RESTRICTED
WORLD TRADE G/SCM/W/416
5March 1998
ORGANIZATION(98-0854)
Committee onSubsidies
andCountervailing Measures
QUESTIONS AND ANSWERS AND COMMENTS REGARDING THE
REPORT OFTHE INFORMAL GROUP OFEXPERTS (G/SCM/W/415)
Note from theInformal Group ofExperts
I. QUESTIONS RECEIVED
QUESTIONS FROM THE EUROPEAN COMMUNITY
TheEuropean Community submits thefollowing questions fordiscussion during themeeting
oftheSubsidies Committee andmembers oftheInformal Group ofExperts on26January 1998. These
questionsareposedforclarificationpurposesonlyandarewithoutprejudicetotheCommunity'seventual
position onanyoftheissues involved.
Recommendation 1-Expensing vs.allocation ofsubsidies
Q.1 What isthereason forfixing thedeminimis threshold below which subsidies areexpensed
at0.50percent?
A. TheGroup wasoftheopinion thatsmall subsidies should notbeallocated overalengthy period
oftimebecause theimpact ofsuchsubsidies onacompany arelikely tobelimited andofshortduration.
TheGroup chose 0.50percentasreasonably representing averysmall subsidy.
Q.2 DoestheGroup consider thatthere isarequirement todemonstrate thatasubsidy islinked
tothepurchase offixed assets before itcanbeallocated?
A. Whether ornotasubsidy wasusedforthepurchase offixed assets isoneoftheprinciples
tobeconsidered when determining ifasubsidy should beallocated overtimeorexpensed. Other
principles theGroup isrecommending beconsidered arelisted inparagraph 9andRecommendation 1
ofthereport. Inaddition, certain presumptions (found inparagraph 6andRecommendation 1ofthe
report) werealsodeemed appropriate. Withrespect tothegeneric types ofsubsidies listed inTable 1
ofRecommendation 1,alinkbetween thesubsidy andtheacquisition offixedassets isoftenanimportant
factor tobeconsidered when determining ifasubsidy should beallocated orexpensed.
Recommendation 2-Allocation period
Q.3 Forthepurpose ofestablishing theallocation period, would itnotbesimpler tousethe
depreciation period forfixed assets employed bythefirminquestion?
A. TheGroup recommends inRecommendation 1thatthe"useful lifeofassets" ofthefirmin
question beusedastheallocation period. Generally, theeconomically "true" depreciation period for
afirmistheaverage useful lifeofitsdepreciable assets. Recommendation 1alsoprovides foralternativeG/SCM/W/416
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datasources fordetermining theuseful lifeofassets forcases inwhich thepreferred approach cannot
beused.
Q.4 Paragraph 9ofRecommendation 2describes therecommended approach asanestimation
technique andrecognizes thatother approaches maybeused. Inthecasethataparticular subsidy
canbelinked tothepurchase ofaparticular asset orassets, would thereference totheuseful
lifeofthatparticular asset orassets (asopposed totheaverage useful lifeofallassets) bean
acceptable approach? Ifso,what sortofcriteria should beusedtoconclude thataparticular
subsidy islinked tothepurchase ofaparticular asset. Would Recommendation 6.10beapplicable?
A. Seeanswer toJapan'squestions 3and4below.
Recommendation 3
Q.5 CantheGroup explain inmore detail thereasons forchoosing one-half ofthedifference
between theinflation rateandthegovernment borrowing rateastheadjustment factor? Why
wastheapproach considered preferable tocalculating aweighted average costoffunds tothe
Government?
A. Theconcept ofagovernment 'sweighted average costoffunds wasdiscussed bytheGroup
anditwasacknowledgedthatthemethodwouldprovideafairrepresentationofagovernment'smonetary
costs. However, noconsensus wasreached withrespect tothismethod 'stheoretical appropriateness.
Inaddition, itwasrecognized thatsuchamethod might bedifficult toimplement inpractice, given
thattherecould becases where thedatanecessary tocalculate theweighted average, ifevenavailable,
would perhaps notbekeptinaveryaccessible manner bythegovernment entity. Ifmany levels of
government were involved, thecalculation would befurther complicated.
Recommendation 3reflects acompromise reached bytheGroup totrytoreflect anumber of
considerations suchastheweighted average costoffunds asmentioned above, thecostofmoney raised
through taxation andbondfinancing, theopportunity costofmoney tothegovernment, thetimevalue
ofmoney andinflation. Therecommendation alsoreflects theviewofthegroup thattheadjustment
factor would havetomaintain thevalue andsignificance oftheamount tobeallocated overanumber
ofyears.
Itshould bepointed outthattherecommended adjustment factor isinfactthefullrateofinflation
plushalfofthedifference between thisrateandthegovernment borrowing rate. Therecommendation
therefore provides anadjustment forthefullrateofinflation. Theadditional amount forhalfofthe
difference between therateofinflation andthegovernment 'sborrowing istheGroup 'swayofgiving
recognition tothefactthatgovernments borrow money, collect taxes (which haveasocial cost)and
have anopportunity costwhile atthesame timekeeping thecalculation easytounderstand and
administer.
Recommendation 5
Q.6 Could theGroup briefly elaborate onthepossible means foridentifying inflationary
countries (seeparagraph 43).
A. Asindicated inthereport (paragraphs 42-44), theGroup discussed various possible means
ofidentifying "inflationary" economy countries. Inparticular, theGroup researched whether anyof
several international financial institutions useastandard, fixed numerical definition of"inflationary".
Nosuchfixed definition isusedbyanyoftheinstitutions contacted. Moreover, theGroup wasaware
thatafixedratethathadbeenusedinthepastbytheUnited States inthecontext ofanti-dumping casesG/SCM/W/416
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hadbeenabandoned. TheGroup concluded, therefore, thattheidentification of"inflationary" economy
countries inthecontext ofparagraph 5ofAnnex IVwould needtobedoneonacase-by-case basis,
andtheGroup 'srecommendation provides foratwo-part approach tomaking thisdetermination: the
firstpartbeing acomparison withtheaverage rateofinflation inother (developed) countries (see
response toMexico 'scomment, below); andthesecond being whether, inthecountry inquestion,
inflation indexing isusedroutinely intransactions andaccounting.
Q.7 Itissuggested intherecommendation thattheinflation rateofthecountries concerned
should becompared withtheaverage OECD rate, butnoguidance isgiven onhowfarabove
theOECD rate, therateinan"inflationary" country should be.Could theGroup provide
clarification, toavoid future disputes overwhat constitutes aninflationary economy?
A. Asindicated intheanswer toECquestion 6,above, theGroup concluded thatitwould be
impossible toestablish afixed numerical definition of"inflationary" economy countries. Inthesame
way, itisnotpossible fortheGroup toidentify aparticular numerical amount ofinflation inexcess
ofthatinthecomparator countries thatwould be"significant" andthuswould satisfy thefirstpart
ofthetwo-part testrecommended bytheGroup. Toacertain extent, thismaybeafunction ofthe
moment intimewhen agiven dispute takesplace. Moreover, asindicated intheanswer toECquestion
6,thecomparison withtheaverage rateofinflation incertain other countries isonlyonepartofthe
two-part testrecommended. Even iftherateofinflation inthesubsidizing country weredeemed to
be"significantly" higher thantheaverage forthecomparator countries, thecountry would onlybe
deemed inflationary, under theapproach recommended, ifasaroutine matter inthatcountry, inflation
indexing wasusedintransactions andaccounting. TheGroup notes thatithasedited itsreport torefer
to"developed countries", rather than"OECD countries". (Seetheresponse tothecomment from
Mexico, below.)
Recommendation 6-Sales denominator
Q.8 Asregards theRecommendation 6.Bontax-related subsidies, doesthisnotpresent practical
problems ofcalculation ifthefiscal yearisdifferent from theaccounting yearandother types
ofsubsidies areinvolved?
A. Itispossible thatagiven firmmight usedifferent periods foritsgeneral accounting records
andforitstaxrecords. Probably thiswould betheexception, nottherule,however. Asindicated,
theGroup could notforesee every possible situation, anddidnotattempt toanswer every possible
question, thatmight ariseinanArticle 6.1(a) case. Thehypothetical situation posed would noton
itsfaceappear tobecapable ofresolution intheabstract. Rather, itwould seemthatthebestapproach
inasituation ofthiskindwould needtobedetermined onacase-by-case basis.
Q.9 InRecommendation 6.G,would thesame approach beusedifacombination ofdomestic
andexport subsidies were involved?
A. Thisquestion isaddressed inparagraph 67ofthereport. Asdiscussed inthatparagraph, the
question ofwhether export subsidies should beallocated onlytoexport saleswasdiscussed bytheGroup,
butnoconsensus wasreached.
Recommendation 8-Grants
Q.10 Inthecaseofreimbursable grants, cantheGroup explain whytheallocation period should
begin onthedateasofwhich itisdetermined thatthegrant willnotberepaid, rather thanon
thedatewhen thegrant wasoriginally awarded tothefirminquestion? (Paragraph 6).G/SCM/W/416
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Q.11 ThesamequestionisalsovalidforRecommendation9(contingentliabilityloans),asregards
paragraph 5.
A. TheGroup believed thatitwasmore appropriate tobegin theallocation period onthedate
asofwhich thereimbursable grant orcontingent liability loan"becomes" agrant, rather thanonthe
dateofinitial award ofthemoney, because uptothatpoint thenature ofthesubsidy inquestion is
notagrant. Thatis,untilthatpoint thepossibility ofrepayment isreal. Infact,some repayment
might havebeenmade during that"pre-conversion" period. From thestandpoint ofthegovernment,
itwould beonlyatthemoment ofconversion thatitwould become clearthatthecostofthatsubsidy
tothegovernment wasthefullamount outstanding -i.e.thatthere were nofurther prospects of
repayment. Furthermore, iftheinitial granting ofasubsidy weretobetheoperative dateforallocation,
agovernment could delay anyforgiveness untiltheendoftheallocation period andtheprincipal value
ofthegrant orloanwould never becaptured; thesubsidy would besimply aseries ofinterest-free
loans.
Recommendation 11-Debt-forgiveness/loss
Q.12 Inwhich circumstances could debtforgiveness andlosscoverage cause serious prejudice
under Article 6.1(a) ifsuchserious prejudice could notbeestablished under Articles 6.1(b), (c)
or(d)?
A. Thisrecommendation isnotmeant toimply thatthere would becircumstances where debt
forgiveness andlosscoverage assuchwould notbesufficient toestablish serious prejudice under
Articles 6.1(b), (c)or(d)butwould under Article 6.1(a). Rather, thereasoning wasthatagiven firm
might receive other subsidies, inaddition tosubsidies fordebtforgiveness and/or losscoverage. The
possibility wasforeseen thatinsuchacase, ifasubsidy forlosscoverage ordebtforgiveness was
relativelysmall,acomplainantmight,bycumulatingthissubsidywithothersreceived,useArticle6.1(a)
rather than(orasanalternative to)Articles 6.1(b), (c)or(d),asthebasis forestablishing serious
prejudice. Given thatthepossibility existed, theGroup found ituseful tomake recommendations
regarding thetreatment ofsubsidies ofthistypeinthecontext ofArticle 6.1(a) calculations.
Recommendation 12-Taxconcessions
Q.13 Asregards accelerated depreciation, would theGroup notagree thatthe"OECD approach"
(paragraph 97ofthereport) isimpractical forArticle 6.1(a) investigations, since apanel could
notwaitfortheendofthedepreciation period before making itscalculation?
A. Thisquestionisaddressedtoacertainextentinparagraph97.Asstatedthere,theGroupdeemed
theinability, untiltheendofadepreciation period, todetermine exactly theamount ofdepreciation
expense, torepresent "amajor disadvantage" oftheOECD approach. Ontheother hand, the"year-by-
year" approach alsopresented thedisadvantage thatitassumed therecipient tobefreeoftaxliability
inthefuture. Asindicated inparagraph 98,however, theGroup didnotreach consensus ona
recommendation regarding howtocalculate theadvalorem subsidization fromaccelerated depreciation.
Recommendation 14-Loan/credit guarantees
Q.14 Ifaloanguarantee programme isviable inaccordance withparagraph 3,isitcorrect
tosaythatthesubsidy amount iszeroevenifthefirmunder investigation hasdefaulted onits
guaranteed loan?
A. TheGroup 'srecommendation regarding loanguarantees thatareprovided through aprogramme
essentially treats suchaprogramme asaformofinsurance. Thatis,solongastheprogramme isself-G/SCM/W/416
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financing (i.e.solongasthepremiums paidintotheprogramme aresufficient tocover thecosts of
theprogramme) anygiven firm'suseofits"insurance coverage" tocover adefault would notinitself
giverisetoasubsidy. Bythesame token, iftheprogramme didnotcover itsowncosts, nodefault
coverage onbehalf oftheparticular firminvolved inanArticle 6.1(a) casewould berequired fora
subsidy tothatfirmtoexist.
Q.15 Themethodology forcalculating thecostofloan-guarantees doesnotseem totakeaccount
ofthecostoftherisktogovernment. Thiscanbedefined astheprobability thatacostmaybe
incurred should thecostofadefault exceed theamount paidintoascheme. Does theGroup
notbelieve thatsuchacostshould betaken intoaccount?
A. Inthecaseofguarantees given intheframework ofaprogramme, theriskelement iscovered
bytherequirement thattheprogramme must beviable forthere tobenocosttothegovernment.
Inthecaseofad-hoc guarantees, theGroup hasnotyetreached aconsensus onhowriskto
government maybequantified andfactored intoasubsidy calculation.
Recommendation 15-Provision ofgoods andservices
Q.16 CantheGroup indicate onwhat basis the"reasonable return" referred toinparagraph 1
maybecalculated?
A. TheGroup made nospecific recommendation regarding whatrepresents a"reasonable" return.
TheGroup 'sbasicideainthisregard wasthatthepricecharged should besufficient tocover allrelevant
costs. Anysuchdetermination would needtobemade onacase-by-case basis.
Upstream subsidies -Paragraph 115ofthereport
Q.17 CantheGroup explain inwhich circumstances there maybedouble-counting ofupstream
subsidies?
A. Onesituation where thepotential fordouble-counting might existwould bewhere twodifferent
Article 6.1(a) cases werebrought, onewithrespect totheupstream product andanother withrespect
tothedownstream product. Ifthetotalamount ofasubsidy ontheupstream product wereincluded
inthecalculations inbothcases, theamount ofthesubsidy would appear tobedouble-counted.
QUESTIONS FROM JAPAN
Japan would liketoseekclarification onthefollowing points fromthereport oftheInformal
Group ofExperts.
Recommendation 2(Identification ofallocated period forallocated subsidies)
Inorder todetermine theallocation period according totherecommendations ofthereport,
itwould seem necessary toclarify thefollowing points:
Q.1 What isthemeaning of"operational assets"? Areintangible assets, suchasintellectual
property rights, included within thescope of"operational assets"?
A. TheGroup intended thephrase "operational assets" onlytoinclude thephysical depreciable
assets ofafirmandhasedited thereport toreflect precisely itsintention.G/SCM/W/416
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Q.2 How isdetermined "themost recent relevant multi-year period which isrepresentative
ofnormal operations" (please refer toparagraph 15onpage6ofthereport)? Also, what ismeant
by"normal operations"?
A. The"most recent relevant multi-year period" and"normal operations" cannot bedefined in
theabstract. Thispartoftherecommendation wassimply intended toemphasize thataone-year period
forthecalculation ofacompany 'saverage useful lifeofassets would notbesufficient, andthat,at
aminimum, several years should beexamined suchthatanomalies arenotincluded, atleastwithout
some typeofnormalizing adjustments.
Q.3 How isdetermined theallocation period forsubsidies used fortheacquisition ofnon-
depreciative assets, such asland? Iftheallocation period ofthose subsidies isdetermined by
"theaverage useful lifeofoperational assets", despite thefactthatnon-depreciative assets donot
have anyuseful life,what isthetheory behind suchdetermination?
A. Ifasubsidy wasusedforthepurchase ofland, along withother assets, theallocation period
would stillbedetermined bytheaverage useful lifeofdepreciable assets employed bythefirmin
question. Themethodology proposed represents anestimation oftheaverage useful lifeoftherelevant
firm'sphysical depreciable assets. Thisestimation, intheopinion oftheGroup, isafair,predictable
andreasonable methodology forestablishing theperiod overwhich allocatable subsidies should be
attributed. Fundamentally, there isnotheoretically perfect answer forestablishing theappropriate
allocation period forasubsidy.
Q.4 Inthecasewhere asubsidy isassociated withtheacquisition ofparticular assets, itwould
seem more appropriate andexact touse"theaverage useful life"oftheparticular assets than
alltheoperational assets ofthesubsidized firm, when defining theallocation period ofsucha
subsidy. Ifso,isitpossible touse"theaverage useful life"oftheparticular asset foritsallocation
period?
A. TheGroup hasrecommended thattheaverage useful lifeofacompany 'sdepreciable assets
beusedastheallocationperiod,regardlessoftheparticularassetspurchasedwiththesubsidyinquestion.
Thisapproach wasrecommended foritseaseofapplication toalargenumber offoreseeable situations
and,inparticular, foritsavoidance oftheneedtoseparately calculate theuseful livesofnumerous
individual assets.
Q.5 Since asubsidy forR&D isgranted fortechnology development, itseems tobedifferent
inbothnature andeffect from asubsidy granted forproduction facility. Itmayoften occur that
advalorem subsidization exceeds 5percentduetotherelatively lowsales oftheproduct inthe
fewyears following thedisbursement oftheR&D subsidization, eventhough thesubsidy forR&D
doesnotmake anyadverse effects onother countries. Thus, itwould seem necessary toadopt
adifferent approach when determining theallocation period forasubsidy forR&D, than for
production facility. Please comment onthisview.
A. R&D subsidies cantakemany different forms andcanbetargeted toachieve many different
results. Likemany other types ofsubsidies, theimpact onacompany anditscompetitive position
canbeimmediate orlong-term. Totheextent thatanR&D subsidy doesnotmeetthecriteria ofArticle
8.2(a), theAgreement doesnotprovide abasistodifferentiate between anR&D subsidy andanyother
subsidy.
TheGroup did,however, specifically consider thequestions ofwhether toallocate orexpense
R&D subsidies, andwhether suchsubsidies could beconsidered "tied" toparticular products. With
respect totheformer point, theGroup recognized thatinviewoftheirfuture orientation, R&D subsidiesG/SCM/W/416
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should bepresumptively allocated, rather thanexpensed (seeRecommendation 1).Inthisregard, it
should benoted thatpursuant totheallocation formula agreed uponbytheGroup, thelevelofbenefits
isnot"front-loaded" inanymanner. With respect tothelatter point, theGroup recognized thatit
maybedifficult inpractice todetermine thatR&D subsidies aretiedtoaparticular product, andthat
therefore, suchsubsidies should bepresumptively attributed totherecipient firm'stotalsales, rather
thantosalesonlyoftheproduct atissue (seeRecommendation 20).
Finally, theGroup recognizes thatithasnotbeenabletoforesee every conceivable situation
andthatitwillbeuptotheparties toassert theirarguments astotheappropriate treatment ofany
subsidy inthecontext ofaparticular Article 6.1(a) proceeding.
Recommendation 6(Recommendation 6concerning thesalesdenominator)
E. Firm-specific salesdenominator
Q.6 Itwould seem reasonable thatserious prejudice bedeemed toexistonafirm-specific basis,
duetothere being expression, "byanenterprise", inArticle 6.1(c). However, inthecaseof
Article 6.1(a), itwould seem difficult tojudge whether serious prejudice bedeemed toexiston
afirm-specific basis asthere istheexpression, "thetotaladvalorem subsidization ofaproduct".
When theGroup concluded thatArticle 6.1(a) required calculation oftheamount ofasubsidy
onafirm-specific basis, howdidtheGroup interpret thewording "ofaproduct" inArticle 6.1(a)?
Thefirm-specific approach isnotderived from Article 6.1(c). Thisquestion isaddressed in
paragraph 61ofthereport. TheGroup believed thatthemultiple references inAnnex IVto"therecipient
firm" indicated thatfirm-specific calculations should bemade, andthatfootnote 14toArticle 6.1(a),
byindicating thatadvalorem subsidization of"aproduct" should becalculated inaccordance with
Annex IV,confirmed thisapproach. Further, reference to"total" subsidization ofaproduct could
mean totalsubsidization under multiple programmes received byanindividual firm(asperparagraph 6
ofAnnex IV),rather thanthesubsidy granted toallproducers oftheproduct intheterritory ofa
member.
Regarding themeaning of"product" otherwise, paragraphs 2and3ofAnnex IVprovide that
subsidization ofaproduct isdetermined byallocating untied subsidies totherecipient firm'stotalsales,
andtiedsubsidies totherecipient firm'ssalesoftheproduct towhich thesubsidy istied. These points
areaddressed inparagraphs 62-66 oftheGroup 'sreport, andRecommendation 6,Parts FandG.
Q.7 Ifadvalorem subsidization exceeds 5percentonafirm-specific basis, serious prejudice
within themeaning ofparagraph (c)ofArticle 5should bedeemed toexistonlybytheenterprise
whose advalorem subsidization exceeds 5percentandnotbytheother firms ortheindustry
whose advalorem subsidizations areunder 5percent. Please comment onthisview.
A. Thisquestion isaddressed inparagraph 61(lastsentence), aswellasinRecommendation 6,
PartE."...firms withlessthan5percentsubsidization would notbepresumed tobecausing serious
prejudice."
Q.8 Serious prejudice shallbedeemed toexistifadvalorem subsidization ofacertain enterprise
exceeds 5percentaccording tothereport. Inthiscase, inorder toprove thesubsidy doesnot
giveserious prejudice, should thesubsidizing Member prove thatthesubsidy granted onlyto
thefirmwhose advalorem subsidization exceeds 5percent, gives noserious prejudice, orshould
itprove thatthesubsidy asawhole (including onesgranted tofirms whose advalorem subsidization
areunder 5percent) gives noserious prejudice?G/SCM/W/416
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A. Thisquestion raises anissuethatwould appear tobeoutside thescope oftheGroup 'smandate,
asitseeks guidance regarding howapresumption ofserious prejudice based onArticle 6.1(a) can/should
berebutted. Asnoted inresponse toQuestion 7,however, based onthefirm-specific approach, firms
withlessthan5percentsubsidization would notbepresumed tobecausing serious prejudice.
Q.9 Inthecasewhere there aremany subsidized firms, isitpossible tocalculate theadvalorem
subsidization ofthefirms, notonafirmspecific-basis, butonanindustry-average basis, orby
using some statistical methods, suchas"sampling"?
A. Thisquestion alsoaddresses anissue thatappears tobeatleastpartially outside thescope of
theGroup 'smandate. Apanel would needtodetermine howtodealwithasituation ofmany subsidized
firms; thisisnotreally acalculation issue assuch. Inasituation where there aremany firms, the
Group 'srecommendations should beapplied tothesalesofeachfirm. Ifapanel decides, forpractical
reasons, tousesampling oranindustry average, therecommendations oncalculation setoutinthe
report would stillbevalid forusebythepanel, asitconsidered appropriate.
Q.10 Incalculating theadvalorem subsidization onafirm-specific basis, should anenterprise
anditssubstantially identical firms (such asitssubsidiaries) beregarded asa"single" enterprise
oras"separate" ones?
A. Thiswould needtobedecided onacase-by-case basis, although itwould seem reasonable
topresume thattherecipient firmwasthebeneficiary ofthesubsidy. Iftherecipient wereasubsidiary
ofalarger company, thedenominator thuswould betheappropriate salesvalue ofthesubsidiary, and
would beextended toinclude other entities within theparent company onlyifitwereshown thatsuch
entities hadbenefited from thesubsidy.
Q.11 Ifasubsidy isgranted toaprivate association which doesnotrunabusiness foritself
(such asanassociation ofrelated enterprises), andthesubsidy remains within theassociation
(notgranted toindividual enterprises through theassociation), howistheadvalorem subsidization
becalculated? Please comment onthefollowing ideas:
(a) Theadvalorem subsidization iszerobecause theassociation isnotanenterprise.
Therefore, serious prejudice within themeaning ofparagraph (c)ofArticle 5shall
notbedeemed toexist;
(b) Theprivate association isregarded asasingle enterprise, evenifitdoesnotrun
abusiness foritself. Inthiscase, thevalue ofthesales istheaggregation ofthe
totalamount ofsales from themember enterprises oftheassociation.
A. Thisquestion alsoaddresses issues thatappear tobeoutside thescope oftheGroup 'smandate.
Theanswer tothisquestion would appear tobeonethatcould onlybedetermined onacase-by-case
basis depending onthespecific facts. More fundamentally, itgoestotheheart ofissues addressed
inArticle 2oftheSCM Agreement -i.e.questions of"enterprise" etc.Thus, thisisnotacalculation
issue. Again, suchquestions areforpanels todecide.
QUESTIONS FROM POLAND
Inorder toproperly understand therecommendations suggested inthereport oftheInformal
GroupofExperts-G/SCM/W/415,thePolishdelegationwouldliketoreceivesomeadditionalcomments
concerning theissues raised below.G/SCM/W/416
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Q.1 Wewould liketoknow whether anextra amount ofmoney, equal totheforegone
opportunity costsofasubsidy istobealways imputed asthecostofthesubsidy, nomatter whether
allocated ornot.Iftheanswer isaffirmative, thenitwould belogical tousetheyield tomaturity
ongovernment securities asaproxy forthisextra costtothegovernment since instead ofgranting
thesubsidy thegovernment could retire some ofitsdebtordecrease thescale ofborrowing by
theamount corresponding tothefacevalue ofthissubsidy.
A. Theanswer isno.Onlysubsidies thatareallocated overtimewould besubject totheadjustment
factor. Foradiscussion ofthisissue, seeparagraphs 17-38 oftheGroup 'sreport.
Q.2 Insofar asourunderstanding oftherecommendation iscorrect, expensed grants donot
carry withthem anyextra costs beyond andabove their facevalue (noopportunity costinthe
sense ofpoint No.1above andnoneedtoadjust them forinflation andinterest [para. 77,p.17]).
A. Thatiscorrect. Grants thatareexpensed would bevalued attheirfaceamount andwould
notbesubject toanyadjustment.
Q.3 Inthecaseofordinary loans, wewould liketomake surethatitisrecommended that
theappropriate government bond ratebeusedinstead oftheformula presented inpara. 35,p.9.
Ifthisisthecasewewould appreciate yourcomments onthisissue, especially indicating thereasons
fordifferent treatment ofanallocatable grant (say, forpurchasing anasset oftenyearuseful
life)andaloanwithtenyears repayment period. Inbothcases thecosttothegovernment should
reflect anopportunity cost.
A. Thisquestion isaddressed inparagraph 18.Thatis,forloans, agovernment bond ratefor
abondwithatermtomaturity thatisforthesame period oftimeasthelifeoftheloanwould beused
inthecalculation ofthecosttothegovernment oftheloan. Theconcept ofopportunity costwas
discussed extensively bytheGroup, asmentioned inpartIIIofthereport. TheGroup decided that
because ordinary loans arerepaid bytherecipient, itisconceptually easier tosaythatthegovernment
incurs acostforafinite period oftime, unlike grants, where theperiod oftimeduring which the
government incurs acostismore difficult todelimit. Bylinking thecostofloans tothecostof
government bonds, theGroup wasabletoprovide arecommendation thatiseasytoadminister and
wasabletogetbeyond thedifficult concepts ofopportunity cost,social costofcapital, etc.
Q.4. AstoRecommendation 9,partB-would itbeinlinewiththeAuthors 'intentions to
reformulate para. 85tounderline thatfactthat"...theamount repaid ..."means "...theamount
repaid above theprincipal" andnotjustthesumofrepaid money?
A. Inparagraph 85,itisexplained thatifacontingent liability isrepaid, thenitisnolonger a
contingent liability, buthasrather taken ontheattributes ofanordinary loan. Therecommendation
totreatitassuch(i.e.tolookattheshortfall, ifany,between theinterest received andtheamount
paidonagovernment bondofcomparable bondofcomparable maturity) isconsistent withthisreading
ofparagraph 85.TheGroup hasrevised paragraph 85andRecommendation 9todescribe the
recommended approach more clearly.
Q.5 AstoRecommendation10-sinceinthesituationdescribedinpara.89interestratesubsidies
aretobetreated asaseries ofrecurring grants, noallocation comes intoplayandthusthere
isnoneedtoimpute anextra costtothegovernment (asanopportunity costofthese payments).
Isthisinterpretation correct?G/SCM/W/416
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A. Recommendation 10covers twosituations -oneinwhich interest ratesubsidies areprovided
asaseries ofrecurring grants tocover interest expenses atthetimethatinterest payments aredue,
andthesecond inwhich alump sumisprovided tocover interest expenses. Inthefirstsituation, the
subsidy amounts would betreated asrecurring grants, i.e.theywould notbeadjusted forinflation
andinterest. Inthesecond situation, thesubsidy amount would betreated asanon-recurring grant
which, when allocated, would beadjusted forinflation andinterest.
Q.6 AstoRecommendation 11,para. 92-since under thedebtforgiveness concept anoverdue
loanturns intoagrant, there isaproblem howtotreat theperiod before thedatethedebtis
forgiven. Uptothedatethedebtisforgiven thegovernment incurred some costwhich maybe
higher thantheinterest thatwassupposed tobepaidonthisloan(e.g.preferential low-interest
loans). Which interest should beincluded asacosttothegovernment, alow-interest ofa
preferential loancontract oragovernment bond ratecorresponding totheloaninquestion? What
isthecostoftheloan-turned-into-grant andhowshould itbetreated (allocated)?
A. Although thisquestion isnotraised explicitly inthereport orrecommendation regarding debt
forgiveness, itwould seem implicit thatthecostultimately attributed tothegrant would include the
interest amounts thatwould havebeenimputed before thedateofforgiveness, i.e.when theywere
ordinary loans. Ordinary government loans would bedeemed tobesubsidized ornotdepending on
theirrateofinterest compared withtheappropriate government borrowing rate. Ifsuchloans were
ultimatelyforgivenoutright,thentheloanmethodologyimpliesthattheamountofunpaidaccruedinterest
would beadded totheprincipal forgiven. Thatis,theunpaid principal andanyunpaid interest that
hadaccrued uptothatpoint under theterms ofthegovernment loanwould betreated asagrant and
allocated overtimeusing themethodology recommended forallocated grants.
QUESTIONS FROM THE UNITED STATES
Q.1 Could theGroup explain whyitdidnotattempt toestablish rules forthemeasurement
ofsuchactivities asthecostoffloating bonds andtheadministrative costsofasubsidy programme?
Wouldn 'tthese alsobea"cost tothegranting government" within themeaning ofparagraph 1
ofAnnex IVtotheAgreement?
A. Asstated inthelastparagraph ofthecovering notetothereport, theGroup didrecognize these
costs asbeing costs tothegranting government. However, because oftheir small impact ona
government 'soverall costoffunds andtomake therecommendation easytoadminister, theywere
notspecifically included intheadjustment factor calculation.
Q.2 Inparagraph 9onpage5,theGroup listsfivegeneral principles fordetermining whether
asubsidy should beallocated overtime. IsittheGroup 'sviewthatthese principles should be
considered individually orcollectively? Isanyprinciple more important than another? How
should theprinciples beinterpreted inconjunction withthetable toRecommendation 1?
A. Thevarious considerations tobetaken intoaccount when determining whether toallocate or
expense asubsidy aredescribed above. With respect tothequestion ofhow thetable to
Recommendation 1should beinterpreted inconjunction withtheprinciples listed inparagraph 9,it
should benoted thattheprinciples underlie andaregenerally considered tobeinternally consistent
withtherecommendations made inthetable. Totheextent thatthetable provides more specific
guidance, itshould beexamined first. Ifthesubsidy inquestion isnotfound inthetableorthere is
some other ambiguity, thegeneral principles andpresumptions found inparagraphs 6and9,and
Recommendation 1should beapplied.G/SCM/W/416
Page11
II. COMMENTS RECEIVED
COMMENTS FROM CANADA
Canada would liketotakethisopportunity tothank theexperts andtheSecretariat fortheir
efforts inproducing acomprehensive report onthesedifficult calculation issues. Canada feelsstrongly
thattheserecommendations address aneedforinterpretation inanareawhere exporters needguidance.
Canada therefore believes thereport tobeauseful toolandwelcomes theopportunity toreview and
discuss therecommendations inorder toencourage thereport 'smovement forward.
Onthebasisofwork donetodate,Canada would support extending themandate oftheInformal
Group ofExperts.
Canada proposes thefollowing items fordiscussion attheinformal meeting oftheCommittee
on26January 1998.
General
Either inthecover notetothereport orintheintroduction tothereport, itshould be
stated thatalthough theywere discussed during theGroup 'smeetings, certain issues such as
accelerated depreciation, equity infusions androyalty based financing, among others, remain
outstanding andwould need tobeaddressed inthefuture.
Response
Alistofissues onwhich noconsensus wasreached hasbeeninserted intothecover noteto
thereport.
A. Proposed amendments totherecommendations
Recommendation 8:Grants
Paragraph 4oftherecommendation should refer torecommendation 9(not8).
Response
Thereport hasbeenedited toreflect thiscorrection.
Recommendation 14:Loan/credit guarantees
Some flexibility totherecommendation should beadded bynotspecifying anumber of
years (inthiscasefive). Therecommendation should instead speak interms ofafulleconomic
cycle during which theviability oftheprogramme would beexamined. Thiswould ensure that
theviability ofaprogramme isnotassessed onlyduring arecession orexpansion period ofthe
cycle.
Response
Thereport hasbeenedited toindicate thatthefiveyearperiod suggested "normally" would
beused.G/SCM/W/416
Page12
Recommendation 18:Export subsidies
Thetitleshould bechanged to"export related subsidies".
Response
Thereport hasbeenedited toreflect thischange.
Recommendation 21:Worker training
Paragraph 2should beamended asfollows:
"Itisrecommended thatthecosttothegovernment bethecostthatthegovernment incurs
inproviding orfunding theworker training andwhich would otherwise have beenborne bythe
firm."
Response
Thereport hasbeenedited toreflect thischange.
B. Other Comments
Recommendation 3:Adjustment forinflation andinterest
Would itbeuseful toprovide more guidance withrespect tothechoice ofinflation rate
thatwould beused intheadjustment calculation. Forexample, there arevarious consumer,
sectoral andeconomy wide deflators.
Response
TheGroup believes thatthechoice ofinflation index would needtobemade onacase-by-case
basis, toensure theselection ofthemost appropriate index tofittheparticular circumstances.
Presumably, inthetypical case, thiswould beoneoftheeconomy-wide indexes.
Recommendation 6:Sales denominator
Thisrecommendation, although designed primarily forcommodities orconsumer goods
alsodeals withspecial circumstances suchastaxrelated subsidies andtiedsubsidies. However,
therecommendation issilent withrespect tosales ofcapital goods, particularly large value, low
volume goods. Inthose circumstances, therateofsubsidization might exceed the5percent
threshold duetolowsales inagiven year. Ifthecalculation hadbeen made inanyother year,
therateofsubsidization might bewellbelow thethreshold.
Response
Thisissue hasnotbeendiscussed bytheGroup. TheGroup believes itwould beuseful to
consider itinthefuture.G/SCM/W/416
Page13
COMMENTS FROM THE EUROPEAN COMMUNITY
A. Proposed amendments tothereport
TheEuropean Community proposes thefollowing amendments tothereport. Thepurpose
oftheseamendments istoclarify theinterpretation ofcertain partsofthereport, andtoavoid prejudging
anyissue notrelated tothemethod ofcalculating subsidies forthepurpose ofArticle 6.1(a).
1. General
Itshould bemade clear atthebeginning ofthereport thatnone oftherecommendations
apply tocivilaircraft, inaccordance withfootnote 15oftheSubsidies Agreement.
2. Recommendations 8and9onreimbursable grants andcontingent-liability loans
Itshould bespecified thatrecommendations 8and9donotapply toroyalty-based financing
forcivilaircraft.
Response tocomments A.1and2
TheGroup hasedited itsreport tomake clearthatthereport andrecommendations arerelevant
onlywithrespect tospecific subsidies, asdefined intheAgreement, towhich Article 6.1(a) applies,
pertheAgreement. Thus, totheextent thatArticle 6.1(a) doesnotapply toaparticular situation or
measure, thereport andrecommendations would ofcourse notapply.
3. Recommendation 13onequity infusions
Thisrecommendation should bemodified toavoid anticipating adefinition ofsubsidy in
suchacase. Thefirstparagraph should read:
"Itisrecommended, where therecipient 'sstock ispublicly traded, thatthecosttothe
government ofanequity infusion bedetermined bycomparing theprice thegovernment actually
paidfortheequity withanappropriately established market price fortheequity. Ifthegovernment
haspaidmore than thisprice fortheequity, thecosttothegovernment would betheamount
oftheoverpayment."
Response
Thereport andrecommendation havebeenedited toreferto"therelevant market price" for
theequity inquestion.
4. Recommendation 21onWorker training aid
Paragraph 2should beamended asfollows:
"Itisrecommended thatthecosttothegovernment bethecostthatthegovernment incurs
inproviding orfunding theworker training, totheextent thattheaidconfers abenefit tothe
enterprise andnottoindividual workers."G/SCM/W/416
Page14
Response
Thereport andrecommendation havebeenedited torefer tothegovernment 'sincurring of
costs "which would otherwise havebeenborne bythefirm".
5. Recommendation 18onexport subsidies
Itisproposed that:
(a) Thetitleofrecommendation bechanged to"export-related subsidies";
(b) Athird paragraph beadded which makes clear thattherecommendations donot
apply totheexport credit area.
Response
Thetitlesinthereport andrecommendation havebeenchanged assuggested. Regarding export
credits, theGroup believes thatthere maybesome circumstances inwhich export credits might be
included inaclaim under Article 6.1(a), forexample, where suchcredits wereprovided insuchaway
astoconfer export subsidies, assetforth inAnnex I,paragraph (k)oftheAgreement.
B. Other Comments
TheCommunity alsoconsiders thatthefollowing clarifications tothetextmaybeuseful:
1. Thesecond sentence ofparagraph 3ofrecommendation 1should read:
"Rather onlymeasures thataresubsidies perArticle 1oftheAgreement, arespecific per
Article 2andarenotnon-actionable perArticle 8.1(b), would berelevant inthatcontext."
2. Asregards debtforgiveness (Recommendation 11),thiscould notbeassimilated intoa
6.1(a) caseconcerning economies intransformation toamarket economy. (Article 29(2) ofthe
Subsidies Agreement.)
Inthisregard, itisalsoclear thatfootnote 16toArticle 6.1(d) oftheAgreement would
preclude theinclusion ofroyalty-based financing forcivilaircraft ina6.1(a) case.
Response tocomments B.1and2
Asindicated intheresponse tocomments A.1and2,theGroup hasedited itsreport tomake
clearthatthereport andrecommendations arerelevant onlywithrespect tospecific subsidies, asdefined
intheAgreement, towhich Article 6.1(a) applies, pertheAgreement.
COMMENTS FROM KOREA
First ofall,Iwould liketothank themembers oftheInformal Group ofExperts forthe
excellent report wehavenow. Iamtoldthatmycolleagues inthecapital arestillcarefully studying
thisreport. Therefore, asapreliminary note, Iwould discuss justonepoint provided inthereport.
InSection IVofthereport anditsRecommendation 3,theGroup recommended thatthe
allocated subsidy amount beadjusted forinflation. Itwasindicated thaterosion oftherealG/SCM/W/416
Page15
significance andvalue ofsubsidy caused byinflation should beavoided. However, Ithink there
might besome different opinion arguing thatinflation adjustment ofthesubsidy amount isnot
allowed forthefollowing reasons.
First, Annex IVoftheAgreement provides thatonlythevalue oftheproduct calculated
onthebasis ofthetotalsales shall beindexed bytherateofinflation. Ifboththevalue ofthe
product andsubsidy amount areadjusted, thentheresult would bethesame astheonenotadjusted
atall.AndiftheAgreement hassupposed thissituation, there would havebeennoneedtosay
anything about theadjustment ofthevalue oftheproduct.
Second, inaninflationary economy, theprice competitiveness oftheproducts produced
inthatcountry isnormally weakened and,asaresult, thelikelihood ofcausing serious prejudice
totheinterests ofanother country willalsobedecreased. Therefore, itdoesnotseem logical
toinflate thesubsidy amount inaninflationary economy andtoraise, oratleastmaintain, the
possibility ofexceeding 5percentasprovided inArticle 6.1(a), while theactual riskofserious
prejudice isreduced.
Third, itisnoted thattheamount ofsubsidy shall becalculated interms ofthecostto
thegranting government inaccordance withparagraph 1ofAnnex IV.Once asubsidy hasbeen
given totherecipient, thecosttothegovernment ofthesubsidy hasalready occurred anditis
fixed. Thus, itwillnotbeeasytounderstand whythesubsidy amount based onthefixed cost
togovernment should bechanged without anyclear legal ground intheAgreement.
Mycomment istheresult ofpreliminary consideration onjustonepoint outofmany issues
addressed inthereport. Expressing again mydelegation 'sthanks tothemembers oftheInformal
Group foridentifying various issues possibly toberaised during theimplementation ofthe
Agreement, especially ofArticle 6.1(a), Iexpect allissues addressed inthereport willbesettled
through more discussions inthisCommittee.
Response
TheGroup takes noteofthecomments fromKorea, andwishes toemphasize thatmostofthe
arguments putforward byKorea wereconsidered bytheGroup during itsdiscussions, andthatsome
oftheviews expressed byKorea were initially defended bycertain Group members. Asindicated
inthereport itself, andintheGroup members 'responses toquestions discussed attheCommittee 's
informal consultation session of26January 1998, theissue ofwhether andbyhowmuch toadjust
allocated subsidy amounts astheyaremoved through timewasoneofthemost difficult questions
discussed bytheGroup, andtherecommendation ultimately made bytheGroup represents acompromise
between different points ofview.
Regarding thecomment astowhatisandisnotexplicitly stated inthetextofAnnex IV,the
Group notes thatitsterms ofreference, which arederived directly from footnote 62toAnnex IVof
theAgreement, are"toexamine matters which arenotspecified inAnnex IVtotheAgreement orwhich
needfurther clarification forthepurposes ofparagraph 1(a)ofArticle 6...".Thus, theAgreement
itselfrecognizes thatnotallmatters relevant tothecalculation ofadvalorem subsidization ofaproduct
forpurposes ofArticle 6.1(a) arespecified inAnnex IV,andtheAgreement further specifically provides
forthedevelopment ofanunderstanding asnecessary withrespect tosuchmatters.
AsregardstheGroup'sgeneralrecommendation(Recommendation3)toadjustallocatedsubsidy
amounts (other thanloans, which arethesubject ofaseparate recommendation, Recommendation 9)
forinflation, theGroup 'sintellectual point ofdeparture wasparagraph 5ofAnnex IV,which contains
provisions forinflationary economy countries. Thatparagraph provides fortheadjustment forinflationG/SCM/W/416
Page16
ofthesalesdenominator, which islagged byoneyearinrelation tothesubsidy amount. Ineffect,
theinflation adjustment "brings uptodate" thesalesdenominator, which islagged byoneyear, by
incorporating theinflation thathasoccurred during theone-year period prior tothegranting ofthe
subsidy. Thisensures thatthenumerator anddenominator arecomparable.
TheGroup'sviewwasthattheprovisionsofparagraph5ofAnnexIV,aswellasofparagraphs2
and3,alldepict situations where subsidies areexpensed intheyeargranted, rather thanallocated over
multiple years. Foranon-inflationary country, there would benoneedtoadjust subsidy amounts for
inflation withrespect toexpensed subsidies. Rather, thesubsidy amounts could simply becompared
"asis"withtheprior year'ssalestocalculate theadvalorem subsidization.
Annex IV,paragraph 7clearly foresees thepossibility thatcertain subsidies willbeallocated,
however. Inlinewiththisgeneral principle, theGroup recommended thatcertain types ofsubsidies
beallocated, rather thanexpensed (assetforthinRecommendation 1).TheGroup discussed extensively
theeffects ofthepassage oftimeonallocated, nominal subsidy amounts. Ultimately, theGroup agreed
thatifthere were noadjustment toallocated subsidy amounts overtimeatleastforinflation, an
inconsistency would beintroduced between thenumerator (allocated subsidy amounts) andthe
denominator (sales), asthedenominator would beupdated eachyearoftheallocation period. Moreover,
without anadjustment forinflation, therealvalue andsignificance ofasubsidy would change solely
asaresult ofitsbeing allocated, rather thanexpensed. Thatis,thetotalrealvalue ofagiven subsidy
amount would belessthanitsfaceamount ifitwereallocated butnotadjusted forinflation overthe
allocation period, whereas therealvalue would bethesame asthefaceamount ifthesubsidy were
expensed.
Finally, theGroup recognized thatthegovernment 'scostofproviding asubsidy inanycase
would always behigher thanthefacevalue ofthesubsidy, because thegovernment would incur costs
inraising thefunds provided asasubsidy, andcertain ofthese costs (e.g. thecostofgovernment
borrowing) continue tobeincurred beyond theyearinwhich thesubsidy isgranted. That is,
governments raisefunds through amixture oftaxation andborrowing, bothofwhich carry costs; and
concepts suchasopportunity costtogovernment andsocial costoftaxation might alsoberelevant.
Therefore, inaddition torecommending thatallocated subsidy amounts beadjusted forinflation, the
Group recommended thatthese subsidy amounts alsobeadjusted foraportion ofthe"real" rateof
interest (meaning thedifference between thenominal interest rateandtherateofinflation), asaproxy
forthese underlying costs tothegovernment ofobtaining funds. Itisthecombination ofthefullrate
ofinflation plusthisportion oftherealinterest ratethatcomprises theadjustment factor recommended
bytheGroup forallocated subsidies other thanloans (which, asnoted, arethesubject ofaseparate
recommendation). Inthisway, thegroup attempted tofaithfully reflect thecosttothegranting
government, asprovided forinparagraph 1ofAnnex IV.
Thequestion ofprice competitiveness ofproducts, thesecond issue raised byKorea, would
appear togobeyond thescope oftheGroup 'smandate.
COMMENTS FROM MEXICO
Irefertotheinformal meeting oftheCommittee onSubsidies andCountervailing Measures
which tookplace on26January 1998, inwhich theInformal Group ofExperts 'report tothe
Committee onSubsidies andCountervailing Measures (G/SCM/W/415) wasdiscussed.
Inthisregard, Iwishtomake thefollowing comments concerning paragraph 44ofthe
report andparagraph 2ofRecommendation 5:G/SCM/W/416
Page17
- IntheAgreementonSubsidiesandCountervailingMeasures,thedivisionbetweencountries
isalways withrespect totheir levelofdevelopment; thatis,developed ontheonehand
anddeveloping ontheother.
- Anyother division, forexample, membership inother international intergovernmental
organizations, isnotsomething thatcanbetaken intoaccount.
- Norshould thejuxtaposition ofcriteria, forexample, membership inother international
intergovernmental organizations andcriteria pertaining tothelevel ofdevelopment, be
taken intoaccount.
Given theforegoing, paragraph 44(and itsrespective footnote 3)andparagraph 2of
Recommendation 5,should bemodified asindicated below, withtheterms tobeeliminated in
strike-out type, andthose tobeinserted initalic type.
Paragraph 44:
Therefore, theGroup recommends thatthedetermination ofwhether acountry is
inflationary inthesense ofparagraph 5ofAnnex IVshould bemade casebycase, based
ontwocriteria: (1)acomparison ofthatcountry 'srateofinflation withtheaverage rate
inOECD WTO Member countries listed intheAnnex3;and(2)theextent towhich inflation
indexing isusedroutinely intransactions andaccounting. (Itwasnoted thatifacompany
routinely indexes itssales values forinflation, such indexed sales values could beused
asthesalesdenominator inthesubsidy calculations performed pursuant toArticle 6.1(a)).
Footnote 3:
Ifthecountry involved isanOECD Member, listed intheAnnex ,thisaverage should
exclude thatcountry.
Paragraph 2ofRecommendation 5:
First, thatcountry 'sinflation rateshould becompared withtheaverage rateofinflation
inother countries. Ifthecountry involved inthedispute isadeveloping country, itsrate
ofinflation should becompared withtheaverage rateinOECD theWTO Member countries
listed intheAnnex .Ifthecountry involved isanOECD Member listed intheAnnex ,this
average should exclude thatcountry.
ThelistofWTO Members intheAnnex would becomprised ofOECD member countries
other thanMexico andtheother members ofOECD andWTO which consider themselves tobe
developing countries intheWTO.
Response
TheGroup hasedited itsreport toremove thereferences to"OECD countries", andreplace
these withreferences to"developed countries".
__________