RESTRICTED
WORLD TRADE G/SCM/W/415/Rev.1
4March 1998
ORGANIZATION(98-0843)
Committee onSubsidies
andCountervailing Measures
REPORT BYTHE INFORMAL GROUP OFEXPERTS
TOTHE COMMITTEE ONSUBSIDIES AND COUNTERVAILING MEASURES
Note from theInformal Group ofExperts
Revision
TheattachedreportissubmittedbytheInformalGroupofExpertstotheCommitteeonSubsidies
andCountervailing Measures ("the Committee"). Asreflected indocument G/SCM/5, theInformal
Group ofExperts wascreated byadecision oftheCommittee, atitsmeeting of13June1995, with
thefollowing terms ofreference:
"Toexamine matters which arenotspecified inAnnex IVtotheAgreement orwhich
needfurther clarification forthepurposes ofparagraph 1(a)ofArticle 6,andtoreport
totheCommittee such recommendations astheGroup considers could assist the
Committee inthedevelopment ofanunderstanding among Members, asnecessary,
regarding suchmatters."
Inaccordance withthese terms ofreference, theInformal Group ofExperts 'report contains
anumber ofrecommendations withrespect toparticular calculation issues arising under Annex IV
totheAgreement onSubsidies andCountervailing Measures ("theAgreement"). Inaddition, itreports
ontheGroup 'sdiscussions ofallissues thatitconsidered. Anoutline oftheissues discussed bythe
Group wascirculated inG/SCM/W/413. Thereport isorganized suchthatitsmain body describes
theGroup 'sdiscussions andrecommendations, bytopic. Following this,thetextsofalloftheGroup 's
recommendations areappended separately. Alsoappended isthefulltextofAnnex IVoftheAgreement.
TheCommittee decided thattheInformal Group would becomposed ofexperts nominated
byMembers andbycountries eligible tobecome original Members oftheWTO, andthattheexperts
would serve intheirpersonal capacities rather thanasrepresentatives ofgovernments. TheCommittee
further decided thatthemembers oftheGroup should havesubstantive expertise insubsidy calculation
methodology andbeabletocontribute actively, bothorally andinwriting, tothework oftheInformal
Group. Themembers oftheInformal Group ofExperts are:Mr.Robert Arnott, succeeded by
Mr.David Sprott (Australia); Mr.Stephen Gospage (EC); Mr.Takuya Ishikawa, succeeded by
Mr.JoOkumura (Japan); Mr. Ju-Young Lim (Korea); Mr. Roy A.Malmrose (US);
Mr.Alberto Lerín Mestas (Mexico); Mr.Wayne Neamtz, succeeded byMr.Andre Moncion (Canada);
andMs.VeraThorstensen (Brazil). Mr.Victor doPrado (Brazil) served asChairman oftheGroup,
andMs.Clarisse Morgan (WTO Secretariat) asSecretary oftheGroup.
TheGroup thusfarhasheldtenmeetings, onthefollowing dates: 1November 1995,
13December 1995, 29February 1996, 26April 1996, 18-19 July1996, 7-8October 1996,
25-26 November 1996, 5-6February 1997, 8-10April 1997, and21-22 May1997. TheGroup expects
tocontinue meeting totrytoresolve issues where todatenoconsensus hasbeenreached, which includeG/SCM/W/415/Rev.1
Page2
accelerateddepreciation,upstreamsubsidies,equityinfusions,royalty-basedfinancing,salesdenominator
forexport subsidies, andexpected cost/risk ofadhocloanguarantees.
TheGroup wishes toemphasize thefollowing substantive points withrespect tothereport.
First, asrequired byparagraph 1ofAnnex IV,alloftheGroup 'sdiscussions were heldand
recommendations formulated from thepoint ofview ofcosttogovernment. Second, theGroup 's
recommendations inthecontext ofArticle 6.1(a) andAnnex IVoftheAgreement aremade exclusively
withrespect tothatcontext, andarewithout prejudice toanyother area(such ascountervailing
measures). Third, itisimplicit throughout thereport thatonlymeasures thatconstitute specific subsidies
within themeaning ofArticles 1and2oftheAgreement, towhich Article 6.1(a) applies perthe
Agreement -inwhatever form(i.e.,grants, loans, etc.)-arecovered bytheGroup 'srecommendations.
Fourth, theGroup doesnotview thereport asexhaustive ofevery potentially relevant issue under
Article 6.1(a) andAnnex IV. Thus, thefactthatthereport maynotrefertoagiven issue orgiven
measure isnotmeant toimply thatsuchanissue isirrelevant inthiscontext, orthatsuchameasure
should notbeincluded inanycalculation under Article 6.1(a) andAnnex IV.
Finally, theGroup recognizes that, intheinterests oftransparency, predictability and
administrability, itsrecommendations should beassimple aspossible. Forthisreason, forcertain
questions which werediscussed butwerefound tobeexcessively difficult toadminister and/or tohave
atmost asmall impact onthefinalresults ofanygiven calculation, theGroup doesnotrecommend
anyadjustments inthecalculations ofcosttogovernment oradvalorem subsidization. Asanexample,
thequestion offlotation costs ofbonds wasdiscussed, aswere administrative costs associated with
theprovision ofsubsidies. While these costs arguably should beincluded inanyArticle 6.1(a)
calculation, theGroup believes thattheeffort tomeasure these costs would outweigh anymarginal
increase intheaccuracy ofthesubsidy calculations thatmight result.
ThisrevisedversionofthereporttakesintoaccountcommentsandsuggestionsmadebyMembers
inthecontext ofCommittee informal consultations regarding thereport.G/SCM/W/415/Rev.1
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REPORT BYTHE INFORMAL GROUP OFEXPERTS
TOTHE COMMITTEE ONSUBSIDIES AND COUNTERVAILING MEASURES
Introduction
TheInformal Group ofExperts conceived itsbasic task,pursuant tothemandate assigned to
itbytheCommittee, asformulating recommendations onhowtocalculate thecosttogovernment of,
andtheadvalorem subsidization from, particular types ofsubsidies. Inpreparing thisreport, theGroup
recognized thatanumber ofissues thatithaddiscussed wereissues thatmight potentially affect more
thanonetypeofsubsidy, anddecided that,foreaseofreading andlogic ofpresentation, thereport
should discuss suchcross-cutting issues first. Theissues ofthistypethatwerediscussed are:expensing
versus allocation ofsubsidy benefits; allocation period; government costoffunds andtimevalue of
money; adjustments forinflation andinterest; inflationary economy countries; salesdenominator; and
start-up situations. These issues arepresented inSections Ithrough VII,respectively. Section VIII
thenaddresses theindividual types ofsubsidies discussed bytheGroup: grants, loans, interest rate
subsidies, debtforgiveness, losscoverage, taxconcessions, equity infusions, loan/credit guarantees,
governmentprovisionofgoodsand/orservices,assumptionoflegalobligations,export-relatedsubsidies,
upstreamsubsidies,multipleexchangerateprogrammes,researchanddevelopmentsubsidies,andworker
training. Thetextofthereport presents summaries oftheGroup 'sdiscussions oneachpoint, and
summaries ofitsrecommendations. Separately appended tothereport arethetextsofalloftheGroup 's
recommendations.
I. EXPENSING VERSUS ALLOCATION OFSUBSIDY BENEFITS
A. Implications forDetermination ofSerious Prejudice based on5percentThreshold
1. Thequestion ofwhether andunder whatcircumstances subsidies should beallocated oversome
multi-year period, versus attributed toasingle year(i.e., "expensed") wasextensively discussed. In
particular, itwasnoted thatalthough thepayment ofasubsidy generally would occur atasingle moment
intime, itmight notbeappropriate inthecontext ofArticle 6.1(a) toattribute thatsubsidy (i.e., the
presumption ofserious prejudice based onmore than5percentadvalorem subsidization ofaproduct)
exclusively toasingle year. Ifthisweredone, evenaverylarge subsidy would havenoeffects, for
purposes ofArticle 6.1(a), beyond theyearinwhich itwasgranted. Thatis,regardless ofitssize,
theimpact ofanygiven subsidy would vanish, forpurposes ofArticle 6.1(a), asoftheendoftheyear
inwhich itwasgranted. Inaddition, ifthepossibility ofallocation didnotexist, theadvalorem
subsidization during theyearinwhich thesubsidy wasgranted could beoverstated.
2. Such anoutcome wasdeemed inappropriate under Article 6.1(a) foranumber ofreasons.
First, ifthepresumption ofserious prejudice could never lastbeyond asingle year, thismight make
implementation ofanappropriate remedy (i.e., removal oftheadverse effects ofthesubsidy or
withdrawal ofthesubsidy) difficult where serious prejudice under Article 6.1(a) wasfound. For
example, bythetimearemedy wasobtained, the"adverse effects" ofthesubsidy purportedly would
havevanished oftheirownaccord. Second, ifexpensing resulted inoverstatement oftheadvalorem
subsidization fortheyearinwhich thesubsidy wasgranted, thiscould giverisetoanunjustified
presumption ofserious prejudice forthatyear. Moreover, paragraph 7ofAnnex IV,byreferring
topre-WTO subsidies whose benefits wereallocated tofuture production, suggests thatallocation of
subsidy benefits isforeseen inthecontext ofcalculating 5percentadvalorem subsidization ofaproduct.
Ifthere werenopossibility ofallocating anypost-WTO subsidies, thiswould create aninconsistency
between theallowed treatment ofpre-andpost-WTO subsidies inthecontext ofArticle 6.1(a).G/SCM/W/415/Rev.1
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3. Ontheotherhand, allocating allsubsidies, regardless oftheirnature, would seeminappropriate
iftheirimpact upon therecipient waslimited andofshort duration. Moreover, ifallsubsidies were
allocated, theduration ofthepresumption ofserious prejudice might beinappropriately lengthened.
Thus, itwasconcluded thatnotallsubsidies should beallocated.
4. Itthuswasnecessary toidentify under whatcircumstances subsidies ofvarious kinds should
beallocated versus expensed. TheGroup developed recommendations inthisregard, intheformof
anillustrative table ofsubsidies thatshould beallocated versus expensed, along withacover note
explaining theunderlying principles forsuchacategorization. Itwasfeltthatsuchatablewould create
themosttransparency andpredictability forallconcerned. Theillustrative tableandcover noteare
presented inRecommendation 1.
B. Illustrative Table andGeneral Principles (Recommendation 1)
5. Theillustrative table reflects theGroup 'sconclusions regarding anumber ofpoints. First,
thetableindicates thatcertain types ofsubsidies (e.g., grants) maybeeither expensed orallocated,
depending onthecircumstances. Where agiven typeofsubsidy could beeither expensed orallocated
depending onthecircumstances, itisshown straddling thetwocolumns. Other types ofsubsidies
generally would beeither always expensed oralways allocated. Certain considerations relevant to
thequestion ofexpensing orallocating different types ofsubsidies alsoarereflected inthetable.
6. Thetableandcover notereflect certain additional recommendations, aswell. Thefirstofthese
isthatresearch subsidies bepresumptively allocated, unless expensing isdemonstrated tobemore
appropriate inagiven case. Similarly, itisrecommended thatnon-recurring and/or large subsidies
bepresumptively allocated, unless expensing isdemonstrated tobemore appropriate inagiven case.
Further, itwasdeemed appropriate, primarily fromthestandpoint ofadministrative convenience, that
verysmall subsidies beexpensed regardless oftypeorother considerations. Aleveloflessthan0.5per
centofsales foranyindividual subsidy isrecommended forthisthreshold. Finally, thecover note
indicates thattheinclusion ofanygiven typeofmeasure inthetableisnotintended toimply thatsuch
ameasure inallcaseswould berelevant inthecontext ofArticle 6.1(a). Rather, onlymeasures meeting
theAgreement 'sdefinitions of"subsidy" and"specificity" would beconsidered inthiscontext.
7. Thetableincludes acategory forexport-related subsidies, notwithstanding thattherelevance
ofthequestion ofexpensing versus allocating inthecontext ofsuchsubsidies might belimited, atleast
withrespect tothose export-related subsidies thatareexport subsidies inthesense oftheAgreement.
Thatis,theprohibitiononexportsubsidies,andthenon-applicabilitytosuchsubsidiesofthepresumption
ofserious prejudice where transition periods apply, could mean thatsubsidies ofthistypemight only
rarely beatissueunder Article 6.1(a). Ontheotherhand, where theprohibition applies, theAgreement
doesnotappear toforce aMember toallege thatasubsidy isprohibited, andtherefore toseekaremedy
onlyunder Article 4.Thus itwasdeemed appropriate toinclude areference tothese subsidies inthe
table.
8. Thetablealsoreflects discussions astowhether subsidies fordebtforgiveness andlosscoverage
should beallocated orexpensed inthecontext ofAnnex IVcalculations, orwhether theyshould be
consideredatall,giventhatsuchsubsidieswouldgiverisetoaseparatepresumptionofseriousprejudice.
Forthereasons discussed inSections VIII.D andE,itwasdeemed appropriate toinclude suchsubsidies
intheexpense/allocate table, without prejudice totheexistence ofanyseparate presumptions ofserious
prejudice under Article 6.1(b), (c)or(d).
9. Regarding thesubsidies inthetablethatareshown assometimes being expensed andsometimes
allocated, thediscussion focused onfurther elaborating thecriteria thatmight beapplied inmaking
suchadetermination inanygiven case. Thefollowing general principles wereidentified, affirmativeG/SCM/W/415/Rev.1
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answers tooneormore ofwhich normally would point toward allocating, rather thanexpensing, a
given subsidy:
1. Whether thepurpose ofthesubsidy wasforthepurchase offixed assets
2. Whether non-recurring and/or large
3. Whether oriented toward future production
4. Whether consisting ofequity
5. Whether carried forward inrecipient 'saccounting records
These principles alsogenerally underlie therecommendations astoexpensing orallocating theremaining
types ofsubsidies shown inthetable.
10. Thepurpose ofasubsidy, inparticular whether itisusedforacquisition ofassets, wasdeemed
relevant bytheGroup. TheGroup noted thatasageneral principle, subsidies forasset acquisition
should beallocated overtime, while recurring subsidies tocover operating costs orother subsidies
fornon-asset purposes might inmany circumstances beexpensed.
11. Thefrequency andsizeofasubsidy weredeemed relevant tothequestion ofexpensing versus
allocating. Justasitisrecommended thatrecurring and/or small subsidies beexpensed, soisit
recommended thatnon-recurring and/or large subsidies generally beallocated. Oneconsideration in
thiscontext isthatitmight beillogical toexpense verylarge subsidies duetothelikely substantial
impact thatsuchsubsidies would haveontherecipient companies beyond theyearinwhich theywere
received. Forexample, itislikely thatnon-recurring large subsidies would beusedtopurchase fixed
assets, orevenifnotsoused, would freeupacomparable amount ofcompany funds forthispurpose.
Bycontrast, recurring subsidies aremore likely toberelatively small, aremore likely tobeusedfor
non-asset purposes, aremore likely tobeoriented toward present rather thanfuture production, are
lesslikely toconsist ofequity, andarelesslikely tobecarried forward intherecipient 'saccounts,
thanarenon-recurring subsidies.
12. Theremaining general principles areessentially self-explanatory. Whether asubsidy isoriented
toward production infuture periods, consists ofequity, oriscarried forward intherecipient 'saccounts
wereviewed asrelated tothequestion ofwhether itsbenefits persist beyond asingle period, andhence
whether itshould beallocated tofuture periods.
II. ALLOCATION PERIOD (Recommendation 2)
13. Forthose subsidies thatwillbeallocated, itwasrecognized thatguidance would beuseful as
tohowtodetermine theallocation period. Asageneral matter, itisrecommended thattheaverage
useful lifeofalloftherecipient 'sphysical depreciable assets should beusedastheallocation period
foralltypes ofsubsidies except longtermloans, andpossibly equity infusions, depending onthe
circumstances. Itisfurther recommended thattheaverage useful lifeofassets becalculated asthe
ratioofthetotalaverage bookvalue ofoperational assets totheaverage annual depreciation expense.
14. Therecommendations establish ahierarchy ofdatasources forcalculating theaverage useful
lifeofassets inagiven situation. Thepreferred source (from thestandpoint ofaccuracy) isdeemed
tobetheoverall information forthefirmorfirms receiving thesubsidy. Ifsuchdatacannot beobtained
orarenotreasonable, dataforother firms producing theproduct inthesame country could beG/SCM/W/415/Rev.1
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considered, orfailing that,dataforfirms inthesame business sector inthatcountry (defined asthe
nextlargest category intheInternational Standard Industrial Classification ("ISIC") orsimilar
nomenclature system). Ifthisisnotpossible orfeasible, dataforfirms producing theproduct outside
thatcountry could beused. Issues thatcould affect thesuitability ofagiven firm'sdatacould include
thecalculation ofdepreciation expense onsome basis other thantheuseful lifeofassets, theuseof
adepreciation method other thanstraight line,and/or irregular changes totheassetpool. Regardless
ofthedatasource, theGroup recommends themethod forcalculating theuseful lifeofassets thatis
described inparagraph 13andRecommendation 2.
15. Themostrecent relevant multi-year period which isrepresentative ofnormal operations should
bechosen forcalculating thenecessary averages, toprevent potential extraordinary events inasingle
yearfromdistortingthecalculation.Normalizingadjustmentsmaybenecessaryifassetshaveundergone
extraordinary revaluations, orinthecaseofhyperinflation. Moreover, accounting datashould be
preferred totaxdepreciation datainselecting adatasource forthecalculations, astheformer arethe
more likely toreflect thetrueeconomic lifespan ofassets.
16. Forsubsidies from long-term loans, itisrecommended thattheallocation period bethelife
oftheloan. Forequity infusions, iftheamount ofthesubsidy canbecalculated asagrant (i.e., if
there isamarket price fortheequity (seeSection VIII.G) theallocation period would betheuseful
lifeofassets, calculated asdescribed. Ifthereisnosuchmarket price, however, andsome othermethod
isusedtodetermine theamount ofanysubsidy, another basis fordetermining theallocation period
might bemore appropriate. Forexample, theperiod during which aninvestor might "reasonably"
expect areturn onaninvestment could beused, oritcould beassumed thatacosttogovernment
potentially could ariseduring theentire period inwhich thegovernment heldtheequity.
III. GOVERNMENT COST OFFUNDS AND TIME VALUE OFMONEY
17. Itwasrecognized thatthecosttogovernment approach mandated inparagraph 1ofAnnex IV
raises thequestion, affecting alltypes ofsubsidies, ofhowagovernment 'scostoffunds should be
measured. Thatis,governments raisefunds intwoways, taxation andborrowing, eachofwhich carries
some cost. Some Group members viewed these costsaslimited totheobservable ("monetary") costs
associated withraising thefunds. Others believed thatthese costsalsoinclude certain non-observable
costs, inparticular theopportunity costtothegovernment associated withusing suchfunds, andpotential
indirect costsoftaxation. Theissuediscussed wastheextent towhich some orallofthesecostsshould
bereflected inArticle 6.1(a)/Annex IVcalculations.
18. Withrespect toloans, assetforthintherelevant section ofthisreport, theGroup recommends
using anappropriate government borrowing rate(i.e., abond rate)asaproxy forthegovernment 's
costoffunds. Thus, thediscussion inthissection ofthegovernment 'scostoffunds applies toallocated
subsidies other thanloans.
19. Regarding theobservable monetary component ofagovernment 'scostoffunds, theGroup
generally agreed thatthisiscomprised oftheadministrative costs incurred inraising taxes, aswell
astheinterest costincurred ongovernment borrowing. Theamounts ofsuchcosts inprinciple can
bedirectly derived from government accounts.
20. Inthiscontext, some Group members tooktheviewthataweighted average monetary cost
offunds should becalculated, andattributed toevery subsidy provided. Thus, under thisapproach,
thesame underlying (average) monetary costoffunds would beattributed toallsubsidies. Thatis,
noattemptwouldbemadetoidentifyparticularsubsidieswithparticularsourcesoffunds.Thereasoning
behind thisproposed approach wasthatgovernment funds fromallsources mostoftenarecommingledG/SCM/W/415/Rev.1
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inageneral revenue account, making itimpossible inmost cases toidentify particular government
expenditures (including subsidies) withparticular sources offunds (borrowing ortaxation).
21. TheGroup noted thattocalculate suchaweighted average monetary costinarelatively precise
way,detailed datawould beneeded onthegovernment 'smonetary costsincurred inraising taxrevenue,
aswellasonthedifferent rates ofinterest paidbythegovernment onitsvarious outstanding debt
instruments. Alsonecessary would beinformation ontherelative proportions oftotalgovernment
revenues accounted forbyborrowed funds andtaxrevenues, respectively.
22. Although some members oftheGroup found theconcept oftheweighted average monetary
costoffunds useful, theGroup nevertheless concluded thattrying toapply itinArticle 6.1(a)/Annex IV
calculationsmightprovenottobefeasible.Ofparticularconcerninthisregardwouldbedataavailability
(especially where several levels ofgovernment might beinvolved), aswellaspractical difficulties of
collecting andanalysing thedata.
23. Inaddition, some Group members found theconcept oftheweighted average monetary cost
offunds incomplete, inpartbecause itwould notreflect inanywaythepotential indirect costoftaxation,
which intheirviewisquitehigh. These Group members pointed tomany governments ’heavy reliance
onborrowing asevidence oftheextent ofthiscost.Intheviewofthese Group members, iftherewere
nocosttotaxation beyond itssmall monetary administrative cost,governments would taxmore heavily
andrelylessonborrowing thanisinfactthecase. These Group members suggested thatthelong-term
governmentborrowingraterepresentsthemostaccuratemeasureofthepotentialindirectcostoftaxation,
inthesense ofrepresenting theamount thatgovernments arewilling topaytoavoid resorting to
additional taxation.
24. SomeGroupmembersalsofeltthatgovernmentsincuropportunitycostsinusingfundstoprovide
subsidies, andthatsuchcosts would notbereflected ifcalculations were limited tomonetary costs.
According tothispoint ofview, imputation ofanopportunity costintheArticle 6.1(a) context would
notimply holding thegovernment toaprofit-maximization standard withrespect totheuseofitsfunds.
Rather, suchanopportunity costcould beconceptualized astheopportunity costtothegovernment
thatarises when government resources areemployed foragiven purpose, thereby becoming unavailable
foranyoftheother possible purposes towhich theycould havebeenput.Inthesubsidy context, a
relatively straightforward example ofsuchacostwould bethat,byvirtue ofproviding asubsidy, a
government would forego theopportunity toreduce itsinterest expenses byretiring some ofitsdebt
(e.g., bybuying backoutstanding bonds). (Or,conversely, tofinance asubsidy, thegovernment would
needtoissue abond, onwhich itwould incur interest expenses.) Ineither case, theopportunity cost
tothegovernment could bemeasured astheinterest expense thatthegovernment would incur onthose
bonds.
25. Asomewhat overlapping concept, which wasdiscussed extensively inthecontext ofallocated
subsidies, istimevalue ofmoney. IntheviewofGroup members favouring incorporation oftime
value ofmoney where subsidies areallocated, suchadjustments arepurely technical innature, allowing
amounts ofmoney atdifferent points intimetobecompared inreal(rather thannominal) terms. A
simple example ofatimevalue ofmoney question would betocalculate theamount ofmoney atsome
future datethatwould beequivalent toagiven sumtoday. Inthiscase, theanswer would befound
byapplying anappropriate interest (or"discount") ratetothepresent-day sumfortherelevant period.
Thebasic argument raised infavour ofincluding thetimevalue ofmoney wasthatallocating asubsidy
constitutes amovement ofmoney through time, andthatmoney cannot meaningfully bemoved through
timewithout taking intoaccount itstimevalue. Thatis,ifasubsidy isdivided intoequal nominal
annual increments, therealvalue ofthelastincrement willbesmaller thantherealvalues ofthose
thatprecede it,meaning thatthetotalrealamount ofsubsidization overtheperiod would beunderstated.
TheGroup recognized that,depending onthediscount rateused, adjusting fortimevalue ofmoneyG/SCM/W/415/Rev.1
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alsomight takeintoaccount theconcepts ofopportunity costtogovernment ofthefunds provided as
subsidies, and/or ofthepotential indirect costoftaxation. Noconsensus wasreached astowhether
suchconcepts should bereflected inArticle 6.1(a)/Annex IVsubsidy calculations.
26. There alsowasconsiderable discussion astohowtimevalue calculations, ifincorporated, should
beperformed. Inparticular, arange ofviews wasexpressed astowhether timevalue should figure
onlyincalculation oftheinitial amount ofasubsidy, orwhether therelated adjustments should be
made tothesubsidy amounts allocated toeachyearofanallocation period. Regarding theformer
approach,themethodologydiscussedwouldcalculatethetotalamountofagrant(includingitsdiscounted
lifetime financing cost)asofthedatethesubsidy wasprovided, thenallocate thisamount overtime.
Inflation indexing would beapplied totheallocated amounts tokeeptheoriginal significance andvalue
ofthesubsidy intact throughout theallocation period. Themethodology discussed inthecontext of
thesecond approach totimevalue calculations would "gross up"theallocated annual increments of
theinitial nominal subsidy amount byadiscount ratesetataprevailing government bond rate. No
additional adjustment forinflation would benecessary under thisapproach, asthediscount ratealready
would incorporate theexpected rateofinflation.
27. Thebasic argument raised against including thetimevalue ofmoney insubsidy allocation
calculations wasthatsuchanapproach would beinconsistent withthecost-to-government approach
required byparagraph 1ofAnnex IV.According tothisview, thecosttothegovernment ofproviding
asubsidy thatisallocated overtimeshould benodifferent inyear5thaninyear1,because fromthe
government 'spoint ofview, thecosttothegovernment isincurred atthetimethesubsidy isprovided,
intheamount oftheinitial nominal value ofthesubsidy, evenifthatvalue isthenallocated overtime.
Some Group members alsowere oftheviewthat,totheextent thatincorporating thetimevalue of
money would bebased inpartontheconcept ofopportunity costtogovernment, thiswould be
inappropriate. Inparticular, according tothisview, introducing theconcept ofopportunity costwould
shifttheperspective oftheanalysis toabenefit-to-recipient approach, contrary totheAgreement 's
requirement thatacost-to-government approach beused.
IV. ADJUSTMENTS FOR INFLATION AND INTEREST
28. TheGroup recognized that,eveniftheoretical agreement were reached onthequestions of
weighted average monetary costoffunds, government opportunity costsoffunds, timevalue ofmoney
andpotential indirect costs oftaxation, inpractical terms these costs would bedifficult tomeasure
directly. Moreover, noconsensus wasreached astoproxies thatcould beusedtorepresent thesecosts
insubsidy calculations. Inview ofthis,theGroup changed theframework ofitsanalysis slightly,
tofocus ontheeffects onsubsidy amounts ofinflation andinterest, particularly withrespect tosubsidies
allocated overtime. TheGroup believed thatbychanging focus inthisway, anumber ofthese
underlying issues could beaddressed atleastpartially, andinanadministratively practicable manner.
Thespecific question considered bytheGroup inthisregard wastheextent towhich subsidy calculations
might takeintoaccount thecompounding effects ofinflation andinterest (implicit orexplicit) associated
withnominal subsidy amounts astheyaremoved through time.
29. TheGroup noted herethatanyinterest rateinfactiscomprised oftwocomponents, anticipated
inflation andthe"real" interest rate,i.e.,thepurecostofuseofthemoney overtherelevant period.
Inviewofthis,theGroup found ituseful toconsider these twocomponents separately indiscussing
anddevising itsrecommendations. TheGroup noted thattherealinterest rateinsimple terms isthe
difference between thenominal interest rateandtheinflation rate.G/SCM/W/415/Rev.1
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A. Inflation
30. Regarding inflation, amajor consideration, which arises inthecontext ofallocating subsidy
amounts overtime, ishowtoensure aconsistent basisforboththenumerator (subsidy amount during
therelevant period) andthedenominator (value ofsalesduring therelevant period) incalculating the
advalorem subsidization ofaproduct. Itwasrecognized thatthisquestion isrelated tohowfrequently
andonwhat basis thesales denominator should varyoverthecourse oftheallocation period fora
given subsidy. Inthisregard, asdiscussed indetail inSection VI.B, theGroup recommends thateach
yearofanallocation period should haveitsownsalesdenominator, i.e.,theprevious year'ssales.
31. Thisrecommendation isrelevant towhether ornotthesubsidy amount should beadjusted for
inflation because overtime, thenominal value ofafirm'ssales willtendtochange purely dueto
inflation, evenifthefirm'sscope orscaleofoperations doesnotchange. Thus, asthesalesdenominator
isrevised eachyearduring anallocation period, itautomatically willincorporate theeffects ofinflation.
Ifnoadjustment ismade tothenumerator (theallocated subsidy amount) alsotoadjust forinflation
overtimeadissimilarity between thenature ofthenumerator andthatofthedenominator willbe
introduced. Given this,itwasconcluded thatadjusting thenumerator toaccount fortheeffects of
inflation would beappropriate. Making suchanadjustment would prevent inflation fromeroding the
realsignificance andvalue ofthesubsidy overthecourse oftheallocation period.
32. Byvirtue ofbeing indexed forinflation, theallocated subsidy amounts would progressively
increase innominal terms, although theirvalue would remain constant inrealterms. Because, asnoted,
thesalesdenominator alsowould incorporate anamount forinflation every yearduring anallocation
period, thecomparability ofthenumerator anddenominator would bepreserved.
B. Interest
33. Beyond thequestion ofinflation, theGroup discussed theextent towhich allocated subsidy
amounts alsoshould beadjusted insome waytoincorporate anelement of"real" interest. TheGroup
concluded thatitwould beappropriate tomake some adjustment forrealinterest where subsidies are
allocated overtime.
34. Thisconclusion wasarrived atfromseveral different perspectives. First, asdiscussed above,
theGroup recognized thatwhere governments borrow, aninterest costwillbeincurred which generally
willnotbeabletobeidentified withanyparticular setofexpenditures made fromtheborrowed funds.
Thiswasdeemed toargue infavour ofattributing some interest costtoallsubsidies. Theadditional
perspectives brought tobearonthisquestion were opportunity costtothegovernment andthetime
value ofmoney, asdiscussed. Either ofthese perspectives would involve imputation ofsome interest
component toallocated subsidies, asameasure ofthecostofforegone usesofthefunds overtherelevant
period, orasameans ofmaintaining thesubsidies 'realvalue andsignificance astheymove through
time.
C. Methodology1(Recommendation 3)
35. Inviewoftheforegoingconsiderations,andthedifficultiesencounteredbytheGroupinreaching
consensus onasingle theoretical basis foraconceptually pureallocation methodology, theGroup
recommends thatallocated subsidy amounts beadjusted fullyforinflation andinclude aswellaportion
ofthe"real" interest rate. Itisspecifically recommended thatthisbedonebyattributing toallocated
subsidy amounts thefullrateofinflation plusone-half ofthedifference between therateofinflation
1Asnoted above, thisrecommended approach applies toallocated subsidies other thanloans.G/SCM/W/415/Rev.1
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andthegovernment borrowing rateondebtwhose maturity mostclosely approximates theallocation
period ofthesubsidy. IntheGroup 'sview, thisapproach provides anapproximation ofthepreviously-
mentioned components ofgovernment costs offunds, aswellanadministratively practicable method
ofmaintaining therealvalue ofasubsidy overagiven period. Theonlyexception tothisapproach
would bewhere therateofinterest waslessthantherateofinflation (which might occur during periods
ofhighinflation). Inthiscircumstance, therecommended adjustment factor isthefullrateofinflation,
unadjusted foranyinterest component.
36. TheGroup further recommends that,asageneral principle, theadjustment factor should be
derived from theinterest andinflation ratesprevailing atthetimethesubsidy isreceived, andthat
thisfactor bekeptconstant throughout theallocation period. Thus, forevery yearofanallocation
period, excluding theyearofreceipt, theallocated subsidy amount would reflect anamount forthe
compounded adjustment factor.2TheGroup recognizes thatkeeping theadjustment factor fixed over
theallocation period maynotbeappropriate during periods ofsignificant changes ininflation andinterest
rates. Insuchcases, derivation oftheadjustment factor onanannual basis overthecourse ofthe
allocation period maybemore appropriate.
37. Thefollowing example illustrates howtheadjustment factor would bedetermined. Ifthe
government 'sborrowing rateis10percentandtherateofinflation is6percentatthetimethesubsidy
isreceived, theadjustment factor would be8percent: 6percent(inflation rate)plus2percent,
calculatedasone-halfofthefour-percentage-pointdifferencebetween10percent(governmentborrowing
rate)and6percent(inflation rate). Inpractice, thisadjustment factor canbecalculated asthearithmetic
average oftheinflation rateandthegovernment borrowing rate.
38. Theallocation methodology recommended bytheGroup inthissection ismade exclusively
inthecontext ofArticle 6.1(a) andAnnex IV,andassuchisnotintended toaffect theallocation
methodologies followed byindividual countries employing countervailing measures. Alsobyvirtue
ofthiscontext, thisrecommendation islimited tothecost-to-government perspective formeasuring
asubsidy, andthusisintended toberelevant onlywithrespect tothatperspective.
D. DataSources forGovernment Borrowing Rates (Recommendation 4)
39. Inthecontexts ofboththeadjustment factor justdiscussed, andthecomparator interest rates
fordetermining thecosttogovernment ofsubsidies intheformofloans (seeSection VIII.B), theGroup
recognized thatsome means ofidentifying government borrowing rateswould benecessary. Inthis
regard, theGroup concluded thattheyieldtomaturity ongovernment securities (newissues orthose
trading insecondary markets) represents themost accurate measure oftherateofinterest paidbya
government. Byidentifying abond orother government debtinstrument withtheappropriate term
tomaturity, itwould bepossible tomatch theallocation periods ofthesubsidies andthematurities
ofthegovernment debtinstruments, asforeseen intheGroup 'smethodological recommendations.
40. Avariety ofsources forinformation onthesecondary market forgovernment securities were
identified. Particularly noted forbeing available onafullyup-to-date basis, andforbeing apparently
comprehensive intheircoverage ofissuing countries, markets andcurrencies, aretheon-line services
ofReutersandBloomberg.Moody'sInternationalManualandtheIMF'sGovernmentFinanceStatistical
Yearbook were identified asadditional sources ofinterest ratesongovernment bonds.
2TheGroup discussed theissue ofwhether theadjustment factor should beapplied totheyearof
receipt. Duetothedifferences withrespect totheconceptual bases fortheadjustment factor, theGroup
haddifficulty reaching aconsensus. Intheend,theGroup decided thattheadjustment factor should
notbeapplied tothesubsidy amount allocated totheyearofreceipt.G/SCM/W/415/Rev.1
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V. INFLATIONARY ECONOMY COUNTRIES (Recommendation 5)
41. Thesecond major issue discussed inthecontext ofinflation isthequestion of"inflationary
economy countries". Paragraph 5ofAnnex IVprovides explicitly forindexing thesalesdenominator
forinflation where therecipient firmislocated inan"inflationary economy country". Anumber of
questions were identified anddiscussed withrespect tothisparagraph.
A. Definition of"Inflationary"
42. Itwasnoted asaninitial matter thatAnnex IVdoesnotdefine theterm"inflationary economy
country", butitwasgenerally believed that"inflationary" inthecontext ofparagraph 5isintended
torefertocountries withhighinflation. Ifsuchalimitwerenotadopted, arguably anycountry with
apositive rateofinflation would be"inflationary" inthesense ofparagraph 5.Yetthefactthatthis
paragraph setsinflationary economy countries apartasaspecial caseseems toindicate thatonlycertain
countries should becovered byitsprovisions.
43. Various possible means foridentifying "inflationary" countries were discussed. First, the
possibility ofestablishing afixed numerical definition wasconsidered. Inthiscontext, itwasnoted
thatneither theInteramerican Development Bank, northeWorld Bank, northeInternational Monetary
Fund usesanynumerical standard todefine "inflationary" economy countries. Moreover, while the
United States inpastanti-dumping cases hasused50percent,more recently theUSmethodology has
moved away from suchanumerical approach. TheGroup concluded that,without some external
reference point, anumerical standard would notbeadvisable, asitwould bedifficult todefine and
justify.
44. Therefore, theGroup recommends thatthedetermination ofwhether acountry isinflationary
inthesense ofparagraph 5ofAnnex IVshould bemade casebycase, based ontwocriteria: (1)a
comparison ofthatcountry 'srateofinflation withtheaverage rateindeveloped countries3;and(2)
theextent towhich inflation indexing isusedroutinely intransactions andaccounting. (Itwasnoted
thatifacompany routinely indexes itssalesvalues forinflation, suchindexed salesvalues could be
usedasthesalesdenominator inthesubsidy calculations performed pursuant toArticle 6.1(a)).
B. Whether andHow toReflect Inflation inNumerator
45. Paragraph 5ofAnnex IVprovides explicitly forinflation indexing ofthesalesdenominator
for"inflationary economies", butissilent withrespect tothenumerator. Asdiscussed inSection IV,
theGroup ’sgeneral recommendation isthatsubsidy amounts (thenumerator) beadjusted foratleast
therateofinflation. Therecommendation inaddition provides forthepossibility thattheadjustment
factor could berevised annually ifinflation andinterest ratesarechanging rapidly. Inviewofthis,
theGroup found thatnoadditional recommendation wasneeded regarding adjusting thenumerator
forinflation inthecaseofinflationary economy countries.
46. Thequestion ofwhich inflation index orindexes toapply tothenumerator anddenominator
inthecaseofinflationary economy countries wasconsidered. Inparticular, countries thatuseinflation
indexing normally publish anduseaseries ofdifferent inflation indexes, andnotallcountries will
create thesamenumber ortypeofsuchindexes. Thus, itmight bedifficult toidentify asingle standard
inflation index thatwould necessarily existorcould appropriately beapplied toallsituations thatmight
ariseunder paragraph 5ofAnnex IV.
3Ifthecountry involved isadeveloped country, thisaverage should exclude thatcountry.G/SCM/W/415/Rev.1
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47. Inparticular, while itwasrecognized thatestablishing asthenorm theuseofthegeneral
composite rateofinflation could increase thetransparency andpredictability oftheoutcome where
aninflationary economy country wasinvolved, italsowasrecognized thatsuchanapproach might
havelimitations. Thatis,iftheGroup recommended thisoranyother single inflation index, such
anindex might notbeappropriate toallsituations.
48. Itwasnoted thattherecipient firm'saccounting records could provide useful guidance in
determining which inflation index touse. Itwasdeemed appropriate toleave thisquestion open.
49. TheGroup discussed asanalternative converting thesubsidy amounts andsalesdenominators
toastable currency commonly usedininternational business transactions, ortoabasket ofcurrencies
(such asthePurchasing Power Parity index ortheaverage fordeveloped countries). Itwasnoted that
insome inflationary economies, suchcurrency conversions aremade instead ofinflation indexing in
international accounting practices, andinthepreparation ofconsolidated accounting balances. Ifsuch
anapproach weretaken, separately indexing forinflation would notbenecessary, andthustherewould
benoneed toidentify theappropriate inflation indexes tobeapplied tothenumerator andthe
denominator. Moreover, ifsuchacurrency conversion were made, thentheadjustment factor for
inflation andinterest recommended inSection IVandRecommendation 3could bebased oninflation
andinterest ratesforthecurrency orbasket ofcurrencies used, considerably simplifying thecostto
government andsubsidization calculations. Ifabasket ofcurrencies were used, itwasnoted thatit
would beadvisable toweight average theexchange ratesincluded bysome appropriate factor.
VI. SALES DENOMINATOR (Recommendation 6)
A. Period onwhich Sales Denominator isBased (Recommendation 6,parts A-C)
50. Theissuesinvolvedinidentifyingtheappropriatesalesdenominatorforcalculationsofadvalorem
subsidization ofaproduct, within theconfines established byAnnex IV,werediscussed extensively.
Attheoutset, theguidance inparagraphs 2and3ofAnnex IVonthisissue wasacknowledged. In
particular, these paragraphs provide thattherelevant sales datashall bethose forthemost recent
12-month period preceding theperiod inwhich thesubsidy isgranted. Thegeneral viewwasthatthis
means that,except asotherwise explicitly provided, alagwillalways existbetween theperiod covered
bythenumerator andthatcovered bythedenominator (i.e., current-year subsidies willbedivided
bytheprevious year'ssales).
51. Twospecial cases inthecontext ofthisgeneral rulewereidentified. Thefirstoccurs inthe
caseofaninflationary economy country, where salesinthepreceding calendar yeararetobeindexed
fortheinflation experienced during themost recent 12-month period. Thatis,while there isalag
inthebasic data, thedatathemselves areinasense updated through theapplication oftheinflation
index.
52. Thesecond special casepertains tothetreatment oftax-related subsidies, assetforth in
Footnote 64toAnnex IV.Thisfootnote states thatfortax-related subsidies, thevalue oftheproduct
istobe"thetotalvalue oftherecipient firm'ssalesinthefiscal yearinwhich thetaxrelated measure
wasearned" (emphasis added). Thislanguage indicates thatasingle period should beusedinidentifying
thenumerator andthedenominator, i.e.,theperiod inwhich thesubsidy wasearned, which would
mean thatnolagwould bepresent. Itwasnoted inthiscontext thatthe"earning" ofataxsubsidy
normally occurs during thefiscal yearpreceding thefiscal yearinwhich therelated taxreturn isfiled.
Thus, taxrevenue normally willbeforegone bythegranting government intheyearafterthetaxsubsidy
isearned. Taking intoaccount thelanguage ofFootnote 64,theGroup recommends incalculations
ofadvalorem subsidization fromtaxsubsidies thatthenumerator should betheamount ofthetaxsubsidy
earned inthefiscal yearpreceding thefiscal yearinwhich therelevant taxreturn wasfiled, andthatG/SCM/W/415/Rev.1
Page13
thedenominator should bethecompany 'ssales inthatsame fiscal year, i.e.,theonepreceding the
fiscal yearinwhich thetaxreturn wasfiled.
53. TheGroup further noted thatthereference, inparagraphs 2and3ofAnnex IVto"themost
recent 12-month period, forwhich salesdataisavailable, preceding theperiod inwhich thesubsidy
isgranted" wassomewhat ambiguous. Inparticular, theperiod referred tomight beeither therecipient
firm'smost recent accounting year, oralternatively, theactual 12months immediately prior tothe
month inwhich thesubsidy wasgranted (whether ornotthisperiod coincided withtherecipient 's
accounting year). TheGroup recommends, because ofthepossibility ofyear-end adjustments for
discounts, rebates, returns, etc.,andgeneral easeofobtaining data, thatthesalesdataforthemost
recent accounting yearbeused. Under thisapproach, ifasubsidy weregranted inApril, andthefirm's
accounting yearwasthecalendar year, thesales denominator would bethefirm'ssales during the
preceding calendar year. Inaddition, theGroup recommends thatthesalesdatausedbenetrather than
gross sales.
B. Variability (Recommendation 6,PartD)
54. Afurther question discussed regarding thesalesdenominator waswhether andwhen thesales
denominator should varyinthecalculation oftheadvalorem rateofsubsidization from allocated
subsidies. Several possibilities were discussed. Oneapproach would betoestablish asingle sales
denominator foreachsubsidy -thelevelofsales during theyearpreceding theperiod inwhich the
subsidy wasgranted -andcarry thatdenominator forward forthatsubsidy fortheentire period over
which thesubsidy wasallocated. Thus, iftheaggregate amount ofsubsidization intheyearbeing
reviewed consisted ofallocated amounts ofthreesubsidies, eachofwhich hadbeengranted inadifferent,
prior year, there would bethree salesdenominators (oneforeachsubsidy), which would beusedto
determine aseparate advalorem rateofsubsidization foreachsubsidy fortheyearofreview. These
advalorem percentages, eachofwhich hadbeencalculated overadifferent year'ssales level, then
would beadded together todetermine theoverall rateofsubsidization. Thefactthatkeeping thesales
denominatorfixedwouldtendtooverestimatetheactualrateofsubsidizationduringperiodsofexpanding
sales, while tending tounderestimate thisrateduring periods ofdeclining sales, wasidentified asa
drawback, while thecertainty ofestablishing asingle advalorem rateofsubsidization foreachallocated
subsidy wasidentified asanadvantage.
55. Asecond approach would betoapply asingle salesdenominator toallsubsidies granted in
orallocated toagiven year. Thisdenominator would bethelevelofsalesduring theyearpreceding
themost recent granting ofasubsidy. Thus, during theperiod ofallocation ofasubsidy, thesales
denominator would remain fixed atthelevelofsalesduring theyearpreceding thefirstsubsidy, until
asecond subsidy wasgranted, atwhich point thesalesdenominator applied tobothsubsidies would
shifttothelevelofsalesduring theyearpreceding thegranting ofthesecond subsidy, andsoforth.
Thisapproach wasviewed asapossible means toestablish some degree ofpredictability astotherate
ofsubsidization thatwould arisefrom eachsubsidy, while atthesame timeallowing forchanges in
thelevelofsalesovertimetobeatleastpartially incorporated. Ontheother hand, thisapproach would
suffer from thesame potential foroverstatement orunderstatement oftheadvalorem subsidization
asthefirstapproach.
56. Because ofthelimitations ofthefirsttwoapproaches, andbecause itisviewed asmore closely
reflecting reality, theGroup recommends athird approach, under which eachyearofanallocation
period would haveitsownsalesdenominator, i.e.,theprevious year'ssaleslevel. Thus, ifasubsidy
granted in1996wereallocated overfiveyears, thesalesdenominator usedtodetermine the1996rate
ofsubsidization would be1995sales, thedenominator forthe1997rateofsubsidization would be1996
sales, etc.Thisapproach suggests thatwhere allocated subsidies wereinvolved, theword "granted"
inparagraph 2ofAnnex IVwould betaken tomean "allocated". Inother words, thedenominatorG/SCM/W/415/Rev.1
Page14
would betherecipient 'ssalesduring themostrecent 12-month period preceding theperiod towhich
therelevant portion ofthesubsidy wasallocated.
57. Amajor consideration inmaking thisrecommendation isthatfacts, inparticular, companies ’
saleslevels, change overtime. Forexample, acompany 'sscope ofoperations mayexpand orcontract,
orinflation maychange thevalue ofsalesevenwhere thevolume remains constant. Varying thesales
denominator eachyearwasdeemed thebestwaytoensure thatthelevelofsubsidization wascalculated
onanup-to-date basis foreachyearofanallocation period. Inthisconnection, theGroup alsonoted
thatadjusting thesalesdenominator eachyearisconsistent withitsrecommendation toadjust allocated
subsidy amounts forinflation andinterest eachyear. Onbalance, thesepositive elements weredeemed
tooutweigh anydecrease inpredictability thatmight result from suchanapproach.
C. Calculation ofthe5percentonanIndustry-Wide orFirm-Specific Basis (Recommendation 6,
PartE)
58. Another question raised inthecontext ofthesales denominator waswhether advalorem
subsidization istobemeasured onafirm-specific orindustry-wide basis. Onthispoint, arange of
views wasexpressed. Ifsubsidization werecalculated onafirm-specific basis, apresumption ofserious
prejudice could ariseevenwhere onlyonesmall firmreceived subsidies amounting tomore than5
percentofitssales, while themajority oftheindustry wasunsubsidized. Ontheother hand, if
subsidization were calculated onanindustry-wide basis, there might benopresumption ofserious
prejudice, evenwhere asingle firmwasheavily subsidized, solongasother firms received small or
nosubsidies.
59. Infavour ofanindustry-wide approach, itwasstated thatArticle 6.1(a) 'sreference to"total
advalorem subsidization ofaproduct exceeding 5percent" could beviewed asrequiring acalculation
ofsubsidization oftheproduct asawhole, rather thantheproduct produced byanindividual subsidized
firm. Forexample, inanindustry consisting offivefirms, twoofthefivemight receive more than
5percentsubsidization, while theweighted average rateofsubsidization fortheindustry asawhole
(counting thenon-subsidized firms sales) might belessthan5percent.
60. Inthisconnection, some concern wasexpressed overthepossibility thatsubsidization ofa
single firmcould giverisetoapresumption ofserious prejudice under Article 6.1(a), evenwhere the
industry-average subsidization oftheproduct waslessthan5percent, inparticular, thatthismight
giverisetonon-meritorious cases.
61. Inspiteofthese concerns, however, theGroup concluded thatthelanguage ofArticle 6.1(a)
andAnnex IVprovide forcalculation ofsubsidies onafirm-specific basis. Inparticular, itwaspointed
outthatparagraphs 2-5ofAnnex IVareworded entirely interms ofindividual recipient firms. In
thiscontext, italsowasnoted thatArticle 6.1(a), while referring tothetotaladvalorem subsidization
ofaproduct, alsodirects through footnote 14thattherateofsubsidization istobecalculated in
accordance withAnnex IVwhich, asnoted, iscouched interms ofindividual recipient firms. Further,
thereference to"total" subsidization could betaken tomean totalsubsidization under multiple
programmes received byanindividual firm. Inaddition, itwasnoted thattheenumeration inArticle 6
oftheadverse effects thatconstitute serious prejudice case(e.g., priceundercutting, anddisplacement
ofexports ofalikeproduct) could result fromindividual firmactions, andthatunder Article 6.1(c),
subsidization ofanindividual enterprise explicitly gives risetoapresumption ofserious prejudice.
TheGroup alsonoted that,inanyevent, firms withlessthan5percentsubsidization would notbe
presumed tobecausing serious prejudice.G/SCM/W/415/Rev.1
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D. "Tying" ofsubsidies toparticular products (Recommendation 6,PartF)
62. Thereference inparagraph 3ofAnnex IVtothe"tying" ofsubsidies tocertain products in
calculating advalorem subsidization wasdiscussed. Thisprovision indicates thatforsubsidies tied
totheproduction orsaleofagiven product, therelevant denominator issalesofthatproduct, while
paragraph 2ofAnnex IVprovides thatforallother subsidies, therelevant denominator istherecipient
firm'stotalsales. Paragraph 3doesnotspecify how"tying" istobeestablished, however, leaving
openanumber ofquestions, forexample, howclosely related toaproduct asubsidy must betobe
"tied" tothatproduct; andhowthesaleofassets/plants affects theamount ofasubsidy andits"tying"
toaproduct.
63. Itwasnoted thatthepanel report onLead andBismuth Steel contains language relevant to
thequestion of"tying" which could provide useful guidance, andwhich forms thebasisfortheGroup 's
recommendations onthispoint. Under thisapproach, asubsidy would bedeemed tobetiedifits
intended usewasknown tothegiver ofthesubsidy, andsoacknowledged, priortoorconcurrent with
thesubsidy 'sbestowal. Itwasrecognized thatother possible approaches might existaswell.
E. SalesDenominatorsforTiedandUntiedSubsidies,andAggregationofadvaloremSubsidization
from Different Kinds ofSubsidies (Recommendation 6,PartG)
64. Afurther question pertains toidentifying thecorrect salesdenominator where bothtiedand
untied subsidies arereceived. Inparticular, paragraph 6ofAnnex IV'srequirement that"subsidies
given under different programmes andbydifferent authorities intheterritory ofaMember shallbe
aggregated" raises thequestion generally ofhowsuchaggregation should bedonewhen calculating
advalorem subsidization.
65. TheGroup recognizes that,asrequired byAnnex IV,where asubsidy istiedtoaparticular
typeofproduct, thesubsidy received should bedivided bysalesofthatproduct. TheGroup further
recognizes that,asalsorequired byAnnex IV,where asubsidy isuntied, thesubsidy amount should
bedivided bythecompany 'stotalsales. Inthisconnection, theGroup recommends thatwhere amixture
oftiedanduntied subsidies isreceived, therespective advalorem subsidy calculations should be
performed separately (each using theappropriate sales denominator), andtheresulting advalorem
percentages added together toarrive atthetotaladvalorem subsidization oftheproduct.
66.Forexample, assume thatanArticle 6.1(a) casehasbegun withrespect tomilk. Ifacompany
produces steelandmilk, andreceives atiedsubsidy toproduce milk, thesubsidy amount should be
divided bytherecipient company 'ssalesofmilktodetermine theadvalorem subsidization fromthat
subsidy. Ifthecompany alsoreceives anuntied subsidy, thissubsidy amount should bedivided by
thefirm'stotalsalesofsteelandmilk. Thetworesulting advalorem percentages thenshould beadded
together toarrive atthetotaladvalorem subsidization ofmilk.
67. Another question pertaining tothesalesdenominator iswhether asingle salesdenominator
should beusedwithrespect tosubsidies ofdifferent scopes, forexample, export versus domestic
subsidies, orsubsidies forsales toparticular markets. (Inthiscontext, itisrecalled thatanexport
subsidy might beincorporated intoanArticle 6.1(a) allegation, rather thanseparately being usedas
thebasisforanallegation ofprohibited subsidy under theArticle 4procedures. SeeSection I.B,above.)
TheGroup considered butdidnotreach aconsensus onwhether export subsidies should bedivided
byexport salesorbytotalsales, noronwhether subsidies tiedtoparticular markets should bedivided
bysalestothatparticular market orbytotalsales.G/SCM/W/415/Rev.1
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VII. START-UP SITUATIONS (Recommendation 7)
68. Thequestion ofrecipient firms "inastart-up situation", asprovided forinparagraph 4of
Annex IV,wasdiscussed. Itwasrecognized bytheGroup thatthelackofexperience inapplying
paragraph 4precluded thedevelopment ofrecommendations inthisarea. Inparticular, theGroup
recognized thatfootnote 65toAnnex IVwould needtobeconsidered indefining thecommencement
ofastart-up period.
69. Thedescription inparagraph 4astowhen thestart-up period ends, namely oneyearafterthe
beginning ofproduction oftheproduct, wasseenassuggesting thatastart-up period could begin several
years before production began, andextend through theendofthefirstyearofproduction. Itwas
recognized, however, thatparagraph 4doesnotspecify inprecise terms atwhatpoint "production"
would beconsidered tohavebegun (i.e., production forsale,production incommercial quantities,
production ofaprototype, etc.).
70. Thequestion alsowasraised astothenumerator anddenominator forcalculation ofthe15per
centsubsidization threshold inthecontext ofastart-up (thatis,whether theoverall rateofsubsidization
exceeds 15percentoftotalfunds invested). Itwasconcluded thatthenumerator should bethetotal
absolute amount ofsubsidies received during therelevant period, andthedenominator should betotal
funds invested.
71. While recognizing again thatwithout experience inimplementing paragraph 4establishment
ofamethodology wasnotpossible, itwasnoted thatingeneral terms, funds invested could beviewed
asbeing equal tototalassets: land, buildings, equipment, andother assets. Thepoint wasmade that
thequestion ofhowthese assets were financed wasnotrelevant tomeasuring theirvalue. Thatis,
funds invested should notbelimited tothefirm'sequity, inviewofthefactthatdebtfinancing could
beusedaswell. Thus, the"assets" sideofthebalance sheet should provide thegeneral basis for
determining theamount offunds invested.
72. Aquestionwasraisedastowhatportionofasubsidizedloanshouldbeincludedinthecalculation
ofthetotalvalue ofsubsidies received during thestart-up period. Inparticular, itwasquestioned
whether theprincipal amount oftheloanplustheinterest subsidy should beincluded, orwhether only
theinterest subsidy should beincluded. TheGroup noted thatasageneral principle, onlytheinterest
subsidy should beincluded. Among other reasons, ifthefullprincipal amount were included, this
would mean thatthetreatment ofsubsidized loans inthecontext ofastart-up situation would bedifferent
fromthatinthegeneral, non-start-up context. (SeeSection VIII.B, below, onloans.) Nevertheless,
thepossibility wasdiscussed thatifthestart-up firmcould nothaveobtained theloanfromanyother
source atanyreasonable market price/cost, itmight beappropriate toinclude thefullprincipal amount
inthecalculation oftotalsubsidies received. Nofirmconclusion wasreached onthisissue.
73. Italsowasnoted thattheprotection afforded tothesubsidy recipient bythe15percentthreshold
onlylastsforalimited period. Thus, ifafirmreceived aconsiderable amount ofstart-up subsidization,
although notenough toreach the15percentthreshold, acasebased onthe5percentthreshold could
bebrought oncethefirstyearofproduction hadpassed.
74. Italsowasdiscussed, andisrecommended, thatwhether ornotaserious prejudice casebased
onthestart-up provisions wasbrought under paragraph 4ofAnnex IV,anylater(post-start-up period)
cases based onthe5percentthreshold should include anyportions ofstart-up subsidies thatwere
allocable totherelevant period forpurposes ofthe5percentcalculation. Toexclude suchearly
subsidies from later5percentcases simply onthegrounds thattheywere start-up subsidies would
create amulti-year grace period forthesesubsidies, which would beinconsistent withtheclearend-point
forthestart-up period reflected inparagraph 4.G/SCM/W/415/Rev.1
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VIII. COSTTOGOVERNMENTOFANDADVALOREMSUBSIDIZATIONFROMDIFFERENT
TYPES OFSUBSIDIES
75. Beyond theforegoing cross-cutting issues (e.g., allocation, inflation, interest, sales
denominator, etc.), which would affect calculations involving allkinds ofsubsidies, itwasrecognized
thatcalculating thecosttogovernment ofanygiven kindofsubsidy might raiseissues unique tothat
kindofsubsidy. Thus, thequestion ofthecosttogovernment ofasubsidy wasdiscussed extensively
inthecontext ofparticular kinds ofsubsidies.
A. Grants (Recommendation 8)
76. Twobasickinds ofgrants, outright grants andreimbursable grants, wereidentified. Moreover,
itwasnoted thatgrants might beprovided ininstalments, rather thanasone-time payments.
1. Outright grants (Recommendation 8,PartA)
77. TheGroup agreed thatatthemost basic level, thecosttogovernment ofagrant isitsface
value. Inaccordance withthegeneral methodology recommended, forallocated grants thisamount
would beadjusted toreflect inflation andinterest.
78. Forgrants paidininstalments, itisrecommended thateachinstalment betreated asaseparate
grant. Thisapproach isconsistent withtherecommendation tovarythesalesdenominator eachyear
during anallocation period. Italsoallows foranydifferences between theamount ofaninstalment
grant authorized andtheamount actually paidtobereflected inthecalculations inasimple and
straightforward way.
2. Reimbursable Grants (Recommendation 8,PartB)
79. Forgrants withterms thatinclude theobligation ofreimbursement intheevent thatcertain
conditionsarefulfilled(e.g.,thattherecipientbecomesprofitable),thesimilaritywithcontingentliability
loans wasrecognized (seeSection VIII.B.2, below). Given this,itisrecommended thatduring the
period before theyarereimbursed, reimbursable grants betreated asaseries ofshort-term interest-free
loans. Thecosttothegovernment insuchacasewould becalculated using themethodology forordinary
loans, described below.
80. Itisrecognized that,regardless ofthefactthatagiven grant wasnominally reimbursable, it
might bedetermined atsome point thatsuchagrant infactnever would bereimbursed (asinthecase,
forexample, ofachronically unprofitable recipient). Thus, itmaybecome appropriate todetermine
thatanominally reimbursable grant ineffect hasbecome anoutright grant, andtotreatitassuch.
Insuchasituation, thecosttothegovernment ofthegrant would beitsoutstanding amount asofthat
date(thatis,theoriginal amount lessanyreimbursement thathadbeenmade tothatpoint).
81. Given thatwhere areimbursable granthasbecome anoutright grantthisissimilar toaninstance
ofdebtforgiveness, itisrecommended thattheallocation period foranysuchoutstanding amount should
begin onthedateasofwhich itisdetermined thatthisamount effectively hasbecome anoutright grant.
Thisapproach isrecommended toensure thatthe"principal amount" ofreimbursable grants iscaptured
inArticle 6.1(a) subsidy calculations where suchgrants havebeenoutstanding forlengthy periods and
havenorealistic prospect ofbeing reimbursed. Todootherwise would mean thatonlyanimputed
interest costassociated withwhateffectively wereoutright grants would bereflected inArticle 6.1(a)
calculations.G/SCM/W/415/Rev.1
Page18
B. Loans (Recommendation 9)
82. Twodifferent kinds ofloans, ordinary loans andcontingent liability loans, werediscussed in
thecontext ofcosttogovernment.
1. Ordinary loans (Recommendation 9,PartA)
83. Itisrecommended thatthecosttothegovernment ofanordinary loanbemeasured based on
theextent towhich theeffective interest ratecharged ontheloanprovided islower thantheappropriate
government bond rateintheyearinwhich theloanisgiven. Forshort-term government loans (i.e.,
loans withamaturity oflessthanoneyear), theappropriate bond ratewould bethatonshort-term
government bonds ofcomparable maturity. Forlong-term government loans, theappropriate bond
ratewould bethatonlong-term government bonds ofcomparable maturity. Asasimplified example,
iftheappropriate government bond ratewas5percent, andtheinterest rateontheloanwas4per
cent,thecosttothegovernment ofproviding theloanwould beonepercentage point ofinterest. Any
grace period provided bythegovernment loan, during which timeinterest didnotaccrue, alsowould
beconsidered acostincurred bythegovernment, calculated using theappropriate government bond
rate. Forpurposes ofestablishing arelatively simple andpredictable calculation methodology, itis
further recommended thatthebenefits thuscalculated bedeemed toariseonayear-by-year basisover
thelifeoftheloan(i.e.,asaseries ofrecurring grants). TheGroup alsonotes thatdeferrals ofprincipal
and/or interest normally willgiverisetoadditional costs tothegovernment.
2. Contingent liability loans (Recommendation 9,PartB)
84. Itwasnoted thatcontingent liability loans aresimilar toreimbursable grants, inthattheyare
repayable onlyupon theoccurrence ofsome future event, suchasachievement ofacertain level of
profitability. Because itisimpossible topredict theoccurrence offuture events, itisrecommended,
asforreimbursable grants, thatcontingent liability loans betreated asiftheywereaseries ofshort
terminterest-free loans forpurposes ofdetermining thecosttothegovernment.
85. Ifsuchloanseventuallywererepaid,theamountofthesubsidywouldbecalculatedinaccordance
withthemethodology described above forordinary loans.
86. Itwasrecognized that,aswithreimbursable grants, itmight bedetermined thatagiven
contingent liability loanwould notberepaid. Intheevent thatsuchaconclusion wasreached, itis
recommended thatsuchloans betreated asgrants. Inthese circumstances, theamount ofthesubsidy
(i.e., thecosttothegovernment) would bethefaceamount oftheloanlessanyrepayments, plus
accrued interest calculated using thegovernment 'slong-term bond rate.
87. Given thatwhere acontingent liability loanhasbecome anoutright grant thisissimilar toan
instance ofdebtforgiveness, itisrecommended thattheallocation period foranyoutstanding contingent
loanamount begin onthedateasofwhich itisdetermined thatthisamount effectively hasbecome
anoutright grant. Thisapproach isrecommended toensure thattheprincipal amount ofcontingent
liability loans iscaptured inArticle 6.1(a) subsidy calculations where suchloans havebeenoutstanding
forlengthy periods andhavenorealistic prospect ofbeing repaid. Todootherwise would mean that
onlyanimputed interest costassociated withwhateffectively wereoutright grants would bereflected
inArticle 6.1(a) calculations.G/SCM/W/415/Rev.1
Page19
C. Interest RateSubsidies (Recommendation 10)
88. Thequestion ofinterest ratesubsidies, asdistinct from subsidized government loans, was
discussed. Inparticular, itwasnoted thatsuchsubsidies might arisewhere theloanitselfwasobtained
from acommercial source, withthegovernment covering some oralloftheinterest cost.
89. Twopossible cases ofinterest ratesubsidies were identified. Thefirstwould bewhere, as
ofthereceipt oftheloan, oratsome laterpoint, thegovernment subsidized theinterest expense on
anongoing basis aspayments became due. Inthissituation, itisrecommended thatthesubsidy be
calculated astheamount ofinterest covered bythegovernment. Itisrecommended thatsuchinterest
amounts betreated asaseries ofrecurring grants provided onthedates onwhich interest payments
were due.
90. Thesecond casewould bewhere thegovernment provided, atacertain point intime, alump
sumpayment tooffset therecipient 'sinterest expenses (whether withrespect topastinterest, paidor
unpaid, orwithrespect tofuture interest expenses). Inthissituation, itisrecommended thattheamount
ofthesubsidy, oncepaid, betreated asanon-recurring grant.
D. Debt Forgiveness (Recommendation 11)
91. Thequestion ofhowtotreat, inthecontext ofArticle 6.1(a), subsidies intheform ofdebt
forgiveness wasdiscussed. Asoneaspect ofthisissue, itwasnoted thatthefactthatsubsidies ofthis
typewould giverisetoaseparate rebuttable presumption ofserious prejudice under Article 6.1(d)
didnotmean that such subsidies necessarily would beirrelevant inthecontext of
paragraph 6.1(a)/Annex IV.Forexample, itisforeseeable thatasingle actofdebtforgiveness might
befoundnottohavecaused,byitself,seriousprejudice(i.e.,thepresumptionwouldhavebeenrebutted).
Nevertheless, iftheoverall rateofsubsidization (from thatsubsidy plusother subsidies tothesame
product) amounted tomore than5percentadvalorem ,asecond rebuttable presumption would be
created. Conversely, however, thefactthatagiven instance ofdebtforgiveness wasinvolved inan
Article 6.1(a) casewould notprejudice theseparate presumption thatwould existbydefinition under
Article 6.1(d).
92. Totheextent thatsubsidies intheformofdebtforgiveness areatissueinagiven caseunder
Article 6.1(a), itisrecommended thatthecosttothegovernment bemeasured astheamount ofthe
government outlay (i.e.,theoutstanding principal plusaccrued interest). Thisamount should betreated
asagrant received onthedatethedebtisforgiven.
E. LossCoverage (Recommendation 11)
93. Thequestion ofhow,inthecontext ofArticle 6.1(a), totreatsubsidies tocover operating losses
raises similar questions tothose withrespect todebtforgiveness. Thatis,asinthecaseofdebt
forgiveness, inclusion ofsubsidies forlosscoverage inanArticle 6.1(a) casewould bewithout prejudice
totheseparate presumption ofserious prejudice towhich suchsubsidies would giveriseunder either
Article 6.1(b) or(c).Ontheother hand, anysuchseparate presumption would notprevent subsidies
ofthiskindfrom being included inacalculation ofadvalorem subsidization inthecontext of
Article 6.1(a).
94. Totheextent thatsubsidies intheform oflosscoverage areatissue inagiven caseunder
Article 6.1(a), itisrecommended thatthecosttothegovernment bemeasured astheamount ofthe
losscoverage provided. Thisamount normally should betreated asagrant, unless thelosscoverage
takes some other form.G/SCM/W/415/Rev.1
Page20
F. TaxConcessions (Recommendation 12)
95. Onthegeneral question ofhowtomeasure thecosttogovernment oftaxconcessions, itwas
agreed thatinprinciple, thecosttogovernment would bethefaceamount ofrevenue foregone.4It
wasrecognized thatthecalculation ofthisamount inanygiven casewould depend ontheparticular
typeoftaxconcession involved. Italsowasnoted thattheconcept of"tax" inthiscontext potentially
could encompass allmechanisms whereby governments generate revenue, including import andexport
duties, social security contributions, etc.
1. Accelerated depreciation
96. Foraccelerated depreciation, twoapproaches tocalculating thecosttogovernment (i.e,the
revenue foregone) werediscussed. Thefirstwould betocalculate thesubsidy onayear-by-year basis,
onlyforthose years inwhich thegovernment foregoes revenue, onthegrounds thatitisimpossible
topredict thebeneficiary 'struetaxliability overtheentire depreciation period. Moreover, itwas
noted that,although accelerated depreciation programmes generally areconstructed insuchamanner
thattaxreductions early onarerecaptured attheendoftheperiod, inpractice suchrecapture may
never occur. Forexample, ifthebeneficiary company isunprofitable attheendoftheperiod, ittypically
would incur notaxliability. Inaddition, evenifprofitable attheendoftheperiod, itmayhaveincurred
earlier losses thatcould havebeenbrought forward tooffset current profits, again removing orreducing
thetaxliability thatotherwise would havearisen atthattime. Further, ifnewequipment werepurchased
toward theendofthedepreciation period, accelerated depreciation effectively could be"rolled over"
uponthecommencement ofanew,front-loaded accelerated depreciation period onthenewequipment,
again meaning thatrecapture oftaxreductions from thefirstdepreciation period would beavoided.
97. Themajor disadvantage tothisapproach wasthatitwould assume therecipient company to
beunprofitable indefinitely intothefuture, orataminimum tobefreeoftaxliability. Thesecond
approach thatwasdiscussed isthatusedbytheOECD initscalculations ofthecosttogovernment
ofvarious kinds ofindustrial support measures. Foraccelerated depreciation, theOECD approach
istocalculate alump sumbycomparing thetaxthecompany actually willpaytowhatit"normally"
would havepaidovertheentire depreciation period. Thisamount isthenrestated interms ofitspresent
value asofthebeginning ofthedepreciation period. Theformula assumes thatthecompany willbe
profitable, i.e.,thatitwillpaytax,eachyear. Themajor disadvantage tothisapproach wasthatan
absolutely accurate measurement could onlybemade attheendofthedepreciation period.
98. Noconsensus wasreached withrespect toaccelerated depreciation.
2. Taxexemptions, deductions, holidays, etc.(Recommendation 12,PartA)
99. Fortaxexemptions, deductions, holidays, andanysimilar measures, itisrecommended that
thecosttothegovernment bemeasured astheamount ofrevenue thatthegovernment otherwise would
havecollected.
3. Taxdeferrals (Recommendation 12,PartB)
100. Fortaxdeferrals, itisrecommended thatthecosttogovernment becalculated bytreating the
amount ofdeferred taxasifitwere aninterest-free loanfortheperiod ofdeferral.
4Thus, thisamount would notbeadjusted forinflation andinterest.G/SCM/W/415/Rev.1
Page21
G. Equity Infusions (Recommendation 13)
101. TheGroup deemed thatthemethodology fordetermining thecosttothegovernment ofasubsidy
conferred through theprovision ofequity would depend uponwhether ornottherecipient firm’sstock
waspublicly traded. Itwasrecognized inthisconnection thattheprovision ofequity byagovernment
toafirmdoesnotnecessarily constitute asubsidy. Only ifthere isabenefit totherecipient fromthe
provision oftheequity willasubsidy exist.
102. Where therecipient firm’sstock ispublicly traded, theGroup recommends thatthecostto
thegovernment, ifany,ofanequity infusion bythegovernment bedetermined bycomparing theprice
thegovernment actually paidtothefirmfortheequity withtherelevant market price fortheequity.
Ifthegovernment paidmore thantherelevant price fortheequity, thecosttothegovernment would
betheamount oftheoverpayment. Thisoverpayment would betreated asagrant forpurposes of
thecalculation ofadvalorem subsidization.
103. Incases where there isnomarket price fortheshares, determination ofwhether andtowhat
extent asubsidy isprovided willbelessstraightforward. TheGroup noted thatifasubsidy exists,
thecostthereof tothegovernment should becalculated inaccordance withthegeneral principles of
thisreport. Noconsensus wasreached astospecific methodology inthisregard.
H. Loan/Credit Guarantees (Recommendation 14)
104. TheGroup noted thatguarantees canoperate withrespect totheguarantee beneficiary either
asaborrower orasalender. Intheformer case,thebeneficiary isaborrower whose debtisguaranteed
against theborrower 'sowndefault. Inthelatter case,thebeneficiary isalender, forexample, through
theprovision ofcredit toitscustomers. Aguarantee inthissituation guarantees thislender against
potential default byitscustomers.
105. Atwo-part procedure wasdiscussed forcalculating thecosttothegovernment ofloan/credit
guarantees, where suchguarantees areprovided inthecontext ofaprogramme, asopposed toonan
adhocbasis. Aspartone,theoverall viability oftheloanguarantee programme overarelatively long
period (normally, thefiveyears priortothereceipt oftheguarantee) should bedetermined. Normally,
viability could beassessed byexamining theprogramme 'sfinancial statements overtheperiod. If
thisexamination revealed thatthetotalfeespaidintotheprogramme byparticipating firms during the
period were lessthanthetotalamount paidbythegovernment incoverage ofdefaulted loans under
theprogramme plusthecosts ofoperating theprogramme, theprogramme would bedeemed notto
beviable, meaning thatacosttothegovernment would havebeenincurred.
106. Parttwowould betocalculate theamount ofthecosttothegovernment tobeattributed to
thefirminvolved intheArticle 6.1(a) enquiry. Thefirststepunder parttwowould betocalculate
thecosttothegovernment oftheprogramme asawhole, asthedifference between thetotalamount
offeesactually paidintotheprogramme byallofitsparticipants (including those notinvolved inthe
enquiry) andthetotalamount offeesthatwould havebeenrequired fortheprogramme tobeviable
during therelevant period. Thesecond stepwould betoattribute theappropriate portion ofthiscost
totheparticular firminvolved intheenquiry. Thisattribution would bebased onthatfirm'sshare
oftotalloanamounts guaranteed under theprogramme during therelevant period. Thus, under this
approach, asubsidy would beattributed tothefirminvolved intheenquiry whether ornotthatparticular
firmhadmade anyclaim under theprogramme foradefault. Thissubsidy would bedeemed tohave
beenprovided onthedate(s) thefeeswere paidbythatfirm.
107. Inthecaseofadhocguarantees (i.e., those thatclearly arenotlinked toanyguarantee
programme), itisrecommended thatthecosttogovernment ofanadhocguarantee, intheevent thatG/SCM/W/415/Rev.1
Page22
agovernment covers adefault, betheamount ofthedefault coverage provided, lessanyfeespaidfor
theguarantee. TheGroup recognizes thatinthese circumstances, thetreatment ofadhocguarantees
forpurposes ofArticle 6.1(a) would beidentical totherecommended treatment ofdebtforgiveness.
108. Some Group members expressed theview thatanadhocguarantee imposes acostonthe
providing government evenwhere there isnodefault. Specifically, theexpected costofproviding
theguarantee could becalculated. Forexample, ifthegeneral default rateongovernment guaranteed
loans orcredits, ortheprobability ofdefault onaspecific guaranteed loanorcredit, was10percent,
10percentoftheloanprincipal could beconsidered tobethecosttothegovernment ofproviding
theguarantee. Thisapproach would beconsistent withhowsome governments treatloanguarantees
intheiraccounting andbudget records. Noconsensus wasreached onthisissue.
I. Government Provision ofGoods and/or Services (Recommendation 15)
109. Ingeneral, itisrecommended thatthecosttothegovernment ofproviding agoodand/or service
becalculatedastheexpenses/costsincurredbythegovernmentinprovidingthegoodorservice,including
areasonable return, minus thepricereceived forthegoodand/or service. Ifthecosttothegovernment
cannot becalculated according tothisapproach, itcould becalculated using other approaches under
theadequate remuneration standard ofArticle 14(d). Thisamount could betreated asagrant inthe
calculation ofadvalorem subsidization.
110. Anumber ofspecial considerations werediscussed regarding howtomeasure thecosttothe
government ofproviding goods andservices inspecific contexts. Forexample, incertain circumstances
suchastheprovision ofwidely-used inputs likeelectricity ornatural gas,aprice differential between
different customers might notbeabnormal. Large customers would tendtobecharged alower price
byanelectric utility thansmaller users, based onthecostdifferential tosupply them. Thus, itwould
beimportant toexamine thestandard pricelistorpricing schedule applicable tothedifferent categories
ofcustomer. Ifaparticular customer werecharged adisproportionately lowprice inrelation tothe
"normal price", there might beacosttothegovernment. The"normal price" would betheprice that
would beexpected based ontheprice schedule, orbased ontheprice tocomparable customers, which
covered allofthegovernment 'scosts ofproviding thegood orservice tothecustomer (including a
reasonable return).
J. Government Purchase ofGoods (Recommendation 16)
111. Ingeneral, itisrecommended thatthecosttothegovernment ofpurchasing goods bedetermined
inaccordance withtheguidelines contained inArticle 14(d) oftheAgreement. Thatis,suchcalculations
should bebased on"more thanadequate remuneration". Totheextent thatagovernment isfound
tohaveoverpaid forgoods incomparison withtheirprevailing market value, thecosttothegovernment
would betheamount oftheoverpayment. Thisamount could betreated asagrant inthecalculation
ofadvalorem subsidization.
112. Itisrecognized thattheguidelines inArticle 14oftheAgreement refertothe"benefit tothe
recipient" context. Nevertheless, inthecaseofgovernment purchases ofgoods, thecosttothe
government andthebenefit totherecipient inpractice aresimilar, making itpossible toapply the
Article 14guidelines directly.
K. Assumption ofLegal Obligations (Recommendation 17)
113. Asageneral matter, itisrecommended thatthecosttogovernment oftheassumption oflegal
obligations, totheextent thatthisinvolves anelement ofsubsidization, becalculated astheamount
oftheobligations assumed. Various kinds oflegalobligations wereidentified aspossibly belongingG/SCM/W/415/Rev.1
Page23
inthiscategory. These include thecoverage byagovernment ofseverance pay,ofotherlegally-imposed
employment costs, possibly ofcertain environmental costs, andofsimilar obligations. Thisamount
normally should betreated asagrant.
L. Export-Related Subsidies (Recommendation 18)
114. Asnoted inSection I.B,above, itisrecognized thatbecause export subsidies areprohibited,
establishing acost-to-government methodology maybeoflimited use. Nevertheless, totheextent
thatsuchsubsidies areinvolved inagiven caseunder Article 6.1(a), theircosttogovernment would
depend ontheirspecific nature. Thatis,export-related subsidies intheformofcredit guarantees would
betreated inaccordance withtheloan/credit guarantee methodology, those intheformofgrants would
betreated inthesame wayasother grants, those intheform ofloans would betreated inthesame
wayasother loans, etc.
M. Upstream Subsidies
115. TheGroup discussed, butreached noconsensus on,upstream subsidies. Itwasrecognized
thatanycalculation method forsuchsubsidies would needtoinclude abasisfordetermining theamount
ofthesubsidy benefitting thedownstream product, andalsowould needtoavoid anydouble-counting
ofthesubsidy thatmight exist.
N. Multiple Exchange RateProgrammes (Recommendation 19)
116. Itisrecommended thatthecosttothegovernment ofapplication ofamultiple exchange rate
system toagiven transaction bebased onacomparison oftheexchange rateactually applied withan
appropriate benchmark, suchasthemarket exchange rateoranother exchange rate(such asthe
Purchasing Power Parity rate)published byaninternational organization. Thecosttothegovernment
would bethedifference between theabsolute value ofthetransaction attheexchange rateactually
applied, andthevalue thatwould haveresulted ifthebenchmark ratehadbeenapplied. Thisamount
should betreated asagrant.
O. Research andDevelopment Subsidies (Recommendation 20)
117. Itisrecognized thatthecosttogovernment ofsubsidies forresearch anddevelopment will
depend ontheparticular types ofsubsidies provided. Forexample, thecosttogovernment ofresearch
subsidies intheform ofgrants should bedetermined inthesame wayasforallother grants, etc.
118. Itisfurther noted that,because ofthefuture orientation ofR&D activities, itmight bedifficult
toallocate therelated subsidies toproducts notyetinproduction (i.e.suchsubsidies generally would
notbe"tied"). Given this,itmaybeappropriate inthesecircumstances toallocate suchsubsides across
therecipient firm'stotalsales.
P. Worker Training (Recommendation 21)
119. Thequestion ofthecosttogovernment ofproviding worker training inthecontext of
Article 6.1(a) isrecognized toraiseanumber ofissues. First, itisnoted asageneral principle that
inthemoststraightforward case,government-subsidized orgovernment-provided worker training can
besimilar toawage subsidy. Thatis,ifagovernment 'spayment fortheworker training relieves a
company ofacostthatitotherwise would havehadtopay,asubsidy thatwould berelevant under
Article 6.1(a) mayexist.G/SCM/W/415/Rev.1
Page24
120. Inaddition, thequestion ofwhether afirmhasalegalobligation totrainitsworkers isrelevant.
Thatis,when afirmhasalegalobligation, suchastoretrain laid-off workers, andthegovernment
assists thecompany inpaying forsuchretraining, asubsidy would existtotheextent thatthegovernment
hasincurred acostinproviding theassistance which would otherwise havebeenborne bythefirm.
Itisrecommended thatsuchasubsidy betreated asagrant.G/SCM/W/415/Rev.1
Page25
RECOMMENDATION 1
Illustrative Table onExpensing Versus Allocation ofSubsidies
intheContext ofArticle 6.1(a) andAnnex IV
1. Theattached table reflects theInformal Group ofExperts 'recommended guidelines for
determining when certain types ofsubsidies should beexpensed versus allocated overtimeincalculating
whether the5percentthreshold established inArticle 6.1(a) hasbeenmet. Thefirstpageofthetable
identifiesvarioustypesofsubsidiesthatmightbeeitherexpensedorallocateddependingontheparticular
circumstances. Factors thatwould berelevant tothisdetermination areidentified foreachtypeof
subsidy. Thesecond pageidentifies those types ofsubsidies thatgenerally would beallocated, and
those thatgenerally would beexpensed.
2. Thetreatment recommended forthedifferent types ofsubsidies aswellasthesubsidy-specific
reasoning shown arebased onthefollowing general principles: Allocation rather thanexpensing of
asubsidy normally would beindicated ifthepurpose ofthesubsidy isforthepurchase offixed assets,
ifitisnon-recurring and/or large, ifitisoriented toward future production, ifitconsists ofequity,
orifitiscarried forward intherecipient 'saccounting records. Inaddition, twopresumptions are
deemed appropriate: First, R&D subsidies should bepresumptively allocated, except where itis
demonstrated thatdoing sowould beinappropriate. Similarly, non-recurring subsidies should be
presumptively allocated, except where itisdemonstrated thatthiswould beinappropriate.
3. Theinclusion ofanygiven typeofmeasure inthetableisnotintended toimply thatsucha
measure inallcases would berelevant inthecontext ofArticle 6.1(a). Rather onlymeasures that
aresubsidies perArticle 1oftheAgreement andarespecific perArticle 2,andtowhich Article 6.1(a)
applies pertheAgreement, would berelevant inthatcontext.G/SCM/W/415/Rev.1
Page26EXPENSE ALLOCATE
GRA
Purpose isforother thanpurchase offixed assets
Recurring and/or smallNTS
Purpose isforpurchase offixed assets
Non-recurring and/or large
TAX BENEFITS/INDIRECT
Foroperating expenses
Benefits related todirect taxesTAX REBATES/IMPORT DUTY EXEMPTIONS
Forpurchase of/related tofixed assets (e.g.import duty/indirect
taxexemption onmachinery)
PROVISION OFGOODS
Provision ofservices/consumable inputsAND SERVICES
Provision offixed assets andnon-general infrastructure
RESEARCH &
Expense onlyifallocation notappropriateDEVELOPMENT
Presumption toallocate
LOSS COVERAGE/
Recurring and/or smallOPERATING COSTS (OVERLAPS WITH 6.1.(b) AND (c))
Non-recurring and/or large
Benefit goods notyetproduced
INTEREST
Interest subsidy payments made asloanpayments become dueRATE SUBSIDIES
Subsidy islump sumtooffset past,present orfuture interest due
orpaidG/SCM/W/415/Rev.1
Page27EXPENSE ALLOCATE
EQUITY INFUSIONS
LONG-TERM LOAN BENEFITS
(benefits existoverlifeofloan)
FORGIVENESS/ASSUMPTION OFLONG-TERM DEBT
(OVERLAPS WITH 6.1(d))
(including principal andinterest)
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% ofsalesforanyindividual subsidy)G/SCM/W/415/Rev.1
Page28
RECOMMENDATION 2
Identification ofAllocation Period forAllocated Subsidies
1.Asageneral principle, theaverage useful lifeofassets should beusedastheallocation period
forsubsidies subject toallocation.
2.Ahierarchy ofbases from which todetermine theaverage useful lifeofassets should beused,
asfollows:
Information fortheindividual firmorfirms receiving thesubsidy
Or,ifnotfeasible/available/reasonable,
Information forother firms producing theproduct inthecountry inquestion
Or,ifnotfeasible/available/reasonable,
Information forfirms inthesame business sector1inthecountry inquestion,
Or,ifnotfeasible/available/reasonable,
Information forother firms producing theproduct outside thecountry inquestion
3.Ifthefirstbasis, above, canbeused2,thetotalaverage bookvalue3ofphysical depreciable assets
(excluding landandconstruction inprocess) ofthefirmduring themost recent relevant multi-year
period could bedivided bytheaverage annual amount ofdepreciation expense during thatperiod, with
theresult being theaverage useful lifeofassets inyears. (Example: $1,000 average assetvalue/$100
average annual depreciation =10yearaverage lifeofassets.) Therelevant period should bedefined
soastorepresent normal operations. Asimilar calculation could bemade using anyoftheother bases
inthehierarchy, ifapplied.
4.Inthecaseofasset revaluations (write-downs orwrite-ups), orofhyperinflation, normalizing
adjustments maybenecessary.
5.Inapplying thismethodology, there should beapreference forusing accounting datarather than
tax-related depreciation periods fordetermining theuseful lifeofassets, asaccounting dataaremore
likely toreflect actual useful livesofassets.
1Defined asthenext-largest category intheInternational Standard Industrial Classification ("ISIC")
orsimilar nomenclature system.
2Ifsome method other thanstraight linedepreciation isusedbythefirm, ifthefirm'sdepreciation
isnotbased onanestimate oftheactual useful lifeofitsassets, orifthefirm'sacquisition ofassets
isveryirregular, thefirstbasis maynotbeappropriate, inwhich caseoneoftheother bases inthe
hierarchy should beconsidered.
3I.e.,netofaccumulated depreciation; based onbeginning-of-period values.G/SCM/W/415/Rev.1
Page29
6.Theaverage useful lifeofalloperational assets (asidentified through theapplication ofthe
hierarchy) normally should beusedastheallocation period forallocable subsidies regardless oftype,
other thanlong-term loans andpossibly equity infusions.
7.Ifthesubsidy inquestion isthebenefit from alongtermloan, theallocation period should be
thelifeoftheloan.
8.Ifthesubsidy inquestion isanequity infusion, andthesubsidy iscalculated astheoverpayment
forequity byagovernment, incomparison withthemarket value oftheequity, thisoverpayment should
betreated asagrant andallocated overtheaverage useful lifeofassets asidentified through the
application oftheabove methodology. Ifanother method isusedtodetermine thecosttogovernment
ofasubsidy fromanequity infusion, adifferent approach toidentifying theallocation period maybe
appropriate. Forexample, theperiod during which aninvestor might “reasonably ”expect areturn
onaninvestment could beused, oritcould beassumed thatacosttogovernment potentially could
ariseduring theentire period inwhich thegovernment heldtheequity, onayear-by-year basis.
9.Itisrecognized thattheapproach recommended herein fordetermining theuseful lifeofassets
represents anestimation technique. Thisapproach isrecommended foritseaseandstraightforwardness
ofapplication toalarge number offoreseeable situations, andinparticular foritsavoidance ofthe
needtoseparately calculate theuseful livesofindividual assets. Asreflected inthispaper, however,
there maybesituations where some other approach willneedtobeused, orwhere thebasic approach
described herein mayneedtobeadjusted.G/SCM/W/415/Rev.1
Page30
RECOMMENDATION 3
Adjustments forInflation andInterest
1.Itisrecommended, where subsidies areallocated overtime, thatsubsidy amounts beadjusted
fullyforinflation andinclude aportion ofthe“real”interest rate. Specifically, theadjustment factor
tobeapplied normally should bethefullrateofinflation plusone-half ofthedifference between the
rateofinflation andtheappropriate government borrowing rate.(This canbecalculated asthearithmetic
average oftheinflation andborrowing rates.) Where therateofinflation ishigher thanthegovernment
borrowing rate,however, theadjustment factor should bethefullrateofinflation, unadjusted forany
interest component.
2.Theadjustment factor should becalculated based onprevailing interest andinflation ratesasof
thedatethesubsidy isreceived. Ingeneral, thisfactor should bekeptconstant throughout theallocation
period, andapplied onacompounded basis toeachoftheannual subsidy allocations, excluding the
amount allocated totheyearofreceipt. Ifduring theallocation period there aresignificant changes
ininflation andinterest rates, however, itmaybeappropriate torecalculate theadjustment factor on
anannual basis.
3.Theappropriate government interest rateshould betherateforagovernment debtinstrument
whose maturity most closely approximates thelength ofthesubsidy allocation period.
4.Thismethodology should beapplied toalltypes ofsubsidies allocated overtimeother thanloans.G/SCM/W/415/Rev.1
Page31
RECOMMENDATION 4
DataSources forGovernment Borrowing
Where government borrowing ratesarerequired inmaking Article 6.1(a)/Annex IVcalculations,
itisrecommended thattheyields tomaturity ongovernment securities (newissues andthose trading
insecondary markets) beused. Identifying securities withappropriate terms tomaturity willpermit
theallocation periods ofthesubsidies tobematched withsecurities ofcomparable maturities, asforeseen
incertain ofthemethodological recommendations.G/SCM/W/415/Rev.1
Page32
RECOMMENDATION 5
"Inflationary Economy Countries"
intheSense ofParagraph 5ofAnnex IV
Determination ofWhether aCountry isInflationary
1.Thedetermination ofwhether acountry isinflationary inthesense ofparagraph 5ofAnnex IV
(andthuswhether theprovisions ofthatparagraph should apply) isnoteasily susceptible toapplication
ofanumerical standard. Therefore, thedetermination should bemade onacase-by-case basis, by
applying atwo-part analysis.
2.First,thatcountry'sinflationrateshouldbecomparedwiththeaveragerateofinflationindeveloped
countries. Ifthecountry involved inthedispute isadeveloped country, thisaverage should exclude
thatcountry.
3.Iftherateofinflation inthesubject country issubstantially higher thantheaverage ratetowhich
itiscompared, thiswould mean thatthecountry could befound tobeinflationary, depending onthe
second partoftheanalysis. If,however, therateofinflation inthesubject country isnotsubstantially
higher thanthecomparison rate,thecountry would notbeinflationary, andtheanalysis would not
reach thesecond part.
4.Asthesecond partoftheanalysis, thenormal business andgovernment accounting practices with
respect toinflation should beconsidered. Inparticular, ifatleastmonthly inflation indexing isused
routinely throughout theeconomy ofacountry withanabove-average rateofinflation, inboththe
public andprivate sectors, thenthatcountry should beconsidered inflationary inthesense ofparagraph 5
ofAnnex IV.
Adjustment oftheNumerator (Subsidy Amount) forInflation inInflationary Countries
5.Itisnoted thattheGroup 'sgeneral recommendation thatallocated subsidy amounts beadjusted
forinflation (andinterest) would apply toinflationary economy countries. Itisfurther noted that,
forsuchcountries, theadjustment factor mayneedtoberevised annually, asprovided forinthegeneral
recommendation.
6.Itisrecommendedthatthedeterminationofwhichinflationindexshouldbeappliedtothenumerator
andthedenominator bemade onacase-by-case basis, toensure theselection ofthemostappropriate
index tofittheparticular circumstances.
7.Asanalternative toadjusting thenumerator andthedenominator forinflation intheinflationary
country granting thesubsidy, boththesubsidy amounts andthesalesdenominators could beconverted
toastable currency commonly usedininternational business transactions, ortoabasket ofcurrencies
(thePurchasing Power Parity Index ortheaverage fordeveloped countries, forexample).
8.Ifsuchacurrency conversion ismade, theadjustment factor forinflation andinterest recommended
inRecommendation 3should bebased oninflation andinterest rates forthecurrency orbasket of
currencies used. Ifabasket ofcurrencies isused, theexchange ratesincluded should beweight-averaged
byanappropriate factor.G/SCM/W/415/Rev.1
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RECOMMENDATION 6
Recommendations Concerning theSales Denominator
A.UseofAccounting Year Data
1.Itisrecognized thatparagraphs 2and3ofAnnex IVindicate thatnormally there willbealag
between thesales denominator andthenumerator (i.e., thesubsidy) incalculations ofadvalorem
subsidization. Thatis,asprovided inparagraphs 2and3,therelevant sales dataarethose forthe
"most recent 12-month period, forwhich sales dataisavailable, preceding theperiod inwhich the
subsidy isgranted".
2.Itisrecommended withrespect tothisgeneral issuethatthedatafor"themostrecent 12-month
period" should bethedatafortherecipient firm'smostrecent fullaccounting year. Because ofthe
possibility ofyear-end adjustments fordiscounts, rebates, returns, etc.,useofsalesdataforaperiod
other thananormal accounting period could introduce inaccuracies.
3.Itisnoted thatthelanguage ofparagraphs 2and3ofAnnex IV,byrequiring useofa12-month
period forsalesdatathatprecedes thegranting ofasubsidy, builds inalagbetween thesubsidy and
thesalesdatatowhich itiscompared inthecalculation oftheadvalorem subsidization ofaproduct.
B.Special Case: Tax-Related Subsidies
4.Asprovided forinfootnote 64toAnnex IV,thesalesdenominator fortax-related subsidies is
something ofaspecial case. Thefootnote indicates thatthesalestobeusedarethose "inthefiscal
yearinwhich thetaxrelated measure wasearned."
5.Taking intoaccount thislanguage, itisrecommended, incalculating theadvalorem subsidization
from tax-related subsidies, thatthenumerator betheamount ofthetaxsubsidy earned inthefiscal
yearpreceding thefiscal yearinwhich therelevant taxreturn wasfiled, andthatthedenominator be
thecompany ’ssalesinthesame fiscal year, i.e.,theonepriortothefiscal yearinwhich thetaxreturn
wasfiled.
C.UseofNetRather Than Gross Sales
6.Itisrecommended thattherecipient firm'snetsales(i.e., netofdiscounts, returns, allowances,
etc.), beusedinidentifying thevalue oftherecipient firm'ssales forcalculations ofadvalorem
subsidization.
D.Variability ofSales Denominator During Allocation Period
7.Itisrecognized that,during thecourse ofanallocation period forasubsidy, thenature andscope
ofafirm'sactivities maychange. Given this,ifthesales denominator remained fixed during the
allocation period, orwere onlyirregularly revised, thenumerator anddenominator might notbe
comparable. Inviewoftheseconsiderations, itisrecommended thatthesalesdenominator beupdated
during every yearofanallocation period (soastoreflect therelevant value ofsalesduring thepreceding
accounting year).
8.Related tothis,itisfurther recommended thattheallocation ofaparticular subsidy amount to
agiven yearinanallocation period bedeemed toconstitute the"granting" ofthatsubsidy amount in
thesense ofparagraph 2ofAnnex IV.Inother words, thedenominator would betherecipient 'ssalesG/SCM/W/415/Rev.1
Page34
during themostrecent accounting yearpreceding theperiod towhich therelevant portion ofthesubsidy
wasallocated.
E.Firm-Specific Sales Denominator
9.Itisrecommended thattheadvalorem subsidization ofaproduct becalculated onafirm-specific,
rather thananindustry-wide, basis. Thisrecommendation isbased onthelanguage ofAnnex IV,
particularly thatofparagraphs 2-5,which areworded entirely interms ofindividual recipient firms.
Itisrecognized thatindividual firms withlessthan5percentsubsidization would notbesubject to
apresumption ofcausing serious prejudice.
F.Determination ofWhether aSubsidy isTiedtoaProduct
10.Todetermine whether asubsidy is"tied" toaparticular product inthesense ofparagraph 3of
Annex IV,andhence whether thesales denominator should betherecipient 'ssales ofthatproduct
alone, instead oftoitstotalsales, itisrecommended thatasubsidy bedeemed tobetiedtoaproduct
ifitsintended useisknown tothegiver, andsoacknowledged, priortoorconcurrent withthesubsidy 's
bestowal.
11.Itisrecognized, however, thatinanygiven situation, some other approach might bemore
appropriate.
G.Sales Denominators forTiedandUntied Subsidies, andAggregation ofadvalorem Subsidization
from Different Kinds ofSubsidies
12.Itisrecommended, where afirmreceives bothtiedanduntied subsidies, thatseparate advalorem
calculations beperformed foreachusing theappropriate sales denominators, andthattheresulting
percentages beaggregated, todetermine thetotaladvalorem subsidization oftheproduct. Specifically,
itisrecommended thattheadvalorem subsidization percentages from tiedanduntied subsidies be
calculated using asthesales denominators therecipient firm’ssalesoftherelevant product andthe
recipient firm’stotalsales, respectively, asrequired byAnnex IV.Theresulting advalorem percentages
thenshould beadded together todetermine theaggregate advalorem subsidization oftheproduct from
these subsidies.G/SCM/W/415/Rev.1
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RECOMMENDATION 7
Treatment of"Start-Up" Subsidies inArticle 6.1(a) Calculations
Made After theEndoftheStart-Up Period
Intheevent thatanArticle 6.1(a) caseisbrought aftertheendofastart-up period during which
subsidies werereceived, itisrecommended thatthese subsidies beanalyzed todetermine whether any
portion ofthemisallocable totheperiod under consideration. Ifso,these allocated subsidy amounts
should beincluded inthecalculation ofadvalorem subsidization todetermine ifthe5percentthreshold
hasbeenreached.G/SCM/W/415/Rev.1
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RECOMMENDATION 8
CosttotheGovernment ofGrants
A.Outright Grants
1.Foroutright grants notpaidininstalments, itisrecommended thatthecosttothegovernment
bedeemed tobethefaceamount ofthegrant, adjusted (ifallocated overtime) forinflation andinterest
inaccordance withthegeneral recommendation.
2.Foroutright grants paidininstalments, itisrecommended thateachinstalment betreated asa
separate grant. Itisnoted thatthisrecommendation isconsistent withtherecommendation tovary
thesalesdenominator during eachyearofanallocation period.
B.Reimbursable Grants
3.Itisnoted thatgrants whose terms include theobligation ofreimbursement intheevent thatcertain
conditions arefulfilled (e.g., thattherecipient becomes profitable) aresimilar tocontingent liability
loans.
4.Inviewofthis,itisrecommended thatsuchgrants betreated asaseries ofshort-term interest-free
loans. Thecosttothegovernment forsuchgrants during theperiod before theyarereimbursed thus
shouldbecalculatedaccordingtotherecommendedmethodologyforordinaryloans(Recommendation9).
5.Itmaybedetermined thatagiven reimbursable grant never willberepaid, (Forexample, the
recipient maybeunprofitable overalongperiod.) Should such aconclusion bereached, itis
recommended thatthereimbursable grant betreated asanoutright grant. Thecosttothegovernment
would betheoriginal faceamount ofthegrant, lessanyreimbursement thatmight havebeenmade
tothatdate.
6.Itisrecommended thattheallocation period foranysuchoutstanding amount should begin on
thedateasofwhich itisdetermined thatthisamount effectively hasbecome anoutright grant.G/SCM/W/415/Rev.1
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RECOMMENDATION 9
CosttotheGovernment ofLoans
A.Ordinary Loans
1.Itisrecommended thatthecosttothegovernment ofanordinary loanbemeasured based on
theextent towhich theeffective interest ratecharged ontheloanprovided islower thantheappropriate
government bond rateintheyearinwhich theloanisgiven. Forshort-term government loans (i.e.,
loans withamaturity oflessthanoneyear), theappropriate bond ratewould bethatonshort-term
government bonds ofcomparable maturity. Forlong-term government loans, theappropriate bond
ratewould bethatonlong-term government bonds ofcomparable maturity. Asasimplified example,
iftheappropriate government bond ratewas5percent, andtheinterest rateontheloanwas4per
cent,thecosttothegovernment ofproviding theloanwould be1percent. Anygrace period provided
bythegovernment loan, during which timeinterest didnotaccrue, alsowould beconsidered acost
incurred bythegovernment, calculated using theappropriate government bond rate. Forpurposes
ofestablishing arelatively simple andpredictable calculation methodology, itisfurther recommended
thatthebenefits thuscalculated bedeemed toariseonayear-by-year basis overthelifeoftheloan
(i.e., asaseries ofrecurring grants). Itisnoted inaddition thatdeferrals ofprincipal and/or interest
maygiverisetoadditional costs tothegovernment.
B.Contingent Liability Loans
2.Itisrecognized thatcontingent liability loans aresimilar toreimbursable grants, inthattheyare
repayable onlyupon theoccurrence ofsome future event, suchasachievement ofacertain level of
profitability. Because itisimpossible topredict theoccurrence offuture events, itisrecommended,
asforreimbursable grants, thatcontingent liability loans betreated asiftheywereaseries ofshort
terminterest-free loans forpurposes ofdetermining thecosttothegovernment.
3.Ifsuchloans eventually wererepaid, theamount ofthesubsidy would becalculated inaccordance
withthemethodology described above forordinary loans.
4. Intheevent thataconclusion isreached thatagiven contingent liability loanwillnotberepaid,
itisrecommended thatsuchloans betreated asgrants. Theamount ofthesubsidy (i.e., thecostto
thegovernment) would bethefaceamount oftheloan, plusaccrued interest calculated using the
government 'slong-term bond rate.
5.Itisrecommended thattheallocation period foranyoutstanding contingent loanamount begin
onthedateasofwhich itisdetermined thatthisamount effectively hasbecome anoutright grant.G/SCM/W/415/Rev.1
Page38
RECOMMENDATION 10
Interest RateSubsidies
1.Where, asofthereceipt ofaloan, oratsome laterpoint, thegovernment subsidizes theinterest
expense onanongoing basisasinterest payments become due,itisrecommended thatthesubsidy be
calculated astheamount ofinterest covered bythegovernment. Itisrecommended thatsuchamounts
betreated asaseries ofrecurring grants provided onthedates onwhich interest payments weredue.
2.Where thegovernment provides, atacertain point intime, alump sumpayment tooffset the
recipient 'sinterest expenses (whether withrespect topastinterest, paidorunpaid, orwithrespect to
future interest expenses), itisrecommended thattheamount ofthesubsidy, oncepaid, betreated as
anon-recurring grant.G/SCM/W/415/Rev.1
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RECOMMENDATION 11
Debt Forgiveness andLossCoverage
1.Itisnoted thatdebtforgiveness andlosscoverage maygiverisetoseparate rebuttable presumptions
ofserious prejudice under Article 6.1(b), (c)and(d).Nevertheless, itisrecognized thatsubsidies
ofthese types might beincluded inclaims under Article 6.1(a).
2.Ifasubsidy intheform ofdebtforgiveness isincluded inaclaim under Article 6.1(a), itis
recommended thatthecosttothegovernment forpurposes ofthisclaim becalculated astheamount
ofthegovernment outlay (theoutstanding principal plusaccrued interest). Itisfurther recommended
thatthisamount betreated asagrant received onthedatethedebtisforgiven.
3.Ifasubsidy intheform oflosscoverage isincluded inaclaim under Article 6.1(a), itis
recommended thatthecosttothegovernment forpurposes ofthisclaim becalculated astheamount
oflosscoverage provided. Itisfurther recommended thatthisamount betreated asagrant, unless
thelosscoverage takes some other form.
4.These recommendations arewithout prejudice toanyseparate claims thatmight existunder the
other subparagraphs ofArticle 6.1.G/SCM/W/415/Rev.1
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RECOMMENDATION 12
TaxConcessions
A.TaxExemptions, Deductions, Holidays, etc.
1.Itisrecommended thatthecosttothegovernment oftaxexemptions, deductions, holidays, and
anysimilar measures becalculated astheamount ofrevenue thatthegovernment otherwise would
havecollected.
B.TaxDeferrals
2.Itisrecommended thatthecosttothegovernment oftaxdeferrals becalculated bytreating the
amount ofthedeferred taxasifitwere aninterest-free loanfortheperiod ofdeferral.G/SCM/W/415/Rev.1
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RECOMMENDATION 13
Equity Infusions
1.Itisrecommended, where therecipient firm’sstock ispublicly traded, thatthecosttothe
government, ifany,ofanequity infusion bedetermined bycomparing thepricethegovernment actually
paidfortheequity withtherelevant market price fortheequity. Ifthegovernment haspaidmore
thantherelevant price fortheequity, thecosttothegovernment would betheamount ofthe
overpayment.
2.Itisfurther recommended thatthisamount betreated asagrant.
3.Where there isnomarket price fortheequity, thisrecommended methodology would needto
bemodified.G/SCM/W/415/Rev.1
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RECOMMENDATION 14
Loan/Credit Guarantees
1.Itisrecognized thatguarantees canbeprovided bothtoborrowers (asloanguarantees) andto
lenders (ascredit guarantees).
2.Atwo-part procedure isrecommended fordetermining thecosttothegovernment ofloanorcredit
guarantees, where suchguarantees areprovided through aprogramme. Thefirstpartconsists of
assessing thelong-term viability oftheguarantee programme asawhole. Thesecond partconsists
ofattributing thetofirminvolved intheArticle 6.1(a) enquiry theappropriate portion ofthe
government ’scostunder theprogramme.
3.Toassess thelong-term viability ofaguarantee programme, itisrecommended thatthefinancial
statements fortheprogramme forarelatively longperiod, normally themost recent fiveyears, be
examined. Ifitisfound thatthetotalfeespaidintotheprogramme byparticipating firms during the
period werelessthanthetotalamount paidbythegovernment under theprogramme tocover defaulted
loans plusthecosts ofoperating theprogramme, theprogramme would notbeviable.
4.Inthesecond partoftheanalysis, attributing theappropriate amount ofgovernment costunder
theprogramme totherelevant firm, itisrecommended tofirstcalculate thecosttothegovernment
oftheprogramme asawhole. Thiscostshould becalculated asthedifference between thetotalamount
offeesactually paidintotheprogramme byallparticipants (including those notinvolved intheenquiry)
andthetotalamount offeesthatwould havebeenrequired fortheprogramme tobeviable during the
relevant period.
5.Thenextstepintherecommended methodology would betoattribute theappropriate portion
ofthiscosttotheparticular firminvolved intheenquiry. Thisshould becalculated byapplying to
thetotalcostthatfirm’spercentage share oftotalloanamounts guaranteed under theprogramme during
therelevant period. Thissubsidy would bedeemed tohavebeenprovided onthedate(s) thefeeswere
paidbythatfirm.
6.Inthecaseofadhocguarantees (i.e.,thosethatclearly arenotlinked toanyguarantee programme),
itisrecommended, intheevent thatadefault iscovered byagovernment, thatthecosttogovernment
oftheadhocguarantee betheamount ofthedefault coverage provided, lessanyfeespaidforthe
guarantee.G/SCM/W/415/Rev.1
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RECOMMENDATION 15
Government Provision ofGoods and/or services
1.Ingeneral, itisrecommended thatthecosttothegovernment ofproviding agoodand/or service
becalculatedastheexpenses/costsincurredbythegovernmentinprovidingthegoodorservice,including
areasonable return, minus thepricereceived forthegoodand/or service. Ifthecosttothegovernment
cannot becalculated according tothisapproach, itcould becalculated using other approaches under
theadequate remuneration standard ofArticle 14(d).
2.Inaddition, withregard totheprovision ofwidely-used inputs (e.g., electricity, water ornatural
gas),itisrecommended thatagovernment bedeemed tohaveincurred acostinproviding agood or
service onlyiftheprice actually charged toaparticular customer islessthanthenormal ”price for
thattypeorcategory ofcustomer. The"normal" price would betheprice thatwould beexpected
based ontheprice schedule, orbased ontheprice tocomparable customers, andwhich covered the
cost(including areasonable return) ofproviding thegood orservice tothecustomer.
3.Itisrecognized thataprice differential fordifferent customers might notbeabnormal (as,for
example, inthecaseofanelectric utility). Onlyif,based onthestandard pricelistorpricing schedule,
thepricecharged toaparticular customer weredisproportionately lowinrelation tothepricethatwould
beexpected based ontheprice schedule (orinrelation totheprice charged toother, comparable,
customers), might acosttothegovernment possibly arise.
4.Intheevent thatacosttothegovernment isfound toexist, thiscostshould becalculated based
onthedifference between thenormal ”price forthegood orservice andtheprice actually charged.G/SCM/W/415/Rev.1
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RECOMMENDATION 16
Government Purchase ofGoods
1.Itisrecommended thatthecosttothegovernment ofpurchasing goods bedetermined inaccordance
withtheguidelines inArticle 14(d) oftheAgreement onSubsidies andCountervailing Measures. That
is,suchcalculations should bebased onmore thanadequate remuneration ”.Totheextent thata
government paysmore thanadequate remuneration when purchasing goods, thecosttothegovernment
should becalculated astheamount ofsuchoverpayment. Thisamount should betreated asagrant.
2.Itisnoted that,although theguidelines inArticle 14areinthecontext ofbenefit totherecipient ”,
inthecaseofgovernment purchases ofgoods, thecosttothegovernment andthebenefit totherecipient
inpractice would besimilar. Thus, theArticle 14guidelines canbeapplied directly under Article 6.1(a).G/SCM/W/415/Rev.1
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RECOMMENDATION 17
Assumption ofLegal Obligations
1.Assumptionoflegalobligationsmightencompasssuchgovernmentactionsascoverageofseverance
pay,ofother legally-required employment costs, possibly ofcertain environmental costs, etc.
2.Itisrecommended thatthecosttothegovernment ofassumption oflegalobligations betheamount
oftheobligations assumed, totheextent thatthisinvolves anelement ofsubsidization. Thisamount
normally should betreated asagrant.G/SCM/W/415/Rev.1
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RECOMMENDATION 18
Export-Related Subsidies
1.Given theprohibition onexport subsidies, itisrecognized thatsubsidies ofthistypemayonly
rarely, ifever, beincluded inaclaim under Article 6.1(a).
2.Totheextent thatsuch subsidies aresoincluded, itisrecommended thattheir costtothe
government bedetermined based ontheirform. Thus, thecosttothegovernment ofsuchsubsidies
intheform ofgrants would bedetermined using theapproach forgrants, those intheform ofloans
using theapproach forloans, etc.G/SCM/W/415/Rev.1
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RECOMMENDATION 19
Multiple Exchange RateProgrammes
1.Itisrecommended thatthecosttothegovernment ofapplication ofamultiple exchange rate
system toagiven transaction bebased onacomparison oftheexchange rateactually applied withan
appropriate benchmark rate,suchasthemarket exchange rateoranother exchange rate(e.g., the
Purchasing Power Parity rate)published byaninternational organization.
2.Thecosttothegovernment would bethedifference between theabsolute value ofthetransaction
attheexchange rateactually applied, andthevalue thatwould haveresulted ifthebenchmark rate
hadbeenapplied.
3.Itisrecommended thatthisamount betreated asagrant.G/SCM/W/415/Rev.1
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RECOMMENDATION 20
Research andDevelopment Subsidies
1.Itisrecommended thatthecosttothegovernment ofresearch anddevelopment subsidies be
determined based ontheirform. Thus, thecosttothegovernment ofsuchsubsidies intheform of
grants would bedetermined using theapproach forgrants, those intheformofloans using theapproach
forloans, etc.
2.Itisfurther recommended, inviewofthefuture orientation ofresearch anddevelopment activities,
thatsubsidies fortheseactivities bepresumptively allocated across therecipient firm’stotalsales, unless
itisdemonstrated thattreating them astied”totheproduct inquestion isappropriate.G/SCM/W/415/Rev.1
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RECOMMENDATION 21
Worker Training
1.Asageneralprinciple,government-subsidizedorgovernment-providedworkertrainingcanresemble
awage subsidy, totheextent thatitrelieves afirmofacostthatthefirmotherwise would haveborne.
Itisnoted thatthequestion ofwhether afirmhasalegalobligation totrainitsworkers (e.g., toretrain
laid-off workers) isrelevant totheexistence ofasubsidy forworker training. Where suchanobligation
exists, asubsidy might ariseifthegovernment incurs acostinproviding theassistance.
2.Itisrecommended thatthecosttothegovernment bethecostthatthegovernment incurs in
providing orfunding theworker training andwhich would otherwise havebeenborne bythefirm.
3.Itisfurther recommended thatthisamount betreated asagrant.G/SCM/W/415/Rev.1
Page50
APPENDIX: TEXT OFANNEX IVTOTHE AGREEMENT ON
SUBSIDIES AND COUNTERVAILING MEASURES
ANNEX IV
CALCULATION OFTHE TOTAL ADVALOREM SUBSIDIZATION
(PARAGRAPH 1(a)OFARTICLE 6)62
1.Anycalculation oftheamount ofasubsidy forthepurpose ofparagraph 1(a)ofArticle 6shall
bedoneinterms ofthecosttothegranting government.
2.Except asprovided inparagraphs 3through 5,indetermining whether theoverall rateof
subsidization exceeds 5percentofthevalue oftheproduct, thevalue oftheproduct shallbecalculated
asthetotalvalue oftherecipient firm's63salesinthemost recent 12-month period, forwhich sales
dataisavailable, preceding theperiod inwhich thesubsidy isgranted.64
3.Where thesubsidy istiedtotheproduction orsaleofagiven product, thevalue oftheproduct
shallbecalculated asthetotalvalue oftherecipient firm'ssales ofthatproduct inthemost recent
12-month period, forwhich salesdataisavailable, preceding theperiod inwhich thesubsidy isgranted.
4.Where therecipient firmisinastart-up situation, serious prejudice shallbedeemed toexistif
theoverall rateofsubsidization exceeds 15percentofthetotalfunds invested. Forpurposes ofthis
paragraph, astart-up period willnotextend beyond thefirstyearofproduction.65
5.Where therecipient firmislocated inaninflationary economy country, thevalue oftheproduct
shallbecalculated astherecipient firm'stotalsales(orsalesoftherelevant product, ifthesubsidy
istied)inthepreceding calendar yearindexed bytherateofinflation experienced inthe12months
preceding themonth inwhich thesubsidy istobegiven.
6.Indetermining theoverall rateofsubsidization inagiven year, subsidies given under different
programmes andbydifferent authorities intheterritory ofaMember shallbeaggregated.
7.Subsidies granted prior tothedateofentry intoforce oftheWTO Agreement, thebenefits of
which areallocated tofuture production, shallbeincluded intheoverall rateofsubsidization.
8.Subsidieswhicharenon-actionableunderrelevantprovisionsofthisAgreementshallnotbeincluded
inthecalculation oftheamount ofasubsidy forthepurpose ofparagraph 1(a)ofArticle 6.
__________
62Anunderstanding among Members should bedeveloped, asnecessary, onmatters which are
notspecified inthisAnnex orwhich needfurther clarification forthepurposes ofparagraph 1(a)of
Article 6.
63Therecipient firmisafirmintheterritory ofthesubsidizing Member.
64Inthecaseoftax-related subsidies thevalue oftheproduct shallbecalculated asthetotalvalue
oftherecipient firm'ssalesinthefiscal yearinwhich thetax-related measure wasearned.
65Start-up situations include instances where financial commitments forproduct development or
construction offacilities tomanufacture products benefiting from thesubsidy havebeenmade, even
though production hasnotbegun.