WORLD TRADE  
ORGANIZATION  TN/RL/W/192 
23 November 2005 
 (05-5524) 
Negotiating Group on Rules Original:   English 
  
 
ALLOCATION OF SUBSIDY BENEFITS 
 
Paper from Brazil
 
  
 The following communication, dated 15 November 2005, is being circulated at the request of 
the Delegation of Brazil.  
_______________ 
 
 
I. INTRODUCTORY COMMENTS
1 
1. This paper comments on the summary paper by the United States on when and how to 
allocate subsidy benefits over time.2  In particular, we focus on how the US position relates to rights 
and obligations under Part III of the Agreemen t on Subsidies and Countervailing Duties (“SCM 
Agreement”).  Specifically, we discuss whether, in  the context of the multilateral disciplines covering 
serious prejudice:    
 (a) the approach of allocating subsidy benefits  used under Part V of the SCM Agreement should 
extend to other parts of the SCM Agreement;  and 
  
(b) the effects
 of subsidies should be viewed as always  coincident in time with the benefits  from 
subsidies.   
 
II. DISCUSSION 
(a) Should the allocation of subsidy benefits be required in serious prejudice proceedings of 
Part III? 
  
2. The US summary paper seems to suggest  th at specific subsidy allocation rules should be 
applicable both  to countervailing duty investigations unde r Part V of the SCM Agreement and to 
dispute settlement proceedings under Parts II and III of the SCM Agreement.  Brazil disagrees with 
the United States and proposes to discuss the practical  and legal issues of extending any obligation to 
precisely allocate subsidy benefits into the area of multilateral subsidy remedies.  We are of the view 
that the advantages or disadvantages of doing so should be openly debated for the benefit of the 
Members.    
 
                                                     
 
 1 We reserve our rights to submit further contributions on the issues identified in this paper as well as 
on other aspects of the SCM Agreement. 
 2 Further Submission on When and How to Allocate Subsidy Benefits Over Time  (TN/RL/GEN/45). TN/RL/W/192 
Page 2  
 
 3. The precise quantification of the benefit confe rred by a subsidy is mandatory in the context of 
countervailing duty proceeding.  Such quantification is  necessary to calculate margins of subsidization 
individually for each exporter involved in order to a pply countervailing duties at a level reflecting that 
margin, or at a level below the margin, if the la tter suffices to offset the injury resulting from the 
subsidized imports.  
 
4. In the calculation of the amount of the bene fit, many investigating authorities categorize 
subsidies as “recurring” or “non-recurring”.  The benefits conferred by “recurring subsidies” are 
usually fully absorbed (“expensed ”) in the year of receipt, whereas the benefits from “non-recurring 
subsidies”, normally associated with the acquisition of  fixed assets, are “allocated over time”;  that is, 
distributed to the year of receipt and subsequent years. 
 5. The calculation of the amount of the subsidy
 is governed by Article 14 of the SCM 
Agreement, which deals exclusively with m easures applied pursuant to a countervailing duty 
investigation under Part V.  The question is  then whether precisely calculating the amount  of the 
subsidy is necessary in subsidies disputes under Part III of the SCM Agreement, which addresses 
subsidies causing “adverse effects,” including “serious prejudice”.  6. In this respect, we re call that the Appellate Body
2 concluded that, under Article 6.3(c) of 
Part III of the SCM Agreement, there is no requiremen t to calculate the precise amount of the subsidy.  
In particular, the Appellate Body stated: 
 
{T}he apparent rationale for Part III differs from that for Part V of the SCM Agreement .  Under Part V, the amount of the subsidy must be calculated 
because, under Article 19.4 of the SCM Agreement and Article VI:3 of the 
GATT 1994, countervailing duties cannot be levied in excess of that amount.  In 
contrast, under Part III, the remedy envisaged under Article 7.8 of the SCM 
Agreement  is the withdrawal of the subsidy or the removal of the adverse effects.  
This remedy is not specific to individual co mpanies.  Rather, it targets the effects of 
the subsidy more generally.  Article 6.3(c)  thus goes in the same vein and does not 
require a precise quantification of the subsidies at issue  (emphasis added).3  
7. The Appellate Body’s statement is part of a broader discussion on what should be the focus of 
a serious prejudice investigation.  The Panel in US-Cotton4 correctly stressed that  the analytical focus 
should ensure consistency between the nature of the analysis it carries out and the nature of the 
remedy.  More concretely, the investigation s hould provide the necessary information on which to 
base the application of the remedy, i.e., removal or w ithdrawal of the adverse effects of the subsidy.  
The identification of the adverse effects of the subs idy depends on an evaluation of how and to what 
extent the subsidy adversely affects trade in the product under investigation.  Such evaluation should 
be a comprehensive one, taking into account the st ructure, design, and operation of the subsidy.   
Therefore, the focus of the adve rse effects/serious prejudice analysis under Article 6.3 of the SCM 
Agreement is not limited to a quantitative asse ssment, but also includes qualitative factors.   
 
8. The additional consideration of qualitativ e factors does not mean, however, that the 
quantitative dimension of the granted subsidy is not  also a relevant factor in evaluating serious 
prejudice, but precise quantification is not a sine qua non requirement.  
                                                     
 
 3 United States - Subsidies in Upland Cotton , WT/DS267/AB/R, Appellate Body Report, adopted 
21 March 2005, para. 464.  
 4 The Appellate Body upheld all the panel’s rulings re lated to Article 6 of the SCM Agreement.  On the 
issue of the magnitude of the subsidies, it observed that the panel “could have been more explicit and specified 
what it meant by large amounts” (paras. 461-468).  TN/RL/W/192 
 Page 3 
 
 
 9. The Panel in US - Cotton  found support for its conclusion in the text of numerous provisions 
of  Part III of the SCM Agreement, including Articles 7.2, 6.3, and 7.8.5 
  10. In addition, the Panel noted that an excessi ve quantitative focus under Part III would impede a 
finding of serious prejudice in situations where ef ficiently applied small subsidies have a potent 
effect, in terms of guaranteeing an incremental competitive edge to the subsidized product and 
causing adverse effects, be it in the form of price depression, price suppression, or the displacement of 
exports.  The Appellate Body confirme d this interpretation, observing that 
 
“the size of a subsidy is only one of the factors that may be relevant to the 
determination of the effects of a challe nged subsidy. A panel needs to assess the 
effect of the subsidy taking into account all relevant factors.”
6 
(b) Should the effects  of subsidies, in serious prejudice proceedings, be viewed as always 
coincident in time with the benefits  from subsidies? 
 11. Another question that the United States has not  fully addressed in its submission is whether 
the effects
 of subsidies should be viewed as co -existing in time with the benefits  from subsidies.  The 
core issue in this regard is whether one can as sume there is a “coincidence in time” between the 
benefits and the effects of subsidies.  If so, then bo th the benefits and the effects of recurring subsidies 
would be limited to the year of receipt.  Likewi se, if the benefits of non-recurring subsidies were 
spread over the year of receipt and subsequent years, so would the effects of non-recurring subsidies.  
This approach, however, begs the obvious practical question of how to test for how much longer the 
effects of subsidies last than the benefits of such subsidies.  12. Brazil agrees with the Panel in US - Cotton  that, given the mainly qualitative focus of a 
serious prejudice investigation, one cannot prejudge th e effect of the subsidy by automatically relying 
on an a priori diagnosis, supported by a fixed calc ulation of subsidies and corresponding effects.  
Indeed, Article 6 of the SCM Agreement calls fo r a reasoned and  adequate case-by-case assessment 
of the concrete interplay between the structure, design, operation, and magnitude of the programmes 
that may result in serious prejudice in terms of items a) through d) of Article 6.3. 
 
13. An example of a recurring subsidy with medium  or long terms effects would be a programme 
of price or income support, with regular disbur sements, which guarantees a high level of profitability 
and/or robust cash flow to the receiving company.   Such a programme would permit, for example, 
substantial capacity expansion.  14.  The Panel’s findings in US - Cotton  were confirmed by the Appellate Body. In the appeal, the 
United States argued that the effects of recurring subsid ies were limited to the year in which they were 
“expensed”.  While the Appellate Body recognized that the answers to this question may depend on 
the nature of the subsidy and the product in ques tion, it found no textual support for the US position. 
In particular, the Appellate Body stated: 
                                                     
 
 5 For example, Article 7.1 of the SCM Agreement, which sets to motion the consultation phase, the first 
step leading to the possible establishmen t of the panel, calls for  an examination of  “the existence and nature” of 
the subsidy as the basis for a request for consultations. There is no mention of “amount”.     Article 6.3 focuses on the effect of  the subsidy, not specifically on its magnitude.  Moreover, the lapsed 
Article 6.1(a), which contains a pr esumption of serious prejudice based on quantitative thresholds, may be 
rebutted as a result of a broader qualita tive assessment based on Article 6.3. 
Article 7.8, the remedy provision that requires the Member granting or maintaining the subsidy to “take 
appropriate Steps to remove the advers e effects or withdraw the subsidy“, do es not necessarily mean that there 
is a requirement to limit the conferred amount.  
6 United States - Subsidies in Upland Cotton , WT/DS267/AB/R, Appellate Body Report, adopted 
21 March 2005,.paragraph  461. TN/RL/W/192 
Page 4  
 
  
“We see nothing in the text of Article 6.3( c) [of the SCM Agreement] that excludes 
a priori  the possibility that the effect of a "recurring" subsidy may continue after the 
year in which it is paid.  Article 6.3(c) d eals with the "effect" of a subsidy, and not 
with the financial accounting of the amount of the subsidy” (footnote omitted).
7   
15. While recognizing that whether the effects of a recurring subsidy may continue after the year 
in which it is paid is a factual issue to be decide d in each dispute, Brazil agrees with the Appellate 
Body that there is no legal requirement that the eff ect of the subsidy be coincident in time with the 
benefit.  If the United States intends to imply othe rwise in its paper, then Brazil disagrees with the 
United States.    
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 7 United States - Subsidies in Upland Cotton , WT/DS267/AB/R, Appellate Body Report, adopted 
21 March 2005, para. 476.