# Countervailing Duties

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URL: https://www.frixlaw.com/law-library/documents/fr%3A97-4538

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** February 26, 1997
- **Citation:** 62 FR 8818

## Text

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 sp

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A97-4538. Public record. Not legal advice.