EC laws and regulations on the method of calculating subsidy margins in EU anti-subsidy investigation cases

Since Vietnam joined the World Trade Organization (WTO), along with the benefits from the removal of tariff barriers in major markets, Vietnamese exports have always had to face new challenges and difficulties from trade defense measures. Trade defense measures are a tool for WTO member countries to protect domestic production from competition from imported goods when tariff measures are gradually removed. Up to now, Vietnamese exports have been investigated in a total of about 74 trade defense cases (including 44 anti-dumping cases, 5 anti-subsidy cases, 15 self-defense cases and 10 anti-tax evasion investigations). However, in recent years, anti-subsidy investigations on Vietnamese exports have tended to increase. From 2009 to 2013, the United States initiated four anti-subsidy investigations on goods imported from Vietnam (PE bags, steel pipes, clothes hangers and warm-water shrimp).

In addition, on December 19, 2013, the European Commission (EC) initiated an anti-subsidy investigation related to polyester staple fibres (PSF) imported into the EU from Vietnam, India and China - this is the first anti-subsidy investigation by the EU against Vietnam. Among the WTO members applying many anti-subsidy measures, it is impossible not to mention the EU - ranked second in the use of anti-subsidy measures (after the United States).

In anti-subsidy investigations, the calculation method to clearly determine the level of subsidy that the exporting enterprise enjoys and use it as the basis for applying countervailing duties is one of the important issues, which directly affects the subsidy margin and the tax rate that the enterprise must pay.

This study aims to provide an overview of the EC's anti-subsidy investigation and the method of calculating the subsidy margin for specific programs so that readers can better understand this field.

Accordingly, the study will carry out the following specific objectives:

- Study the legal basis, general principles of the EC's countervailing investigation and the EC's subsidy margin calculation method

- Provide recommendations for the Government, manufacturers/exporters, and industry associations of Vietnam in responding to anti-subsidy lawsuits.

Overview of the EU's regulations on subsidy investigations and countervailing measures

Legal basis

Currently, the legal provisions on anti-subsidy investigations and the application of countervailing measures of the EC are stipulated in Regulation No. 597/2009 of 11 June 2009 on protection against subsidized imports from countries that are not members of the European Community. This regulation is systematized based on various legal documents of the EU and international treaties to which the EU is a member, including: (1) Article 133 of the Treaty establishing the European Community; (2) the Regulations establishing the common organization of agricultural markets and the Regulations adopted in accordance with Article 308 of the Treaty (1) apply to goods made from agricultural products, and in particular the provisions of the above Regulations allow exemption from the general principle that border protection measures can be unilaterally replaced by measures set out in these Regulations; (3) Council Regulation (EC) No 2026/97 of 6 October 1997 on safeguards against subsidised imports from countries not members of the European Community; (4) The final outcome of the Uruguay Round of multilateral trade negotiations establishing the World Trade Organization (WTO); (5) Annex 1A to the Agreement establishing the WTO (WTO Agreement), adopted by the Council by Decision No 94/800/EC of 22 December 1994 concluding on behalf of the European Community, which includes, inter alia, the General Agreement on Tariffs and Trade 1994 (GATT 1994), the Agreement on Agriculture, the Agreement on Implementation of Article VI of GATT 1994 (Anti-Dumping Agreement – ​​ADA) and the Agreement on Subsidies and Countervailing Measures (Subsidies Agreement – ​​SCM).

Subsidies and Countervailing Measures

Definition of Subsidies

According to the WTO’s legal provisions in Article 1 of the Agreement on Subsidies and Countervailing Measures (SCM Agreements), a subsidy is considered to exist if

“(a)(1) there is a financial contribution by a government or a public body in the territory of a Member (hereinafter referred to in this Agreement as “the government”) when:

the government directly transfers funds (e.g., grants, loans, or equity contributions), or direct transfers or debt are likely to occur (e.g., loan guarantees);

revenues due to the government have been foregone or not collected (e.g., financial incentives such as tax breaks);

the government provides goods or services other than general infrastructure, or purchases goods;

the government contributes money to a financing mechanism, or assigns or orders a private entity to perform one or more of the functions listed in (i) through (iii) above, which are functions that are normally is normally vested in the government and the work of the private entity is in fact not different from the ordinary activities of the government.

or

(a) (2) there is any form of income support or price subsidy within the meaning of Article XVI of the GATT 1994;

and

(b) a benefit has been conferred as a result.”

In general, subsidies are a policy tool of national governments to support economic development, social security, science and technology development, support for the poor, support education, support for ethnic minorities in difficult areas, etc. However, it is easy to see that these subsidies have contributed to the distortion of international trade, or in other words, these subsidies have created unfair trade that needs to be eliminated in the context of global integration and trade liberalization. Therefore, the WTO has regulations to handle subsidy acts that cause unfair competition between subsidized goods and similar unsubsidized goods from other countries. The WTO's SCM Agreement also stipulates mechanisms and measures to combat this subsidy.

Subsidy classification:

According to WTO regulations, there are 3 types of subsidies as follows:

- Prohibited subsidies: are subsidies that are completely prohibited (including export subsidies and subsidies to prioritize the use of domestic goods instead of imported goods)

- Non-actionable subsidies: are subsidies that are not specifically for any industry, enterprise or group of enterprises (for example, subsidies for research, joint development, support for disadvantaged regions, etc.). However, these subsidies have had to be terminated since 1999.

- Actionable subsidies: Actionable subsidies are subsidies (other than those in the above 2 categories) that cause adverse effects on the interests of other Members. Countervailing subsidies often cause the following effects:

A country's subsidy can cause damage to the domestic industry of the importing country

A country's subsidy can cause damage to another country's exporters when competing in a third country

A country's domestic subsidy can cause damage to exporters who want to compete in this market.

Countervailing measures:

According to WTO regulations, for prohibited subsidies and countervailing subsidies, the injured country can use 02 methods to resolve the violation of the subsidizing Member, including: (1) using the dispute settlement mechanism at the WTO or (2) investigating and applying countervailing measures (Countervailing duty). However, EU law only stipulates one method, which is investigating and applying countervailing measures.

Countervailing measures are used to offset subsidies on imported goods to ensure fair trade conditions and protect domestic production from injury caused by subsidized imports.

In a CVD investigation, to impose anti-subsidy duties (or countervailing duties), the EU investigating authority, the European Commission (EC), must investigate and prove that the subsidy programs of the exporting country's government satisfy the following conditions:

The exporting enterprise benefits from the countervailing subsidy programs;

And the subsidized exports cause or threaten to cause significant injury to the domestic production of the European Union;

The countervailing measures must benefit the Union.

If there is a conclusion that anti-subsidy measures must be applied, it is usually in the form of countervailing duties or price undertakings from the exporter or the government of the subsidizing country. The purpose of either type of measure is to offset the effect of the subsidy that causes the injury. Therefore, according to EC regulation (Article 15.1 of Regulation 2026/97), the level of the countervailing duty shall not exceed the level of the subsidy found and shall be lower than the level of the subsidy if the imposition of this lower level of duty is sufficient to remove the injury to the Union industry.

In either case, it is necessary to know the exact level of the subsidy, which requires a method of calculating the subsidy.

The subsidy may take many forms but must constitute a benefit. According to Article 5 of Regulation 2026/17, the calculation of the benefit shall reflect the amount of subsidy that existed during the investigation period and not simply the face value of the subsidy at the time it was transferred to the recipient or not collected by the government. Therefore, the face value of the subsidy must be converted into its actual value during the investigation period by applying the normal market interest rate.

EC Regulation on the calculation of subsidy margins in investigations

Calculation of subsidies by unit/ad valorem

The WTO SCM Agreement and EC Regulation 2026/97 assume that the main effect of a subsidy is to reduce the production costs of enterprises. Therefore, to reflect this, the SCM Agreement and the EC Regulation stipulate that the calculation of the subsidy margin is to determine the benefit that enterprises enjoy per unit of product during the investigation period. If the product is a consumer product, such as a television, the appropriate unit would be each television. If the product is a bulk product, not packaged, such as fertilizers or chemicals, the subsidy can be calculated per tonne or other appropriate unit of measure. Therefore, the simplest type of subsidy to calculate is the one granted on a per unit basis.

Subsidies on a per unit basis can be converted to an ad valorem value at the Union's borders by expressing the unit subsidy as a percentage of the average CIF import price (excluding duties) per unit of product. In this way, it is possible to conclude whether the subsidy is de minimis (insignificant) or not, since it is expressed in percentage terms (for example, a subsidy is considered de minimis if it is only 1% for imports from developed countries, 2-3% for developing countries).

As analyzed in the previous part of the article, the subsidy programs under investigation are usually preferential programs for tax exemptions (import and export duties, corporate income taxes, etc.), preferential loans for investment and development or for production.

Specific examples of grants or equivalents

To calculate the total amount of the subsidy, all the amounts given in the example below need to be added with interest as described above; the total amount of the subsidy also depends on whether the subsidy is an allocation or an expense.

Direct transfer: This is the simplest case, the amount of the subsidy is exactly the amount received by the enterprise (e.g. a subsidy to offset operating losses).

Tax exemption: the amount of the subsidy is the amount of tax that the exempted company would have paid at the basic tax rate applicable during the investigation period

(iii) Tax reduction: the amount of the subsidy is determined by the difference between the actual tax reduction the enterprise received during the investigation period and the amount that it would have paid at the normal tax rate. (The same method applies to all types of exemptions from obligations, e.g. import duties, severance payments, social security payments)

(iv) Accelerated depreciation: Accelerated depreciation of fixed assets under a government program is treated as a tax credit. This will result in an increase in the enterprise's costs and a reduction in the amount of tax that the enterprise must pay in that financial year. The amount of the subsidy is determined by the difference between the tax that the enterprise would have paid during the investigation period under the normal depreciation schedule for the relevant asset and the tax that the enterprise actually paid under the accelerated depreciation program. Since accelerated depreciation results in a reduction in tax during the investigation period, this constitutes a benefit.

(v) Interest subsidy: In this case, the amount of the subsidy is the amount of interest that the subsidized enterprise saved during the investigation period.

b. Loans

The calculation of the amount of subsidy for loans is usually preferential interest subsidies and, in particular, tax deferrals or non-refundable loans.

For preferential interest subsidies:

As a general rule, the amount of subsidy is determined by the difference in interest rates between the enterprise borrowing from the Government and borrowing from private commercial banks during the investigation period.

Specifically, in these cases, the investigating authority will have to compare the interest rate that the enterprise has to pay (when borrowing from the Government) and the normal interest rate for loans to a similar enterprise from private commercial banks in the domestic exporting country. However, if there is no information on interest rates on loans in the private market, the investigating authority can build the interest rates of private commercial banks based on data on the economy at that time and the situation of the defendant enterprise.

From there, the investigation agency determines the difference in interest rates and the amount of incentives that the enterprise has enjoyed during the investigation period.

For some special cases:

Tax deferral: In some cases, the deferral of taxes or any other financial obligations can be considered an interest-free loan from the state to the enterprise that enjoys it. Therefore, the amount of incentives will also be calculated according to the above method.

Refundable financing: This case is also considered a loan that does not have to be paid interest until it is repaid. If it is not repaid, in whole or in part, it will be considered a grant instead of an interest-free loan from the date it becomes non-refundable. If the grant is allocated over time, this allocation will start on the non-refundable date. The amount of subsidy will be the amount of funding minus the amounts that have been repaid.

Non-Repayable Loans: In certain cases where loans are determined to be non-repayable, the entire loan (including principal and interest) will be considered a grant calculated from the date of the loan.

c. Loan Guarantees

In general, loan guarantees reduce the lender’s risk and make it easier for businesses – the borrowers – to access cheaper capital (lower interest rates). In fact, if the government provides loan guarantees, the business’s access to loans at more favorable interest rates may not be considered a subsidy if the guarantees are based on commercial objectives (businesses must pay a fee to borrow the guaranteed loan at a preferential interest rate).

In the event that the government’s loan guarantee program is determined to be not based on commercial purposes, the program will be considered a financial contribution from the government and create a subsidy for businesses. The amount of the subsidy that a firm receives under the program is determined by one of two methods: (i) the difference between the fee the firm actually paid and the fee the firm would have paid to make the guarantee viable or (ii) the amount the firm pays for the guaranteed loan (fee + interest) and the interest rate the firm would have paid if it had borrowed commercially (whichever method yields the lower result).

If the firm does not pay any fee to receive the incentive, the subsidy is determined by the difference between the amount the firm pays for the guaranteed loan and the amount the firm would have paid for a conventional commercial loan without the government guarantee.

The same calculation principle applies to credit guarantees.

d. State-provided goods and services

A state-provided good or service can be considered a subsidy if it is provided at a price lower than the price of the good or service in the domestic market. For example, the state grants land use rights or leases land to enterprises at a preferential price compared to the free market price. The amount of the subsidy in this case is determined as the difference between the price the company pays for the good/service and the price that would compensate for the good/service under normal market conditions (if the price paid to the government is lower than the market price).

The compensation price is usually determined under market conditions in the exporting country's market and the calculation of the subsidy must only reflect the part of the good/service that is directly used in the production or sale of the like product during the investigation period.

In the case of private suppliers

Similar to other subsidy programs, the amount of subsidy that an enterprise receives is determined by comparing the unit price of services and goods provided by the state with the price provided by private enterprises. Therefore, in this case, the investigating agency determines the amount of subsidy that the enterprise receives as the difference between the state price and the lowest price that the private enterprise provides to the defendant during the investigation period.

If in the case that the defendant enterprise has no transactions with private suppliers, the free market price will be determined by the price that a similar company (in the same industry) pays to buy that product from the free market. And the amount of subsidy is also determined by comparing prices as above.

Government monopoly:

If the government is the sole supplier in a market (e.g. electricity or water), the goods or services provided by the government will be considered to be below the remunerative price if a particular company or industry benefits from the preferential price. In this case, the amount of subsidy is determined by the difference between the preferential price paid to the respondent enterprise (or the industry producing the product under investigation) and the normal price.

However, if the goods or services are widely supplied in the market, then a subsidy will be considered to be specific if there is evidence that the preferential price is reserved for a particular industry or enterprise.

It is possible that prices will vary depending on objective and neutral criteria, for example, large volume buyers will pay less than small retail buyers, for example when buying gas or electricity. In this case, the fact that some firms benefit from preferential prices more than others does not mean that the provision of goods/services is below the full compensation price if this pricing is applied to the whole economy rather than to a particular sector or firm. The amount of subsidy is, in principle, the difference between the preferential price and the normal price.

However, if the normal price is insufficient to cover the average total cost of the supplier (plus an average reasonable profit for the industry), the amount of subsidy is the difference between the preferential price and the price that covers costs and profits.

If the government is the exclusive supplier of the goods/services with a specific use, the preferential price issue does not arise, and the amount of subsidy will be the difference between the price paid by the relevant enterprise and the price that covers the costs and profits of the supplier.

e. Where the government purchases goods

In the case where the government purchases goods or services from the investigated enterprise (at a price higher than the free market price), the amount of subsidy is determined by the difference between the government purchase price and the highest price at which the enterprise sells to the private sector. If the relevant enterprise does not sell to the private sector, the purchase price of private enterprises in the industry from comparable enterprises should be considered.

As above, in the case of a state monopoly in the purchase of such goods and services, the amount of subsidy is determined by the difference between the selling price of the company sufficient to compensate (including the average cost price during the investigation period + reasonable profit) and the price paid by the state to the company (higher than the above price). However, the selling price sufficient to compensate the company is determined on a case-by-case basis.

f. Government provision of equity capital

The provision of equity capital by the government will not be considered to create benefits, unless the investment decision can be considered to be inconsistent with the normal investment practice (including the provision of risk capital) of private investors in the exporting country.

Therefore, the provision of equity capital itself does not create benefits. The issue is whether private investors will invest in the company for which the government provides equity capital. On this basis, the issue should be dealt with on a case-by-case basis. It is clear that if the government buys shares in a company and pays more than the market price for those shares (taking into account other factors that might have influenced a private investor), the amount of the subsidy is the difference between the two prices.

As a general rule, in the absence of a market for freely traded shares, the government’s realistic expectation of the return that would result from the purchase of the shares should be considered. In this case, if there is an independent study showing that the company is a reasonable investment, this would be the most reasonable evidence; otherwise, the burden is on the government to demonstrate the basis on which it expects a reasonable return from the investment.

In cases where there is no market price and the injection of funds to purchase shares is made as part of a government investment program, it is necessary to consider not only the analysis related to the company whose shares are purchased but also the general performance of the program over the last few years. If the information shows that the investment program has brought a reasonable return to the government, it should be considered that the government acted in accordance with the usual investment practices of private investors. Otherwise, the government must demonstrate a basis for the expectation of this investment.

The existence of a subsidy is determined based on the information available to the parties at the time of the injection. Therefore, if the injection was made a few years ago, the fact that the company did not perform as expected does not mean that a subsidy exists, if it can be demonstrated that the expectation of a return is based on the data and facts available at the time of the injection.

Conversely, a subsidy may exist even if a reasonable return has been achieved, if at the time of the capital injection the prospects for that return are so uncertain that no private investor would be willing to invest.

Where there is no market price for the capital injection and there is a subsidy and benefit, i.e. the government has not acted in the manner customary for a private investor, all or part of the capital injection should be treated as a grant. The decision that the entire capital injection should be treated as a grant should only be made in exceptional circumstances where it is considered that the government did not intend to receive any return on the investment and was in fact providing a disguised grant to the company concerned. The decision as to what percentage of the capital injection should be treated as a grant will depend on how closely the government approaches the criteria of a private investor and will be made on a case-by-case basis.

g. Government Non-Collection

The non-collection of a debt by the government or a state-owned bank results in the enterprise not having to pay its financial obligations and is therefore considered a grant. If the grant is to be distributed over time, the period of distribution will begin from the date of non-collection. The amount of the grant will be the amount of the outstanding debt (including accrued interest).