Subsidies Agreement : Countervailing Duty Perspective.

Subsidies Agreement : Subsidies Agreement : Countervailing Duty Countervailing Duty

PerspectivePerspective

Approach to subsidisation-Approach to subsidisation-ASCM ASCM

Disciplines on flexibility to subsidizeDisciplines on flexibility to subsidizeCalibrated approach to disciplines Calibrated approach to disciplines

against subsidisationagainst subsidisation

CategorisationCategorisation

Prohibited Subsidy – Art. 3Prohibited Subsidy – Art. 3

Actionable subsidiesActionable subsidies

Non-actionable subsidiesNon-actionable subsidies

Actionable subsidyActionable subsidy

Specific subsidies causing adverse effects Specific subsidies causing adverse effects (injury, serious prejudice, nullification and (injury, serious prejudice, nullification and impairment) are actionableimpairment) are actionable

Action and DSU panel process in all cases Action and DSU panel process in all cases and through countervailing duty and through countervailing duty investigation for imports investigation for imports

Remedy is removal of adverse effects of Remedy is removal of adverse effects of the subsidy or imposition of countervailing the subsidy or imposition of countervailing duty on importsduty on imports

Non-actionable subsidyNon-actionable subsidy No action can be taken against subsidies that are No action can be taken against subsidies that are

non-specific - determined on the basis ofnon-specific - determined on the basis of Eligibility based on objective criteria or conditionsEligibility based on objective criteria or conditions Eligibility automatic, criteria strictly adhered toEligibility automatic, criteria strictly adhered to Criteria are neutral, economic in nature and Criteria are neutral, economic in nature and

horizontal in applicationhorizontal in application No predominant use by certain enterprisesNo predominant use by certain enterprises Up to 1999 specific given for R &D, assistance to Up to 1999 specific given for R &D, assistance to

disadvantaged regions and for environmental disadvantaged regions and for environmental purposes were non-actionable. Now lapsedpurposes were non-actionable. Now lapsed

S&D ProvisionsS&D ProvisionsFlexibilities for Annex VII countries Flexibilities for Annex VII countries

including India including India Export subsidies not prohibited (Art Export subsidies not prohibited (Art

27.2(a)) subject to reaching export 27.2(a)) subject to reaching export competitivenesscompetitiveness

Enhanced subsidy margin of 3% and Enhanced subsidy margin of 3% and volume of subsidized imports of 4% / volume of subsidized imports of 4% / 9% not subject to countervailing 9% not subject to countervailing duties duties

What is relevant for Countervailing What is relevant for Countervailing duty Investigationduty Investigation

Definition of subsidyDefinition of subsidyUnderstanding specificityUnderstanding specificityQuantification of the subsidyQuantification of the subsidyCalculation of the dutyCalculation of the dutyInjury and CausalityInjury and Causality

When Does Subsidy Exist- Art 1When Does Subsidy Exist- Art 1

Financial contributionFinancial contribution Direct / potential direct transfer of fundsDirect / potential direct transfer of funds Revenue otherwise due foregoneRevenue otherwise due foregone Provision of goods or services – excluding Provision of goods or services – excluding

general infrastructuregeneral infrastructure Entrustment by Government of above Entrustment by Government of above

functionsfunctionsOr Income / price supportOr Income / price support

ANDANDBenefit thereby conferredBenefit thereby conferred..

Footnote 1- Important exemptionFootnote 1- Important exemption

Exemption of an exported productExemption of an exported productFrom duties or taxes borne by a like From duties or taxes borne by a like

product destined for domestic product destined for domestic consumptionconsumption

Not deemed a subsidy Not deemed a subsidy

Specific SubsidiesSpecific Subsidies Article 1.2 provides that a subsidy shall be Article 1.2 provides that a subsidy shall be

countervailable only if such a subsidy is specificcountervailable only if such a subsidy is specific Criteria for specificityCriteria for specificity Prohibited subsidiesProhibited subsidies Enterprise specificityEnterprise specificity Industry specificityIndustry specificity Regional specificityRegional specificity Two broad categories in Article 2Two broad categories in Article 2 De jureDe jure specific subsidies specific subsidies De-factoDe-facto specific subsidies specific subsidies

Specific Subsidies – Specific Subsidies – de-jurede-jure A subsidy is de-jure specific ifA subsidy is de-jure specific ifAccess to the subsidy Access to the subsidy explicitlyexplicitly limited to limited to

certain enterprises. If access is limited certain enterprises. If access is limited based on objective criteria then it would based on objective criteria then it would not be a specific subsidynot be a specific subsidy

Prohibited subsidies are deemed specificProhibited subsidies are deemed specific To be determined with reference to the To be determined with reference to the

jurisdiction of the granting authority.jurisdiction of the granting authority.

De-factoDe-facto Specificity [2.1(c)] Specificity [2.1(c)] Notwithstanding any appearance of non-Notwithstanding any appearance of non-

specificity, the subsidy may specificity, the subsidy may in factin fact be be specific. Following factors may be specific. Following factors may be consideredconsidered

Use by a limited number of enterprisesUse by a limited number of enterprisesPredominant use by certain enterprisesPredominant use by certain enterprisesGranting of disproportionately large Granting of disproportionately large

amounts to certain enterprisesamounts to certain enterprisesManner in which discretion has been Manner in which discretion has been

exercised.exercised.

Prohibited SubsidiesProhibited Subsidies

Local content subsidiesLocal content subsidiesExport subsidies-Export subsidies-IllustrativeIllustrative List in List in

Annex IAnnex IRemedy through DSU Remedy through DSU Defaulting member required to Defaulting member required to

withdraw the subsidywithdraw the subsidy or face or face counter- measurescounter- measures

Certain Exceptions from Prohibition in Certain Exceptions from Prohibition in Annex IAnnex I

Exemption or remission of indirect taxes on export Exemption or remission of indirect taxes on export productsproducts

RED of prior stage cumulative indirect taxes on inputs RED of prior stage cumulative indirect taxes on inputs usedused in production of the exported product provided this in production of the exported product provided this does not exceed corresponding RED on inputs used in the does not exceed corresponding RED on inputs used in the production of domestically sold like products – item (h)production of domestically sold like products – item (h)

RED on prior stage cumulative indirect taxes on inputs RED on prior stage cumulative indirect taxes on inputs consumed in production of the exported product. To be consumed in production of the exported product. To be interpreted in accordance with guidelines in Annex II – interpreted in accordance with guidelines in Annex II – item (h)item (h)

Remission or drawback of import charges on imported Remission or drawback of import charges on imported inputs inputs consumedconsumed in the production of the exported in the production of the exported product. Substitution drawback schemes are permitted in product. Substitution drawback schemes are permitted in accordance with guidelines in Annex III – item (i)accordance with guidelines in Annex III – item (i)

Conditions for RED of Cumulative Conditions for RED of Cumulative Indirect TaxesIndirect Taxes

Inputs must have been consumed in Inputs must have been consumed in the production processthe production process

Physically incorporated inputsPhysically incorporated inputsEnergy, fuel, oil and catalysts Energy, fuel, oil and catalysts There must be a reasonable and There must be a reasonable and

effective verification system in place effective verification system in place to confirm which inputs are consumed to confirm which inputs are consumed and in what amounts.and in what amounts.

Substitution Drawback SchemesSubstitution Drawback Schemes

Home market inputs of same quality Home market inputs of same quality and characteristics as imported and characteristics as imported product are used in the production product are used in the production process.process.

Corresponding imports are made Corresponding imports are made subsequentlysubsequently

The total period between export and The total period between export and import is not more than 2 years.import is not more than 2 years.

Countervailing Duty InvestigationCountervailing Duty InvestigationProvisions are in Articles 10-23 of the Provisions are in Articles 10-23 of the

Subsidies Agreement Subsidies Agreement Basics are similar to those in anti-Basics are similar to those in anti-

dumping investigation.dumping investigation.However, pre-initiation consultations However, pre-initiation consultations

with the exporting country provided with the exporting country provided for in Article 9for in Article 9

Govt. of the exporting country Govt. of the exporting country actively involvedactively involved

Investigation - Main RequirementsInvestigation - Main Requirements

Establishing specificity of the Establishing specificity of the subsidiessubsidies

Calculating amount of subsidy per Calculating amount of subsidy per unit during the POIunit during the POI

Establishing injury and causality due Establishing injury and causality due to subsidised importsto subsidised imports

Calculation of the Amount of Calculation of the Amount of SubsidySubsidy

Two broad approachesTwo broad approachesCost to the governmentCost to the governmentBenefit to the recipientBenefit to the recipientArticle 14 specifies that for purposes Article 14 specifies that for purposes

of countervailing dutyof countervailing dutyBenefit to the recipient approach to Benefit to the recipient approach to

be followedbe followed

Benefit to Recipient – Article 14Benefit to Recipient – Article 14Method to calculate benefit to Method to calculate benefit to

recipient shall be provided for in recipient shall be provided for in national legislation or implementing national legislation or implementing regulation.regulation.

Any such method shall be consistent Any such method shall be consistent with the guidelines in Article 14with the guidelines in Article 14

Pass through of benefitPass through of benefit The benefit of a subsidy may pass through The benefit of a subsidy may pass through

from the recipient of the financial from the recipient of the financial contribution to other entities.contribution to other entities.

Even if the ultimate recipient of benefit Even if the ultimate recipient of benefit has not received the financial contribution, has not received the financial contribution, a subsidy would exist if in fact some one a subsidy would exist if in fact some one has received ithas received it

Recipient of financial contribution and Recipient of financial contribution and recipient of benefit could be different.recipient of benefit could be different.

Establish pass through before Establish pass through before countervailing indirect subsidiescountervailing indirect subsidies

Steps in Calculating the SubsidySteps in Calculating the SubsidyCalculation should reflect the amount of Calculation should reflect the amount of

subsidy found to exist during the period subsidy found to exist during the period of investigation and not simply the face of investigation and not simply the face value of the financial contribution.value of the financial contribution.

Check whether benefit is expensed during Check whether benefit is expensed during period of investigation. Else allocateperiod of investigation. Else allocate

Calculate per unit subsidy (Article 19.4) Calculate per unit subsidy (Article 19.4) during the period of investigation for each during the period of investigation for each schemescheme

Arrive at the total per unit subsidy for all Arrive at the total per unit subsidy for all schemes.schemes.

Expense Vs. AllocationExpense Vs. Allocation Under what circumstances should Under what circumstances should

subsidies be allocated over some multi-subsidies be allocated over some multi-year period, versus expensed during a year period, versus expensed during a single year?single year?

In absence of allocationIn absence of allocationA large subsidy would have no effects A large subsidy would have no effects

beyond the year in which grantedbeyond the year in which grantedSubsidization amount would be overstated Subsidization amount would be overstated

in certain cases.in certain cases.

Three presumptions for AllocationThree presumptions for AllocationSubsidies linked to purchase of fixed Subsidies linked to purchase of fixed

assets to be allocated.assets to be allocated.R&D subsidies to be presumptively R&D subsidies to be presumptively

allocated except, when allocated except, when demonstrated that doing so is demonstrated that doing so is inappropriate.inappropriate.

Non-recurring subsidies should be Non-recurring subsidies should be presumptively allocated, except presumptively allocated, except when demonstrated that doing so is when demonstrated that doing so is inappropriate.inappropriate.

General Principles for AllocationGeneral Principles for Allocation Affirmative answers to any one of the Affirmative answers to any one of the

following would normally point towards following would normally point towards allocationallocation

Whether the purpose of the subsidy was Whether the purpose of the subsidy was for purchase of fixed assetsfor purchase of fixed assets

Whether non-recurring and / or largeWhether non-recurring and / or largeWhether oriented towards future Whether oriented towards future

productionproductionWhether consisting of equity infusionWhether consisting of equity infusionWhether carried forward in recipients Whether carried forward in recipients

accounting records.accounting records.

Allocation Vs. Expense TableAllocation Vs. Expense TableDistribution of the tableDistribution of the tableGeneral discussionGeneral discussion

Calculation of Certain Types of Calculation of Certain Types of SubsidySubsidy

GrantGrantLoansLoansLoan guaranteesLoan guaranteesProvisions of goods and services by Provisions of goods and services by

the governmentthe governmentPurchase of goods by governmentPurchase of goods by governmentProvision of equity capitalProvision of equity capital

GrantsGrants Direct Transfer of funds :Amount receivedDirect Transfer of funds :Amount received Tax exemption: Amount of tax payable at Tax exemption: Amount of tax payable at

applicable rateapplicable rate Tax reduction: Amount of tax payable at Tax reduction: Amount of tax payable at

applicable rate – tax paidapplicable rate – tax paid Accelerated depreciation: Amount of tax Accelerated depreciation: Amount of tax

payable under normal depreciation schedule – payable under normal depreciation schedule – amount actually paidamount actually paid

Interest rate subsidies: Amount of interest Interest rate subsidies: Amount of interest saved by the recipientsaved by the recipient

In all above cases add an amount for interest In all above cases add an amount for interest during period of investigation.during period of investigation.

Loans from the Government Art 14 (b)Loans from the Government Art 14 (b) Subsidy = Interest normally payable on Subsidy = Interest normally payable on

comparable commercial loan during period of comparable commercial loan during period of investigation – amount of interest paidinvestigation – amount of interest paid

Comparable commercial loan:a loan of a similar Comparable commercial loan:a loan of a similar amountamount with similar with similar repayment periodrepayment period obtainable by the obtainable by the recipientrecipient from a from a representative private bankrepresentative private bank operating on the operating on the domestic marketdomestic market

Commercial interest rate Commercial interest rate Preferably established on the basis of the rate Preferably established on the basis of the rate

actually paid by the concerned company on actually paid by the concerned company on comparable loan from private bank.comparable loan from private bank.

If not, then interest paid on comparable loans If not, then interest paid on comparable loans to companies in to companies in similar financial situation in similar financial situation in the same sectorthe same sector/in /in anyany sector sector

Loans – Special CasesLoans – Special CasesTax deferrals, deferral of any other Tax deferrals, deferral of any other

financial obligations – treat as financial obligations – treat as interest free loansinterest free loans

Reimbursable grants – treat as Reimbursable grants – treat as interest free loans till reimbursedinterest free loans till reimbursed

Contingent liability loans at Contingent liability loans at preferential interest rate – treat as preferential interest rate – treat as loans till determined that it would not loans till determined that it would not be repaid.be repaid.

Loan GuaranteeLoan Guarantee[Art. 14 (c)][Art. 14 (c)]

If not guarantee paidIf not guarantee paidSubsidy= amount of interest payable for Subsidy= amount of interest payable for

comparable loan in absence of comparable loan in absence of government guarantee – amount of government guarantee – amount of interest paid on the guaranteed loan.interest paid on the guaranteed loan.

If guarantee fee paidIf guarantee fee paidNo subsidy if fee is sufficient to enable the No subsidy if fee is sufficient to enable the

guarantee program to cover all its costs guarantee program to cover all its costs and earn a reasonable profit marginand earn a reasonable profit margin

If fee is not sufficient to enable operation If fee is not sufficient to enable operation on a commercial basis then treat as if no on a commercial basis then treat as if no guarantee fee paid.guarantee fee paid.

Provision of Goods and Services by Provision of Goods and Services by the Government- Art. 14(d)the Government- Art. 14(d)

Subsidy = Adequate remuneration for the Subsidy = Adequate remuneration for the product/service in relation to prevailing market product/service in relation to prevailing market conditions in the domestic market – price paid by conditions in the domestic market – price paid by the firmthe firm

Adequacy of remunerationAdequacy of remuneration Establish that same goods/services provided Establish that same goods/services provided

both by government and private operationboth by government and private operation Subsidy = price charged by government – price Subsidy = price charged by government – price

charged by private operators for comparable charged by private operators for comparable purchase topurchase toi) concerned company; elsei) concerned company; elseii) comparable companies in the same sector; ii) comparable companies in the same sector; elseelseiii) in the economy as a wholeiii) in the economy as a whole

Provisions of Goods or Services Provisions of Goods or Services Government MonopolyGovernment Monopoly

Goods or services provided for less than Goods or services provided for less than adequate remuneration if certain adequate remuneration if certain enterprises benefit from preferential rate.enterprises benefit from preferential rate.

Amount of subsidy = normal price – Amount of subsidy = normal price – preferential price.preferential price.

If normal price is insufficient to cover the If normal price is insufficient to cover the supplier’s average total costs plus a supplier’s average total costs plus a reasonable profit margin then,reasonable profit margin then,

Subsidy = Price which would cover total Subsidy = Price which would cover total average costs plus a reasonable profit – average costs plus a reasonable profit – preferential price.preferential price.

Adequacy of Remuneration BenchmarksAdequacy of Remuneration Benchmarks Normally the prices at which the same or similar goods Normally the prices at which the same or similar goods

are sold by private suppliers in arm’s length are sold by private suppliers in arm’s length transactions in the country of provisiontransactions in the country of provision

In following situations prices other than private prices In following situations prices other than private prices may be usedmay be used

Monopoly supply by governmentMonopoly supply by government Government administratively controls the prices for the Government administratively controls the prices for the

goods concernedgoods concerned Private pricesPrivate prices are are distorteddistorted due to government’s due to government’s

predominant role predominant role as a provider of the goodsas a provider of the goods In the above 3 situations any proxy price/constructed In the above 3 situations any proxy price/constructed

price may be used, ensuring that it relates to the price may be used, ensuring that it relates to the prevailing market situation in the country of provisionprevailing market situation in the country of provision

Purchase of Goods by GovernmentPurchase of Goods by Government Subsidy = Price paid for the like product Subsidy = Price paid for the like product

by government – highest price offered for by government – highest price offered for a comparable purchase of the same goods a comparable purchase of the same goods by the private sectorby the private sector

If concerned company makes no If concerned company makes no comparable sales to private operators, comparable sales to private operators, thenthen

Subsidy = Price paid for the like product Subsidy = Price paid for the like product by government – price paid by private by government – price paid by private operators to comparable companies in the operators to comparable companies in the same sector / in the economy as a wholesame sector / in the economy as a whole

Government Monopoly in Purchase Government Monopoly in Purchase of Goodsof Goods

Subsidy = Amount paid by Subsidy = Amount paid by government for the goods – government for the goods – adequate remunerationadequate remuneration

Adequate remuneration = average Adequate remuneration = average cost incurred by the firm selling the cost incurred by the firm selling the product during POI plus reasonable product during POI plus reasonable amount of profit.amount of profit.

Government Provision of Equity Government Provision of Equity CapitalCapital

Not a subsidy unless investment decision Not a subsidy unless investment decision is inconsistent with usual investment is inconsistent with usual investment practice of private investors in the practice of private investors in the exporting country.exporting country.

Subsidy = Price paid by the government Subsidy = Price paid by the government for the shares – normal market price for for the shares – normal market price for the sharesthe shares

If no market is freely traded shares exists, If no market is freely traded shares exists, scrutinize governments’ expectation of a scrutinize governments’ expectation of a return on price paid for equityreturn on price paid for equity

Expense Vs AllocationExpense Vs AllocationTwo broad exercises required for Two broad exercises required for

allocationallocationAttribution to the POI of a portion of Attribution to the POI of a portion of

subsidies granted before the POI but subsidies granted before the POI but whose effects extend over a number whose effects extend over a number of yearsof years

Allocation of the subsidy amount Allocation of the subsidy amount attributed to POI to per unit of the attributed to POI to per unit of the like product.like product.

Attribution of subsidies to POIAttribution of subsidies to POIFor non-recurring subsidiesFor non-recurring subsidiesLinked for acquisition of fixed assetsLinked for acquisition of fixed assetsValue of subsidy to be spread over Value of subsidy to be spread over

normal life of the assetsnormal life of the assetsBased on schedule of depreciation of Based on schedule of depreciation of

assets in the industry involvedassets in the industry involvedUse of straight line method commonUse of straight line method common If asset has life of 5 years then 20% If asset has life of 5 years then 20%

of the subsidy attributed to POI.of the subsidy attributed to POI.

Allocation of Subsidy to per unit of Allocation of Subsidy to per unit of Like ProductLike Product

If export subsidies, then amount If export subsidies, then amount attributed to POI may be divided by attributed to POI may be divided by export volume during POIexport volume during POI

For non-export subsidies domestic For non-export subsidies domestic plus export sales in POI to be used as plus export sales in POI to be used as denominatordenominator

If benefit of subsidy not limited to a If benefit of subsidy not limited to a particular product, total recipient particular product, total recipient sales to be used as denomenator.sales to be used as denomenator.

Deduction from Amount of subsidyDeduction from Amount of subsidy Following may be deducted from amount of Following may be deducted from amount of

subsidysubsidy Application fee / other costs necessarily incurred Application fee / other costs necessarily incurred

to qualify for or obtain the subsidyto qualify for or obtain the subsidy Must be shown that above payment compulsory Must be shown that above payment compulsory

to receive the subsidy. Payment should be to to receive the subsidy. Payment should be to government.government.

Payment to private parties e.g. lawyers, Payment to private parties e.g. lawyers, accountants etc. for obtaining subsidy not accountants etc. for obtaining subsidy not deducteddeducted

Export taxes may be deducted if these continue Export taxes may be deducted if these continue to be levied at the time when duty is to be levied at the time when duty is recommended.recommended.

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