. /.  WORLD TRADE  
ORGANIZATION  TN/RL/GEN/86 
17 November 2005 
 (05-5431) 
Negotiating Group on Rules Original:   English/ 
 French 
 
 
 
BENEFIT PASS-THROUGH 
 
Paper from Canada  
 
 
 The following communication, dated 16 November 2005, is being circulated at the request of 
the Delegation of Canada.   The submitting delegation has requested that th is paper, which was submitted to the Rules 
Negotiating Group as an informal document (JOB(05)/ 289), also be circulated as a formal document. 
 
_______________ 
 
 
 Members will recall that, at the June 2004 session of the Negotiating Group, Canada presented a paper on “Benefit Pass-Through” (circula ted as document JOB(04)/55).  Having had the 
benefit of Members’ views, Canada is submitting this revised version of its original paper.  In this 
regard, and given the comments of various Members with respect to the Annex proposed in that 
paper, Canada has significantly streamlined its text  proposal and eliminated the Annex altogether.  
Canada believes its revised proposal represents an important codification of GATT/WTO 
jurisprudence (given that benefit pass-through is  the vehicle by which subsidies are bestowed 
indirectly within the meaning of Article VI:3  of the GATT 1994), and improvement to the WTO 
Agreement on Subsidies and Countervailing Measures (SCM Agreement).    
I.   ISSUE 
 
1. It is well-established in GATT/WTO jurisprudence that, where the recipient of a financial 
contribution and the alleged recipient of the resulti ng benefit are different entities, the investigating 
authority of a Member cannot presume a benefit pass -through, but rather, must examine whether, and 
to what extent, the benefit of the financial c ontribution has actually been passed through from the 
entity that was the initial recipient of the financia l contribution to the entity that produces the product 
at issue.
1   
                                                      
1 In the US – Canadian Pork  GATT panel report (adopted on 11 July 1991), the panel held that, 
because swine producers an d pork producers were separate industri es operating at arms length, the US 
Department of Commerce was required to examine whether and to what ex tent the subsidies bestowed on the 
upstream producers benefited the downstream producers. In a somewhat different (i.e. pre-privatization subsidy) context, the WTO panel in US – Lead and Bismuth II  (WT/DS/138/R) stated (at fn. 69) that:  “A ‘financial 
contribution’ does not have to be bestowed directly on a company in order to confer a ‘benefit’ on that 
company.  For example, one company may be found to ‘benefit’ from a ‘financial contribution’ conferred on 
another company.”  The Appellate Body report (WT/DS138/AB/R, adopted on 7 June 2000) however went on 
to clarify that a pre-privatization subsidy cannot be d eemed to confer a benefit to  a successor company.  The 
Appellate Body in United States – Final Countervailing Duty Determination with respect to Certain Softwood from Canada (WT/DS257/AB/R of 17 February 2004) also reaffirmed the findings in US – Canadian Pork 
explaining, at paragraph 143, that: TN/RL/GEN/86 
Page 2  
 
 2. The current SCM Agreement does not, however, afford any direct guidance on this matter.  In 
the absence of explicit guidance to  conduct pass-through analyses, there is greater scope for the 
authorities of a Member to apply countervaili ng measures on the basis of a perfunctory or pro forma 
analysis.  It would therefore be useful to incl ude guidelines in the SCM Agreement to assist both 
investigating authorities in the conduct of pass-thro ugh analyses and dispute se ttlement panels in the 
consideration of such issues.  
III.   PROPOSED TEXT AMENDMENTS    
 
3. It is proposed that a new footnote be added to current Article 1.1(b) of the SCM Agreement 
that takes account of existing GATT/WTO jurisprude nce that the pass-through of the benefit of a 
financial contribution from one entity to an unrelat ed entity cannot be presumed, but rather, must be 
demonstrated.  For greater clarity, and internal coherence, the demonstration of pass-through should 
be linked to current Article 14 of the SCM Agreement, i.e.:    
 
Where there is evidence suggesting that a fi nancial contribution, within the meaning 
of that term in Article 1.1(a)(1), is rece ived by one entity and a benefit, within the 
meaning of that term in Article 1.1(b), is conferred thereby to an unrelated entity so 
as to constitute the bestowal of an indir ect subsidy, the Member concerned shall 
determine whether, and to what extent, th e benefit of the financial contribution was 
actually passed through from the former to the latter in accordance with the 
provisions of Article 14 of  this Agreement applied mutatis mutandis .  A pass-through 
analysis shall be conducted in a transparent manner and a finding that all or part of 
the benefit of a subsidy has been passed thro ugh to another entity shall be adequately 
explained.  For greater clarity, the requirem ent to demonstrate that the benefit of a 
financial contribution has passed from one entity through to another is limited to 
transactions within the territory of the Memb er in which the subsidy was bestowed.    
* * * 
 
The above does not purport to be an exhaustive e numeration of issues relating to pass-through and 
Canada reserves its right to offer additional thoughts on the matter.  
 
__________ 
                                                                                                                                                                    
 
[F]or a potentially countervailable subsidy to exist, there must be a financial contribution by 
the government that confers a benefit to a recipient .  Where a subsidy is conferred on input 
products, and the countervailing duty is imposed on processed products, the initial recipient of the subsidy and the producer of the eventually countervailed product, may not be the same.  In 
such a case, there is a direct recipient  of the benefit—the producer of the input product.  When 
the input is subsequently processed, the producer of the processed product  is an indirect 
recipient  of the benefit—provided it can be established that the benefit flowing from the input 
subsidy is passed through, at least in part, to the processed product.  Where the input 
producers and producers of the processed products operate at arm's length , the pass-through of 
input subsidy benefits from the direct recipients  to the indirect recipi ents downstream cannot 
simply be presumed; it must be established by the investigating authority.  In the absence of such analysis, it cannot be shown that the essential elements of the subsidy definition in 
Article 1 are present in respect of the processed product .  In turn, the right to impose a 
countervailing duty on the processed product for the purpose of offsetting an input subsidy, would not have been established in accordan ce with Article VI:3 of the GATT 1994, and, 
consequently, would also not have been in acco rdance with Articles 10 and 32.1 of the SCM 
Agreement.  (Emphasis in original
)