WORLD TRADE  
ORGANIZATION  TN/RL/GEN/95 
19 January 2006 
 
 (06-0239) 
Negotiating Group on Rules Original:   English/ 
 French 
 
 
 
ARTICLE 2 – PROFITABILITY TEST AND COST ALLOCATIONS 
 
Paper from Canada  
 
 
 The following communication, dated 18 January 2 006, 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 
Negotiation Group as an informal document (JOB(06)/5 ), also be circulated as a formal document. 
 
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  In a previous submission to this Group
1, Canada identified several specific issues related to 
the calculation of dumping margins that warrant clarification and improvement, including the 
provisions of the Anti-Dumping Agreement (ADA) on “o rdinary course of trade” and cost allocations.  
With this submission, Canada elaborates on these issues and proposes textual changes to clarify and 
improve these concepts in the ADA.   Profitability Test 
 
Issue
 
  Article 2.1 introduces the concept of “ordin ary course of trade” with the sentence:  
 
For the purpose of this Agreement, a product is to be considered as being dumped, 
i.e. introduced into the commerce of anoth er country at less than its normal value, if 
the export price of the product exported fr om one country to another is less than the 
comparable price, in the ordinary course of  trade, for the like product when destined 
for consumption in the exporting country. 
Article 2.2.1 elaborates on the concept of “ordinar y course of trade” by permitting authorities to treat 
certain home market sales or third-country sales as  not being in the “ordinary course of trade by 
reason of price” and, as a consequence, to disregard those sales in determining normal value.  The conditions under which this can be  done are together generally known as the “profitability test”. 
 
 In TN/RL/W/47, Canada noted that the current pr ofitability test has particular implications for 
those industries whose product pricing is especially sensitive to shifts in supply and demand and for 
agricultural and other commodity sectors whose producer s are typically “price takers”.  Specifically, 
                                                     
 
1 TN/RL/W/47. TN/RL/GEN/95 
Page 2  
 
  the profitability test provides that when sales below cost are made in substantial quantities
2, normal 
values may be determined on the sole basis of those individual transactions that are not below cost.  
Accordingly, in situations where, for example, there is substantial price volatility, the application of 
the profitability test often results in normal valu es that reflect higher price levels that would not 
normally be sustainable in the market and, th erefore, do not reflect market realities.   
 
 Canada considers that straightforward modifi cations to the profitability test would address 
this issue. Authorities should be allowed to disreg ard transactions because they are not in the ordinary 
course of trade by reason of price only if, over an extended period of time, the weighted-average 
selling price of the transactions under consideration is  below the weighted-average costs, regardless of 
the quantities of transactions that may have been ma de individually at prices below cost.   In such 
situations, the transactions under consideration shou ld be considered collectively as “not in the 
ordinary course of trade by reason of price”, with the investigating authorities precluded from 
determining normal values on the basis of any of those transactions.  Rather, the investigating 
authorities could resort to constructed normal value in such cases. 
 
 That said, Canada notes that some Members have  proposed that Article 2.2.1 be clarified to 
require that the profitability test only be conducted on the basis of all sales of the domestic like product as a whole, and not any sub-groups of these sales
3.  In Canada’s view, such a modification 
could raise concerns for authorities and exportin g countries alike, for instance when the mix of 
exports differs significantly from the mix of sales of the like product as a whole in the domestic 
market.  Therefore, Canada is not proposing an y changes to that aspect of Article 2.2.1.  
 Proposed Text
 
  Canada proposes that current Article 2.2.1 of  the ADA, and its footnotes, be replaced by the 
following:   
 
2.2.1   Sales of the like product under consideration fo r the determination of the normal value, either 
made  in the domestic market of  the exporting country or sales made  to a third country at prices below 
per unit (fixed and variable) costs of production plus administrative, selling and general costs  may, on 
a collective basis only,  be treated as not being in the ordinary course of trade by reason of price and 
may, on that basis,  be disregarded in determining normal value only if the authorities3 determine that 
such sales are made within an extended period of time4 at a weighted average selling price that is 
below weighted average per unit fixed and variable  costs of production plus administrative, selling 
and general costs. in substantial quantities5 and are at prices which do not provide for the recovery of 
all costs within a reasonable period of time.  If prices which are below per u nit costs at the time of sale 
are above weighted average per unit costs for the period of investigation, such prices shall be considered 
to provide for recovery of costs w ithin a reasonable period of time.  
 
3 When in this Agreement the term "authorities" is used, it shall be interpreted as meaning authorities at an 
appropriate senior level. 
4 The extended period of time should normally be one year, but shall in no case be less than six months.  
5  Sales below per unit costs are made in substantial quantitie s when the authorities establish that the weighted 
average selling price of the transactions under considera tion for the determination of the normal value is below 
the weighted average per unit costs, or that the volume of sales below per unit costs repres ents not less than 20 
per cent of the volume sold in transactions under consideration for the determination of the normal value.  
 
                                                      
2 Footnote 5 of the ADA provides two ways to test if sales at a loss are made in substantial quantities: if 
the weighted-average selling price of the transactions unde r consideration is below the weighted-average cost of 
those transactions, or if the volume of sales at a loss is 20 per cent or more of the transactions under consideration. 
3 TN/RL/GEN/9.  TN/RL/GEN/95 
 Page 3 
 
 
  Cost Allocations 
 
Issue  
  In various aspects of the calculations to de termine whether a product under investigation is 
being dumped, authorities need to make allocations of  costs incurred to a specific product or products.  
In this context, Article 2.2.1.1 directs authorities to “… consider all available evidence on the proper 
allocation of costs….”  In many, if not most, cases, these allocations are not regularly made outside of the context of a dumping investigation, as anti-dum ping investigations normally require a greater 
degree of detailed allocations than either regular fi nancial or management acc ounting systems contain.  
Exporters or producers whose sales are being examined rarely allocate all costs (fixed and variable) 
on the detailed product-level basis that is required for a thorough and complete dumping 
determination.  However, the second sentence of Ar ticle 2.2.1.1 appears to suggest that significance 
should be ascribed to whether or not the allocations  in the final clause of that sentence have been 
utilized by an exporter or producer, with the phrase:  
 
 “…provided that such allocations have been histor ically utilized by the exporter or producer, in 
particular in relation to establishing appropri ate amortization and depreciation periods and 
allowances for capital expend itures and other development costs. ”   
 Canada believes that this language  in Article 2.2.1.1 should be eliminated so that authorities are 
simply directed to consider all available evidence on the proper allocation of costs, including evidence 
provided by respondents.  Canada considers that this  would make clear that authorities are required to 
consider the individual circumstances of each exporte r or producer under investigation, and take into 
account the evidence submitted by it in determining the appropriate amounts of costs to be allocated 
to a specific product.  This would not, of course, prevent authorities from taking into account other 
available evidence. 
 Proposed Text
 
  Canada proposes that Article 2.2.1. 1 of the ADA be modified as follows: 
 
2.2.1.1 For the purpose of paragraph 2, costs shall normally be calculated on the basis of records kept 
by the exporter or producer under investigation,  provided that such records are in accordance 
with the generally accepted accounting principl es of the exporting country and reasonably 
reflect the costs associated with the production and sale of the product under consideration.  
Authorities shall consider all available eviden ce on the proper allocation of costs, including 
that which is made available by the exporter or producer in the course of the investigation 
provided that such allocations have been historical
ly utilized by the exporter or producer, in 
particular in relation to establishing appropr iate amortization and de preciation periods and 
allowances for capital expenditures and other development costs .  Unless already reflected in 
the cost allocations under this sub-paragraph, co sts shall be adjusted appropriately for those 
non-recurring items of cost which benefit fu ture and/or current production, or for 
circumstances in which costs during the period of investigation are affected by start-up 
operations.[footnote 6 to remain unchanged] 
 
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