as to how time value calculations, if incorporated, 
should be performed.  In particular, a range of views was expressed as to whether time value should figure only in calculation of the initial amount of a subsidy, or whether the re lated adjustments should 
be made to the subsidy amounts allocated to each year of an allocation period.  Regarding the former 
approach, the methodology discussed would calculate  the total amount of a grant (including its 
discounted lifetime financing cost) as of the date the subsidy was provided, then allocate this amount 
over time.  Inflation indexing would be applied to  the allocated amounts to keep the original 
significance and value of the subsidy intact throughout the allocation period.  The methodology discussed in the context of the second approach to time value calculations would "gross up" the 
allocated annual increments of the initial nomi nal subsidy amount by a discount rate set at a 
prevailing government bond rate.  No additional ad justment for inflation would be necessary under 
this approach, as the discount rate already would incorporate the expected rate of inflation.     G/SCM/W/415/Rev.2 
Page 8  
 
27. The basic argument raised against including th e time value of money in subsidy allocation 
calculations was that such an approach would be inconsistent with the cost-to-government approach 
required by paragraph 1 of Annex IV.  According to this view, the cost to the government of 
providing a subsidy that is allocated over time should be no different in year 5 than in year 1, because 
from the government's point of view, the cost to th e government is incurred at the time the subsidy is 
provided, in the amount of the initial nominal value of the subsidy, even if that value is then allocated 
over time.  Some Group members also were of the view  that, to the extent that incorporating the time 
value of money would be based in part on the concept of opportunity cost to government, this would 
be inappropriate.  In particular, according to this  view, introducing the concept of opportunity cost 
would shift the perspective of the analysis to a benefit-to-recipient approach, contrary to the 
Agreement's requirement that a cost -to-government approach be used.  
 
 
IV. ADJUSTMENTS FOR INFLATION AND INTEREST   
28. The Group recognized that, even if theoretical agreement were reached on the questions of 
weighted average monetary cost of funds, government opportunity costs of funds, time value of money and potential indirect costs of taxation, in practical terms these costs would be difficult to 
measure directly.  Moreover, no consensus was reached as to proxies that could be used to represent 
these costs in subsidy calculations.  In view of this, the Group changed the framework of its analysis 
slightly, to focus on the effects on subsidy amounts of inflation and interest, particularly with respect 
to subsidies allocated over time.  The Group believed that by changing focus in this way, a number of these underlying issues could be addressed at leas t partially, and in an ad ministratively practicable 
manner. The specific question considered by the Grou p in this regard was the extent to which subsidy 
calculations might take into account the compounding  effects of inflation and interest (implicit or 
explicit) associated with no minal subsidy amounts as they are moved through time.  
29. The Group noted here that any interest rate in fact is comprised of two components, 
anticipated inflation and the "real" interest rate, i.e., the pure cost of use of the money over the 
relevant period.  In view of this, the Group found it useful to consider these two components 
separately in discussing and devising its recommendatio ns.  The Group noted that the real interest rate 
in simple terms is the differenc e between the nominal interest ra te and the inflation rate.   
A. I
NFLATION  
30. Regarding inflation, a major consideration, whic h arises in the context of allocating subsidy 
amounts over time, is how to ensure a consistent ba sis for both the numerator (subsidy amount during 
the relevant period) and the denominator (value of sales during the relevant period) in calculating the 
ad valorem  subsidization of a product.  It was recognized that this question is related to how 
frequently and on what basis the sales denominator should vary over the course of the allocation 
period for a given subsidy.  In this regard, as discussed in detail in Section VI.B, the Group recommends that each year of an allocation period should have its own sales denominator, i.e., the previous year's sales. 
31. This recommendation is relevant to whether or  not the subsidy amount should be adjusted for 
inflation because over time, the no minal value of a firm's sales w ill tend to change purely due to 
inflation, even if the firm's scope or scale of operations does not change.  Thus, as the sales 
denominator is revised each year during an allo cation period, it automatically will incorporate the 
effects of inflation.  If no adjustment is made to  the numerator (the allocated subsidy amount) also to 
adjust for inflation over time a dissimilarity betw een the nature of the numerator and that of the 
denominator will be introduced.  Given this, it was concluded that adjusting the numerator to account 
for the effects of inflation would be appropriate.  Making such an adjustment would prevent inflation 
from eroding the real significance and value of the subsidy over the course of the allocation period.  
32. By virtue of being indexed for inflation, th e allocated subsidy amounts would progressively 
increase in nominal terms, although their value would remain constant in real terms.  Because, as  G/SCM/W/415/Rev.2 
 Page 9 
 
 
noted, the sales denominator also would incorporate an amount for inflation every year during an 
allocation period, the comparability of the numerato r and denominator would be preserved.     
B. I NTEREST  
33. Beyond the question of inflation, the Group discussed the extent to which allocated subsidy 
amounts also should be adjusted in some way to in corporate an element of "real" interest.  The Group 
concluded that it would be appropriate to make some  adjustment for real interest where subsidies are 
allocated over time.   
34. This conclusion was arrived at from several diff erent perspectives.  First, as discussed above, 
the Group recognized that where governments borro w, an interest cost will be incurred which 
generally will not be able to be identified with  any particular set of expenditures made from the 
borrowed funds.  This was deemed to argue in favour of attributing some interest cost to all subsidies.  
The additional perspectives brought to bear on this question were opportunity cost to the government 
and the time value of money, as discussed.  Either of these perspectives would involve imputation of 
some interest component to allocated subsidies, as a measure of the cost of foregone uses of the funds 
over the relevant period, or as a means of maintaining the subsidies' real value and significance as they move through time. 
C. M
ETHODOLOGY1 (Recommendation 3) 
35. In view of the foregoing considerations, a nd the difficulties encountered by the Group in 
reaching consensus on a single theoretical basis for a conceptually pure allocation methodology, the 
Group recommends that allocated subsidy amounts be adjusted fully for inflation and include as well 
a portion of the "real" interest rate.  It is specifi cally recommended that this be done by attributing to 
allocated subsidy amounts the full rate of inflation pl us one-half of the difference between the rate of 
inflation and the government borrowing rate on debt whose maturity most closely approximates the allocation period of the subsidy.  In the Group's view , this approach provides an approximation of the 
previously-mentioned components of government costs of funds, as well an administratively 
practicable method of maintaining the real value of a subsidy over a given period.  The only exception 
to this approach would be where the rate of interest  was less than the rate of inflation (which might 
occur during periods of high inflation).  In this circumstance, the recommended adjustment factor is 
the full rate of inflation, unadjus ted for any interest component. 
36. The Group further recommends that, as a general principle, the adjustment factor should be 
derived from the interest and inflation rates prevailing  at the time the subsidy is received, and that this 
factor be kept constant throughout the allocation peri od.  Thus, for every year of an allocation period, 
excluding the year of receipt, the allocated s ubsidy amount would reflect an amount for the 
compounded adjustment factor.
2  The Group recognizes that keeping the adjustment factor fixed over 
the allocation period may not be appropriate during periods of significant changes in inflation and 
interest rates.  In such cases, derivation of the adjustment factor on an annual basis over the course of the allocation period may be more appropriate.   
37. The following example illustrates how the adjust ment factor would be determined.  If the 
government's borrowing rate is 10 per cent and the rate of inflation is 6 per cent at the time the 
subsidy is received, the adjustment factor would be 8 per cent:  6 per cent (inflation rate) plus 2 per 
cent, calculated as one-half of the four-percentag e-point difference between 10 per cent (government 
borrowing rate) and 6 per cent (inflation rate). In prac tice, this adjustment factor can be calculated as 
the arithmetic average of the inflation rate and the government borrowing rate.    
                                                     
 
1 As noted above, this recommended approach applies to allocated subsidies other than loans. 
2 The Group discussed the issue of whether the adjustment factor should be applied to the year of 
receipt.  Due to the differences with respect to the conceptual bases for the adjustment factor, the Group had 
difficulty reaching a consensus.  In the end, the Group decided that the adjustment factor should not be applied to the subsidy amount allocated to the year of receipt. G/SCM/W/415/Rev.2 
Page 10  
 
38. The allocation methodology recommended by the Gr oup in this section is made exclusively in 
the context of Article 6.1(a) and Annex IV, and as such is not intended to affect the allocation 
methodologies followed by individual countries employing countervailing measures.  Also by virtue 
of this context, this recommendation is limited to the cost-to-government perspective for measuring a 
subsidy, and thus is intended to be relevant  only with respect to that perspective.   
D. D
ATA SOURCES FOR GOVERNMENT BORROWING RATES (Recommendation 4) 
39. In the contexts of both the adjustment factor ju st discussed, and the comparator interest rates 
for determining the cost to government of subsidies in the form of loans (see Section VIII.B), the 
Group recognized that some means of identifying government borrowing rates would be necessary.  
In this regard, the Group concluded that the yield to maturity on government securities (new issues or 
those trading in secondary markets) represents the most accurate measure of the rate of interest paid 
by a government. By identifying a bond or other government debt instrument with the appropriate 
term to maturity, it would be possible to match the allocation periods of the subsidies and the 
maturities of the government debt instruments, as foreseen in the Group's methodological 
recommendations.   
40. A variety of sources for information on the s econdary market for government securities were 
identified.  Particularly noted for being available on  a fully up-to-date basis, and for being apparently 
comprehensive in their coverage of issuing countries, markets and currencies, are the on-line services 
of Reuters and Bloomberg.  Moody's International Manual and the IMF's Government Finance 
Statistical Yearbook were identified as additional sources of interest rates on government bonds.  
 
V. INFLATIONARY ECONOMY COUNTRIES (Recommendation 5)  
41. The second major issue discussed in the context of inflation is the question of "inflationary 
economy countries".  Paragraph 5 of Annex IV prov ides explicitly for indexing the sales denominator 
for inflation where the recipient firm is located in  an "inflationary economy country".  A number of 
questions were identified and discussed with respect to this paragraph.   
A. D EFINITION OF "INFLATIONARY " 
42. It was noted as an initial matter that Annex IV does not define the term "inflationary economy 
country", but it was generally believed that "inflation ary" in the context of paragraph 5 is intended to 
refer to countries with high inflation.  If such a limit were not adopted, arguably any country with a 
positive rate of inflation would be "inflationary" in the sense of paragraph 5. Yet the fact that this 
paragraph sets inflationary economy countries apart as a special case seems to indicate that only certain countries should be covered by its provisions.  
43. Various possible means for identifying "inflationa ry" countries were discussed.  First, the 
possibility of establishing a fixed numerical definiti on was considered.  In this context, it was noted 
that neither the Interamerican Development Bank, nor the World Bank, nor the International 
Monetary Fund uses any numerical standard to define "inflationary" economy countries.  Moreover, 
while the United States in past anti-dumping case s has used 50 per cent, more recently the US 
methodology has moved away from such a numerical approach.  The Group concluded that, without 
some external reference point, a numerical standard would not be advisable, as it would be difficult to 
define and justify.  
44. Therefore, the Group recommends that the determination of whether a country is inflationary 
in the sense of paragraph 5 of Annex IV should be  made case by case, based on two criteria:  (1) a 
comparison of that country's rate of inflation with the average rate in developed countries
3; and (2) the 
extent to which inflation indexing is used routinely in transactions and accounting.  (It was noted that 
if a company routinely indexes its sales values for in flation, such indexed sales values could be used 
as the sales denominator in the subsidy calculatio ns performed pursuant to Article 6.1(a)).    
                                                      
3 If the country involved is a developed country, this average should exclude that country.   G/SCM/W/415/Rev.2 
 Page 11 
 
 
B. W HETHER AND HOW TO REFLECT INFLATION IN NUMERATOR  
45. Paragraph 5 of Annex IV provides explicitly for inflation indexing of the sales denominator 
for "inflationary economies", but is silent with resp ect to the numerator.  As discussed in Section IV, 
the Group’s general recommendation is that subsidy amounts (the numerator) be adjusted for at least 
the rate of inflation.  The recommendation in add ition provides for the possibility that the adjustment 
factor could be revised annually if  inflation and interest rates are changing rapidly.  In view of this, 
the Group found that no additiona l recommendation was needed rega rding adjusting the numerator for 
inflation in the case of inflationary economy countries.   
46. The question of which inflation index or indexe s to apply to the numerator and denominator 
in the case of inflationary economy countries was considered.  In particular, countries that use 
inflation indexing normally publish and use a series of different inflation indexes, and not all 
countries will create the same number  or type of such indexes.  Thus, it might be difficult to identify a 
single standard inflation index that would necessarily exist or could appropriately be applied to all 
situations that might arise under paragraph 5 of Annex IV.   
47. In particular, while it was recognized that es tablishing as the norm the use of the general 
composite rate of inflation could increase the tran sparency and predictability of the outcome where an 
inflationary economy country was involved, it also was recognized that such an approach might have 
limitations.  That is, if the Group recommended this or any other single inflation index, such an index 
might not be appropriate to all situations.  
48. It was noted that the recipient firm's accoun ting records could provide useful guidance in 
determining which inflation index to use.  It was deemed appropriate to leave this question open.  
49. The Group discussed as an alternative convertin g the subsidy amounts and sales denominators 
to a stable currency commonly used in international bu siness transactions, or to a basket of currencies 
(such as the Purchasing Power Parity index or the av erage for developed countries).  It was noted that 
in some inflationary economies, such currency conv ersions are made instead of inflation indexing in 
international accounting practices, and in the preparatio n of consolidated accounting balances.  If such 
an approach were taken, separa tely indexing for inflation would not be necessary, and thus there 
would be no need to identify the appropriate inflat ion indexes to be applied to the numerator and the 
denominator.  Moreover, if such a currency conversion were made, then the adjustment factor for 
inflation and interest recommended in Section IV and Recommendation 3 could be based on inflation 
and interest rates for the currency or basket of cu rrencies used, considerably simplifying the cost to 
government and subsidization calculations.  If a basket of currencies were used, it was noted that it 
would be advisable to weight average the excha nge rates included by some appropriate factor.  
 
VI. SALES DENOMINATOR  (Recommendation 6) 
A. P ERIOD ON WHICH SALES DENOMINATOR IS BASED (Recommendation 6, Parts A-C) 
50. The issues involved in identifying the appr opriate sales denominator for calculations of ad 
valorem  subsidization of a product, within the confines established by Annex IV, were discussed 
extensively.  At the outset, the guidance in para graphs 2 and 3 of Annex IV on this issue was 
acknowledged.  In particular, these paragraphs provid e that the relevant sales data shall be those for 
the most recent 12-month period preceding the period in which the subsidy is granted. The general 
view was that this means that, except as otherwise explicitly provided, a lag will always exist between 
the period covered by the numerator and that covered by the denominator (i.e., current-year subsidies 
will be divided by the previous year's sales).   
51. Two special cases in the context of this general rule were identified.  The first occurs in the 
case of an inflationary economy country, where sales in the preceding calendar year are to be indexed 
for the inflation experienced during the most recent 12-month period.  That is, while there is a lag in G/SCM/W/415/Rev.2 
Page 12  
 
the basic data, the data themselves are in a sense updated through the application of the inflation 
index.   
52. The second special case pertains to the treatment of tax-related subsidies, as set forth in 
Footnote 64 to Annex IV.  This footnote states that for tax-related subsidies, the value of the product 
is to be "the total value of the recipient firm's sale s in the fiscal year in which the tax related measure 
was earned " (emphasis added).  This language indicates that a single period should be used in 
identifying the numerator and  the denominator, i.e., the period in which the subsidy was earned, 
which would mean that no lag would be present.  It  was noted in this context that the "earning" of a 
tax subsidy normally occurs during the fiscal year preceding the fiscal year in which the related tax 
return is filed.  Thus, tax revenue normally will be foregone by the granting government in the year 
after the tax subsidy is earned.  Taking into account the language of Footnote 64, the Group 
recommends in calculations of ad valorem  subsidization from tax subsidie s that the numerator should 
be the amount of the tax subsidy earned in the fiscal year preceding the fiscal year in which the 
relevant tax return was filed, and that the denomi nator should be the company's sales in that same 
fiscal year, i.e., the one preceding the fiscal year in which the tax return was filed.   
53. The Group further noted that the reference, in paragraphs 2 and 3 of Annex IV to "the most 
recent 12-month period, for which sales data is ava ilable, preceding the period in which the subsidy is 
granted" was somewhat ambiguous.  In particular, the period referred to might be either the recipient 
firm's most recent accounting year , or alternatively, the actual 12 months immediately prior to the 
month in which the subsidy was granted (whether or not this period coincided with the recipient's 
accounting year).  The Group recommends, because of  the possibility of year-end adjustments for 
discounts, rebates, returns,  etc., and general ease of obtaining data, that the sales data for the most 
recent accounting year be used.  Under this approach, if a subsidy were granted in April, and the 
firm's accounting year was the calendar year, the sales denominator would be the firm's sales during 
the preceding calendar year. In addition, the Group recommends that the sales data used be net  rather 
than gross  sales.  
B. V ARIABILITY (Recommendation 6, Part  D)   
54. A further question discussed regarding the sales denominator was whether and when the sales 
denominator should vary in the calculation of the ad valorem  rate of subsidization from allocated 
subsidies.  Several possibilities were  discussed.  One approach would be to establish a single sales 
denominator for each subsidy - the level of sales during the year preceding the period in which the 
subsidy was granted - and carry that denominator forward for that subsidy  for the entire period over 
which the subsidy was allocated.  Thus, if the aggregate amount of subsidization in the year being 
reviewed consisted of allocated amounts of three subsidies, each of which had been granted in a 
different, prior year, there would be three sales deno minators (one for each subsidy), which would be 
used to determine a separate ad valorem  rate of subsidization for each subsidy for the year of review.  
These ad valorem  percentages, each of which had been calculated over a different year's sales level, 
then would be added together to determine the overall rate of subsidization.  The fact that keeping the 
sales denominator fixed would tend to overestimate the actual rate of subsidization during periods of 
expanding sales, while tending to underestimate this rate during periods of declining sales, was 
identified as a drawback, while the certainty of establishing a single ad valorem  rate of subsidization 
for each allocated subsidy was identified as an advantage.   
55. A second approach would be to apply a single  sales denominator to all subsidies granted in or 
allocated to a given year.  This denominator would be the level of sales during the year preceding the 
most recent  granting of a subsidy.  Thus, during the period of allocation of a subsidy, the sales 
denominator would remain fixed at the level of sales during the year preceding the first subsidy, until 
a second subsidy was granted, at which po int the sales denominator applied to both  subsidies would 
shift to the level of sales during the year preceding the granting of the second subsidy, and so forth.  This approach was viewed as a possible means to esta blish some degree of pred ictability as to the rate 
of subsidization that would arise from each subsidy,  while at the same time allowing for changes in 
the level of sales over time to be at least partia lly incorporated.  On the other hand, this approach  G/SCM/W/415/Rev.2 
 Page 13 
 
 
would suffer from the same potential for overstatement or understatement of the ad valorem  
subsidization as the first approach. 
56. Because of the limitations of the first two ap proaches, and because it is viewed as more 
closely reflecting reality, the Group reco mmends a third approach, under which each  year of an 
allocation period would have its own sales denominator, i.e., the previous year's sales level.  Thus, if a 
subsidy granted in 1996 were allocated over five y ears, the sales denominator used to determine the 
1996 rate of subsidization would be 1995 sales, the denominator for the 1997 rate of subsidization 
would be 1996 sales, etc.  This approach suggests that where allocated subsidies were involved, the 
word "granted" in paragraph 2 of Annex IV would be taken to mean "allocated".  In other words,  the 
denominator would be the recipient's sales duri ng the most recent 12-month period preceding the 
period to which the relevant portion of the subsidy was allocated .    
57. A major consideration in making this recommendati on is that facts, in particular, companies’ 
sales levels, change over time. For example, a comp any's scope of operations may expand or contract, 
or inflation may change the value of sales even where the volume remains constant.  Varying the sales 
denominator each year was deemed the best way to  ensure that the level of subsidization was 
calculated on an up-to-date basis for each year of an allocation period.  In this connection, the Group also noted that adjusting the sales denominator each  year is consistent with its recommendation to 
adjust allocated subsidy amounts for inflation and interest each year.  On balance, these positive 
elements were deemed to outweigh any decrease in predictability that might result from such an 
approach.   
C. C
ALCULATION OF THE 5 PER CENT ON AN INDUSTRY -WIDE OR FIRM-SPECIFIC BASIS 
(Recommendation 6, Part E) 
58. Another question raised in the context of the sales denominator was whether ad valorem  
subsidization is to be measured on a firm-specific or  industry-wide basis.  On this point, a range of 
views was expressed.  If subsidization were calcul ated on a firm-specific basis, a presumption of 
serious prejudice could arise even where only one small firm received subsidies amounting to more than 5 per cent of its sales, while the majority of the industry was unsubsidized.  On the other hand, if 
subsidization were calculated on an industry-wide basis, there might be no presumption of serious 
prejudice, even where a single firm was heavily su bsidized, so long as other firms received small or 
no subsidies.   
59. In favour of an industry-wide approach, it was st ated that Article 6.1(a)'s reference to "total 
ad valorem  subsidization of a product exceeding 5 pe r cent" could be viewed as requiring a 
calculation of subsidization of the product as a whole, rather than the product produced by an 
individual subsidized firm.  For example, in an industry consisting of five firms, two of the five might 
receive more than 5 per cent subsidization, while the weighted average rate of subsidization for the 
industry as a whole (counting the non-subsidized firms sales) might be less than 5 per cent.   
60. In this connection, some concern was expressed over the possibility that subsidization of a 
single firm could give rise to a presumption of serious prejudice under Article 6.1(a), even where the 
industry-average subsidization of the product was less than 5 per cent, in particular, that this might 
give rise to non-meritorious cases.   
61. In spite of these concerns, however, the Group concluded that the language of Article 6.1(a) 
and Annex IV provide for calculation of subsidies on a firm-specific basis.  In particular, it was 
pointed out that paragraphs 2-5 of Annex IV are wo rded entirely in terms of individual recipient 
firms.  In this context, it also was noted th at Article 6.1(a), while referring to the total ad valorem  
subsidization of a product, also directs through footnote 14 that the rate of subsidization is to be 
calculated in accordance with Annex IV which, as no ted, is couched in terms of individual recipient 
firms. Further, the reference to "total" subsidization could be taken to mean total subsidization under 
multiple programmes received by an individual firm.  In addition, it was noted that the enumeration in 
Article 6 of the adverse effects that constitute se rious prejudice case (e.g., price undercutting, and 
displacement of exports of a like product) could result from individual firm actions, and that under G/SCM/W/415/Rev.2 
Page 14  
 
Article 6.1(c), subsidization of an individual enterp rise explicitly gives rise to a presumption of 
serious prejudice.  The Group also noted that, in any event, firms with less than 5 per cent 
subsidization would not be presumed to be causing serious prejudice.   
D. "T
YING " OF SUBSIDIES TO PARTICULAR PRODUCTS (Recommendation 6, Part  F) 
62. The reference in paragraph 3 of Annex IV to the "tying" of subsidies to certain products in 
calculating ad valorem  subsidization was discussed.  This provision indicates that for subsidies tied to 
the production or sale of a given product, the relevant denominator is sales of that product, while 
paragraph 2 of Annex IV provides that for all other subsidies, the relevant denominator is the recipient 
firm's total sales.  Paragraph 3 does not specify ho w "tying" is to be established, however, leaving 
open a number of questions, for example, how closely related to a product a subsidy must be to be 
"tied" to that product; and how the sale of assets/p lants affects the amount of a subsidy and its "tying" 
to a product.   
63. It was noted that the panel report on Lead and Bismuth Steel  contains language relevant to the 
question of "tying" which could provide useful guidance, and which forms the basis for the Group's 
recommendations on this point.  Under this approach , a subsidy would be deemed to be tied if its 
intended use was known to the giver of the subsidy, and so acknowledged, prior to or concurrent with 
the subsidy's bestowal.  It was recognized that ot her possible approaches might exist as well.   
E. S ALES DENOMINATORS FOR TIED AND UNTIED SUBSIDIES , AND AGGREGATION OF AD 
VALOREM  SUBSIDIZATION FROM DIFFERENT KINDS OF SUBSIDIES (Recommendation 6, 
Part G) 
64. A further question pertains to identifying the correct sales denominator where both tied and 
untied subsidies are received.  In particular, paragraph 6 of Annex IV's requirement that "subsidies 
given under different programmes and by different auth orities in the territory of a Member shall be 
aggregated" raises the question generally of how such aggregation should be done when calculating 
ad valorem  subsidization. 
65. The Group recognizes that, as required by Anne x IV, where a subsidy is tied to a particular 
type of product, the subsidy received should be divided by sales of that product.  The Group further 
recognizes that, as also required by Annex IV, where a subsidy is untied, the subsidy amount should 
be divided by the company's total sales.  In this connection, the Group recommends that where a 
mixture of tied and untied subsid ies is received, the respective ad valorem  subsidy calculations should 
be performed separately (each using the appropriate sales denominator), and the resulting  ad valorem  
percentages added together to arrive at the total ad valorem  subsidization of the product. 
66. For example, assume that an Article 6.1(a) case has begun with respect to milk.  If a company 
produces steel and milk, and receives a tied subsid y to produce milk, the subsidy amount should be 
divided by the recipient company's sales of milk to determine the ad valorem  subsidization from that 
subsidy.  If the company also receives an untied subsidy, this subsidy amount should be divided by 
the firm's total sales of steel and milk.  The two resulting ad valorem  percentages then should be 
added together to arrive at the total ad valorem  subsidization of milk.   
67. Another question pertaining to the sales denominator is whether a single sales denominator 
should be used with respect to subsidies of different scopes, for example, export versus domestic 
subsidies, or subsidies for sales to particular market s.  (In this context, it is recalled that an export 
subsidy might be incorporated into an Article 6.1(a)  allegation, rather than separately being used as 
the basis for an allegation of prohibited subsidy under the Article 4 procedures.  See Section I.B, 
above.)  The Group considered but did not reach a consensus on whether export subsidies should be divided by export sales or by total sales, nor on whether subsidies tied to particular markets should be 
divided by sales to that particul ar market or by total sales. 
   G/SCM/W/415/Rev.2 
 Page 15 
 
 
VII. START-UP SITUATIONS  (Recommendation 7) 
68. The question of recipient firms "in a start-up situation", as provided for in paragraph 4 of 
Annex IV, was discussed.  It was recognized by the Group that the lack of experience in applying 
paragraph 4 precluded the development of recommenda tions in this area.  In particular, the Group 
recognized that footnote 65 to Annex IV would need  to be considered in defining the commencement 
of a start-up period.    
69. The description in paragraph 4 as to when the start-up period ends, namely one year after the 
beginning of production of the product, was seen  as suggesting that a start-up period could begin 
several years before production began, and extend th rough the end of the first year of production.  It 
was recognized, however, that paragraph 4 does not specify in precise terms at what point 
"production" would be considered to have begun (i.e., production for sale, production in commercial 
quantities, production of a prototype, etc.). 
70. The question also was raised as to the numerator and denominator for calculation of the 
15 per cent subsidization threshold in the context of  a start-up (that is, whether the overall rate of 
subsidization exceeds 15 per cent of total funds invest ed).  It was concluded that the numerator should 
be the total absolute amount of subsidies receive d during the relevant period, and the denominator 
should be total funds invested.   
71. While recognizing again that without experience  in implementing paragraph 4 establishment 
of a methodology was not possible, it was noted that in general terms, funds invested could be viewed 
as being equal to total assets:  land, buildings, equi pment, and other assets.  The point was made that 
the question of how these assets were financed was not relevant to measuring their value.  That is, 
funds invested should not be limited to the firm's eq uity, in view of the fact that debt financing could 
be used as well.  Thus, the "assets" side of the balance sheet should provide the general basis for 
determining the amount of funds invested.   
72. A question was raised as to what portion of a subsidized loan should be included in the 
calculation of the total value of subsidies received during the start-up period.  In particular, it was 
questioned whether the principal amount of the loan plus the interest subsidy should be included, or 
whether only the interest subsidy should be included.  The Group noted that as a general principle, 
only the interest subsidy should be included.  Among  other reasons, if the full principal amount were 
included, this would mean that the treatment of subsidized loans in the context of a start-up situation 
would be different from that in the general, non-s tart-up context.  (See Section VIII.B, below, on 
loans.)  Nevertheless, the possibility was discussed th at if the start-up firm could not have obtained 
the loan from any other source at any reasonable market price/cost, it might be appropriate to include 
the full principal amount in the calculation of tota l subsidies received.  No firm conclusion was 
reached on this issue. 
73. It also was noted that the protection afforded to the subsidy recipient by the 15 per cent 
threshold only lasts for a limited period.  Thus, if a firm received a considerable amount of start-up 
subsidization, although not enough to reach the 15 pe r cent threshold, a case based on the 5 per cent 
threshold could be brought once the first year of production had passed.   
74. It also was discussed, and is recommended, that whether or not a serious prejudice case based 
on the start-up provisions was brought under paragra ph 4 of Annex IV, any late r (post-start-up period) 
cases based on the 5 per cent threshold should include any portions of start-up subsidies that were 
allocable to the relevant period for purposes of th e 5 per cent calculation.  To exclude such early 
subsidies from later 5 per cent cases simply on the grounds that they were start-up subsidies would 
create a multi-year grace period for these subsidies, which would be inconsistent with the clear 
end-point for the start-up period reflected in paragraph 4.   
 G/SCM/W/415/Rev.2 
Page 16  
 
VIII. COST TO GOVERNMENT OF AND AD VALOREM  SUBSIDIZATION FROM 
DIFFERENT TYPES OF SUBSIDIES 
75. Beyond the foregoing cross-cutting issues (e .g., allocation, inflation, interest, sales 
denominator, etc.), which would affect calculations involving all kinds of subsidies, it was recognized 
that calculating the cost to government of any given kind of subsidy might raise issues unique to that 
kind of subsidy.  Thus, the question of the cost to government of a subsidy was discussed extensively 
in the context of particular kinds of subsidies.   
A. G
RANTS (Recommendation  8) 
76. Two basic kinds of grants, outright grants and reimbursable grants, were identified.  
Moreover, it was noted that grants might be provided in instalments, rather than as one-time 
payments.   
1. Outright grants (Recommendation 8, Part A) 
77. The Group agreed that at the most basic level, the cost to government of a grant is its face 
value. In accordance with the general methodology recommended, for allocated grants this amount 
would be adjusted to reflect inflation and interest.    
78. For grants paid in instalments, it is recommended that each instalment be treated as a separate 
grant.  This approach is consistent with the reco mmendation to vary the sales denominator each year 
during an allocation period.  It also allows for any differences between the amount of an instalment 
grant authorized and the amount actually paid to be reflected in the calculations in a simple and 
straightforward way.   
 2. Reimbursable Grants (Recommendation 8, Part B) 79. For grants with terms that include the obligati on of reimbursement in the event that certain  
conditions are fulfilled (e.g., that the recipient becomes profitable), the similarity with contingent 
liability loans was recognized (see  Section VIII.B.2, below).  Given this, it is recommended that 
during the period before they are reimbursed, reimbursable grants be treated as  a series of short-term 
interest-free loans.  The cost to the government  in such a case would be calculated using the 
methodology for ordinary loans, described below.   
80. It is recognized that, regardless of the fact that a given grant was nominally reimbursable, it 
might be determined at some point that such a grant in fact never would be reimbursed (as in the case, 
for example, of a chronically unprofitable recipien t). Thus, it may become appropriate to determine 
that a nominally reimbursable grant in effect has beco me an outright grant, and to treat it as such.  In 
such a situation, the cost to the government of th e grant would be its outstanding amount as of that 
date (that is, the original amount less any reimbu rsement that had been made to that point).  
81. Given that where a reimbursable grant has become  an outright grant this is similar to an 
instance of debt forgiveness, it is recommended that the allocation period for any such outstanding 
amount should begin on the date as of which it is determined that this amount effectively has become 
an outright grant.  This approach is recommen ded to ensure that the "principal amount" of 
reimbursable grants is captured in Article 6.1(a) subsidy calculations where such grants have been outstanding for lengthy periods and have no realistic prospect of being reimbursed. To do otherwise 
would mean that only an imputed interest cost associated with what effectively were outright grants 
would be reflected in Article 6.1(a) calculations.   
B. L
OANS (Recommendation  9) 
82. Two different kinds of loans, ordinary loans an d contingent liability loans, were discussed in 
the context of cost to government.   
1. Ordinary loans (Recommendation 9, Part A)  G/SCM/W/415/Rev.2 
 Page 17 
 
 
83. It is recommended that the cost to the government  of an ordinary loan be measured based on 
the extent to which the effective interest rate charged on the loan provided is lower than the 
appropriate government bond rate in the year in whic h the loan is given.  For short-term government 
loans (i.e., loans with a maturity of less than one  year), the appropriate bond rate would be that on 
short-term government bonds of comparable ma turity.  For long-term government loans, the 
appropriate bond rate would be that on long-term government bonds of comparable maturity.  As a 
simplified example, if the appropriate government bond rate was 5 per cent, and the interest rate on 
the loan was 4 per cent, the cost to the government of providing the loan would be one percentage 
point of interest.  Any grace period provided by the government loan, during which time interest did 
not accrue, also would be considered a cost in curred by the government, calculated using the 
appropriate government bond rate.  For purposes of establishing a relatively simple and predictable 
calculation methodology, it is further recommended that the benefits thus calculated be deemed to 
arise on a year-by-year basis over the life of the loan (i.e., as a series of recurring grants).  The Group 
also notes that deferrals of principal and/or interest  normally will give rise to additional costs to the 
government.     
2. Contingent liability loans (Recommendation 9, Part B) 
84. It was noted that contingent liability loans are si milar to reimbursable grants, in that they are 
repayable only upon the occurrence of some future event, such as achievement of a certain level of 
profitability.  Because it is impossible to predict the occurrence of future ev ents, it is recommended, 
as for reimbursable grants, that contingent liability lo ans be treated as if they were a series of short 
term interest-free loans for purposes of determining the cost to the government. 
85. If such loans eventually were repaid, the amount of the subsidy would be calculated in 
accordance with the methodology described above for ordinary loans.  
86. It was recognized that, as with  reimbursable grants, it might be determined that a given  
contingent liability loan would not be repaid.  In the event that such a conclusi on was reached,  it is 
recommended that such loans be treated as grants.   In these circumstances, the amount of the subsidy (i.e., the cost to the government) would be the face amount of the loan less any repayments, plus  accrued interest calculated using the government's long-term bond rate.   
87. Given that where a contingent liability loan has become an outright grant this is similar to an 
instance of debt forgiveness, it is recommended that the allocation period for any outstanding 
contingent loan amount begin on the date as of whic h it is determined that this amount effectively has 
become an outright grant.  This approach is re commended to ensure that the principal amount of 
contingent liability loans is captured  in Article 6.1(a) subsidy calcula tions where such loans have been 
outstanding for lengthy periods and have no realistic  prospect of being repaid.  To do otherwise would 
mean that only an imputed interest cost associated  with what effectively were outright grants would 
be reflected in Article 6.1(a) calculations.  
 
C. I
NTEREST RATE SUBSIDIES (Recommendation  10) 
88. The question of interest rate subsidies, as di stinct from subsidized government loans, was 
discussed.  In particular, it was noted that such  subsidies might arise where the loan itself was 
obtained from a commercial source, with the governme nt covering some or all of the interest cost.   
89. Two possible cases of interest rate subsidies were identified.  The first would be where, as of 
the receipt of the loan, or at some later point, the government subsidized the interest expense on an 
ongoing basis as payments became due.  In this si tuation, it is recommended that the subsidy be 
calculated as the amount of interest covered by the go vernment.  It is recommended that such interest 
amounts be treated as a series of recurring grants provided on the dates on which interest payments 
were due.   G/SCM/W/415/Rev.2 
Page 18  
 
90. The second case would be where the government provided, at a certain point in time, a lump 
sum payment to offset the recipient's interest expenses  (whether with respect to past interest, paid or 
unpaid, or with respect to future interest expenses).   In this situation, it is recommended that the 
amount of the subsidy, once paid, be treated as a non-recurring grant.  
D. D
EBT FORGIVENESS (Recommendation  11) 
91. The question of how to treat, in the context of Article 6.1(a), subsidies in the form of debt 
forgiveness was discussed.  As one aspect of this issu e, it was noted that the fact that subsidies of this 
type would give rise to a separate rebuttable pres umption of serious prejudice under Article 6.1(d) did 
not mean that such subsidies necessarily would be irrelevant in the context of 
paragraph 6.1(a)/Annex IV.  For example, it is foreseeable that a single act of debt forgiveness might 
be found not to have caused, by itself, serious prejudice (i.e., the presumption would have been 
rebutted).  Nevertheless, if the overall rate of subsid ization (from that subsidy plus other subsidies to 
the same product) amounted to more than 5 per cent ad valorem , a second rebuttable presumption 
would be created.  Conversely, however, the fact that a given instance of debt forgiveness was 
involved in an Article 6.1(a) case would not prejud ice the separate presumption that would exist by 
definition under Article 6.1(d).   
92. To the extent that subsidies in the form of debt forgiveness  are at  issue in a given case under  
Article 6.1(a), it is recommended that  the cost  to the government be measured as the amount of the 
government outlay (i.e., the outstanding principal pl us accrued interest).  This amount should be 
treated as a grant received on the date the debt is forgiven.  
E. L OSS COVERAGE (Recommendation  11) 
93. The question of how, in the context of Article 6.1(a), to treat subsidies to cover operating 
losses raises similar questions to those with respect to debt forgiveness.  That is, as in the case of debt 
forgiveness, inclusion of subsidies for loss covera ge in an Article 6.1(a) case would be without 
prejudice to the separate presumption of serious prejudice to which such subsidies would give rise 
under either Article 6.1(b) or (c).  On the othe r hand, any such separate presumption would not 
prevent subsidies of this kind from being included in a calculation of ad valorem  subsidization in the 
context of Article 6.1(a).   
94. To the extent that subsidies in the form of loss coverage are at issue in a given case under 
Article 6.1(a), it is recommended th at the cost to the government be measured as the amount of the 
loss coverage provided.  This amount normally shou ld be treated as a grant, unless the loss coverage 
takes some other form.   
 
F. T AX CONCESSIONS (Recommendation  12) 
95. On the general question of how to measure the co st to government of tax concessions, it was 
agreed that in principle, the cost to government  would be the face amount of revenue foregone.4  It 
was recognized that the calculation of this amount in any given case would depend on the particular 
type of tax concession involved.  It also was noted th at the concept of "tax" in this context potentially 
could encompass all mechanisms whereby governments generate revenue, including import and 
export duties, social security contributions, etc.  
 1. Accelerated depreciation  96. For accelerated depreciation, two approaches to calculating the cost to government  (i.e, the 
revenue foregone) were discussed.  The first woul d be to calculate the subsidy on a year-by-year 
basis, only for those years in which the governm ent foregoes revenue, on the grounds that it is 
impossible to predict the beneficiary's true tax liab ility over the entire depreciation period.  Moreover, 
it was noted that, although accelerated depreciatio n programmes generally are constructed in such a 
                                                     
 
4 Thus, this amount would not be adjusted for inflation and interest.  G/SCM/W/415/Rev.2 
 Page 19 
 
 
manner that tax reductions early on are recaptured at  the end of the period, in practice such recapture 
may never occur.  For example, if the beneficiary company is unprofitable at the end of the period, it 
typically would incur no tax liability.  In addition, even if profitable at the end of the period, it may 
have incurred earlier losses that could have been brought forward to offset current profits, again 
removing or reducing the tax liability that otherwise would have arisen at that time.  Further, if new 
equipment were purchased toward the end of th e depreciation period, accelerated depreciation 
effectively could be "rolled over" upon the co mmencement of a new, fro nt-loaded accelerated 
depreciation period on the new equipment, again me aning that recapture of tax reductions from the 
first depreciation period would be avoided.  
97. The major disadvantage to this approach was that it would assume the recipient company to 
be unprofitable indefinitely into the future, or at a minimum to be free of tax liability.  The second 
approach that was discussed is that used by the OECD in its calculations of the cost to government of 
various kinds of industrial support measures.  For accelerated depreciation, the OECD approach is to 
calculate a lump sum by comparing the tax the comp any actually will pay to what it "normally" would 
have paid over the entire depreciation period.  This amount is then restated in terms of its present 
value as of the beginning of the depreciation peri od.  The formula assumes that the company will be 
profitable, i.e., that it will pay tax, each year.  The major disadvantage to this  approach was that an 
absolutely accurate measurement could only be made at the end of the depreciation period.   
98. No consensus was reached with respect to accelerated depreciation.  
 2. Tax exemptions, deductions, holidays, etc. (Recommendation 12, Part A) 99. For tax exemptions, deductions, holidays, and an y similar measures, it is recommended that 
the cost to the government be measured as the amount of revenue that the government otherwise 
would have collected.   
 3. Tax deferrals (Recommendation 12, Part B) 
100. For tax deferrals, it is recommended that the cost  to government be calculated by treating the 
amount of deferred tax as if it were an interest-free loan for the period of deferral.  
 
G. E
QUITY INFUSIONS  (Recommendation  13) 
101. The Group deemed that the methodology for determining the cost to the government of a 
subsidy conferred through the provision of equity would depend upon whether or not the recipient 
firm’s stock was publicly traded.  It was recognized in  this connection that the provision of equity  by 
a government to a firm does not necessarily constitu te a subsidy.  Only if there is a benefit to the 
recipient from the provision of th e equity will a subsidy exist. 
102. Where the recipient firm’s stock is publicly tr aded, the Group recommends that the cost to the 
government, if any, of an equity infusion by the government be determined by comparing the price the government actually paid to the firm for the equi ty with the relevant market price for the equity.  
If the government paid more than the relevant price for the equity, the cost to the government would be the amount of the overpayment.  This overpaymen t would be treated as a grant for purposes of the 
calculation of ad valorem  subsidization. 
103. In cases where there is no market price for the shares, determination of whether and to what 
extent a subsidy is provided will be less straightforwar d.  The Group noted that if a subsidy exists, the 
cost thereof to the government should be calculated in accordance with the gene ral principles of this  
report.  No consensus was reached as to  specific methodology in this regard. 
H. L
OAN/CREDIT GUARANTEES (Recommendation  14) 
104. The Group noted that guarantees can operate with  respect to the guarantee beneficiary either 
as a borrower or as a lender.  In the former ca se, the beneficiary is a borrower whose debt is G/SCM/W/415/Rev.2 
Page 20  
 
guaranteed against the borrower's own default.  In  the latter case, the beneficiary is a lender, for 
example, through the provision of credit to its customers.  A guarantee in this situation guarantees this 
lender against potential defa ult by its customers.   
105. A two-part procedure was discussed for calculat ing the cost to the government of loan/credit 
guarantees, where such guarantees are provided in the context of a programme, as opposed to on an ad 
hoc basis.  As part one, the overall viability of th e loan guarantee programme over a relatively long 
period (normally, the five years prior to the receipt  of the guarantee) should be determined.  Normally, 
viability could be assessed by examining the programme' s financial statements over the period.  If this 
examination revealed that the total fees paid in to the programme by par ticipating firms during the 
period were less than the total amount paid by th e government in coverage of defaulted loans under 
the programme plus the costs of operating the progr amme, the programme would be deemed not to be 
viable, meaning that a cost to the government would have been incurred. 
106. Part two would be to calculate the amount of the cost to the government to be attributed to the 
firm involved in the Article 6.1(a) enquiry.  The first step under part two would be to calculate the 
cost to the government of the programme as a whole, as the difference between the total amount of fees actually paid into the programme by all of its participants (including those not involved in the 
enquiry) and the total amount of fees that would have been required for the programme to be viable 
during the relevant period.  The second step would be to attribute the appropriate portion of this cost 
to the particular firm involved in the enquiry.  This  attribution would be based on that firm's share of 
total loan amounts guaranteed under the programme during the relevant period.  Thus, under this 
approach, a subsidy would be attributed to the firm involved in the enquiry whether or not that particular firm had made any cl aim under the programme for a default.  This subsidy would be 
deemed to have been provided on the date(s ) the fees were paid by that firm.   
107. In the case of ad hoc guarantees (i.e., those that clearly are not linked to any guarantee 
programme), it is recommended that the cost to govern ment of an ad hoc guarantee, in the event that a 
government covers a default, be the amount of the default coverage provided, less any fees paid for the guarantee.  The Group recognizes that in these circumstances, the treatment of ad hoc guarantees for purposes of Article 6.1(a) would be identical to  the recommended treatment of debt forgiveness.  
108. Some Group members expressed the view that an ad hoc guarantee imposes a cost on the 
providing government even where there is no default.   Specifically, the expected cost of providing the 
guarantee could be calculated.  For example, if  the general default rate on government guaranteed 
loans or credits, or the probability of default on a sp ecific guaranteed loan or credit, was 10 per cent, 
10 per cent of the loan principal could be considered  to be the cost to the government of providing the 
guarantee.  This approach would be consistent with  how some governments treat loan guarantees in 
their accounting and budget records.  No consensus was reached on this issue. 
I. G
OVERNMENT PROVISION OF GOODS AND /OR SERVICES (Recommendation  15) 
109. In general, it is recommended that the cost to the government of providing a good and/or 
service be calculated as the expenses/costs incurred by the government in providing the good or 
service, including a reasonable return, minus the price received for the good and/or service.  If the 
cost to the government cannot be calculated according to this approach, it could be calculated using 
other approaches under the adequate remuneration standard of Article 14(d). This amount could be 
treated as a grant in the calculation of ad valorem  subsidization. 
110. A number of special considerations were discu ssed regarding how to measure the cost to the 
government of providing goods and services in specific contexts.  For example, in certain 
circumstances such as the provision of widely-used inputs like electricity or natural gas, a price 
differential between different cust omers might not be abnormal.  Large customers would tend to be 
charged a lower price by an electric utility than smaller users, based on the cost differential to supply 
them.  Thus, it would be important to examine the st andard price list or pricing schedule applicable to 
the different categories of customer.  If a particular customer were charged a disproportionately low 
price in relation to the "normal price", there might be a cost to the government.  The "normal price"  G/SCM/W/415/Rev.2 
 Page 21 
 
 
would be the price that would be expected based on the price schedule, or based on the price to 
comparable customers, which covered all of the gove rnment's costs of providing the good or service 
to the customer (including a reasonable return).   
J. G OVERNMENT PURCHASE OF GOODS (Recommendation  16) 
111. In general, it is recommended that the cost to the government of purchasing goods be 
determined in accordance with the guidelines contai ned in Article 14(d) of the Agreement.  That is, 
such calculations should be based on "more than adequate remuneration".  To the extent that a 
government is found to have overpaid for goods in comparison with their prevailing market value, the 
cost to the government would be the amount of the overpayment.  This amount could be treated as a 
grant in the calculation of ad valorem  subsidization. 
112. It is recognized that the guidelines in Article 14 of the Agreement refer to the "benefit to the 
recipient" context.  Nevertheless, in the case of government purchases of goods, the cost to the 
government and the benefit to the recipient in pract ice are similar, making it possible to apply the 
Article 14 guidelines directly.  
K. A SSUMPTION OF LEGAL OBLIGATIONS (Recommendation  17) 
113. As a general matter, it is recommended that the cost to government of the assumption of legal 
obligations, to the extent that this involves an element of subsidization, be calculated as the amount of 
the obligations assumed.  Various kinds of legal obligations were identified as possibly belonging in 
this category.  These include the coverage by a government of severance pay, of other legally-
imposed employment costs, possibly of certain environmental costs, and of similar obligations.  This 
amount normally should be treated as a grant.  
L. E XPORT -RELATED SUBSIDIES (Recommendation 18)   
114. As noted in Section I.B, above, it is recognized  that because export subsidies are prohibited, 
establishing a cost-to-government methodology may be  of limited use.  Nevertheless, to the extent 
that such subsidies are involved in a given case under Article 6.1(a), their cost to government would 
depend on their specific nature.  That is, export-related subsidies in the form of credit guarantees 
would be treated in accordance with the loan/credit guarantee methodology, those in the form of 
grants would be treated in the same way as other gran ts, those in the form of loans would be treated in 
the same way as other loans, etc. 
M. U PSTREAM SUBSIDIES  
115. The Group discussed, but reached no consensus on, upstream subsidies.  It was recognized 
that any calculation method for such subsidies would need to include a basis for determining the amount of the subsidy benefitting the downstream pr oduct, and also would need to avoid any double-
counting  of the subsidy that might exist.   
N. M
ULTIPLE EXCHANGE RATE PROGRAMMES (Recommendation  19) 
116. It is recommended that the cost to the government of application of a multiple exchange rate 
system to a given transaction be based on a comparison of the exchange rate actually applied with an appropriate benchmark, such as the market exchange rate or another exchange rate (such as the Purchasing Power Parity rate) published by an intern ational organization.  The cost to the government 
would be the difference between the absolute value of  the transaction at the exchange rate actually 
applied, and the value that would ha ve resulted if the benchmark rate had been applied.  This amount 
should be treated as a grant.  G/SCM/W/415/Rev.2 
Page 22  
 
O.
  R ESEARCH AND DEVELOPMENT SUBSIDIES (Recommendation  20) 
117. It is recognized that the cost to government of subsidies for research and development will 
depend on the particular types of subsidies provided.  For example, the cost to government of research 
subsidies in the form of grants should be determin ed in the same way as for all other grants, etc. 
118. It is further noted that, because of the futu re orientation of R&D activities, it might be 
difficult to allocate the related su bsidies to products not yet in production (i.e. such subsidies 
generally would not be "tied").  Given this, it may be appropriate in these circumstances to allocate 
such subsides across the reci pient firm's total sales. 
P. W ORKER TRAINING (Recommendation  21) 
119. The question of the cost to government of providing worker training in the context of 
Article 6.1(a) is recognized to raise a number of issues .  First, it is noted as a general principle that in 
the most straightforward case, government-subsidized or government-provided worker training can be 
similar to a wage subsidy.  That is, if a gove rnment's payment for the worker training relieves a 
company of a cost that it otherwise would have had to pay, a subsidy that would be relevant under 
Article 6.1(a) may exist. 
120. In addition, the question of whether a firm has a legal obligation to train its workers is 
relevant.  That is, when a firm has a legal obligati on, such as to retrain laid-off workers, and the 
government assists the company in paying for such retraining, a subsidy would exist to the extent that 
the government has incurred a cost in providing the assistance which would otherwise have been 
borne by the firm.  It is recommended that such a subsidy be treated as a grant.  G/SCM/W/415/Rev.2 
 Page 23 
 
 
 
RECOMMENDATION 1  
 
Illustrative Table on Expensing Versus Allocation of Subsidies  
in the Context of Article 6.1(a) and Annex IV  
 
 
1. The attached table reflects the Informal Group of Experts' recommended guidelines for 
determining when certain types of subsidies should be expensed versus allocated over time in 
calculating whether the 5 per cent threshold established in Article 6.1(a) has been met.  The first page of the table identifies various types of subsidies that might be either expensed or allocated depending on the particular circumstances.  Factors that would be  relevant to this determination are identified for 
each type of subsidy.  The second page identifies those types of subsidies that generally would be 
allocated, and those that ge nerally would be expensed.  
 
2. The treatment recommended for the different types of subsidies as well as the subsidy-specific reasoning shown are based on the followi ng general principles:  Allocation rather than 
expensing of a subsidy normally would be indicated if the purpose of the subsidy is for the purchase 
of fixed assets, if it is non-recurring and/or large,  if it is oriented toward future production, if it 
consists of equity, or if it is carried forward in the recipient's accounting records.  In addition, two 
presumptions are deemed appropriate:  First, R& D subsidies should be presumptively allocated, 
except where it is demonstrated that doing so would be inappropriate.  Similarly, non-recurring subsidies should be presumptively allocated, except  where it is demonstrated that this would be 
inappropriate.    G/SCM/W/415/Rev.2 
Page 24 EXPENSE ALLOCATE 
GRA
Purpose is for other than purchase of fixed assets 
Recurring and/or small NTS  
  Purpose is for purchase of fixed assets 
 Non-recurring and/or large  
TAX BENEFITS/INDIRECT
For operating expenses 
Benefits related to direct taxes TAX REBATES/IMPORT DUTY EXEMPTIONS  
 For purchase of/related to fixed a ssets (e.g. import duty/indirect tax 
exemption on machinery) 
 PROVISION OF GOODS
Provision of services/consumable inputs AND  SERVICES  
  Provision of fixed assets and non-general infrastructure 
RESEARCH &
Expense only if allocation not appropriateDEVELOPMENT  
 Presumption to allocate 
 
LOSS COVERAGE/
Recurring and/or small OPERATING COSTS (OVERLAPS WITH 6.1.(b) AND (c))  
  Non-recurring and/or large  
 Benefit goods not yet produced 
INTEREST
Interest subsidy payments made as loan payments become dueRATE SUBSIDIES  
 Subsidy is lump sum to offset past , present or future interest due or 
paid 
 
  G/SCM/W/415/Rev.2
 Page 25 
EXPENSE ALLOCATE 
 
 EQUITY INFUSIONS  
 
 LONG-TERM LOAN BENEFITS  
(benefits exist over life of loan) 
 FORGIVENESS/ASSUMPTION OF LONG-TERM DEBT 
(OVERLAPS WITH 6.1(d))   
(including principal and interest) 
SHORT-TERM LOAN BENEFITS  
EXPORT REBATES  
EXPORT INSURANCE  
EXPORT PROMOTION ASSISTANCE  
REDUNDANCY PAYMENTS/EARLY RETIREMENT/
WORKER ASSISTANCE 
WORKER TRAINING  
WAGE SUBSIDIES  
PRICE SUPPORT PAYMENTS  
SUBSIDIES BELOW MINIMUM THRESHOLD SIZE
(<0.5% of sales for any individual subsidy) 
G/SCM/W/415/Rev.2 
Page 26  
 
 RECOMMENDATION 2
 
 
Identification of Allocation Period for Allocated Subsidies  
 
 
1. As a general principle, the average useful life of  assets should be used as the allocation period  
for subsidies subject to allocation.   
 
2. A hierarchy of bases from which to determine the average useful life of assets should be used, as 
follows:  
Information for the individual firm or firms receiving the subsidy  
    
    Or, if not feasible/available/reasonable, 
 
Information for other firms producing the product in the country in question  
 
    Or, if not feasible/available/reasonable, 
 
Information for firms in the same business sector
1 in the country in question,  
     Or, if not feasible/available/reasonable,  
Information for other firms producing the product outside the country in question  
 
 
3. If the first basis, above, can be used
2, the total average book value3 of physical depreciable assets 
(excluding land and construction in process) of th e firm during the most recent relevant multi-year 
period could be divided by the average annual amount of depreciation expense during that period, 
with the result being the average useful life of assets in years.  (Example:  $1,000 average asset 
value/$100 average annual depreciation = 10 year average life of assets.)  The relevant period should 
be defined so as to represent normal operations.  A similar calculation could be made using any of the 
other bases in the hierarchy, if applied. 
 
4. In the case of asset revalua tions (write-downs or write-ups), or of hyperinflation, normalizing 
adjustments may be necessary.    
5. In applying this methodology, there should be a preference for using accounting data rather than 
tax-related depreciation periods for determining the useful life of assets, as accounting data are more 
likely to reflect actual useful lives of assets.  
 
6. The average useful life of all
 operational assets (as identifie d through the application of the 
hierarchy) normally should be used as the allocation period for allocable subsidies regardless of type, 
other than long-term loans and possibly equity infusions.   
 
                                                      
1 Defined as the next-largest category in the International Standard Industrial Classification ("ISIC") or 
similar nomenclature system. 
2If some method other than straight line depreciation is used by the firm, if the firm's depreciation is not 
based on an estimate of the actual useful life of its assets, or if the firm's acquisition of assets is very irregular, 
the first basis may not be appropriate, in which case one of the other bases in the hierarchy should be 
considered.   
3 I.e., net of accumulated depreciation; based on beginning-of-period values.  G/SCM/W/415/Rev.2 
 Page 27 
 
 
 7. If the subsidy in question is the benefit from a long term loan, the allocation period should be the 
life of the loan. 
 
8. If the subsidy in question is an equity infusion,  and the subsidy is calculated as the overpayment 
for equity by a government, in comparison with the market value of the equity, this overpayment 
should be treated as a grant and allocated over the average useful life of assets as identified through 
the application of the above methodology.  If another method is used to determine the cost to 
government of a subsidy from an equity infusion, a different approach to identifying the allocation 
period may be appropriate.  For example, the peri od during which an investor might “reasonably” 
expect a return on an investment could be used, or it could be assumed that a cost to government potentially could arise during the entire period in which the government held the equity, on a year-by-year basis.   
 
9. It is recognized that the approach recommended herein for determining the useful life of assets 
represents an estimation technique.  This approach is recommended for its ease and 
straightforwardness of application to  a large number of foreseeable situations, and in particular for its 
avoidance of the need to separately calculate the useful  lives of individual assets.  As reflected in this 
paper, however, there may be situations where some other approach will need to be used, or where the 
basic approach described herein may need to be adjusted.   G/SCM/W/415/Rev.2 
Page 28  
 
 RECOMMENDATION 3
 
 
Adjustments for Inflation and Interest  
 
  
1. It is recommended, where subsidies are allocated over time, that subsidy amounts be adjusted 
fully for inflation and include a portion of the “real” interest rate.  Specifically, the adjustment factor 
to be applied normally should be the full rate of inflation plus one-half of the difference between the 
rate of inflation and the appropriate government borrowing rate. (This can be calculated as the 
arithmetic average of the inflation and borrowing rates.)  Where the rate of inflation is higher than the 
government borrowing rate, however, the adjustment factor should be the full rate of inflation, 
unadjusted for any interest component.   
 
2. The adjustment factor should be calculated base d on prevailing interest and inflation rates as of 
the date the subsidy is received.  In general, th is factor should be kept constant throughout the 
allocation period, and applied on a compounded ba sis to each of the annual subsidy allocations, 
excluding the amount allocated to the year of receipt.  If during the allocation period there are 
significant changes in inflation and interest rates,  however, it may be appropriate to recalculate the 
adjustment factor on an annual basis.   
 
3. The appropriate government interest rate should be the rate for a government debt instrument 
whose maturity most closely approximates the length of the subsidy allocation period.  
4. This methodology should be applied to all ty pes of subsidies allocated over time other than 
loans.  
  G/SCM/W/415/Rev.2 
 Page 29 
 
 
 RECOMMENDATION 4  
 
Data Sources for Government Borrowing  
 
 
 Where government borrowing rates are required in making Article 6.1(a) /Annex IV calculations, 
it is recommended that the yields to maturity on government securities (new issues and those trading 
in secondary markets) be used.  Identifying secur ities with appropriate terms to maturity will permit 
the allocation periods of the subsidies to be matc hed with securities of co mparable maturities, as 
foreseen in certain of the methodological recommendations.    G/SCM/W/415/Rev.2 
Page 30  
 
 RECOMMENDATION 5
 
 
"Inflationary Economy Countries"  
in the Sense of Paragraph 5 of Annex IV  
 
Determination of Whether a Country is Inflationary  
 
1. The determination of whether a country is inflat ionary in the sense of paragraph 5 of Annex IV 
(and thus whether the provisions of that paragr aph should apply) is not easily susceptible to 
application of a numerical standard.  Therefore, the determination should be made on a case-by-case basis, by applying a two-part analysis.    
2. First, that country's inflation rate should be  compared with the average rate of inflation in 
developed countries.  If the country involved in the dispute is a developed country, this average 
should exclude that country.  
 3. If the rate of inflation in the subject country is  substantially higher than the average rate to which 
it is compared, this would mean that the country could
 be found to be inflationary, depending on the 
second part of the analysis.  If, however, the rate of inflation in the subject country is not  substantially 
higher than the comparison rate, the country would not be inflationary, and the analysis would not 
reach the second part.    4. As the second part of the analysis, the normal business and government accounting practices 
with respect to inflation should be considered.  In pa rticular, if at least monthly inflation indexing is 
used routinely throughout the economy of a country with an above-average rate of inflation, in both 
the public and private sectors, then that country should be considered inflationary in the sense of 
paragraph 5 of Annex IV.   
 
Adjustment of the Numerator (Subsidy Amount) for Inflation in Inflationary Countries
 
 
5. It is noted that the Group's general recommenda tion that allocated subsidy amounts be adjusted 
for inflation (and interest) would a pply to inflationary economy countries.  It is further noted that, for 
such countries, the adjustment factor may need to be  revised annually, as provided for in the general 
recommendation.   
 
6. It is recommended that the determination of which inflation index should be applied to the 
numerator and the denominator be made on a case-by-case basis, to ensure the selection of the most 
appropriate index to fit the pa rticular circumstances.   
 
7. As an alternative to adjusting the numerator and the denominator for inflation in the inflationary 
country granting the subsidy, both the subsidy amounts and the sales denominators could be converted 
to a stable currency commonly used in international bu siness transactions, or to a basket of currencies 
(the Purchasing Power Parity Index or the aver age for developed countries, for example).   
 
8. If such a currency conversion is made, the adjustment factor for inflation and interest 
recommended in Recommendation 3 should be based on inflation and interest rates for the currency or 
basket of currencies used.  If a basket of currencies is used, the exchange rates included should be 
weight-averaged by an appropriate factor. 
   G/SCM/W/415/Rev.2 
 Page 31 
 
 
 RECOMMENDATION 6  
 
Recommendations Concerning the Sales Denominator  
 
 
A. Use of Accounting Year Data  
 
1. It is recognized that paragraphs 2 and 3 of A nnex IV indicate that normally there will be a lag 
between the sales denominator and the numerato r (i.e., the subsidy) in calculations of ad valorem  
subsidization.  That is, as provided in paragraphs 2 and 3, the relevant sales data are those for the 
"most recent 12-month period, for which sales data is available, preceding the period in which the 
subsidy is granted".  
 
2. It is recommended with respect to this general issue that the data for "the most recent 12-month 
period" should be the data for the recipient firm's most recent full accounting  year.  Because of the 
possibility of year-end adjustments for discounts, reba tes, returns, etc., use of sales data for a period 
other than a normal accounting period could introduce inaccuracies.   
 
3. It is noted that the language of paragraphs 2 and 3 of Annex IV, by requiring use of a 12-month 
period for sales data that precedes the granting of a subsidy, builds in a lag between the subsidy and 
the sales data to which it is comp ared in the calculation of the ad valorem  subsidization of a product.   
 B. Special Case: Tax-Related Subsidies
 
 
4. As provided for in footnote 64 to Annex IV, the sales denominator for tax-related subsidies is 
something of a special case.  The footnote indicates that the sales to be used are those "in the fiscal 
year in which the tax rela ted measure was earned."  
 
5. Taking into account this language, it is recommended, in calculating the ad valorem  
subsidization from tax-related subsidies, that the nu merator be the amount of the tax subsidy earned in 
the fiscal year preceding the fiscal year in whic h the relevant tax return was filed, and that the 
denominator be the company’s sales in the same fiscal year, i.e., the one prior to the fiscal year in 
which the tax return was filed.   
 
C. Use of Net Rather Than Gross Sales  
 6. It is recommended that the recipient firm's net
 sales (i.e., net of disco unts, returns, allowances, 
etc.), be used in identifying the value of th e recipient firm's sales for calculations of ad valorem  
subsidization.   
 
D. Variability of Sales Denomin ator During Allocation Period  
 
7. It is recognized that, during th e course of an allocation period for a subsidy, the nature and scope 
of a firm's activities may change.  Given this, if the sales denominator remained fixed during the 
allocation period, or were only ir regularly revised, the numerator and denominator might not be 
comparable.  In view of these considerations, it is recommended that the sales denominator be 
updated during every year of an allocation period (so as to reflect the relevant value of sales during 
the preceding accounting year).    8. Related to this, it is further recommended that the allocation of a particular subsidy amount to a 
given year in an allocation period be deemed to consti tute the "granting" of th at subsidy amount in the 
sense of paragraph 2 of Annex IV.  In other word s, the denominator would be the recipient's sales G/SCM/W/415/Rev.2 
Page 32  
 
 during the most recent accounting year preceding the period to which the relevant portion of the 
subsidy was allocated.       
 
E. Firm-Specific Sales Denominator
 
 
9. It is recommended that the ad valorem  subsidization of a product be calculated on a firm-
specific, rather than an industry-wide, basis.  This recommendation is based on the language of 
Annex IV, particularly that of paragraphs 2-5, wh ich are worded entirely in terms of individual 
recipient firms.  It is recognized that individual firms with less than 5 per cent subsidization would not 
be subject to a presumption of causing serious prejudice.      F. Determination of Whether a Subsidy is Tied to a Product
 
 
10. To determine whether a subsidy is "tied" to a particular product in the sense of paragraph 3 of 
Annex IV, and hence whether the sales denominator should be the recipient's sales of that product 
alone, instead of to its total sales, it is recommende d that a subsidy be deemed to be tied to a product 
if its intended use is known to the giver, and so acknowledged, prior to or concurrent with the 
subsidy's bestowal.  
  
11. It is recognized, however, that in any give n situation, some other approach might be more 
appropriate.    
G. Sales Denominators for Tied and Untied Subsidies, and Aggregation of ad valorem
 
Subsidization from Different Kinds of Subsidies  
 
12. It is recommended, where a firm receives both tied and untied subsidies, that separate ad 
valorem  calculations be performed for each using the appropriate sales denominators, and that the 
resulting percentages be aggreg ated, to determine the total ad valorem  subsidization of the product.  
Specifically, it is recommended that the ad valorem  subsidization percentages from tied and untied 
subsidies be calculated using as the sales denomin ators the recipient firm’s sales of the relevant 
product and the recipient firm’s total sales, resp ectively, as required by Annex IV.  The resulting ad 
valorem  percentages then should be added together to determine the aggregate ad valorem  
subsidization of the product from these subsidies.   
  G/SCM/W/415/Rev.2 
 Page 33 
 
 
 RECOMMENDATION 7  
 
Treatment of "Start-Up" Subsidie s in Article 6.1(a) Calculations  
Made After the End of the Start-Up Period  
 
 
 In the event that an Article 6.1(a) case is brought after the end of a start-up period during which 
subsidies were received, it is recommended that these subsidies be analyzed to determine whether any 
portion of them is allocable to the period under cons ideration.  If so, these allocated subsidy amounts 
should be included in the calculation of ad valorem  subsidization to determine if the 5 per cent 
threshold has been reached.     
 G/SCM/W/415/Rev.2 
Page 34  
 
 RECOMMENDATION 8
 
 
Cost to the Government of Grants  
 
 
A. Outright Grants  
 
1. For outright grants not paid in instalments, it is recommended that the cost to the government be 
deemed to be the face amount of the grant, adjusted  (if allocated over time) for inflation and interest 
in accordance with the general recommendation.    2. For outright grants paid in instalments, it is recommended that each instalment be treated as a 
separate grant.  It is noted that  this recommendation is consistent with the recommendation to vary the 
sales denominator during each year of an allocation period.   
 
B. Reimbursable Grants
 
 
3. It is noted that grants whose terms include th e obligation of reimbursement in the event that 
certain conditions are fulfilled (e.g., that the reci pient becomes profitable) are similar to contingent 
liability loans.   
 4. In view of this, it  is recommended that such gr ants be treated as a series of short-term interest-
free loans.  The cost to the government for such gr ants during the period before they are reimbursed 
thus should be calculated according to the recommended methodology for ordinary loans 
(Recommendation 9).  
 
5. It may be determined that a given reimbursabl e grant never will be repaid,  (For example, the 
recipient may be unprofitable over a long period. )  Should such a conclusion be reached, it is 
recommended that the reimbursable grant be treated as an outright grant. The cost to the government 
would be the original face amount of the grant, le ss any reimbursement that might have been made to 
that date.   
 
6. It is recommended that the allocation period for any such outstanding amount should begin on 
the date as of which it is determined that this am ount effectively has become an outright grant.   
 
  G/SCM/W/415/Rev.2 
 Page 35 
 
 
 RECOMMENDATION 9  
 
Cost to the Government of Loans  
 
 
A. Ordinary Loans   
 
1.  It is recommended that the cost to the governme nt of an ordinary loan be measured based on the 
extent to which the effective interest rate charged on the loan provided is lower than the appropriate 
government bond rate in the year in which the loan is given.  For short-term government loans (i.e., loans with a maturity of less than one year), the appropriate bond rate would be that on short-term government bonds of comparable maturity.  For long-term government loans, the appropriate bond 
rate would be that on long-term government bonds of  comparable maturity.  As a simplified example, 
if the appropriate government bond rate was 5 per cent, and the interest rate on the loan was 4 per 
cent, the cost to the government of providing the loan would be 1 per cent.  Any grace period 
provided by the government loan, during which time interest did not accrue, also would be considered 
a cost incurred by the government, calculated us ing the appropriate government bond rate.  For 
purposes of establishing a relatively simple and predictable calculation methodology, it is further 
recommended that the benefits thus calculated be deemed to arise on a year-by-year basis over the life 
of the loan (i.e., as a series of recurring grants).  It is noted in addition that deferrals of principal 
and/or interest may give rise to additional costs to the government.       B. Contingent Liability Loans
 
 
2. It is recognized that contingent liability loans are similar to reimbursable grants, in that they are 
repayable only upon the occurrence of some future event, such as achievement of a certain level of 
profitability.  Because it is impossible to predict the occurrence of future ev ents, it is recommended, 
as for reimbursable grants, that contingent liability lo ans be treated as if they were a series of short 
term interest-free loans for purposes of determining the cost to the government. 
   
3.  If such loans eventually were repaid, the amount of the subsidy would be calculated in 
accordance with the methodology described above for ordinary loans.  
 
4.  In the event that a conclusion is reached that a given contingent liability loan will not be repaid, 
it is recommended that such loans be treated as grants .   The amount of the subsidy (i.e., the cost to 
the government) would be the face amount of the loan, plus accrued interest calculated using the 
government's long-term bond rate.  
 
5. It is recommended that the allocation period for any outstanding contingent loan amount begin 
on the date as of which it is determined that this  amount effectively has become an outright grant.  
 
 G/SCM/W/415/Rev.2 
Page 36  
 
 RECOMMENDATION 10
 
 
Interest Rate Subsidies  
 
 
1.  Where, as of the receipt of a loan, or at some later point, the government subsidizes the interest 
expense on an ongoing basis as interest payments become due, it is recommended that the subsidy be 
calculated as the amount of interest covered by th e government.   It is recommended that such 
amounts be treated as a series of recurring grants provided on the dates on which interest payments 
were due.    2.  Where the government provides, at a certain point in time, a lump sum payment to offset the 
recipient's interest expenses (whether with respect to  past interest, paid or unpaid, or with respect to 
future interest expenses), it is recommended that th e amount of the subsidy, once paid, be treated as a 
non-recurring grant.  
   G/SCM/W/415/Rev.2 
 Page 37 
 
 
 RECOMMENDATION 11  
 
Debt Forgiveness and Loss Coverage  
 
 
1. It is noted that debt forgiveness and loss coverage may give rise to separate rebuttable 
presumptions of serious prejudice under Article 6.1(b) , (c) and (d).  Nevertheless, it is recognized that 
subsidies of these types might be included in claims under Article 6.1(a).  
 
2. If a subsidy in the form of debt forgiveness is included in a claim under Article 6.1(a), it is 
recommended that the cost to the government for purposes of this claim be calculated as the amount of the government outlay (the outstanding principal plus accrued interest).  It is further recommended 
that this amount be treated as a grant received on the date the debt is forgiven.   
 
3. If a subsidy in the form of loss coverage is included in a claim under Article 6.1(a), it is 
recommended that the cost to the government for purposes of this claim be calculated as the amount of loss coverage provided.  It is further recommended that this amount be treated as a grant, unless the 
loss coverage takes some other form.   
 
4.  These recommendations are without prejudice to any separate claims that might exist under the 
other subparagraphs of Article 6.1.   G/SCM/W/415/Rev.2 
Page 38  
 
 RECOMMENDATION 12
 
 
Tax Concessions  
 
 
A. Tax Exemptions, Deductions, Holidays, etc.  
 
1. It is recommended that the cost to the government of tax exemptions, deductions, holidays, and 
any similar measures be calculated as the amount of revenue that the government otherwise would 
have collected.    B. Tax Deferrals
 
 
2. It is recommended that the cost to the governme nt of tax deferrals be calculated by treating the 
amount of the deferred tax as if it were an in terest-free loan for the period of deferral. 
  
  G/SCM/W/415/Rev.2 
 Page 39 
 
 
 RECOMMENDATION 13  
 
Equity Infusions  
 
 
1. It is recommended, where the recipient firm’s stock is publicly traded, that the cost to the 
government, if any, of an equity infusion be de termined by comparing the price the government 
actually paid for the equity with the relevant market  price for the equity.  If the government has paid 
more than the relevant price for the equity, the cost to the government would be the amount of the 
overpayment.    2. It is further recommended that this amount be treated as a grant.   
 
3. Where there is no market price for the equity, this recommended methodology would need to be 
modified.   
  G/SCM/W/415/Rev.2 
Page 40  
 
 RECOMMENDATION 14
 
 
Loan/Credit Guarantees  
 
 
1. It is recognized that guarantees can be provide d both to borrowers (as loan guarantees) and to 
lenders (as credit guarantees).   
 
2. A two-part procedure is recommended for determining the cost to the government of loan or 
credit guarantees, where such guarantees are provided through a programme.  The first part consists of 
assessing the long-term viability of the guarantee progr amme as a whole.  The second part consists of 
attributing the to firm involved in the Article  6.1(a) enquiry the appropriate portion of the 
government’s cost under the programme.   
 
3. To assess the long-term viability of a guaran tee programme, it is recomme nded that the financial 
statements for the programme for a relatively long period, normally the most recent five years, be examined.  If it is found that the total fees paid into the programme by participating firms during the 
period were less than the total amount paid by the government under the programme to cover 
defaulted loans plus the costs of operating the programme, the programme would not be viable.   
 
4.  In the second part of the analysis, attributing the appropriate amount of government cost under the programme to the relevant firm, it is recommended to first calculate the cost  to the government of 
the programme as a whole.  This cost should be calculated as the difference between the total amount 
of fees actually paid into the programme by all participants (including those not involved in the 
enquiry) and the total amount of fees that would have been required for the programme to be viable 
during the relevant period.   
 
5. The next step in the recommended methodology would be to attribute the appropriate portion of 
this cost to the particular firm involved in the en quiry.  This should be calculated by applying to the 
total cost that firm’s percentage  share of total loan amounts guar anteed under the programme during 
the relevant period.  This subsidy would be deemed to have been provided on the date(s) the fees were 
paid by that firm.  
 
6. In the case of ad hoc guarantees (i.e., those that clearly are not linked to any guarantee 
programme), it is recommended, in the event that a default is covered by a government, that the cost 
to government of the ad hoc guarantee be the amount  of the default coverage provided, less any fees 
paid for the guarantee.  
 
  G/SCM/W/415/Rev.2 
 Page 41 
 
 
 RECOMMENDATION 15  
 
Government Provision of Goods and/or services  
 
 
1. In general, it is recommended that the cost to the government of providing a good and/or service 
be calculated as the expenses/costs incurred by the government in providing the good or service, 
including a reasonable return, minus the price received for the good and/or service.  If the cost to the 
government cannot be calculated according to this approach, it could be calculated using other 
approaches under the adequate remuneration standard of Article 14(d).   2. In addition, with regard to the provision of wi dely-used inputs (e.g., electricity, water or natural 
gas), it is recommended that a gove rnment be deemed to have incurred a cost in providing a good or 
service only if the price actually charged to a par ticular customer is less than the normal” price for 
that type or category of customer.  The "normal" price would be the price that would be expected 
based on the price schedule, or based on the price to comparable customers, and which covered the 
cost (including a reasonable return) of provid ing the good or service to the customer.   
 
3. It is recognized that a price differential for different customers might not be abnormal (as, for 
example, in the case of an electric utility).  Only  if, based on the standard price list or pricing 
schedule, the price charged to a particular customer  were disproportionately low in relation to the 
price that would be expected based on the price schedule (or in relation to the price charged to other, comparable, customers), might a cost to the government possibly arise.   
 
4. In the event that a cost to the government is fo und to exist, this cost should be calculated based 
on the difference between the normal” price for th e good or service and the price actually charged.  
 
 G/SCM/W/415/Rev.2 
Page 42  
 
 RECOMMENDATION 16
 
 
Government Purchase of Goods  
 
 
1. It is recommended that the cost to the government of purchasing goods be determined in 
accordance with the guidelines in Article 14(d) of the Agreement on Subsidies and Countervailing 
Measures.  That is, such calculations should be ba sed on more than adequate remuneration”.  To the 
extent that a government pays more than adequate  remuneration when purchasing goods, the cost to 
the government should be calculated as the amount of such overpayment.  This amount should be treated as a grant.   
2. It is noted that, although the guidelines in Article 14 are in the context of  benefit to the 
recipient”, in the case of government purchases of goods, the cost to the government and the benefit to 
the recipient in practice would be similar.  Thus, the Article 14 guidelines can be applied directly 
under Article 6.1(a).    
  G/SCM/W/415/Rev.2 
 Page 43 
 
 
 RECOMMENDATION 17  
 
Assumption of Legal Obligations  
 
 
1. Assumption of legal obligations might encompass such government actions as coverage of 
severance pay, of other legally-required employ ment costs, possibly of certain environmental 
costs, etc. 
 
2. It is recommended that the cost to the government of assumption of legal obligations be the amount of the obligations assumed, to the extent that  this involves an element of subsidization.  This 
amount normally should be treated as a grant.   
 
 
 G/SCM/W/415/Rev.2 
Page 44  
 
 RECOMMENDATION 18
 
 
Export-Related Subsidies  
 
 
1. Given the prohibition on export subsidies, it is  recognized that subsidies of this type may only 
rarely, if ever, be included in a claim under Article 6.1(a).  
 
2.  To the extent that such subsidies are so included, it is recommended that their cost to the 
government be determined based on their form.  Thus, the cost to the government of such subsidies in the form of grants would be determ ined using the approach for grants, those in the form of loans using 
the approach for loans, etc.   
 
  G/SCM/W/415/Rev.2 
 Page 45 
 
 
 RECOMMENDATION 19  
 
Multiple Exchange Rate Programmes  
 
 
1. It is recommended that the cost to the government of application of a multiple exchange  rate 
system to a given transaction be based on a comparison of the exchange rate actually applied with an 
appropriate benchmark rate, such as the market exchange rate or another exchange rate (e.g., the  
Purchasing Power Parity rate) published by an international organization.   
 2. The cost to the government would be the difference between the absolute value of the 
transaction at the exchange rate actually applied,  and the value that woul d have resulted if the 
benchmark rate had been applied.   
 
3. It is recommended that this amount be treated as a grant. 
  
 G/SCM/W/415/Rev.2 
Page 46  
 
 RECOMMENDATION 20
 
 
Research and Development Subsidies  
 
 
1. It is recommended that the cost to the gove rnment of research and development subsidies be 
determined based on their form.  Thus, the cost to the government of such subsidies in the form of 
grants would be determined using the approach fo r grants, those in the form of loans using the 
approach for loans, etc. 
 2.  It is further recommended, in view of th e future orientation of research and development 
activities, that subsidies for these activities be presum ptively allocated across the recipient firm’s total 
sales, unless it is demonstrated that treating them as tied” to the product in question is appropriate.   
 
 
  G/SCM/W/415/Rev.2 
 Page 47 
 
 
 RECOMMENDATION 21  
 
Worker Training  
 
 
1. As a general principle, government-subsidi zed or government-provided worker training can 
resemble a wage subsidy, to the extent that it relieve s a firm of a cost that the firm otherwise would  
have borne.  It is noted that the question of whet her a firm has a legal obligation to train its workers 
(e.g., to retrain laid-off workers) is relevant to th e existence of a subsidy for worker training.  Where 
such an obligation exists, a subsidy might arise if the government incurs a cost in providing the assistance.  
2. It is  recommended that the cost to the government be the cost that the government incurs in 
providing or funding the worker training and which would otherwise have been borne by the firm. 
 
3. It is further recommended that this amount be treated as a grant.  G/SCM/W/415/Rev.2 
Page 48  
 
 APPENDIX:  TEXT OF ANNEX IV TO THE AGREEMENT ON  
SUBSIDIES AND COUNTERVAILING MEASURES  
  
ANNEX IV 
 
CALCULATION OF THE TOTAL AD VALOREM SUBSIDIZATION 
(PARAGRAPH 1(a) OF ARTICLE 6)
62  
 
1. Any calculation of the amount of a subsidy for the purpose of paragraph 1(a) of Article 6 shall be done in terms of the cost to the granting government.  
2. Except as provided in paragraphs 3 through 5, in determining whether the overall rate of 
subsidization exceeds 5 per cent of the value of the product, the value of the product shall be 
calculated as the total value of the recipient firm's
63 sales in the most recent 12-month period, for 
which sales data is availabl e, preceding the period in which the subsidy is granted.64 
 
3. Where the subsidy is tied to the production or sale of a given product, the value of the product 
shall be calculated as the total value of the recipient firm's sales of that product in the most recent 12-
month period, for which sales data is available, prec eding the period in which the subsidy is granted. 
 4. Where the recipient firm is in a start-up situa tion, serious prejudice sha ll be deemed to exist if 
the overall rate of subsidization exceeds 15 per cent of the total funds invested.  For purposes of this  
paragraph, a start-up period will not exte nd beyond the first year of production.
65 
 
5. Where the recipient firm is located in an inflationary economy country, the value of the product 
shall be calculated as the recipient firm's total sale s (or sales of the relevant product, if the subsidy is 
tied) in the preceding calendar year indexed by the rate of inflation experienced in the 12 months 
preceding the month in which th e subsidy is to be given. 
 
6. In determining the overall rate of subsidiza tion in a given year, subsidies given under different 
programmes and by different authorities in the territory of a Member shall be aggregated. 
 
7. Subsidies granted prior to the date of entry in to force of the WTO Agreement, the benefits of 
which are allocated to future production, shall be included in the overall rate of subsidization. 
 8. Subsidies which are non-actionable under relevant provisions of this Agreement shall not be 
included in the calculation of the amount of a subsidy for the purpose of paragraph 1(a) of Article 6. 
 
 
__________ 
 
                                                     
 
62 An understanding among Members should be developed, as necessary, on matters which are not specified in this 
Annex or which need further clarification for the purposes of paragraph 1(a) of Article 6. 
63 The recipient firm is a firm in the territory of the subsidizing Member. 
64 In the case of tax-related subsidies the value of the prod uct shall be calculated as the total value of the recipient 
firm's sales in the fiscal year in which the tax-related measure was earned. 
65 Start-up situations include instances where financial commitments for product development or construction of 
facilities to manufacture products be nefiting from the subsidy ha ve been made, even though production has not begun.