RESTRICTED
WORLD TRADE G/SCM/W/415
25July1997
ORGANIZATION(97-3140)
Committee onSubsidies
andCountervailing Measures
REPORT BYTHE INFORMAL GROUP OFEXPERTS
TOTHE COMMITTEE ONSUBSIDIES AND COUNTERVAILING MEASURES
Note from theInformal Group ofExperts
TheattachedreportissubmittedbytheInformalGroupofExpertstotheCommitteeonSubsidies
andCountervailing Measures ("the Committee"). Asreflected indocument G/SCM/5, theInformal
Group ofExperts wascreated byadecision oftheCommittee, atitsmeeting of13June1995, with
thefollowing terms ofreference:
"Toexamine matters which arenotspecified inAnnex IVtotheAgreement orwhich
needfurther clarification forthepurposes ofparagraph 1(a)ofArticle 6,andtoreport
totheCommittee such recommendations astheGroup considers could assist the
Committee inthedevelopment ofanunderstanding among Members, asnecessary,
regarding suchmatters."
Inaccordance withthese terms ofreference, theInformal Group ofExperts 'report contains
anumber ofrecommendations withrespect toparticular calculation issues arising under Annex IV
totheAgreement onSubsidies andCountervailing Measures ("theAgreement"). Inaddition, itreports
ontheGroup 'sdiscussions ofallissues thatitconsidered. Anoutline oftheissues discussed bythe
Group wascirculated inG/SCM/W/413. Thereport isorganized suchthatitsmain body describes
theGroup 'sdiscussions andrecommendations, bytopic. Following this,thetextsofalloftheGroup 's
recommendations areappended separately. Alsoappended isthefulltextofAnnex IVoftheAgreement.
TheCommittee decided thattheInformal Group would becomposed ofexperts nominated
byMembers andbycountries eligible tobecome original Members oftheWTO, andthattheexperts
would serve intheirpersonal capacities rather thanasrepresentatives ofgovernments. TheCommittee
further decided thatthemembers oftheGroup should havesubstantive expertise insubsidy calculation
methodology andbeabletocontribute actively, bothorally andinwriting, tothework oftheInformal
Group. Themembers oftheInformal Group ofExperts are:Mr.Robert Arnott, succeeded by
Mr.David Sprott (Australia); Mr.Stephen Gospage (EC); Mr.Takuya Ishikawa, succeeded by
Mr.JoOkumura (Japan); Mr. Ju-Young Lim (Korea); Mr. Roy Malmrose (US);
Mr.Alberto Lerín Mestas (Mexico); Mr.Wayne Neamtz, succeeded byMr.Andre Moncion (Canada);
andMs.VeraThorstensen (Brazil). Mr.Victor doPrado (Brazil) served asChairman oftheGroup,
andMs.Clarisse Morgan (WTO Secretariat) asSecretary oftheGroup.
TheGroup thusfarhasheldtenmeetings, onthefollowing dates: 1November 1995,
13December 1995, 29February 1996, 26April 1996, 18-19 July1996, 7-8October 1996,
25-26 November 1996, 5-6February 1997, 8-10April 1997, and21-22 May1997. TheGroup expects
tocontinue meeting totrytoresolve issues where todatenoconsensus hasbeenreached.G/SCM/W/415
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TheGroup wishes toemphasize thefollowing substantive points withrespect tothereport.
First, asrequired byparagraph 1ofAnnex IV,alloftheGroup 'sdiscussions were heldand
recommendations formulated from thepoint ofview ofcosttogovernment. Second, theGroup 's
recommendations inthecontext ofArticle 6.1(a) andAnnex IVoftheAgreement aremade exclusively
withrespect tothatcontext, andarewithout prejudice toanyother area(such ascountervailing
measures). Third, itisimplicit throughout thereport thatonlymeasures thatconstitute specific subsidies
within themeaning ofArticles 1and2oftheAgreement, inwhatever form(i.e., grants, loans, etc.)
arecovered bytheGroup 'srecommendations. Thus, onlyifspecificity andbenefit existed would cost
togovernment becalculated forpurposes ofArticle 6.1(a). Fourth, theGroup doesnotviewthereport
asexhaustive ofevery potentially relevant issue under Article 6.1(a) andAnnex IV. Thus, thefact
thatthereport maynotrefertoagiven issueorgiven measure isnotmeant toimply thatsuchanissue
isirrelevant inthiscontext, orthatsuchameasure should notbeincluded inanycalculation under
Article 6.1(a) andAnnex IV.
Finally, theGroup recognizes that, intheinterests oftransparency, predictability and
administrability, itsrecommendations should beassimple aspossible. Forthisreason, forcertain
questions which werediscussed butwerefound tobeexcessively difficult toadminister and/or tohave
atmost asmall impact onthefinalresults ofanygiven calculation, theGroup doesnotrecommend
anyadjustments inthecalculations ofcosttogovernment oradvalorem subsidization. Asanexample,
thequestion offlotation costs ofbonds wasdiscussed, aswere administrative costs associated with
theprovision ofsubsidies. While these costs arguably should beincluded inanyArticle 6.1(a)
calculation, theGroup believes thattheeffort tomeasure these costs would outweigh anymarginal
increase intheaccuracy ofthesubsidy calculations thatmight result.G/SCM/W/415
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REPORT BYTHE INFORMAL GROUP OFEXPERTS
TOTHE COMMITTEE ONSUBSIDIES AND COUNTERVAILING MEASURES
Introduction
TheInformal Group ofExperts conceived itsbasic task,pursuant tothemandate assigned to
itbytheCommittee, asformulating recommendations onhowtocalculate thecosttogovernment of,
andtheadvalorem subsidization from, particular types ofsubsidies. Inpreparing thisreport, theGroup
recognized thatanumber ofissues thatithaddiscussed wereissues thatmight potentially affect more
thanonetypeofsubsidy, anddecided that,foreaseofreading andlogic ofpresentation, thereport
should discuss suchcross-cutting issues first. Theissues ofthistypethatwerediscussed are:expensing
versus allocation ofsubsidy benefits; allocation period; government costoffunds andtimevalue of
money; adjustments forinflation andinterest; inflationary economy countries; salesdenominator; and
start-up situations. These issues arepresented inSections Ithrough VII,respectively. Section VIII
thenaddresses theindividual types ofsubsidies discussed bytheGroup: grants, loans, interest rate
subsidies, debtforgiveness, losscoverage, taxconcessions, equity infusions, loan/credit guarantees,
government provision ofgoods and/or services, assumption oflegal obligations, export credit
insurance/exportpromotion/otherexport-related,upstreamsubsidies,multipleexchangerateprogrammes,
research anddevelopment subsidies, andworker training. Thetextofthereport presents summaries
oftheGroup 'sdiscussions oneachpoint, andsummaries ofitsrecommendations. Separately appended
tothereport arethetextsofalloftheGroup 'srecommendations.
I. EXPENSING VERSUS ALLOCATION OFSUBSIDY BENEFITS
A. Implications forDetermination ofSerious Prejudice based on5%Threshold
1. Thequestion ofwhether andunder whatcircumstances subsidies should beallocated oversome
multi-year period, versus attributed toasingle year(i.e., "expensed") wasextensively discussed. In
particular, itwasnoted thatalthough thepayment ofasubsidy generally would occur atasingle moment
intime, itmight notbeappropriate inthecontext ofArticle 6.1(a) toattribute thatsubsidy (i.e., the
presumption ofserious prejudice based onmore than5%advalorem subsidization ofaproduct)
exclusively toasingle year. Ifthisweredone, evenaverylarge subsidy would havenoeffects, for
purposes ofArticle 6.1(a), beyond theyearinwhich itwasgranted. Thatis,regardless ofitssize,
theimpact ofanygiven subsidy would vanish, forpurposes ofArticle 6.1(a), asoftheendoftheyear
inwhich itwasgranted. Inaddition, ifthepossibility ofallocation didnotexist, theadvalorem
subsidization during theyearinwhich thesubsidy wasgranted could beoverstated.
2. Such anoutcome wasdeemed inappropriate under Article 6.1(a) foranumber ofreasons.
First, ifthepresumption ofserious prejudice could never lastbeyond asingle year, thismight make
implementation ofanappropriate remedy (i.e., removal oftheadverse effects ofthesubsidy or
withdrawal ofthesubsidy) difficult where serious prejudice under Article 6.1(a) wasfound. For
example, bythetimearemedy wasobtained, the"adverse effects" ofthesubsidy purportedly would
havevanished oftheirownaccord. Second, ifexpensing resulted inoverstatement oftheadvalorem
subsidization fortheyearinwhich thesubsidy wasgranted, thiscould giverisetoanunjustified
presumption ofserious prejudice forthatyear. Moreover, paragraph 7ofAnnex IV,byreferring
topre-WTO subsidies whose benefits wereallocated tofuture production, suggests thatallocation of
subsidy benefits isforeseen inthecontext ofcalculating 5%advalorem subsidization ofaproduct.
Ifthere werenopossibility ofallocating anypost-WTO subsidies, thiswould create aninconsistency
between theallowed treatment ofpre-andpost-WTO subsidies inthecontext ofArticle 6.1(a).G/SCM/W/415
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3. Ontheotherhand, allocating allsubsidies, regardless oftheirnature, would seeminappropriate
iftheirimpact upon therecipient waslimited andofshort duration. Moreover, ifallsubsidies were
allocated, theduration ofthepresumption ofserious prejudice might beinappropriately lengthened.
Thus, itwasconcluded thatnotallsubsidies should beallocated.
4. Itthuswasnecessary toidentify under whatcircumstances subsidies ofvarious kinds should
beallocated versus expensed. TheGroup developed recommendations inthisregard, intheformof
anillustrative table ofsubsidies thatshould beallocated versus expensed, along withacover note
explaining theunderlying principles forsuchacategorization. Itwasfeltthatsuchatablewould create
themosttransparency andpredictability forallconcerned. Theillustrative tableandcover noteare
presented inRecommendation 1.
B. Illustrative Table andGeneral Principles (Recommendation 1)
5. Theillustrative table reflects theGroup 'sconclusions regarding anumber ofpoints. First,
thetableindicates thatcertain types ofsubsidies (e.g., grants) maybeeither expensed orallocated,
depending onthecircumstances. Where agiven typeofsubsidy could beeither expensed orallocated
depending onthecircumstances, itisshown straddling thetwocolumns. Other types ofsubsidies
generally would beeither always expensed oralways allocated. Certain considerations relevant to
thequestion ofexpensing orallocating different types ofsubsidies alsoarereflected inthetable.
6. Thetableandcover notereflect certain additional recommendations, aswell. Thefirstofthese
isthatresearch subsidies bepresumptively allocated, unless expensing isdemonstrated tobemore
appropriate inagiven case. Similarly, itisrecommended thatnon-recurring and/or large subsidies
bepresumptively allocated, unless expensing isdemonstrated tobemore appropriate inagiven case.
Further, itwasdeemed appropriate, primarily fromthestandpoint ofadministrative convenience, that
verysmall subsidies beexpensed regardless oftypeorother considerations. Aleveloflessthan0.5%
ofsalesforanyindividual subsidy isrecommended forthisthreshold. Finally, thecover noteindicates
thattheinclusion ofanygiven typeofmeasure inthetableisnotintended toimply thatsuchameasure
inallcases would berelevant inthecontext ofArticle 6.1(a). Rather, onlymeasures meeting the
Agreement 'sdefinitions of"subsidy" and"specificity" would beconsidered inthiscontext.
7. Thetableincludes acategory forexport-related subsidies, notwithstanding thattherelevance
ofthequestion ofexpensing versus allocating inthecontext ofsuchsubsidies might belimited, atleast
withrespect tothose export-related subsidies thatareexport subsidies inthesense oftheAgreement.
Thatis,theprohibitiononexportsubsidies,andthenon-applicabilitytosuchsubsidiesofthepresumption
ofserious prejudice where transition periods apply, could mean thatsubsidies ofthistypemight only
rarely beatissueunder Article 6.1(a). Ontheotherhand, where theprohibition applies, theAgreement
doesnotappear toforce aMember toallege thatasubsidy isprohibited, andtherefore toseekaremedy
onlyunder Article 4.Thus itwasdeemed appropriate toinclude areference tothese subsidies inthe
table.
8. Thetablealsoreflects discussions astowhether subsidies fordebtforgiveness andlosscoverage
should beallocated orexpensed inthecontext ofAnnex IVcalculations, orwhether theyshould be
consideredatall,giventhatsuchsubsidieswouldgiverisetoaseparatepresumptionofseriousprejudice.
Forthereasons discussed inSections VIII.D andE,itwasdeemed appropriate toinclude suchsubsidies
intheexpense/allocate table, without prejudice totheexistence ofanyseparate presumptions ofserious
prejudice under Article 6.1(b), (c)or(d).
9. Regarding thesubsidies inthetablethatareshown assometimes being expensed andsometimes
allocated, thediscussion focused onfurther elaborating thecriteria thatmight beapplied inmaking
suchadetermination inanygiven case. Thefollowing general principles wereidentified, affirmativeG/SCM/W/415
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answers tooneormore ofwhich normally would point toward allocating, rather thanexpensing, a
given subsidy:
1. Whether thepurpose ofthesubsidy wasforthepurchase offixed assets
2. Whether non-recurring and/or large
3. Whether oriented toward future production
4. Whether consisting ofequity
5. Whether carried forward inrecipient 'saccounting records
These principles alsogenerally underlie therecommendations astoexpensing orallocating theremaining
types ofsubsidies shown inthetable.
10. Thepurpose ofasubsidy, inparticular whether itisusedforacquisition ofassets, wasdeemed
relevant bytheGroup. TheGroup noted thatasageneral principle, subsidies forasset acquisition
should beallocated overtime, while recurring subsidies tocover operating costs orother subsidies
fornon-asset purposes might inmany circumstances beexpensed.
11. Thefrequency andsizeofasubsidy weredeemed relevant tothequestion ofexpensing versus
allocating. Justasitisrecommended thatrecurring and/or small subsidies beexpensed, soisit
recommended thatnon-recurring and/or large subsidies generally beallocated. Oneconsideration in
thiscontext isthatitmight beillogical toexpense verylarge subsidies duetothelikely substantial
impact thatsuchsubsidies would haveontherecipient companies beyond theyearinwhich theywere
received. Forexample, itislikely thatnon-recurring large subsidies would beusedtopurchase fixed
assets, orevenifnotsoused, would freeupacomparable amount ofcompany funds forthispurpose.
Bycontrast, recurring subsidies aremore likely toberelatively small, aremore likely tobeusedfor
non-asset purposes, aremore likely tobeoriented toward present rather thanfuture production, are
lesslikely toconsist ofequity, andarelesslikely tobecarried forward intherecipient 'saccounts,
thanarenon-recurring subsidies.
12. Theremaining general principles areessentially self-explanatory. Whether asubsidy isoriented
toward production infuture periods, consists ofequity, oriscarried forward intherecipient 'saccounts
wereviewed asrelated tothequestion ofwhether itsbenefits persist beyond asingle period, andhence
whether itshould beallocated tofuture periods.
II. ALLOCATION PERIOD (Recommendation 2)
13. Forthose subsidies thatwillbeallocated, itwasrecognized thatguidance would beuseful as
tohowtodetermine theallocation period. Asageneral matter, itisrecommended thattheaverage
useful lifeofalloftherecipient 'soperational assets should beusedastheallocation period foralltypes
ofsubsidies except longtermloans, andpossibly equity infusions, depending onthecircumstances.
Itisfurther recommended thattheaverage useful lifeofassets becalculated astheratioofthetotal
average book value ofoperational assets totheaverage annual depreciation expense.
14. Therecommendations establish ahierarchy ofdatasources forcalculating theaverage useful
lifeofassets inagiven situation. Thepreferred source (from thestandpoint ofaccuracy) isdeemed
tobetheoverall information forthefirmorfirms receiving thesubsidy. Ifsuchdatacannot beobtained
orarenotreasonable, dataforother firms producing theproduct inthesame country could beG/SCM/W/415
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considered, orfailing that,dataforfirms inthesame business sector inthatcountry (defined asthe
nextlargest category intheInternational Standard Industrial Classification ("ISIC") orsimilar
nomenclature system). Ifthisisnotpossible orfeasible, dataforfirms producing theproduct outside
thatcountry could beused. Issues thatcould affect thesuitability ofagiven firm'sdatacould include
thecalculation ofdepreciation expense onsome basis other thantheuseful lifeofassets, theuseof
adepreciation method other thanstraight line,and/or irregular changes totheassetpool. Regardless
ofthedatasource, theGroup recommends themethod forcalculating theuseful lifeofassets thatis
described inparagraph 13andRecommendation 2.
15. Themostrecent relevant multi-year period which isrepresentative ofnormal operations should
bechosen forcalculating thenecessary averages, toprevent potential extraordinary events inasingle
yearfromdistortingthecalculation.Normalizingadjustmentsmaybenecessaryifassetshaveundergone
extraordinary revaluations, orinthecaseofhyperinflation. Moreover, accounting datashould be
preferred totaxdepreciation datainselecting adatasource forthecalculations, astheformer arethe
more likely toreflect thetrueeconomic lifespan ofassets.
16. Forsubsidies from long-term loans, itisrecommended thattheallocation period bethelife
oftheloan. Forequity infusions, iftheamount ofthesubsidy canbecalculated asagrant (i.e., if
there isamarket price fortheequity (seeSection VIII.G) theallocation period would betheuseful
lifeofassets, calculated asdescribed. Ifthereisnosuchmarket price, however, andsome othermethod
isusedtodetermine theamount ofanysubsidy, another basis fordetermining theallocation period
might bemore appropriate. Forexample, theperiod during which aninvestor might "reasonably"
expect areturn onaninvestment could beused, oritcould beassumed thatacosttogovernment
potentially could ariseduring theentire period inwhich thegovernment heldtheequity.
III. GOVERNMENT COST OFFUNDS AND TIME VALUE OFMONEY
17. Itwasrecognized thatthecosttogovernment approach mandated inparagraph 1ofAnnex IV
raises thequestion, affecting alltypes ofsubsidies, ofhowagovernment 'scostoffunds should be
measured. Thatis,governments raisefunds intwoways, taxation andborrowing, eachofwhich carries
some cost. Some Group members viewed these costsaslimited totheobservable ("monetary") costs
associated withraising thefunds. Others believed thatthese costsalsoinclude certain non-observable
costs, inparticular theopportunity costtothegovernment associated withusing suchfunds, andpotential
indirect costsoftaxation. Theissuediscussed wastheextent towhich some orallofthesecostsshould
bereflected inArticle 6.1(a)/Annex IVcalculations.
18. Withrespect toloans, assetforthintherelevant section ofthisreport, theGroup recommends
using anappropriate government borrowing rate(i.e., abond rate)asaproxy forthegovernment 's
costoffunds. Thus, thediscussion inthissection ofthegovernment 'scostoffunds applies toallocated
subsidies other thanloans.
19. Regarding theobservable monetary component ofagovernment 'scostoffunds, theGroup
generally agreed thatthisiscomprised oftheadministrative costs incurred inraising taxes, aswell
astheinterest costincurred ongovernment borrowing. Theamounts ofsuchcosts inprinciple can
bedirectly derived from government accounts.
20. Inthiscontext, some Group members tooktheviewthataweighted average monetary cost
offunds should becalculated, andattributed toevery subsidy provided. Thus, under thisapproach,
thesame underlying (average) monetary costoffunds would beattributed toallsubsidies. Thatis,
noattemptwouldbemadetoidentifyparticularsubsidieswithparticularsourcesoffunds.Thereasoning
behind thisproposed approach wasthatgovernment funds fromallsources mostoftenarecommingledG/SCM/W/415
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inageneral revenue account, making itimpossible inmost cases toidentify particular government
expenditures (including subsidies) withparticular sources offunds (borrowing ortaxation).
21. TheGroup noted thattocalculate suchaweighted average monetary costinarelatively precise
way,detailed datawould beneeded onthegovernment 'smonetary costsincurred inraising taxrevenue,
aswellasonthedifferent rates ofinterest paidbythegovernment onitsvarious outstanding debt
instruments. Alsonecessary would beinformation ontherelative proportions oftotalgovernment
revenues accounted forbyborrowed funds andtaxrevenues, respectively.
22. Although some members oftheGroup found theconcept oftheweighted average monetary
costoffunds useful, theGroup nevertheless concluded thattrying toapply itinArticle 6.1(a)/Annex IV
calculationsmightprovenottobefeasible.Ofparticularconcerninthisregardwouldbedataavailability
(especially where several levels ofgovernment might beinvolved), aswellaspractical difficulties of
collecting andanalysing thedata.
23. Inaddition, some Group members found theconcept oftheweighted average monetary cost
offunds incomplete, inpartbecause itwould notreflect inanywaythepotential indirect costoftaxation,
which intheirviewisquitehigh. These Group members pointed tomany governments ’heavy reliance
onborrowing asevidence oftheextent ofthiscost.Intheviewofthese Group members, iftherewere
nocosttotaxation beyond itssmall monetary administrative cost,governments would taxmore heavily
andrelylessonborrowing thanisinfactthecase. These Group members suggested thatthelong-term
governmentborrowingraterepresentsthemostaccuratemeasureofthepotentialindirectcostoftaxation,
inthesense ofrepresenting theamount thatgovernments arewilling topaytoavoid resorting to
additional taxation.
24. SomeGroupmembersalsofeltthatgovernmentsincuropportunitycostsinusingfundstoprovide
subsidies, andthatsuchcosts would notbereflected ifcalculations were limited tomonetary costs.
According tothispoint ofview, imputation ofanopportunity costintheArticle 6.1(a) context would
notimply holding thegovernment toaprofit-maximization standard withrespect totheuseofitsfunds.
Rather, suchanopportunity costcould beconceptualized astheopportunity costtothegovernment
thatarises when government resources areemployed foragiven purpose, thereby becoming unavailable
foranyoftheother possible purposes towhich theycould havebeenput.Inthesubsidy context, a
relatively straightforward example ofsuchacostwould bethat,byvirtue ofproviding asubsidy, a
government would forego theopportunity toreduce itsinterest expenses byretiring some ofitsdebt
(e.g., bybuying backoutstanding bonds). (Or,conversely, tofinance asubsidy, thegovernment would
needtoissue abond, onwhich itwould incur interest expenses.) Ineither case, theopportunity cost
tothegovernment could bemeasured astheinterest expense thatthegovernment would incur onthose
bonds.
25. Asomewhat overlapping concept, which wasdiscussed extensively inthecontext ofallocated
subsidies, istimevalue ofmoney. IntheviewofGroup members favouring incorporation oftime
value ofmoney where subsidies areallocated, suchadjustments arepurely technical innature, allowing
amounts ofmoney atdifferent points intimetobecompared inreal(rather thannominal) terms. A
simple example ofatimevalue ofmoney question would betocalculate theamount ofmoney atsome
future datethatwould beequivalent toagiven sumtoday. Inthiscase, theanswer would befound
byapplying anappropriate interest (or"discount") ratetothepresent-day sumfortherelevant period.
Thebasic argument raised infavour ofincluding thetimevalue ofmoney wasthatallocating asubsidy
constitutes amovement ofmoney through time, andthatmoney cannot meaningfully bemoved through
timewithout taking intoaccount itstimevalue. Thatis,ifasubsidy isdivided intoequal nominal
annual increments, therealvalue ofthelastincrement willbesmaller thantherealvalues ofthose
thatprecede it,meaning thatthetotalrealamount ofsubsidization overtheperiod would beunderstated.
TheGroup recognized that,depending onthediscount rateused, adjusting fortimevalue ofmoneyG/SCM/W/415
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alsomight takeintoaccount theconcepts ofopportunity costtogovernment ofthefunds provided as
subsidies, and/or ofthepotential indirect costoftaxation. Noconsensus wasreached astowhether
suchconcepts should bereflected inArticle 6.1(a)/Annex IVsubsidy calculations.
26. There alsowasconsiderable discussion astohowtimevalue calculations, ifincorporated, should
beperformed. Inparticular, arange ofviews wasexpressed astowhether timevalue should figure
onlyincalculation oftheinitial amount ofasubsidy, orwhether therelated adjustments should be
made tothesubsidy amounts allocated toeachyearofanallocation period. Regarding theformer
approach,themethodologydiscussedwouldcalculatethetotalamountofagrant(includingitsdiscounted
lifetime financing cost)asofthedatethesubsidy wasprovided, thenallocate thisamount overtime.
Inflation indexing would beapplied totheallocated amounts tokeeptheoriginal significance andvalue
ofthesubsidy intact throughout theallocation period. Themethodology discussed inthecontext of
thesecond approach totimevalue calculations would "gross up"theallocated annual increments of
theinitial nominal subsidy amount byadiscount ratesetataprevailing government bond rate. No
additional adjustment forinflation would benecessary under thisapproach, asthediscount ratealready
would incorporate theexpected rateofinflation.
27. Thebasic argument raised against including thetimevalue ofmoney insubsidy allocation
calculations wasthatsuchanapproach would beinconsistent withthecost-to-government approach
required byparagraph 1ofAnnex IV.According tothisview, thecosttothegovernment ofproviding
asubsidy thatisallocated overtimeshould benodifferent inyear5thaninyear1,because fromthe
government 'spoint ofview, thecosttothegovernment isincurred atthetimethesubsidy isprovided,
intheamount oftheinitial nominal value ofthesubsidy, evenifthatvalue isthenallocated overtime.
Some Group members alsowere oftheviewthat,totheextent thatincorporating thetimevalue of
money would bebased inpartontheconcept ofopportunity costtogovernment, thiswould be
inappropriate. Inparticular, according tothisview, introducing theconcept ofopportunity costwould
shifttheperspective oftheanalysis toabenefit-to-recipient approach, contrary totheAgreement 's
requirement thatacost-to-government approach beused.
IV. ADJUSTMENTS FOR INFLATION AND INTEREST
28. TheGroup recognized that,eveniftheoretical agreement were reached onthequestions of
weighted average monetary costoffunds, government opportunity costsoffunds, timevalue ofmoney
andpotential indirect costs oftaxation, inpractical terms these costs would bedifficult tomeasure
directly. Moreover, noconsensus wasreached astoproxies thatcould beusedtorepresent thesecosts
insubsidy calculations. Inview ofthis,theGroup changed theframework ofitsanalysis slightly,
tofocus ontheeffects onsubsidy amounts ofinflation andinterest, particularly withrespect tosubsidies
allocated overtime. TheGroup believed thatbychanging focus inthisway, anumber ofthese
underlying issues could beaddressed atleastpartially, andinanadministratively practicable manner.
Thespecific question considered bytheGroup inthisregard wastheextent towhich subsidy calculations
might takeintoaccount thecompounding effects ofinflation andinterest (implicit orexplicit) associated
withnominal subsidy amounts astheyaremoved through time.
29. TheGroup noted herethatanyinterest rateinfactiscomprised oftwocomponents, anticipated
inflation andthe"real" interest rate,i.e.,thepurecostofuseofthemoney overtherelevant period.
Inviewofthis,theGroup found ituseful toconsider these twocomponents separately indiscussing
anddevising itsrecommendations. TheGroup noted thattherealinterest rateinsimple terms isthe
difference between thenominal interest rateandtheinflation rate.G/SCM/W/415
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A. Inflation
30. Regarding inflation, amajor consideration, which arises inthecontext ofallocating subsidy
amounts overtime, ishowtoensure aconsistent basisforboththenumerator (subsidy amount during
therelevant period) andthedenominator (value ofsalesduring therelevant period) incalculating the
advalorem subsidization ofaproduct. Itwasrecognized thatthisquestion isrelated tohowfrequently
andonwhat basis thesales denominator should varyoverthecourse oftheallocation period fora
given subsidy. Inthisregard, asdiscussed indetail inSection VI.B, theGroup recommends thateach
yearofanallocation period should haveitsownsalesdenominator, i.e.,theprevious year'ssales.
31. Thisrecommendation isrelevant towhether ornotthesubsidy amount should beadjusted for
inflation because overtime, thenominal value ofafirm'ssales willtendtochange purely dueto
inflation, evenifthefirm'sscope orscaleofoperations doesnotchange. Thus, asthesalesdenominator
isrevised eachyearduring anallocation period, itautomatically willincorporate theeffects ofinflation.
Ifnoadjustment ismade tothenumerator (theallocated subsidy amount) alsotoadjust forinflation
overtimeadissimilarity between thenature ofthenumerator andthatofthedenominator willbe
introduced. Given this,itwasconcluded thatadjusting thenumerator toaccount fortheeffects of
inflation would beappropriate. Making suchanadjustment would prevent inflation fromeroding the
realsignificance andvalue ofthesubsidy overthecourse oftheallocation period.
32. Byvirtue ofbeing indexed forinflation, theallocated subsidy amounts would progressively
increase innominal terms, although theirvalue would remain constant inrealterms. Because, asnoted,
thesalesdenominator alsowould incorporate anamount forinflation every yearduring anallocation
period, thecomparability ofthenumerator anddenominator would bepreserved.
B. Interest
33. Beyond thequestion ofinflation, theGroup discussed theextent towhich allocated subsidy
amounts alsoshould beadjusted insome waytoincorporate anelement of"real" interest. TheGroup
concluded thatitwould beappropriate tomake some adjustment forrealinterest where subsidies are
allocated overtime.
34. Thisconclusion wasarrived atfromseveral different perspectives. First, asdiscussed above,
theGroup recognized thatwhere governments borrow, aninterest costwillbeincurred which generally
willnotbeabletobeidentified withanyparticular setofexpenditures made fromtheborrowed funds.
Thiswasdeemed toargue infavour ofattributing some interest costtoallsubsidies. Theadditional
perspectives brought tobearonthisquestion were opportunity costtothegovernment andthetime
value ofmoney, asdiscussed. Either ofthese perspectives would involve imputation ofsome interest
component toallocated subsidies, asameasure ofthecostofforegone usesofthefunds overtherelevant
period, orasameans ofmaintaining thesubsidies 'realvalue andsignificance astheymove through
time.
C. Methodology1(Recommendation 3)
35. Inviewoftheforegoingconsiderations,andthedifficultiesencounteredbytheGroupinreaching
consensus onasingle theoretical basis foraconceptually pureallocation methodology, theGroup
recommends thatallocated subsidy amounts beadjusted fullyforinflation andinclude aswellaportion
ofthe"real" interest rate. Itisspecifically recommended thatthisbedonebyattributing toallocated
subsidy amounts thefullrateofinflation plusone-half ofthedifference between therateofinflation
1Asnoted above, thisrecommended approach applies toallocated subsidies other thanloans.G/SCM/W/415
Page10
andthegovernment borrowing rateondebtwhose maturity mostclosely approximates theallocation
period ofthesubsidy. IntheGroup 'sview, thisapproach provides anapproximation ofthepreviously-
mentioned components ofgovernment costs offunds, aswellanadministratively practicable method
ofmaintaining therealvalue ofasubsidy overagiven period. Theonlyexception tothisapproach
would bewhere therateofinterest waslessthantherateofinflation (which might occur during periods
ofhighinflation). Inthiscircumstance, therecommended adjustment factor isthefullrateofinflation,
unadjusted foranyinterest component.
36. TheGroup further recommends that,asageneral principle, theadjustment factor should be
derived from theinterest andinflation ratesprevailing atthetimethesubsidy isreceived, andthat
thisfactor bekeptconstant throughout theallocation period. Thus, forevery yearofanallocation
period, excluding theyearofreceipt, theallocated subsidy amount would reflect anamount forthe
compounded adjustment factor.2TheGroup recognizes thatkeeping theadjustment factor fixed over
theallocation period maynotbeappropriate during periods ofsignificant changes ininflation andinterest
rates. Insuchcases, derivation oftheadjustment factor onanannual basis overthecourse ofthe
allocation period maybemore appropriate.
37. Thefollowing example illustrates howtheadjustment factor would bedetermined. Ifthe
government 'sborrowing rateis10%andtherateofinflation is6%atthetimethesubsidy isreceived,
theadjustment factor would be8%: 6%(inflation rate)plus2%,calculated asone-half ofthefour-
percentage-point difference between 10%(government borrowing rate)and6%(inflation rate). In
practice, thisadjustment factor canbecalculated asthearithmetic average oftheinflation rateand
thegovernment borrowing rate.
38. Theallocation methodology recommended bytheGroup inthissection ismade exclusively
inthecontext ofArticle 6.1(a) andAnnex IV,andassuchisnotintended toaffect theallocation
methodologies followed byindividual countries employing countervailing measures. Alsobyvirtue
ofthiscontext, thisrecommendation islimited tothecost-to-government perspective formeasuring
asubsidy, andthusisintended toberelevant onlywithrespect tothatperspective.
D. DataSources forGovernment Borrowing Rates (Recommendation 4)
39. Inthecontexts ofboththeadjustment factor justdiscussed, andthecomparator interest rates
fordetermining thecosttogovernment ofsubsidies intheformofloans (seeSection VIII.B), theGroup
recognized thatsome means ofidentifying government borrowing rateswould benecessary. Inthis
regard, theGroup concluded thattheyieldtomaturity ongovernment securities (newissues orthose
trading insecondary markets) represents themost accurate measure oftherateofinterest paidbya
government. Byidentifying abond orother government debtinstrument withtheappropriate term
tomaturity, itwould bepossible tomatch theallocation periods ofthesubsidies andthematurities
ofthegovernment debtinstruments, asforeseen intheGroup 'smethodological recommendations.
40. Avariety ofsources forinformation onthesecondary market forgovernment securities were
identified. Particularly noted forbeing available onafullyup-to-date basis, andforbeing apparently
comprehensive intheircoverage ofissuing countries, markets andcurrencies, aretheon-line services
ofReutersandBloomberg.Moody'sInternationalManualandtheIMF'sGovernmentFinanceStatistical
Yearbook were identified asadditional sources ofinterest ratesongovernment bonds.
2TheGroup discussed theissue ofwhether theadjustment factor should beapplied totheyearof
receipt. Duetothedifferences withrespect totheconceptual bases fortheadjustment factor, theGroup
haddifficulty reaching aconsensus. Intheend,theGroup decided thattheadjustment factor should
notbeapplied tothesubsidy amount allocated totheyearofreceipt.G/SCM/W/415
Page11
V. INFLATIONARY ECONOMY COUNTRIES (Recommendation 5)
41. Thesecond major issue discussed inthecontext ofinflation isthequestion of"inflationary
economy countries". Paragraph 5ofAnnex IVprovides explicitly forindexing thesalesdenominator
forinflation where therecipient firmislocated inan"inflationary economy country". Anumber of
questions were identified anddiscussed withrespect tothisparagraph.
A. Definition of"Inflationary"
42. Itwasnoted asaninitial matter thatAnnex IVdoesnotdefine theterm"inflationary economy
country", butitwasgenerally believed that"inflationary" inthecontext ofparagraph 5isintended
torefertocountries withhighinflation. Ifsuchalimitwerenotadopted, arguably anycountry with
apositive rateofinflation would be"inflationary" inthesense ofparagraph 5.Yetthefactthatthis
paragraph setsinflationary economy countries apartasaspecial caseseems toindicate thatonlycertain
countries should becovered byitsprovisions.
43. Various possible means foridentifying "inflationary" countries were discussed. First, the
possibility ofestablishing afixed numerical definition wasconsidered. Inthiscontext, itwasnoted
thatneither theInteramerican Development Bank, northeWorld Bank, northeInternational Monetary
Fund usesanynumerical standard todefine "inflationary" economy countries. Moreover, while the
United States inpastanti-dumping cases hasused50%, more recently theUSmethodology hasmoved
away from suchanumerical approach. TheGroup concluded that,without some external reference
point, anumerical standard would notbeadvisable, asitwould bedifficult todefine andjustify.
44. Therefore, theGroup recommends thatthedetermination ofwhether acountry isinflationary
inthesense ofparagraph 5ofAnnex IVshould bemade casebycase, based ontwocriteria: (1)a
comparison ofthatcountry 'srateofinflation withtheaverage rateinOECD Member countries3;and
(2)theextent towhich inflation indexing isusedroutinely intransactions andaccounting. (Itwasnoted
thatifacompany routinely indexes itssalesvalues forinflation, suchindexed salesvalues could be
usedasthesalesdenominator inthesubsidy calculations performed pursuant toArticle 6.1(a)).
B. Whether andHow toReflect Inflation inNumerator
45. Paragraph 5ofAnnex IVprovides explicitly forinflation indexing ofthesalesdenominator
for"inflationary economies", butissilent withrespect tothenumerator. Asdiscussed inSection IV,
theGroup ’sgeneral recommendation isthatsubsidy amounts (thenumerator) beadjusted foratleast
therateofinflation. Therecommendation inaddition provides forthepossibility thattheadjustment
factor could berevised annually ifinflation andinterest ratesarechanging rapidly. Inviewofthis,
theGroup found thatnoadditional recommendation wasneeded regarding adjusting thenumerator
forinflation inthecaseofinflationary economy countries.
46. Thequestion ofwhich inflation index orindexes toapply tothenumerator anddenominator
inthecaseofinflationary economy countries wasconsidered. Inparticular, countries thatuseinflation
indexing normally publish anduseaseries ofdifferent inflation indexes, andnotallcountries will
create thesamenumber ortypeofsuchindexes. Thus, itmight bedifficult toidentify asingle standard
inflation index thatwould necessarily existorcould appropriately beapplied toallsituations thatmight
ariseunder paragraph 5ofAnnex IV.
3Ifthecountry involved isanOECD Member, thisaverage should exclude thatcountry.G/SCM/W/415
Page12
47. Inparticular, while itwasrecognized thatestablishing asthenorm theuseofthegeneral
composite rateofinflation could increase thetransparency andpredictability oftheoutcome where
aninflationary economy country wasinvolved, italsowasrecognized thatsuchanapproach might
havelimitations. Thatis,iftheGroup recommended thisoranyother single inflation index, such
anindex might notbeappropriate toallsituations.
48. Moreover, itwasacknowledged thatadifferent index might needtobeapplied tothenumerator
from thatapplied tothedenominator. Forexample, ifagrant were tiedtothepurchase ofafixed
asset, itmight beappropriate touseacapital goods index tomake theinflation adjustment tothe
numerator (thesubsidy), whereas itmight beappropriate touseaconsumer goods index toadjust the
salesdenominator (i.e., ifthegoods produced bythefixed assetwereconsumer goods). Itwasnoted
thattherecipient firm'saccounting records could provide useful guidance indetermining whether to
usetwodifferent indexes inthisway,andifsowhich one. Itwasdeemed appropriate toleave open
thequestion ofwhich index(es) toapply inanygiven situation under paragraph 5ofAnnex IV,keeping
theforegoing considerations inmind.
49. TheGroup discussed asanalternative converting thesubsidy amounts andsalesdenominators
toastable currency commonly usedininternational business transactions, ortoabasket ofcurrencies
(such asthePurchasing Power Parity index ortheaverage forOECD countries). Itwasnoted that
insome inflationary economies, suchcurrency conversions aremade instead ofinflation indexing in
international accounting practices, andinthepreparation ofconsolidated accounting balances. Ifsuch
anapproach weretaken, separately indexing forinflation would notbenecessary, andthustherewould
benoneed toidentify theappropriate inflation indexes tobeapplied tothenumerator andthe
denominator. Moreover, ifsuchacurrency conversion were made, thentheadjustment factor for
inflation andinterest recommended inSection IVandRecommendation 3could bebased oninflation
andinterest ratesforthecurrency orbasket ofcurrencies used, considerably simplifying thecostto
government andsubsidization calculations. Ifabasket ofcurrencies wereused, itwasnoted thatit
would beadvisable toweight average theexchange ratesincluded bysome appropriate factor.
VI. SALES DENOMINATOR (Recommendation 6)
A. Period onwhich Sales Denominator isBased (Recommendation 6,parts A-C)
50. Theissuesinvolvedinidentifyingtheappropriatesalesdenominatorforcalculationsofadvalorem
subsidization ofaproduct, within theconfines established byAnnex IV,werediscussed extensively.
Attheoutset, theguidance inparagraphs 2and3ofAnnex IVonthisissue wasacknowledged. In
particular, these paragraphs provide thattherelevant sales datashall bethose forthemost recent
12-month period preceding theperiod inwhich thesubsidy isgranted. Thegeneral viewwasthatthis
means that,except asotherwise explicitly provided, alagwillalways existbetween theperiod covered
bythenumerator andthatcovered bythedenominator (i.e., current-year subsidies willbedivided
bytheprevious year'ssales).
51. Twospecial cases inthecontext ofthisgeneral rulewereidentified. Thefirstoccurs inthe
caseofaninflationary economy country, where salesinthepreceding calendar yeararetobeindexed
fortheinflation experienced during themost recent 12-month period. Thatis,while there isalag
inthebasic data, thedatathemselves areinasense updated through theapplication oftheinflation
index.
52. Thesecond special casepertains tothetreatment oftax-related subsidies, assetforth in
Footnote 64toAnnex IV.Thisfootnote states thatfortax-related subsidies, thevalue oftheproduct
istobe"thetotalvalue oftherecipient firm'ssalesinthefiscal yearinwhich thetaxrelated measure
wasearned" (emphasis added). Thislanguage indicates thatasingle period should beusedinidentifyingG/SCM/W/415
Page13
thenumerator andthedenominator, i.e.,theperiod inwhich thesubsidy wasearned, which would
mean thatnolagwould bepresent. Itwasnoted inthiscontext thatthe"earning" ofataxsubsidy
normally occurs during thefiscal yearpreceding thefiscal yearinwhich therelated taxreturn isfiled.
Thus, taxrevenue normally willbeforegone bythegranting government intheyearafterthetaxsubsidy
isearned. Taking intoaccount thelanguage ofFootnote 64,theGroup recommends incalculations
ofadvalorem subsidization fromtaxsubsidies thatthenumerator should betheamount ofthetaxsubsidy
earned inthefiscal yearpreceding thefiscal yearinwhich therelevant taxreturn wasfiled, andthat
thedenominator should bethecompany 'ssales inthatsame fiscal year, i.e.,theonepreceding the
fiscal yearinwhich thetaxreturn wasfiled.
53. TheGroup further noted thatthereference, inparagraphs 2and3ofAnnex IVto"themost
recent 12-month period, forwhich salesdataisavailable, preceding theperiod inwhich thesubsidy
isgranted" wassomewhat ambiguous. Inparticular, theperiod referred tomight beeither therecipient
firm'smost recent accounting year, oralternatively, theactual 12months immediately prior tothe
month inwhich thesubsidy wasgranted (whether ornotthisperiod coincided withtherecipient 's
accounting year). TheGroup recommends, because ofthepossibility ofyear-end adjustments for
discounts, rebates, returns, etc.,andgeneral easeofobtaining data, thatthesalesdataforthemost
recent accounting yearbeused. Under thisapproach, ifasubsidy weregranted inApril, andthefirm's
accounting yearwasthecalendar year, thesales denominator would bethefirm'ssales during the
preceding calendar year. Inaddition, theGroup recommends thatthesalesdatausedbenetrather than
gross sales.
B. Variability (Recommendation 6,PartD)
54. Afurther question discussed regarding thesalesdenominator waswhether andwhen thesales
denominator should varyinthecalculation oftheadvalorem rateofsubsidization from allocated
subsidies. Several possibilities were discussed. Oneapproach would betoestablish asingle sales
denominator foreachsubsidy -thelevel ofsalesduring theyearpreceding theperiod inwhich the
subsidy wasgranted -andcarry thatdenominator forward forthatsubsidy fortheentire period over
which thesubsidy wasallocated. Thus, iftheaggregate amount ofsubsidization intheyearbeing
reviewed consisted ofallocated amounts ofthreesubsidies, eachofwhich hadbeengranted inadifferent,
prior year, there would bethree salesdenominators (oneforeachsubsidy), which would beusedto
determine aseparate advalorem rateofsubsidization foreachsubsidy fortheyearofreview. These
advalorem percentages, eachofwhich hadbeencalculated overadifferent year'ssales level, then
would beadded together todetermine theoverall rateofsubsidization. Thefactthatkeeping thesales
denominatorfixedwouldtendtooverestimatetheactualrateofsubsidizationduringperiodsofexpanding
sales, while tending tounderestimate thisrateduring periods ofdeclining sales, wasidentified asa
drawback, while thecertainty ofestablishing asingle advalorem rateofsubsidization foreachallocated
subsidy wasidentified asanadvantage.
55. Asecond approach would betoapply asingle salesdenominator toallsubsidies granted in
orallocated toagiven year. Thisdenominator would bethelevelofsalesduring theyearpreceding
themost recent granting ofasubsidy. Thus, during theperiod ofallocation ofasubsidy, thesales
denominator would remain fixed atthelevelofsalesduring theyearpreceding thefirstsubsidy, until
asecond subsidy wasgranted, atwhich point thesalesdenominator applied tobothsubsidies would
shifttothelevelofsalesduring theyearpreceding thegranting ofthesecond subsidy, andsoforth.
Thisapproach wasviewed asapossible means toestablish some degree ofpredictability astotherate
ofsubsidization thatwould arisefrom eachsubsidy, while atthesame timeallowing forchanges in
thelevelofsalesovertimetobeatleastpartially incorporated. Ontheother hand, thisapproach would
suffer from thesame potential foroverstatement orunderstatement oftheadvalorem subsidization
asthefirstapproach.G/SCM/W/415
Page14
56. Because ofthelimitations ofthefirsttwoapproaches, andbecause itisviewed asmore closely
reflecting reality, theGroup recommends athird approach, under which eachyearofanallocation
period would haveitsownsalesdenominator, i.e.,theprevious year'ssaleslevel. Thus, ifasubsidy
granted in1996wereallocated overfiveyears, thesalesdenominator usedtodetermine the1996rate
ofsubsidization would be1995sales, thedenominator forthe1997rateofsubsidization would be1996
sales, etc.Thisapproach suggests thatwhere allocated subsidies wereinvolved, theword "granted"
inparagraph 2ofAnnex IVwould betaken tomean "allocated". Inother words, thedenominator
would betherecipient 'ssalesduring themostrecent 12-month period preceding theperiod towhich
therelevant portion ofthesubsidy wasallocated.
57. Amajor consideration inmaking thisrecommendation isthatfacts, inparticular, companies ’
saleslevels, change overtime. Forexample, acompany 'sscope ofoperations mayexpand orcontract,
orinflation maychange thevalue ofsalesevenwhere thevolume remains constant. Varying thesales
denominator eachyearwasdeemed thebestwaytoensure thatthelevelofsubsidization wascalculated
onanup-to-date basis foreachyearofanallocation period. Inthisconnection, theGroup alsonoted
thatadjusting thesalesdenominator eachyearisconsistent withitsrecommendation toadjust allocated
subsidy amounts forinflation andinterest eachyear. Onbalance, thesepositive elements weredeemed
tooutweigh anydecrease inpredictability thatmight result from suchanapproach.
C. Calculation ofthe5%onanIndustry-Wide orFirm-Specific Basis (Recommendation 6,PartE)
58. Another question raised inthecontext ofthesales denominator waswhether advalorem
subsidization istobemeasured onafirm-specific orindustry-wide basis. Onthispoint, arange of
views wasexpressed. Ifsubsidization werecalculated onafirm-specific basis, apresumption ofserious
prejudice could ariseevenwhere onlyonesmall firmreceived subsidies amounting tomore than5%
ofitssales, while themajority oftheindustry wasunsubsidized. Ontheother hand, ifsubsidization
werecalculated onanindustry-wide basis, there might benopresumption ofserious prejudice, even
where asingle firmwasheavily subsidized, solongasother firms received small ornosubsidies.
59. Infavour ofanindustry-wide approach, itwasstated thatArticle 6.1(a) 'sreference to"total
advalorem subsidization ofaproduct exceeding 5%"could beviewed asrequiring acalculation of
subsidization oftheproduct asawhole, rather thantheproduct produced byanindividual subsidized
firm. Forexample, inanindustry consisting offivefirms, twoofthefivemight receive more than
5%subsidization, while theweighted average rateofsubsidization fortheindustry asawhole (counting
thenon-subsidized firms sales) might belessthan5%.
60. Inthisconnection, some concern wasexpressed overthepossibility thatsubsidization ofa
single firmcould giverisetoapresumption ofserious prejudice under Article 6.1(a), evenwhere the
industry-average subsidization oftheproduct waslessthan5%,inparticular, thatthismight giverise
tonon-meritorious cases.
61. Inspiteofthese concerns, however, theGroup concluded thatthelanguage ofArticle 6.1(a)
andAnnex IVprovide forcalculation ofsubsidies onafirm-specific basis. Inparticular, itwaspointed
outthatparagraphs 2-5ofAnnex IVareworded entirely interms ofindividual recipient firms. In
thiscontext, italsowasnoted thatArticle 6.1(a), while referring tothetotaladvalorem subsidization
ofaproduct, alsodirects through footnote 14thattherateofsubsidization istobecalculated in
accordance withAnnex IVwhich, asnoted, iscouched interms ofindividual recipient firms. Further,
thereference to"total" subsidization could betaken tomean totalsubsidization under multiple
programmes received byanindividual firm. Inaddition, itwasnoted thattheenumeration inArticle 6
oftheadverse effects thatconstitute serious prejudice case(e.g., priceundercutting, anddisplacement
ofexports ofalikeproduct) could result from individual firmactions, andthatunder Article 6.1(c),
subsidization ofanindividual enterprise explicitly gives risetoapresumption ofserious prejudice.G/SCM/W/415
Page15
TheGroup alsonoted that,inanyevent, firms withlessthan5%subsidization would notbepresumed
tobecausing serious prejudice.
D. "Tying" ofsubsidies toparticular products (Recommendation 6,PartF)
62. Thereference inparagraph 3ofAnnex IVtothe"tying" ofsubsidies tocertain products in
calculating advalorem subsidization wasdiscussed. Thisprovision indicates thatforsubsidies tied
totheproduction orsaleofagiven product, therelevant denominator issalesofthatproduct, while
paragraph 2ofAnnex IVprovides thatforallother subsidies, therelevant denominator istherecipient
firm'stotalsales. Paragraph 3doesnotspecify how"tying" istobeestablished, however, leaving
openanumber ofquestions, forexample, howclosely related toaproduct asubsidy must betobe
"tied" tothatproduct; andhowthesaleofassets/plants affects theamount ofasubsidy andits"tying"
toaproduct.
63. Itwasnoted thatthepanel report onLead andBismuth Steel contains language relevant to
thequestion of"tying" which could provide useful guidance, andwhich forms thebasisfortheGroup 's
recommendations onthispoint. Under thisapproach, asubsidy would bedeemed tobetiedifits
intended usewasknown tothegiver ofthesubsidy, andsoacknowledged, prior toorconcurrent with
thesubsidy 'sbestowal. Itwasrecognized thatother possible approaches might existaswell.
E. SalesDenominatorsforTiedandUntiedSubsidies,andAggregationofadvaloremSubsidization
from Different Kinds ofSubsidies (Recommendation 6,PartG)
64. Afurther question pertains toidentifying thecorrect salesdenominator where bothtiedand
untied subsidies arereceived. Inparticular, paragraph 6ofAnnex IV'srequirement that"subsidies
given under different programmes andbydifferent authorities intheterritory ofaMember shallbe
aggregated" raises thequestion generally ofhowsuchaggregation should bedonewhen calculating
advalorem subsidization.
65. TheGroup recognizes that,asrequired byAnnex IV,where asubsidy istiedtoaparticular
typeofproduct, thesubsidy received should bedivided bysalesofthatproduct. TheGroup further
recognizes that,asalsorequired byAnnex IV,where asubsidy isuntied, thesubsidy amount should
bedivided bythecompany 'stotalsales. Inthisconnection, theGroup recommends thatwhere amixture
oftiedanduntied subsidies isreceived, therespective advalorem subsidy calculations should be
performed separately (each using theappropriate sales denominator), andtheresulting advalorem
percentages added together toarrive atthetotaladvalorem subsidization oftheproduct.
66.Forexample, assume thatanArticle 6.1(a) casehasbegun withrespect tomilk. Ifacompany
produces steelandmilk, andreceives atiedsubsidy toproduce milk, thesubsidy amount should be
divided bytherecipient company 'ssalesofmilktodetermine theadvalorem subsidization fromthat
subsidy. Ifthecompany alsoreceives anuntied subsidy, thissubsidy amount should bedivided by
thefirm'stotalsalesofsteelandmilk. Thetworesulting advalorem percentages thenshould beadded
together toarrive atthetotaladvalorem subsidization ofmilk.
67. Another question pertaining tothesalesdenominator iswhether asingle salesdenominator
should beusedwithrespect tosubsidies ofdifferent scopes, forexample, export versus domestic
subsidies, orsubsidies forsales toparticular markets. (Inthiscontext, itisrecalled thatanexport
subsidy might beincorporated intoanArticle 6.1(a) allegation, rather thanseparately being usedas
thebasisforanallegation ofprohibited subsidy under theArticle 4procedures. SeeSection I.B,above.)
TheGroup considered butdidnotreach aconsensus onwhether export subsidies should bedivided
byexport salesorbytotalsales, noronwhether subsidies tiedtoparticular markets should bedivided
bysalestothatparticular market orbytotalsales.G/SCM/W/415
Page16
VII. START-UP SITUATIONS (Recommendation 7)
68. Thequestion ofrecipient firms "inastart-up situation", asprovided forinparagraph 4of
Annex IV,wasdiscussed. Itwasrecognized bytheGroup thatthelackofexperience inapplying
paragraph 4precluded thedevelopment ofrecommendations inthisarea. Inparticular, theGroup
recognized thatfootnote 65toAnnex IVwould needtobeconsidered indefining thecommencement
ofastart-up period.
69. Thedescription inparagraph 4astowhen thestart-up period ends, namely oneyearafterthe
beginning ofproduction oftheproduct, wasseenassuggesting thatastart-up period could begin several
years before production began, andextend through theendofthefirstyearofproduction. Itwas
recognized, however, thatparagraph 4doesnotspecify inprecise terms atwhatpoint "production"
would beconsidered tohavebegun (i.e., production forsale,production incommercial quantities,
production ofaprototype, etc.).
70. Thequestion alsowasraised astothenumerator anddenominator forcalculation ofthe15%
subsidization threshold inthecontext ofastart-up (thatis,whether theoverall rateofsubsidization
exceeds 15%oftotalfunds invested). Itwasconcluded thatthenumerator should bethetotalabsolute
amount ofsubsidies received during therelevant period, andthedenominator should betotalfunds
invested.
71. While recognizing again thatwithout experience inimplementing paragraph 4establishment
ofamethodology wasnotpossible, itwasnoted thatingeneral terms, funds invested could beviewed
asbeing equal tototalassets: land, buildings, equipment, andother assets. Thepoint wasmade that
thequestion ofhowthese assets were financed wasnotrelevant tomeasuring theirvalue. Thatis,
funds invested should notbelimited tothefirm'sequity, inviewofthefactthatdebtfinancing could
beusedaswell. Thus, the"assets" sideofthebalance sheet should provide thegeneral basis for
determining theamount offunds invested.
72. Aquestionwasraisedastowhatportionofasubsidizedloanshouldbeincludedinthecalculation
ofthetotalvalue ofsubsidies received during thestart-up period. Inparticular, itwasquestioned
whether theprincipal amount oftheloanplustheinterest subsidy should beincluded, orwhether only
theinterest subsidy should beincluded. TheGroup noted thatasageneral principle, onlytheinterest
subsidy should beincluded. Among other reasons, ifthefullprincipal amount were included, this
would mean thatthetreatment ofsubsidized loans inthecontext ofastart-up situation would bedifferent
fromthatinthegeneral, non-start-up context. (SeeSection VIII.B, below, onloans.) Nevertheless,
thepossibility wasdiscussed thatifthestart-up firmcould nothaveobtained theloanfromanyother
source atanyreasonable market price/cost, itmight beappropriate toinclude thefullprincipal amount
inthecalculation oftotalsubsidies received. Nofirmconclusion wasreached onthisissue.
73. Italsowasnoted thattheprotection afforded tothesubsidy recipient bythe15%threshold
onlylastsforalimited period. Thus, ifafirmreceived aconsiderable amount ofstart-up subsidization,
although notenough toreach the15%threshold, acasebased onthe5%threshold could bebrought
oncethefirstyearofproduction hadpassed.
74. Italsowasdiscussed, andisrecommended, thatwhether ornotaserious prejudice casebased
onthestart-up provisions wasbrought under paragraph 4ofAnnex IV,anylater(post-start-up period)
cases based onthe5%threshold should include anyportions ofstart-up subsidies thatwereallocable
totherelevant period forpurposes ofthe5%calculation. Toexclude suchearly subsidies fromlater
5%cases simply onthegrounds thattheywerestart-up subsidies would create amulti-year grace periodG/SCM/W/415
Page17
forthesesubsidies, which would beinconsistent withtheclearend-point forthestart-up period reflected
inparagraph 4.
VIII. COSTTOGOVERNMENTOFANDADVALOREMSUBSIDIZATIONFROMDIFFERENT
TYPES OFSUBSIDIES
75. Beyond theforegoing cross-cutting issues (e.g., allocation, inflation, interest, sales
denominator, etc.), which would affect calculations involving allkinds ofsubsidies, itwasrecognized
thatcalculating thecosttogovernment ofanygiven kindofsubsidy might raiseissues unique tothat
kindofsubsidy. Thus, thequestion ofthecosttogovernment ofasubsidy wasdiscussed extensively
inthecontext ofparticular kinds ofsubsidies.
A. Grants (Recommendation 8)
76. Twobasickinds ofgrants, outright grants andreimbursable grants, wereidentified. Moreover,
itwasnoted thatgrants might beprovided ininstalments, rather thanasone-time payments.
1. Outright grants (Recommendation 8,PartA)
77. TheGroup agreed thatatthemost basic level, thecosttogovernment ofagrant isitsface
value. Inaccordance withthegeneral methodology recommended, forallocated grants thisamount
would beadjusted toreflect inflation andinterest.
78. Forgrants paidininstalments, itisrecommended thateachinstalment betreated asaseparate
grant. Thisapproach isconsistent withtherecommendation tovarythesalesdenominator eachyear
during anallocation period. Italsoallows foranydifferences between theamount ofaninstalment
grant authorized andtheamount actually paidtobereflected inthecalculations inasimple and
straightforward way.
2. Reimbursable Grants (Recommendation 8,PartB)
79. Forgrants withterms thatinclude theobligation ofreimbursement intheevent thatcertain
conditionsarefulfilled(e.g.,thattherecipientbecomesprofitable),thesimilaritywithcontingentliability
loans wasrecognized (seeSection VIII.B.2, below). Given this,itisrecommended thatduring the
period before theyarereimbursed, reimbursable grants betreated asaseries ofshort-term interest-free
loans. Thecosttothegovernment insuchacasewould becalculated using themethodology forordinary
loans, described below.
80. Itisrecognized that,regardless ofthefactthatagiven grant wasnominally reimbursable, it
might bedetermined atsome point thatsuchagrant infactnever would bereimbursed (asinthecase,
forexample, ofachronically unprofitable recipient). Thus, itmaybecome appropriate todetermine
thatanominally reimbursable grant ineffect hasbecome anoutright grant, andtotreatitassuch.
Insuchasituation, thecosttothegovernment ofthegrant would beitsoutstanding amount asofthat
date(thatis,theoriginal amount lessanyreimbursement thathadbeenmade tothatpoint).
81. Given thatwhere areimbursable granthasbecome anoutright grantthisissimilar toaninstance
ofdebtforgiveness, itisrecommended thattheallocation period foranysuchoutstanding amount should
begin onthedateasofwhich itisdetermined thatthisamount effectively hasbecome anoutright grant.
Thisapproach isrecommended toensure thatthe"principal amount" ofreimbursable grants iscaptured
inArticle 6.1(a) subsidy calculations where suchgrants havebeenoutstanding forlengthy periods and
havenorealistic prospect ofbeing reimbursed. Todootherwise would mean thatonlyanimputedG/SCM/W/415
Page18
interest costassociated withwhateffectively wereoutright grants would bereflected inArticle 6.1(a)
calculations.
B. Loans (Recommendation 9)
82. Twodifferent kinds ofloans, ordinary loans andcontingent liability loans, werediscussed in
thecontext ofcosttogovernment.
1. Ordinary loans (Recommendation 9,PartA)
83. Itisrecommended thatthecosttothegovernment ofanordinary loanbemeasured based on
theextent towhich theeffective interest ratecharged ontheloanprovided islower thantheappropriate
government bond rateintheyearinwhich theloanisgiven. Forshort-term government loans (i.e.,
loans withamaturity oflessthanoneyear), theappropriate bond ratewould bethatonshort-term
government bonds ofcomparable maturity. Forlong-term government loans, theappropriate bond
ratewould bethatonlong-term government bonds ofcomparable maturity. Asasimplified example,
iftheappropriate government bond ratewas5%,andtheinterest rateontheloanwas4%,thecost
tothegovernment ofproviding theloanwould beonepercentage point ofinterest. Anygrace period
provided bythegovernment loan, during which timeinterest didnotaccrue, alsowould beconsidered
acostincurred bythegovernment, calculated using theappropriate government bondrate.Forpurposes
ofestablishing arelatively simple andpredictable calculation methodology, itisfurther recommended
thatthebenefits thuscalculated bedeemed toariseonayear-by-year basis overthelifeoftheloan
(i.e., asaseries ofrecurring grants). TheGroup alsonotes thatdeferrals ofprincipal and/or interest
normally willgiverisetoadditional costs tothegovernment.
2. Contingent liability loans (Recommendation 9,PartB)
84. Itwasnoted thatcontingent liability loans aresimilar toreimbursable grants, inthattheyare
repayable onlyupon theoccurrence ofsome future event, suchasachievement ofacertain levelof
profitability. Because itisimpossible topredict theoccurrence offuture events, itisrecommended,
asforreimbursable grants, thatcontingent liability loans betreated asiftheywere aseries ofshort
terminterest-free loans forpurposes ofdetermining thecosttothegovernment.
85. Ifsuchloans eventually wererepaid, theamount ofthesubsidy would be,asforordinary loans,
theshortfall, ifany,between theamount repaid andthegovernment ’sinterest costcalculated using
theappropriate government bond rate.
86. Itwasrecognized that,aswithreimbursable grants, itmight bedetermined thatagiven
contingent liability loanwould notberepaid. Intheevent thatsuchaconclusion wasreached, itis
recommended thatsuchloans betreated asgrants. Inthese circumstances, theamount ofthesubsidy
(i.e., thecosttothegovernment) would bethefaceamount oftheloanlessanyrepayments, plus
accrued interest calculated using thegovernment 'slong-term bond rate.
87. Given thatwhere acontingent liability loanhasbecome anoutright grant thisissimilar toan
instance ofdebtforgiveness, itisrecommended thattheallocation period foranyoutstanding contingent
loanamount begin onthedateasofwhich itisdetermined thatthisamount effectively hasbecome
anoutright grant. Thisapproach isrecommended toensure thattheprincipal amount ofcontingent
liability loans iscaptured inArticle 6.1(a) subsidy calculations where suchloans havebeenoutstanding
forlengthy periods andhavenorealistic prospect ofbeing repaid. Todootherwise would mean that
onlyanimputed interest costassociated withwhateffectively wereoutright grants would bereflected
inArticle 6.1(a) calculations.G/SCM/W/415
Page19
C. Interest RateSubsidies (Recommendation 10)
88. Thequestion ofinterest ratesubsidies, asdistinct from subsidized government loans, was
discussed. Inparticular, itwasnoted thatsuchsubsidies might arisewhere theloanitselfwasobtained
from acommercial source, withthegovernment covering some oralloftheinterest cost.
89. Twopossible cases ofinterest ratesubsidies were identified. Thefirstwould bewhere, as
ofthereceipt oftheloan, oratsome laterpoint, thegovernment subsidized theinterest expense on
anongoing basis aspayments became due. Inthissituation, itisrecommended thatthesubsidy be
calculated astheamount ofinterest covered bythegovernment. Itisrecommended thatsuchinterest
amounts betreated asaseries ofrecurring grants provided onthedates onwhich interest payments
were due.
90. Thesecond casewould bewhere thegovernment provided, atacertain point intime, alump
sumpayment tooffset therecipient 'sinterest expenses (whether withrespect topastinterest, paidor
unpaid, orwithrespect tofuture interest expenses). Inthissituation, itisrecommended thattheamount
ofthesubsidy, oncepaid, betreated asanon-recurring grant.
D. Debt Forgiveness (Recommendation 11)
91. Thequestion ofhowtotreat, inthecontext ofArticle 6.1(a), subsidies intheform ofdebt
forgiveness wasdiscussed. Asoneaspect ofthisissue, itwasnoted thatthefactthatsubsidies ofthis
typewould giverisetoaseparate rebuttable presumption ofserious prejudice under Article 6.1(d)
didnotmean that such subsidies necessarily would beirrelevant inthecontext of
paragraph 6.1(a)/Annex IV.Forexample, itisforeseeable thatasingle actofdebtforgiveness might
befoundnottohavecaused,byitself,seriousprejudice(i.e.,thepresumptionwouldhavebeenrebutted).
Nevertheless, iftheoverall rateofsubsidization (from thatsubsidy plusother subsidies tothesame
product) amounted tomore than5%advalorem ,asecond rebuttable presumption would becreated.
Conversely, however, thefactthatagiven instance ofdebtforgiveness wasinvolved inanArticle 6.1(a)
casewould notprejudice theseparate presumption thatwould existbydefinition under Article 6.1(d).
92. Totheextent thatsubsidies intheformofdebtforgiveness areatissueinagiven caseunder
Article 6.1(a), itisrecommended thatthecosttothegovernment bemeasured astheamount ofthe
government outlay (i.e.,theoutstanding principal plusaccrued interest). Thisamount should betreated
asagrant received onthedatethedebtisforgiven.
E. LossCoverage (Recommendation 11)
93. Thequestion ofhow,inthecontext ofArticle 6.1(a), totreatsubsidies tocover operating losses
raises similar questions tothose withrespect todebtforgiveness. Thatis,asinthecaseofdebt
forgiveness, inclusion ofsubsidies forlosscoverage inanArticle 6.1(a) casewould bewithout prejudice
totheseparate presumption ofserious prejudice towhich suchsubsidies would giveriseunder either
Article 6.1(b) or(c).Ontheother hand, anysuchseparate presumption would notprevent subsidies
ofthiskindfrom being included inacalculation ofadvalorem subsidization inthecontext of
Article 6.1(a).
94. Totheextent thatsubsidies intheform oflosscoverage areatissue inagiven caseunder
Article 6.1(a), itisrecommended thatthecosttothegovernment bemeasured astheamount ofthe
losscoverage provided. Thisamount normally should betreated asagrant, unless thelosscoverage
takes some other form.G/SCM/W/415
Page20
F. TaxConcessions (Recommendation 12)
95. Onthegeneral question ofhowtomeasure thecosttogovernment oftaxconcessions, itwas
agreed thatinprinciple, thecosttogovernment would bethefaceamount ofrevenue foregone.4It
wasrecognized thatthecalculation ofthisamount inanygiven casewould depend ontheparticular
typeoftaxconcession involved. Italsowasnoted thattheconcept of"tax" inthiscontext potentially
could encompass allmechanisms whereby governments generate revenue, including import andexport
duties, social security contributions, etc.
1. Accelerated depreciation
96. Foraccelerated depreciation, twoapproaches tocalculating thecosttogovernment (i.e,the
revenue foregone) werediscussed. Thefirstwould betocalculate thesubsidy onayear-by-year basis,
onlyforthose years inwhich thegovernment foregoes revenue, onthegrounds thatitisimpossible
topredict thebeneficiary 'struetaxliability overtheentire depreciation period. Moreover, itwas
noted that,although accelerated depreciation programmes generally areconstructed insuchamanner
thattaxreductions early onarerecaptured attheendoftheperiod, inpractice suchrecapture may
never occur. Forexample, ifthebeneficiary company isunprofitable attheendoftheperiod, ittypically
would incur notaxliability. Inaddition, evenifprofitable attheendoftheperiod, itmayhaveincurred
earlier losses thatcould havebeenbrought forward tooffset current profits, again removing orreducing
thetaxliability thatotherwise would havearisen atthattime. Further, ifnewequipment werepurchased
toward theendofthedepreciation period, accelerated depreciation effectively could be"rolled over"
uponthecommencement ofanew,front-loaded accelerated depreciation period onthenewequipment,
again meaning thatrecapture oftaxreductions from thefirstdepreciation period would beavoided.
97. Themajor disadvantage tothisapproach wasthatitwould assume therecipient company to
beunprofitable indefinitely intothefuture, orataminimum tobefreeoftaxliability. Thesecond
approach thatwasdiscussed isthatusedbytheOECD initscalculations ofthecosttogovernment
ofvarious kinds ofindustrial support measures. Foraccelerated depreciation, theOECD approach
istocalculate alump sumbycomparing thetaxthecompany actually willpaytowhatit"normally"
would havepaidovertheentire depreciation period. Thisamount isthenrestated interms ofitspresent
value asofthebeginning ofthedepreciation period. Theformula assumes thatthecompany willbe
profitable, i.e.,thatitwillpaytax,eachyear. Themajor disadvantage tothisapproach wasthatan
absolutely accurate measurement could onlybemade attheendofthedepreciation period.
98. Noconsensus wasreached withrespect toaccelerated depreciation.
2. Taxexemptions, deductions, holidays, etc.(Recommendation 12,PartA)
99. Fortaxexemptions, deductions, holidays, andanysimilar measures, itisrecommended that
thecosttothegovernment bemeasured astheamount ofrevenue thatthegovernment otherwise would
havecollected.
3. Taxdeferrals (Recommendation 12,PartB)
100. Fortaxdeferrals, itisrecommended thatthecosttogovernment becalculated bytreating the
amount ofdeferred taxasifitwere aninterest-free loanfortheperiod ofdeferral.
4Thus, thisamount would notbeadjusted forinflation andinterest.G/SCM/W/415
Page21
G. Equity Infusions (Recommendation 13)
101. TheGroup deemed thatthemethodology fordetermining thecosttothegovernment ofasubsidy
conferred through theprovision ofequity would depend uponwhether ornottherecipient firm’sstock
waspublicly traded. Itwasrecognized inthisconnection thattheprovision ofequity byagovernment
toafirmdoesnotnecessarily constitute asubsidy. Only ifthere isabenefit totherecipient fromthe
provision oftheequity willasubsidy exist.
102. Where therecipient firm’sstock ispublicly traded, theGroup recommends thatthecostto
thegovernment, ifany,ofanequity infusion bythegovernment bedetermined bycomparing theprice
thegovernment actually paidtothefirmfortheequity withthemarket price fortheequity. Ifthe
government paidmore thanmarket pricefortheequity, thecosttothegovernment would betheamount
oftheoverpayment. Thisoverpayment would betreated asagrant forpurposes ofthecalculation
ofadvalorem subsidization.
103. Incases where there isnomarket price fortheshares, determination ofwhether andtowhat
extent asubsidy isprovided willbelessstraightforward. TheGroup noted thatifasubsidy exists,
thecostthereof tothegovernment should becalculated inaccordance withthegeneral principles of
thisreport. Noconsensus wasreached astospecific methodology inthisregard.
H. Loan/Credit Guarantees (Recommendation 14)
104. TheGroup noted thatguarantees canoperate withrespect totheguarantee beneficiary either
asaborrower orasalender. Intheformer case,thebeneficiary isaborrower whose debtisguaranteed
against theborrower 'sowndefault. Inthelatter case,thebeneficiary isalender, forexample, through
theprovision ofcredit toitscustomers. Aguarantee inthissituation guarantees thislender against
potential default byitscustomers.
105. Atwo-part procedure wasdiscussed forcalculating thecosttothegovernment ofloan/credit
guarantees, where suchguarantees areprovided inthecontext ofaprogramme, asopposed toonan
adhocbasis. Aspartone,theoverall viability oftheloanguarantee programme overarelatively long
period (specifically, thefiveyears priortothereceipt oftheguarantee) should bedetermined. Normally,
viability could beassessed byexamining theprogramme 'sfinancial statements overtheperiod. If
thisexamination revealed thatthetotalfeespaidintotheprogramme byparticipating firms during the
period were lessthanthetotalamount paidbythegovernment incoverage ofdefaulted loans under
theprogramme plusthecosts ofoperating theprogramme, theprogramme would bedeemed notto
beviable, meaning thatacosttothegovernment would havebeenincurred.
106. Parttwowould betocalculate theamount ofthecosttothegovernment tobeattributed to
thefirminvolved intheArticle 6.1(a) enquiry. Thefirststepunder parttwowould betocalculate
thecosttothegovernment oftheprogramme asawhole, asthedifference between thetotalamount
offeesactually paidintotheprogramme byallofitsparticipants (including those notinvolved inthe
enquiry) andthetotalamount offeesthatwould havebeenrequired fortheprogramme tobeviable
during therelevant five-year period. Thesecond stepwould betoattribute theappropriate portion
ofthiscosttotheparticular firminvolved intheenquiry. Thisattribution would bebased onthat
firm'sshare oftotalloanamounts guaranteed under theprogramme during therelevant period. Thus,
under thisapproach, asubsidy would beattributed tothefirminvolved intheenquiry whether ornot
thatparticular firmhadmade anyclaim under theprogramme foradefault. Thissubsidy would be
deemed tohavebeenprovided onthedate(s) thefeeswere paidbythatfirm.
107. Inthecaseofadhocguarantees (i.e., those thatclearly arenotlinked toanyguarantee
programme), itisrecommended thatthecosttogovernment ofanadhocguarantee, intheevent thatG/SCM/W/415
Page22
agovernment covers adefault, betheamount ofthedefault coverage provided, lessanyfeespaidfor
theguarantee. TheGroup recognizes thatinthese circumstances, thetreatment ofadhocguarantees
forpurposes ofArticle 6.1(a) would beidentical totherecommended treatment ofdebtforgiveness.
108. Some Group members expressed theview thatanadhocguarantee imposes acostonthe
providing government evenwhere there isnodefault. Specifically, theexpected costofproviding
theguarantee could becalculated. Forexample, ifthegeneral default rateongovernment guaranteed
loans orcredits, ortheprobability ofdefault onaspecific guaranteed loanorcredit, was10%, 10%
oftheloanprincipal could beconsidered tobethecosttothegovernment ofproviding theguarantee.
Thisapproach would beconsistent withhowsome governments treatloanguarantees intheiraccounting
andbudget records.
I. Government Provision ofGoods and/or Services (Recommendation 15)
109. Ingeneral, itisrecommended thatthecosttothegovernment ofproviding agoodand/or service
becalculatedastheexpenses/costsincurredbythegovernmentinprovidingthegoodorservice,including
areasonable return, minus thepricereceived forthegoodand/or service. Ifthecosttothegovernment
cannot becalculated according tothisapproach, itcould becalculated using other approaches under
theadequate remuneration standard ofArticle 14(d). Thisamount could betreated asagrant inthe
calculation ofadvalorem subsidization.
110. Anumber ofspecial considerations werediscussed regarding howtomeasure thecosttothe
government ofproviding goods andservices inspecific contexts. Forexample, incertain circumstances
suchastheprovision ofwidely-used inputs likeelectricity ornatural gas,aprice differential between
different customers might notbeabnormal. Large customers would tendtobecharged alower price
byanelectric utility thansmaller users, based onthecostdifferential tosupply them. Thus, itwould
beimportant toexamine thestandard pricelistorpricing schedule applicable tothedifferent categories
ofcustomer. Ifaparticular customer werecharged adisproportionately lowprice inrelation tothe
"normal price", there might beacosttothegovernment. The"normal price" would betheprice that
would beexpected based ontheprice schedule, orbased ontheprice tocomparable customers, which
covered allofthegovernment 'scosts ofproviding thegood orservice tothecustomer (including a
reasonable return).
J. Government Purchase ofGoods (Recommendation 16)
111. Ingeneral, itisrecommended thatthecosttothegovernment ofpurchasing goods bedetermined
inaccordance withtheguidelines contained inArticle 14(d) oftheAgreement. Thatis,suchcalculations
should bebased on"more thanadequate remuneration". Totheextent thatagovernment isfound
tohaveoverpaid forgoods incomparison withtheirprevailing market value, thecosttothegovernment
would betheamount oftheoverpayment. Thisamount could betreated asagrant inthecalculation
ofadvalorem subsidization.
112. Itisrecognized thattheguidelines inArticle 14oftheAgreement refertothe"benefit tothe
recipient" context. Nevertheless, inthecaseofgovernment purchases ofgoods, thecosttothe
government andthebenefit totherecipient inpractice aresimilar, making itpossible toapply the
Article 14guidelines directly.
K. Assumption ofLegal Obligations (Recommendation 17)
113. Asageneral matter, itisrecommended thatthecosttogovernment oftheassumption oflegal
obligations, totheextent thatthisinvolves anelement ofsubsidization, becalculated astheamount
oftheobligations assumed. Various kinds oflegalobligations wereidentified aspossibly belongingG/SCM/W/415
Page23
inthiscategory. These include thecoverage byagovernment ofseverance pay,ofotherlegally-imposed
employment costs, possibly ofcertain environmental costs, andofsimilar obligations. Thisamount
normally should betreated asagrant.
L. Export Credit Insurance/Export Promotion/Other Export-Related (Recommendation 18)
114. Asnoted inSection I.B,above, itisrecognized thatbecause export subsidies areprohibited,
establishing acost-to-government methodology maybeoflimited use. Nevertheless, totheextent
thatsuchsubsidies areinvolved inagiven caseunder Article 6.1(a), theircosttogovernment would
depend ontheirspecific nature. Thatis,export-related subsidies intheformofcredit guarantees would
betreated inaccordance withtheloan/credit guarantee methodology, those intheformofgrants would
betreated inthesame wayasother grants, those intheform ofloans would betreated inthesame
wayasother loans, etc.
M. Upstream Subsidies
115. TheGroup discussed, butreached noconsensus on,upstream subsidies. Itwasrecognized
thatanycalculation method forsuchsubsidies would needtoinclude abasisfordetermining theamount
ofthesubsidy benefitting thedownstream product, andalsowould needtoavoid anydouble-counting
ofthesubsidy thatmight exist.
N. Multiple Exchange RateProgrammes (Recommendation 19)
116. Itisrecommended thatthecosttothegovernment ofapplication ofamultiple exchange rate
system toagiven transaction bebased onacomparison oftheexchange rateactually applied withan
appropriate benchmark, suchasthemarket exchange rateoranother exchange rate(such asthe
Purchasing Power Parity rate)published byaninternational organization. Thecosttothegovernment
would bethedifference between theabsolute value ofthetransaction attheexchange rateactually
applied, andthevalue thatwould haveresulted ifthebenchmark ratehadbeenapplied. Thisamount
should betreated asagrant.
O. Research andDevelopment Subsidies (Recommendation 20)
117. Itisrecognized thatthecosttogovernment ofsubsidies forresearch anddevelopment will
depend ontheparticular types ofsubsidies provided. Forexample, thecosttogovernment ofresearch
subsidies intheform ofgrants should bedetermined inthesame wayasforallother grants, etc.
118. Itisfurther noted that,because ofthefuture orientation ofR&D activities, itmight bedifficult
toallocate therelated subsidies toproducts notyetinproduction (i.e.suchsubsidies generally would
notbe"tied"). Given this,itmaybeappropriate inthesecircumstances toallocate suchsubsides across
therecipient firm'stotalsales.
P. Worker Training (Recommendation 21)
119. Thequestion ofthecosttogovernment ofproviding worker training inthecontext of
Article 6.1(a) isrecognized toraiseanumber ofissues. First, itisnoted asageneral principle that
inthemoststraightforward case,government-subsidized orgovernment-provided worker training can
besimilar toawage subsidy. Thatis,ifagovernment 'spayment fortheworker training relieves a
company ofacostthatitotherwise would havehadtopay,asubsidy thatwould berelevant under
Article 6.1(a) mayexist.G/SCM/W/415
Page24
120. Inaddition, thequestion ofwhether afirmhasalegalobligation totrainitsworkers isrelevant.
Thatis,when afirmhasalegalobligation, suchastoretrain laid-off workers, andthegovernment
assists thecompany inpaying forsuchretraining, asubsidy would existtotheextent thatthegovernment
hasincurred acostinproviding theassistance. Itisrecommended thatsuchasubsidy betreated as
agrant.G/SCM/W/415
Page25
RECOMMENDATION 1
Illustrative Table onExpensing Versus Allocation ofSubsidies
intheContext ofArticle 6.1(a) andAnnex IV
1. Theattached table reflects theInformal Group ofExperts 'recommended guidelines for
determining when certain types ofsubsidies should beexpensed versus allocated overtimeincalculating
whether the5%threshold established inArticle 6.1(a) hasbeenmet.Thefirstpageofthetableidentifies
various types ofsubsidies thatmight beeither expensed orallocated depending ontheparticular
circumstances. Factors thatwould berelevant tothisdetermination areidentified foreachtypeof
subsidy. Thesecond pageidentifies those types ofsubsidies thatgenerally would beallocated, and
those thatgenerally would beexpensed.
2. Thetreatment recommended forthedifferent types ofsubsidies aswellasthesubsidy-specific
reasoning shown arebased onthefollowing general principles: Allocation rather thanexpensing of
asubsidy normally would beindicated ifthepurpose ofthesubsidy isforthepurchase offixed assets,
ifitisnon-recurring and/or large, ifitisoriented toward future production, ifitconsists ofequity,
orifitiscarried forward intherecipient 'saccounting records. Inaddition, twopresumptions are
deemed appropriate: First, R&D subsidies should bepresumptively allocated, except where itis
demonstrated thatdoing sowould beinappropriate. Similarly, non-recurring subsidies should be
presumptively allocated, except where itisdemonstrated thatthiswould beinappropriate.
3. Theinclusion ofanygiven typeofmeasure inthetableisnotintended toimply thatsucha
measure inallcases would berelevant inthecontext ofArticle 6.1(a). Rather onlymeasures that
aresubsidies perArticle 1oftheAgreement andarespecific perArticle 2would berelevant inthat
context.G/SCM/W/415
Page26EXPENSE ALLOCATE
GRA
Purpose isforother thanpurchase offixed assets
Recurring and/or smallNTS
Purpose isforpurchase offixed assets
Non-recurring and/or large
TAX BENEFITS/INDIRECT
Foroperating expenses
Benefits related todirect taxesTAX REBATES/IMPORT DUTY EXEMPTIONS
Forpurchase of/related tofixed assets (e.g.import duty/indirect
taxexemption onmachinery)
PROVISION OFGOODS
Provision ofservices/consumable inputsAND SERVICES
Provision offixed assets andnon-general infrastructure
RESEARCH &
Expense onlyifallocation notappropriateDEVELOPMENT
Presumption toallocate
LOSS COVERAGE/
Recurring and/or smallOPERATING COSTS (OVERLAPS WITH 6.1.(b) AND (c))
Non-recurring and/or large
Benefit goods notyetproduced
INTEREST
Interest subsidy payments made asloanpayments become dueRATE SUBSIDIES
Subsidy islump sumtooffset past,present orfuture interest due
orpaidG/SCM/W/415
Page27EXPENSE ALLOCATE
EQUITY INFUSIONS
LONG-TERM LOAN BENEFITS
(benefits existoverlifeofloan)
FORGIVENESS/ASSUMPTION OFLONG-TERM DEBT
(OVERLAPS WITH 6.1(d))
(including principal andinterest)
SHORT-TERM LOAN BENEFITS
EXPORT REBATES
EXPORT INSURANCE
EXPORT PROMOTION ASSISTANCE
REDUNDANCY PAYMENTS/EARLY RETIREMENT/
WORKER ASSISTANCE
WORKER TRAINING
WAGE SUBSIDIES
PRICE SUPPORT PAYMENTS
SUBSIDIES BELOW MINIMUM THRESHOLD SIZE
(<0.5 %ofsalesforanyindividual subsidy)G/SCM/W/415
Page28
RECOMMENDATION 2
Identification ofAllocation Period forAllocated Subsidies
1.Asageneral principle, theaverage useful lifeofassets should beusedastheallocation period
forsubsidies subject toallocation.
2.Ahierarchy ofbases from which todetermine theaverage useful lifeofassets should beused,
asfollows:
Information fortheindividual firmorfirms receiving thesubsidy
Or,ifnotfeasible/available/reasonable,
Information forother firms producing theproduct inthecountry inquestion
Or,ifnotfeasible/available/reasonable,
Information forfirms inthesame business sector1inthecountry inquestion,
Or,ifnotfeasible/available/reasonable,
Information forother firms producing theproduct outside thecountry inquestion
3.Ifthefirstbasis, above, canbeused2,thetotalaverage bookvalue3ofoperational assets (excluding
landandconstruction inprocess) ofthefirmduring themostrecent relevant multi-year period could
bedivided bytheaverage annual amount ofdepreciation expense during thatperiod, withtheresult
being theaverage useful lifeofassets inyears. (Example: $1,000 average assetvalue/$100 average
annual depreciation =10yearaverage lifeofassets.) Therelevant period should bedefined soas
torepresent normal operations. Asimilar calculation could bemade using anyoftheother bases in
thehierarchy, ifapplied.
4.Inthecaseofasset revaluations (write-downs orwrite-ups), orofhyperinflation, normalizing
adjustments maybenecessary.
5.Inapplying thismethodology, there should beapreference forusing accounting datarather than
tax-related depreciation periods fordetermining theuseful lifeofassets, asaccounting dataaremore
likely toreflect actual useful livesofassets.
1Defined asthenext-largest category intheInternational Standard Industrial Classification ("ISIC")
orsimilar nomenclature system.
2Ifsome method other thanstraight linedepreciation isusedbythefirm, ifthefirm'sdepreciation
isnotbased onanestimate oftheactual useful lifeofitsassets, orifthefirm'sacquisition ofassets
isveryirregular, thefirstbasis maynotbeappropriate, inwhich caseoneoftheother bases inthe
hierarchy should beconsidered.
3I.e.,netofaccumulated depreciation; based onbeginning-of-period values.G/SCM/W/415
Page29
6.Theaverage useful lifeofalloperational assets (asidentified through theapplication ofthe
hierarchy) normally should beusedastheallocation period forallocable subsidies regardless oftype,
other thanlong-term loans andpossibly equity infusions.
7.Ifthesubsidy inquestion isthebenefit from alongtermloan, theallocation period should be
thelifeoftheloan.
8.Ifthesubsidy inquestion isanequity infusion, andthesubsidy iscalculated astheoverpayment
forequity byagovernment, incomparison withthemarket value oftheequity, thisoverpayment should
betreated asagrant andallocated overtheaverage useful lifeofassets asidentified through the
application oftheabove methodology. Ifanother method isusedtodetermine thecosttogovernment
ofasubsidy fromanequity infusion, adifferent approach toidentifying theallocation period maybe
appropriate. Forexample, theperiod during which aninvestor might “reasonably ”expect areturn
onaninvestment could beused, oritcould beassumed thatacosttogovernment potentially could
ariseduring theentire period inwhich thegovernment heldtheequity, onayear-by-year basis.
9.Itisrecognized thattheapproach recommended herein fordetermining theuseful lifeofassets
represents anestimation technique. Thisapproach isrecommended foritseaseandstraightforwardness
ofapplication toalarge number offoreseeable situations, andinparticular foritsavoidance ofthe
needtoseparately calculate theuseful livesofindividual assets. Asreflected inthispaper, however,
there maybesituations where some other approach willneedtobeused, orwhere thebasic approach
described herein mayneedtobeadjusted.G/SCM/W/415
Page30
RECOMMENDATION 3
Adjustments forInflation andInterest
1.Itisrecommended, where subsidies areallocated overtime, thatsubsidy amounts beadjusted
fullyforinflation andinclude aportion ofthe“real”interest rate. Specifically, theadjustment factor
tobeapplied normally should bethefullrateofinflation plusone-half ofthedifference between the
rateofinflation andtheappropriate government borrowing rate.(This canbecalculated asthearithmetic
average oftheinflation andborrowing rates.) Where therateofinflation ishigher thanthegovernment
borrowing rate,however, theadjustment factor should bethefullrateofinflation, unadjusted forany
interest component.
2.Theadjustment factor should becalculated based onprevailing interest andinflation ratesasof
thedatethesubsidy isreceived. Ingeneral, thisfactor should bekeptconstant throughout theallocation
period, andapplied onacompounded basis toeachoftheannual subsidy allocations, excluding the
amount allocated totheyearofreceipt. Ifduring theallocation period there aresignificant changes
ininflation andinterest rates, however, itmaybeappropriate torecalculate theadjustment factor on
anannual basis.
3.Theappropriate government interest rateshould betherateforagovernment debtinstrument
whose maturity most closely approximates thelength ofthesubsidy allocation period.
4.Thismethodology should beapplied toalltypes ofsubsidies allocated overtimeother thanloans.G/SCM/W/415
Page31
RECOMMENDATION 4
DataSources forGovernment Borrowing
Where government borrowing ratesarerequired inmaking Article 6.1(a)/Annex IVcalculations,
itisrecommended thattheyields tomaturity ongovernment securities (newissues andthose trading
insecondary markets) beused. Identifying securities withappropriate terms tomaturity willpermit
theallocation periods ofthesubsidies tobematched withsecurities ofcomparable maturities, asforeseen
incertain ofthemethodological recommendations.G/SCM/W/415
Page32
RECOMMENDATION 5
"Inflationary Economy Countries"
intheSense ofParagraph 5ofAnnex IV
Determination ofWhether aCountry isInflationary
1.Thedetermination ofwhether acountry isinflationary inthesense ofparagraph 5ofAnnex IV
(andthuswhether theprovisions ofthatparagraph should apply) isnoteasily susceptible toapplication
ofanumerical standard. Therefore, thedetermination should bemade onacase-by-case basis, by
applying atwo-part analysis.
2.First, thatcountry 'sinflation rateshould becompared withtheaverage rateofinflation inother
countries. Ifthecountry involved inthedispute isadeveloping country, itsrateofinflation should
becompared withtheaverage rateinOECD countries. Ifthecountry involved isanOECD Member,
thisaverage should exclude thatcountry.
3.Iftherateofinflation inthesubject country issubstantially higher thantheaverage ratetowhich
itiscompared, thiswould mean thatthecountry could befound tobeinflationary, depending onthe
second partoftheanalysis. If,however, therateofinflation inthesubject country isnotsubstantially
higher thanthecomparison rate,thecountry would notbeinflationary, andtheanalysis would not
reach thesecond part.
4.Asthesecond partoftheanalysis, thenormal business andgovernment accounting practices with
respect toinflation should beconsidered. Inparticular, ifatleastmonthly inflation indexing isused
routinely throughout theeconomy ofacountry withanabove-average rateofinflation, inboththe
public andprivate sectors, thenthatcountry should beconsidered inflationary inthesense ofparagraph 5
ofAnnex IV.
Adjustment oftheNumerator (Subsidy Amount) forInflation inInflationary Countries
5.Itisnoted thattheGroup 'sgeneral recommendation thatallocated subsidy amounts beadjusted
forinflation (andinterest) would apply toinflationary economy countries. Itisfurther noted that,
forsuchcountries, theadjustment factor mayneedtoberevised annually, asprovided forinthegeneral
recommendation.
6.Itisrecommended thatthedetermination ofwhich inflation index orindexes should beapplied
tothenumerator andthedenominator bemade onacase-by-case basis, toensure theselection ofthe
mostappropriate index orindexes tofittheparticular circumstances. Forexample, ifasubsidy were
tiedtothepurchase ofafixed asset, acapital goods index might bethemostappropriate index toapply
tothenumerator. Ifthegoods produced using thatfixedassetwereconsumer goods, aconsumer goods
index might bethemost appropriate index toapply tothedenominator.
7.Asanalternative toadjusting thenumerator andthedenominator forinflation intheinflationary
country granting thesubsidy, boththesubsidy amounts andthesalesdenominators could beconverted
toastable currency commonly usedininternational business transactions, ortoabasket ofcurrencies
(thePurchasing Power Parity Index ortheaverage forOECD countries, forexample).
8.Ifsuchacurrency conversion ismade, theadjustment factor forinflation andinterest recommended
inRecommendation 3should bebased oninflation andinterest rates forthecurrency orbasket of
currencies used. Ifabasket ofcurrencies isused, theexchange ratesincluded should beweight-averaged
byanappropriate factor.G/SCM/W/415
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RECOMMENDATION 6
Recommendations Concerning theSales Denominator
A.UseofAccounting Year Data
1.Itisrecognized thatparagraphs 2and3ofAnnex IVindicate thatnormally there willbealag
between thesales denominator andthenumerator (i.e., thesubsidy) incalculations ofadvalorem
subsidization. Thatis,asprovided inparagraphs 2and3,therelevant sales dataarethose forthe
"most recent 12-month period, forwhich sales dataisavailable, preceding theperiod inwhich the
subsidy isgranted".
2.Itisrecommended withrespect tothisgeneral issuethatthedatafor"themostrecent 12-month
period" should bethedatafortherecipient firm'smostrecent fullaccounting year. Because ofthe
possibility ofyear-end adjustments fordiscounts, rebates, returns, etc.,useofsalesdataforaperiod
other thananormal accounting period could introduce inaccuracies.
3.Itisnoted thatthelanguage ofparagraphs 2and3ofAnnex IV,byrequiring useofa12-month
period forsalesdatathatprecedes thegranting ofasubsidy, builds inalagbetween thesubsidy and
thesalesdatatowhich itiscompared inthecalculation oftheadvalorem subsidization ofaproduct.
B.Special Case: Tax-Related Subsidies
4.Asprovided forinfootnote 64toAnnex IV,thesalesdenominator fortax-related subsidies is
something ofaspecial case. Thefootnote indicates thatthesalestobeusedarethose "inthefiscal
yearinwhich thetaxrelated measure wasearned."
5.Taking intoaccount thislanguage, itisrecommended, incalculating theadvalorem subsidization
from tax-related subsidies, thatthenumerator betheamount ofthetaxsubsidy earned inthefiscal
yearpreceding thefiscal yearinwhich therelevant taxreturn wasfiled, andthatthedenominator be
thecompany ’ssalesinthesame fiscal year, i.e.,theonepriortothefiscal yearinwhich thetaxreturn
wasfiled.
C.UseofNetRather Than Gross Sales
6.Itisrecommended thattherecipient firm'snetsales(i.e., netofdiscounts, returns, allowances,
etc.), beusedinidentifying thevalue oftherecipient firm'ssales forcalculations ofadvalorem
subsidization.
D.Variability ofSales Denominator During Allocation Period
7.Itisrecognized that,during thecourse ofanallocation period forasubsidy, thenature andscope
ofafirm'sactivities maychange. Given this,ifthesales denominator remained fixed during the
allocation period, orwere onlyirregularly revised, thenumerator anddenominator might notbe
comparable. Inviewoftheseconsiderations, itisrecommended thatthesalesdenominator beupdated
during every yearofanallocation period (soastoreflect therelevant value ofsalesduring thepreceding
accounting year).
8.Related tothis,itisfurther recommended thattheallocation ofaparticular subsidy amount to
agiven yearinanallocation period bedeemed toconstitute the"granting" ofthatsubsidy amount in
thesense ofparagraph 2ofAnnex IV.Inother words, thedenominator would betherecipient 'ssalesG/SCM/W/415
Page34
during themostrecent accounting yearpreceding theperiod towhich therelevant portion ofthesubsidy
wasallocated.
E.Firm-Specific Sales Denominator
9.Itisrecommended thattheadvalorem subsidization ofaproduct becalculated onafirm-specific,
rather thananindustry-wide, basis. Thisrecommendation isbased onthelanguage ofAnnex IV,
particularly thatofparagraphs 2-5,which areworded entirely interms ofindividual recipient firms.
Itisrecognized thatindividual firms withlessthan5%subsidization would notbesubject toa
presumption ofcausing serious prejudice.
F.Determination ofWhether aSubsidy isTiedtoaProduct
10.Todetermine whether asubsidy is"tied" toaparticular product inthesense ofparagraph 3of
Annex IV,andhence whether thesales denominator should betherecipient 'ssales ofthatproduct
alone, instead oftoitstotalsales, itisrecommended thatasubsidy bedeemed tobetiedtoaproduct
ifitsintended useisknown tothegiver, andsoacknowledged, priortoorconcurrent withthesubsidy 's
bestowal.
11.Itisrecognized, however, thatinanygiven situation, some other approach might bemore
appropriate.
G.Sales Denominators forTiedandUntied Subsidies, andAggregation ofadvalorem Subsidization
from Different Kinds ofSubsidies
12.Itisrecommended, where afirmreceives bothtiedanduntied subsidies, thatseparate advalorem
calculations beperformed foreachusing theappropriate sales denominators, andthattheresulting
percentages beaggregated, todetermine thetotaladvalorem subsidization oftheproduct. Specifically,
itisrecommended thattheadvalorem subsidization percentages from tiedanduntied subsidies be
calculated using asthesales denominators therecipient firm’ssalesoftherelevant product andthe
recipient firm’stotalsales, respectively, asrequired byAnnex IV.Theresulting advalorem percentages
thenshould beadded together todetermine theaggregate advalorem subsidization oftheproduct from
these subsidies.G/SCM/W/415
Page35
RECOMMENDATION 7
Treatment of"Start-Up" Subsidies inArticle 6.1(a) Calculations
Made After theEndoftheStart-Up Period
Intheevent thatanArticle 6.1(a) caseisbrought aftertheendofastart-up period during which
subsidies werereceived, itisrecommended thatthese subsidies beanalyzed todetermine whether any
portion ofthemisallocable totheperiod under consideration. Ifso,these allocated subsidy amounts
should beincluded inthecalculation ofadvalorem subsidization todetermine ifthe5%threshold has
beenreached.G/SCM/W/415
Page36
RECOMMENDATION 8
CosttotheGovernment ofGrants
A.Outright Grants
1.Foroutright grants notpaidininstalments, itisrecommended thatthecosttothegovernment
bedeemed tobethefaceamount ofthegrant, adjusted (ifallocated overtime) forinflation andinterest
inaccordance withthegeneral recommendation.
2.Foroutright grants paidininstalments, itisrecommended thateachinstalment betreated asa
separate grant. Itisnoted thatthisrecommendation isconsistent withtherecommendation tovary
thesalesdenominator during eachyearofanallocation period.
B.Reimbursable Grants
3.Itisnoted thatgrants whose terms include theobligation ofreimbursement intheevent thatcertain
conditions arefulfilled (e.g., thattherecipient becomes profitable) aresimilar tocontingent liability
loans.
4.Inviewofthis,itisrecommended thatsuchgrants betreated asaseries ofshort-term interest-free
loans. Thecosttothegovernment forsuchgrants during theperiod before theyarereimbursed thus
shouldbecalculatedaccordingtotherecommendedmethodologyforordinaryloans(Recommendation8).
5.Itmaybedetermined thatagiven reimbursable grant never willberepaid, (Forexample, the
recipient maybeunprofitable over alongperiod.) Should such aconclusion bereached, itis
recommended thatthereimbursable grant betreated asanoutright grant. Thecosttothegovernment
would betheoriginal faceamount ofthegrant, lessanyreimbursement thatmight havebeenmade
tothatdate.
6.Itisrecommended thattheallocation period foranysuchoutstanding amount should begin on
thedateasofwhich itisdetermined thatthisamount effectively hasbecome anoutright grant.G/SCM/W/415
Page37
RECOMMENDATION 9
CosttotheGovernment ofLoans
A.Ordinary Loans
1.Itisrecommended thatthecosttothegovernment ofanordinary loanbemeasured based on
theextent towhich theeffective interest ratecharged ontheloanprovided islower thantheappropriate
government bond rateintheyearinwhich theloanisgiven. Forshort-term government loans (i.e.,
loans withamaturity oflessthanoneyear), theappropriate bond ratewould bethatonshort-term
government bonds ofcomparable maturity. Forlong-term government loans, theappropriate bond
ratewould bethatonlong-term government bonds ofcomparable maturity. Asasimplified example,
iftheappropriate government bond ratewas5%,andtheinterest rateontheloanwas4%,thecost
tothegovernment ofproviding theloanwould be1%.Anygrace period provided bythegovernment
loan, during which timeinterest didnotaccrue, alsowould beconsidered acostincurred bythe
government, calculated using theappropriate government bond rate. Forpurposes ofestablishing a
relatively simple andpredictable calculation methodology, itisfurther recommended thatthebenefits
thuscalculated bedeemed toarise onayear-by-year basis over thelifeoftheloan (i.e., asaseries
ofrecurring grants). Itisnoted inaddition thatdeferrals ofprincipal and/or interest may give riseto
additional costs tothegovernment.
B. Contingent Liability Loans
2. Itisrecognized thatcontingent liability loans aresimilar toreimbursable grants, inthatthey are
repayable only upon theoccurrence ofsome future event, such asachievement ofacertain level of
profitability. Because itisimpossible topredict theoccurrence offuture events, itisrecommended,
asforreimbursable grants, thatcontingent liability loans betreated asifthey were aseries ofshort
term interest-free loans forpurposes ofdetermining thecosttothegovernment.
3. Ifsuch loans eventually were repaid, theamount ofthesubsidy would be,asforordinary loans,
theshortfall, ifany, between theamount repaid andthegovernment ’sinterest costcalculated using
theappropriate government bond rate.
4. Intheevent thataconclusion isreached thatagiven contingent liability loan willnotberepaid,
itisrecommended thatsuch loans betreated asgrants. Theamount ofthesubsidy (i.e., thecostto
thegovernment) would betheface amount oftheloan, plus accrued interest calculated using the
government 'slong-term bond rate.
5. Itisrecommended thattheallocation period foranyoutstanding contingent loan amount begin
onthedate asofwhich itisdetermined thatthisamount effectively hasbecome anoutright grant.G/SCM/W/415
Page38
RECOMMENDATION 10
Interest Rate Subsidies
1. Where, asofthereceipt ofaloan, oratsome later point, thegovernment subsidizes theinterest
expense onanongoing basis asinterest payments become due, itisrecommended thatthesubsidy be
calculated astheamount ofinterest covered bythegovernment. Itisrecommended thatsuch amounts
betreated asaseries ofrecurring grants provided onthedates onwhich interest payments were due.
2. Where thegovernment provides, atacertain point intime, alump sum payment tooffset the
recipient 'sinterest expenses (whether with respect topastinterest, paid orunpaid, orwith respect to
future interest expenses), itisrecommended thattheamount ofthesubsidy, once paid, betreated as
anon-recurring grant.G/SCM/W/415
Page39
RECOMMENDATION 11
Debt Forgiveness andLoss Coverage
1. Itisnoted thatdebtforgiveness andlosscoverage maygiverisetoseparate rebuttable presumptions
ofserious prejudice under Article 6.1(b), (c)and(d). Nevertheless, itisrecognized thatsubsidies of
these types might beincluded inclaims under Article 6.1(a).
2. Ifasubsidy intheform ofdebt forgiveness isincluded inaclaim under Article 6.1(a), itis
recommended thatthecosttothegovernment forpurposes ofthisclaim becalculated astheamount
ofthegovernment outlay (theoutstanding principal plusaccrued interest). Itisfurther recommended
thatthisamount betreated asagrant received onthedate thedebt isforgiven.
3. Ifasubsidy intheform ofloss coverage isincluded inaclaim under Article 6.1(a), itis
recommended thatthecosttothegovernment forpurposes ofthisclaim becalculated astheamount
oflosscoverage provided. Itisfurther recommended thatthisamount betreated asagrant, unless
thelosscoverage takes some other form.
4. These recommendations arewithout prejudice toanyseparate claims thatmight exist under the
other subparagraphs ofArticle 6.1.G/SCM/W/415
Page40
RECOMMENDATION 12
TaxConcessions
A. TaxExemptions, Deductions, Holidays, etc.
1. Itisrecommended thatthecosttothegovernment oftaxexemptions, deductions, holidays, and
anysimilar measures becalculated astheamount ofrevenue thatthegovernment otherwise would have
collected.
B. TaxDeferrals
2. Itisrecommended thatthecosttothegovernment oftaxdeferrals becalculated bytreating the
amount ofthedeferred taxasifitwere aninterest-free loan fortheperiod ofdeferral.G/SCM/W/415
Page41
RECOMMENDATION 13
Equity Infusions
1. Itisrecommended, where therecipient firm’sstock ispublicly traded, thatthecost tothe
government, ifany,ofanequity infusion bedetermined bycomparing theprice thegovernment actually
paid fortheequity with themarket price fortheequity. Ifthegovernment haspaid more than market
price fortheequity, thecosttothegovernment would betheamount oftheoverpayment.
2. Itisfurther recommended thatthisamount betreated asagrant.
3. Where there isnomarket price fortheequity, thisrecommended methodology would need to
bemodified.G/SCM/W/415
Page42
RECOMMENDATION 14
Loan/Credit Guarantees
1. Itisrecognized thatguarantees canbeprovided both toborrowers (asloan guarantees) andto
lenders (ascredit guarantees).
2. Atwo-part procedure isrecommended fordetermining thecosttothegovernment ofloanorcredit
guarantees, where suchguarantees areprovided through aprogramme. Thefirstpartconsists ofassessing
thelong-term viability oftheguarantee programme asawhole. Thesecond partconsists ofattributing
thetofirminvolved intheArticle 6.1(a) enquiry theappropriate portion ofthegovernment ’scostunder
theprogramme.
3. Toassess thelong-term viability ofaguarantee programme, itisrecommended thatthefinancial
statements fortheprogramme forthemost recent fiveyears beexamined. Ifitisfound thatthetotal
feespaid intotheprogramme byparticipating firms during theperiod were lessthan thetotal amount
paid bythegovernment under theprogramme tocover defaulted loans plusthecosts ofoperating the
programme, theprogramme would notbeviable.
4. Inthesecond partoftheanalysis, attributing theappropriate amount ofgovernment costunder
theprogramme totherelevant firm, itisrecommended tofirst calculate thecosttothegovernment
oftheprogramme asawhole. This costshould becalculated asthedifference between thetotal amount
offeesactually paidintotheprogramme byallparticipants (including those notinvolved intheenquiry)
andthetotal amount offeesthatwould have been required fortheprogramme tobeviable during the
relevant (five-year) period.
5. Thenext stepintherecommended methodology would betoattribute theappropriate portion of
thiscosttotheparticular firm involved intheenquiry. This should becalculated byapplying tothe
total costthatfirm’spercentage share oftotal loan amounts guaranteed under theprogramme during
therelevant period. This subsidy would bedeemed tohave been provided onthedate(s) thefeeswere
paid bythatfirm.
6. Inthecaseofadhocguarantees (i.e., those thatclearly arenotlinked toanyguarantee programme),
itisrecommended, intheevent thatadefault iscovered byagovernment, thatthecosttogovernment
oftheadhocguarantee betheamount ofthedefault coverage provided, lessanyfeespaid forthe
guarantee.G/SCM/W/415
Page43
RECOMMENDATION 15
Government Provision ofGoods and/or services
1. Ingeneral, itisrecommended thatthecosttothegovernment ofproviding agood and/or service
becalculated astheexpenses/costs incurred bythegovernment inproviding thegood orservice, including
areasonable return, minus theprice received forthegood and/or service. Ifthecosttothegovernment
cannot becalculated according tothisapproach, itcould becalculated using other approaches under
theadequate remuneration standard ofArticle 14(d).
2. Inaddition, with regard totheprovision ofwidely-used inputs (e.g., electricity, water ornatural
gas), itisrecommended thatagovernment bedeemed tohave incurred acostinproviding agood or
service only iftheprice actually charged toaparticular customer islessthan thenormal ”price for
thattypeorcategory ofcustomer. The"normal" price would betheprice thatwould beexpected based
ontheprice schedule, orbased ontheprice tocomparable customers, andwhich covered thecost
(including areasonable return) ofproviding thegood orservice tothecustomer.
3. Itisrecognized thataprice differential fordifferent customers might notbeabnormal (as,for
example, inthecaseofanelectric utility). Only if,based onthestandard price listorpricing schedule,
theprice charged toaparticular customer were disproportionately lowinrelation totheprice thatwould
beexpected based ontheprice schedule (orinrelation totheprice charged toother, comparable,
customers), might acosttothegovernment possibly arise.
4. Intheevent thatacosttothegovernment isfound toexist, thiscostshould becalculated based
onthedifference between thenormal ”price forthegood orservice andtheprice actually charged.G/SCM/W/415
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RECOMMENDATION 16
Government Purchase ofGoods
1. Itisrecommended thatthecosttothegovernment ofpurchasing goods bedetermined inaccordance
with theguidelines inArticle 14(d) oftheAgreement onSubsidies andCountervailing Measures. That
is,such calculations should bebased onmore than adequate remuneration ”.Totheextent thata
government pays more thanadequate remuneration when purchasing goods, thecosttothegovernment
should becalculated astheamount ofsuch overpayment. This amount should betreated asagrant.
2. Itisnoted that,although theguidelines inArticle 14areinthecontext ofbenefit totherecipient ”,
inthecaseofgovernment purchases ofgoods, thecosttothegovernment andthebenefit totherecipient
inpractice would besimilar. Thus, theArticle 14guidelines canbeapplied directly under Article 6.1(a).G/SCM/W/415
Page45
RECOMMENDATION 17
Assumption ofLegal Obligations
1. Assumptionoflegalobligationsmightencompasssuchgovernmentactionsascoverageofseverance
pay, ofother legally-required employment costs, possibly ofcertain environmental costs, etc.
2. Itisrecommended thatthecosttothegovernment ofassumption oflegal obligations betheamount
oftheobligations assumed, totheextent thatthisinvolves anelement ofsubsidization. This amount
normally should betreated asagrant.G/SCM/W/415
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RECOMMENDATION 18
Export Credit Insurance, Export Promotion, Other Export-Related
1. Given theprohibition onexport subsidies, itisrecognized thatsubsidies ofthistype may only
rarely, ifever, beincluded inaclaim under Article 6.1(a).
2. Totheextent thatsuchsubsidies aresoincluded, itisrecommended thattheir costtothegovernment
bedetermined based ontheir form. Thus, thecosttothegovernment ofsuch subsidies intheform
ofgrants would bedetermined using theapproach forgrants, those intheform ofloans using the
approach forloans, etc.G/SCM/W/415
Page47
RECOMMENDATION 19
Multiple Exchange Rate Programmes
1. Itisrecommended thatthecosttothegovernment ofapplication ofamultiple exchange rate
system toagiven transaction bebased onacomparison oftheexchange rateactually applied with an
appropriate benchmark rate, such asthemarket exchange rateoranother exchange rate(e.g., the
Purchasing Power Parity rate) published byaninternational organization.
2. Thecosttothegovernment would bethedifference between theabsolute value ofthetransaction
attheexchange rateactually applied, andthevalue thatwould have resulted ifthebenchmark ratehad
been applied.
3. Itisrecommended thatthisamount betreated asagrant.G/SCM/W/415
Page48
RECOMMENDATION 20
Research andDevelopment Subsidies
1. Itisrecommended thatthecost tothegovernment ofresearch anddevelopment subsidies be
determined based ontheir form. Thus, thecosttothegovernment ofsuch subsidies intheform of
grants would bedetermined using theapproach forgrants, those intheform ofloans using theapproach
forloans, etc.
2. Itisfurther recommended, inview ofthefuture orientation ofresearch anddevelopment activities,
thatsubsidies forthese activities bepresumptively allocated across therecipient firm’stotal sales, unless
itisdemonstrated thattreating them astied”totheproduct inquestion isappropriate.G/SCM/W/415
Page49
RECOMMENDATION 21
Worker Training
1. Asageneralprinciple,government-subsidizedorgovernment-providedworkertrainingcanresemble
awage subsidy, totheextent thatitrelieves afirm ofacostthatthefirm otherwise would have borne.
Itisnoted thatthequestion ofwhether afirm hasalegal obligation totrain itsworkers (e.g., toretrain
laid-off workers) isrelevant totheexistence ofasubsidy forworker training. Where such anobligation
exists, asubsidy might arise ifthegovernment incurs acostinproviding theassistance.
2. Itisrecommended thatthecosttothegovernment bethecostthatthegovernment incurs in
providing orfunding theworker training.
3. Itisfurther recommended thatthisamount betreated asagrant.G/SCM/W/415
Page50
APPENDIX: TEXT OFANNEX IVTOTHE AGREEMENT ON
SUBSIDIES AND COUNTERVAILING MEASURES
ANNEX IV
CALCULATION OFTHE TOTAL ADVALOREM SUBSIDIZATION
(PARAGRAPH 1(a)OFARTICLE 6)62
1. Any calculation oftheamount ofasubsidy forthepurpose ofparagraph 1(a)ofArticle 6shall
bedone interms ofthecosttothegranting government.
2. Except asprovided inparagraphs 3through 5,indetermining whether theoverall rate of
subsidization exceeds 5%ofthevalue oftheproduct, thevalue oftheproduct shall becalculated as
thetotal value oftherecipient firm's63sales inthemost recent 12-month period, forwhich sales data
isavailable, preceding theperiod inwhich thesubsidy isgranted.64
3. Where thesubsidy istiedtotheproduction orsaleofagiven product, thevalue oftheproduct
shall becalculated asthetotal value oftherecipient firm'ssales ofthatproduct inthemost recent 12-
month period, forwhich sales dataisavailable, preceding theperiod inwhich thesubsidy isgranted.
4. Where therecipient firm isinastart-up situation, serious prejudice shall bedeemed toexist if
theoverall rateofsubsidization exceeds 15% ofthetotalfunds invested. Forpurposes ofthisparagraph,
astart-up period willnotextend beyond thefirstyear ofproduction.65
5. Where therecipient firm islocated inaninflationary economy country, thevalue oftheproduct
shall becalculated astherecipient firm'stotal sales (orsales oftherelevant product, ifthesubsidy
istied) inthepreceding calendar year indexed bytherateofinflation experienced inthe12months
preceding themonth inwhich thesubsidy istobegiven.
6. Indetermining theoverall rateofsubsidization inagiven year, subsidies given under different
programmes andbydifferent authorities intheterritory ofaMember shall beaggregated.
7. Subsidies granted prior tothedate ofentry intoforce oftheWTO Agreement, thebenefits of
which areallocated tofuture production, shall beincluded intheoverall rateofsubsidization.
8. Subsidieswhicharenon-actionableunderrelevantprovisionsofthisAgreementshallnotbeincluded
inthecalculation oftheamount ofasubsidy forthepurpose ofparagraph 1(a)ofArticle 6.
62Anunderstanding among Members should bedeveloped, asnecessary, onmatters which are
notspecified inthisAnnex orwhich need further clarification forthepurposes ofparagraph 1(a)of
Article 6.
63Therecipient firm isafirm intheterritory ofthesubsidizing Member.
64Inthecaseoftax-related subsidies thevalue oftheproduct shall becalculated asthetotal value
oftherecipient firm'ssales inthefiscal year inwhich thetax-related measure wasearned.
65Start-up situations include instances where financial commitments forproduct development or
construction offacilities tomanufacture products benefiting from thesubsidy have been made, even
though production hasnotbegun.