WORLD TRADE  
ORGANIZATION  TN/RL/GEN/45 
3 June 2005 
 
 (05-2194) 
Negotiating Group on Rules Original:   English 
  
 
FURTHER SUBMISSION ON WHEN AND HOW 
TO ALLOCATE SUBSIDY BENEFITS OVER TIME  
  
Paper from the United States
 
 
 
 The following communication, dated 27 May 2005, is being circulated at the request of the Delegation of the United States.   The submitting delegations has requested that  this paper, which was submitted to the 
Rules Negotiating Group as an informal document (JOB (05)/87), also be circulated as a formal 
document.  
_______________
 
 
 
 The United States previously submitted papers for informal discussion on the questions of 
when and how to allocate subsid y benefits over time in the c ontext of both multilateral subsidy 
disciplines and remedies as well as countervailing du ties.  One paper examined how to distinguish 
between subsidies whose benefits are fully realized ("expensed") in a single year and subsidies whose 
benefits are "allocated" over more than one year.1  Another paper continued the discussion by 
considering how to determine an appropriate allocation period over wh ich allocable subsidy benefits 
should be distributed.2  A third paper presented one possible m odel for calculating the benefit from an 
allocable subsidy in any given year.3  This paper reviews and further elaborates on these concepts.  
The United States reserves the right to submit furt her elaboration on the concepts and suggested 
changes contained in these papers.  DISCUSSION 
 
 The United States has previously noted that, a lthough it is generally accepted that the benefit 
from certain types of subsidies should be spr ead over time, the Agreement on Subsidies and 
Countervailing Measures (Subsidies Agreement) is s ilent concerning when or how this should be 
done.  Alternative approaches to these questions can result in extreme differences in the calculated 
subsidy benefit allocated to a given year, thereb y making it imperative that the Rules Group clarify 
and improve the rules in this area.  Some efforts have been made by Members, over the decades since 
the inception of the GATT, to develop more spec ific guidelines for allocating subsidy benefits.
4  The 
most recent, concerted effort in this regard was by the Informal Group of Experts to the Committee on 
Subsidies and Countervailing Measures (IGE), which i ssued a list of recommendations regarding, 
                                                      
1 TN/RL/GEN/17, 15 September 2004. 
2 TN/RL/GEN/12, 14 July 2004. 
3 TN/RL/GEN/4, 14 July 2004. 
4 TN/RL/GEN/12, 14 July 2004, at 1-2. TN/RL/GEN/45 
Page 2  
 
 inter alia,  when and how to allocate subsidy benefits over time.
5  Much of what the United States has 
proposed to date, and further elaborates below, on this  topic builds on or is consistent with the general 
recommendations of the IGE.6 
 
 Before providing the specifics of a possible appro ach to this issue, we would like to recall 
three points we have suggested that Members keep in  mind when taking up this topic.  These are:  
(1) any methodology for determining which subsid y benefits should be allocated, and how such 
allocation should be performed, must strike a r easonable balance among the goals of predictability, 
accuracy, transparency, and administrability;  (2) any subsidy allocation period is only an 
approximation of the actual duration of the subsidy benefit;  and (3) it can not be determined in 
advance whether a particular approach taken in de termining the duration of a subsidy benefit will be 
more advantageous to the complainant or the res pondent in the context of a potential countervailing 
duty or dispute settlement proceeding; therefore, the issue should be addressed purely on a technical 
basis.7  Moreover, we would like to reiterate the point that the questions of when and how to allocate 
subsidy benefits over time are more than minor , technical calculation issues relating only to 
countervailing duty remedies; rather, in our view, th ese issues have possible broader implications for 
WTO subsidy disciplines and dispute settlement in cluding, as most recently noted by one Member, 
the remedy of subsidy withdrawal.8 
 
 We suggest that the first step in determining th e amount of a subsidy benefit in any given year 
would be to categorize the subsidy as either "non-recurring" or "recurring", where non-recurring subsidy benefits are allocated over more than one year and recurring subsidy benefits are deemed to 
benefit the recipient solely in the year of receipt.
9  This would be done for both theoretical and 
practical reasons.  The theory behind distinguishin g and allocating non-recurring subsidies is that 
these types of subsidies, by their nature, generally  are infrequent, exceptional and linked more directly 
to the longer-term financial structure ( i.e., debt and equity) and fixed assets ( e.g., plant and 
equipment) of the firm and, therefore, continue to  benefit the firm beyond the year of receipt.  For 
example, where the government provides a grant to purchase machinery and equipment, the firm will 
continue to benefit from the use of this e quipment throughout that asset’s useful life.10  Recurring 
subsidy benefits, on the other hand, are normally rela ted to or consumed in a firm ’s regular/ongoing 
production and sales activity.  Ongoing corporate inco me tax exemptions, for example, mainly have 
an impact on annual after-tax profits and are not a primary factor in the firm’s longer-term productive 
capability.     From a practical point of view, since non -recurring subsidies are generally (though not 
necessarily) larger in size than recurring subsidies, it may be inappropriate to concentrate the entire 
amount of the subsidy benefit in just one year.  Fu rthermore, expensing small, recurring subsidies in 
the year of receipt reduces the burden on subs idy recipients involved in countervailing duty 
proceedings, for example, in that they do not have to track and report numerous small, ongoing 
subsidies dating several years prior to  the period being investigated.    
 
                                                     
 
5 G/SCM/W/415/Rev.2, 15 May 1998 ("IGE Report").  All WTO Members were invited to nominate 
representatives to the IGE.  Experts, serving in their personal capacities, from Australia, Brazil, Canada, Japan, 
Korea, Mexico, the European Communities and the United States participated.  Although the mandate of the 
IGE was to develop recommendations for clarifying certain provisions under Annex IV, the recommendations ultimately developed are also relevant to other provisions of the Subsidies Agreement. 
6 We also note that other Members have pointed to the IGE report as a starting point for consideration 
of further development of subsidy benefit calculation rules.  See, for example, TN/RL/W/85, 30 April 2003.    
7 For example, in the countervailing duty co ntext, longer allocation periods do not, per se , necessarily 
benefit one party over another. 
8 TN/RL/GEN/35, 23 March 2005. 
9 IGE Report, at 3. 
10 See also, TN/RL/W/19, 7 October 2002.  TN/RL/GEN/45 
 Page 3 
 
 
  To facilitate consistency and predictability in dispute settle ment proceedings or in the 
administration of countervailing dut y proceedings, and consistent w ith the IGE recommendations, this 
Group should consider adopting illust rative lists of types of subsidies that, normally, would be 
considered to be recurring or non-recurring.11  It has been the United States’ experience, for example, 
that the following subsidies normally provide benefits that are best characterized as recurring: direct 
tax exemptions and deductions; exemptions from an d excessive rebates of indirect taxes or import 
duties; provision of goods and services for less than  adequate remuneration; price support payments; 
discounts on electricity, water, and other utilities; fre ight subsidies; export promotion assistance; early 
retirement payments; worker assistance; worker trai ning; wage subsidies; and upstream subsidies.  
Subsidies that have normally provided non-recurring benefits include: equity infusions, grants, plant 
closure assistance, debt forgiveness, coverage fo r an operating loss, debt-to-equity conversions, 
provision of non-general infrastructure, a nd provision of plant and equipment.   
  Although such lists normally would be practical  as well as accurate, they should remain 
illustrative only.  Parties to a subsidy-related dis pute should be able to make arguments based on the 
unique factual circumstances of a particular case.  Any ultimate finding of whether a particular 
subsidy is appropriately characterized as recurring or non-recurring could be ma de with reference to 
the following three criteria, reflecting the theore tical and practical consid erations noted above:  
(1) whether the subsidy is exceptional in the sense  that the recipient cannot expect to receive 
additional subsidies under the same programme on an  ongoing basis from year to year;  (2) whether 
the subsidy required or received the govern ment’s express authorization or approval ( i.e., receipt of 
benefits is not automatic);  or (3) whether the subsidy was provided for, or linked to, the capital 
structure or capital assets of the firm.    Once an allocable (non-recurring) subsidy has been identified, the logical next step in 
determining the subsidy benefit in a given year would be to decide upon the number of years over 
which the subsidy benefit should be spread.  Cons istent with the IGE recommendations, we believe 
that this period should be based on the average of  the useful lives (AUL) of all the depreciable, 
physical assets of the subsidy recipient.
12  Such a period is a reasonable approximation of the duration 
of the benefit that a subsidy recipient enjoys, an d is the most practical approach in terms of 
application.13  For example, if a government provides a grant to a chair manufacturer to purchase 
electric saws and wood-carving equipment, it is reasonable to assume that the chair producer 
continues to benefit from that subsidy throughout the life of the equipment.  
  However, the AUL of all a subsidy recipient’s depreciable, physical assets is not necessarily a readily identifiable number, and calculating such a figure can be complex and controversial given that 
the different depreciation periods of  numerous assets generally must be  taken into account.  This leads 
to the threshold question of whethe r such an AUL should be based on the actual (and, therefore, ever-
fluctuating) financial position of the individual subsidy recipient, or instead on some other objective 
measurement or standard.  Although the use of company-specific AUL data might appear preferable in terms of accuracy, there are common instances wher e this may not be the case and, in fact, there 
can be a considerable downside to relying on company-specific data.  
 One very common situation where individual  company-specific data may not be an 
appropriate basis for determining the AUL of asset s is where a company bases its asset depreciation 
schedules on estimated asset lives that are based on other financial considerations and not on the 
actual expected operating life of the asset.  Similarly, it could be problematic to use company-specific 
                                                     
 
11 Such lists are only relevant to those government actions that meet the definition of a subsidy under 
Article 1 and are specific under Artic le 2 of the Subsidies Agreement. 
12 IGE Report, at 5. 
13 An exception should be made for subsidized long-term loans, where the benefit could be allocated 
over the life of the loan given that the duration of the loan (and its benefit) is a fixed and known period. TN/RL/GEN/45 
Page 4  
 
 data where the company’s depreciation expenses are based on an accelerated depreciation 
methodology.
14 or when a company has written down its as sets.  Calculating a company-specific AUL 
can also prove unduly burdensome, often requiring the subsidy recipient to perform an analysis and 
provide documentation at a level of detail that may be difficult, costly and time consuming.  
Generally, the United States has found that calculating company-specific AULs can very often 
produce inconsistent, unpredictable results.   
  Given the theoretical preference for relying on company-specific data, but the practical 
problems that such data can entail, we would suggest  a flexible approach with regard to selection of 
AULs that allows for the possibility of basing the determination on either the company-specific data 
or an industry standard value, depending on the facts of a particular situation.  We think the best 
approach would be to start with an initial presump tion that the allocation period for a subsidy benefit 
is the AUL of depreciable physical assets for the industry concerned.
15  
  Any industry standard value used should reasona bly reflect the actual AUL of the industry.  
Specifically, it should the product of a system that  was set up to determine the actual AUL of 
industries in the country, that is based on reliable surveys and/or studies used to gather information 
from companies on their AULs, and that ensures the accuracy of any reported information and of any 
calculations performed.    However, if it is clear in the context of a given WTO subsid ies dispute or countervailing duty 
proceeding that the presumed industry AUL does not reasonably reflect the actual AUL of the 
particular assets of the subsidy recipient, the act ual company-specific AUL could be used as the basis 
for allocating subsidy benefits.  This situation, in  turn, raises additional complexities.  Because firms 
often do not calculate the "actual" AUL for all assets in the normal course of business, this Group should give consideration to deve loping a straightforward, practical approach to calculating company-
specific AULs based on information generally cont ained in a company’s regular accounting records.
16  
  The allocation period ( i.e., length of the benefit stream), once identified, logically becomes a 
key variable in any model for determining the benefi t in a given year of an allocable (non-recurring) 
subsidy.  A second key variable is the interest or discount rate used to take  into account the time value 
of money (discussed in further detail below).  Unde r the US allocation methodology, for example, the 
values for these two variables, along with the face valu e of the subsidy, are entered into an established 
subsidy allocation formula that calculates the amount of  benefit allocable to any given year within the 
allocation period.  As this formula was discussed in detail in TN/RL/GEN/4 (14 July 2004), and is 
fairly complex, we will not reproduce it here.  Howe ver, we would like to reiterate some basic points 
about the mechanics of subsidy allocation genera lly, and possible formulas, in particular.  
 
                                                     
 
14 As discussed in greater detail in document TN/RL/GEN/12 (14 July 2004), averaging the expected 
useful lives of all a firm’s depreciable physical assets involves a calculation that takes into account total annual 
depreciation charges.  A company’s annual total depr eciation expense can be significantly affected (and 
distorted) by the choice of depreciation methodology ( e.g., accelerated versus straight line depreciation). 
15 This immediately raises the question of whic h industry AULs should be used: those of the 
investigating Member in a countervailing duty investigation (or the complaining Member in a multilateral 
dispute) or, rather, those of the opposing Member?  There may be good arguments on both sides. 
16 One such approach could be as follows.  First, the annual average gross b ook value of the firm’s 
depreciable renewable physical assets (which is usually based on historical cost) would be cumulated over an 
appropriate period of historical data ( e.g., 10 years).  The average gross book value for a given year can be 
determined by adding the gross book value in the beginning of the year and the gross book value at the end of 
the year, and then dividing the sum by  two.   Next, the firm’s annual ch arges to accumulated depreciation for the 
same time period would be summed.  Finally, the sum of the annual average gross book values would be divided by the sum of annual depreciation charges, resulting in an AUL for the company’ s stock of all physical assets 
during the historical period.  TN/RL/GEN/45 
 Page 5 
 
 
  In structuring a methodology, it may be helpful to visualize the allocation of subsidy benefits 
as a line on a graph.  The x-axis of the graph repr esents each year within the allocation period and the 
y-axis represents the corresponding annual allocated benefits.  Any method of allocating benefits over 
time essentially has three facets:  the shape of the benefit stream, the length of the benefit stream 
(already discussed in detail above), and the discount rate. 
 
 The shape of the benefit stream, i.e., the slope of the line in the visualized graph, can be flat, 
upward sloping, or downward sloping.  A flat line imp lies that the subsidy recipient benefits in equal 
annual increments over time.  An upward sloping line indicates that the recipient receives greater benefit from the subsidy in the later years of th e allocation period.  A downward sloping line suggests 
that the level of annual benefit declines over time.  Different arguments can be made as to what the 
correct shape or slope of the benefit line is, and it may not be necessary for this Group to adopt a rigid 
rule one way or the other.  That said, we note th at the US model assumes that the subsidy recipient 
receives greater benefits in the early y ears and thus has a downward sloping line. 
 
 The effect of the discount rate is to set the hei ght of the flat benefit stream or the slope of the 
slanted stream of benefits.  Once it is accepted that  the benefit from a subsidy should be allocated over 
time, use of a discount rate is necessary to account for the time value of money.
17  More precisely, the 
incorporation of a discount rate en sures that the net present value of the annual benefits spread over 
time is equal to the face value of the subsidy provided  in the year of bestowal.  The result is that the 
real benefit provided by the original subsidy is de termined, in constant grant-year dollars, regardless 
of the period over which the benefit is allocated.  We  believe that the appropriate discount rate to use 
in most cases would be the subsidy recipient’s long-term cost of funds.  
SUMMARY OF SUGGESTED CHANGES 
  Ideally, this Group would reach a consensus on a single methodology or set of guidelines, to 
be employed by all Members and dispute settlement  panels, for determini ng when and how subsidy 
benefits should be expensed or a llocated.  We have provided concre te, specific suggestions above for 
how such a methodology or guidelines could be struct ured.  At a minimum, however, any new rules in 
this regard should recognize the following general principles:  
 (1) "Recurring" subsidies ( e.g., those that are not exceptional, or linked to the capital 
assets or capital structure of the recipien t firm) only benefit the subsidy recipient in 
the year of receipt. "Non-recurring" subs idies benefit the subsidy recipient 
throughout the allocation period. 
 
 (2) The allocation period for non-recurring s ubsidies should normally be based on the 
AUL of depreciable, physical assets for the relevant industry or firm. 
  (3) Any method for allocating subsidy benefits  over time must reflect the time value of 
money. 
 
 (4) Members shall notify the particular s ubsidy allocation methodology they follow in 
countervailing duty proceedings and explain the rationale for any subsequent deviation from that methodology. 
 
                                                     
 
17 A fundamental principle of finance is that $1,000 received today, fo r example, is worth more than 
$1,000 received one year from today, even though the face values of the payments are the same.  We firmly 
believe that this basic, well-recognized principle of th e time value of money must be incorporated into any 
method of subsidy allocation in order for the measurement of subsidy benefits to be meaningful. TN/RL/GEN/45 
Page 6  
 
  We also note that one additional, practical question that arises in considering this issue is how 
(and where) any such new rules or guidelines would be  incorporated into the Subsidies Agreement.  
One logical place in which to add such rules is Article 14, which provides guidelines for calculating 
the subsidy benefit to the recipient.  Althoug h Article 14 only pertains to countervailing duty 
remedies, several dispute settlement  reports have applied the principles of Article 14 to dispute 
settlement proceedings under Parts II and III of the Subsidies Agreement.
18  This raises the broader 
issue of whether specific subsidy calculation rul es should be applicable to dispute settlement 
proceedings under Parts II and III of the Subsidies Agreement.  The United States believes that much, 
if not all of Article 14 should also be relevant to Parts II and III of the Subsidies Agreement, but 
recognizes that this is an issue worthy of further deliberation and discussion.    
 
__________ 
 
 
                                                      
18 See, e.g., Appellate Body Report, Canada - Measures Affecting th e Export of Civilian Aircraft , 
WT/DS70/AB/R; Panel Report, Korea - Measures Affecting Trade in Commercial Vessels , WT/DS273/R, 
para. 7.420.