TN/RL/W/232 
Page B-1 
 
  
 
     
 
    
 
    
 
ANNEX B – SUBSIDIES AND COUNTERVAILING MEASURES  
   TN/RL/W/232
 Page B-3Chairman's Text Delegations' Comments on Chairman's Text 
Benefit   
____________________________ 
 2 A benefit is conferred when the terms of the financial contribution are more 
favourable than those otherwise commercially available to the recipient in the market, 
including, where applicable, as provided for in the guidelines in Article 14.1.  Concerning footnote 2 to the Chairman's text, delegations generally supported inclusion 
of a footnote clarifying the concept of "benefit"  and referring to the relevant 
provisions of Article 14.  However, questions were raised whether the reference should be a strict requirement to follow the provisions of that Article, or more in the nature of 
guidelines or relevant context.  Some dele gations considered that the drafting of the 
footnote could be improved, including by replacing the term "commercially available on the market", which in their view constitute d a two-part test, with language referring 
to a "market-determined" price.  Questions  were raised as to the consistency of 
terminology in the footnote with terminolog y elsewhere in the Ag reement as to where 
to look for a benchmark – in the country of provision, in the territory of the Member, 
on the market, and similar phrases, and whether it would be useful to  harmonize these 
references as much as possible.  Questions we re also raised as to whether the reference 
to "terms" of a financial contribution could be applied to all types of subsidies, as a 
market comparator might not exist for certain financial contributions. 
Regulated Prices & Benchmark Estimation  
2.1 In order to determine whether a subsidy, as defined in paragraph 1 of 
Article 1, is specific to an enterprise or in dustry or group of enterprises or industries 
(referred to in this Agreemen t as "certain enterprises") within the jurisdiction of the 
granting authority, the following principles shall apply: 
 
(c) If, notwithstanding any appearance of non-specificity resulting 
from the application of the principles laid down in subparagraphs (a) and (b), there are reasons to believe that the subsidy may in 
fact be specific, other factors may be  considered.  Such factors are:  
use of a subsidy programme by a limited number of certain enterprises, predominant use by cer tain enterprises, the granting of 
disproportionately large amounts of  subsidy to certain enterprises, 
and the manner in which discretion has been exercised by the granting authority in the decision to grant a subsidy.
4  In the case 
of subsidies conferred through the provision of goods or services 
at regulated prices, factors that may be considered include the 
exclusion of firms within the country in question from access to 
the goods or services at the regulated prices.  In applying this 
subparagraph, account shall be  taken of the extent of 
diversification of economic activities within the jurisdiction of the 
granting authority, as well as of the length of time during which 
the subsidy programme has been in operation. 
 
14.1 For the purpose of Part V, the any methods  used by the investigating 
authority to calculate the benefit to the r ecipient conferred pursuant to paragraph 1 
of Article 1 shall be provided for in the national legislation or implementing 
regulations of the Member concerned and its their application to each particular case The sponsor of the original proposal on dual pricing firmly supported the need for a 
provision on regulated prices  along the lines of the Chairman's text.  This delegation 
indicated that some of its industries risked going out of business if the problem was not 
addressed, and that if regulated prices conferred a benefit the countervailing remedy 
should be available.  A number of other delegations also generally favoured provisions 
along the lines of those found in the Chairman's text. These delegations indicated that 
regulated prices could give rise to subsidies and that they supported the general thrust of the proposed amendments on this point. 
 
Other delegations considered that the proposed amendments gave rise to concerns regarding developing Members' policy sp ace.  It was observed that developing 
Members had a legitimate interest in regulating prices for various objectives, including 
in the context of public utilities,  and that this did not necessar ily give rise to subsidies.  
It was noted that the proposals could force convergence between domestic and export 
prices and deny developing Members the comparative advantage arising from resource 
endowments.  
One delegation observed that it had been subject to repeated countervailing actions 
relating to regulated prices, as well as below-cost financing and external benchmarks, and that the Chairman's text and non-papers  on these issues were specifically targeted 
at practices addressed in these cases.  This  delegation considered that it was premature 
and unacceptable to include pr ovisions on these issues in the SCM Agreement.   
 
Delegations also raised a number of more technical points.  On Article 2.1(c), some 
delegations considered that the proposed am endments could treat a subsidy as specific 
if only one or a few companies were exclud ed from access to goods or services at a 
regulated price.  On Article 14.1(d), some delegations suggested that unregulated prices  TN/RL/W/232  
Page B-4  Chairman's Text Delegations' Comments on Chairman's Text 
shall be transparent and adequately explained.   Furthermore, any such methods  shall 
be consistent with the following guidelines: 
 
(d) the provision of goods or services or purchase of goods by a 
government shall not be considered as conferring a benefit unless 
the provision is made for less than adequate remuneration, or the purchase is made for more than adequate
 remuneration.   The  
adequacy of remuneration shall be determined in relation to 
prevailing market conditions for the good or service in question in the country of provision or purchase (including price, quality, 
availability, marketability, transportation and other conditions of 
purchase or sale).  Where the price level of goods or services 
provided by a government is regulated, the adequacy of 
remuneration shall be determined in relation to prevailing market 
conditions for the goods or services in the country of provision 
when sold at unregulated prices, adjusting for quality, availability, 
marketability, transportation and other conditions of sale;  
provided that, when there is no unregulated price, or such 
unregulated price is distorted beca use of the predominant role of 
the government in the market as a provider of the same or similar 
goods or services, the adequacy of remuneration may be 
determined by reference to the export price for these goods or 
services, or to a market-determined price outside the country of 
provision, adjusting for quality, availability, marketability, 
transportation, and other conditions of sale.  
 ________________________ 
 4 In this regard, in particular, information on the frequency with which applications 
for a subsidy are refused or approved and the reasons for such decisions shall  be considered. 
 might be distorted for reasons other than those identified in the text, and suggested a 
less specific formulation that could cover these situations. Other delegations noted that 
while the reference to external benchmarks reflected an Appellate Body ruling to some extent, the text allowed Members to jump directly to external benchmarks, and 
neglected the requirement that such benchmarks relate to prevailing market conditions 
in the country in question.  In response to this concern, several delegations submitted alternative non-papers contai ning language intended to more accurately reflect the 
jurisprudence.  While some delegations considered the proposed new language in one 
of the new papers to be a step in the right direction, one delegation considered that the new language actually deviated from and weakened existing jurisprudence. Various 
issues were also raised regarding the other new non-paper.  Numerous technical issues 
were raised regarding the meaning and implications of the Chairman^'s texts.  
With respect to benchmark estimation , one delegation expressed disappointment that 
its proposal (TN/RL/GEN/101/Rev.1) was not reflected in the Chairman's text.  This 
delegation submitted a non-paper that identified a number of possible change to its 
proposal. A number of delegations indicated that they were interested in further work 
on this proposal as they supported the basic concepts.  Regarding proposed footnote y, concerning the identification of benchmarks  where a long-term cap ital market does not 
exist in a developing country, some delegations suggested that this footnote should be 
applicable to all Members, not just devel oping Members.  Some questions were raised 
as to benchmarks based on the "international market", including how to avoid 
arbitrariness in identifying such benchmar ks, and how to ensure that any benchmark 
reflected the situation of the recipient.   Regarding proposed footnote z, some 
delegations considered that a mandatory list of factors for determining whether loans 
were comparable was too prescriptive.  The view was also expressed that the criterion 
that the loans to be compared be granted in the territory of the same Member was 
inappropriate.   
Role of Illustrative List & De facto Export Subsidies  
3.1 Except as provided in the Agreement on Agriculture, the following 
subsidies, within the meaning of Article 1, shall be prohibited: 
 
(a) subsidies contingent, in law or in fact5, whether solely or as one of 
several other conditions, upon export performance, including those 
illustrated in Annex  I6; 
 
________________________ 
5This standard is met when the facts dem onstrate that the granting of a subsidy, 
without having been made legally contingent upon  export performance, is in fact tied to actual 
or anticipated exportation or export earnings. Th e mere fact that a subsidy is granted to 
enterprises which export shall not for that reason alone be considered to be an export subsidy With respect to note 6 on the role of the Illustrative List , some delegations supported 
the Chairman's text as a useful codification of certain adopted panel decisions that an a 
contrario  reading of the Illustrative List was not permitted, while other delegations 
questioned the value of the proposed clarification and pointed out that the issue had not 
yet been pronounced on by the Appellate Body.  Concern was expressed by one Member that this footnote would increase the scope of the prohibited subsidy category.  
Issues were also raised about specific aspects of the drafting of the footnote. 
 One delegation expressed disappointment that its proposal on de facto export 
subsidies  (TN/RL/GEN/Rev.1) was not reflected in the Chairman's text.  This 
delegation explained that the elements of its proposal were that export propensity is 
relevant to, but should not be the sole r eason for, a determination of de facto export   TN/RL/W/232
 Page B-5Chairman's Text Delegations' Comments on Chairman's Text 
within the meaning of  this provision.  
 6The Mmeasures  referred to in Annex I as export subsidies shall be deemed to fall 
within paragraph (a).  The legal status of any measure not referred to in  Annex I as an export 
subsidy shall be determined on the basis of pa ragraph (a), and Annex I shall not be used to 
establish by negative implicatio n that a measure does not constitute an export subsidy within 
the meaning of that paragraph;  provided, how ever, that measures explicitly referred to in 
Annex I as not constituting prohibited export subsidies shall not be prohibited under this or 
any other provision of this Agre ement.  This footnote is wit hout prejudice to the operation of 
footnote 1.  
 contingency, and that panels should take a case-by-case approach to  this issue, taking 
into account the totality of th e evidence.  A number of delegations expressed concern 
over the proposed language "regardless of the level of export", either as being unnecessary or as implying that the level of exports was irrelevant.  One delegation 
supported that language.  Questions were raised as to how the totality of the evidence 
would be defined, how different factors in that evidence would be weighted, and whether an illustrative list of factors would be necessary if the proposed reference to 
"all relevant factors" were maintained.  The question also was raised as to what was 
added by the requirement to base determinations on an examination of all of the evidence, as the DSU already requires that  determinations be made on a case-by-case 
basis, taking into account the relevant evidence.   
Withdrawal of a Prohibited Subsidy  
4.7 If the measure in question is found to be a prohibited subsidy, the panel 
shall recommend that the subsidizing Member  withdraw the subsidy without delay.   
In this regard, the panel shall specify in its recommendation the time-period within 
which the measure must be withdrawn.  One delegation expressed disappointment that its proposal on withdrawal of a subsidy 
(TN/RL/GEN/115/Rev.1) was not reflected in the Chairman's text.  This delegation  
stated that its goal was to ensure that dispute settlement panels should give guidance on 
what constitutes "withdrawal", taking into account the nature  of the subs idy involved, 
and that it was not proposing retrospective, punitive remedies.  A number of delegations indicated that it would be useful to introduce clarification of the concept of 
withdrawal, and that they were willing to work further on the issue, but remained 
concerned over any provision that would require repayment of subsidies.  Some 
questioned the link with subsidy allocation in this context.   
Below Cost Financing  
____________________________ 
46Notwithstanding the above, a loan or loan guarantee by a government shall be 
deemed to confer a benefit where the provider institution incurs long-term operating losses on 
its provision of such financing as a whole.  The existence of such a bene fit shall be rebuttable 
by a demonstration that the particular financi ng at issue does not confer a benefit pursuant to 
paragraph (b) or (c), as applicable.  
 With respect to the issue of " below-cost financing " as addressed in footnote 46 of the 
Chairman's text, while certain delegations welcomed in principle the inclusion in the text of language addressing this issue, various delegations observed that the proposed 
footnote inappropriately focused on the cost to financial providers rather than on the 
benefit to the recipient. Several delegations considered that the fact that a lender was 
incurring long-term losses did not necessarily mean that the recipient of loans was 
receiving a benefit.  Other delegations note d that the focus of work should be on 
practices that increase long-term losses due to policy decisions by governments.  The 
proponent noted that discussion in the Group had evolved toward a focus on the 
borrower rather than the lender. 
 Two delegations submitted a non-paper containing concrete suggestions on alternatives 
to the footnote, focusing on the existence of  benefit in situations where there is long 
term government support of government financial institutions not independently 
operating on a commercial basis, and the ins titutions provide loans or loan guarantees 
or swap debt for equity in unequityworthy or uncreditworthy state enterprises.  These 
delegations emphasized the high thresholds and focused nature of the suggested 
disciplines.  A number of delegations welcom ed the new ideas, with several delegations 
preferring them to the current provision in the Chairman's text.  Other delegations had concerns or questions.  One delegation recal led its earlier position that these proposals 
were specifically directed against it ( see comments under "regulated prices", above),  TN/RL/W/232  
Page B-6  Chairman's Text Delegations' Comments on Chairman's Text 
discriminated against state-owned enterprises, and had no merit.  Several delegations 
sought clarity about the meaning and significance of financial institutions operating 
"independently", whether support included regulatory or only financial support, and the implications of the absence of long-term financing in a developing country as a result 
of market failure.  More generally, certain  delegations questioned whether the proposed 
new language would be better placed in Article 3 or Article 6, with one of the sponsors 
of the non-paper preferring th at the practices be subject to the Article 3 prohibition, but 
willing to accept an Article 6 "dark amber" ap proach.  Other delegations preferred that 
any such provision be placed in Article 6 or 14.       
Pass-Through  
14.2 For the purpose of Part V, where a subsidy is granted in respect of an input 
used to produce the product under consideration, and the producer of the product 
under consideration is unrelated to the pro ducer of the input, no benefit from the 
subsidy in respect of the input shall be attributed to the product under consideration 
unless a determination has been made that the producer of the product under 
consideration obtained the input on terms more favourable than otherwise would 
have been commercially available to that producer in the market.47  
 
________________________ 
47Where, however, it has been established th at the effect of the subsidy is so 
substantial that other releva nt prices available to the producer of the product under 
consideration are distorted and do not reasonabl y reflect commercial prices that would prevail 
in the absence of the subsidization, other sources, such as world market prices, can be used as 
the basis for the determination in question.  
 On Article 14.2 of the Chairman's text, ther e was a broadly-held view that the inclusion 
in the ASCM of provisions on pass-through  could be useful.  There were however 
disagreements about whether su ch provisions should be pl aced in Article 14 (and hence 
relate to Part V only) or in Article 1.  On e delegation considered that the limitation in 
the Chairman's text to the context of input subsidies was too narrow, as the concept of 
pass-through applied wherever the direct reci pient is not the exporter.  Similar to the 
discussion of Article 14.1(c), some delegations raised concerns that proposed footnote 
47 provided inadequate guidance regarding resort to alternative benchmarks and should 
be clarified, with one delegation indica ting that the footnote should be deleted 
altogether.  Another delegation considered that footnote 47 should be retained.  
Concerns were also raised regarding the m eaning and desirable scope of the concept of 
"unrelated" parties, as well as whether the concept of "arms-length" should also be 
reflected.  
 
Allocation of Benefit  
14.3 For the purpose of Part V, the methods used by the investigating authority 
to attribute subsidy benefits to particular time periods shall be consistent with the 
following guidelines:48 
 
 (a) With the exception of benefits from loan subsidies and similar 
subsidized debt instruments, subsidy benefits shall either be 
expensed in full in the year of receipt ("expensed") or allocated 
over a period of years ("allocated").  Expensed subsidies shall be 
deemed to benefit the recipient by the full amount of the benefit in 
the year in which they are expe nsed, whereas allocated subsidies 
shall be deemed to benefit the recipient throughout the allocation 
period.  Loan subsidies, and similar subsidized debt instruments, 
shall be deemed to benefit the recipient throughout the period in 
which the loan or debt instrument remains outstanding.  
  (b) Benefits from subsidies arising from the following types of A number of delegations considered that it was useful to have specific guidance in the SCM Agreement concerning the allocation of benefit  in the context of countervailing 
measures, and supported the approach in th e Chairman's text, which in their view 
broadly reflected the current practice of mo st Members using countervailing measures.  
Some delegations considered that these provisions should be applicable not only in 
respect of countervailing measures but also in respect of prohibited and actionable subsidy rules.  Other delegations disagreed, indicating that the provisions should be 
limited to countervailing measures. 
 A number of delegations raised questions concerning the concepts of recurring and 
non-recurring subsidies, including whether it was clear that all subsidies would fall into 
one of these categories.  Some also questioned whether the provisions contain sufficient flexibility to permit authorities to determine on a case-by-case basis whether 
to expense subsidy benefits in the year of  receipt or to allocate them over time.  
Regarding the allocation period, some sought clarification as to whether the average useful life of assets referred to would be for the firm or industry in the exporting   TN/RL/W/232
 Page B-7Chairman's Text Delegations' Comments on Chairman's Text 
measures normally shall be expens ed:  direct tax exemptions and 
deductions;  exemptions from and 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;  freight subsidies;  export 
promotion assistance;  early retirement payments;  worker 
assistance;  worker training;  and wage subsidies.  
 
 (c) Benefits from subsidies arising from the following types of 
measures shall be allocated:  equity infusions;  grants;  plant 
closure assistance;  debt forgiven ess;  coverage for an operating 
loss;  debt-to-equity conversions;  provision of non-general 
infrastructure;  and provision of plant and equipment.  
 
 (d) In determining whether a subsidy listed in paragraph 2(b) is more 
appropriately allocated, or whethe r a subsidy listed in paragraph 
2(c) is more appropriately expensed, and in determining whether a 
subsidy of a type not listed in either paragraph 2(b) or 2(c) should 
be allocated or expensed, the following non-exhaustive list of 
factors shall be considered:  
 
  (i) whether the subsidy is non-recurring (e.g., one-time, 
exceptional, requiring express government approval) or 
recurring49 
 
  (ii) the purpose of the subsidy50;  and  
 
  (iii) the size of the subsidy.51  
  (e) The allocation period for allocated subsidies normally should 
correspond to th e average useful life of the depreciable, physical 
assets of the relevant industry or firm.  
 
 (f) Any method for measuring the amount of allocated subsidy 
benefits at a particular point in the allocation period may reflect a 
reasonable measure of the time value of money.  
 
 (g) Any public notice issued pursuant to paragraph 3 of Article 22 
shall include a full description and adequate explanation of the 
allocation and expensing methodologies used.  
________________________ 
48 The reference in this paragraph to partic ular measures does not mean that those 
measures will necessarily constitute specific subs idies;  rather, a determination regarding the country or the importing country.  Concerning the introduction of the time value of 
money in the calculation of subsidy benefits allocated over time, a number of 
delegations indicated that this  was appropriate, as it reflects economic reality.  Some 
other delegations considered that this aspect needs further discussion.  TN/RL/W/232  
Page B-8  Chairman's Text Delegations' Comments on Chairman's Text 
existence of a specific subsidy shall be made pursuant to Part I of the Agreement in the light 
of the facts of a particular case.  
49 The fact that a subsidy is non-recurring norma lly will be indicative of allocation.  
The fact that a subsidy is recurring norma lly will be indicat ive of expensing.  
50 For example, the fact that a subsidy is tied to the capital assets or structure of the 
recipient normally will be indicative of allocation.   The fact that a subsidy is tied to a firm's 
regular, ongoing production and sales activities (e.g ., wages) normally will be indicative of 
expensing.  
51 The fact that a subsidy is large normally w ill be indicative of allocation.  The fact 
that a subsidy is small normally will be indicative of expensing.  
 
 
Export Competitiveness  
27.5 A developing country Member wh ich has reached export competitiveness 
in any given product shall phase out its export subsidies for such product(s) over a 
period of two years.  However, for a developing country Member which is referred 
to in Annex VII and which has reached export  competitiveness in one or more products, export subsidies on such products shall be gradually phased out over a 
period of eight years.   
 
27.6 Export competitiveness in a product exists if a developing country 
Member's exports of that product have reac hed a share of at least 3.25 per cent in 
world trade of that product for two consecutive calendar years.  Export 
competitiveness shall exist either (a) on the basis of notification by the developing 
country Member having reached export competitiveness, or (b) on the basis of a 
computation undertaken by the Secretariat at the request of an y Member.  For the 
purpose of this paragraph, a product is defined as a section heading of the 
Harmonized System Nomenclature.  The Committee shall review the operation of 
this provision five years from the date of the entry into force of  the WTO 
Agreement. 
  One delegation recalled an earlier proposal submitted by four delegations concerning 
the determination of export competitiveness  (TN/RL/GEN/136), which included 
basing calculations on a five-year moving average for two consecutive years, "stopping 
the clock" for export subsidy phase-out if a developing Member lost export competitiveness during the phase-out period, and allowing a developing Member to 
reintroduce export subsidies if export competitiveness is lost after the end of the phase-
out period.  While some delegations supported the thrust of the proposal, others had 
doubts, with one delegation qualifying the proposal as maximalist while another 
observing that the current provisions were logical, and that it was reluctant to change these rules relating to distortive export subsid ies.  A number of delegations suggested 
that a more serious issue for the operationalisation of this provision was to clarify the 
definition of "product", as it was unclear whether it referred to HTS Sections or 
headings.       
 
With regard to specific elements. on the m oving averages proposal, some delegations 
agreed that there was a problem of volatility that could be addressed by this approach.  
Other delegations doubted that there was a volatility problem or considered that the 
moving averages idea was in any event too complicated.  It was suggested that the 
proposal would in fact require 7 years of export competitiveness, and that a simpler 
approach might be simply to refer to three or perhaps four consecu tive years.  Various 
delegations questioned whether the five-year moving average would apply to losing export competitiveness as well as achieving it.  While one delegation supported 
allowing developing Members to re-introduce export subsidies if they lost export 
competitiveness, other delegations had serious concerns, with one delegation noting that this went beyond "stop-the-clock" proposals previously considered in the SCM 
Committee.             
 
Verification system for du ty rebate schemes / definition of inputs consumed  
 
ANNEX I  
 
ILLUSTRATIVE LIST OF  CERTAIN EXPORT SUBSIDIES    
Shortly before the issuance of the Chairman's text, a delegation submitted a proposal, 
later revised, concerning the verification system  for duty and tax rebate schemes as 
provided for in items (g), (h) and (i) of Annex I of the SCM Agreement, and Annexes   TN/RL/W/232
 Page B-9Chairman's Text Delegations' Comments on Chairman's Text 
. . . . 
 
(g) The exemption or remission, in respect of the production and distribution of 
exported products, of indirect taxes5865 in excess of those levied in respect 
of the production and distribution of like products when sold for domestic 
consumption. 
 
(h) The exemption, remission or deferral of prior-stage cumulative indirect 
taxes5865 on goods or services used in the production of exported products 
in excess of the exemption, remissi on or deferral of like prior-stage 
cumulative indirect taxes on goods or services used in the  production of 
like products when sold for domestic consumption;  provided, however, that prior-stage cumulative indirect taxes may be exempted, remitted or 
deferred on exported products even when not exempted, remitted or 
deferred on like products when sold for domestic consumption, if the prior-stage cumulative indirect taxes are levied on inputs that are consumed 
in the production of the exported product  (making normal allowance for 
waste).
67   This item shall be interprete d in accordance with the guidelines 
on consumption of inputs in the production process contained in Annex II. 
 
(i) The remission or drawback of import charges5865 in excess of those levied 
on imported inputs that are consumed in the production of the exported 
product (making normal allowance for waste);  provided, however, that in particular cases a firm may use a quantity of home market  inputs equal to, 
and having the same quality and characteristics as, the imported inputs as a 
substitute for them in order to benefit from this provision if the import and 
the corresponding export operations both occur within a reasonable time 
period, not to exceed two years.   This  item shall be interpreted in 
accordance with the guidelin es on consumption of inputs in the production 
process contained in Annex II and the guidelines in the determination of 
substitution drawback systems as export subsidies contained in Annex III. 
 
_________________________ 
      56 For the purpose of this Agreement: 
 The term "direct taxes" shall mean ta xes on wages, profits, interests, rents, 
royalties, and all other forms of income, a nd taxes on the ownership of real property; 
 The term "import charges" shall m ean tariffs, duties, and other fiscal 
charges not elsewhere enumerated in this note that are levied on imports; 
 The term "indirect taxes" shall mean sales, excise, turnover, value added, 
franchise, stamp, transfer, inventory and equi pment taxes, border taxe s and all taxes other 
than direct taxes and import charges; 
 "Prior-stage" indirect taxes are those levied on goods or services used 
directly or indirectly in making the product; 
 "Cumulative" indirect taxes are multi-staged taxes levied where there is II and III (TN/RL/GEN/153 and Rev. 1).  The proposal also suggested modifying the 
definition of "inputs consumed in the production process" in this context.  Concerning 
duty rebate schemes, the proponent indicated  that the principle underlying its proposal 
was that in a countervailing duty context, only the excess amount of rebate could be 
countervailed, rather than the whole scheme, and that in this regard, the Agreement 
should be clarified to indicate that certain  averaging schemes based on standard input-
output or similar norms should be presumed to be sufficient for purposes of verifying 
the use of imported inputs in the production of goods for export.  In the same context, 
the proponent proposed expanding the definition of inputs consumed, to cover capital goods and consumables.   
 
A number of delegations supported the principle that only the excess amount of any rebate could be treated as a countervaila ble subsidy, and expressed a willingness to 
work on the issues raised in the proposal, bu t raised questions as to whether the existing 
language in the Agreement already could accommodate the situations referred to in the proposal.  Some also questioned certain prac tical aspects of the cal culations that would 
be involved.  In addition, some delegations questioned the basis for the proposed 
presumption that an averaging system gene rated accurate results, including because of 
changes to production technology over time, whether any such presumption would be 
rebuttable and if so, on what basis, and how to implement such averaging schemes 
where taxes being rebated are prior-stage cu mulative indirect taxes.  Concerning the 
expansion of the definition of inputs consumed to include capital goods and 
consumables, some delegations raised questions of principle, noting that under international taxation norms, taxes on goods are to be imposed in the country where 
they are consumed, which in the case of  capital goods would be the country of 
production of the exported goods.  Delegations also raised practical questions concerning how any accounting for the use of capital goods in the production of 
exported products could be verified, and concerning the definition of "consumables".  
One delegation noted that the current SCM rules on taxes favoured indirect tax systems, and disadvantaged direct taxes, and that the proposed change to the definition 
of inputs consumed would further this imbalance.   
  TN/RL/W/232  
Page B-10  Chairman's Text Delegations' Comments on Chairman's Text 
no mechanism for subsequent crediti ng of the tax if the goods or services subject to tax at one 
stage of production are used in a succeeding stage of production; 
 "Remission" of taxes includes th e refund or rebate of taxes; 
 "Remission or drawback" includes the full or partial exemption or deferral 
of import charges. 
 
                            67Paragraph (h) does not apply to va lue-added tax systems and border-tax 
adjustment in lieu thereof;  the problem of the excessive remission of value-added taxes is 
exclusively covered by paragraph (g). 
 
ANNEX II 
 
GUIDELINES ON CONSUMPTION OF INPUTS IN THE PRODUCTION 
PROCESS69 
 
I 
 
1. Indirect tax rebate schemes can allow for exemption, remission or deferral 
of prior-stage cumulative indirect taxes levied on inputs that are consumed in the 
production of the exported product (making normal allowance for waste).   
Similarly, drawback schemes can allow for the remission or  drawback of import 
charges levied on inputs that are consumed in the production of the exported product 
(making normal allowance for waste). 
 
2. The Illustrative List of Export Subsidies in Annex I of this Agreement makes reference to the term "inputs that are consumed in the production of the 
exported product" in paragraphs (h) and (i).  Pursuant to paragraph (h), indirect tax 
rebate schemes can constitute an export subsidy to the extent  that they result in exemption, remission or deferral of prior-stage cumulative indirect taxes in excess of 
the amount of such taxes actually levied on inputs that are consumed in the 
production of the exported product.   Pursuant to paragraph (i), drawback schemes 
can constitute an export subsidy to the extent  that they result in a remission or 
drawback of import charges in excess of t hose actually levied on inputs that are 
consumed in the production of the exported product.   Both paragraphs stipulate that 
normal allowance for waste must be made in findings regarding consumption of 
inputs in the production of the exported product.   Paragraph (i) also provides for substitution, where appropriate. 
______________________ 
69Inputs consumed in the production process are inputs physically incorporated, 
energy, fuels and oil used in the production proc ess and catalysts which are consumed in the 
course of their use to obtain the exported product. 
 
II 
   TN/RL/W/232
 Page B-11Chairman's Text Delegations' Comments on Chairman's Text 
 In examining whether inputs are consumed in the production of the 
exported product, as part of a countervailing duty investigation pursuant to this 
Agreement, investigating authorities should proceed on the following basis:  
1. Where it is alleged that an indirect tax rebate scheme, or a drawback 
scheme, conveys a subsidy by reason of over-rebate or excess drawback of indirect taxes or import charges on inputs consumed in the production of the exported 
product, the investigating authorities should first determine whether the government 
of the exporting Member has in place and applies a system or procedure to confirm which inputs are consumed in the production of the exported product and in what 
amounts.   Where such a system or procedure is determined to be applied, the 
investigating authorities should then examine the system or procedure to see whether it is reasonable, effective for the purpose intended, and based on generally accepted 
commercial practices in the country of export.   The investigating authorities may 
deem it necessary to carry out, in accordance with paragraph 6 of Article 12, certain practical tests in order to verify information or to satisfy themselves that the system 
or procedure is being effectively applied. 
 2. Where there is no such system or procedure, where it is not reasonable, or 
where it is instituted and considered reasonabl e but is found not to be applied or not 
to be applied effectively, a further examination by the exporting Member based on 
the actual inputs involved would need to be carried out in the context of determining 
whether an excess payment occurred.   If the investigating authorities deemed it necessary, a further exam ination would be carried out in accordance with 
paragraph 1. 
 3. Investigating authorities should treat inputs as physically incorporated if 
such inputs are used in the production process and are physically present in the 
product exported.   The Members note that an input need not be present in the final product in the same form in which it entered the production process. 
 
4. In determining the amount of a par ticular input that is consumed in the 
production of the exported product, a "normal allowance for waste" should be taken 
into account, and such waste should be treated as consumed in the production of the 
exported product.   The term "waste" refers to that portion of a given input which does not serve an independent function in the production process, is not consumed in 
the production of the exported product (for r easons such as inefficiencies) and is not 
recovered, used or sold by the same manufacturer.  
5. The investigating authority's determination of whether the claimed 
allowance for waste is "norma l" should take into account the production process, the 
average experience of the industry in the country of export, and other technical 
factors, as appropriate.   The investiga ting authority should bear in mind that an  TN/RL/W/232  
Page B-12  Chairman's Text Delegations' Comments on Chairman's Text 
important question is whether the authorities in the exporting Member have 
reasonably calculated the amount of waste, when such an amount is intended to be 
included in the tax or duty rebate or remission.  
ANNEX III 
 
GUIDELINES IN THE DETERMINATION OF SUBSTITUTION 
DRAWBACK SYSTEMS AS EXPORT SUBSIDIES 
 
I 
 
 Drawback systems can allow for the refund or drawback of import charges 
on inputs which are consumed in the production process of another product and 
where the export of this latter product contains domestic inputs having the same 
quality and characteristics as those substituted for the imported inputs.  Pursuant to paragraph (i) of the Illustrative List of Export Subsidies in Annex I, substitution 
drawback systems can constitute an export subsidy to the extent that they result in an 
excess drawback of the import charges levied initially on the imported inputs for which drawback is being claimed. 
 
II 
 
 In examining any substitution drawback system as part of a countervailing duty investigation pursuant to this Agreement, investigating authorities should 
proceed on the following basis: 
 1. Paragraph (i) of the Illustrative List stipulates that home market inputs may 
be substituted for imported inputs in the production of a product for export provided 
such inputs are equal in quantity to, and have the same quality and characteristics as, the imported inputs being substituted.   The existence of a verification system or 
procedure is important because it enables the government of the exporting Member 
to ensure and demonstrate that the quantity of inputs for which drawback is claimed does not exceed the quantity of similar products exported, in whatever form, and that 
there is not drawback of im port charges in excess of those originally levied on the 
imported inputs in question.  
2. Where it is alleged that a substituti on drawback system conveys a subsidy, 
the investigating authorities should first proceed to determine whether the government of the exporting Member has in place and applies a verification system 
or procedure.   Where such a system or pr ocedure is determined to be applied, the 
investigating authorities should then examine the verification procedures to see 
whether they are reasonable, effective for the purpose intended, and based on 
generally accepted commercial practices in the country of export.   To the extent that   TN/RL/W/232
 Page B-13Chairman's Text Delegations' Comments on Chairman's Text 
the procedures are determined to meet th is test and are effectively applied, no 
subsidy should be presumed to exist.   It may be deemed necessary by the 
investigating authorities to carry out, in accordance with paragraph 6 of Article 12, 
certain practical tests in order to verify information or to satisfy themselves that the 
verification procedures are being effectively applied. 
 3. Where there are no verification pro cedures, where they are not reasonable, 
or where such procedures are instituted an d considered reasonable but are found not 
to be actually applied or not applied effectiv ely, there may be a subsidy.   In such 
cases a further examination by the exporting Member based on the actual 
transactions involved would need to be carried out to determine whether an excess 
payment occurred.   If the investigating authorities deemed it necessary, a further examination would be carried out in accordance with paragraph 2. 
 
4. The existence of a substitution drawback provision under which exporters are allowed to select particular import shipments on which drawback is claimed 
should not of itself be considered to convey a subsidy. 
 5. An excess drawback of import charges in the sense of paragraph (i) would 
be  deemed to exist where governments paid interest on any monies refunded under 
their drawback schemes, to the extent of  the interest actually paid or payable. 
 
  TN/RL/W/232  
Page B-14  Chairman's Text Delegations' Comments on Chairman's Text 
Export Credit Practices  
(j) The provision by governments (or special institutions controlled by and/or 
acting under the authority of governments) of export credit guarantee or 
insurance programmes, of insuran ce or guarantee programmes against 
increases in the cost of exported pro ducts or of exchange risk programmes, 
at premium rates which are inadequate to cover the long-term operating 
costs and losses of the programmes. 
(k) The grant by governments (or special institutions controlled by and/or 
acting under the authority of governments) of export credits at rates below 
those available to the recipient on international capital markets (absent any 
government guarantee or support), for funds of the same maturity and other 
credit terms and denominated in the sa me currency as the export credit. at 
rates below those which they actually have to pay for the funds so 
employed (or would have to pay if they borrowed on international capital 
markets in order to obtain funds of the same maturity and other credit ter ms 
and denominated in the same currency as the export credit), or the payment 
by them of all or part of the costs incurred by exporters or financial 
institutions in obtaining credits, in so far as they are used to secure a 
material advantage in the field o f export credit terms.  
Provided, however, that if a Member  is a party to an international 
undertaking on official export credits  to which at least twelve original 
Members to this Agreemen t are parties as of 1 Ja nuary 1979 (o r a successor 
undertaking which has been adopted by those original Members)68, or if in 
practice a Member applies the interest rates provisions of the relevant undertaking, an export credit practice which is in conformity with those 
provisions shall not be considered an export subsidy prohibited by this 
Agreement. ________________________ 
68 The parties to such undertaking in effect as of the date of entry into force of the 
results of the DDA shall notify that undertaking to the Committee not later than 30 days after 
that date.  Upon request by a Member, the Comm ittee shall examine the notified undertaking.   
Thereafter, any further successor undertaking shall be notified by the parties thereto 
to the Committee, and Members shall have a pe riod of 30 days from the date of such 
notification to request examination by the  Committee of the notified successor undertaking.  
Where no such request is made, the provisions of  the second paragraph of item (k) shall apply 
to the notified successor undertaking as from the end of the 30-day period.  Where such a 
request is made, the Committee shall examine the notified successor undertaking within 60 
days following the receipt of the request, taking into account the need to maintain effective 
multilateral disciplines on export credit practices and to preserve a balance of rights and 
obligations among Members.  The provisions of the second paragraph of item (k) shall not 
apply in respect of the notified successor unde rtaking until the requested examination has 
been completed.  In general terms, the proponent of changes in the area of export credit practices  
emphasized that a cost-to-government approach to export credits represented an 
inherent disadvantage for developing Members whose costs of borrowing are higher due to higher risk.  While this delegation generally welcomed the changes proposed in 
the Chairman's text, it considered that additional adjustments to items (j) and (k) were 
also required.  Specifically, it sought the in clusion of a second test under item (j) for 
export credit guarantees at premium rates be low those available to the recipient on 
international capital markets for export cred it guarantees or insurance of similar terms 
and denominated in the same currency.  It also sought restoration of language in item (k) of the SCM Agreement relating to the payment of costs incurred by exporters or 
financial institutions in obtaining export credits.  Some other delegations had very 
serious concerns. They considered that th e proposed changes in the Chairman's text 
would disadvantage developing Member borrowers by raising the cost of export credit 
financing, that they could reduce predictabil ity for export credit ag encies, and that they 
could make export credit agencies irrelevant, and that this would be aggravated by the additional changes being sought by the proponent.  These delegations generally 
considered that a cost -to-government approach was appropria te in this area and that the 
proposed changes could render items (j) and (k) meaningless. 
                   
With respect to note 68, the proponent noted that under the so-called "evolutionary" interpretation, a small group of Members can negotiate changes to the OECD Export 
Credit Arrangement among themselves and that these changes would then apply under 
the safe haven in item (k) second paragraph without having been agreed by all WTO Members. Thus, the proponent considered that  note 68 was desirable, especially in 
insuring transparency, but that it was not sufficiently clear about the need for the WTO 
to adopt any changes to the Arrangement.  This delegation proposed alternative language under which the provisions of th e second paragraph would apply on condition 
that they be notified to the SCM Committee and that no Member objects within 30 
days.  While certain delegations supported this language, other delegations were seriously concerned.  They were of the view that note 68 would make it difficult if not 
impossible to effectuate changes to the OECD Arrangement, as the note in the 
Chairman's text could be taken to require de facto approval, and the proponent's language would in fact make clear all Members had an effective veto.  Several 
delegations noted that the OECD Arrangement had become more transparent and 
inclusive, such as in the aircraft sector.  One delegation noted that it had instructions at the highest level that it could not agree to such language.