Countervailing Duties

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\

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\1\ The 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).

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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.

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\2\ See, Statement of Administrative Action accompanying H.R.

5110 (H.R. Doc. No. 316, Vol. 1, 103d Cong., 2d Sess. (1994)).

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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.

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\3\ See Notice of Proposed Rulemaking and Request for Public

Comments (Countervailing Duties), 54 FR 23366 (May 31, 1989).

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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 non-expert.

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 open-minded 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

[[Page 8819]]

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.''

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\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.''

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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/

import__admin/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 Sec. 351.102.

Many of these definitions are identical (or virtually identical) to

definitions contained in Sec. 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 Sec. 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 ``government-

provided'' 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

Sec. 351.502, Secs. 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,

Secs. 351.525 through 351.527 contain rules regarding program-wide

changes, transnational subsidies, and the tax consequences of benefits,

respectively.

The last sentence of Sec. 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

[[Page 8820]]

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-by-case 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

[[Page 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 state-owned 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 previously-conferred

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

[[Page 8822]]

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

[[Page 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, Sec. 355.43 of the 1989 Proposed

Regulations, Sec. 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, Sec. 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 Sec. 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 non-countervailable. 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 Sec. 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 small-and 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 medium-sized 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

[[Page 8824]]

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

[[Page 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 Flat-Rolled 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

Sec. 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 Sec. 355.43(b)(6) particularly helpful.

However, the fact that we are not recodifying Sec. 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

[[Page 8826]]

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

Sec. 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 Sec. 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 Sec. 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

``non-recurring'' grants. See Sec. 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 non-recurring. 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 Sec. 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 Sec. 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 Sec. 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 Sec. 351.503(c)(2)(ii) to

say that the Secretary will ``normally'' expense non-recurring 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 Non-Recurring 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 Sec. 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

[[Page 8827]]

practice, paragraph (c)(2) provides that the Secretary will allocate a

non-recurring 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

Sec. 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 company-specific 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 long-term

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 para. 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

[[Page 8828]]

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 non-

recurring 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 company-specific.

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 Sec. 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 Sec. 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 Sec. 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

[[Page 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 government-provided

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

Sec. 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

Sec. 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 government-provided

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 company-specific 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 company-specific 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 Sec. 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

[[Page 8830]]

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

Sec. 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 Sec. 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 government-

provided 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 non-speculative 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 Sec. 355.44(b)(6) of the 1989 Proposed

Regulations.

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

Sec. 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

Secs. 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 government-provided 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 Sec. 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 government-owned 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 government-

owned 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 government-owned), 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 government-

owned 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

[[Page 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 Sec. 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 Sec. 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

government-provided 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 Sec. 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 Sec. 355.49(c)(2)

of the 1989 Proposed Regulations that the amount of the subsidy

conferred by a government-provided 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 long-term, 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 Sec. 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 Sec. 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 Sec. 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 Sec. 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 non-recurring 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 para. 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, para. 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 non-controversial

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 Sec. 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

government-provided 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

Sec. 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

[[Page 8832]]

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 government-owned 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

Sec. 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 Sec. 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 Sec. 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 government-provided equity infusion. Like Sec. 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 Sec. 355.44(e)(1) of the 1989 Proposed

Regulations. Under Sec. 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 newly-issued 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

publicly-traded 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

[[Page 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, publicly-traded 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'' equity-like 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

Sec. 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

Sec. 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

government-provided 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

[[Page 8834]]

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 Hot-rolled 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 government-

provided 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

[[Page 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 Sec. 355.44(e)(3) of the 1989 Proposed Regulations. In

our view, Sec. 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 non-

recurring grant, using the methodology set forth for such grants in

Sec. 351.503(c)(2). This approach is consistent with

Sec. 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 government-provided debt assumptions or

forgiveness, is little changed from Sec. 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

Sec. 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 Sec. 351.509 retains the standard set forth in

Sec. 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 Sec. 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 government-provided loans. Therefore,

consistent with our practice, paragraph (a)(2) directs that the loan

methodology described in Sec. 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 Sec. 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 Sec. 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 Sec. 351.102).

However, Sec. 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 Sec. 351.509 is based on Sec. 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

[[Page 8836]]

the taxes the firm would have paid in the absence of the program. As in

the case of direct taxes under Sec. 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 Sec. 351.509 is based on Sec. 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 Sec. 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 Sec. 355.48(b)(2) of the 1989 Proposed

Regulations, and continues to provide that the benefit from a

government-provided 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 Sec. 355.43(b)(4)

of the 1989 Proposed Regulations. Although the commenters suggested

different modifications to this test, they all used Sec. 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 government-provided 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

Sec. 355.43(b)(4) remain useful analytical tools for distinguishing

potentially countervailable ``infrastructure'' from non-countervailable

``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].''

[[Page 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 worker-related subsidies. Under

paragraph (a), which is based on Sec. 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, Sec. 351.513

expands the definition of an export subsidy.

In particular, Sec. 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 Sec. 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 Sec. 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, Sec. 355.44(h) of the 1989 Proposed Regulations,

Sec. 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

[[Page 8838]]

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 non-countervailability 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 Sec. 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 Sec. 351.516 deals with the exemption or remission of

indirect taxes in general, Sec. 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 Sec. 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 Sec. 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 government-provided 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.

[[Page 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).

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