8818 Federal Register / Vol. 62, No. 38 / Wednesday, February 26, 1997 / Proposed Rules

1The prior notices published by the Department

as part of its URAA rulemaking activity are: (1)

Advance Notice of Proposed Rulemaking and

Request for Public Comments (Antidumping Duties;

Countervailing Duties; Article 1904 of the North

American Free Trade Agreement), 60 FR 80 (Jan. 3,

1995); (2) Advance Notice of Proposed Rulemaking;

Extension of Comment Period (Antidumping Duties;

Countervailing Duties; Article 1904 of the North

American Free Trade Agreement), 60 FR 9802 (Feb.

22, 1995); (3) Interim Regulations; Request for

Comments ((Antidumping and Countervailing

Duties), 60 FR 25130 (May 11, 1995); (4) Proposed

Rule; Request for Comments (Antidumping and

Countervailing Duty Proceedings; Administrative

Protective Order Procedures; Procedures for

Imposing Sanctions for Violation of a Protective

Order), 61 FR 4826 (Feb. 8, 1996); (5) Notice of

Proposed Rulemaking and Request for Public

Comments (Antidumping Duties; Countervailing

Duties), 61 FR 7308 (February 27, 1996); (6)

Extension of Deadline to File Public Comments on

Proposed Antidumping and Countervailing Duty

Regulations and Announcement of Public Hearing

(Antidumping Duties; Countervailing Duties), 61 FR

18122 (April 24, 1996); and Announcement of

Opportunity to File Public Comments on the Public

Hearing of Proposed Antidumping and

Countervailing Duty Regulations (Antidumping

Duties; Countervailing Duties), 61 FR 28821 (June

6, 1996).

2See, Statement of Administrative Action

accompanying H.R. 5110 (H.R. Doc. No. 316, Vol.

1, 103d Cong., 2d Sess. (1994)).

3See Notice of Proposed Rulemaking and Request

for Public Comments (Countervailing Duties), 54 FR

23366 (May 31, 1989).

DEPARTMENT OF COMMERCE

International Trade Administration

19 CFR Part 351

[Docket No. 950306068–6185–03]

RIN 0625–AA45

Countervailing Duties

AGENCY: International Trade

Administration, Department of

Commerce.

ACTION: Notice of proposed rulemaking

and request for public comments.

SUMMARY: The Department of Commerce

(‘‘the Department’’) proposes to

establish regulations to conform the

Department’s existing countervailing

duty regulations to the Uruguay Round

Agreements Act, which implemented

the results of the Uruguay Round

multilateral trade negotiations. In

addition to conforming changes, the

Department has sought to issue

regulations that: (1) Where appropriate

and feasible, translate the principles of

the implementing legislation into

specific and predictable rules, thereby

facilitating the administration of these

laws and providing greater

predictability for private parties affected

by these laws; (2) simplify and

streamline the Department’s

administration of countervailing duty

proceedings in a manner consistent with

the purpose of the statute and the

President’s regulatory principles; and

(3) codify certain administrative

practices determined to be appropriate

under the new statute and under the

President’s Regulatory Reform Initiative.

DATES: Written comments will be due

on April 28, 1997.

ADDRESSES: Address written comments

to Robert S. LaRussa, Acting Assistant

Secretary for Import Administration,

Central Records Unit, Room 1870, U.S.

Department of Commerce, Pennsylvania

Avenue and 14th Street, NW,

Washington, DC 20230. Comments

should be addressed: Attention:

Proposed Regulations/Uruguay Round

Agreements Act—Countervailing Duties.

Each person submitting a comment is

requested to include his or her name

and address, and give reasons for any

recommendation.

FOR FURTHER INFORMATION CONTACT:

Jennifer A. Yeske at (202) 482–0189 or

Penelope Naas at (202) 482-3534.

SUPPLEMENTARY INFORMATION:

Background

This notice, which deals with

countervailing duty (‘‘CVD’’)

methodology, constitutes part of a larger

process of developing regulations under

the Uruguay Round Agreements Act

(‘‘URAA’’). The process began when the

Department took the unusual step of

requesting advance public comments in

order to ensure that, at the earliest

possible stage, we could consider and

take into account the views of the

private sector entities that are affected

by the antidumping (‘‘AD’’) and CVD

laws. Following an extension of the

comment period, on May 11, 1995, the

Department published interim-final

rules that dealt with a limited number

of new or revised procedures resulting

from the URAA. On February 8, 1996,

the Department published proposed

rules (‘‘APO Regulations’’) that, among

other things, revised procedures relating

to administrative protective orders in

AD and CVD proceedings. Finally, on

February 27, 1996, the Department

published proposed rules dealing with

AD and CVD procedures and AD

methodology (‘‘AD Proposed

Regulations’’).1

In these proposed regulations, the

Department has continued to be guided

by the objectives described in the AD

Proposed Regulations. Specifically,

these objectives are: (1) Conformity with

the statutory amendments made by the

URAA; (2) the elaboration through

regulation of certain statements

contained in the Statement of

Administrative Action (‘‘SAA’’); 2 and

(3) consistency with President Clinton’s

Regulatory Reform Initiative and his

directive to identify and eliminate

obsolete and burdensome regulations.

In the case of CVD methodology, the

Department’s existing ‘‘regulations’’

consist largely of the proposed

regulations published in 1989 (‘‘1989

Proposed Regulations’’).3 Because the

Department never issued final rules, the

1989 Proposed Regulations were not

binding on the Department or private

parties. Nevertheless, to some extent

both the Department and private parties

relied on the 1989 Proposed Regulations

as a restatement of the Department’s

CVD methodology as it existed at the

time. Thus, notwithstanding statutory

amendments made by the URAA and

subsequent developments in the

Department’s administrative practice,

the 1989 Proposed Regulations still

serve as a point of departure for any

new regulations dealing with CVD

methodology.

As described in the AD Proposed

Regulations, we have consolidated the

AD and CVD regulations into a single

part 351. For the most part, the

regulations contained in this notice

constitute subpart E of part 351. We

anticipate that the consolidation of the

AD and CVD regulations will make the

regulations easier to use and, by

reducing their sheer size, will make the

regulations more accessible to the nonexpert.

Comments—In General

The Department wishes to emphasize

that the regulations contained in this

notice are proposed regulations only.

While they reflect our best judgment at

this time regarding the appropriate style

and content of regulations dealing with

CVD methodology, we remain openminded on the various issues raised

herein. Therefore, we are very interested

in receiving public comment on these

proposed regulations. We have found

the dialogue that commenced with the

advance notice to be extremely useful,

and we hope and expect that it will

continue.

Comments—Format and Number of

Copies

Each person submitting a comment

should include his or her name and

address, and give reasons for any

recommendation. To facilitate their

consideration by the Department,

comments regarding these proposed

regulations should be submitted in the

following format: (1) Identify each

comment by reference to the section

and/or paragraph of these proposed
Federal Register / Vol. 62, No. 38 / Wednesday, February 26, 1997 / Proposed Rules 8819

4 If a comment does not pertain to a particular

proposed regulation, please clearly identify the

comment as ‘‘Other,’’ followed by a brief

description of the issue to which the comment

pertains; e.g., ‘‘Other—Infrastructure.’’

regulations to which the comment

pertains; 4 (2) begin each comment on a

separate page; (3) concisely state the

issue identified and discussed in the

comment; and (4) provide a brief

summary of the comment (a maximum

of 3 sentences) and label this section

‘‘summary of the comment.’’

To help simplify the processing and

distribution of comments, the

Department encourages the submission

of documents in electronic form

accompanied by an original and two

copies in paper form. We request that

documents filed in electronic form be

on DOS formatted 3.5′′ diskettes and

prepared in either WordPerfect format

or a format that the WordPerfect

program can convert and import into

WordPerfect. Please submit comments

on a separate file on the diskette and

identify each comment in the manner

described in the preceding paragraph.

Comments received on diskette will

be made available to the public on the

Internet at the following address: http:/

/www.ita.doc.gov/importladmin/

records/.

In addition, the Department will make

comments available to the public on

3.5′′ diskettes, with specific instructions

for accessing compressed data, at cost,

and paper copies will be available for

reading and photocopying in Room B–

099 of the Central Records Unit. Any

questions concerning file formatting,

document conversion, access on the

Internet, or other file requirements

should be addressed to Andrew Lee

Beller, Director of Central Records, (202)

482–0866.

Explanation of the Proposed Rules

Section 351.102

These proposed regulations add

several definitions to § 351.102. Many of

these definitions are identical (or

virtually identical) to definitions

contained in § 355.41 of the 1989

Proposed Regulations, and some are

based on definitions contained in the

Illustrative List of Export Subsidies

(‘‘Illustrative List’’) annexed to the

Agreement on Subsidies and

Countervailing Measures (‘‘SCM

Agreement’’). However, a few

definitions warrant comment.

The definition of firm is based on

§ 355.41(a) of the 1989 Proposed

Regulations, but an additional clause

has been added to clarify that the

purpose of this term is to serve as a

shorthand expression for the recipient

of an alleged subsidy. While other terms

could be used, the use of the term

‘‘firm’’ in this manner has become an

accepted part of CVD nomenclature.

Similarly, government-provided is

used as a shorthand adjective to

distinguish the act or practice being

analyzed as a possible countervailable

subsidy from the act or practice being

used as a benchmark. As made clear in

the regulation, the use of ‘‘governmentprovided’’ does not mean that a subsidy

must be provided directly by a

government.

Loan is defined to include forms of

debt financing other than what one

normally considers as a ‘‘loan,’’ such as

bonds, overdrafts, etc. Again, this

definition is intended as a shorthand

expression in order to avoid repetitive

use of more cumbersome phrases, such

as ‘‘loans or other debt instruments.’’

In this regard, the Department

considered codifying its approach with

respect to so-called ‘‘hybrid

instruments,’’ financial instruments that

do not readily fall into the basic

categories of grant, loan, or equity. In

the 1993 steel determinations, see

Certain Cold-Rolled Carbon Steel Flat

Products from Austria (General Issues

Appendix), 58 FR 37062, 37254 (‘‘GIA’’),

the Department developed a

hierarchical approach for categorizing

hybrid instruments, an approach that

was sustained in Geneva Steel v. United

States, 914 F. Supp. 563 (Ct. Int’l Trade

1996). However, notwithstanding this

judicial imprimatur, the Department has

relatively little experience with hybrid

instruments. Therefore, although the

Department has no present intention of

deviating from the approach set forth in

the GIA, the codification of this

approach in the form of a regulation

would be premature at this time.

Section 351.501

Section 351.501 restates very

generally the subject matter of subpart

E. To be a bit more specific, the

arrangement of subpart E is as follows.

After dealing with the specificity of

domestic subsidies in § 351.502,

§§ 351.503 through 351.512 deal with

the identification and measurement of

various general types of subsidy

practices. Sections 351.513 through

351.519 focus on export subsidies,

incorporating the appropriate standards

from the Illustrative List. Section

351.520 deals with general export

promotion activities of governments.

Sections 351.521 through 351.523 deal

with import substitution subsidies

(currently designated as ‘‘Reserved’’),

certain agricultural subsidies, and

upstream subsidies, respectively.

Section 351.524 sets forth rules

regarding the calculation of an ad

valorem subsidy rate and the attribution

of a subsidy to a product. Finally,

§§ 351.525 through 351.527 contain

rules regarding program-wide changes,

transnational subsidies, and the tax

consequences of benefits, respectively.

The last sentence of § 351.501

acknowledges that subpart E does not

address every possible type of subsidy

practice. However, the same sentence

provides that in dealing with alleged

subsidies that are not expressly covered

by these regulations, the Secretary will

be guided by the underlying principles

of the Act and subpart E.

In this regard, the Act and the SCM

Agreement serve to eliminate much of

the confusion and controversy

surrounding the necessary elements of a

countervailable subsidy. First, under

section 771(5)(B) of the Act and Article

1.1(a) (1) and (2) of the SCM Agreement,

there must be a financial contribution

that a government provides either

directly or indirectly, or an income or

price support in the sense of Article XVI

of GATT 1994. Although the precise

parameters will have to be determined

on a case-by-case basis, this element

provides a framework for analysis that

was previously missing.

Second, under section 771(5)(B) and

Article 1.1(b) of the SCM Agreement,

the financial contribution (or income or

price support) must confer a benefit.

Although the concept of a ‘‘benefit to

the recipient’’ is not new to U.S. CVD

law, in some cases the meaning of this

concept had become obscured. The new

law clarifies this concept and eliminates

any possibility of confusing the

‘‘benefit’’ of a subsidy with the ‘‘effect’’

of a subsidy. In particular, section

771(5)(E) of the Act and Article 14 of the

SCM Agreement, through their

description of the various standards (or

‘‘benchmarks’’) used to identify and

measure the benefits attributable to

different types of subsidy practices,

make clear that a benefit is conferred

when a firm pays less for its ‘‘inputs’’

than it otherwise would pay in the

absence of the government-provided

input or earns more than it otherwise

would earn. For example, when the

amount that a firm pays on a

government-provided loan is less than

what the firm ‘‘would pay on a

comparable commercial loan that the

(firm) could actually obtain on the

market,’’ the firm’s cost of borrowing

money is reduced. See section

771(5)(E)(ii) of the Act. Similarly, when

a firm sells its goods to the government

and ‘‘such goods are purchased for more

than adequate remuneration,’’ the firm’s

revenues are increased beyond what it

would otherwise earn. See section
8820 Federal Register / Vol. 62, No. 38 / Wednesday, February 26, 1997 / Proposed Rules

771(5)(E)(iv) of the Act. In neither

instance need the Department do more

than apply the test enumerated by the

statute in order to find that a benefit has

been conferred.

In this regard, when we talk about a

firm paying less for its inputs than it

otherwise would pay (or receiving more

revenues than it otherwise would earn),

we are referring to the lower price it

pays to acquire the thing provided by

the government, i.e., money, a good, or

a service. We do not mean to suggest, as

has sometimes been argued, that one

must consider the overall impact of

government actions on a firm in

determining whether a particular

government action confers a benefit.

Neither the statute nor the SCM

Agreement supports such an analysis.

For example, assume that a

government puts in place new

environmental requirements that require

a firm to purchase new equipment to

adapt its facilities. Assume also that the

government provides the firm with

subsidies to purchase that new

equipment, but the subsidies do not

fully offset the total increase in the

firm’s costs; i.e., the net effect of the

new environmental requirements and

the subsidies leaves the firm with costs

that are higher than they previously

were.

In this situation, section 771(5B)(D) of

the Act, which deals with one form of

non-countervailable subsidy, makes

clear that a subsidy exists. Section

771(5B)(D) treats the imposition of new

environmental requirements and the

subsidization of compliance with those

requirements as two separate actions. A

subsidy that reduces a firm’s cost of

compliance remains a subsidy (subject,

of course, to the statute’s remaining tests

for countervailability), even though the

overall effect of the two government

actions, taken together, may leave the

firm with higher costs.

Thus, if there is a financial

contribution and a firm pays less for an

input than it otherwise would pay in the

absence of that financial contribution

(or receives revenues beyond the

amount it otherwise would earn), that is

the end of the inquiry insofar as the

benefit element is concerned. The

Department need not consider how a

firm’s behavior is altered when it

receives a financial contribution that

lowers its input costs or increases its

revenues.

If there were any doubt on this score,

section 771(5)(C) of the Act eliminates

it by clarifying that the ‘‘benefit’’ and

the ‘‘effect’’ of a subsidy are two

different things. While, as stated above,

there must be a benefit in order for a

subsidy to exist, section 771(5)(C)

expressly provides that the Department

‘‘is not required to consider the effect of

a subsidy in determining whether a

subsidy exists.’’ This message is driven

home by the SAA at 256, which states

that ‘‘the new definition of subsidy does

not require that Commerce consider or

analyze the effect (including whether

there is any effect at all) of a government

action on the price or output of the class

or kind of merchandise under

investigation or review.’’

As stated above, a benefit exists where

a firm pays less for an input than it

otherwise would pay in the absence of

the financial contribution (or receives

revenues beyond the amount it

otherwise would earn). By the same

token, where a firm does not pay less for

an input than it otherwise would pay (or

its revenues are not increased) as a

result of a financial contribution, it

would be very difficult to contend that

a benefit exists. However, we have not

closed our minds here and we would

welcome comment on this issue.

Finally, under section 771(5)(A) of the

Act and Article 1.2 of the SCM

Agreement, a subsidy must be specific

in order to be countervailable. The

‘‘specificity test’’ is discussed in more

detail below, but we note here that by

clarifying the purpose of the specificity

test and the manner in which it is to be

applied, the URAA, the SAA and the

SCM Agreement should serve to reduce

the volume of litigation concerning this

heavily litigated issue.

Regarding the coverage of subpart E,

we should note two topics that are not

addressed by these regulations: indirect

subsidies (with the exception of

upstream subsidies) and privatization.

The topic of ‘‘indirect subsidies’’ refers

generally to situations where a

government provides a financial

contribution through a private body,

and involves the application of section

771(5)(B)(iii) of the Act. Several

comments were received on this topic,

including particular suggestions

regarding the possible contents of a

regulation. Although the issues raised

by the commenters are important ones,

we are not addressing them at this time.

We note that the legislative history

clearly calls for the Department to

proceed on a case-by-case basis. See

SAA at 255–56. Our decision not to

address these comments serves, in part,

to preserve this flexibility and

discretion, and allows us the

opportunity to request comments

specifically pertaining to the factors we

should consider in making our case-bycase determinations.

The topic of privatization typically

involves situations where ownership of

a government-owned firm is transferred

to a private entity. Privatization raises

the question of the extent to which

previously bestowed subsidies which

are allocated over time remain

countervailable after the privatization,

and involves the application of section

771(5)(F) of the Act, the new section in

the URAA addressing this subject.

In these proposed regulations, we

have not included a provision dealing

with privatization. However, we are

evaluating whether a regulation on this

topic is appropriate. Therefore, in the

discussion that follows, we describe and

discuss certain issues that we believe

are raised by section 771(5)(F). We begin

with a review of the methods we have

used to date for addressing prior

subsidies and privatization. We then

turn to the new legislation.

Agency Practice

Although there were earlier

administrative precedents, the recent

history of the privatization issue began

in January 1993, with the Department’s

final CVD determinations in the Lead

and Bismuth cases (see, in particular,

Certain Hot-rolled Lead and Bismuth

Carbon Steel Products from the United

Kingdom, 58 FR 6237). In those

determinations, the Department ruled

that the sale of a firm (or a ‘‘productive

unit’’ of a firm), even if at arm’s length,

does not alter the countervailability of

previously bestowed subsidies. The

Department reasoned that it ‘‘does not

examine the impact of subsidies on

particular assets or tie the benefit level

of subsidies to changes in the company

under investigation. Therefore, it

follows that when a company sells a

productive unit, the sale does nothing to

alter the subsidies enjoyed by that

productive unit.’’ Id., at 6240.

In the July 1993 final CVD

determinations in the Certain Steel

cases, the Department modified the

approach taken in the Lead and Bismuth

cases. The Department concluded that

once a subsidy is bestowed, the Act

precludes a reevaluation of the amount

or countervailability of a subsidy based

on subsequent events, such as a change

in the ownership of a firm. The

Department stated: ‘‘Accordingly,

whether subsidies convey a

demonstrable competitive benefit upon

recipients, in the year of receipt or any

subsequent year, is irrelevant—the

statute embodies the irrebutable

presumption that subsidies confer a

countervailable benefit upon goods

produced by their recipients.’’ The

Department further ruled that ‘‘a private

party purchasing all or part of a

government-owned company (e.g., a

productive unit) can repay prior

subsidies on behalf of the company as
Federal Register / Vol. 62, No. 38 / Wednesday, February 26, 1997 / Proposed Rules 8821

part or all of the sales price.’’ GIA at

37262. Put differently, a portion of

previously bestowed subsidies might

not ‘‘travel to a new home’’ depending

on the price paid for a firm by the buyer.

To determine the amount of

previously bestowed subsidies that pass

through to the privatized firm, the

Department developed a repayment

method. Under that method, the

Department determines the amount of

subsidies repaid based on a ratio of the

privatized firm’s subsidies to the firm’s

net worth over a period of time.

Subsidies that are not repaid continue to

benefit the merchandise produced by

the privatized firm. Id., at 37263. Only

non-recurring subsidies (i.e., subsidies

allocated over time) are included in the

pass through and repayment

calculations.

New Law

In June, 1994, the U.S. Court of

International Trade (‘‘CIT’’) overturned

the Department’s determinations in the

Lead and Bismuth cases. In Inland Steel

Bar Co. v. United States, 858 F. Supp.

179, rev’d, 86 F.3d 1174 (Fed. Cir. 1996)

(‘‘Inland’’), and Saarstahl AG v. United

States, 858 F. Supp. 187, rev’d, 78 F.3d

1539 (Fed. Cir. 1996) (‘‘Saarstahl’’), the

CIT declared the Department’s

privatization methodology to be

unlawful ‘‘to the extent it states

previously bestowed subsidies are

passed through to a successor company

sold in an arm’s length transaction.’’

This decision meant that if a firm is

privatized in an arm’s length

transaction, previously bestowed

subsidies are extinguished.

When the CIT issued its decisions in

Inland and Saarstahl, the

Administration and Congress were in

the process of drafting, under ‘‘fast

track’’ procedures, H.R. 5110, the bill

that ultimately would become the

URAA. As of June 1994, the draft CVD

legislation did not contain any

provisions that dealt expressly with the

issue of privatization, and no such

provisions were contemplated.

However, following the CIT’s decisions,

a new provision was added that became

section 771(5)(F) of the Act.

As enacted, section 771(5)(F) provides

as follows:

Change in ownership.—A change in the

ownership of all or part of a foreign

enterprise or the productive assets of a

foreign enterprise does not by itself require

a determination by the (Department) that a

past countervailable subsidy received by the

enterprise no longer continues to be

countervailable, even if the change in

ownership is accomplished through an arm’s

length transaction.

The SAA at 928 offered the following

explanation of section 771(5)(F):

Section 771(5)(F) provides that a change in

the ownership of ‘‘all or part of a foreign

enterprise’’ (i.e., a firm or a division of a firm)

or the productive assets of a firm, even if

accomplished through an arm’s-length

transaction, does not by itself require

Commerce to find that past countervailable

subsidies received by the firm no longer

continue to be countervailable. For purposes

of section 771(5)(F), the term ‘‘arm’s-length

transaction’’ means a transaction negotiated

between unrelated parties, each acting in its

own interest, or between related parties such

that the terms of the transaction are those

that would exist if the transaction had been

negotiated between unrelated parties.

Section 771(5)(F) is being added to clarify

that the sale of a firm at arm’s length does

not automatically, and in all cases,

extinguish any prior subsidies conferred.

Absent this clarification, some might argue

that all that would be required to eliminate

any countervailing duty liability would be to

sell subsidized productive assets to an

unrelated party. Consequently, it is

imperative that the implementing bill correct

and prevent such an extreme interpretation.

The issue of the privatization of a stateowned firm can be extremely complex and

multifaceted. While it is the Administration’s

intent that Commerce retain the discretion to

determine whether, and to what extent, the

privatization of a government-owned firm

eliminates any previously conferred

countervailable subsidies, Commerce must

exercise this discretion carefully through its

consideration of the facts of each case and its

determination of the appropriate

methodology to be applied.

In addition to this passage in the

SAA, the Senate Report on the URAA

stated as follows:

The Committee believes that this provision

serves the important purpose of making clear

that the sale of a firm at ‘‘arm’s length’’ does

not automatically extinguish any previouslyconferred subsidies. New section 771(5)(F)

stands in contrast to such an interpretation,

which would result in an end to the

countervailability of prior subsidies

otherwise allocable to the merchandise. The

sale of subsidized goods or assets to an

unrelated party should not in and of itself

permit the avoidance of duties. The

Commerce Department should continue to

have the discretion to determine whether,

and to what extent (if any), actions such as

the ‘‘privatization’’ of a government-owned

company actually serve to eliminate such

subsidies. It is the Committee’s expectation

that Commerce will exercise this discretion

carefully and make its determination based

on the facts of each case, developing a

methodology consistent with the principles

of the countervailing duty statute.

S. Rep. No. 412, 103d Cong., 2d Sess. 92

(1994).

Approach Under the New Law

Based on our reading of section

771(5)(F) and the legislative history of

that provision, we believe that the new

law overturns the approach adopted by

the CIT in Inland and Saarstahl, i.e.,

that an arm’s length transaction, in and

of itself, is sufficient to extinguish prior

subsidies. We would further note that in

March, 1996, the Court of Appeals for

the Federal Circuit reversed the CIT’s

decision, holding that ‘‘the [CIT] erred

in holding that as a matter of law a

subsidy cannot be passed through

during an arm’s length transaction’’

(Saarstahl, AG v. United States, 78 F.3d

1539, 1544). Hence, under the pre- and

post-URAA statute, the Department’s

position is that even if a privatization is

accomplished by means of an arm’s

length transaction, previously bestowed

subsidies are not automatically, and in

all cases, extinguished.

By the same token, it has been

suggested that the language in the SAA

and the Senate Report directing

Commerce to consider ‘‘the facts of each

case’’ in determining whether and to

what extent privatization of a

government-owned firm eliminates any

previously conferred subsidies may

preclude an approach whereby all prior

subsidies would automatically, and in

all cases, be passed through to the

privatized company.

Instead of establishing automatic rules

in determining the extent to which prior

subsidies pass through or are

extinguished by privatization, a more

flexible approach would be to examine

a broad array of factors specific to the

individual case. This may include

examining the circumstances

surrounding the privatization

transaction, as well as the impact of

prior subsidies on current market

conditions.

Having said this, however, we do not

believe that Congress intended that the

Department’s privatization

determinations be made on an ad hoc

basis. As stated in the Senate Report, it

was expected that the Department

would develop ‘‘a methodology

consistent with the principles of the

countervailing duty statute.’’ S. Rep. No.

412, 103d Cong., 2d Sess. 92 (1994).

Thus, the question to which we now

turn is what facts would be relevant to

determining the effect that a change in

ownership has on previously bestowed

subsidies.

One starting point for consideration of

the appropriate approach under the new

law is the method previously adopted

by the Department. As discussed above,

we have recognized that privatization

has some impact on previously

bestowed subsidies and have employed

a repayment formula to determine the

extent to which those subsidies pass

through to the privatized firm. We have

indicated in recent cases our position
8822 Federal Register / Vol. 62, No. 38 / Wednesday, February 26, 1997 / Proposed Rules

that the repayment method is

permissible under the new law (see, in

particular, Certain Hot-rolled Lead and

Bismuth Carbon Steel Products from the

United Kingdom; Final Results of

Countervailing Duty Administrative

Review, 61 FR 58377, 58379. Some have

questioned the Department’s method for

calculating the amount of repayment.

For example, in computing the share of

the sales price that repays past

subsidies, the Department averages

several years data on subsidies and the

net worth of the firm.

• Should this average be weighted to

give greater weight to the years

immediately preceding the

privatization? Or, should the average be

abandoned and replaced with

information on subsidies and net worth

at the time of privatization?

• Are there other ways of determining

whether repayment has occurred (e.g.,

whether repayment must be made by

the firm as opposed to the purchasers of

the firm) and are there more accurate

means of calculating such repayment?

Besides the facts that are relevant to

the repayment method discussed above,

there may be a number of considerations

that should be evaluated in determining

the extent to which previously bestowed

subsidies are extinguished or passed

through by means of privatization. For

example, while the new statutory

provision rules out the possibility that

an arm’s length transaction, in and of

itself, is sufficient to extinguish past

subsidies in all cases, it leaves open the

question of what importance (if any) we

should assign to the fact that a

privatization does or does not occur at

arm’s length.

• Should the arm’s length criterion

alter the extent to which the Department

considers previously bestowed

subsidies to be countervailable with

respect to merchandise produced by the

privatized firm? Under the methodology

currently applied by the Department,

the presence or absence of an arm’s

length transaction does not affect our

repayment calculation.

• In situations where the

privatization transaction is not an arm’s

length transaction, is it more likely that

prior subsidies pass through to the

privatized company, or that a larger

amount of the prior subsidies pass

through? What factors would determine

the extent, if any, to which prior

subsidies pass through?

• Is it necessary for a privatization to

be an arm’s length transaction before the

Department could even consider that

previously bestowed subsidies are

extinguished by the privatization?

Conversely, if the privatization

transaction is not at arm’s length,

should the Department even consider

that any previously bestowed subsidies

could have been extinguished?

• Under what circumstances and

what privatization techniques does the

transaction give rise to new subsidies to

the purchasers? Would these new

subsidies be in addition to any prior

subsidies that pass through to the

purchaser?

In addition to considering whether

the privatization is an arm’s length

transaction, there may be other

circumstances of the privatization

transaction relevant to determining the

extent to which previously bestowed

subsidies pass through to the privatized

firm. For example, it has been argued

that when the privatization process

occurs in a competitive market setting,

the purchasers may be paying the full

value of the company, including the

current value of any previously

bestowed subsidies.

• Can a competitive market setting, in

and of itself, extinguish past subsidies?

Under what circumstances would this

occur?

• What elements might give rise to a

competitive market setting and what is

the relevance of those elements in

determining the extent to which prior

subsidies are passed through.

• Is it important to look at the nature

of the auction, public stock offering, or

other type of sale of the firm, including

the number of bidders? Where there are

few bidders, would it be important to

consider whether the privatizing

government placed restriction on who

could purchase the company (e.g.,

whether certain classes of buyers were

precluded from participating)?

• Is it important that the privatization

be carried out in an open, transparent

manner? What elements might be

important to this consideration?

• What role should independent

valuations of the firm (e.g., valuations

by independent auditors) play? What if

the winning bid for the firm being

privatized was less than the value

established in independent

assessments?

• Given that equity markets may be

more advanced in some countries than

in others, should the Department

account for the effect of the state of

market development on the competitive

bid process?

• Does the method of payment

matter? For example, if the seller

accepts debt or vouchers as payment for

the privatized firm, should that be

viewed differently than accepting cash?

Beyond these circumstances relating

to the mechanics of the privatization

transaction are events leading up to the

privatization. These might include

actions taken by the government to

make the firm more attractive to

potential purchasers. For example, the

government might forgive debt owed to

it by the firm in order to ‘‘clean up the

balance sheet.’’ Or, the government may

undertake the expense of closing certain

inefficient operations and sell off only

the more modern plants.

• Are these types of actions taken in

anticipation of privatization relevant to

a determination of whether subsidies

pass through to the privatized firm?

• Should such actions be separated

from what would otherwise be

considered ‘‘prior’’ subsidies in

determining the extent to which

subsidies pass through or are

extinguished?

Similarly, the government may

impose post-privatization restrictions on

the privatized firm. For example, the

new owners may be required to produce

particular goods or services, to operate

in particular locations, to purchase

particular supplies from particular

suppliers, to retain a certain number of

workers or to undertake a certain level

of investment in the privatized firm. Or,

government restrictions on the

privatized firm may take the form of a

‘‘golden share’’ whereby the government

retains the right to make decisions about

the certain specified operations of the

firm, although ownership and control

has otherwise passed to the new

owners.

• Should these types of conditions on

the sale be considered in determining

whether, and the extent to which, prior

subsidies pass through?

It has also been argued that certain

government-owned companies benefit

from government preferences, be it

through low, government-guaranteed

input prices or preferential access to

government-controlled credit.

• Should the Department be

concerned with whether the privatized

firm will continue to benefit from such

preferences? Or, would it be necessary

for the government to eliminate the

preferences before privatization?

Finally, the issue has been raised that

in the privatization scenarios typically

encountered by the Department, excess

global capacity exists because one or

more foreign governments have created

or maintained productive assets that

would not exist in the absence of

government subsidization. Because of

this, some would argue, even if the

buyer of a firm pays a market price, the

prior subsidies to the privatized

company result in an unfairly low price

being received for the firm.

• In a situation where subsidies have

led to the creation of excess capacity

(thereby lowering the market price for
Federal Register / Vol. 62, No. 38 / Wednesday, February 26, 1997 / Proposed Rules 8823

the firm being privatized), are those

facts relevant to determining whether

and to what extent the prior subsidies

pass through to the privatized firm?

• How would the Department

determine that excess global capacity

has been created? How would excess

capacity be defined and measured?

• It has also been argued that if excess

capacity created by subsidies is relevant

to the issue of privatization, then

reductions to capacity made possible by

subsidies should also be relevant. What

relevance should the nature of the

subsidy (i.e., whether it contributes to or

reduces capacity) have in determining

whether and to what extent prior

subsidies pass through to the privatized

firm?

Conclusion

These lines of inquiry are consistent

with section 771(5)(F) and with the

recognition in the SAA, at 928, that the

privatization issue ‘‘can be extremely

complex and multifaceted.’’

In addition, it is consistent with the

emphasis in both the SAA and the

Senate Report on the importance of

considering the facts of individual

cases. We wish to emphasize that our

list is not meant to be all-inclusive and

we invite commenters to offer their

views on other factors they consider to

be relevant. Also, commenters should

explain how these factors would be

incorporated into a framework for

analyzing privatizations and calculating

subsidies to privatized firms.

We further invite comment on

whether we should attempt to

promulgate a final rule on the topic of

privatization and what that rule might

look like. Regarding the latter question,

commenters are invited to address

whether precise formulae should be

used to determine the extent to which,

if any, prior subsidies pass through or

whether a case-by-case approach

integrating some or all of the

considerations identified in this

preamble should be adopted.

Commenters may want to address

whether a formulaic approach could be

developed that would be sufficiently

comprehensive to account for special

circumstances, or whether a formulaic

approach would be undesirably rigid.

Commenters may also want to address

the consequences of the uncertainty

resulting from a case-by-case approach.

In conclusion, we would like to repeat

that the Department is carefully

considering whether to issue a final

regulation on the subject of

privatization. To that end, the foregoing

discussion is intended to stimulate,

rather than foreclose, further thinking

on this topic. We appreciate the

comments that have been submitted on

this topic thus far, and the fact that we

may not have identified a particular

suggestion should not be construed as

an indication that we have rejected the

suggestion.

Section 351.502

Section 351.502 deals with the

‘‘specificity’’ of domestic subsidies.

Unlike its predecessor, § 355.43 of the

1989 Proposed Regulations, § 351.502

does not contain a ‘‘general’’ specificity

test. This is due to the fact that section

771(5A) of the Act and the SAA provide

much more detail and clarity regarding

the application of the ‘‘specificity test’’

than did the prior statute and its

legislative history. Thus, on the subject

of specificity, there are far fewer

interpretative gaps for the Department to

fill in than there were in 1989, and,

thus, less need for regulations.

Accordingly, § 351.502 deals with

certain aspects of the specificity test that

are not addressed expressly in the

statute or the SAA.

Paragraph (a) is based on

§ 355.43(b)(8) of the 1989 Proposed

Regulations, and continues to provide

that the Secretary will not consider a

subsidy as being specific merely

because it is limited to the agricultural

sector. Instead, as under prior practice,

the Secretary will find an agricultural

subsidy to be countervailable only if it

is specific within the agricultural sector;

e.g., a subsidy is limited to livestock, or

livestock receives disproportionately

large amounts of the subsidy. See Lamb

Meat from New Zealand, 50 FR 37708,

37711 (1985).

One commenter suggested that the

Department should abandon the special

specificity rule for agricultural

subsidies, citing the fact that under

section 771(5B)(F) of the Act and Article

13(a) of the WTO Agreement on

Agriculture, so-called ‘‘green box’’

agricultural subsidies are noncountervailable. With respect to this

comment, we note that the Department’s

application of the specificity test to

agricultural subsidies was upheld in

Roses, Inc. v. United States, 774 F.

Supp. 1376 (Ct. Int’l Trade 1991). In

light of this judicial affirmance, and

given the absence of any indication that

Congress intended to change the

Department’s practice or overturn Roses,

we are retaining the special specificity

rule for agricultural subsidies.

Paragraph (b) is based on

§ 355.43(b)(7) of the 1989 Proposed

Regulations, and continues to provide

that the Secretary will not consider a

subsidy as being specific merely

because it is limited to small or smalland medium-sized firms. Instead, as

under prior practice, the Secretary will

find such a subsidy to be

countervailable if, either on a de jure or

a de facto basis, the subsidy is limited

to certain small or small-and mediumsized firms. As in the case of the special

specificity rule for agricultural

subsidies, there is no indication that

Congress intended to alter this aspect of

the Department’s specificity practice.

Paragraph (c) provides that the

Secretary will not regard disaster relief

as a specific subsidy if the relief

constitutes general assistance available

to anyone in the affected area. Although

paragraph (c) has no counterpart in the

1989 Proposed Regulations, the rule

contained in paragraph (c) has been part

of the Department’s specificity practice

since Certain Steel Products from Italy,

47 FR 39356, 39360 (1982), in which the

Department stated that ‘‘[d]isaster relief

is not selective in the same manner as

other regional programs since there is

no predetermination of eligible areas

and no part of the country, and no

industry, is excluded from eligibility in

principle.’’ However, before declaring a

subsidy to be non-specific under

paragraph (c), the Department would

have to be satisfied that the subsidy in

question was, in fact, bona fide disaster

relief. See Certain Steel Products from

Italy, 58 FR 37327, 37332 (1993).

The Department received several

comments regarding the issue of

specificity, most of which had to do

with the specificity of domestic

subsidies. For ease of discussion, we

have divided these comments up by

sub-issue.

Purpose of the specificity test

Some commenters requested that the

Department restate in the regulations

the policy rationale behind the

specificity test. According to these

commenters, the underlying purpose of

the specificity test is to identify those

domestic subsidies that confer a

competitive advantage and thereby

distort international trade. Other

commenters pointed out that the new

statute expressly states that the

Department is not required to examine

the effects of a subsidy or establish that

the subsidy has any effect at all. These

commenters, citing the reference to the

Carlisle decision in the SAA, maintain

that the sole purpose of the specificity

test is to ‘‘winnow out those foreign

subsidies which are truly broadly

available and widely used throughout

the economy.’’ SAA at 259–260, citing

Carlisle Tire & Rubber Co. versus United

States, 564 F. Supp. 834 (Ct. Int’l Trade

1983).

In our view, the language from the

SAA cited above makes the purpose of
8824 Federal Register / Vol. 62, No. 38 / Wednesday, February 26, 1997 / Proposed Rules

the specificity test abundantly clear.

Given the clarity of the SAA on this

point, the authoritative nature of the

SAA (see section 102(d) of the URAA),

and our general reluctance to issue

regulations that merely repeat the

statute or the SAA, we do not consider

it appropriate to issue a regulation that

restates the purpose of the specificity

test.

Use of Presumptions

Two commenters suggested that in

applying the specificity test, the

Department should employ certain

presumptions. One commenter

maintained that the Department should

presume that domestic subsidy

programs are specific, and that the

burden should be on respondent

interested parties to prove otherwise.

The second commenter stated that, for

each domestic subsidy program under

investigation, the Department should

request information concerning

applications and approvals made since

the inception of the program. In the

absence of such information, according

to this commenter, the Department

should presume that the foreign

government in question exercises

discretion in the administration of the

program, and that the program is

specific. Similarly, when the

Department is analyzing newly

instituted programs with few users, it

should employ a rebuttable

presumption that the program is

specific. Both commenters made the

point that information regarding the

distribution of program benefits

normally is not available to a petitioner

prior to the filing of a petition.

Other commenters argued that there is

no legal basis for making such

presumptions. With respect to de facto

specificity, for example, the SAA states

that the Department is obligated to

‘‘seek and consider’’ information

relevant to each of the four factors listed

in section 771(5A)(D)(iii) of the Act.

SAA at 261. One of these commenters

also asserted that a petitioner alleging

that a subsidy is specific should be

required to provide a reasonable amount

of information supporting the allegation.

As was true under the old law, a

petitioner that includes a domestic

subsidy in a petition must provide

reasonably available information

supporting the specificity allegation.

See section 702(c) of the Act. On the

other hand, the Department recognizes

that because detailed information

regarding the distribution of program

benefits usually is either not published

or is not widely available, it often is not

reasonably available to a petitioner at

the time a petition is filed. Therefore, in

deciding whether to include alleged

domestic subsidies in its investigation,

the Department carefully considers the

information the petitioner has put

forward, the reasons why more

information may not be available, and

any arguments the petitioner makes

regarding the specificity of the program.

Because the types of allegations and

information available will vary from

case-to-case, it is not possible to state a

general rule for accepting or rejecting

specificity allegations. However, we

believe that the threshold we have used

in the past for including alleged

subsidies in CVD investigations has

been sufficient to ensure that all

potentially countervailable subsidies are

investigated. We intend to continue

employing this initiation threshold.

Where domestic subsidy programs are

included in an investigation, the

Department will not presume the

program is specific. Instead, the

Department will seek in its

questionnaire all of the information

necessary to apply the specificity test

according to section 771(5A)(D) of the

Act. Based on its analysis of the

information provided in the

questionnaire responses, verification,

and other information that may be

collected, the Department will make the

necessary specificity determination. If a

respondent refuses to provide the

information requested by the

Department to conduct its specificity

analysis, the Department may draw

adverse inferences in the application of

the ‘‘facts available.’’ See section 776(b)

of the Act. However, the use of an

adverse inference in these situations is

not the same thing as relying on a

rebuttable presumption.

Sequential Analysis

Some commenters argued that the

Department should codify the

‘‘sequential approach’’ to specificity.

Under the sequential approach, as

reflected in the 1989 Proposed

Regulations, if a subsidy was de jure

specific or met any one of the

enumerated de facto specificity factors,

further analysis was unnecessary and

was not undertaken. In support of their

position, these commenters emphasized

the language contained in both section

771(5A)(D)(iii) of the Act and the SAA

that a subsidy will be considered

specific ‘‘if one or more’’ of the factors

exist. SAA at 261. Furthermore, these

commenters noted, the SAA and the

legislative history of the URAA make

clear that the specificity test was

intended to be generally consistent with

the Department’s previous practice, a

practice that included the sequential

approach. SAA at 259; S. Rep. No. 412,

103d Cong., 2d Sess. 93–94 (1994).

Finally, these commenters cited the

legislative history of the North

American Free Trade Agreement

(NAFTA) as endorsing the sequential

approach.

In opposition to this view, other

commenters maintained that the

sequential approach contradicts the

SAA, because the SAA states that the

Department will ‘‘seek and consider

information relevant’’ to all four of the

de facto specificity factors. SAA at 261.

Moreover, these commenters

maintained, the language in the SCM

Agreement requires that all of the de

facto specificity factors be considered

and that any specificity determination

‘‘shall be clearly substantiated on the

basis of positive evidence.’’ Articles

2.1(c) and 2.4 of the SCM Agreement.

We believe that the Act and the SAA

are sufficiently clear that, with the

exception of the government discretion

factor, the Department may find a

domestic subsidy to be specific based on

the presence of a single de facto

specificity factor. Therefore, while the

Department will continue its practice of

collecting information regarding each of

the four de facto specificity factors, our

analysis of the issue will stop if the

Secretary determines that a single factor

justifies a finding of specificity. As for

the SCM Agreement, none of the

provisions cited precludes a finding of

specificity based on the presence of a

single factor.

In this regard, however, the

Department does not agree that a finding

of specificity automatically may be

based solely on the fact that some

measure of discretion may have been

exercised in the administration of a

subsidy program. Indeed, such an

approach would be inconsistent with

the purpose of the specificity test, as

articulated in Carlisle. If a subsidy

program is broadly available and widely

used and there is no evidence of

dominant or disproportionate use, the

mere fact that government officials may

have exercised discretion in

administering the program is

insufficient to justify a finding of

specificity. SAA at 261.

Based on our experience in

administering the CVD law, some

measure of administrative discretion

exists in the operation of almost every

alleged subsidy program. At the most

basic level, an administrator of a

program typically must exercise

judgment (i.e., discretion) in evaluating

the facts of an application for a subsidy

to determine whether the applicant

qualifies for the subsidy. If we were to

find specificity based simply on the

exercise of this type of discretion, the
Federal Register / Vol. 62, No. 38 / Wednesday, February 26, 1997 / Proposed Rules 8825

other de facto factors would become

practically meaningless, because

virtually every subsidy program in the

world could be declared specific on the

basis of the discretion factor alone. This

would produce the very sort of absurd

results warned against in Carlisle.

As indicated in the SAA at 261, the

discretion factor is generally more

valuable as an analytical tool that

enhances the analysis of the other de

facto specificity factors and criteria. For

example, in the case of a new subsidy

program for which there have been few

applicants and few recipients, the

Department must make a judgment as to

the likely future distribution of benefits

under the program. The manner in

which authorities have exercised their

discretion in the early days of a new

program would inform the Department

in making this type of judgment. See

SAA at 261.

Purposeful Government Action

Some commenters, citing such cases

as Saudi Iron and Steel Co. (Hadeed) v.

United States, 675 F. Supp. 1362, 1367

(Ct Int’l Trade 1987), maintained that a

finding of specificity does not require a

finding of targeting or some other sort of

purposeful government action that

limits the number of subsidy program

beneficiaries. In a similar vein, they

cited the statute and its legislative

history for the proposition that the fact

that program usage may be limited by

the ‘‘inherent characteristics’’ of the

thing being provided by the government

should be deemed irrelevant. SAA at

262; S. Rep. No. 412, 103d Cong., 2d

Sess. 94 (1994). Finally, these same

commenters argued that the Department

should analyze the availability and use

of a subsidy in the context of the

economy as a whole and not in the

context of the universe of potential

subsidy recipients.

Other commenters insisted that the

Department must look behind the

distribution of subsidy benefits and

explore the reasons why the use of a

subsidy may be limited. According to

these commenters, ‘‘purposeful

government action’’ should be critical to

a finding of specificity.

In our view, the SAA and other

legislative history make it very clear that

the Department does not need to find

‘‘targeting’’ or ‘‘purposeful government

action’’ to conclude that a domestic

subsidy is specific. See SAA at 262

(‘‘[E]vidence of government intent to

target or otherwise limit benefits would

be irrelevant in a de facto specificity

analysis.’’). Except in the special

circumstances described in section

771(5A), i.e., where respondents request

the Department to take into account the

extent of economic diversification in the

jurisdiction of the granting authority or

the length of time during which the

program has been in operation, the

Department is not required to explain

why the users of a subsidy may be

limited in number. Thus, for example,

the fact that users may be limited due

to the inherent characteristics of what is

being offered would not be a basis for

finding the subsidy non-specific. SAA at

262; S. Rep. No. 412, 103d Cong., 2d

Sess. 94 (1994).

Characteristics of a ‘‘Group’’

Citing PPG Industries, Inc. v. United

States, 978 F.2d 1232, 1240–41 (Fed.

Cir. 1992) (‘‘PPG II’’), several

commenters argued that to be consistent

with judicial precedent, the Department

must examine the ‘‘actual make-up’’ of

a group of beneficiaries when

performing a specificity analysis.

According to these commenters, if a

group of recipients does not share

similar characteristics, but, instead,

consists of companies in a variety of

industries, the Department cannot

conclude that the subsidy in question is

limited to a ‘‘group of industries.’’

Moreover, nothing in the Act or the

SAA requires the Department to ignore

the characteristics of the group receiving

the benefits from an alleged subsidy

program.

Other commenters argue that the

Department can identify a ‘‘group’’ of

subsidy recipients without regard to any

shared characteristics of the individual

group members. According to these

commenters, a proper understanding of

what may constitute a specific ‘‘group of

industries’’ flows directly from the

Carlisle purpose of the specificity test;

namely, that subsidy recipients should

be considered a specific group unless

the recipient industries are numerous

and distributed very broadly throughout

the economy. Moreover, these

commenters maintain that the

Department has on several occasions

found subsidy programs specific even

when the ‘‘group’’ of recipients have not

shared common characteristics. Steel

Wheels from Brazil 54 FR 15523, 15526

(1989); Cold-Rolled Carbon steel FlatRolled Products from Korea, 49 FR

47284, 47287 (1984).

We disagree with the first set of

comments. In determining whether a

subsidy is de jure or de facto specific,

the Department is not required to

evaluate the actual make-up of those

firms that are eligible for, or actually

receive, a subsidy.

With respect to PPG II, assuming

arguendo that it is relevant under the

new law, we note that the decision

upheld the Department’s determination

of the non-specificity of a program. To

put PPG II in its proper context, it is

necessary to understand the facts

presented in the underlying CVD case.

In that case, there were numerous

enterprises that used the FICORCA

program being investigated. Therefore,

when looked at in terms of the number

of enterprises, the actual recipients were

not limited. However, this conclusion

says nothing as to whether the number

of industries that received FICORCA

benefits was limited. To answer this

question, the Department (and the court)

correctly focussed on the makeup of the

users. If the numerous enterprises that

received benefits had comprised a

limited number of industries, then

FICORCA would have been specific.

However, because the users represented

numerous and diverse industries,

FICORCA was found not to be specific.

We see no basis in PPG II or in the

language of section 771(5A)(D) of the

Act for imposing a requirement that the

limited users also share similar

characteristics. Moreover, we believe

that such a requirement would

undermine the purpose of the

specificity test as articulated in the

SAA.

Integral Linkage

Section 355.43(b)(6) of the 1989

Proposed Regulations provided that, for

purposes of applying the specificity test,

the Department would consider two or

more subsidy programs as a single

program if the Secretary determined that

the programs were ‘‘integrally linked.’’

Section 355.43(b)(6) also set forth

factors to be considered in making this

determination.

Although the Department did not

receive any comments, pro or con,

regarding the integral linkage test, we

have decided not to incorporate

§ 355.43(b)(6) into these regulations.

Questions of integral linkage were

relatively rare, and when they did arise,

we did not find the factors set forth in

§ 355.43(b)(6) particularly helpful.

However, the fact that we are not

recodifying § 355.43(b)(6) does not mean

that we never would consider two or

more ostensibly separate subsidy

programs as constituting a single

program for specificity purposes,

although we anticipate that the

circumstances leading to such a

combination of programs will seldom

arise. In situations where the subsidy

programs have the same particular

purpose (e.g., to promote technological

innovation), bestow the same type of

benefits (e.g., long-term loans or tax

credits), and confer similar levels of

benefits on similarly situated firms,

treating the programs as a single
8826 Federal Register / Vol. 62, No. 38 / Wednesday, February 26, 1997 / Proposed Rules

program may be appropriate. However,

when an interested party believes that

two or more programs should be

considered in combination for purposes

of the Department’s specificity analysis,

it will have the burden of identifying

the relevant programs and providing

information and documentation

regarding their purposes and types and

levels of benefit.

Section 351.503

Section 351.503 deals with the benefit

attributable to the most basic type of

subsidy, a grant. Paragraph (a), which is

based on § 355.44(a) of the 1989

Proposed Regulations, provides that in

the case of a grant, a benefit exists in the

amount of a grant. Paragraph (b), which

is based on § 355.48(b)(1) of the 1989

Proposed Regulations, sets forth the rule

for determining when a firm is

considered to have received a subsidy

provided in the form of a grant.

Paragraph (c) deals with the allocation

of the benefit to a particular time period.

Although paragraph (c) is based on

§ 355.49 of the 1989 Proposed

Regulations, it also contains certain

changes in approach that merit

comment.

Which Grants Are Allocated Over Time

Paragraph (c) retains the distinction

between ‘‘recurring’’ and ‘‘nonrecurring’’ grants. See § 355.49(a) of the

1989 Proposed Regulations. Paragraph

(c)(1) provides that the Secretary will

allocate a recurring grant to the year in

which the subsidy is considered as

having been received, a practice usually

referred to as ‘‘expensing.’’ Paragraph

(c)(2) provides that, with one exception

(discussed below), the Secretary will

allocate non-recurring grants over time.

Paragraph (c)(3) contains a test for

distinguishing between recurring and

non-recurring grants, and is based on

the standard applied by the Department

in the GIA. Under this standard, if a

benefit is exceptional or requires

express government approval, the

Department will consider it as nonrecurring. As explained in the GIA:

Under the modified test, we are attempting

to analyze the frequency and ‘‘automaticity’’

with which a benefit is provided.

‘‘Exceptional’’ benefits are those types of

benefits which are not received on a regular

and predictable basis; the recipient cannot

expect to receive the benefits on an ongoing

basis from review period to review period.

The element of ‘‘government approval’’

relates to the issue of whether the program

provides benefits automatically, essentially

as an entitlement, or whether it requires a

formal application and/or specific

government approval prior to the provision

of each yearly benefit. The approval of

benefits under the latter type of program

cannot be assumed and is not automatic. The

receipt of a benefit after merely filling out the

appropriate forms (e.g., tax benefits) or, after

initial qualification for yearly benefits under

a program (e.g., some types of price support

programs), would meet the automaticity part

of the test.

Id. If a grant is not non-recurring under

this standard, the Department will treat

it as a recurring grant.

In these proposed regulations, we

have codified the standard contained in

the GIA for distinguishing between

recurring and non-recurring benefits.

However, we continue to consider

whether there might be a better standard

for distinguishing between these two

types of benefits. An important purpose

of the recurring/non-recurring test is to

reduce the burden on the Department

and interested parties by limiting the

amount of information requested on

subsidies bestowed prior to the period

of investigation or review. However, the

Department is increasingly facing

arguments regarding its application of

the standard described in the GIA. At

some point, the burden of applying the

GIA standard may well outweigh the

benefits. Therefore, we particularly

invite comments on this issue. We note

that the Department has considered

other options in the past including: (1)

Developing a list of the types of

subsidies that would be allocated and

those that would be expensed; (2)

allocating any grant-like benefit that

exceeds 0.50 percent (discussed below);

and (3) allocating only those grant-like

subsidies that are tied to the purchase

of fixed assets. See Memorandum from

Staff to Joseph Spetrini, Acting

Assistant Secretary for Import

Administrations and Barbara R.

Stafford, Deputy Assistant Secretary for

Investigations, dated May 17, 1993,

regarding Countervailing Duty

Investigations of Certain Steel Products,

How to Make the Expense vs. Allocate

Decision; Investigations, C–100–004,

Public Document. Regarding the first

option, i.e., development of a list of the

types of subsidies that would be

allocated and those that would be

expensed, the Department has given

examples of the two types of subsidies

in the preamble to § 355.49(a)(2) of the

1989 Proposed Regulations and in the

GIA at 37226.

The 0.50 Percent Test and the

Expensing of Small Grants

Although the Department normally

will allocate non-recurring grants over

time, paragraph (c)(2)(ii) retains (with

some stylistic changes) the so-called

0.50 percent test. See § 355.49(a)(3)(i) of

the 1989 Proposed Regulations; GIA at

37226. Under this test, the Department

will expense non-recurring grants

received under a particular subsidy

program to the year of receipt if the total

amount of such grants is less than 0.50

percent ad valorem, as calculated under

§ 351.525.

The Department considers this test to

be an important part of its efforts to

simplify CVD proceedings and to reduce

the burdens on all parties involved. By

expensing small non-recurring grants to

the year of receipt, the Department

avoids the need to: (1) Collect, analyze,

and verify the data needed to allocate

such grants over time; and (2) keep track

of the allocation calculations for

minuscule subsidies from year to year.

If considered only in the context of a

single case, the burdens imposed by this

activity may not appear to be

particularly onerous. However, when

considered across all investigations and

administrative reviews, the cumulative

burden becomes considerable.

Certain commenters have argued that

the 0.5 test should be applied on an

aggregated basis; i.e., that non-recurring

subsidies should be expensed only

when the total of benefits under all

programs is less than 0.5 percent. In

their view, this would prevent foreign

governments from evading

countervailing duties by awarding

‘‘small’’ benefits under numerous

programs.

To address this concern, we have

written § 351.503(c)(2)(ii) to say that the

Secretary will ‘‘normally’’ expense nonrecurring grants received under a

program if the grants are less than 0.5

percent. Thus, although we intend to

continue to apply the 0.5 percent rule

on a program basis, we have given

ourselves the flexibility to take a

different approach in situations where

petitioners are able to point to clear

evidence that the foreign government

has deliberately structured its subsidy

programs so as to reduce the exposure

of its exporters to countervailing duties.

The Time Period Over Which NonRecurring Grants Are Allocated

Once the Department has determined

that a grant is non-recurring, it will

calculate the amount of subsidy to be

assigned to a particular year according

to the formula described in paragraph

(c)(4). The formula is the same one that

appeared in § 355.49(b)(1) of the 1989

Proposed Regulations. We note that

comments were received recently on

this formula. We have not addressed

those comments here, but intend to do

so for the final regulations.

As described below, we have made

changes in the methods used to

determine certain variables used in the

formula. In a departure from past
Federal Register / Vol. 62, No. 38 / Wednesday, February 26, 1997 / Proposed Rules 8827

practice, paragraph (c)(2) provides that

the Secretary will allocate a nonrecurring grant over the number of years

corresponding to a firm’s AUL, a term

that is defined in paragraph (c)(4)(ii) as

the average useful life of a firm’s

productive assets. Before describing

how the Department will calculate a

firm-specific AUL, we first should

discuss why we are changing our

practice.

Selection of the AUL Method

It has often been suggested that there

is no single correct method for

determining the number of years over

which a subsidy should be allocated.

For example, in paragraph 2 of its

Guidelines on Amortization and

Depreciation, BISD 32S/154 (1984–85)

(‘‘Guidelines’’), the Tokyo Round

Committee on Subsidies and

Countervailing Measures stated:

‘‘Financial and accounting theory and

practice do not provide any single

acceptable method of determining the

appropriate time-period over which

subsidies should be allocated.’’

Similarly, in the Subsidies Appendix

annexed to Cold-Rolled Carbon Steel

Flat-Rolled Products from Argentina, 49

FR 18016, 18018 (1984), the Department

stated that ‘‘[t]here are no economic or

financial rules that mandate the choice

of an allocation period.’’

In addition, there has been little

guidance from Congress on this issue.

The legislative history of the Trade

Agreements Act of 1979 refers to the

selection of ‘‘a reasonable period based

on the commercial and competitive

benefit to the recipient as a result of the

subsidy,’’ S. Rep. No. 249, 96th Cong.,

1st Sess. 86–87 (1979), and reliance on

‘‘generally accepted accounting

principles.’’ H.R. Rep. No. 317, 96th

Cong., 1st Sess. 74–75 (1979); H.R. Doc.

No. 153, Pt. II, 96th Cong., 1st Sess. 433

(1979). However, this advice does not of

itself supply concrete answers,

particularly in light of the fact that, as

suggested above, generally accepted

accounting principles do not provide

rules for allocating subsidies over time.

Against this conceptual and legal

background, in the Subsidies Appendix,

the Department chose the so-called ‘‘IRS

tables method’’ of selecting an

allocation period. Under this method,

the Department allocated a subsidy over

the number of years corresponding to

the average useful life of a firm’s

renewable physical assets (equipment),

as set forth in the U.S. Internal Revenue

Service’s 1977 Class Life Asset

Depreciation Range System (Rev. Proc.

77–10, 1977–1, C.B. 548 (RR–38).

Subsequently, the Department codified

this method in § 355.49(b)(3) of the 1989

Proposed Regulations. At the time, the

Department believed that the IRS tables

method offered ‘‘consistency and

predictability,’’ although the

Department expressed a willingness to

consider other approaches. See 54 FR at

23376–77.

The IRS tables method has not been

a subject of controversy in the vast

majority of CVD proceedings in which

the Department has used that method.

However, in those proceedings where

one or more parties did challenge the

IRS tables method, the Department has

been unable to successfully defend that

method in court. Beginning with British

Steel Corp. v. United States, 632 F.

Supp. 59, 68 (1986), and continuing up

to Usinor Sacilor v. United States, 893

F. Supp. 1112 (1995), the CIT repeatedly

has struck down the use of the IRS

tables method. In addition, in United

States—Imposition of Countervailing

Duties on Certain Hot-Rolled Lead and

Bismuth Carbon Steel Products

Originating in France, Germany and the

United Kingdom, SCM/185, Nov. 15

1994 (Unadopted), a panel convened

pursuant to the Tokyo Round Subsidies

Code found fault with the IRS tables

method as applied by the Department.

The common theme of these adverse

decisions appears to be that because the

IRS tables method is not a companyspecific approach, it fails to adequately

reflect the benefit of a subsidy to a

particular firm.

While we do not necessarily agree

with the reasoning of these decisions,

the inability of the IRS tables method to

pass judicial muster undermines the

consistency and predictability that are

the most attractive features of that

method. Pending a resolution of this

issue by the U.S. Court of Appeals for

the Federal Circuit, which could be a

long time in coming, every

determination by the Department

relying on the IRS tables method would

be vulnerable to litigation, a process that

is expensive and time-consuming not

only for the Department, but also for the

private parties that the CVD law is

intended to serve.

Accordingly, the Department has

determined to abandon the IRS tables

method. In identifying a replacement

method, one obvious consideration is

that the method must relate sufficiently

to the ‘‘commercial and competitive

benefit to the recipient as a result of the

subsidy,’’ the phrase from the legislative

history to which the courts, rightly or

wrongly, have assigned great

significance. It is also important that the

method must be sufficiently

administrable so as not to impose undue

burdens on private parties and the

Department.

With these criteria in mind, we have

considered alternatives to the IRS tables

method that have been suggested in

comments submitted as part of this

rulemaking, as well as in past and

pending litigation. See, e.g., Final

Results of Redetermination Pursuant to

Court Remand on General Issue of

Allocation in British Steel plc. v. United

States, Consol. Ct. No. 93–09–00550–

CVD (Ct. Int’l Trade June 30, 1995)

(‘‘British Steel Remand’’). The principal

alternatives are: (1) Company-specific

average useful life of productive assets;

(2) company-specific average maturity

of long-term debt; (3) company-specific

weighted-average use of funds; and (4)

the IRS tables as a rebuttable

presumption.

We have chosen the first alternative,

the company-specific average useful life

of productive assets, or ‘‘AUL.’’ First,

we believe that the AUL method will be

more administrable and predictable

than the other alternatives, because, as

discussed in more detail below, it

should be easily calculable from a firm’s

accounting records. With respect to the

long-term debt alternative, based on our

experience, many of the firms that we

investigate do not have access to longterm debt financing (except possibly as

a result of government support).

Therefore, as a practical matter, this

alternative would frequently lead us to

use non-company-specific, surrogate

measures of life of debt. With respect to

the use of funds alternative, this

alternative appears unduly complicated,

requiring both private parties and the

Department to calculate multiple

allocation periods, including a

company-specific AUL, and then take a

weighted-average of those figures.

Finally, with respect to using the IRS

tables as a rebuttable presumption, this

alternative likely would waste the time

of private parties and the Department in

arguments over whether or not the

allocation period called for by the IRS

tables had been effectively ‘‘rebutted’’

by a firm’s own AUL.

Second, the AUL method has been

recognized internationally as a

reasonable method of determining the

appropriate time period over which

subsidies should be allocated. As stated

in ¶ 5.1 of the Guidelines, ‘‘[w]hile the

benefit of a grant (that is, elimination of

financial obligations the recipient

company would otherwise incur) has no

exact correlation to the life of any assets

purchased with the grant, allocating the

grant over the average life of renewable

physical assets is one generally

practical, fair, and consistent method of

allocation.’’ Although the Guidelines are

no longer in effect due to the

termination of the Tokyo Round
8828 Federal Register / Vol. 62, No. 38 / Wednesday, February 26, 1997 / Proposed Rules

Subsidies Code, we consider it

significant that the United States and its

major trading partners went on record as

endorsing the AUL method as an

acceptable method of determining an

allocation period for subsidies.

Finally, we note that the Department’s

use of company-specific AUL was

recently affirmed in British Steel PLC v.

United States, 929 F. Supp. 426 (Ct. Int’l

Trade 1996).

Calculation of a Company-Specific AUL

Paragraph (c)(4)(ii) describes the

manner in which the Department will

calculate a company-specific AUL.

Normally, firms will not calculate their

‘‘actual’’ AUL in the normal course of

business, and requiring firms to

calculate this figure for purposes of a

CVD proceeding could pose an

extremely onerous burden on firms with

thousands of individual assets.

Therefore, what is needed is a

calculation method that results in

reasonable reporting requirements,

while at the same time produces a

reasonable estimate of a firm’s actual

AUL.

We believe that paragraph (c)(4)(ii)

achieves these dual objectives. Under

paragraph (c)(4)(ii), a firm’s AUL will be

calculated by dividing the firm’s

depreciable productive assets by the

firm’s average annual charge to

accumulated depreciation. As indicated

in the second sentence of paragraph

(c)(4)(ii), this calculation will be based

on data covering a period considered

appropriate by the Secretary. Because

this is a new method with which the

Department has little experience, we are

reluctant to provide more detail at this

time in the form of a regulation. Instead,

we intend to include detailed

instructions in our CVD questionnaires

concerning the calculation of an AUL.

Once we have gained more experience

with this method, we may add

additional detail to the regulation.

We should note, however, that we

currently intend to include in our initial

CVD questionnaires a request that a firm

calculate its average AUL over a period

of ten years, a period that would include

the period of investigation and the nine

preceding years. Based on the results of

this calculation, the firm then would

provide information on its nonrecurring subsidies for a time period

corresponding to the average AUL it

calculated. For example, if a firm

calculated that its average AUL for the

ten-year period described above was 15

years, the firm would provide data on

its subsidies for the period of

investigation and the 14 preceding

years. If the investigation results in a

CVD order, the AUL will be recalculated

for non-recurring subsidies received

after the period on investigation (‘‘POI’’)

based on updated information. For

example, if a non-recurring grant is

received in the third year after the

original POI, the allocation period for

that subsidy would be the average AUL

for the year that subsidy is received and

the nine previous years.

As in the case of any other piece of

data included in a response to a CVD

questionnaire, a firm’s calculation of its

AUL would be subject to verification by

the Department and comment by parties

to the proceeding.

As set forth in the third sentence of

paragraph (c)(4)(ii), the Secretary will

attempt to exclude fixed assets that are

not depreciable (such as land or

construction in progress) and assets that

have been fully depreciated and that are

no longer in service. However, assets

that are in service would be included

even if they have been fully depreciated.

In addition, it may be necessary to

make normalizing adjustments for

factors that may distort the calculation

of an AUL. Again, we are not in a

position at this time to provide

additional detail in the regulation itself,

because the types of adjustments

necessary likely will vary based on the

facts of a particular case. However,

certain obvious normalizing

adjustments that come to mind are

situations in which a firm may have

charged an extraordinary write-down of

fixed assets to depreciation due, or

where the economy of the country in

question can be characterized as

hyperinflationary.

Finally, there may be situations in

which an AUL cannot be calculated in

the manner described above (assets

divided by depreciation). For example,

if a firm’s depreciation is not based on

an estimate of the actual useful life of

its assets, the calculation described

above would not be a reasonable

method of calculating AUL. Similarly,

AUL could not be calculated in this

manner if the firm does not use

straightline depreciation and additions

to the firm’s asset pool are irregular and

uneven. Indeed, there may be cases

where there is no reasonable method of

calculating a company-specific AUL. In

such cases, the Department will

consider, among other things, any

alternative calculation methods for AUL

offered by parties to the proceeding,

including the IRS table method

previously used by the Department.

Such alternative methods will not be

limited to those that are companyspecific.

In addition, we should note that

because petitioners may not be in a

position to calculate a potential

respondent’s AUL at the time a petition

is filed, petitioners may not know how

many years back they can go in alleging

countervailable subsidies. To provide

more certainty to petitioners, the

Department will accept the period

specified in the IRS tables for purposes

of making subsidy allegations in a

petition.

Calculation of the Benefit Stream

Paragraph (c)(4)(iii) deals with the

selection of a discount rate. Consistent

with the GIA at 37227, paragraph

(c)(4)(iii)(B) provides that, in the case of

an uncreditworthy firm, the Secretary

will use as a discount rate an interest

rate with a ‘‘risk premium’’ included.

Section 351.504

Section 351.504 deals with loans and

other forms of debt financing. Paragraph

(a) deals with the identification and

measurement of the benefit attributable

to a loan. Paragraph (a)(1) tracks the

general standard set forth in section

771(5)(E)(ii) of the Act, which directs

the Department to use a ‘‘comparable

commercial loan that the recipient

could actually obtain on the market’’ as

the benchmark for determining whether

a government-provided loan confers a

benefit. Additionally, paragraph (a)(1)

restates the Department’s current

practice, as reflected in § 355.44(b)(8) of

the 1989 Proposed Regulations, that in

making this comparison the Secretary

normally will seek to compare effective

interest rates rather than nominal rates.

‘‘Effective interest rates’’ are intended to

take account of the actual cost of the

loan, including the amount of any fees,

commissions, compensating balances,

government charges (such as stamp

taxes) or penalties paid in addition to

the ‘‘nominal’’ interest. However, the

Department intends that, if effective

rates are not available, the Secretary will

compare nominal rates or, as a last

resort, nominal to effective rates, as

under current practice. If the ‘‘loan’’ is

a bond (see definition of ‘‘loan’’ in

§ 351.102), the Department normally

will treat the yield on the bond as the

effective interest rate.

Paragraphs (a)(2) and (a)(3) elaborate

on the criteria for selecting the

benchmark. As the reader quickly will

ascertain, the criteria contained in

paragraphs (a)(2) and (a)(3) are much

more general (and, thus, much more

flexible) than the detailed hierarchies

contained in § 355.44(b) of the 1989

Proposed Regulations. The Department

seldom used these hierarchies, because,

in practice, the required information

was seldom available.

Paragraph (a)(2) sets out the criteria

the Department will normally consider
Federal Register / Vol. 62, No. 38 / Wednesday, February 26, 1997 / Proposed Rules 8829

in selecting a comparable commercial

loan. We received the following

comments relating to this issue: (1) If

the Department modifies its current

benchmark hierarchies, any new

hierarchies or benchmark selection

criteria should take account of the

maturity and corresponding level of risk

associated with the governmentprovided loan being analyzed; (2)

requiring identical financing is

impractical and undermines the

Department’s discretion; (3) in the case

of foreign currency loans, which

typically are long-term in nature, the

Department’s selection of a comparable

loan should be based explicitly on the

comparable currency, and should only

be based on the domestic currency in

certain unique situations; and (4) the

Department should make clear its policy

of selecting as its benchmark a loan that

was taken out (or could have been taken

out) at the same point in time as the

government-provided loan.

With respect to these comments, we

agree that a comparable commercial

loan used as a benchmark should

represent a financial instrument that is

similar to the government-provided loan

and that was taken out (or could have

been taken out) at the same point in

time. We believe that this type of

approach will ensure a reasonable

comparison, because the comparable

loan will exhibit the same basic

characteristics of maturity, risk, and

currency denomination that are

embodied in the allegedly subsidized

financing. In addition, we agree with the

commenter that recommended that the

Department specify the time period

from which it will select comparable

financing. See paragraphs (a)(2)(iii) and

(a)(2)(iv). With respect to those

comments suggesting refinements to the

benchmark hierarchies contained in the

1989 Proposed Regulations, as

explained above, we have discarded

those hierarchies in favor of a more

flexible approach. However, we believe

that our new approach is consistent

with the objectives underlying the

comments.

Several commenters suggested that

loans under a government program,

even if the program is not specific,

should not be considered ‘‘commercial’’

loans. We agree with these commenters,

and have incorporated their suggestion

into paragraph (a)(2)(ii). We note,

however, that we do not equate a ‘‘loan

provided under a government program’’

with a ‘‘loan from a government-owned

bank.’’ Consistent with § 355.44(b)(9) of

the 1989 Proposed Regulations, which is

discussed further below in connection

with paragraph(a)(6)(ii), the Secretary

normally will consider loans from

government-owned banks as

commercial loans.

The commenters disagreed over the

selection of a comparable commercial

loan in the case of a suspension

agreement, some commenters arguing

that special rules should be used in the

case of a suspension agreement,

because: (1) a suspension agreement is

forward-looking, and (2) the use of a

retrospective benchmark undermines

the utility of a suspension agreement.

We agree that a suspension agreement

is forward-looking, but we do not

believe that this fact requires special

rules governing the selection of

comparable commercial loans.

Typically, in its administration of a

suspended investigation, the

Department will monitor developments

in commercial benchmarks outside of

the normal administrative review

process. This monitoring activity

ensures that the commercial

benchmarks used are timely. See Roses

and Other Cut Flowers From Colombia;

Miniature Carnations From Colombia,

61 FR 9429 (March 8, 1996).

Paragraph (a)(3) addresses the

requirement that the comparable loan be

one that the firm ‘‘could actually obtain

on the market,’’ and reflects a change in

practice for short-term loans. As

described in § 355.44(b)(3) of the 1989

Proposed Regulations, the Department

has used national average interest rates

to determine the benefit from

government-provided short-term loans.

However, at the time the 1989 Proposed

Regulations were promulgated, the

Department announced that it would

consider using company-specific

benchmarks for short-term loans. Based

upon our experience in the interim, and

especially because of the ability to

computerize our loan calculations, we

have concluded that we have the

capability to use company-specific

benchmarks. Moreover, we believe that

company-specific benchmarks provide a

more accurate measure of the benefit, if

any, to a recipient of a governmentprovided short-term loan. Therefore,

paragraph (a)(3)(i) states a preference for

using company-specific benchmarks for

both short-and long-term loans. Under

paragraph (a)(3)(ii), we normally would

use national averages only in the event

that the firm did not take out any

comparable commercial loans during

the relevant period.

One commenter argued that a

benchmark hierarchy for short-term

loans should emphasize companyspecific rates and should rely on

country-wide rates only as a last resort.

In response to these comments, another

commenter argued that mandating the

use of company-specific rates has no

basis in the statute and may be

inappropriate in cases involving a large

number of companies.

We disagree that there is no basis in

the statute for using company-specific

benchmarks for short-term loans. To the

contrary, we see the use of companyspecific benchmarks as being more

consistent with the requirement that the

benefit be determined by looking at a

loan (or loans) the firm actually could

obtain. In large cases, e.g., cases with

numerous respondents, it may become

necessary to use a national average rate.

If so, paragraph (a)(3)(i) provides

sufficient flexibility to do so.

Paragraph (a)(3)(iii) deals with the

long-term loans to firms considered to

be uncreditworthy. In a change from the

practice described in § 355.44(b)(6)(iv)

of the 1989 Proposed Regulations,

paragraph (a)(3)(iii) describes a new

method for calculating the benchmark

the Department will use in identifying

and measuring the benefit attributable to

a government-provided long-term loan

received by an uncreditworthy firm.

The new method is based explicitly

on the notion that when a lender makes

a loan to a company that is considered

to be uncreditworthy (as opposed to a

safer, creditworthy company) the lender

faces a higher probability that the

borrower will default on repayment of

the loan. As a consequence of this

higher probability of default, the lender

will charge a higher interest rate. The

calculation described in paragraph

(a)(3)(iii) captures the increased

probability of default by adjusting

upward the rate of interest a

creditworthy company would pay in the

country in question.

In making this adjustment, the

Department is not proposing to calculate

the probability that a particular

uncreditworthy firm will default on a

particular loan. Such a calculation

would require extensive data and

analysis, and any conclusion would be

highly speculative. Instead, similar to

the method the Department has used

since 1984, we are proposing to rely on

information regarding the U.S. debt

market. In particular, we have used the

weighted average one-year default rate

for speculative grade bonds between

1970 and 1994, as reported by Moody’s

Investor Service. This average default

rate is 4.3 percent. This rate is reflected

indirectly in the formula, which is

based on the probability that these risky

loans will be repaid (i.e., 1—.043 =

.957).

Although the uncreditworthy

benchmark we adopted in 1984 and

included in the 1989 Proposed

Regulations has not been controversial,

we believe that the method we are
8830 Federal Register / Vol. 62, No. 38 / Wednesday, February 26, 1997 / Proposed Rules

proposing here offers a more accurate

measure of risk involved in lending to

firms with little or no access to

commercial bank loans. By adjusting the

interest rate that a healthy, low-risk

company would pay in the country in

question upward to account for the

greater likelihood of default by an

uncreditworthy borrower, we capture

more precisely the speculative nature of

loans to uncreditworthy companies and

the premium they would have to pay

the lender to assume that risk.

Paragraph (a)(4) sets forth the

standard for determining when a firm is

uncreditworthy. Paragraph (a)(4)(i) is

based on § 355.44(b)(6)(i) of the 1989

Proposed Regulations, but has been

modified to clarify the analysis the

Department intends to undertake in

determining whether a company is

creditworthy. In § 355.44(b)(6)(i) of the

1989 Proposed Regulations we stated

that the Secretary would deem a firm

uncreditworthy if that ‘‘firm did not

have sufficient revenues or resources to

meet its costs and fixed financial

obligations in the three years prior to

the year in which the firm and the

government agreed upon the terms of

the loan.’’ We have replaced this

statement with an explanation of what

we mean by ‘‘uncreditworthiness.’’

Specifically, we will find a company to

be uncreditworthy if information

available at the time the governmentprovided loan is made indicates that the

firm could not have obtained long-term

financing from conventional

commercial sources. In this context,

‘‘conventional commercial sources’’ is

meant to refer to bank loans and nonspeculative grade bond issues. Hence,

uncreditworthy companies are those

that would be forced to resort to other

sources, such as junk bonds, to raise

funds. The Department will make its

creditworthiness finding based on the

information described in paragraphs

(a)(5)(ii) (A), (B), (C), and (D), which are

unchanged from the comparable

paragraphs in § 355.44(b)(6) of the 1989

Proposed Regulations.

Paragraph (a)(4)(ii) is based on the last

sentence of § 355.44(b)(6)(i) of the 1989

Proposed Regulations. However, the

word ‘‘normally’’ has been replaced by

the phrase ‘‘In the case of firms not

owned by the government * * * .’’

Also, the term ‘‘government-provided

guarantee’’ replaces ‘‘explicit

government guarantee.’’ With respect to

the first change, the deletion of ‘‘normal

ly’’ reflects the Department’s consistent

practice considering commercial

financing to a firm to be dispositive

evidence of a firm’s creditworthiness

only if the firm is privately-owned. With

respect to the second change, this is

intended to indicate that the

Department will consider the

circumstances surrounding the

financing as a whole, instead of relying

on one factor in determining whether

the financing shows that the firm is

creditworthy.

Paragraphs (a)(4)(iii) and (a)(6)(i) are

based on §§ 355.44(b)(6) (ii) and (iii) of

the 1989 Proposed Regulations.

Paragraph (a)(4)(iii) states that the

Secretary will ignore current and prior

countervailable subsidies in

determining whether a firm is

uncreditworthy. In other words, the

Secretary will not attempt to adjust a

firm’s financial data for current and

prior subsidies in making a

creditworthiness determination.

Paragraph (a)(6)(i) continues to require a

specific allegation before the Secretary

will consider the uncreditworthiness of

a firm.

Paragraph (a)(5) deals with long-term

variable rate loans, and codifies a

methodology set forth in the GIA. Under

paragraph (a)(5)(i), the year in which the

terms of the government-provided loan

are set establishes the reference point

for comparing the government-provided

variable-rate loan with the comparable

commercial variable-rate loan. If the

interest rate on the governmentprovided loan is lower than the interest

rate on the comparable commercial

loan, a benefit exists. If the interest rate

on the government-provided loan is the

same or higher, no benefit exists. The

rationale for basing the decision on the

first-year interest rate differential is that

the interest rate spread, if any, in that

year generally will apply throughout the

life of the loan. Paragraph (a)(5)(ii)

recognizes that there may be situations

where the method described in

paragraph (a)(5)(i) is not appropriate

and provides the Department with the

discretion to modify that method. For

example, there may be no comparable

commercial variable-rate loan to use for

comparison purposes or the repayment

structure of the government-provided

variable-rate loan may be such that the

simple interest rate comparison

described in paragraph (a)(5)(i) would

not yield an accurate measure of the

benefit.

Paragraph (a)(6)(ii) establishes an

evidentiary standard for investigations

of loans extended by government-owned

banks, and is based on § 355.44(b)(9) of

the 1989 Proposed Regulations. See also

paragraph (a)(2)(ii), discussed above. In

this regard, some commenters argued

that the Department should investigate

all loans from government-owned, or

government-supported, banks, and that

the Department should abandon its

requirement that evidence be presented

that such loans were provided under a

specific government program.

According to the commenters, because

this type of information is not

reasonably available to petitioners, the

burden of proving that a company has

not received subsidized loans from a

government-owned bank should be

shifted to respondent interested parties.

In addition, these commenters argued

that the Department should consider

financing provided by a bank that is

partially funded by the government to

be countervailable even in the absence

of a particular government program.

In response, one commenter argued

that the Department should continue to

require reasonable evidence that loans

from government-owned banks are

provided at government direction or

from government funds and on

subsidized terms. According to this

commenter, the adoption of a looser

approach would create a per se rule that

the lending practices of governmentowned banks are in and of themselves

suspect. Additionally, shifting the

burden of proof to respondents to show

that such loans are not countervailable

would be a violation of the ‘‘positive

evidence’’ approach outlined in Article

2.4 of the SCM Agreement and the

‘‘substantial evidence’’ requirement of

section 516A(b)(1)(B) of the Act.

Under our past practice, we have

distinguished between governmentowned banks that are operated to meet

special financing needs and commercial

banks that are government-owned. For

the former (i.e., special purpose banks

such as national development banks),

petitioners are asked to provide

information reasonably available to

them to show that loans being provided

by such banks are specific and that the

interest being charged is not at

commercial rates. For the latter (i.e.,

commercial banks that are governmentowned), we have additionally requested

that petitioners provide reasonably

available information that the loans in

question are something more than mere

commercial loans. In particular, we

request information suggesting that such

loans are being provided at the direction

of the government or with funds

provided by the government.

We believe this approach is

appropriate because we have no basis to

presume that loans given under the

commercial operations of governmentowned banks confer a subsidy.

Moreover, we do not believe that our

request for this additional information

places an unreasonable burden on

petitioners; they need only provide

reasonably available information that

the government-owned bank, for

example, administers government loan
Federal Register / Vol. 62, No. 38 / Wednesday, February 26, 1997 / Proposed Rules 8831

programs that could be the source of the

loan in question.

Thus, with the exception of special

purpose banks (as discussed above), we

agree with the commenters who argued

that the Department should investigate

loans from a government-owned bank

only when a petitioner provides

information suggesting that such loans

are being provided at the direction of

the government or with funds provided

by the government. Accordingly,

paragraph (a)(6)(ii) reaffirms the

Department’s prior approach with

respect to government-owned banks.

Paragraph (b) sets forth a rule

regarding the point in time at which the

benefit from a loan arises, and is based

on § 355.48(b)(3) of the 1989 Proposed

Regulations. The second sentence of

paragraph (b) addresses loans with

special characteristics, such as loans

with preferential grace periods. In the

case of these types of loans, we do not

believe that it is appropriate to wait

until the end of the grace period to

begin assigning subsidy amounts,

because the longer the grace period, the

greater the subsidy benefit and the

greater the time before countervailing

duties can be assessed.

Paragraph (c) deals with the allocation

of the benefits of a government-provided

loan to a particular time period. While

paragraph (c) is based, in part, on

§ 355.49 of the 1989 Proposed

Regulations, it contains several changes.

Paragraph (c)(1) provides that the

benefit of a short-term loan will be

allocated (expensed) to the year(s) in

which the firm is due to make interest

payments on the loan. This approach,

which essentially treats short-term loans

as recurring subsidies, is consistent with

longstanding Department practice.

Paragraph (c)(2) deals with situations

in which the benefit of a governmentprovided loan stems solely from the

concessionary interest rate of the loan,

not from any differences in repayment

terms. Where this is the case, there is no

need to engage in the complicated

calculations called for by § 355.49(c) of

the 1989 Proposed Regulations. Instead,

as paragraph (c)(2) provides, the annual

benefit can be determined by simply

calculating, for each year in which the

loan is outstanding, the difference in

interest payments between the

government-provided loan and the

comparison loan. The last sentence of

paragraph (c)(2) restates the principle

reflected in § 355.49(c)(2) of the 1989

Proposed Regulations that the amount of

the subsidy conferred by a governmentprovided loan never can exceed the

amount that would have been calculated

if the loan had been given as a grant.

Paragraph (c)(3) deals with situations

where both the government-provided

loan and the comparison loan are longterm, fixed-interest loans, but where the

two loans have dissimilar grace periods

or maturities, or where the repayment

schedules have different shapes (e.g.,

declining balance versus annuity style).

Because a firm may derive a benefit

from special repayment terms, in

addition to any benefit derived from a

concessional interest rate, for these

loans we will continue to calculate what

was described as the ‘‘grant equivalent’’

in § 355.49(c) of the 1989 Proposed

Regulations. However, instead of

adopting the loan allocation formula

from the 1989 Proposed Regulations, we

intend to use the grant allocation

formula described in § 351.503(c)

(except that the allocation period will be

the life of the government-provided

loan). The elimination of the old loan

formula reflects our desire to streamline

methodologies, where possible.

Moreover, by timing the receipt of the

benefit from these types of loans to the

year in which the government-provided

loan was received (see § 351.504(b)), the

old loan formula becomes unnecessary,

because its primary purpose was to

begin assigning annual subsidy amounts

in the year after the receipt of the loan.

Paragraph (c)(4) sets forth the method

of calculating an annual benefit for

government-provided variable-rate

loans, and is little changed from

§ 355.49(d) of the 1989 Proposed

Regulations.

Several commenters suggested that

instead of using the life of the loan as

the allocation period for long-term

loans, the Department should use the

same allocation period as used for other

types of non-recurring subsidies. Given

that, as discussed above, the Department

has adopted the AUL method for nonrecurring grants, if the Department were

to adopt this suggestion it would mean

allocating the benefit of a long-term loan

over the average useful life of a firm’s

renewable assets.

For the following reasons, we have

not adopted this suggestion. First, as

part of our streamlining effort, we are

not, as a general matter, calculating

grant equivalents. Therefore, our new

methodology does not lend itself to

allocating loan subsidies over any

period other than the life of the loan.

Moreover, while ¶ 4.2 of the Guidelines

recognizes that the allocation of the

benefit of a long-term loan over the life

of assets is a reasonable method, ¶ 4.1

recognizes that allocation over the life of

the loan is also a reasonable method. In

addition, the life-of-the-loan method

imposes less of a burden on private

parties and Department staff than other

alternatives, because it is a

comparatively easy matter to determine

the life of a loan. The Department’s

longstanding practice of allocating a

long-term loan benefit over the life of

the loan has been relatively noncontroversial and litigation-free, and we

are reluctant to change this practice

absent a persuasive demonstration that

an alternative method is superior to

existing practice. In this instance, we do

not believe that such a demonstration

has been made.

Paragraph (d) sets forth a method for

calculating the annual benefit

attributable to a long-term interest-free

loan, the obligation for repayment of

which is contingent upon subsequent

events, such as the achievement of a

particular profit level by the firm.

Paragraph (d) is based on § 355.49(f) of

the 1989 Proposed Regulations, and

continues to provide that the Secretary

will treat any outstanding balance on

one of these types of loans as an

interest-free, short-term loan (using a

short-term loan benchmark), and will

expense any benefit(s) to the year(s) in

which interest would have been paid on

the short-term loan.

Section 351.505

Section 351.505 deals with loan

guarantees. Paragraph (a)(1) sets forth

the general rule for identifying and

measuring the benefit attributable to a

government-provided loan guarantee,

and conforms to the new standard

contained in section 771(5)(E)(iii) of the

Act.

One commenter argued that in

choosing a comparable commercial loan

by which to identify and measure the

benefit attributable to a governmentprovided loan guarantee, the

Department should use a loan with a

comparable commercial guarantee. This

same commenter also recommended

that the Department continue the

approach described in § 355.44(c)(2) of

the 1989 Proposed Regulations. Under

this practice, if the government was the

owner of the firm and it was normal

commercial practice in the country for

owners or shareholders to provide loan

guarantees comparable to the

government-provided guarantee, the

Department did not consider the

government-provided guarantee as

giving rise to a benefit. In response, one

commenter argued that the

Department’s practice in this regard is

inconsistent with the government’s

involvement in the transaction in that,

unless a subsidy was being provided,

the firm would have obtained the loan

through a commercial guarantor.

We agree that in determining whether

a government-provided loan guarantee
8832 Federal Register / Vol. 62, No. 38 / Wednesday, February 26, 1997 / Proposed Rules

confers a benefit, the Department should

determine whether it is a normal

commercial practice in the country in

question for a private owner, or parent

company, to guarantee a loan. We have

drafted paragraph (a)(2) accordingly. A

government-provided guarantee should

not be considered countervailable if it is

given by the government in its capacity

as owner (i.e., not under a government

guarantee program used by governmentowned and privately-owned companies)

and if private owners normally provide

guarantees in the same circumstances.

For example, if the government directly

guaranteed the debt of a company it

owned, it would fall upon the

respondent to demonstrate that private

shareholders in that country also would

normally guarantee the debt of the

companies in which they own shares.

Where a government-owned holding

company guarantees the debt of its

subsidiaries, the respondent would need

to show that it is normal commercial

practice for non-government-owned

corporations to guarantee the debt of

their subsidiaries. In addition, the

respondent would need to demonstrate

sufficient internally-generated resources

to serve as guarantor of the debt. Where

the government or a government-owned

holding company guaranteed the debt of

an ‘‘uncreditworthy’’ company it owned

(see § 351.504(a)(4) regarding

uncreditworthy companies), the

respondent would need to provide

evidence that private owners would also

guarantee the debt of uncreditworthy

companies they own.

The Department normally will not

consider whether the behavior of a

government owner/guarantor represents

normal commercial practice unless a

respondent provides adequate

supporting information. Such

information can include statements by

independent sources such as financial

or banking experts, tax experts or

academics in the field of business.

Absent such a demonstration, the

Department will identify and measure

the benefit from a government-provided

loan guarantee by comparing the

guaranteed loan to a comparable

commercial loan in the same manner as

under § 351.504. In addition, to conform

to new section 771(5)(E)(iii) of the Act,

paragraph (a)(1) provides that the

Department will adjust for any

difference in the guarantee fees.

Therefore, we do not agree with the first

comment that we should decide which

loans are comparable on the basis of the

comparability of the loan guarantees.

Paragraphs (b) and (c) deal,

respectively, with the time at which the

benefit from a loan guarantee is

considered to have been received and

the allocation of the benefit to a

particular time period. Both paragraphs

essentially apply the methodology for

loans set forth in paragraphs (b) and (c)

of § 351.504.

Section 351.506

Section 351.506 deals with equity

infusions. Paragraph (a) deals with the

identification and measurement of the

benefit attributable to a governmentprovided equity infusion. Like

§ 355.44(e) of the 1989 Proposed

Regulations, paragraph (a) is divided

into two methodological tracks, the

choice of methodology depending on

whether or not there are actual private

investor prices to serve as a benchmark

for shares of a firm purchased by a

government. However, paragraph (a)(1)

retains the existing preference for

private investor prices as a benchmark.

Actual Private Investor Prices Available

Paragraph (a)(2) contains rules for

analyzing equity infusions when actual

private investor prices are available, the

first methodological track, and is largely

based on § 355.44(e)(1) of the 1989

Proposed Regulations. Under

§ 355.44(e)(1), the first question in

analyzing an equity infusion was

whether, at the time of the infusion,

there was a market price for newlyissued equity. If so, and if the shares

purchased on the market were in the

same form as the shares purchased by

the government, the Department

determined the amount of the benefit by

comparing the price paid by government

for its shares with the market price. In

an exceptional situation, however, the

Department could find the volume of a

firm’s traded shares to be so low as to

preclude the use of those shares as a

benchmark.

Paragraph (a)(2) is not intended to

alter any of these basic principles. It

does, however, elaborate on them in two

respects. First, it addresses the use of

prices of shares that are not in the same

form as the shares provided to the

government as benchmarks. Second, it

permits the Department to use as a

benchmark the market price of publiclytraded shares that the firm had

previously issued.

The Department considered these last

two issues in the 1993 steel

determinations. With regard to the use

of shares that are not identical to the

shares being purchased by the

government, the Department determined

that in appropriate circumstances,

shares with similar characteristics can

be compared. See GIA at 37252. The CIT

subsequently upheld the principle of

relying on a similar form of equity

where the same form of equity does not

exist. Geneva Steel v. United States, 914

F. Supp. at 580 (1996).

With respect to secondary market

shares, in the GIA at 37250, the

Department explained that its practice

was to ‘‘resort to the use of secondary

market share prices in instances where

private investors did not purchase new

shares from the firm at the same time

they were issued to the government.’’

The Department reaffirmed this

practice, holding that, ‘‘(a)s long as the

market price benchmark at the time of

the infusion has not been shown to be

deficient or tainted * * * a government

equity infusion must be determined to

be made on an equityworthy basis

whenever the government purchases

shares at (the secondary market) price.’’

Id. at 37251. This practice, too, has been

sustained by the courts. Geneva Steel v.

United States, 914 F. Supp. at 581

(1996).

The URAA did not modify these

general principles. Section 771(5)(E)(i)

states that a benefit shall normally be

treated as conferred if, in the case of an

equity infusion, ‘‘the investment

decision is inconsistent with the usual

investment practice of private investors,

including the practice regarding the

provision of risk capital, in the country

in which the equity infusion is made.’’

Market-determined share prices, when

available and useable, provide the best

gauge as to the usual investment

practice of private investors, including

practices regarding the provision of risk

capital.

Therefore, under paragraph

(a)(2)(i)(A), an equity infusion confers a

benefit if the price paid by the

government for newly-issued equity is

more than the price paid by private

investors for newly-issued equity of the

same (or similar) form. For example, if

a government pays $10 per share for

newly-issued shares in a firm, and

private investors pay $5 per share for

the same shares, a benefit exists in the

amount of $5 per share ($10 ¥ $5 = $5).

If there is no private investor price for

newly-issued equity, under paragraph

(a)(2)(i)(B), an equity infusion confers a

benefit if the price paid by the

government for newly-issued equity is

less than the market-determined price,

at such time as permits a reasonable

comparison, of previously issued

publicly-traded shares of the same (or

similar) form. We continue to believe

that market prices should be preferred

as benchmarks, because such prices

incorporate private investors’

perceptions of a firm’s future earning

potential and worth.

In this regard, however, we intend

that in applying this private investor

standard, the amount of shares
Federal Register / Vol. 62, No. 38 / Wednesday, February 26, 1997 / Proposed Rules 8833

purchased by private investors must be

sufficiently significant so as to provide

an appropriate benchmark. See

paragraph (a)(2)(iii). For an example of

a situation where the Department found

sufficient private participation to

warrant use of the prices paid by private

investors as the benchmark, see Small

Diameter Circular Seamless Carbon and

Alloy Steel Standard, Line and Pressure

Pipe from Italy, 60 FR 31922, 31994

(1995). Also, the use of a ‘‘similar’’ share

as the basis of the benchmark neither

precludes nor requires a price

adjustment for differences in the types

of shares. However, under paragraph

(a)(2)(iv), the Department intends to

make the adjustment when it is

appropriate and reasonably quantifiable.

For an example of an adjustment to

account for differences in the types of

shares, see Certain Atlantic Groundfish

from Canada, 51 FR 10047 (1986).

Two commenters, citing AIMCOR v.

United States, 871 F. Supp. 447 (Ct. Int’l

Trade 1994) (‘‘AIMCOR I’’), stated that

the Department should ‘‘clarify’’ its

equity methodology so as to preclude

the use of previously issued, publiclytraded shares as benchmarks. These

commenters claim that merely because

a company has previously issued

publicly-traded shares does not imply

that the company could obtain fresh

equity capital on the same terms from

reasonable private investors. They claim

that the Department’s use of the price of

outstanding shares is flawed because it

recognizes neither the concept of

earnings dilution (i.e., the fact that

newly-issued shares dilute the claims

attributable to previously issued shares)

nor the difference between replacement

cost and market value. Finally, they

argue that the Department’s current

methodology does not take into account

differences between ‘‘hybrid’’ equitylike instruments issued to the

government and previously issued

equity instruments that do not have

‘‘hybrid’’ features.

With respect to these comments,

paragraph (a)(2)(i) reflects a distinction

between the AIMCOR I problem, where

the ownership rights conferred upon the

private shareholders differed from the

ownership rights conferred upon the

government, and the question of

whether the publicly-traded price of

previously issued shares is an adequate

proxy for the price of newly-issued

shares. Paragraph (a)(2)(i) recognizes the

AIMCOR I problem by requiring that the

Department use the same or ‘‘similar’’

shares for its benchmark, and by

permitting the Department to make an

adjustment for differences between the

shares used as the benchmark and the

government-provided equity.

As for the use of secondary market

prices, the Department believes that it

can improve the accuracy of the

secondary market price benchmark by

altering the timing of the calculation. In

particular, we are proposing to use

secondary market prices in the period

immediately following a government

equity infusion. We believe use of these

prices will allow us to capture private

investors’ perceptions as to what the

newly infused capital will allow the

firm to achieve, and also will enable us

to measure any dilution of ownership.

In our view, paragraph (a)(2)(iv) is

sufficiently flexible so as to permit the

Department to calculate a benchmark

based on prices paid during a time

period that will permit a reasonable

comparison with the government equity

infusion. However, we are particularly

interested in public comments on this

issue.

Actual Private Investor Price Not

Available

One of the most difficult

methodological problems confronted by

the Department in its administration of

the CVD law involves the analysis of

government-provided equity infusions

in situations where there is no market

benchmark price. This problem

typically arises in the case of firms that

are wholly owned by the government.

Since 1982, the Department has dealt

with this problem by categorizing firms

as either ‘‘equityworthy’’ or

‘‘unequityworthy.’’ As set forth in

§ 355.44(e)(2) of the 1989 Proposed

Regulations, an equityworthy firm was

one that showed ‘‘an ability to generate

a reasonable rate of return within a

reasonable period of time.’’ An

unequityworthy firm did not show such

an ability. If the Department found that

a firm was equityworthy, the

Department would declare a

government-provided equity infusion in

the firm to be not countervailable. The

Department would not consider

whether, notwithstanding the general

financial health of a firm, an excessive

price was paid for government-provided

equity. Conversely, if the Department

found a firm to be unequityworthy, the

Department would declare a

government-provided equity infusion in

the firm to be countervailable without

further analysis.

In these regulations, we have retained

the equityworthy/unequityworthy

distinction. Thus, under paragraph

(a)(3), if actual private investor prices

are not available under paragraph (a)(2),

the Secretary will determine whether

the firm in question was equityworthy.

Paragraph (a)(4) sets forth the standard

the Secretary will apply in determining

equityworthiness, and is virtually

identical to § 355.44(e)(2) of the 1989

Proposed Regulations.

This distinction between

equityworthy and unequityworthy firms

has certain administrative advantages.

However, as applied by the Department

in the past, it was, to some extent, a

rather simplistic approach to a complex

problem. This point was driven home

by the decision in AIMCOR, Alabama

Silicon, Inc. v. United States, 912 F.

Supp. 549 (Ct. Int’l Trade 1995)

(‘‘AIMCOR II’’), in which the court ruled

that, because of restrictions imposed on

certain ‘‘Class E’’ shares, the

government’s purchase of those shares

was inconsistent with commercial

considerations, notwithstanding the fact

that the firm in question was

equityworthy. As stated previously by

the court in AIMCOR I, ‘‘[w]here a

company is equity-worthy, as here, it

does not necessarily follow that the

purchase of stock from that company

will be consistent with commercial

considerations.’’ 871 F. Supp. at 454.

While we do not necessarily agree

with the court’s resolution of the factual

issue in AIMCOR II (i.e., whether the

purchase of Class E shares was

inconsistent with commercial

considerations), we do agree with the

basic principle articulated by the court.

Put in terms of the new statute, where

a company is equityworthy, it does not

necessarily follow that the purchase of

stock from that company will be

consistent with the usual investment

practice of private investors.

Accordingly, paragraph (a)(5) provides

that if the Secretary finds a firm to be

equityworthy, the Secretary will

conduct a further examination to

determine whether the particular

investment was consistent with usual

investment practice. Our intent here is

not to conduct a further analysis if the

government has purchased common

shares in a firm. Instead, we will

conduct a further analysis in situations,

like AIMCOR I, in which the

government has purchased shares to

which special conditions or restrictions

are attached.

Thus far, we have been discussing

firms determined by the Department to

be equityworthy. However,

unequityworthy firms present the same

problem: just as the Department’s

practice has oversimplified governmentprovided equity to equityworthy

companies, it has also oversimplified

government-provided equity to

unequityworthy companies because it

assumes that the shares purchased by

the government are worthless. We have

reconsidered this practice, adopted in

the 1993 steel determinations, and have
8834 Federal Register / Vol. 62, No. 38 / Wednesday, February 26, 1997 / Proposed Rules

proposed in these regulations an

approach that is consistent with our

general rule for equity which directs

that consistency with the usual

investment practice will normally be

determined by reference to the price a

private investor would pay for the

shares.

This new approach, reflected in

paragraph (a)(6)(i), provides that if the

Secretary determines that a firm is

unequity-worthy, the Secretary

normally will measure the benefit

conferred by a government equity

infusion by estimating the price that a

reasonable private investor would have

paid for the shares purchased by the

government. If the price paid by the

government exceeds this estimated

price, the amount of the benefit will be

the difference between the two prices.

In estimating the price that a reasonable

private investor would have paid, the

Secretary will rely only on information

and analysis that existed at the time of

the equity infusion, because this is the

information that would have been

available to a reasonable private

investor.

At this time, we have not been able

to develop a method for calculating the

price that a reasonable private investor

would have paid for the shares

purchased by the government. Among

the methods we have considered is an

options pricing model, in which

possible future returns would be valued

using a standard pricing formula for

equity call options. To use such a

model, we would need to develop

estimates for the underlying value of the

option and the volatility of expected

returns. We would especially welcome

comments on the use of such a model

for estimating share prices or any

alternative methods.

It has long been recognized that the

ideal approach to equity infusions in

unequityworthy firms would be to

estimate the price that a private investor

would have paid for shares purchased

by the government. See Holmer et al.,

Identifying and Measuring Subsidies

Under the Countervailing Duty Law: An

Attempt at Synthesis, in The Commerce

Department Speaks on Import

Administration and Export

Administration 1984 (Practising Law

Institute 1984), at 444. This approach,

which we will refer to as the

‘‘constructed private investor price’’

method (‘‘CPIP’), corresponds most

closely to the preferred methodology.

However, in the past, the CPIP method

has been rejected as impractical. Id.

Upon further consideration, we have

concluded that before rejecting the CPIP

method as impractical, we first should

attempt to use it in actual cases. Our

conclusion is reinforced by the fact that

while our prior practice may not be

unreasonable as a legal matter, it is even

more reasonable to rely on a

methodology that recognizes that, at

least in some cases, shares of an

unequityworthy firm may have some

value.

We recognize that there may be

instances in which the information

necessary to estimate what a reasonable

private investor would have paid simply

does not exist or does not provide an

appropriate basis for making such an

estimate. Therefore, paragraph (a)(6)(ii)

provides an alternative method for

measuring the benefit conferred by an

equity infusion in an unequityworthy

firm. Under this alternative method, the

Secretary would allocate the equity

infusion to two or more years in

accordance with paragraph (c)(2)

(discussed below), and would adjust the

amount allocated to a particular year by

the amount of subsequent after-tax

returns achieved in that year by the firm

in question. The reason for accounting

for subsequent returns is that under our

preferred methodology, we are

attempting to account for the reasonable

private investor’s expectations, at the

time of the equity infusion in question,

regarding a firm’s future returns. If

available information does not allow us

to estimate those expected returns, the

best proxy is the actual return earned on

the investment. While this approach

lacks the conceptual purity of the CPIP

method, we believe it is preferable to

the grant methodology, which treats all

equity infusions in all unequityworthy

firms as automatically worthless.

Although several comments were

filed on our methodology for

government-provided equity in

unequityworthy companies, they fell

into one of two camps. One group called

for the Department to codify the grant

methodology adopted in the 1993 steel

cases. These commenters pointed to the

fact that the grant methodology has been

upheld by the CIT in British Steel plc v.

United States, 879 F.Supp. 1254, 1309

(Ct. Int’l Trade 1995). See also, Usinor

Sacilor v. United States, 893 F.Supp.

1112, 1125–26 (Ct. Int’l Trade 1995).

They further maintained that this

practice is consistent with the new law.

The other group of commenters urged

the Department to return to the

methodology it employed prior to the

1993 steel investigations, the so-called

‘‘rate of return shortfall’’ (‘‘RORS’’)

methodology. In their view, the RORS

methodology offers the best proxy for

determining the amount by which the

government overpaid for its shares.

These commenters also cited to a GATT

Panel Report that, in their view,

squarely rejected the grant methodology.

(See United States—Imposition of

Countervailing Duties on Certain Hotrolled Lead and Bismuth Carbon Steel

Products Originating in France,

Germany and the United Kingdom,

SCM/185 (Nov.15, 1994) (unadopted).

Although the CIT has upheld the

grant methodology for governmentprovided equity to unequityworthy

firms, AIMCOR I led us to review our

equity methodology in its entirety. We

concluded that a finding of

‘‘equityworthiness’’ or

‘‘unequityworthiness’’ is not by itself a

sufficient basis for measuring the benefit

conferred by government-provided

equity. Specifically, a finding that a firm

is equityworthy does not mean that the

government paid the price a private

investor would have paid for the

particular shares in question. Similarly,

a finding that a firm is unequityworthy

does not mean that a private investor

would have paid nothing for the shares

purchased by the government. Merely

because the government could not

expect a reasonable rate of return given

the price it paid for its shares, it does

not follow that the expected return on

the investment is zero. In this respect,

we believe that the grant methodology,

like the RORS methodology it replaced,

does not adequately account for the

expectation held by the reasonable

private investor, at the time of the

infusion, of the company’s future rate of

return.

The methodology we have proposed

in these regulations for both

equityworthy and unequityworthy firms

reflects our goal of determining the

price a private investor would have paid

in either an equityworthy or

unequityworthy situation. We believe

this approach is preferable to RORS

because it attempts to use information

available at the time of the government’s

equity purchase regarding the firm’s

expected return to calculate the price

the government should have paid for the

shares it purchased. Moreover, where a

CPIP cannot be determined, we believe

that the alternative methodology

proposed in paragraph (a)(6)(ii) is a

better reflection of the benefit conferred

on an unhealthy (i.e., unequityworthy)

firm receiving government-provided

equity than the RORS methodology.

This is because, given our finding that

the firm is unequityworthy, the best

prediction we can make is that the value

of the shares is zero. Our prediction may

be wrong, and paragraph (a)(6)(ii) allows

us to take into account the return we

were not able to predict, but the

prediction we make of a zero-share price

is the best estimate we can make based

on information that would have been
Federal Register / Vol. 62, No. 38 / Wednesday, February 26, 1997 / Proposed Rules 8835

available to investors at the time the

government made its equity purchase.

Moreover, we believe that our

willingness to take into account the

return actually earned by the

government addresses the concern

raised by the GATT Panel.

Paragraph (a)(7) deals with allegations

regarding equity infusions, and is based

on § 355.44(e)(3) of the 1989 Proposed

Regulations. In our view, § 355.44(e)(3)

has not posed an undue burden on

petitioners nor prevented the filing of

meritorious allegations. However, it

does ensure that allegations will consist

of something more than a mere

statement that a government owns a

firm in whole or in part.

Paragraph (b) provides that the

Secretary normally will consider the

benefit from an equity infusion to have

been received as of the date on which

the firm received the infusion.

Paragraph (c) deals with the allocation

of the benefit to particular years and

provides in (c)(1) a general rule that the

Secretary will normally allocate the

benefit of an equity infusion over the

same allocation period that would be

used for a non-recurring grant.

Paragraph (c)(2) provides that where the

Secretary has measured the benefit by

reference to actual or constructed

private investor prices (and, thus, has

calculated a premium that can be

viewed as a grant), the Secretary will

allocate the benefit as if it were a nonrecurring grant, using the methodology

set forth for such grants in

§ 351.503(c)(2). This approach is

consistent with § 355.49(a)(3)(i) of the

1989 Proposed Regulations, which also

required that equity infusions be treated

as grants if a market-determined price

was used to identify and measure the

benefit.

Paragraph (c)(3) applies to equity

infusions in unequityworthy firms in

situations where the Secretary cannot

use the CPIP method under paragraph

(a)(6)(i). Paragraph (c)(2) also provides

for the allocation of the equity infusion

as if it were a non-recurring grant, but

references the fact that the Secretary

will adjust the allocated amount in

accordance with paragraph (a)(6)(ii).

Section 351.507

Section 351.507 deals with

assumptions or forgiveness of debt.

Paragraph (a), which deals with the

identification and measurement of the

benefit attributable to governmentprovided debt assumptions or

forgiveness, is little changed from

§ 355.44(k) of the 1989 Proposed

Regulations. Paragraph (b) describes

when the benefit from debt assumption

or forgiveness will be deemed to have

been received. Paragraph (c) provides

that the Secretary will normally treat the

benefit from debt assumption or

forgiveness as a non-recurring grant for

allocation purposes. However, where

the government is assuming interest

under certain narrowly-drawn

circumstances, the interest assumption

will be treated as a reduced-interest loan

and allocated according to the loan

allocation rules. Although it has

undergone some refinement, this

exception is consistent with the policy

articulated by the Department in the

1993 steel determinations.

Section 351.508

Section 351.508 deals with subsidy

programs that provide a benefit in the

form of relief from direct taxes. (‘‘Direct

tax’’ is defined in § 351.102.) The most

common form of a direct tax is an

income tax, and the subsidy programs

most frequently encountered are those

that provide special income tax

exemptions, deductions or credits. With

respect to the benefit provided by these

types of programs, paragraph (a)(1) of

§ 351.509 retains the standard set forth

in § 355.44(i)(1) of the 1989 Proposed

Regulations; i.e., a benefit exists to the

extent that the taxes paid by a firm as

the result of a program are less than the

taxes the firm would have paid in the

absence of the program. See 1989

Proposed Regulations, 54 FR at 23372,

and cases cited therein.

Another type of direct tax program is

the deferral of direct taxes owed.

Although § 355.44(i)(1) included tax

deferrals with exemptions and

remissions of direct taxes, the

Department has consistently used a

different methodology for identifying

and measuring the benefits of deferrals,

treating deferrals as governmentprovided loans. Therefore, consistent

with our practice, paragraph (a)(2)

directs that the loan methodology

described in § 351.504 will be applied to

direct tax deferrals. Normally, deferrals

of one year or less will be treated as

short-term loans, while multi-year

deferrals will be treated as short-term

loans rolled over on the anniversary

date(s) of the deferral.

Although the Department did not

receive any private sector comments

regarding direct tax subsidy programs,

the Department has identified one

aspect of its practice that might warrant

modification. In the case of special

accelerated depreciation allowances, a

firm typically experiences tax savings in

the early years of an asset’s life and tax

increases in the latter years of the asset’s

life. In the past, the Department has

focused on the tax savings, but has not

acknowledged the later tax increases.

The Department is considering adopting

a methodology that accounts for both

the early tax savings and the later tax

increases by calculating the net present

value of the expected tax savings at the

outset of the accelerated depreciation

period. Before doing so, however, the

Department would like to obtain the

views of the private sector. We are also

seeking private sector views on how the

direct tax methodology should address

losses, including loss carryforwards and

treatment of losses under accelerated

depreciation. Therefore, on these

matters in particular, we encourage

public comment.

Paragraph (b) of § 351.508 deals with

the question of when the benefit from a

direct tax subsidy is considered to have

been received by a firm, and is based on

§ 355.48(b)(4) of the 1989 Proposed

Regulations. As under current practice,

the Secretary will consider the benefit

from a tax exemption, deduction, or

credit to have been received as of the

date when the recipient firm can

calculate the amount of the benefit,

which normally will be when the firm

files its tax return. In the case of a tax

deferral of one year or less, the Secretary

normally will consider the benefit to

have been received when the deferred

tax becomes due. For a multi-year

deferral, the benefit is received on the

anniversary date(s) of the deferral.

Paragraph (c) deals with the allocation

of the benefits of direct tax subsidies to

particular time periods. As under

current practice, the Department

normally will allocate such benefits to

the year in which the benefits are

considered to have been received under

paragraph (b).

Section 351.509

Section 351.509 deals with programs

that provide full or partial exemptions

from, and deferrals of, indirect taxes or

import charges. (‘‘Indirect tax’’ and

‘‘Import charge’’ are defined in

§ 351.102). However, § 351.509 deals

only with programs that potentially

would be considered import

substitution subsidies or domestic

subsidies under section 771(5A)(C) or

section 771(5A)(D) of the Act,

respectively. Sections 351.516–518 deal

with programs that potentially would be

considered export subsidies under

section 771(5A)(B) of the Act because

they provide for an exemption or rebate

of indirect taxes or import charges when

a product is exported.

Paragraph (a)(1) of § 351.509 is based

on § 355.44(i)(2) of the 1989 Proposed

Regulations, and continues to provide

that a benefit exists to the extent that the

taxes or import charges paid by a firm

as the result of a program are less than
8836 Federal Register / Vol. 62, No. 38 / Wednesday, February 26, 1997 / Proposed Rules

the taxes the firm would have paid in

the absence of the program. As in the

case of direct taxes under § 351.508,

deferrals of indirect taxes and import

charges will be treated under paragraph

(a)(2) as government-provided loans.

Normally, deferrals of one year or less

will be treated as short-term loans,

while multi-year deferrals will be

treated as short-term loans rolled over

on the anniversary date(s) of the

deferral.

Paragraph (b) of § 351.509 is based on

§ 355.48(b)(6) of the 1989 Proposed

Regulations, and continues to provide

that the Secretary will consider the

benefit from a full or partial exemption

of indirect taxes or import charges to

have been received as of the date when

the recipient firm otherwise would have

had to pay the tax or charge. In the case

of deferrals of one year or less, the

Secretary normally will consider the

benefit to have been received when the

deferred amount becomes due. For

multi-year deferrals, the benefit is

received on the anniversary date(s) of

the deferral.

Paragraph (c) deals with allocation to

a particular time period, and provides

that the Secretary normally will allocate

(expense) to the year of receipt the

benefits attributable to the types of

subsidy programs covered by § 351.509.

Section 351.510

Section 351.510 deals with the

provision of goods and services. As

explained below, we have designated

paragraph (a) as ‘‘[Reserved]’’ in order to

first acquire some experience with the

relevant statutory provision before

codifying our methodology in the form

of regulations. Paragraph (b) is based on

§ 355.48(b)(2) of the 1989 Proposed

Regulations, and continues to provide

that the benefit from a governmentprovided good or service is considered

to be received when the firm pays, or is

due to pay, for the good or service.

Paragraph (c), which also is consistent

with existing practice, provides that the

Secretary will expense the benefit of a

government-provided good or service to

the year of receipt.

Adequate Remuneration

Prior to the URAA, section

771(5)(A)(ii)(II) of the Act provided that

the provision of goods or services

constituted a subsidy if such provision

was ‘‘at preferential rates.’’ Now, under

section 771(5)(E)(iv) of the Act, a

subsidy exists if such provision is ‘‘for

less than adequate remuneration.’’

Under section 771(5)(E) of the Act, the

adequacy of remuneration is to be

determined

* * * in relation to prevailing market

conditions for the good or service being

provided * * * in the country which is

subject to the investigation or review.

Prevailing market conditions include price,

quality, availability, marketability,

transportation, and other conditions of

purchase or sale.

One commenter suggested that we

provide guidance in the regulations

concerning how the Department intends

to identify and measure adequate

remuneration. Other commenters

debated whether the Department is

required to define adequate

remuneration as the price that would

exist absent government intervention in

the marketplace. At this time, however,

we are reluctant to go beyond the terms

of the statute and the SAA. Instead, we

intend to apply this new standard on a

case-by-case basis. Once we have gained

sufficient experience in actual cases, a

codification of methodology may be

appropriate. However, for the time

being, we have designated paragraph (a)

as ‘‘[Reserved].’’

We should note, however, that while

‘‘adequate remuneration’’ has replaced

‘‘preferential’’ as the standard, we do

not believe this precludes us from

continuing to apply certain

preferentiality-based analyses we have

used in the past. See Pure Magnesium

and Alloy Magnesium from Canada, 57

FR 30946, 30949 (1992); and Certain

Fresh Cut Flowers from the Netherlands,

52 FR 3301, 3302 (1987). There is no

indication that Congress intended to

change our practice with respect to

government-provided goods and

services such as electricity, water, or

natural gas; i.e., goods and services

provided to a wide variety of users by

a government-owned company that is

usually the sole provider of the good or

service.

We note further that where adequate

remuneration is being ascertained by

reference to the prices of goods (or

services) imported into the country in

question, we would propose to use the

amount actually paid for the import.

Hence, if the price of the imported good

included antidumping or countervailing

duties imposed by the country in

question, we would use the price

inclusive of those duties for comparison

purposes. Absent the imposition of

antidumping/countervailing duties by

the country in question, however, we

would not adjust the import prices to

reflect alleged subsidies or dumping.

Infrastructure

We received several comments

regarding the special specificity test for

government-provided infrastructure set

forth in § 355.43(b)(4) of the 1989

Proposed Regulations. Although the

commenters suggested different

modifications to this test, they all used

§ 355.43(b)(4) as a starting point.

Unlike the prior statute, section

771(5) of the Act, as amended by the

URAA, expressly mentions governmentprovided infrastructure. However, it

does so not in the context of specificity,

but in the context of ‘‘financial

contribution,’’ one of the prerequisites

for a subsidy. Specifically, section

771(5)(D)(iii) of the Act, which

implements Article 1.1(a)(1)(iii) of the

SCM Agreement, provides that the term

‘‘financial contribution’’ includes the

provision of ‘‘goods or services, other

than general infrastructure.’’ In other

words, the provision of ‘‘general

infrastructure’’ does not constitute a

‘‘financial contribution,’’ and, thus, does

not constitute a subsidy.

In light of the change in the statute,

the countervailability of infrastructure

depends on the definition of ‘‘general

infrastructure.’’ However, we have no

experience in applying this definition,

and we are uncertain regarding the

extent to which the principles reflected

in § 355.43(b)(4) remain useful

analytical tools for distinguishing

potentially countervailable

‘‘infrastructure’’ from noncountervailable ‘‘general infrastructure.’’

Therefore, we are not issuing

regulations on infrastructure at this

time. Instead, we will apply the

statutory definition on a case-by-case

basis.

Section 351.511

Section 351.511 deals with the

purchase of goods. Section 771(5)(E)(iv)

of the Act provides that the purchase of

goods by a government can confer a

benefit if the goods are purchased ‘‘for

more than adequate remuneration.’’ As

discussed above in connection with the

provisions of goods or services, the

Department does not have any

experience in applying an adequate

remuneration standard. In addition,

while government procurement was

potentially a countervailable subsidy

prior to the URAA, allegations of

procurement subsidies were extremely

rare. Thus, we do not even have

experience on such matters as the

‘‘timing’’ of procurement subsidies or

the allocation of such subsidies to a

particular time period.

Therefore, given our lack of

experience with procurement subsidies

in general, and the adequate

remuneration standard in particular, we

are not issuing regulations concerning

the government purchase of goods.

Instead, we have designated Section

351.511 as ‘‘[Reserved].’’
Federal Register / Vol. 62, No. 38 / Wednesday, February 26, 1997 / Proposed Rules 8837

In this regard, however, one

commenter that suggested a regulation

regarding government procurement

stated that any such regulation should

cover the government procurement of

services. Although, for the reasons

stated above, we are not promulgating a

regulation on government procurement

at this time, we should note that under

section 771(5)(D)(iv) of the Act and

Article 1.1(a)(1)(iii) of the SCM

Agreement, only government

procurement of goods is identified as a

financial contribution.

Section 351.512

Section 351.512 deals with workerrelated subsidies. Under paragraph (a),

which is based on § 355.44(j) of the 1989

Proposed Regulations, the Department

will continue to identify and measure

the benefit of government-provided

assistance to workers based on the

extent to which such assistance relieves

a firm of an obligation it otherwise

normally would incur.

One commenter argued that the

Department should clarify that worker

assistance is countervailable only when

the assistance relieves a firm of an

existing contractual or statutory

obligation. Such a clarification would

prevent what this commenter

considered to be an erroneous

determination in Certain Steel Products

from Germany, 58 FR 38318 (1993); GIA

at 37256–57. In that case, the

Department countervailed the Member

State-funded portion of Article 56(2)(b)

early retirement aid based on its

conclusion that the government’s

contribution was likely to have an effect

on the outcome of labor negotiations

between steel producers and their

workers. A different commenter,

however, endorsed the Department’s

determination and the method used by

the Department to measure the amount

of the subsidy.

The Department disagrees with the

proposal of the first commenter,

because, in certain circumstances, the

relief from an obligation that is not

‘‘binding’’ in a contractual or statutory

sense nonetheless may provide a benefit

to a firm that is readily identifiable and

measurable. On the other hand, the

Department is not prepared to codify the

particular approach used in Certain

Steel Products from Germany. Given the

limited alternatives available in that

case, we consider the approach used

therein to be reasonable. At the same

time, we acknowledged in the

determination that the approach used

was somewhat speculative, and we

stated that we would consider further

refinements in the future, particularly as

part of any administrative review

requested. However, because no such

review was requested, we have not had

the benefit of private sector comments,

other than the two comments described

above. Moreover, the determination

remains the subject of litigation.

Nevertheless, we may deal with this

issue in more detail in the final

regulations. Therefore, we invite public

comment on this issue in particular.

Paragraph (b) deals with the timing of

worker-related subsidies. Most subsidies

of this type are provided in the form of

cash payments (grants), and paragraph

(b) provides that the Secretary will

consider the subsidy to have been

received by the firm as of the date on

which the payment is made that relieves

the firm of the obligation it normally

would incur. Paragraph (c) deals with

the allocation of worker-related

subsidies to a particular time period,

and essentially treats these types of

subsidies as recurring grants to be

allocated (expensed) to the year of

receipt.

Section 351.513

Section 351.513 contains a standard

for determining when a subsidy is an

export subsidy, as opposed to a

domestic or import substitution subsidy.

Consistent with section 771(5A)(B) of

the Act, § 351.513 expands the

definition of an export subsidy.

In particular, § 351.513 would

overturn the practice described in

Extruded Rubber Thread from Malaysia,

57 FR 38472 (1992). In that case, the

Malaysian Government considered 12

criteria in evaluating whether a

particular company should receive

‘‘pioneer’’ status. Two of these criteria

addressed the export potential of a

product or activity. In addition, in

certain situations, companies had to

agree to export commitments. In

analyzing this program, the Department

examined the number of criteria being

applied with respect to a particular

company. If one or more of the criteria

applied by the Government included

favorable prospects for export, but the

export criteria did not carry

preponderant weight, the Department

did not consider the award of pioneer

status to constitute an export subsidy.

However, under the new standard

contained in § 351.513, if exportation or

anticipated exportation was either the

sole or one of several criteria for

granting pioneer status to a firm, we

would consider any benefits provided

under the program to the firm to be

export subsidies.

This expanded definition of export

subsidy is not intended to include

situations where exportation or

anticipated exportation is one of many

criteria for awarding benefits under a

program, but the firm in question has

qualified to receive the benefits under

non-export-related criteria. In these

circumstances, the Department would

not treat the subsidy to that firm as an

export subsidy.

Section 351.514

Section 351.514 corresponds to

paragraph (c) of the Illustrative List, and

deals with preferential internal

transport and freight charges on export

shipments. Paragraph (a)(1) restates the

general principle that a benefit exists to

the extent that a firm pays less for the

transport of goods destined for export

than it would for the transport of goods

destined for domestic consumption. In

addition, paragraph (a)(2), which is

based on § 355.44(g)(2) of the 1989

Proposed Regulations, provides that the

Secretary will not consider a benefit to

exist if differences in charges are the

result of an arm’s length transaction or

are commercially justified.

Paragraph (b) provides that the

Secretary will consider the benefit to

have been received as of the date on

which the firm pays or, in the absence

of payment, was due to pay the

transport or freight charges. Paragraph

(c) provides that the Secretary will

allocate (expense) the benefit to the year

in which the benefit is received.

Section 351.515

Section 351.515 deals with the

government provision of goods or

services on favorable terms or

conditions to exporters. Like its

predecessor, § 355.44(h) of the 1989

Proposed Regulations, § 351.515 is

based on paragraph (d) of the Illustrative

List, and reflects the changes to

paragraph (d) made as part of the

Uruguay Round. Paragraph (a) contains

the standard for determining the

existence and amount of the benefit

attributable to these types of subsidy

programs. As paragraph (a)(2) makes

clear, in determining whether the

domestically sourced input is being

provided on more favorable terms than

are commercially available on world

markets, the Department will add to the

world market price delivery charges to

the country in question. In our view,

delivered prices offer the best measure

of prices that are commercially available

to exporters in that country.

Furthermore, it has been suggested that

commercially available prices in world

markets may include dumped or

subsidized prices and we invite

comment on this issue. Paragraphs (b)

and (c) contain rules regarding the

timing of benefit receipt and the
8838 Federal Register / Vol. 62, No. 38 / Wednesday, February 26, 1997 / Proposed Rules

allocation of the benefit to a particular

time period, respectively.

One commenter argued that the

Department should provide that all

export subsidy payments are prohibited

per se under the SCM Agreement and

U.S. law, and that nothing in paragraph

(d) permits them. According to this

commenter, in the past, foreign

governments have claimed an exception

to paragraph (d) for practices that

protect domestic markets while

promoting subsidized exports of

agricultural and manufactured goods.

The example cited was the European

Community (‘‘EC’’) program providing

‘‘export restitution’’ payments or

‘‘export refunds’’ on durum wheat, the

primary agricultural product used in the

production of pasta. The commenter

stated that these refunds were

prohibited because paragraph (d)

applied only to the ‘‘provision’’ of goods

and/or services, not export payments,

and that the Department’s regulations

should clearly prohibit export

‘‘payments.’’

This argument is identical to one put

forth by petitioners in the 1985

administrative review on Iron

Construction Castings from India, 55 FR

50747, 50748 (1990). In that case,

India’s International Price

Reimbursement Scheme (‘‘IPRS’’)

provided payments to castings

exporters, refunding the difference

between the price of raw materials

purchased domestically and the price

exporters otherwise would have paid on

the world market. The Department

refused to examine whether the IPRS

met the criteria for noncountervailability under the exception

in item (d) and countervailed the IPRS

payments in their entirety.

Exporters and importers challenged

the Department’s determination, and, in

its decision in Creswell Trading Co. v.

United States, 783 F. Supp. 1418 (1992),

the CIT remanded the case to the

Department with instructions to analyze

the consistency of the IPRS with item

(d). The Federal Circuit discussed this

decision with approval in connection

with an appeal from a second CIT

decision in this same case. See Creswell

Trading Co. v. United States, 15 F. 3d

1054 (1994). Therefore, based on the

above judicial precedent, we must

disagree with the commenter that

paragraph (d) does not apply to

programs where a government

reimburses an exporter for the

difference between a higher domestic

price for an input and a lower price that

the exporter would have paid on the

world market, as opposed to providing

the input itself.

Also consistent with the Federal

Circuit’s decision in Creswell, where a

program exists that provides inputs for

exported goods at a lower price than is

available for inputs for use in the

production of goods for domestic

consumption, the burden will be on

respondents to provide evidence that

the lower price reflects the price that is

commercially available on world

markets.

Section 351.516

Section 351.516 deals with the

remission or rebate upon export of

indirect taxes. (‘‘Indirect tax’’ is defined

in § 351.102.) Section 351.516 is

consistent with longstanding U.S.

practice, see Zenith Radio Corp. v.

United States, 437 U.S. 443 (1978), and

is based on paragraph (g) of the

Illustrative List. Paragraph (g) deals with

indirect taxes, such as value added

taxes, and provides that the remission or

rebate of such taxes constitutes an

export subsidy only if the amount of the

remittance or rebate is excessive; i.e., if

it exceeds the amount of indirect taxes

levied on like products sold for

domestic consumption. For example, if

a government imposes a $5 tax on a

widget sold for domestic consumption

and provides a $10 rebate if the same

type of widget is exported, an export

subsidy exists in the amount of $5.

However, a corollary of paragraph (g) is

that the exemption or non-excessive

remission upon export of indirect taxes

does not constitute a subsidy. See note

1 of the SCM Agreement.

Paragraph (b) provides that the benefit

from an excessive rebate of indirect

taxes is deemed to be received on the

date of exportation. Paragraph (c)

provides that the Secretary will expense

these types of subsidies to the year of

receipt.

Section 351.517

While § 351.516 deals with the

exemption or remission of indirect taxes

in general, § 351.517 deals with the

exemption, remission, or deferral of

prior-stage cumulative indirect taxes.

(‘‘Prior-stage indirect tax’’ and

‘‘cumulative indirect tax’’ are defined in

§ 351.102.) Section 351.517 is based on

paragraph (h) of the Illustrative List, and

reflects certain changes made to

paragraph (h) as part of the Uruguay

Round negotiations. Section 351.517 is

intended to be consistent with

paragraph (h) and the Guidelines on

Consumption of Inputs in the

Production Process (Annex II to the

SCM Agreement).

Section 351.17 is drafted to address

separately exemptions, remissions and

deferrals of prior stage cumulative

indirect taxes. Paragraph (a)(1) deals

with exemptions and states that where

inputs are exempt from prior stage

cumulative indirect taxes, a benefit

exists to the extent that the exemption

extends to inputs not consumed in the

production of the exported product,

making normal allowance for waste.

(‘‘Consumed in the production process’’

is defined in § 351.102.) Where a benefit

exists, it is equal to the amount of the

taxes the firm would otherwise pay on

inputs not consumed in the production

of the exported product.

Paragraph (a)(2) addresses remissions

of indirect taxes and states that a benefit

exists to the extent that the amount

remitted exceeds the amount of prior

stage cumulative indirect taxes paid on

inputs that are consumed in the

production of the exported product,

making normal allowance for waste.

Where a benefit exists, paragraph (a)(2)

sets forth a general rule to the effect that

the amount of the benefit normally will

equal the difference between the

amount remitted and the amount of

prior stage cumulative indirect taxes on

inputs that are consumed in the

production of the exported product.

However, paragraph (a)(2) further

directs, based on Annex II to the SCM

Agreement, that the Secretary may

consider the entire amount of a

remission of prior-stage cumulative

taxes to be a benefit if the Secretary

determines that the foreign government

has not examined the actual inputs in

order to confirm which inputs are

consumed in the production of exported

products and in what amounts, and the

taxes that are imposed and paid on

those inputs. This qualification is

essentially a modified version of the

Department’s ‘‘linkage test,’’ a test

upheld in Industrial Fasteners Group,

American Importers Ass’n v. United

States, 710 F.2d 1576 (Fed. Cir. 1983).

Paragraph (a)(3) deals with the

amount of the benefit attributable to a

deferral of prior-stage cumulative

indirect taxes. Consistent with footnote

59 to the SCM Agreement, the first

sentence of paragraph (a)(3) provides

that a deferral does not give rise to a

benefit if the government charges

appropriate interest on the taxes

deferred. Otherwise, the second

sentence of paragraph (a)(3) provides

that the Secretary will determine the

amount of benefit by treating the tax

deferral as if it were a governmentprovided loan in the amount of the taxes

deferred. Normally, deferrals of one year

or less will be treated as short-term

loans, while multi-year deferrals will be

treated as short-term loans rolled over

on the anniversary date(s) of the

deferral.
Federal Register / Vol. 62, No. 38 / Wednesday, February 26, 1997 / Proposed Rules 8839

Paragraph (b) deals with the time of

receipt of the benefit. Paragraph (b)(1)

provides that in the case of a tax

exemption, the benefit is received as of

the date on which the tax otherwise

would have been due. Paragraph (b)(2)

provides that in the case of a tax

remission, the benefit arises as of the

date of exportation. Paragraphs (b)(3)

and (b)(4) address deferrals, stating that

the Secretary will normally treat the

benefit as having been received when

the tax would otherwise be due, for a

deferral of one year or less, or on the

anniversary date(s) of the deferral for

multi-year deferrals. Paragraph (c) deals

with the allocation of the benefit to a

particular time period, and provides

that the Secretary will allocate (expense)

the benefit from an exemption,

remission, or deferral of prior-stage

cumulative indirect taxes to the year of

receipt.

Section 351.518

Section 351.518 deals with the

remission or drawback of import

charges. Section 351.518 generally is

consistent with prior Department

practice, but contains some revisions to

reflect changes made to paragraph (i) of

the Illustrative List during the Uruguay

Round negotiations. Section 351.518 is

intended to be consistent with

paragraph (i), the Guidelines on

Consumption of Inputs in the

Production Process, and the Guidelines

in the Determination of Substitution

Drawback Systems as Export Subsidies

(Annex III to the SCM Agreement).

Paragraph (a)(1) reflects the

longstanding principle that governments

may remit or drawback import charges

levied on imported inputs when the

finished product is exported. However,

if the amount remitted or drawnback

exceeds the amount of import charges

levied, a benefit exists.

Paragraph (a)(2) deals with so-called

‘‘substitution drawback.’’ Under a

substitution drawback system, a firm

may substitute domestic inputs for

imported inputs without losing its

eligibility for drawback. However, a

benefit exists if the amount drawnback

exceeds the amount of import charges

levied on imported inputs, or if the

export of the finished product does not

occur within a reasonable time (not to

exceed two years) of the import of the

inputs.

Paragraph (a)(3) deals with the

calculation of the amount of benefit

attributable to an excessive remission or

drawback of import charges. Paragraph

(a)(3)(i) sets forth the general rule that

the amount of the benefit equals the

difference between the amount remitted

or drawnback and the amount of import

charges levied initially on the imported

inputs for which the remission or

drawback is claimed. For example,

assume that a firm imports widgets to

produce gizmos, and pays $2 in import

duties per widget. If, when the firm

exports finished gizmos, the firm

receives $5 in drawback, the benefit

equals $3 ($5¥$2=$3).

However, paragraph (a)(3)(ii) provides

that in certain circumstances, the

Secretary may consider the amount of

the benefit to equal the amount of the

remission or drawback. Paragraph

(a)(3)(ii) provides for a ‘‘linkage’’ test,

and is essentially identical to

§ 351.517(a)(2)(ii). See discussion of

§ 351.517(a)(2)(ii), above.

Paragraph (b) provides that the

Secretary normally will consider the

benefit to have been received as of the

date of exportation. Paragraph (c)

provides that the Secretary normally

will allocate this benefit to the year in

which it is received.

Section 351.519

Section 351.519 deals with export

insurance. Paragraph (a), which deals

with the benefit attributable to export

insurance, is based on paragraph (j) of

the Illustrative List. Paragraph (a) differs

from the section of the 1989 Proposed

Regulations dealing with export

insurance, § 355.44(d). First, to reflect

changes made to the Illustrative List

during the Uruguay Round, the word

‘‘manifestly’’ has been deleted.

Second, § 355.44(d) required that an

export insurance program must have

exhibited losses for a five-year period

before the Secretary would consider the

program a countervailable subsidy. We

have not included the five-year loss

requirement in these regulations,

because, depending on how an export

insurance program is structured, it may

be evident earlier than five years that

premiums will be inadequate to cover

the long-term operating costs and losses

of the program. On the other hand,

where the program is structured in such

a way that expected premiums can

cover expected long-term operating

costs and losses, we anticipate that we

will continue to apply the five-year rule.

For example, we would continue to

apply the five-year rule to programs like

the Israeli Exchange Insurance Scheme.

With respect to this program, we

originally determined that it was

structured so as to be self-balancing in

the sense that it could reasonably be

expected to break even over the long

term. See Potassium Chloride from

Israel, 49 FR 36122, 36214 (1984).

Therefore, we did not find a

countervailable subsidy despite losses

in the early years of the program.

However, after observing losses for five

years, we concluded that the premiums

charges were inadequate, and we

determined that the scheme conferred a

countervailable benefit.

Finally, § 355.44(d)(1) stated that the

Department would take into account

income from other insurance programs

operated by the entity in question. We

have reconsidered this policy, and,

although we do not have much

experience in this regard, have

concluded that this requirement may be

overly restrictive. For example, there

may be instances where the insuring

entity operates on a commercial basis,

except for the export insurance function

that may be specifically underwritten by

the government. In such a situation, it

would be inappropriate to take into

account the insuring company’s income

from other insurance programs.

Section 351.520

Section 351.520 continues and

codifies the Department’s practice with

respect to certain types of government

export promotion activities. As the

Department has observed in the past,

most countries, including the United

States, maintain general export

promotion programs. As long as these

programs provide only general

information services, such as

information concerning export

opportunities or government advocacy

efforts on behalf of a country’s

exporters, they do not confer a benefit

for purposes of the CVD law. However,

if, for example, such activities promoted

a specific product or provided financial

assistance to a firm, a benefit could exist

under one of the other provisions of

subpart E.

Section 351.521

Section 771(5A)(C) of the Act defines

an ‘‘import substitution subsidy’’ as ‘‘a

subsidy that is contingent upon the use

of domestic goods over imported goods,

alone or as 1 of 2 or more conditions.’’

As stated in the Senate Report, ‘‘the

category of import substitution

subsidies is a new one that is neither

part of the 1979 Subsidies Code nor

included in current law.’’ S. Rep. No.

412, 103rd Cong., 2d Sess. 93 (1994).

Under the new law, import substitution

subsidies are automatically considered

to be specific.

Two domestic parties commented that

the Department should state in its

regulations that import substitution

subsidies include subsidies that are

contingent ‘‘in law or in fact’’ upon the

use of domestic over imported goods.

The quoted language is included in the

export subsidy definition in section

771(5A)(B) of the Act, but does not
8840 Federal Register / Vol. 62, No. 38 / Wednesday, February 26, 1997 / Proposed Rules

appear in the import substitution

subsidy definition in section 771(5A)(C)

of the Act. One of the parties argued that

similar language should be included in

a regulatory definition of import

substitution subsidy to avoid a

‘‘potential loophole’’ for de facto import

substitution subsidies.

We agree with these commenters that

the statute does not expressly state that

import substitution subsidies include

those that are contingent ‘‘in law or in

fact’’ upon the use of domestic over

imported goods. On the other hand,

however, the plain language of section

771(5A)(C) does not limit the definition

of import substitution subsidies to only

those subsidies that are contingent ‘‘in

law’’ upon the use of domestic goods.

Because of the Department’s lack of

experience in dealing with this new

category of subsidies, we are not issuing

a regulation at this time on this

particular point. Instead, we intend to

develop our practice regarding import

substitution subsidies on a case-by-case

basis. However, the omission at this

time of explicit ‘‘in law or in fact’’

language from these regulations should

not be construed as an indication that

the Department believes that section

771(5A)(C) applies only to de jure

import substitution measures.

Section 351.522

Certain Agricultural Subsidies

Section 771(5B)(F) of the Act

implements provisions of the WTO

Agreement on Agriculture regarding the

noncountervailable status of certain

‘‘domestic support measures.’’ Under

Annex 2 of the Agreement on

Agriculture, domestic support measures

that meet the policy-specific criteria and

conditions of Annex 2 are exempt from

Member countries’ commitments to

reduce subsidies. In addition, Article

13(a) of the Agreement on Agriculture

directs that these subsidies, commonly

referred to as ‘‘green box’’ subsidies,

will be noncountervailable during the

nine-year implementation period

described in Article 1(f) of the

Agreement on Agriculture.

In accordance with section 13(a) of

the Agreement, section 771(5B)(F) of the

Act provides that the Secretary will treat

as noncountervailable domestic support

measures that (1) are provided with

respect to products listed in Annex 1 of

the Agreement on Agriculture, and (2)

that the Secretary ‘‘determines conform

fully to the provisions of Annex 2’’ of

that Agreement. To implement section

771(5B)(F), § 351.522 sets out the

criteria the Secretary will consider in

determining whether a particular

domestic support measure conforms

fully to the provisions of Annex 2.

One commenter argued that the

regulations should require the Secretary

to consider whether or not an alleged

green box subsidy has trade distorting

effects. Further, the commenter noted

that the SAA enumerates certain U.S.

programs that meet the green box

criteria. According to the commenter,

the regulations should explicitly treat as

noncountervailable a foreign program

that is similar to an enumerated U.S.

program. This same commenter also

argued that the list of eight types of

direct payments to producers included

in Annex 2 is illustrative, not exclusive.

The commenter stated that the

regulations should provide ‘‘precise,

objective and even-handed’’ criteria for

determining whether a particular

subsidy is a green box subsidy. A

second commenter disputed the

suggestion that the regulations should

include a list of agricultural programs

that the Secretary automatically would

consider as noncountervailable.

According to this commenter, there is

no basis in the statute for automatically

exempting particular programs from the

CVD law. Instead, this commenter

argued, the Department should assess

whether particular programs meet the

green box criteria on a case-by-case

basis.

The Department believes there is little

to be gained from enumerating in the

regulations specific types of programs

that would qualify automatically as

green box subsidies. Annex 2 of the

Agreement provides explicit criteria that

a program must meet to receive green

box status, and § 351.522 reflects the

plain language of these criteria.

Consistent with section 771(5B)(F) of

the Act and the Agreement on

Agriculture, paragraph (a) of § 351.522

provides that the Secretary will treat as

noncountervailable a subsidy provided

to an agricultural product listed in

Annex 1 of the Agreement if the subsidy

fully conforms to both the basic criteria

of subparagraphs (a) and (b) of

paragraph 1 of Annex 2 and the relevant

policy-specific criteria and conditions

set out in paragraphs 2 through 13 of

that Annex.

In this regard, we received two

comments concerning the so-called

‘‘peace clause’’ in the Agreement on

Agriculture. Specifically, Articles 13 (b)

and (c) of that Agreement require WTO

Member countries to exercise ‘‘due

restraint’’ in initiating CVD proceedings

on agricultural subsidies provided by a

Member whose total non-green box

agricultural subsidies (both domestic

and export) are within that Member’s

reduction commitments. See SAA at 67–

69. The obligation to exercise ‘‘due

restraint’’ exists only during the

‘‘implementation period,’’ defined in

Article 1(f) of the Agreement on

Agriculture.

One commenter argued that the

Department’s regulations should ensure

that the Department exercises due

restraint by not self-initiating CVD

investigations on products that benefit

from subsidies described in Articles 13

(b) and (c). A second commenter argued

that the Department should interpret the

due restraint clause narrowly.

We do not believe that a regulation is

necessary on this particular point. The

Department understands the due

restraint requirement to entail a

commitment to refrain from selfinitiating CVD investigations, and the

Department will administer the statute

accordingly.

Green Light Subsidies in General

Under section 771(5B), which

implements Article 8 of the SCM

Agreement, certain domestic subsidies

and domestic subsidy programs are

treated as noncountervailable,

notwithstanding the fact that they are

specific under section 771(5A)(D) of the

Act. There are three categories of these

so-called ‘‘Green Light’’ subsidies: (1)

Research subsidies (see section

771(5B)(B) of the Act); (2) subsidies to

disadvantaged regions (see section

771(5B)(C) of the Act); and (3) subsidies

for adaptation of existing facilities to

new environmental requirements (see

section 771(5B)(D) of the Act). Although

at this time we are not promulgating

regulations regarding Green Light

subsidies, we received many comments

concerning this category of subsidies,

and we address those comments here.

The noncountervailable status of

these Green Light subsidies can be

established in two ways. First, a WTO

Member country can notify a subsidy

program to the WTO SCM Committee in

accordance with Article 8.3 of the SCM

Agreement. Once notified, section

771(5B)(E) provides that a Green Light

subsidy program ‘‘shall not be subject to

investigation or review’’ by the

Department. However, an exception to

this rule exists in situations where a

member country has successfully

challenged in the WTO a claim for

Green Light status. In the event of a

successful challenge, section 751(g) and

section 775 of the Act establish

mechanisms for promptly including the

subsidy or subsidy program in an

existing CVD proceeding should there

be reason to believe that merchandise

subject to the proceeding may be

benefiting from the subsidy or subsidy

program.
Federal Register / Vol. 62, No. 38 / Wednesday, February 26, 1997 / Proposed Rules 8841

The second method for obtaining

Green Light status involves situations

where a subsidy program has not been

notified to the SCM Committee. In the

case of a subsidy given under a nonnotified program, the subsidy is

noncountervailable if the Secretary

determines in a CVD investigation or

review that the subsidy satisfies the

relevant Green Light criteria contained

in subparagraphs (B), (C) or (D) of

section 771(5B). However, the Secretary

must determine that the subsidy

satisfies all of the relevant criteria before

a given subsidy will be treated as

noncountervailable. See section

771(5B)(A) of the Act; SAA at 266.

Moreover, as discussed in the SAA, in

investigations and reviews of nonnotified subsidies, the burden will be on

the party claiming Green Light status to

present evidence demonstrating that a

particular subsidy meets all of the

relevant criteria. SAA at 266. In

addition, under section 771(5B)(A) of

the Act, Green Light status may be

claimed only in proceedings involving

merchandise imported from a WTO

Member country.

In accordance with the

Administration’s commitment in the

SAA, the Department intends to strictly

construe the various Green Light

provisions to ‘‘limit the scope of the

provision(s) to only those situations

which clearly warrant noncountervailable treatment.’’ SAA at 265.

Thus, the Department ‘‘will not limit its

analysis * * * to a narrow review of the

technical criteria of Article 8 of the SCM

Agreement, but will analyze all aspects

of the subsidy program and its

implementation to ensure that the

purposes and terms of Article 8 have

been respected.’’ SAA at 267.

Under the transition rules set forth in

section 291 of the URAA, the new law

applies to investigations and

administrative reviews initiated on the

basis of post-January 1, 1995 requests.

As with other issues that arise in such

investigations and reviews, the

Department will consider claims for

Green Light treatment as parties present

such claims to the Department. A

Department determination that a

particular subsidy received by a firm is

a Green Light subsidy would not

necessarily mean that the Department

would find the entire program under

which the subsidy is provided satisfies

all of the applicable Green Light criteria

in all cases.

Certain commenters suggested that

the Department ‘‘incorporate fully’’ in

the regulations the discussion of Green

Light subsidies contained in the SAA.

We do not believe this is necessary. As

discussed above, our general approach

to the drafting of these regulations has

been to avoid simply repeating the

language of the statute and/or the SAA.

Investigation of Notified Subsidies

One commenter, noting the text of

section 771(5B)(E), suggested that the

Department should refrain from

investigating notified subsidy programs.

According to the commenter, a failure to

‘‘screen out’’ notified subsidies prior to

the initiation of an investigation would

result in a waste of Departmental

resources and unnecessary burdens on

foreign governments.

In response, several commenters

argued that if there is any ambiguity

regarding whether a subsidy alleged by

a petitioner does, in fact, qualify as a

notified Green Light subsidy, the

Department should include the subsidy

in its CVD investigation or review to

determine whether it qualifies for a

Green Light exemption. One example

given by these commenters is a situation

where a petitioner presents evidence

that a subsidy program has been

modified subsequent to its notification

to the SCM Committee. These

commenters also suggested that it may

simply be unclear whether an alleged

subsidy is the same as the notified

subsidy, in which case the Department

should include the alleged subsidy in

the investigation to make this

determination.

In replying to these comments, we

note that section 771(5B)(E) of the Act

and the SAA make clear that if a

subsidy program has been notified

under Article 8.3 of the SCM

Agreement, any challenge regarding its

eligibility for Green Light treatment,

whether due to later modification or

otherwise, must be made through the

review procedures under the WTO

rather than in the context of a CVD

proceeding. As described above,

Commerce may not initiate a CVD

investigation or review of a notified

subsidy program (which appears to

benefit subject merchandise) unless

informed by USTR that a violation has

been determined under the procedures

of Article 8.

However, the identity of a subsidy is

a different matter. If there is a legitimate

question as to whether a subsidy alleged

in a petition is, in fact, a subsidy that

has been notified under Article 8.3, the

Department will include the subsidy in

a CVD investigation or review in order

to resolve the identity of the subsidy in

question. If a party claiming Green Light

status demonstrated that the alleged

subsidy had been notified, that would

be the end of the analysis, and the

Department would not inquire further as

to the subsidy’s conformance with the

applicable Green Light criteria. If the

party failed to establish that the alleged

subsidy program had been notified, then

the Department would analyze the

subsidy’s eligibility for Green Light

status in the same manner as for any

other non-notified subsidy.

Nevertheless, the Department is not

promulgating a regulation concerning

this issue at this time. While the manner

in which the Department would proceed

in the situation described appears fairly

straightforward, our lack of experience

in administering the new Green Light

provisions leaves open the possibility

that questions of interpretation will

arise that cannot be foreseen at this

time.

Policy for Investigating Non-Notified

Subsidies

One commenter argued that the

Department should adopt a regulation

providing that, whenever a petition

includes a potential Green Light subsidy

that has not been notified under Article

8.3, the Department will conduct a full

investigation to determine whether the

subsidy meets the relevant requirements

of section 771(5B). This commenter and

others emphasized that the regulations

also should include the SAA’s express

requirement that the party claiming

Green Light status has the burden of

presenting evidence demonstrating

compliance with all of the relevant

criteria for any particular subsidy

category. See SAA at 266.

While we do not disagree with the

policy espoused, we do not believe that

this policy must be codified in the

regulations. As discussed above, the

statute and the SAA are clear that in

investigations and reviews of subsidies

that have not been notified under

Article 8.3 of the SCM Agreement, the

party claiming Green Light status has

the burden of presenting evidence

demonstrating that a particular subsidy

meets all of the relevant criteria for

noncountervailable status.

Alleged Green Light Subsidies not Used

During the Period of Investigation or

Review

Although this issue was not raised by

any of the commenters, the Department

believes that, in an investigation or a

review of a CVD order or suspended

investigation, the Department should

not consider claims for Green Light

status if the subject merchandise did not

benefit from the subsidy during the

period of investigation or review.

Instead, consistent with the

Department’s existing practice, the

Green Light status of a subsidy should

be considered only in an investigation

or review of a time period where the
8842 Federal Register / Vol. 62, No. 38 / Wednesday, February 26, 1997 / Proposed Rules

subject merchandise did receive a

benefit from the subsidy. However, the

Department does not believe that a

regulation is needed to clarify this issue.

Research Subsidies

Prior to the enactment of the URAA,

the Department treated assistance

provided by a government to finance

research and development (‘‘R&D’’) as

noncountervailable if the R&D results

were (or would be) made available to

the public, including the U.S.

competitors of the recipient of the

assistance. This policy, sometimes

referred to as the public availability test,

was described by Commerce in

§ 355.44(l) of the 1989 Proposed

Regulations. One commenter argued

that the Department should reaffirm the

public availability test.

The Department has not retained the

public availability test in these

regulations. We believe that the

objectives served by the public

availability test are better met by

applying the criteria listed in section

771(5B)(B) of the Act and Article 8.2(a)

of the SCM Agreement.

Another commenter argued that, in

determining whether a given research

subsidy falls within the 75 and 50

percent maximum allowed under

section 771(5B)(B), the Department

should base its analysis on the total

costs incurred over the duration of the

project in question. Under this

reasoning, the Department would not

countervail a subsidy if the 75 or 50

percent maximum was exceeded during

the year under investigation or review,

provided that the applicable threshold

‘‘is not exceeded over the life of the

project.’’ This commenter further argued

that, if the Department determined that

the applicable threshold was exceeded

over the life of the project, only the

amount of subsidy in excess of the

relevant ‘‘maximum’’ should be

countervailed.

Several commenters challenged these

arguments. First, they argued that the

Department should evaluate the 75 and

50 percent maxima based on the costs

already incurred at the time of the

relevant investigation or administrative

review, and not on the basis of expected

costs over the lifetime of the project.

Second, these commenters argued that,

if the Department determined that the

applicable threshold had been

exceeded, the entire benefit—not just

the excess over the relevant threshold—

should be countervailed. According to

these commenters, the SAA states

clearly that all of the relevant criteria

must be met for a given program to

receive Green Light status, and that a

failure to meet all relevant criteria

would result in the ‘‘entire subsidy’’

being countervailable in full. See SAA

at 266.

The Department agrees in part with

the first commenter, and in part with

the latter commenters. With respect to

the proper frame of reference for

determining whether a given research

subsidy has exceeded the 75 or 50

percent maximum, section

771(5B)(B)(iii)(II) of the Act instructs the

Department to base its analysis on ‘‘the

total eligible costs incurred over the

duration of a particular project.’’ Thus,

it would be improper for the

Department to limit its analysis to only

those costs incurred as of the time

period covered by an investigation or

administrative review. The Department

agrees, however, that if, over the

duration of a project, the subsidy

exceeds the 75 or 50 percent threshold,

the entire amount of the subsidy is

countervailable, not merely the excess.

Also, if it is indisputable at the outset

of the project that the relevant threshold

will be exceeded, the entire amount of

the subsidy is countervailable.

Subsidies to Disadvantaged Regions

One commenter suggested that the

Department should clarify that the

Green Light category regarding subsidies

to disadvantaged regions is not limited

to subsidies provided by national

governments, but also includes

subsidies granted by subnational levels

of government, such as states or

provinces. This commenter further

argued that, in determining whether a

subsidy provided by a state or province

to a disadvantaged region meets the

criteria of section 771(5B)(C) of the Act,

the Department should assess the

criteria within the framework of the

subnational government’s jurisdiction.

In response, other commenters argued

that the Department should assess the

Green Light criteria in relation to the

investigated country as a whole, not just

in relation to the jurisdiction of the

subsidizing government if that

government is at the subnational level.

According to these commenters, the

statute and the SAA instruct the

Department to evaluate the relevant

Green Light criteria in relation to the

‘‘average for the country subject to

investigation or review.’’

We agree with the first commenter

that the Green Light categories include

subsidies granted by governments at the

subnational level, and that, in the case

of the regional category, the Department

should assess the relevant criteria in

relation to the jurisdiction of the

granting authority. In discussing the

language in section 771(5B)(C)(ii) of the

Act regarding the ‘‘average for the

country subject to investigation or

review,’’ the SAA explains that, where

a CVD proceeding involves a member of

a customs union, the term ‘‘country’’

shall be defined in accordance with the

structure of the regional assistance

program. SAA at 264. For example, if

the Department were to investigate a

product from Luxembourg, the term

‘‘country’’ would refer to the EC as a

whole if the subsidy being investigated

was received under an EC regional

assistance program. Thus, the SAA

indicates that the Department should

make its determinations based on

averages for the jurisdiction granting the

regional assistance subsidy. Although

the Department is not promulgating a

regulation on this point, the Department

intends to adopt this approach as a

matter of practice.

Subsidies for Adaptation of Existing

Facilities to New Environmental

Requirements

One commenter argued that, with

respect to the Department’s criteria for

Green Light environmental subsidies

described in section 771(5B)(D) of the

Act, the Department should treat as

noncountervailable those subsidies

given to upgrade existing facilities to

environmental standards that are higher

than the minimum standards imposed

by law or regulation. According to this

commenter, ‘‘[g]overnments should be

allowed the flexibility to encourage

higher environmental standards than

the minimum required by law when

government shares the additional costs

of achieving the higher environmental

standards.’’

Several commenters dispute this

suggestion, claiming that section

771(5B)(D)(i) specifically limits Green

Light status for environmental subsidies

to those that are ‘‘provided to promote

the adaptation of existing facilities to

new environmental requirements * * *

.’’ According to these commenters, the

Department has no authority to broaden

the scope of environmental subsidies

eligible for Green Light treatment.

Although we acknowledge that

governments should have the flexibility

to encourage higher environmental

standards, the Department agrees with

the latter commenters. As noted above,

section 771(5B)(D)(i) provides that

noncountervailable environmental

subsidies are those that are ‘‘provided to

promote the adaptation of existing

facilities to new environmental

requirements that are imposed by

statute or by regulation * * * .’’

According to the SAA, ‘‘strict

application of these requirements is

essential in order to limit the scope of

the provision to only those situations
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which clearly warrant noncountervailable treatment.’’ SAA at 267.

Given the clear language of the statute

and the SAA, the Department believes

that subsidies given to upgrade existing

facilities to environmental standards in

excess of legal requirements are

countervailable.

Section 351.523

Section 351.523 deals with the

identification and measurement of

upstream subsidies. Because the URAA

did not significantly amend the

corresponding statutory provision,

section 771A of the Act, § 351.523 is

based largely on § 355.45 of the 1989

Proposed Regulations, except for the

deletion of language that merely repeats

the statute. However, we have made one

change that reflects a change in practice

regarding the identification and

measurement of the competitive benefit

bestowed by an upstream subsidy.

Before turning to that change, we note

that we have adopted certain new

terminology in § 351.523(a).

Specifically, we have replaced ‘‘control’’

with ‘‘cross ownership.’’ See

§ 351.524(b)(6) for an explanation of

‘‘cross ownership.’’

Regarding ‘‘competitive benefit’’ and

upstream subsidies, § 351.523 sets forth

the standard for determining whether a

competitive benefit exists. In this

regard, section 771A(b)(1) of the Act

provides that a competitive benefit

exists when

* * * the price for the (subsidized) input

product is lower than the price that the

manufacturer or producer of merchandise

which is the subject of a countervailing duty

proceeding would otherwise pay for the

product in obtaining it from another seller in

an arms-length transaction.

In addition, section 771A(b)(2) of the

Act provides that when the Secretary

has determined in a previous

proceeding that a countervailable

subsidy is paid or bestowed on the

comparison input product, the

Department ‘‘may (A) where

appropriate, adjust the price that the

manufacturer or producer of

merchandise which is the subject of

such proceeding would otherwise pay

for the product to reflect the effects of

the countervailable subsidy, or (B) select

in lieu of that price a price from another

source.’’

In the past, as reflected in § 355.45(d)

of the 1989 Proposed Regulations, the

Department preferred to base its

comparisons upon the price charged for

unsubsidized inputs produced by other

producers in the same country as the

producer of the subject merchandise. If

the Department had determined in a

prior CVD proceeding that a

countervailable subsidy had been

bestowed in the subject country on the

comparison input, the Department’s

next preferred alternative was to adjust

the price of the input product to reflect

the subsidy. As a final alternative, the

Department could select a ‘‘world

market price for the input product.’’ The

Department interpreted the phrase

‘‘world market price’’ broadly to include

(1) actual prices charged for the input

product by producers located in other

countries, and (2) average import prices.

Additionally, because the statute did

not preclude, for comparison purposes,

the use of prices of subsidized, imported

inputs, the Department had determined

that it would be ‘‘inappropriate to

exclude all subsidized producers, even

assuming that we could identify them.’’

Circular Welded Non-Alloy Steel Pipe

From Venezuela; Final Determination,

57 FR 42964, 42967–68 (1992).

We have revised our approach

regarding ‘‘competitive benefit’’ in the

following manner. Under paragraph

(c)(1)(i), we will rely first upon the

actual price charged or offered for an

unsubsidized input product, regardless

of whether the producer of that input is

located in the same country as the

producer of the subject merchandise.

Upon further reflection, we see no

justification for distinguishing between

input products based on the country of

production. Section 771A(b)(1) of the

Act merely requires the Department to

compare the price paid for the

subsidized input product to the price

that the producer ‘‘would otherwise pay

for the product in obtaining it from

another seller in an arms-length

transaction.’’ The price that the

producer ‘‘would otherwise pay’’ could

include the actual price paid by the

producer of subject merchandise to an

unrelated supplier or a bid offered by an

unrelated supplier, regardless of the

location of that supplier.

If actual prices or offers for

unsubsidized inputs are not available,

we have concluded that it is preferable

to rely upon an average of publicly

available prices for unsubsidized inputs

from different countries or some other

surrogate price deemed appropriate by

the Department. See paragraph (c)(1)(ii).

Only if there are no prices for

unsubsidized inputs available from any

source will we adjust the price of the

comparison input product to reflect a

countervailable subsidy. In such a case,

under paragraph (c)(1)(iii), we first will

rely upon the actual price that the

producer of the subject merchandise

otherwise would pay for the input

product adjusted to reflect the subsidy,

regardless of the country in which the

input product is produced. If such a

price is not available, under paragraph

(c)(1)(iv), the Department would use an

average price for the input product from

different countries adjusted to reflect

the subsidy or some other adjusted

surrogate price. Only when no

adjustable price is available (e.g., the

only available price is a published price

reflecting an average of both subsidized

and non-subsidized prices), would we

rely upon the price of a subsidized

input. See paragraph (c)(1)(v).

We believe that the approach

described in the preceding paragraph

better reflects the overall purpose of the

upstream subsidies provision, which is

to account, when appropriate, for

upstream subsidies provided on input

products used in the production or

manufacture of subject merchandise.

The language of section 771A itself does

not express a preference regarding the

selection of a comparison input price,

and grants the Department wide latitude

in determining when to adjust the price

of the comparison product to reflect

known countervailable subsidies.

However, parts of the legislative history

underlying the Trade and Tariff Act of

1984, which added section 771A to the

Act, support a preference for using the

price of an unsubsidized input, and that

the Department should make

adjustments for subsidies only when

there is no price for unsubsidized

inputs. See, e.g., 130 Cong. Rec. S13970

(daily ed. Oct. 9, 1984) (statement of

Sen. Dole). Although, as described

above, we are revising our practice

regarding the identification and

measurement of a competitive benefit,

the preference for using the price of

unsubsidized inputs also was reflected

in the Department’s earlier practice. See,

e.g., Agricultural Tillage Tools from

Brazil, 50 FR 24270, 24273 (1985).

In the hierarchy described above for

selecting the price that the producer

otherwise would pay for the input, we

intend to use subsidized prices only

when unsubsidized prices are not

available. In determining whether a

price is subsidized, we will rely

primarily on CVD findings made by the

United States or the investigating

authorities of other countries in the

recent past (i.e., within the past five

years).

One other clarification in paragraph

(c) is that in determining whether there

is a competitive benefit, the Department

will adjust prices upward to account for

delivery charges (i.e., c.i.f.). Although

the statute does not specify the precise

basis for calculating a benchmark price

for the input product, section 771A(b)(1)

does require the use of the price that the

manufacturer or producer of the subject

merchandise ‘‘would otherwise pay.’’ In
8844 Federal Register / Vol. 62, No. 38 / Wednesday, February 26, 1997 / Proposed Rules

our view, this requires the use of a price

that represents a commercial alternative

to the producer of the subject

merchandise, and f.o.b. prices do not

provide a measurement of the

commercial alternative to the

downstream producer. See Non-Alloy

Steel Pipe from Venezuela, 57 FR at

42967 (1992).

Several outside parties commented on

the upstream subsidies provision. One

commenter argued that when using a

world market price as a benchmark, the

Department should rely upon an average

of all publicly available export prices,

including U.S. export prices. In

response, several domestic parties

argued that the world market price

should equal the weighted-average

landed price of the input product within

the country under investigation. These

commenters added that the price should

also include all delivery expenses.

Finally, other domestic parties

suggested a hierarchy that would

apparently not include any averaged

prices from the world market, but

instead would be limited to (1) actual

prices paid by the producer of the

subject merchandise to domestic or

third-country suppliers, or (2)

information regarding prices from such

suppliers. We believe the above

explanation adequately addresses the

concerns raised by these comments.

Section 351.524

Section 351.524 deals with the

calculation of the ad valorem subsidy

rate and the attribution of a subsidy to

a particular product. While § 351.524 is

based roughly on § 355.47 of the 1989

Proposed Regulations, it contains

changes that reflect further refinements

in the Department’s practice since 1989.

Paragraph (a) deals with the

calculation of the ad valorem subsidy

rate, and continues to provide that the

Secretary will calculate the rate by

dividing the amount of the subsidy

benefit by the sales value of the product

or products to which the subsidy is

attributed. For example, if a firm

receives an untied domestic subsidy for

which the benefit is $100 and the firm’s

total sales were $1,000, the ad valorem

subsidy rate would be 10 percent ($100

÷ $1,000 = 10 percent).

The second and third sentences of

paragraph (a) deal with the basis on

which the Secretary will determine the

sales value of a product. The

Department’s longstanding practice has

been to determine sales value for

products that are exported on an F.O.B.

(port) basis in order to correspond to the

basis on which the Customs Service

assesses duties. However, in the GIA,

the Department announced that it

would begin using sales values as

recorded in a firm’s financial

statements. The Department did so in

the belief that this approach would be

more accurate, would reduce the burden

on the firms involved, and would allow

the Department to account for the fact

that shipping expenses might be

subsidized. However, in order to ensure

that the Customs Service collected the

correct amount of duties based on an

F.O.B. (port) basis, the Department

found it necessary to adjust the

calculated ad valorem subsidy rate

based on a ratio of the invoice value of

exports to the United States to the

F.O.B. value of exports to the United

States. In the end, only one of the

respondents in the 1993 steel

investigations had the information

needed to calculate this ratio. Therefore,

for all other firms in those cases, the

Department wound up using its

traditional F.O.B. (port) methodology.

Because the Department’s experiment

with a different basis was not

successful, in the second sentence of

paragraph (a) we have reverted to our

standard practice of determining sales

value on an F.O.B. (port) basis in the

case of products that are exported. In

the case of products that are sold for

domestic consumption, we would

determine sales value on an F.O.B.

factory basis. While this method

imposes a bit more work on firms than

does a method that relies on booked

values, we believe that the burden can

be mitigated by relying on aggregate

figures and reasonable allocations of

those figures across markets (e.g.,

subtracting total freight and insurance

expenses, expenses that usually are

maintained in ledgers that are separate

from sales information).

In addition, there is no compelling

reason for allocating subsidy benefits

over sales values that include freight

and other shipping costs. Although

there may be rare instances where the

‘‘shipping’’ component of a transaction

is subsidized, the Department can deal

with those instances on a case-by-case

basis. Accordingly, the third sentence of

paragraph (a) provides that the Secretary

may make appropriate adjustments to

the ad valorem subsidy rate to account

for ‘‘shipping’’ subsidies.

Paragraph (b) deals with the

attribution of a subsidy to a particular

product. Paragraphs (b)(2) through (b)(7)

set forth general rules of attribution that

the Secretary will apply to a given

factual situation. We have taken this

approach because, depending on the

facts, several of the different rules may

come into play at the same time. If we

tried to account for all the possible

permutations in advance, we would

wind up with an extremely lengthy set

of rules that might prove to be unduly

rigid.

On the other hand, we appreciate that

there needs to be a certain degree of

predictability as to how the Department

will attribute subsidies. We believe that

the rules set forth in paragraph (b) are

sufficiently precise so that parties can

predict with a reasonable degree of

certainty how the Department will

attribute subsidies to particular

products in a given factual scenario. In

this regard, the Department’s intent is to

apply these rules in an harmonious

manner.

With respect to the attribution rules

themselves, they are consistent with the

concept of ‘‘benefit’’ described in

§ 351.501, i.e., that a benefit is conferred

when a firm pays less than it otherwise

would pay in the absence of the

government-provided input or when a

firm receives more revenue than it

otherwise would earn. In light of this,

subsidies should be attributed, to the

extent possible, to those products for

which costs are reduced (or revenues

increased). See, e.g., H.R. Rep. No. 317,

96th Cong., 1st Sess. 74–75 (1979)

(‘‘[W]ith regard to subsidies which

provide an enterprise with capital

equipment or a plant * * * the net

amount of the subsidy should

be * * * assessed in relation to the

products produced with such

equipment or plant. * * *.’’).

This principle of attributing a subsidy

to an affected cost (or revenue) center is

embodied in the Department’s

longstanding practice concerning the

‘‘tying’’ of subsidies. See, e.g., § 355.47

of the 1989 Proposed Regulations. As

discussed below, there are various ways

in which a subsidy can be tied.

However, regardless of the method, the

Department attributes a subsidy to the

product or products to which it is tied.

In this regard, one can view an ‘‘untied’’

subsidy as a subsidy that is tied to all

products produced by a firm.

Paragraphs (b)(2) through (b)(7) set

forth rules that the Department will

apply to different types of tying

situations. For example, paragraph (b)(2)

contains an attribution rule regarding

export subsidies. Because an export

subsidy is, by definition, tied to the

exportation, paragraph (b)(2) provides

that the Secretary will attribute an

export subsidy only to products

exported by a firm.

As noted above, the Department

intends to apply paragraphs (b)(2)

through (b)(7) consistently with each

other. As an example, assume that a

government provides an export subsidy

on exports of widgets to Country X.

Here, three attribution rules come into
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play. Under paragraph (b)(2), the

subsidy would be attributed to products

exported by a firm. Under paragraph

(b)(4), the subsidy would be attributed

to products sold by a firm to Country X.

Under paragraph (b)(5), the subsidy

would be attributed to widgets sold by

a firm. Putting the three rules together,

the subsidy in this example would be

attributed to a firm’s exports of widgets

to Country X.

The rules set forth in paragraphs (b)(5)

and (b)(6) warrant additional

explanation because of the special

nomenclature that is being used. In all

other sections of these regulations, the

term ‘‘firm’’ is used to describe the

recipient of the subsidy. See § 351.102.

However, for purposes of certain

attribution rules, where we are

describing how subsidies will be

attributed within firms, ‘‘firm’’ is too

broad. Therefore, for purposes of

paragraphs (b)(5) and (b)(6), we are

using the term ‘‘corporation.’’ In so

doing, we are not intending to limit the

application of these rules to firms that

are organized as corporations. However,

based on our experience, most of the

firms we investigate are organized as

corporations. Therefore, our use of the

term ‘‘corporation’’ makes these

attribution rules as clear as possible. If

a respondent is not organized as a

corporation, we will address any

attribution issues covered by the rules

in paragraphs (b)(5) and (b)(6) based on

the facts of that case.

Paragraph (b)(5) sets out our rules

regarding product tying. Paragraph

(b)(5)(i) states our longstanding general

rule that where a subsidy is tied to

production of a particular product, the

subsidy will be attributed to that

product. Paragraph (b)(5)(ii) provides an

exception to this general rule, which is

also consistent with our past practice.

Under this exception, if an input

product is produced within the same

corporation, subsidies tied to the input

product will be attributed to sales of

both the input and the downstream

products. It is important to note that the

Department intends to limit this

exception to situations where

production of the input and

downstream product occur within the

same corporation. If they are produced

by companies that are separately

incorporated—even if there is ‘‘cross

ownership’’ between those separately

incorporated companies (as discussed

further below)—the Department will

follow the general tying rule in

paragraph (b)(5)(i). Consequently,

petitioners alleging that subsidies to a

separately incorporated input producer

also benefit the downstream product

should file their allegation in

accordance with § 351.523(a) (upstream

subsidies).

Paragraph (b)(6) deals with situations

where cross ownership exists between

corporations. For example, cross

ownership exists where corporation A

owns corporation B (or vice versa), or

where A and B are both owned by

corporation C. Cross ownership does not

require one corporation to own 100

percent of the other corporation.

Normally, cross ownership will exist

where there is a controlling ownership

interest (i.e., majority voting ownership)

between two corporations or through

common ownership of two (or more)

corporations. In certain circumstances, a

large minority voting interest (for

example, 40 percent) may also result in

cross ownership. Specifically, if the

remaining shares are widely held, then

a large minority voting interest interest

would be sufficient to find cross

ownership. (Situations where cross

ownership exists by virtue of common

government ownership are addressed

further below.)

The term ‘‘cross ownership’’ as it is

used here clearly differs from

‘‘affiliation,’’ as that term is defined in

section 771(33) of the Act. ‘‘Affiliation’’

describes a wide range of business

relationships, while cross ownership

describes a much narrower range of

relationships. In limiting our attribution

rules to situations where there is cross

ownership, we are not reading

‘‘affiliated’’ out of the CVD law. Indeed,

we intend to include in our

questionnaires a request for respondents

to identify all affiliated parties. Also,

persons affiliated with companies that

shipped during the period of

investigation will not be entitled to

request a new shipper review under

section 751(a)(2)(B) of the Act. However,

we do not believe that affiliation alone

provides a sufficient basis for attributing

subsidies received by one corporation to

products produced and sold by another

affiliated corporation. Instead, we have

chosen to focus on cross ownership, as

described above, because where cross

ownership exists one corporation can

use or direct the individual assets of the

other corporation in essentially the

same ways it can use its own assets.

Where the interests of the two parties

have merged to this degree, we believe

it is reasonable to presume that

subsidies to one corporation may also

benefit another corporation. Paragraph

(b)(6) reflects this. However, where

cross ownership does not exist, we will

not make this presumption. Nor do we

intend to investigate subsidies to

affiliated parties unless cross ownership

exists or other information indicates

that such subsidies may indeed benefit

the merchandise being produced by the

corporation being investigated.

Paragraph (b)(6) begins by stating a

general rule, which is followed by three

exceptions to that rule deriving from the

presumption described above.

Paragraph (b)(6)(i) states that the

Secretary will normally attribute a

subsidy received by a corporation to the

products produced by that corporation.

Hence, for example, if corporation A

receives a subsidy, then that subsidy

will normally be attributed to the

production of corporation A.

However, under paragraph (b)(6)(ii), if

two (or more) corporations with cross

ownership produce the same

merchandise, then subsidies received by

either or both of those corporations will

be attributed to the combined sales of

the two corporations. Thus, for example,

if corporation A and corporation B are

both owned by corporation C and both

A and B produce widgets, benefits to A

and B will be combined to determine

the subsidy and the subsidy will be

attributed to the combined production

of A and B.

Paragraph (b)(6)(iii) addresses a

second instance where subsidies

received by one corporation are

attributed to sales of another

corporation with cross ownership. This

is where the subsidy is received by a

holding company. Under paragraph

(b)(6)(iii), such subsidies will normally

be attributed to the consolidated sales of

the holding company. However, if the

Department determines that the holding

company is merely serving as a conduit

for government-provided funds to one

(or more) of the holding company’s

subsidiaries, then the subsidy will be

attributed to the production of that

subsidiary. Analogous to this situation

is the situation where a government

provides a subsidy to a non-producing

subsidiary (e.g., a financial subsidiary)

and there are no conditions on how the

money is to be used. Consistent with

our treatment of subsidies to holding

companies, we would attribute a

subsidy to a non-producing subsidiary

to the consolidated sales of the

corporate group that includes the nonproducing subsidiary. See Certain Steel

from Belgium, 58 FR 37273, 37282

(1993).

Finally, paragraph (b)(6)(iv) addresses

situations where a corporation

producing another product receives

subsidies. In this instance, the

Department will determine whether the

corporation receiving the subsidy

transfers it to the corporation producing

the subject merchandise. For example,

subsidies may be transferred between

corporations with cross ownership

through loans or other financial
8846 Federal Register / Vol. 62, No. 38 / Wednesday, February 26, 1997 / Proposed Rules

transactions. However, as discussed

above, where the subsidies are allegedly

transferred through the purchase of

inputs from an input supplier with cross

ownership, that situation will be

addressed under § 351.523 (upstream

subsidies).

Although cross ownership is broadly

defined, permitting us to include

corporations under common

government ownership, we expect that

common government ownership will

not normally be viewed as cross

ownership. Instead, we intend to

continue our longstanding practice of

treating most government-owned

corporations as the government itself,

and not as corporations that transfer

subsidies received from the government

to other government-owned

corporations through loans or other

financial transactions. For example,

where a government-owned corporation

producing the product under

investigation purchases electricity from

a government-owned utility, a subsidy

is conferred if the utility does not

receive adequate remuneration. Nothing

in paragraph (b)(6)(iv) is meant to

require the Department to determine

that the government-owned utility is

receiving subsidies which it then

transfers to the producer of the product

under investigation. The situations

where we would normally expect to

treat common government ownership as

cross ownership are: (1) Upstream

subsidy allegations (see

§ 351.523(a)(1)(ii)(A)); (2) governmentowned corporations producing the same

product (see § 351.524(b)(6)(ii)); and (3)

government-owned corporations

producing different products (see

§ 351.524(b)(6)(iv)) where the

corporations are under the control of the

same ministry or within a corporate

group containing producers of similar

products.

Although the rules described in

paragraphs (b)(2)–(b)(7) of § 351.524

deal with tying, § 351.524 does not

contain a definition of ‘‘tied.’’ In the

past, the Department has described this

concept in a variety of ways. For

example, in Appendix 2 to Certain Steel

Products from Belgium, 47 FR 39304,

39317 (1982), the Department stated that

‘‘a grant is ‘tied’ when the intended use

is known to the subsidy giver and so

acknowledged prior to or concurrent

with the bestowal of the subsidy.’’ In the

preamble to the 1989 Proposed

Regulations, 54 FR at 23374, the

Department stated that a ‘‘tied’’ subsidy

benefit is ‘‘e.g., a benefit bestowed

specifically to promote the production

of a particular product.’’

Given the wide variety of factual

scenarios that the Department has

encountered in the past, and is likely to

encounter in the future, we are reluctant

to promulgate an all-encompassing

definition of ‘‘tied.’’ Moreover, the

absence of a definition of ‘‘tied’’ has not

proven to be a problem in practice, and

Annex IV to the SCM Agreement, which

refers to ‘‘tied’’ subsidies in paragraph 3,

also lacks a definition of this term.

Therefore, for the present time, we

intend to apply the term ‘‘tied’’ on a

case-by-case basis. We would, however,

welcome comments regarding what

factors are relevant to the Department’s

determination of whether benefits are

tied.

Virtually every comment submitted

on attribution-related issues included a

reference to the fungibility of money.

Certain commenters argued that because

money is fungible, the Department

should not allow subsidies to be tied to

particular products or to particular

export markets. In their view, the only

distinction that should be made is

between export and domestic subsidies.

Other commenters invoked the

fungibility principle in support of their

position that untied capital infusions to

companies with multinational

production should be attributed to

worldwide sales of the firm.

While we agree with these

commenters that money is fungible, we

do not believe that the fungibility

principle is useful for purposes of

attributing subsidies. For example,

according to the fungibility principle,

there should be no distinction between

export and domestic subsidies. Yet, this

agency’s consistent and noncontroversial practice over the past 16

years has been to attribute export

subsidies to exported products and

domestic subsidies to all products sold.

Over time, we also have adopted the

practices of attributing: (1) Subsidies

that can be tied to particular markets to

products sold to those markets; (2)

subsidies that can be tied to particular

products to those products; (3) subsidies

to companies with multinational

production to production occurring in

the jurisdiction of the subsidizing

government; and (4) subsidies to

corporate entities to the specific entities

that receive the subsidies, absent a

showing that the subsidies are

transferred elsewhere within the

corporate family. While we have

characterized these as exceptions to the

principle of the fungibility of money,

the exceptions have become more

prevalent than the rule insofar as

attribution of subsidies is concerned.

Therefore, while we do not reject

fungibility, we do not believe that it

should guide our attribution decisions.

This having been said, we would note

that the rules we have proposed are

entirely consistent with the court ruling

most often cited in connection with the

fungibility principle, British Steel Corp.

v. U.S., 605 F. Supp. 286, 293–96 (Ct.

Int’l Trade 1985) (‘‘British Steel’’). In

British Steel, the issue being addressed

by the court was whether funds

provided by the government to cover

redundancy and closure costs of British

Steel Corporation conferred a benefit on

the company’s ongoing production:

In plaintiffs’ view, funds provided to shut

down excess capacity and eliminate

unnecessary jobs are for purposes that are the

very antithesis of ‘‘manufacture, production

or export,’’ and thus are not countervailable

under any circumstances.

Id. Commerce had taken a position

contrary to this view, stating that the

government’s payments made ‘‘the

recipient more efficient and relieve[d] it

of significant financial burdens.’’

Presented with the same facts and

arguments today, we would take the

same position. The fact that the funds

were given for the purpose of closing

down facilities would not render the

funds non-countervailable. This is

because the costs that are affected when

the government provides funds to close

down facilities are the input costs of the

ongoing operation, the operation that

would bear those costs in the absence of

the government payments. Hence,

consistent with the attribution

principles described above, those

subsidies would properly be attributed

to the ongoing production and sales of

the recipient and not to the activities

that had been closed down.

The court also addressed the

Department’s practice of attributing the

benefit of untied subsidies (i.e., the

same redundancy and closure

payments) to all merchandise produced

by the recipient. Plaintiffs had

characterized this practice as being

based on the fungibility principle, and

argued that application of the fungibility

principle did not yield an accurate

measure of the subsidy conferred on the

subject merchandise. The court upheld

Commerce’s practice that untied

subsidies benefit all products on a pro

rata basis. This same practice is

reflected in § 351.524(b)(3) of these

regulations.

Therefore, we see the attribution rules

we have proposed as being consistent

with past practice, even where

fungibility has been at issue. Moreover,

we believe that these rules provide the

best measure of the level of

countervailable subsidies being

conferred on the subject merchandise,

because they match the subsidy with the
Federal Register / Vol. 62, No. 38 / Wednesday, February 26, 1997 / Proposed Rules 8847

activity or cost center experiencing the

cost saving (or revenue increase).

Regarding the attribution of capital

infusions received by companies with

multinational production, certain

commenters urged the Department to

return to its pre-1993 policy of treating

such subsidies as benefitting all of the

recipient’s sales. Other commenters

sought codification of the 1993 policy,

which established a rebuttable

presumption that domestic subsidies are

tied to domestic production.

Section 351.524(b)(7) reflects our

continued position, based upon our past

administrative experience, that

* * * the government of a country

normally provides subsidies for the general

purpose of promoting the economic and

social health of that country and its people,

and for the specific purposes of supporting,

assisting or encouraging domestic

manufacturing or production and related

activities (including, for example, social

policy activities such as the employment of

its people).

GIA at 37231. Moreover, a government

normally will not provide subsidies to

firms that refuse to use them as the

government wants, and firms receiving

subsidies will not use them in a way

that would contravene the government’s

purposes, as they otherwise risk losing

future subsidies. Consistent with this,

§ 351.524(b)(7) states that we normally

will attribute subsidies to merchandise

produced within the jurisdiction of the

granting authority. However, where a

respondent can demonstrate that the

subsidy is tied to foreign production,

the subsidy will be attributed to

merchandise produced by the foreign

facility.

Although the proposed rule is similar

to the practice the Department adopted

in 1993, there are some differences.

First, the rule is not stated as a

rebuttable presumption. Instead of

showing that subsidies are not tied to

domestic production, respondents will

instead have to demonstrate that the

subsidies are tied to foreign production.

We believe that this shift in emphasis

will bring our practice with respect to

multinational companies more in line

with the other attribution rules that

require evidence of tying, as opposed to

evidence that a subsidy is not tied.

Second, where a respondent can

demonstrate that a subsidy is tied to

foreign-produced merchandise, the

subsidy will not be countervailable. See

§ 351.526 (transnational subsidies). This

result is similar to the result under the

practice adopted in 1993; i.e., subsidies

that were found not tied to domestic

production were attributed to

worldwide sales. By using worldwide

sales, the CVD rate was reduced just as

it will be reduced when subsidies are

tied to foreign production and foreign

production is not included in the

denominator used to calculate the ad

valorem CVD rate.

Finally, we note that nothing in

paragraph (b)(7) is intended to imply

that the Department is considering

calculating regional subsidy rates; i.e.,

different CVD rates for imports

originating in different subnational

jurisdictions.

Section 351.525

Section 351.525 deals with programwide changes, and is almost identical to

§ 355.50 of the 1989 Proposed

Regulations.

Section 351.526

Section 351.526 is based on

§ 355.44(o) of the 1989 Proposed

Regulations, and provides that so-called

‘‘transnational subsidies’’ are not

countervailable. Subsidies of this type

include situations where (1) The

government of one country provides

foreign aid that ultimately is received by

a firm located in the donee country, or

(2) funds are provided by an

international lending or development

institution, such as the World Bank.

Section 355.44(o) contained a

paragraph (o)(2) which essentially

duplicated what is now section 701(d)

of the Act, a provision that deals with

subsidies to international consortia. In

light of our decision to avoid regulations

that merely repeat the statute, § 351.526

merely references, but does not repeat,

section 701(d).

Section 351.527

Section 351.527 is based on

§ 355.46(b) of the 1989 Proposed

Regulations, and provides that the

Secretary will ignore the secondary tax

consequences of a subsidy. For example,

the Secretary would not reduce the

benefit of a countervailable grant

because the grant is treated as revenue

for income tax purposes.

Classification

E.O. 12866

This proposed rule has been

determined to be significant under E.O.

12866.

Regulatory Flexibility Act

The Assistant General Counsel for

Legislation and Regulation of the

Department of Commerce certified to

the Chief Counsel for Advocacy of the

Small Business Administration that this

proposed rule, if promulgated as final,

would not have a significant economic

impact on a substantial number of small

entities. The Department does not

believe that there will be any

substantive effect on the outcome of AD

and CVD proceedings as a result of the

streamlining and simplification of their

administration. With respect to the

substantive amendments implementing

the Uruguay Round Agreements Act, the

Department believes that these

regulations benefit both petitioners and

respondents without favoring either,

and, therefore, would not have a

significant economic effects. As such, an

initial regulatory flexibility analysis was

not prepared.

Paperwork Reduction Act

Notwithstanding any other provision

of law, no person is required to respond

to nor shall a person be subject to a

penalty for failure to comply with a

collection of information subject to the

requirements of the Paperwork

Reduction Act unless that collection of

information displays a currently valid

OMB Control Number. This proposed

rule does not contain any new reporting

or recording requirements subject to the

Paperwork Reduction Act.

There are three separate collections of

information contained in this rule. Each

is currently approved by the Office of

Management and Budget. The Petition

Format for Requesting Relief Under U.S.

Antidumping Laws, OMB Control No.

0625–0105, is estimated to impose an

average public reporting burden of 40

hours. The information submitted is

used to assess the petitioner’s

allegations of unfair trade practices and

to determine whether an investigation is

warranted. The information requested

relates to the existence of sales at less

than fair value and injury to the affected

U.S. industry. Second, the Format for

Petition Requesting Relief Under the

Countervailing Duty Law is approved

under OMB Control No. 0625–0148.

This format is used to elicit the

information required by the Tariff Act of

1930, as amended, and its implementing

regulations, for the initiation of a

countervailing duty investigation.

Specifically, the Format requests

information about the imported product,

a description of the alleged subsidies to

the imported product, and the extent to

which the domestic industry is being

injured by the imported product.

Finally, OMB Control No. 0625–0200,

Antidumping and Countervailing

Duties, Procedures for Initiation of

Downstream Product Monitoring,

provides for the filing of a petition

requesting the review of a

‘‘downstream’’ product. A downstream

product is one that has incorporated as

a component part, a part that is covered

by a U.S. antidumping or countervailing

duty finding. To be eligible to file a
8848 Federal Register / Vol. 62, No. 38 / Wednesday, February 26, 1997 / Proposed Rules

petition, the petitioner must produce a

product like the component part or the

downstream product. It is estimated to

require 15 hours per petition.

These estimates include the time for

reviewing instructions, searching

existing data sources, gathering and

maintaining the data needed, and

completing and reviewing the

collections of information. Send

comments regarding these burden

estimates or any other aspect of these

collections of information, including

suggestions for reducing the burden, to

the Department of Commerce (see

ADDRESSES) or to OMB Desk Officer,

New Executive Office Building,

Washington, DC. 20503.

E.O. 12612

This proposed rule does not contain

federalism implications warranting the

preparation of a Federalism Assessment.

List of Subjects in 19 CFR Part 351

Administrative practice and

procedure, Antidumping, Business and

industry, Cheese, Confidential business

information, Countervailing duties,

Investigations, Reporting and

recordkeeping requirements.

Dated: February 18, 1997.

Robert S. LaRussa

Acting Assistant Secretary for Import

Administration.

For the reasons stated, it is proposed

that the proposed rule published at 61

FR 7308 on February 27, 1996, adding

a new 19 CFR part 351, is further

amended as follows:

PART 351—COUNTERVAILING AND

ANTIDUMPING DUTIES

1. The authority citation for part 351

is proposed to continue to read as

follows:

Authority: 5 U.S.C. 301; 19 U.S.C. 1202

note, 1303 note, 1671 et. seq., and 3538.

§ 351.102 [Amended]

2. Section 351.102 (Definitions) is

amended by adding the following

definitions in alphabetical order to read

as follows:

* * * * *

Consumed in the production process.

Inputs ‘‘consumed in the production

process’’ are inputs physically

incorporated, energy, fuels and oil used

in the production process and catalysts

which are consumed in the course of

their use to obtain the product.

Cumulative indirect tax. ‘‘Cumulative

indirect tax’’ means a multi-staged tax

levied where there is no mechanism for

subsequent crediting of the tax if the

goods or services subject to tax at one

stage of production are used in a

succeeding stage of production.

* * * * *

Direct tax. ‘‘Direct tax’’ means a tax on

wages, profits, interests, rents, royalties,

and all other forms of income, a tax on

the ownership of real property, or a

social welfare charge.

* * * * *

Export insurance. ‘‘Export insurance’’

includes, but is not limited to, insurance

against increases in the cost of exported

products, nonpayment by the customer,

inflation, or exchange rate risks.

Firm. For purposes of subpart E

(Identification and Measurement of

Countervailable Subsidies), ‘‘firm’’

means any individual, partnership,

corporation, association, organization,

or other entity, and is used to refer to

the recipient of an alleged

countervailable subsidy.

Government-provided. ‘‘Governmentprovided’’ is used as a shorthand

expression to refer to an act or practice

that is alleged to be a countervailable

subsidy. The use of the term

‘‘government-provided’’ is not intended

to preclude the possibility that a

government may provide a

countervailable subsidy indirectly in a

manner described in section

771(5)(B)(iii) of the Act (indirect

financial contribution).

Import charge. ‘‘Import charge’’

means a tariff, duty, or other fiscal

charge that is levied on imports, other

than an indirect tax.

* * * * *

Indirect tax. ‘‘Indirect tax’’ means a

sales, excise, turnover, value added,

franchise, stamp, transfer, inventory, or

equipment tax, a border tax, or any

other tax other than a direct tax or an

import charge.

Loan. ‘‘Loan’’ means a loan or other

form of debt financing, such as a bond.

Long-term loan. ‘‘Long-term loan’’

means a loan, the terms of repayment

for which are greater than one year.

* * * * *

Prior-stage indirect tax. ‘‘Prior-stage

indirect tax’’ means an indirect tax

levied on goods or services used directly

or indirectly in making a product.

* * * * *

Short-term loan. ‘‘Short-term loan’’

means a loan, the terms of repayment

for which are one year or less.

3. A new subpart E is added to 19 CFR

part 351, to read as follows:

Subpart E—Identification and

Measurement of Countervailable

Subsidies

Sec.

351.501 Scope.

351.502 Specificity of domestic subsidies.

351.503 Grants.

351.504 Loans.

351.505 Loan guarantees.

351.506 Equity.

351.507 Debt forgiveness.

351.508 Direct taxes.

351.509 Indirect taxes and import charges

(other than export programs).

351.510 Provision of goods or services.

351.511 Purchase of goods. [Reserved]

351.512 Worker-related subsidies.

351.513 Export subsidies.

351.514 Internal transport and freight

charges for export shipments

351.515 Price preferences for inputs used in

the production of goods for export.

351.516 Remission upon export of indirect

taxes.

351.517 Exemption, remission or deferral

upon export of prior-stage cumulative

indirect taxes.

351.518 Remission or drawback of import

charges upon export.

351.519 Export insurance.

351.520 General export promotion.

351.521 Import substitution subsidies.

[Reserved]

351.522 Certain agricultural subsidies.

351.523 Upstream subsidies.

351.524 Calculation of ad valorem subsidy

rate and attribution of subsidy to a

product.

351.525 Program-wide changes.

351.526 Transnational subsidies.

351.527 Tax consequences of benefits.

Subpart E—Identification and

Measurement of Countervailable

Subsidies

§ 351.501 Scope.

The provisions of this subpart E set

forth rules regarding the identification

and measurement of countervailable

subsidies. Where this subpart E does not

expressly deal with a particular type of

alleged subsidy, the Secretary will

identify and measure the subsidy, if

any, in accordance with the underlying

principles of the Act and this subpart E.

§ 351.502 Specificity of domestic

subsidies.

(a) Agricultural subsidies. The

Secretary will not regard a subsidy as

being specific under section 771(5A)(D)

of the Act solely because the subsidy is

limited to the agricultural sector

(domestic subsidy).

(b) Subsidies to small- and mediumsized businesses. The Secretary will not

regard a subsidy as being specific under

section 771(5A)(D) of the Act solely

because the subsidy is limited to small

firms or small- and medium-sized firms.

(c) Disaster relief. The Secretary will

not regard disaster relief as being

specific under section 771(5A)(D) of the

Act if such relief constitutes general

assistance available to anyone in the

area affected by the disaster.
Federal Register / Vol. 62, No. 38 / Wednesday, February 26, 1997 / Proposed Rules 8849

§ 351.503 Grants.

(a) Benefit. In the case of a grant, a

benefit exists in the amount of the grant.

(b) Time of receipt of benefit. In the

case of a grant, the Secretary will

consider a benefit as having been

received as of the date on which the

firm received the grant.

(c) Allocation of benefit to a

particular time period.—(1) Recurring

grants. The Secretary will allocate

(expense) a recurring grant to the year

in which the subsidy is received (see

paragraph (b) of this section).

(2) Non-recurring grants.—(i) In

general. The Secretary will allocate a

non-recurring grant over the number of

years corresponding to a firm’s AUL (see

paragraph (c)(4) of this section).

(ii) Exception. The Secretary will

normally allocate (expense) nonrecurring grants received under a

particular subsidy program to the year

in which the subsidies are received if

the total amount of such grants is less

than 0.50 percent of all sales of the firm

in question during the same year, or, in

the case of an export subsidy program,

0.50 percent of the export sales of the

firm in question during the same year.

(3) ‘‘Recurring’’ versus ‘‘nonrecurring.’’ The Secretary will consider

a grant as ‘‘non-recurring’’ if the grant is

exceptional in the sense that the

recipient of the grant cannot expect to

receive additional grants under the same

subsidy program on an ongoing basis

from year to year; or the government

must approve the provision of the grant

each year. If a grant does not satisfy the

standard for a non-recurring grant under

the preceding sentence, the Secretary

will consider the grant as ‘‘recurring.’

(4) Process for allocating nonrecurring grants over time.—(i) In

general. For purposes of allocating a

non-recurring grant over time and

determining the annual subsidy amount

that should be assigned to a particular

year, the Secretary will use the

following formula:

A y n y y n k d

d k = + − −+

/ [ ( / )( )] 1

1

Where

Ak=the amount of the benefit allocated

to year k,

y=the face value of the grant (see

paragraph (a) of this section,

n=the AUL (see paragraph (c)(4)(ii) of

this section),

d=the discount rate (see paragraph

(c)(4)(iii) of this section, and

k=the year of allocation, where the year

of receipt=1 and 1 < k < n.

(ii) AUL. The term ‘‘AUL’’ means the

average useful life of a firm’s productive

assets. Normally, the Secretary will

calculate a firm’s AUL by dividing the

average gross book value of the firm’s

depreciable productive fixed assets (for

a period considered appropriate by the

Secretary) by the firm’s average annual

charge to accumulated depreciation. In

calculating a firm’s AUL, the Secretary

will attempt to exclude fixed assets that

are not depreciable (e.g., land or

construction in progress) and assets that

have been fully depreciated and are no

longer in service. In addition, the

Secretary may make a normalizing

adjustment to account for such factors

as an extraordinary write-down in the

value of fixed assets or hyperinflation.

(iii) Selection of a discount rate.—(A)

In general. The Secretary will select a

discount rate based upon data for the

year in which the government and the

firm agreed on the terms for receiving

the grant. The Secretary will use as a

discount rate the following, in order of

preference:

(1) The cost of long-term, fixed-rate

loans of the firm in question, excluding

any loans that the Secretary has

determined to be countervailable

subsidies;

(2) The average cost of long-term,

fixed-rate loans in the country in

question; or

(3) A rate that the Secretary considers

to be most appropriate.

(B) Exception for uncreditworthy

firms. In the case of a firm considered

by the Secretary to be uncreditworthy

(see § 351.504(a)(4)), the Secretary will

use as a discount rate the interest rate

described in § 351.504(a)(3)(iii).

§ 351.504 Loans.

(a) Benefit.—(1) In general. In the case

of a loan, a benefit exists to the extent

that the amount a firm pays on the

government-provided loan is less than

the amount the firm would pay on a

comparable commercial loan(s) that the

firm could actually obtain on the

market. See section 771(5)(E)(ii) of the

Act. In making the comparison called

for in the preceding sentence, the

Secretary normally will rely on effective

interest rates.

(2) ‘‘Comparable commercial loan’’

defined.—(i) ‘‘Comparable’’ defined. In

selecting a loan that is ‘‘comparable’’ to

the government-provided loan, the

Secretary normally will place primary

emphasis on similarities in the

structures of the loans (e.g., fixed

interest rate v. variable interest rate), the

maturities of the loans (e.g., short-term

v. long-term), and the currencies in

which the loans are denominated.

(ii) ‘‘Commercial’’ defined. In

selecting a ‘‘commercial’’ loan, the

Secretary normally will use a loan taken

out by the firm from a commercial

lending institution or a debt instrument

issued by the firm in a commercial

market. Also, the Secretary will treat a

loan from a government-owned bank as

a commercial loan, unless there is

evidence that the loan from a

government-owned bank is provided at

the direction of the government or with

funds provided by the government.

However, the Secretary normally will

not consider a loan provided under a

government program to be a commercial

loan for purposes of selecting a loan to

compare to a government-provided loan.

(iii) Long-term loans. In selecting a

comparable loan, if the governmentprovided loan is a long-term loan, the

Secretary normally will use a loan the

terms of which were established during,

or immediately before, the year in

which the terms of the governmentprovided loan were established.

(iv) Short-term loans. In making the

comparison required under paragraph

(a)(1) of this section, if the governmentprovided loan is a short-term loan, the

Secretary normally will use an annual

average of the interest rates on

comparable commercial loans during

the period of investigation or review.

However, if the Secretary finds that

interest rates fluctuated significantly

during the period of investigation or

review, the Secretary will use the most

appropriate interest rate based on the

circumstances presented.

(3) ‘‘Could Actually Obtain on the

Market’’ defined.—(i) In general. In

selecting a comparable commercial loan

that the recipient ‘‘could otherwise

obtain on the market,’’ the Secretary

normally will rely on the actual

experience of the firm in question in

obtaining comparable commercial loans.

(ii) Where the firm has no comparable

commercial loans. If the firm did not

take out any comparable commercial

loans during the period referred to in

paragraph (a)(2)(iii) or (a)(2)(iv) of this

section, the Secretary may use a

national average interest rate for

comparable commercial loans.

(iii) Exception for uncreditworthy

companies. If the Secretary finds that a

firm that received a governmentprovided long-term loan was

uncreditworthy, as defined in paragraph

(a)(4) of this section, the Secretary will

calculate the interest rate to be used in

making the comparison called for by

paragraph (a)(1) of this section

according to the following formula:

ib=[(1+if)/0.957]–1

Where

ib=the benchmark interest rate for

uncreditworthy companies;

if=the long-term interest rate that would

be paid by creditworthy companies.
8850 Federal Register / Vol. 62, No. 38 / Wednesday, February 26, 1997 / Proposed Rules

(4) Uncreditworthiness defined.—(i)

In general. The Secretary will consider

a firm to be uncreditworthy if the

Secretary determines that, based on

information available at the time of the

government-provided loan, the firm

could not have obtained long-term loans

from conventional commercial sources.

The Secretary will determine

uncreditworthiness on a case-by-case

basis, and may examine, among other

factors, the following:

(A) The receipt by the firm of

comparable commercial long-term

loans;

(B) The present and past financial

health of the firm, as reflected in various

financial indicators calculated from the

firm’s financial statements and

accounts;

(C) The firm’s recent past and present

ability to meet its costs and fixed

financial obligations with its cash flow;

and

(D) Evidence of the firm’s future

financial position, such as market

studies, country and industry economic

forecasts, and project and loan

appraisals prepared prior to the

agreement between the lender and the

firm on the terms of the loan.

(ii) Significance of long-term

commercial loans. In the case of firms

not owned by the government, the

receipt by the firm of long-term

commercial loans, unaccompanied by a

government-provided guarantee, will

constitute dispositive evidence that the

firm is not uncreditworthy.

(iii) Significance of prior subsidies. In

determining whether a firm is

uncreditworthy, the Secretary will

ignore current and prior subsidies

received by the firm.

(iv) Discount Rate. When the

creditworthiness of a firm is being

considered in connection with the

allocation of non-recurring grants (or

benefits treated as non-recurring grants

(e.g., equity)), the Secretary will rely on

information available in the year in

which the government agrees to provide

the grant.

(5) Long-term variable rate loans.—(i)

In general. In the case of a long-term

variable rate loan, the Secretary

normally will make the comparison

called for by paragraph (a)(1) of this

section by relying on a comparable

commercial loan with a variable interest

rate. The Secretary then will compare

the variable interest rates on the

comparable commercial loan and the

government-provided loan for the year

in which the terms of the governmentprovided loan were established. If the

comparison shows that the interest rate

on the government-provided loan was

equal to or higher than the interest rate

on the comparable commercial loan, the

Secretary will not consider the

government-provided loan as having

conferred a benefit. If the comparison

shows that the interest rate on the

government-provided loan was lower,

the Secretary will consider the

government-provided loan as having

conferred a benefit, and, if the other

criteria for a countervailable subsidy are

satisfied, will calculate the amount of

the benefit in accordance with

paragraph (c)(4) of this section.

(ii) Exception. If the Secretary is

unable to make the comparison

described in paragraph (a)(5)(i) of this

section, the Secretary may modify the

method described in that paragraph.

(6) Allegations.—(i) Allegation of

uncreditworthiness required. Normally,

the Secretary will not consider the

uncreditworthiness of a firm absent a

specific allegation by the petitioner that

is supported by information establishing

a reasonable basis to believe or suspect

that the firm is uncreditworthy.

(ii) Government-owned banks. The

Secretary will not investigate a loan

provided by a government-owned

commercial bank absent a specific

allegation that is supported by

information establishing a reasonable

basis to believe or suspect that:

(A) The government-owned bank

provided the loan at the direction of the

government or with funds provided by

the government; and

(B) A benefit exists within the

meaning of paragraph (a)(1) of this

section.

(b) Time of receipt of benefit. In the

case of loans described in paragraphs

(c)(1), (c)(2), and (c)(4) of this section,

the Secretary normally will consider a

benefit as having been received as of the

date on which the firm is due to make

a payment on the government-provided

loan. In the case of a loan described in

paragraph (c)(3) of this section, the

Secretary normally will consider the

benefit as having been received in the

year in which the firm receives the

proceeds of the loan.

(c) Allocation of benefit to a

particular time period.—(1) Short-term

loans. The Secretary will allocate

(expense) the benefit from a short-term

loan to the year(s) in which the firm is

due to make interest payments on the

loan.

(2) Long-term fixed-rate loans with

concessionary interest rates. Except as

provided in paragraph (c)(3) of this

section, the Secretary normally will

calculate the subsidy amount to be

assigned to a particular year by

calculating the difference in interest

payments for that year; i.e., the

difference between the interest paid by

the firm in that year on the governmentprovided loan and the interest the firm

would have paid on the comparison

loan. However, in no event may the

present value (in the year of receipt of

the loan) of the amounts calculated

under the preceding sentence exceed

the principal of the loan.

(3) Long-term fixed-rate loans with

different repayment schedules.—(i)

Calculation of present value of benefit.

Where the government-provided loan

and the loan to which it is compared

under paragraph (a) of this section are

both long-term, fixed-interest rate loans,

but have different grace periods or

maturities, or where the shapes of the

repayment schedules differ, the

Secretary will determine the total

benefit by calculating the present value,

in the year in which the loan was

received, of the difference between the

amount that the firm is to pay on the

government-provided loan and the

amount that the firm would have paid

on the comparison loan. In no event

may the total benefit calculated under

the preceding sentence exceed the

principal of the loan.

(ii) Calculation of annual benefit.

With respect to the benefit calculated

under paragraph (c)(3)(i) of this section,

the Secretary will determine the portion

of that benefit to be assigned to a

particular year by using the formula set

forth in § 351.503(c)(4)(i) (grants) and

the following parameters:

Ak=the amount countervailed in year k,

y=the present value of the benefit (see

paragraph (c)(3)(i) of this section),

n=the number of years in the life of the

loan,

d=the interest rate on the comparison

loan selected under paragraph (a) of

this section, and

k=the year of allocation, where the year

of receipt=1.

(4) Long-term variable interest rate

loans. In the case of a governmentprovided long-term variable-rate loan,

the Secretary normally will determine

the amount of the benefit attributable to

a particular year by calculating the

difference in payments for that year; i.e.,

the difference between the amount paid

by the firm in that year on the

government-provided loan and the

amount the firm would have paid on the

comparison loan. However, in no event

may the present value (in the year of

receipt of the loan) of the amounts

calculated under the preceding sentence

exceed the principal of the loan.

(d) Contingent liability interest-free

loans. In the case of a long-term,

interest-free loan, the obligation for

repayment of which is contingent upon

subsequent events, the Secretary
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normally will treat any balance on the

loan outstanding during a year as an

interest-free, short-term loan in

accordance with paragraphs (a)(4), (b),

and (c)(1) of this section.

§ 351.505 Loan guarantees.

(a) Benefit.—(1) In general. In the case

of a loan guarantee, a benefit exists to

the extent that the amount a firm pays

on the loan with the governmentprovided guarantee is less than the

amount the firm would pay on a

comparable commercial loan absent the

government-provided guarantee, after

adjusting for any difference in guarantee

fees. See section 771(5)(E)(iii) of the Act.

The Secretary will select a comparable

commercial loan in accordance with

§ 351.504(a) (loans).

(2) Government acting as owner. In

situations where a government, acting as

the owner of a firm, provides a loan

guarantee to that firm, the guarantee

does not confer a benefit if the Secretary

finds that it is a normal commercial

practice in the country in question for

shareholders to provide guarantees to

their firms under similar circumstances

and on comparable terms.

(b) Time of receipt of benefit. In the

case of a loan guarantee, the Secretary

normally will consider a benefit as

having been received as of the date on

which the firm is due to make a

payment on the loan subject to the

government-provided loan guarantee.

(c) Allocation of benefit to a

particular time period. In allocating the

benefit from a government-provided

loan guarantee to a particular time

period, the Secretary will use the

methods set forth in § 351.504(c)

regarding loans.

§ 351.506 Equity.

(a) Benefit.—(1) In general. In the case

of a government-provided equity

infusion, a benefit exists to the extent

that the investment decision is

inconsistent with the usual investment

practice of private investors, including

the practice regarding the provision of

risk capital, in the country in which the

equity infusion is made. See section

771(5)(E)(i) of the Act. In determining

whether an investment decision is

inconsistent with usual investment

practice, the Secretary normally will

compare the price paid by the

government for the equity it purchased

to the price that a private investor in the

country would pay for the same (or

similar) form of equity.

(2) Private investor prices available.

(i) In general. The Secretary will

consider an equity infusion as being

inconsistent with usual investment

practice (see paragraph (a)(1) of this

section) if the price paid by the

government for newly-issued equity is

greater than, in order of preference:

(A) The price paid by private

investors for the same (or similar) form

of newly-issued equity; or

(B) The publicly-traded market price

for previously issued equity of the same

(or similar) form as the newly-issued

equity.

(ii) Timing of private investor prices.

In selecting a private investor price

under paragraph (a)(2)(i) of this section,

the Secretary will rely on sales of equity

made at such time as, in the Secretary’s

judgment, permits a reasonable

comparison to the newly-issued equity

purchased by the government.

(iii) Significant private sector

participation required. The Secretary

will not use private investor prices

under paragraph (a)(2)(i) of this section

if the Secretary concludes that private

investor purchases of newly-issued

equity, or private investor trading in

previously issued equity, is not

significant.

(iv) Adjustments for ‘‘similar’’ form of

equity. Where the Secretary uses private

investor prices for a form of equity that

is similar to the newly-issued equity

purchased by the government (see

paragraph (a)(2)(i) of this section), the

Secretary, where appropriate, will

adjust the prices to reflect the

differences in the forms of equity.

(3) Private investor prices unavailable.

If private investor prices are not

available under paragraph (a)(2) of this

section, the Secretary will determine

whether the firm that received the

government-provided equity was

equityworthy or unequityworthy at the

time of the equity infusion (see

paragraph (a)(4) of this section). If the

Secretary determines that the firm was

equityworthy, the Secretary will apply

paragraph (a)(5) of this section to

determine whether the equity infusion

was inconsistent with the usual

investment practice of private investors.

A determination by the Secretary that

the firm was unequityworthy will

constitute a determination that the

equity infusion was inconsistent with

usual investment practice of private

investors, and the Secretary will apply

paragraph (a)(6) of this section to

measure the benefit, if any, attributable

to the equity infusion.

(4) Equityworthiness.—(i) In general.

The Secretary will consider a firm to

have been equityworthy if the Secretary

determines that, from the perspective of

a reasonable private investor examining

the firm at the time the governmentprovided equity infusion was made, the

firm showed an ability to generate a

reasonable rate of return within a

reasonable period of time. In making

this determination, the Secretary may

examine the following factors, among

others:

(A) Current and past indicators of the

firm’s financial health calculated from

the firm’s statements and accounts,

adjusted, if appropriate, to conform to

generally accepted accounting

principles;

(B) Future financial prospects of the

firm, including market studies,

economic forecasts, and project or loan

appraisals prepared at the time of, or

prior to, the government-provided

equity infusion in question;

(C) Rates of return on equity in the

three years prior to the government

equity infusion; and

(D) Equity investment in the firm by

private investors.

(ii) Significance of prior subsidies. In

determining whether a firm was

equityworthy, the Secretary will ignore

current and prior subsidies received by

the firm.

(5) Benefit to equityworthy firm. If the

Secretary determines that a firm was

equityworthy, the Secretary will

examine the details of the particular

equity infusion in question to determine

whether the investment was

inconsistent with usual investment

practice of private investors. If the

Secretary determines that the

investment was inconsistent with usual

investment practice, the Secretary will

determine the amount of the benefit

conferred on a case-by-case basis.

(6) Benefit to unequityworthy firm.—

(i) Constructed private investor price. If

the Secretary determines that a firm was

unequityworthy, the Secretary normally

will measure the benefit conferred by a

government-provided equity infusion by

estimating, based on information and

analysis available at the time of the

equity infusion, the price that a

reasonable private investor would have

paid for the equity purchased by the

government. If the price paid by the

government for newly-issued equity was

greater than this price, the benefit will

be based on the difference between the

two prices.

(ii) Constructed private investor price

unavailable. If the Secretary determines

that information is not available, or does

not provide an appropriate basis, for

calculating the price that a reasonable

private investor would have paid (see

paragraph (a)(6)(i) of this section), the

Secretary will measure the benefit

conferred by an equity infusion in an

unequityworthy firm by adjusting the

amount of the infusion allocated to a

particular year under paragraph (c)(3) of

this section by the amount of
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subsequent after-tax returns achieved in

that year.

(7) Allegations. The Secretary will not

investigate an equity infusion in a firm

absent a specific allegation by the

petitioner which is supported by

information establishing a reasonable

basis to believe or suspect that the firm

received an equity infusion that

provides a countervailable benefit

within the meaning of paragraph (a) of

this section.

(b) Time of receipt of benefit. In the

case of a government-provided equity

infusion, the Secretary normally will

consider the benefit to have been

received as of the date on which the

firm received the equity infusion.

(c) Allocation of benefit to a

particular time period.—(1) In general.

The benefit conferred by an equity

infusion shall be allocated over the

same time period as a non-recurring

grant. See § 351.503(c)(2).

(2) Allocation where private investor

prices used. Where the Secretary

determines the amount of the benefit

conferred by an equity infusion by using

private investor prices (see paragraph

(a)(2) of this section) or the price that a

reasonable private investor would have

paid (see paragraph (a)(6)(i) of this

section), the Secretary will allocate the

benefit as if it were a non-recurring

grant (see § 351.503(c)(2)).

(3) Allocation where private investor

prices not used. Where the Secretary is

unable to use private investor prices

(see paragraph (a)(2) of this section) or

the price that a reasonable private

investor would have paid (see paragraph

(a)(6)(i) of this section), the Secretary

will allocate the full amount of the

equity infusion as if it were a nonrecurring grant (see § 351.503(c)(2)). The

amount so allocated to a particular year

will be subject to adjustment under

paragraph (a)(6)(ii) of this section.

§ 351.507 Debt forgiveness.

(a) Benefit. In the case of an

assumption or forgiveness of a firm’s

debt obligation, a benefit exists equal to

the amount of the principal and/or

interest (including accrued, unpaid

interest) that the government has

assumed or forgiven. In situations where

the entity assuming or forgiving the debt

receives shares in a firm in return

eliminating or reducing the firm’s debt

obligation, the Secretary will determine

the existence of a benefit under

§ 351.506 (equity infusions).

(b) Time of receipt of benefit. In the

case of a debt or interest assumption or

forgiveness, the Secretary normally will

consider the benefit as having been

received as of the date on which the

debt or interest was assumed or

forgiven.

(c) Allocation of benefit to a

particular time period.—(i) In general.

The Secretary will treat the benefit

determined under paragraph (a) of this

section as a non-recurring grant, and

will allocate the benefit to a particular

year in accordance with

§ 351.503(c)(2)(grants).

(ii) Exception. Where an interest

assumption is tied to a particular loan

and where a firm can reasonably expect

to receive the interest assumption at the

time it applies for the loan, the

Secretary will normally treat the interest

assumption as a reduced-interest loan

and allocate the benefit to a particular

year in accordance with

§ 351.504(c)(loans).

§ 351.508 Direct taxes.

(a) Benefit.—(1) Exemption or

remission of taxes. In the case of a

program that provides for a full or

partial exemption or remission of a

direct tax (e.g., an income tax), or a

reduction in the base used to calculate

a direct tax, a benefit exists to the extent

that the tax paid by a firm as a result

of the program is less than the tax the

firm would have paid in the absence of

the program.

(2) Deferral of taxes. In the case of a

program that provides for a deferral of

direct taxes, a benefit exists to the extent

that appropriate interest charges are not

collected. Normally, a deferral of direct

taxes will be treated as a governmentprovided loan in the amount of the tax

deferred, according to the methodology

described in § 351.504.

(b) Time of receipt of benefit. In the

case of a full or partial exemption or

remission of a direct tax, the Secretary

normally will consider the benefit as

having been received as of the date on

which the recipient firm became

capable of calculating the amount of the

benefit. Normally, this date will be the

date on which the firm filed its tax

return. In the case of a tax deferral of

one year or less, the Secretary normally

will consider the benefit as having been

received as of the date on which the

deferred tax becomes due. In the case of

a multi-year deferral, the Secretary

normally will consider the benefit as

having been received on the anniversary

date(s) of the deferral.

(c) Allocation of benefit to a

particular time period. The Secretary

normally will allocate (expense) the

benefit of a full or partial exemption,

remission, or deferral of a direct tax to

the year in which the benefit is

considered to have been received under

paragraph (b) of this section.

§ 351.509 Indirect taxes and import

charges (other than export programs).

(a) Benefit.—(1) Exemption or

remission of taxes. In the case of a

program, other than an export program,

that provides for the full or partial

exemption or remission of an indirect

tax or an import charge, a benefit exists

to the extent that the taxes or import

charges paid by a firm as a result of the

program are less than the taxes the firm

would have paid in the absence of the

program.

(2) Deferral of taxes. In the case of a

program, other than an export program,

that provides for a deferral of indirect

taxes or import charges, a benefit exists

to the extent that appropriate interest

charges are not collected. Normally, a

deferral of indirect taxes or import

charges will be treated as a governmentprovided loan in the amount of the taxes

deferred, according to the methodology

described in § 351.504.

(b) Time of receipt of benefit. In the

case of a full or partial exemption or

remission of an indirect tax or import

charge, the Secretary normally will

consider the benefit as having been

received at the time the recipient firm

otherwise would be required to pay the

indirect tax or import charge. In the case

of the deferral of an indirect tax or

import charge of one year or less, the

Secretary normally will consider the

benefit as having been received as of the

date the deferred tax becomes due. In

the case of a multi-year deferral, the

Secretary normally will consider the

benefit as having been received on the

anniversary date(s) of the deferral.

(c) Allocation of benefit to a

particular time period. The Secretary

normally will allocate (expense) the

benefit of a full or partial exemption,

remission, or deferral described in

paragraph (a) of this section to the year

in which the benefit is considered to

have been received under paragraph (b)

of this section.

§ 351.510 Provision of goods or services.

(a) Benefit. [Reserved]

(b) Time of receipt of benefit. In the

case of the provision of a good or

service, the Secretary normally will

consider a benefit as having been

received as of the date on which the

firm pays, or in the absence of payment

was due to pay, for the governmentprovided good or service.

(c) Allocation of benefit to a

particular time period. In the case of the

provision of a good or service, the

Secretary will allocate (expense) the

benefit to the year in which the benefit

is considered to have been received

under paragraph (b) of this section.
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§ 351.511 Purchase of goods. [Reserved]

§ 351.512 Worker-related subsidies.

(a) Benefit. In the case of a program

that provides assistance to workers, a

benefit exists to the extent that the

assistance relieves a firm of an

obligation that it normally would incur.

(b) Time of receipt of benefit. In the

case of assistance provided to workers,

the Secretary normally will consider the

benefit as having been received by the

firm as of the date on which the

payment is made that relieves the firm

of the relevant obligation.

(c) Allocation of benefit to a

particular time period. Normally, the

Secretary will allocate (expense) the

benefit from assistance provided to

workers to the year in which the benefit

is considered to have been received

under paragraph (b) of this section.

§ 351.513 Export subsidies.

The Secretary will consider a subsidy

to be an export subsidy if the Secretary

determines that eligibility for, approval

of, or the amount of, a subsidy is

contingent upon actual or anticipated

exportation or export earnings. In

applying this section, the Secretary will

consider a subsidy to be contingent

upon actual or anticipated exportation

or export earnings if receipt of the

subsidy is, in law or in fact, tied to

actual or anticipated export

performance, alone or as one of two or

more factors.

§ 351.514 Internal transport and freight

charges for export shipments.

(a) Benefit.—(1) In general. In the case

of internal transport and freight charges

on export shipments, a benefit exists to

the extent that the charges paid by a

firm for transport or freight with respect

to goods destined for export are less

than what the firm would have paid if

the goods were destined for domestic

consumption. The Secretary will

consider the amount of the benefit to

equal the difference in amounts paid.

(2) Exception. For purposes of

paragraph (a)(1) of this section, a benefit

does not exist if the Secretary

determines that:

(i) Any difference in charges is the

result of an arm’s length transaction

between the supplier and the user of the

transport or freight service; or

(ii) The difference in charges is

commercially justified.

(b) Time of receipt of benefit. In the

case of internal transport and freight

charges for export shipments, the

Secretary normally will consider the

benefit as having been received by the

firm as of the date on which the firm

paid, or in the absence of payment was

due to pay, the charges.

(c) Allocation of benefit to a

particular time period. Normally, the

Secretary will allocate (expense) the

benefit from internal transport and

freight charges for export shipments to

the year in which the benefit is

considered to have been received under

paragraph (b) of this section.

§ 351.515 Price preferences for inputs

used in the production of goods for export.

(a) Benefit. (1) In general. In the case

of the provision by governments or their

agencies, either directly or indirectly

through government-mandated schemes,

of imported or domestic products for

use in the production of exported goods,

a benefit exists to the extent that the

Secretary determines that the terms or

conditions on which the products are

provided are more favorable than the

terms or conditions applicable to the

provision of like or directly competitive

products for use in the production of

goods for domestic consumption. The

amount of the benefit will equal the

difference between the amount that a

firm paid for inputs used in the

production of export products and the

amount the firm would have paid for

like or directly competitive products for

use in the production of goods for

domestic consumption.

(2) Exception. A benefit will not exist

under paragraph (a)(1) of this section if

the Secretary determines that the terms

or conditions relating to the provision of

products for use in the production of

exported goods are not more favorable

than those commercially available on

world markets to exporters in the

country in question. For purposes of the

preceding sentence, the Secretary

normally will compare the price

charged for the domestically sourced

input to the delivered price of the

imported input in order to determine

whether the domestically sourced input

is being provided on more favorable

terms or conditions than those available

on world markets.

(3) Commercially available. For

purposes of paragraph (a)(2) of this

section, ‘‘commercially available’’

means that the choice between domestic

and imported products is unrestricted

and depends only on commercial

considerations.

(b) Time of receipt of benefit. In the

case of a benefit described in paragraph

(a)(1) of this section, the Secretary

normally will consider the benefit to

have been received as of the date on

which the firm paid, or in the absence

of payment was due to pay, for the

product.

(c) Allocation of benefit to a

particular time period. Normally, the

Secretary will allocate (expense)

benefits described in paragraph (a)(1) of

this section to the year in which the

benefit is considered to have been

received under paragraph (b) of this

section.

§ 351.516 Remission upon export of

indirect taxes.

(a) Benefit. In the case of the

remission upon export of indirect taxes,

a benefit exists to the extent that the

Secretary determines that the amount

remitted exceeds the amount levied

with respect to the production and

distribution of like products when sold

for domestic consumption.

(b) Time of receipt of benefit. In the

case of the remission upon export of an

indirect tax, the Secretary will consider

the benefit as having been received as of

the date of exportation.

(c) Allocation of benefit to a

particular time period. Normally, the

Secretary will allocate (expense) the

benefit from the remission upon export

of indirect taxes to the year in which the

benefit is considered to have been

received under paragraph (b) of this

section.

§ 351.517 Exemption, remission or deferral

upon export of prior-stage cumulative

indirect taxes.

(a) Benefit.—(1) Exemption of priorstage cumulative indirect taxes. In the

case of a program that provides for the

exemption of prior-stage cumulative

indirect taxes on inputs used in the

production of an exported product, a

benefit exists to the extent that the

exemption extends to inputs that are not

consumed in the production of the

exported product, making normal

allowance for waste. If the Secretary

determines that the exemption of priorstage cumulative indirect taxes confers

a benefit, the Secretary normally will

consider the amount of the benefit to be

the prior-stage cumulative indirect taxes

that otherwise would have been paid on

the inputs not consumed in the

production of the exported product,

making normal allowance for waste.

(2) Remission of prior-stage

cumulative indirect taxes. In the case of

a program that provides for the

remission of prior-stage cumulative

indirect taxes on inputs used in the

production of an exported product, a

benefit exists to the extent that the

amount remitted exceeds the amount of

prior-stage cumulative indirect taxes

paid on inputs that are consumed in the

production of the exported product,

making normal allowance for waste. If

the Secretary determines that the

remission of prior-stage cumulative

indirect taxes confers a benefit, the

Secretary normally will consider the
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amount of the benefit to be the

difference between the amount remitted

and the amount of the prior-stage

cumulative indirect taxes on inputs that

are consumed in the production of the

export product, making normal

allowance for waste. Notwithstanding

the preceding sentence, the Secretary

will consider the entire amount of the

remittance to confer a benefit, unless the

Secretary determines that:

(i) The government in question has in

place and applies a system or procedure

to confirm which inputs are consumed

in the production of the exported

products and in what amounts, and the

system or procedure is reasonable,

effective for the purposes intended, and

is based on generally accepted

commercial practices in the country of

export; or

(ii) If the government in question does

not have a system or procedure in place,

where the system or procedure is not

reasonable, or where the system or

procedure is instituted and considered

reasonable, but is found not to be

applied or not to be applied effectively,

the government in question has carried

out an examination of actual inputs

involved to confirm which inputs are

consumed in the production of the

exported product.

(3) Deferral of prior-stage cumulative

indirect taxes. In the case of a program

that provides for a deferral of prior-stage

cumulative indirect taxes on an

exported product, a benefit does not

exist if the government charges

appropriate interest on the taxes

deferred. If the Secretary determines

that a benefit exists, the Secretary

normally will treat the deferral as if it

were a government-provided loan in the

amount of the tax deferred, according to

the methodology described in § 351.504.

(b) Time of receipt of benefit. In the

case of the exemption, remission, or

deferral of prior-stage cumulative

indirect taxes, the Secretary normally

will consider the benefit as having been

received:

(1) In the case of an exemption, as of

the date of exportation;

(2) In the case of a remission, as of the

date of exportation;

(3) In the case of a deferral of one year

or less, as of the date on which the

deferred tax was due; and

(4) In the case of a multi-year deferral,

as of the anniversary date(s) of the

deferral.

(c) Allocation of benefit to a

particular time period. The Secretary

normally will allocate (expense) the

benefit of the exemption, remission, or

deferral of prior-stage cumulative

indirect taxes to the year in which the

benefit is considered to have been

received under paragraph (b) of this

section.

§ 351.518 Remission or drawback of

import charges upon export.

(a) Benefit.—(1) In general. In the case

of the remission or drawback of import

charges upon export, a benefit exists to

the extent that the Secretary determines

that the amount of the remission or

drawback exceeds the amount of import

charges on imported inputs consumed

in the production of the exported

product, making normal allowances for

waste.

(2) Substitution drawback.

‘‘Substitution drawback’’ involves a

situation in which a firm uses a quantity

of home market inputs equal to, and

having the same quality and

characteristics as, the imported inputs

as a substitute for them. Substitution

drawback does not necessarily result in

the conferral of a benefit. However, a

benefit exists if the Secretary determines

that:

(i) The import and the corresponding

export operations both did not occur

within a reasonable time period, not to

exceed two years; or

(ii) The amount drawnback exceeds

the amount of the import charges levied

initially on the imported inputs for

which drawback is claimed.

(3) Amount of the benefit from

remission or drawback—(i) In general. If

the Secretary determines that the

remission or drawback, including

substitution drawback, of import

charges confers a benefit under

paragraph (a)(1) or (a)(2) of this section,

the Secretary normally will consider the

amount of the benefit to be the

difference between the amount of

import charges remitted or drawnback

and the amount levied initially on the

imported inputs for which remission or

drawback was claimed.

(ii) Exception. Notwithstanding

paragraph (a)(3)(i) of this section, the

Secretary will consider the entire

amount of a remission or drawback to

confer a benefit, unless the Secretary

determines that:

(A) The government in question has

in place and applies a system or

procedure to confirm which inputs are

consumed in the production of the

exported products and in what amounts,

and the system or procedure is

reasonable, effective for the purposes

intended, and is based on generally

accepted commercial practices in the

country of export; or

(B) If the government in question does

not have a system or procedure in place,

where the system or procedure is not

reasonable, or where the system or

procedure is instituted and considered

reasonable, but is found not to be

applied or not to be applied effectively,

the government in question has carried

out an examination of actual inputs

involved to confirm which inputs are

consumed in the production of the

exported product.

(b) Time of receipt of benefit. In the

case of the remission or drawback of

import charges, the Secretary normally

will consider the benefit as having been

received as of the date of exportation.

(c) Allocation of benefit to a

particular time period. The Secretary

normally will allocate (expense) the

benefit of the remission or drawback of

import charges to the year in which the

benefit is considered to have been

received under paragraph (b) of this

section.

§ 351.519 Export insurance.

(a) Benefit—(1) In general. In the case

of export insurance, a benefit exists if

the premium rates charged are

inadequate to cover the long-term

operating costs and losses of the

program.

(2) Amount of the benefit. If the

Secretary determines under paragraph

(a)(1) of this section that premium rates

are inadequate, the Secretary normally

will calculate the amount of the benefit

as the difference between the amount of

premiums paid by the firm and the

amount received by the firm under the

insurance program during the period of

investigation or review.

(b) Time of receipt of benefit. In the

case of export insurance, the Secretary

normally will consider the benefit as

having been received in the year in

which the difference described in

paragraph (a)(2) of this section occurs.

(c) Allocation of benefit to a

particular time period. The Secretary

normally will allocate (expense) the

benefit from export insurance to the

year in which the benefit is considered

to have been received under paragraph

(b) of this section.

§ 351.520 General export promotion.

In the case of export promotion

activities of a government, a benefit

does not exist if the Secretary

determines that the activities consist of

general informational activities that do

not promote particular products over

others.

§ 351.521 Import substitution subsidies.

[Reserved]

§ 351.522 Certain agricultural subsidies.

The Secretary will treat as

noncountervailable domestic support

measures that are provided to certain

agricultural products (i.e., products

listed in Annex 1 of the WTO
Federal Register / Vol. 62, No. 38 / Wednesday, February 26, 1997 / Proposed Rules 8855

Agreement on Agriculture) and that the

Secretary determines conform to the

criteria of Annex 2 of the WTO

Agreement on Agriculture. See section

771(5B)(F) of the Act. The Secretary will

determine that a particular domestic

support measure conforms fully to the

provisions of Annex 2 if the Secretary

finds that the measure:

(a) Is provided through a publiclyfunded government program (including

government revenue foregone) not

involving transfers from consumers;

(b) Does not have the effect of

providing price support to producers;

and

(c) Meets the relevant policy-specific

criteria and conditions set out in

paragraphs 2 through 13 of Annex 2.

§ 351.523 Upstream subsidies.

(a) Investigation of upstream

subsidies—(1) In general. Before

investigating the existence of an

upstream subsidy (see section 771A of

the Act), the Secretary must have a

reasonable basis to believe or suspect

that all of the following elements exist:

(i) A countervailable subsidy, other

than an export subsidy, is provided with

respect to an input product;

(ii) One of the following conditions

exist:

(A) There is cross ownership between

the supplier of the input product and

the producer of the subject

merchandise;

(B) The price for the subsidized input

product is lower than the price that the

producer of the subject merchandise

otherwise would pay another seller in

an arm’s length transaction for an

unsubsidized input product; or

(C) The government sets the price of

the input product so as to guarantee that

the benefit provided with respect to the

input product is passed through to

producers of the subject merchandise;

and

(iii) The ad valorem countervailable

subsidy rate on the input product,

multiplied by the proportion of the total

production costs of the subject

merchandise accounted for by the input

product, is equal to, or greater than, one

percent.

(b) Input product. For purposes of this

section, ‘‘input product’’ means any

product used in the production of the

subject merchandise.

(c) Competitive benefit—(1) In

general. In evaluating whether a

competitive benefit exists under section

771A(b) of the Act, the Secretary will

determine whether the price for the

subsidized input product is lower than

the benchmark input price. For

purposes of this section, the Secretary

will use as a benchmark input price the

following, in order of preference:

(i) The actual price paid by, or offered

to, the producer of the subject

merchandise for an unsubsidized input

product, including an imported input

product;

(ii) An average price for an

unsubsidized input product, including

an imported input product, based upon

publicly available data;

(iii) The actual price paid by, or

offered to, the producer of the subject

merchandise for a subsidized input

product, including an imported input

product, that is adjusted to account for

the countervailable subsidy;

(iv) An average price for a subsidized

input product, including an imported

input product, based upon publicly

available data, that is adjusted to

account for the countervailable subsidy;

or

(v) An unadjusted price for a

subsidized input product.

(2) Use of delivered prices. The

Secretary will use a delivered (e.g., c.i.f.)

price whenever the Secretary uses the

price of an imported input product

under paragraph (c)(1) of this section.

(d) Significant effect—(1)

Presumptions. In evaluating whether an

upstream subsidy has a significant effect

on the cost of manufacturing or

producing the subject merchandise (see

section 771A(a)(3) of the Act), the

Secretary will multiply the ad valorem

countervailable subsidy rate on the

input product by the proportion of the

total production cost of the subject

merchandise that is accounted for by the

input product. If the product of that

multiplication exceeds five percent, the

Secretary will presume the existence of

a significant effect. If the product is less

than one percent, the Secretary will

presume the absence of a significant

effect. If the product is between one and

five percent, there will be no

presumption.

(2) Rebuttal of presumptions. A party

to the proceeding may present

information to rebut these

presumptions. In evaluating such

information, the Secretary will consider

the extent to which factors other than

price, such as quality differences, are

important determinants of demand for

the subject merchandise.

§ 351.524 Calculation of ad valorem

subsidy rate and attribution of subsidy to a

product.

(a) Calculation of ad valorem subsidy

rate. The Secretary will calculate an ad

valorem subsidy rate by dividing the

amount of the benefit allocated to the

period of investigation or review by the

sales value during the same period of

the product to which the Secretary

attributes the subsidy under paragraph

(b) of this section. Normally, the

Secretary will determine the sales value

of a product on an F.O.B. (port) basis (if

the product is exported) or on an F.O.B.

(factory) basis (if the product is sold for

domestic consumption). However, if the

Secretary determines that

countervailable subsidies are provided

with respect to the movement of a

product from the port or factory to the

place of destination (e.g., freight or

insurance costs are subsidized), the

Secretary may make appropriate

adjustments to the ad valorem subsidy

rate to account for such subsidies.

(b) Attribution of a subsidy to a

product—(1) In general. In attributing a

subsidy to one or more products, the

Secretary will apply the rules set forth

in paragraphs (b)(2) through (b)(7) of

this section.

(2) Export subsidies. The Secretary

will attribute an export subsidy only to

products exported by a firm.

(3) Domestic subsidies and import

substitution subsidies. The Secretary

will attribute a domestic subsidy or an

import substitution subsidy to all

products sold by a firm, including

products that are exported.

(4) Subsidies tied to a particular

market. If a subsidy is tied to sales to

a particular market, the Secretary will

attribute the subsidy only to products

sold by the firm to that market.

(5) Subsidies tied to a particular

product.—(i) In general. If a subsidy is

tied to the production or sale of a

particular product, the Secretary will

attribute the subsidy only to that

product.

(ii) Exception. If a subsidy is tied to

the production or sale of an input

product produced within the same

corporation that produces the

downstream product, then a subsidy

which is tied to the input product will

be attributed to the input and

downstream products produced by that

corporation.

(6) Corporations with Cross

Ownership.—(i) In general. The

Secretary normally will attribute a

subsidy to the products produced by the

corporation that received the subsidy.

(ii) Corporations producing the same

product. If two (or more) corporations

with cross ownership produce the same

product, the Secretary will attribute the

subsidies received by either or both

corporations to the products produced

by both corporations.

(iii) Holding companies. If the firm

that received a subsidy is a holding

company, the Secretary will attribute

the subsidy to the consolidated sales of

the holding company. However, if the
8856 Federal Register / Vol. 62, No. 38 / Wednesday, February 26, 1997 / Proposed Rules

Secretary finds that the holding

company merely served as a conduit for

the transfer of the subsidy from the

government to a subsidiary of the

holding company, the Secretary will

attribute the subsidy to products sold by

the subsidiary.

(iv) Transfer of subsidy between

corporations with cross ownership

producing different products. If a

corporation producing non-subject

merchandise received a subsidy and

transferred the subsidy to a corporation

with cross ownership, the Secretary will

attribute the subsidy to products sold by

the recipient of the transferred subsidy.

(7) Multinational firms. If the firm that

received a subsidy has production

facilities in two or more countries, the

Secretary will attribute the subsidy to

products produced by the firm within

the jurisdiction of the government that

granted the subsidy. However, if the

subsidy is tied to production by a

facility outside of that jurisdiction, the

Secretary will attribute the subsidy to

products produced by that facility.

§ 351.525 Program-wide changes.

(a) In general. The Secretary may take

a program-wide change into account in

establishing the estimated

countervailing duty cash deposit rate if:

(1) The Secretary determines that

subsequent to the period of

investigation or review, but before a

preliminary determination in an

investigation (see § 351.205) or a

preliminary results of an administrative

review or a new shipper review (see

§§ 351.213 and 351.214), a programwide change has occurred; and

(2) The Secretary is able to measure

the change in the amount of

countervailable subsidies provided

under the program in question.

(b) Definition of program-wide

change. For purposes of this section,

‘‘program-wide change’’ means a change

that:

(1) Is not limited to an individual firm

or firms; and

(2) Is effectuated by an official act,

such as the enactment of a statute,

regulation, or decree, or contained in

the schedule of an existing statute,

regulation, or decree.

(c) Effect limited to cash deposit

rate.—(1) In general. The application of

paragraph (a) of this section will not

result in changing an affirmative

determination to a negative

determination or a negative

determination to an affirmative

determination.

(2) Example. In a countervailing duty

investigation, the Secretary determines

that during the period of investigation a

countervailable subsidy existed in the

amount of 10 percent ad valorem.

Subsequent to the period of

investigation, but before the preliminary

determination, the foreign government

in question enacts a change to the

program that reduces the amount of the

subsidy to a de minimis level. In a final

determination, the Secretary would

issue an affirmative determination, but

would establish a cash deposit rate of

zero.

(d) Terminated programs. The

Secretary will not adjust the cash

deposit rate under paragraph (a) of this

section if the program-wide change

consists of the termination of a program

and:

(1) The Secretary determines that

residual benefits may continue to be

bestowed under the terminated

program; or

(2) The Secretary determines that a

substitute program for the terminated

program has been introduced and the

Secretary is not able to measure the

amount of countervailable subsidies

provided under the substitute program.

§ 351.526 Transnational subsidies.

Except as otherwise provided in

section 701(d) of the Act (subsidies

provided to international consortia), a

subsidy does not exist if the Secretary

determines that the funding for the

subsidy is provided:

(a) By a government of a country other

than the country in which the recipient

firm is located, or

(b) By an international lending or

development institution.

§ 351.527 Tax consequences of benefits.

In calculating the amount of a benefit,

the Secretary will not consider the

secondary tax consequences of the

benefit.

[FR Doc. 97–4538 Filed 2–25–97; 8:45 am]

BILLING CODE 3510–25–P