Extruded Rubber Thread From Malaysia; Preliminary Results of Countervailing Duty Administrative Review

DEPARTMENT OF COMMERCE

[C-557-806]

Extruded Rubber Thread From Malaysia; Preliminary Results of

Countervailing Duty Administrative Review

AGENCY: Import Administration, International Trade Administration,

Commerce.

ACTION: Notice of Preliminary Results of Countervailing Duty

Administrative Review.

-----------------------------------------------------------------------

SUMMARY: The Department of Commerce (the Department) is conducting an

administrative review of the countervailing duty order on extruded

rubber thread from Malaysia for the period January 1, 1992 through

December 31, 1992. We preliminarily determine the net subsidy to be

3.27 percent ad valorem for all manufacturers and exporters of

Malaysian extruded rubber thread. We invite interested parties to

comment on these preliminary results.

EFFECTIVE DATE: September 8, 1994.

FOR FURTHER INFORMATION CONTACT: Lorenza Olivas or Chris Jimenez,

Office of Countervailing Compliance, Import Administration,

International Trade Administration, U.S. Department of Commerce, 14th

Street and Constitution Avenue, NW., Washington, DC 20230; telephone:

(202) 482-2786.

SUPPLEMENTARY INFORMATION:

Background

On August 3, 1993, the Department published in the Federal Register

a notice of ``Opportunity to Request an Administrative Review'' (58 FR

41239) of the countervailing duty order on extruded rubber thread from

Malaysia (57 FR 38472; August 24, 1992). On October 29, 1993,

respondents Heveafil Sdn. Bhd. (Heveafil), Filmax Sdn. Bhd. (Filmax),

Rubberflex Sdn. Bhd. (Rubberflex), and Filati Lastex Elastofibre Sdn.

Bhd. (Filati), requested an administrative review of the order. We

initiated the review for the period January 1, 1992 through December

31, 1992, on September 30, 1993 (58 FR 51053). The Department is now

conducting this review in accordance with section 751 of the Tariff Act

of 1930, as amended (the Act).

Scope of Review

Imports covered by this review are shipments of extruded rubber

thread from Malaysia. Extruded rubber thread is defined as vulcanized

rubber thread obtained by extrusion of stable or concentrated natural

rubber latex of any cross sectional shape, measuring from 0.18 mm,

which is 0.007 inch or 140 gauge, to 1.42 mm, which is 0.056 inch or 18

gauge, in diameter. Such merchandise is classifiable under item number

4007.00.00 of the Harmonized Tariff Schedule (HTS). The HTS item number

is provided for convenience and Customs purposes. The written

description remains dispositive.

The period of review is January 1, 1992 through December 31, 1992.

This review covers four companies and 13 programs. Two related

companies participated in the review.

Calculation Methodology for Assessment and Deposit Purposes

We calculated the benefits pursuant to section 355.51 of the

Department's Proposed Substantive Countervailing Duty Regulations

(Proposed Regulations) (54 FR 23366; May 31, 1989). First, we

calculated a country-wide rate, weight-averaging the benefits received

by the four companies subject to review to determine the overall

subsidy from all countervailing programs benefitting exports of subject

merchandise to the United States. Because the country-wide rate was

above de minimis, as defined by 19 CFR 355.7 (1993), we proceeded to

the next step in our analysis and examined the ad valorem rate we

calculated for each company for all countervailable programs to

determine whether individual company rates differed significantly from

the weighted-average country-wide rate. In calculating the individual

company rates described above, only one rate was calculated for

Heveafil and Filmax because Heveafil and Filmax are related parties.

None of the companies received aggregate benefits which were

significantly different within the meaning of 19 CFR 355.22(d)(3)(i).

Therefore, the country-wide rate is based on the weight-averaged

aggregate benefits received by the companies subject to this review.

Analysis of Programs

1. Pioneer Status

Pioneer status is a tax incentive offered to promote investment in

the manufacturing, tourist, and agricultural sectors. Pioneer status

was first introduced under the Pioneer Industries (Relief from Income

Tax) Ordinance of 1958. This ordinance was replaced by the Investment

Incentives Act (IIA) of 1968, which was subsequently replaced by the

Promotion of Investment Act (PIA) of 1986. Under the IIA and the PIA,

the Minister of International Trade and Industry may determine products

or activities to be pioneer status products or activities.

Companies petition for pioneer status for products or activities

that have already been approved and listed as pioneer products. Once a

company receives pioneer status, its profits from the designated

product or activity are exempt from the corporate income tax, the

development tax, and the dividend tax for a period of five years, with

the possibility of an extension for an additional five years. The five-

year extension, however, was abolished effective October 1, 1991.

Furthermore, the computation of capital allowances, which are normally

deducted against the adjusted income, are postponed to the post-tax

holiday period.

In evaluating a project for pioneer status, the Malaysian

Industrial Development Authority (MIDA) will generally consider

whether:

(1) The product is being produced on a commercial scale suitable to

the economic requirements or development of the country,

(2) There are prospects for further development, and

(3) The product or activity meets the national and strategic

requirements of Malaysia.

Specifically, MIDA officials consider 12 essential criteria to

evaluate whether a particular company should receive pioneer status.

Two of these 12 criteria address the export potential of the proposed

product or activity: (1) The government considers if the applicant has

made a case for export markets to absorb the excess above the existing

demand and (2) the government considers whether the project saves

foreign exchange through substitution of imports and, alternatively,

whether it earns considerable foreign exchange by exporting a

substantial part of its output. The other 10 criteria address domestic

factors and are, therefore, export ``neutral''.

Only in cases where the export criteria carry predominant weight is

the program countervailable. Where pioneer status is conferred on a

company because it has been determined that the domestic market is

saturated and will no longer support additional producers and because

that company agrees to export a certain percentage of its production,

the program conveys an export subsidy, regardless of the other

``neutral'' criteria the company is required to meet. This is because

the company is clearly being approved due to the fact it will export

and because receipt of benefits becomes contingent on export

performance. In the Final Affirmative Countervailing Duty Determination

and Countervailing Duty Order; Extruded Rubber Thread From Malaysia (57

FR 38472; August 25, 1992) Malaysian Rubber Thread Final Determination,

we determined that pioneer status was granted to Rubberflex based on

its obligation to export. Therefore, the Department found the program

to be countervailable with respect to that company. Rubberflex

continues to hold pioneer status.

In this review, we reviewed the pioneer status of Filati and Filmax

to determine whether the program is also countervailable with respect

to those two companies. (Heveafil's pioneer status expired.) We

verified that both of those companies were granted pioneer status based

on a commitment that they would export a majority of their production.

Therefore, we preliminarily find this program also countervailable with

respect to Filati and Filmax.

To determine the benefit, we calculated the tax savings from this

program during the review period and divided that by total exports. On

this basis, we preliminarily determine the net subsidy from this

program to be 2.05 percent ad valorem for all manufacturers and

exporters in Malaysia of extruded rubber thread.

2. Export Credit Refinancing (ECR) Program

The ECR program was established in order to promote: (1) exports of

manufactured goods and agricultural food products that have significant

value-added and high local content, (2) greater domestic linkages in

export industries, and (3) easy access to credit facilities. In order

to accomplish this, the Bank Negara Malaysia, the central bank of

Malaysia, provides pre-shipment and post-shipment financing. Pre-

shipment financing is a line of credit based on the previous 12 months'

export performance, and cannot be tied to specific sales in specific

markets. Post-shipment financing is order-based which is provided for

specific sales to specific markets.

The Department determined that this program was countervailable in

the Malaysian Rubber Thread Final Determination because receipt of

loans under this program was contingent upon export performance, and

the loans were provided at preferential interest rates. We verified

that all four companies used both pre-shipment and post-shipment ECR

loans.

In order to determine whether these loans were provided at

preferential rates, we compared the interest rate charged to a

benchmark interest rate. It is our practice to select the predominant

source of short-term financing in the country as our benchmark for

short-term loans. See Sec. 355.44(b)(3) of the Proposed Regulations.

In Malaysia, overdrafts and term loans offered by commercial banks

are the predominant form of short-term financing. The average interest

rates for these types of financing, however, are not individually

available. Therefore, we have used as our benchmark for ECR loans the

average commercial bank lending rate as an estimate of these

predominant short-term lending rates.

Because the pre-shipment loans were not shipment-specific, we

included all loans on which interest was paid during the review period

in our calculations. Because the post-shipment ECR loans were shipment-

specific, we included in our calculations only those loans used to

finance exports of extruded rubber thread to the United States.

We calculated the benefit by comparing the amount of interest

actually paid on the pre- and post-shipment loans during the review

period with the amount that would have been paid at the benchmark rate

of 10.83 percent. The difference between those amounts is the benefit.

We then divided each company's interest savings by that company's total

exports, in the case of pre-shipment loans, because they applied to all

exports, or by its exports to the United States, in the case of post-

shipment loans, because they applied to specific shipments to the

United States. On this basis, we preliminarily determine the net

subsidy for pre-shipment loans to be 0.33 percent for all manufacturers

or exporters. For post-shipment loans, we preliminarily determine the

rate to be 0.30 percent for all manufacturers and exporters in Malaysia

of extruded rubber thread.

3. Abatement of Income Tax Based on the Ratio of Export Sales to Total

Sales

The IIA provided for an abatement of income tax based on the ratio

of export sales to total sales. This law was repealed effective January

1, 1986, and replaced by the PIA. Among other incentives, the new law

also provides an abatement of income tax based on export performance.

Specifically, a portion of income, equal to 50 percent of the ratio of

export sales to total sales, is exempt from income tax. This program is

not available to companies still participating in programs under the

repealed IIA or to companies granted pioneer status or an investment

tax allowance under the PIA. Because this program is limited to

exporters, we determined this program to be countervailable in the

Malaysian Rubber Thread Final Determination.

We verified that only Heveafil claimed this tax abatement on its

income tax return filed during the review period. Heveafil contends

that this tax abatement did not benefit exports of the subject

merchandise to the United States. This contention is based on the fact

that the company did not include U.S. sales in the calculation of the

ratio used to determine the amount of the tax abatement.

The amount of the tax abatement is calculated using a ratio of

total exports divided by total sales. This ratio is then multiplied by

total adjusted income to calculate the claimed tax abatement. In

calculating this ratio, Heveafil deducted the amount of U.S. exports

from both the numerator and denominator, i.e., from both total exports

and total sales. Therefore, in the company's calculation there was no

significant change in the calculated ratio which was applied to the

adjusted income. Thus, the calculation methodology used by Heveafil in

its tax return did not eliminate the benefit attributable to sales of

U.S. exports conferred from the use of this program. Therefore, we

preliminarily determine that this program provides a countervailable

benefit with respect to exports of the subject merchandise.

To calculate the benefit, we calculated the tax savings from this

program during the review period and divided that by total exports,

because these benefits applied to all exports. On this basis, we

preliminarily determine the net subsidy from this program to be 0.38

percent ad valorem for all manufacturers and exporters in Malaysia of

extruded rubber thread.

4. Abatement of Five Percent of the Value of Indigenous Malaysian

Materials Used in Exports

In addition to the income tax abatement based on exports which is

discussed above, the PIA provides for an abatement of income tax in the

amount of five percent of the ratio of export sales to total sales

times the value of indigenous Malaysian materials used in the

manufacture of exported products. This program is not available to

companies still participating in programs under the repealed IIA or to

companies granted pioneer status or an investment tax allowance under

the PIA. We found this program countervailable in the Malaysian Rubber

Thread Final Determination because use of this program is contingent

upon export performance.

We verified that only Heveafil claimed this tax abatement on its

income tax return filed during the review period. Heveafil contends

that this tax abatement did not benefit exports of the subject

merchandise to the United States. This contention is based on the fact

that the company did not include U.S. sales in the calculation of the

ratio used to determine the amount of the tax abatement.

The amount of the tax abatement is calculated using a ratio of

total exports divided by total sales. This ratio is then multiplied by

five percent of the value of indigenous materials to calculate the

claimed tax abatement. In calculating this ratio, Heveafil deducted the

amount of U.S. exports from both the numerator and denominator, i.e.,

from both total exports and total sales. Therefore, in the company's

calculation there was no significant change in calculated ratio which

was applied to the value of indigenous materials to determine the

amount of the tax abatement. Thus, the calculation methodology used by

Heveafil in its tax return did not eliminate the benefit attributable

to sales of U.S. exports conferred from the use of this program.

Therefore, we preliminarily determine that this program provides a

countervailable benefit with respect to exports of the subject

merchandise.

To calculate the benefit, we calculated the tax savings from this

program during the review period and divided that by total exports,

because these benefits applied to all exports. On this basis, we

preliminarily determine the net subsidy from this program to be 0.12

percent ad valorem for all manufacturers and exporters in Malaysia of

extruded rubber thread.

5. Industrial Building Allowance

Sections 63 through 66 of the Income Tax Act of 1967, as amended,

allow an income tax deduction for a percentage of the value of

constructed or purchased buildings used in manufacturing. In 1984, this

allowance, which had been limited to manufacturing facilities, was

extended to include buildings used as warehouses to store finished

goods ready for export or imported inputs to be incorporated into

exported goods. This program includes a 10 percent initial tax

allowance and an additional 2 percent annual tax allowance (i.e., 12

percent in the first year and 2 percent thereafter). The program

effectively reduces a company's taxable income, and the tax allowance

can be carried forward to future tax years until fully exhausted.

Rubber-based exporters are eligible for this program. We found this

program countervailable in the Malaysian Rubber Thread Final

Determination because use of this allowance is limited to exporters.

We verified that Heveafil used this program during the review

period. To calculate the benefit, we calculated the tax savings from

this program during the review period for Heveafil and divided the

savings amount by total exports, because these benefits applied to all

exports. On this basis, we preliminarily determine the net subsidy from

this program to be less than 0.005 percent ad valorem for all

manufacturers and exporters in Malaysia of extruded rubber thread.

6. Double Deduction for Export Promotion Expenses

Section 41 of the Promotion of Investments Act allows companies to

deduct expenses related to the promotion of exports twice, once in

calculating net income on the financial statement and again in

calculating taxable income. Because this program is limited to

exporters, we found this program countervailable in the Malaysian

Rubber Thread Final Determination. We verified that Heveafil and Filmax

used this program during the review period.

To calculate the benefit, we calculated the tax savings from this

program during the review period for each company and divided that by

total exports, because these benefits applied to all exports. On this

basis, we preliminarily determine the net subsidy from this program to

be 0.09 percent ad valorem for all manufacturers and exporters in

Malaysia of extruded rubber thread.

7. Rubber Discount Scheme

We verified that this program was terminated effective January 1,

1992, and that the last date exports were eligible for rebates under

this program was December 31, 1991. In the Malaysian Rubber Thread

Final Determination, we determined that benefits from this program were

conferred when the product was exported. Therefore, we preliminarily

determine that this program is terminated and provides no residual

benefit.

Other Programs

We preliminarily determine that the exporters of extruded rubber

thread did not use the programs listed below with respect to exports of

the subject merchandise to the United States during the review period:

Investment Tax Allowance.

Abatement of Five Percent of Taxable Income Due to

Location in a Promoted Industrial Area.

Allowance of a Percentage of Net Taxable Income Based on

the F.O.B. Value of Export Sales.

Double Deduction of Export Credit Insurance Payments.

Abatement of Taxable Income of Five Percent of Adjusted

Income of Companies Due to Capital Participation and Employment Policy

Adherence.

Preferential Financing for Bumiputras.

Preliminary Results of Review

We preliminarily determine the net subsidy for the period January

1, 1992 through December 31, 1992, to be 3.27 percent.

If the final results of this review remain the same as these

preliminary results, the Department intends to instruct the Customs

Service to assess countervailing duties at 3.27 percent of the f.o.b.

invoice price on shipments of the subject merchandise exported on or

after April 1, 1992, and on or before December 31, 1992.

Pursuant to the International Trade Commission's termination of its

injury determination on Malaysian extruded rubber thread in light of

the revocation of duty free status under the Generalized System of

Preferences, effective March 31, 1992, the Department previously issued

instructions to Customs to liquidate entries of the subject merchandise

entered, or withdrawn from warehouse, for consumption prior to March

31, 1992. Therefore, those entries are not subject to assessment of

countervailing duties (See Amended Final Affirmative Countervailing

Duty Determination and Countervailing Duty Order; Extruded Rubber

Thread from Malaysia (58 FR 41084; August 2, 1993)).

The Department also intends to instruct the Customs Service to

collect a cash deposit of 3.27 percent on all shipments of the subject

merchandise entered, or withdrawn from warehouse, for consumption on or

after the date of publication of the final results of this

administrative review.

Parties to this proceeding may request disclosure of the

calculation methodology and interested parties may request a hearing

not later than 10 days after date of publication of this notice. In

accordance with 19 CFR 355.38(c)(1)(ii), interested parties may submit

written arguments in case briefs on these preliminary results within 30

days of the date of publication. Rebuttal briefs, limited to arguments

raised in case briefs, may be submitted seven days after the time limit

for filing the case brief. Any hearing, if requested, will be held

seven days after the scheduled date for submission of rebuttal briefs.

Copies of case briefs and rebuttal briefs must be served on interested

parties in accordance with 19 CFR 355.38(e).

Representatives of parties to the proceeding may request disclosure

of proprietary information under administrative protective order up

until 10 days after the representative's client or employer becomes a

party to the proceeding, but in no event later than the date the case

briefs are due under 19 CFR 355.38(c).

The Department will publish the final results of this

administrative review, including the results of its analysis of issues

raised in any case or rebuttal briefs.

This administrative review and notice are in accordance with

section 751(a)(1) of the Act (19 U.S.C. 1675(a)(1)) and 19 CFR 355.22.

Dated: August 30, 1994.

Joseph A. Spetrini,

Acting Assistant Secretary for Import Administration.

[FR Doc. 94-22176 Filed 9-7-94; 8:45 am]

BILLING CODE 3510-DS-M