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SECTION 302: Subsidies and Countervailing Duty Law
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SUBSIDIES AND COUNTERVAILING MEASURES

A.            DEFINITIONS 

1. What is subsidy?

"Subsidy" refers to any specific assistance (e.g. financial contribution, income or price 
support schemes) directly or indirectly provided by the government of the country of 
export or origin in respect of the product imported into the Philippines.

      An industry is deemed to have received subsidy where a benefit is conferred as a result of: 

* Direct and/or potential transfer of government funds (e.g., grants, loans, equity infusion, loan guarantees);

* The government foregoing the revenue that should otherwise have been collected (e.g., tax credits); and

* The government providing goods or services, or purchasing goods.

2. What is a countervailing duty?

A "countervailing duty" is a special duty levied, in addition to the regular duty and other charges, by an importing country on its imports which have been found to be subsidized in the country of origin or exportation.   It  is equal to the ascertained amount of subsidy, calculated in terms of subsidy per unit of the subsidized exported product.   It is imposed following an affirmative final determination.

3. What is a countervailing bond?

A "countervailing bond" is a security (cash deposit or bond) equal to the amount of the provisionally calculated amount of subsidy.    It is required to be posted when the investigating authorities find that such measure is necessary to prevent injury being caused during the course of the investigation.           

            4. Are all subsidies countervailable?

            Not all subsidies are countervailable/actionable. Subsidy, in order to be 
countervailable, must be “specific;  i.e., explicitly limited to:

* An enterprise  or group of enterprises;

* An industry sector or group of industries; and

* A designated geographic region within the jurisdiction  of the granting authority. 

"Actionable subsidies” or yellow subsidies" are those falling under the definition of “subsidy” which are neither non-actionable nor prohibited subsidies.  

            5. What are non-actionable and prohibited subsidies?

"Non-actionable subsidies” or green subsidies" "Non-actionable subsidies” or green subsidies" are those which are permitted as 
they  are of  a general nature, i.e., applied across-the-board to all industries and not limited to a specific industry or enterprise or group of enterprises or industries. Subsidy, under this category, cannot be subjected to either countervailing measures or ot
her disciplines under the Agreement.

Examples:

* For research activities conducted by firms;

*To adapt existing production facilities to new environmental requirements; and

* To assist in the development of industries in disadvantaged regions, provided that such assistance is not directed to specific enterprises or industries within the region.

"Prohibited subsidies” or red subsidies," "Prohibited subsidies” or red subsidies," on the other hand, include export subsidies, i.e., those that are contingent on export performance, and subsidies that are contingent on the use of domestic over imported goods. An importing country alleging this kind of subsidy can avail of remedy measures by bringing the matter before the WTO Dispute Settlement Body for redress.   

                                     Examples:                                      Examples:

*        Direct subsidies based on export performance;

*        Currency retention schemes involving a bonus on exports;

*        Provision of subsidized inputs for use in the production of exported goods;

*        Exemption from direct taxes (e.g., tax on profits related to exports);

*        Exemption from, or remission of, indirect taxes (e.g., VAT) on exported products in excess of those borne by these products when sold for domestic consumption;  

*        Remission or drawback of import charges (e.g., tariffs and other duties) in excess of those levied on inputs consumed in the production of exported goods;  

 *        Export guarantee programs at premium rates inadequate to cover the long-term costs of the program; and  

*        Export credits at rates below the government’s cost of borrowing, where they are used to secure a material advantage in export credit terms.

6. What are the elements or factors to be considered before a countervailing duty may be imposed?

There are four (4) elements or factors which must be considered before a countervailing duty may be imposed, namely:

- Product Comparability – a product is identical or alike in all respects to the article under consideration or, in absence of such  product, another product which, although not alike in all respects, has characteristics closely resembling those of the product under consideration.

- Subsidy – refers to any specific assistance directly or indirectly provided by the government of the country of export or origin in respect of a product imported into the Philippines.  

- Injury – means material injury to a domestic industry, threat of material injury or material retardation of the growth or the prevention of the establishment of a domestic industry. Injury test must be based on positive evidence and shall involve an objective examination of both (a) the volume of the subsidized imports and the effect of subsidized imports on the prices of like product in the domestic market, and (b) the consequent impact of these imports on domestic producers of such products.  

- Causal Link  the material injury suffered by the domestic industry is the direct result of the importation of the subsidized product.

7. What is  a country of export?  

            A  “country of export” is the country from where the allegedly subsidized product was shipped to the Philippines, regardless of the location of the seller.  The country of export and the country of origin  may be the same, but not in all instances.

            8. What is a country of origin?

            A “country of origin” is where the allegedly subsidized product was either  wholly obtained or where its last substantial transformation took place.  The country of origin and the country of export may be the same, but not in all instances.  In  case of transshipment, where a product is shipped from a third country that is not the country where the product was manufactured or processed, the country of origin would be different from the country of export.

9. What is  a domestic  industry?

“Domestic industry” refers to the domestic producers, as a whole, of the like product or to those producers of such like product whose collective output of the product constitutes a major proportion of the total domestic production of that product. However, when producers are related to the foreign exporters or importers or are themselves importers of the allegedly subsidized product, the term “domestic industry” may be interpreted as referring to the rest of the producers.

10. What is price depression?

“Price depression”

11. What is price suppression?

“Price suppression” exists when the allegedly subsidized product prevents the domestic producer from increasing its selling price to a level that would allow full recovery of its cost of production.

12. What is price undercutting?

“Price undercutting” refers to the extent by which the allegedly subsidized product is consistently sold at a price below the domestic selling price of the like product.

B.       SCOPE AND COVERAGE 

          1.  What articles are covered by a countervailing action?

A countervailing protest may cover any product which is granted, directly or indirectly, by the government in the country of export or origin, any kind or form of specific subsidy upon the exportation or manufacture of such product, and the importation of such subsidized product is causing or threatening to cause material injury to a domestic industry, or is materially retarding the growth, or preventing the establishment of, a domestic industry.

2. Are there any importations exempted from countervailing action?

Yes, the following importations or consignments shall not be subject to countervailing duty protests:

*        articles imported by, or consigned to, government agencies not organized 
for profit and particularly designated by law or proper authorities to import, directly or through awardees;

*        such articles as would stabilize and/or supplement shortages; and

*        conditionally duty-free importations allowable under Section 105 of the Tariff and Customs Code, as amended.

C.        THE LEGISLATION 

           1. What is the Countervailing Duty Act of 1999? 

Republic Act No. 8751, otherwise known as the “Countervailing Duty Act of 1999,” which amended Section 302 of the Tariff and Customs Code of the Philippines, provides protection to a domestic industry which is  being injured, or is likely to be injured, by subsidized products imported into or sold in the Philippines.

            2. When was R.A. No. 8751 signed?  Effective?

R.A. 8751 was signed  on August 7, 1999 and took effect on August 31, 1999.

  3. What are the fundamental reasons behind the passage of the new countervailing 
duty law?

To transform the domestic countervailing duty law into a more workable and simple piece of legislation providing safety nets against the inflow of cheap subsidized imports;

To strengthen the rules governing the investigation of countervailing cases; and

To align the domestic law with the WTO Agreement on Subsidies and Countervailing Measures.

4. Have the rules and regulations to implement R.A. 8751 been promulgated?

Yes, the Implementing Rules and Regulations (IRR) was signed by the concerned Secretaries/Agency Heads before it was published on September 18, 2000.  The IRR (Joint Administrative Order No. 02, s. 2000) took effect on  September 25, 2000, i.e.,  seven (7) days after publication.

          5. Who administers the countervailing legislation? 

The following government agencies are tasked to administer the countervailing legislation:

Department of Trade and Industry-Bureau of Import Services (DTI-BIS) in the case of industrial goods, or Department of Agriculture  (DA) in the case of agricultural products.

- receives written application and determines whether the application  is proper in form and substance and whether documentary requirements are complied with;

- determines whether or not a prima facie case exists to warrant initiation of investigation; and

-  conducts  preliminary investigation for purposes of determining whether or not provisional measures (countervailing bond) may be imposed.

Tariff Commission (TC)

- conducts formal investigation and submits report of findings to either DTI or DA  Secretary for the issuance, in case of affirmative findings, of a Department Order concerning the imposition of the definitive  countervailing duty.

Bureau of Customs  (BOC)

- imposes the countervailing bond   and/or  the definitive countervailing duty upon receipt of the above Department Order, through  the Secretary of Finance. 

D.       PROCEDURES

1. Who may file a petition for countervailing action?

A petition may be filed by or on behalf of the domestic industry in writing and should be embodied in a notarized form.

2. What is the threshold of support by producers for the petition to be accepted?

(a)     support by domestic producers whose collective output constitutes more than fifty percent (50%) of the total production of the like product produced by the domestic industry; and

(b)     support by producers accounting for at least 25% of the total domestic production of the product alleged to be subsidized.

3. Who else, aside from the domestic industry, may initiate a countervailing investigation?

In special circumstances, DTI or DA may, on its own motion, initiate a countervailing action. The concerned authorities should have sufficient evidence of subsidization, injury and a causal link to justify the initiation of the investigation.

4. What is the “de minimis rule”?

The petition shall be immediately rejected and the investigation terminated in the situations described below:

 In the case of a product originating from a developed country, when:

- the amount of subsidy is de minimis, i.e.,  less than 1%; or

- the volume of subsidized imports or the injury is negligible.

 In the case of a product originating from a developing country, when:

- the level of subsidies granted does not exceed 2% of the value calculated on a per unit basis (for least developed countries, it is 3%); or

- the subsidized imports are less than 4% of the total  imports of the importing
country. However, this rule does not apply when developing countries with individual shares of less than 4% collectively account for more than 9% of total imports.

5. What is meant by “price undertaking”?

a voluntary undertaking by the government of the exporting country to eliminate or limit the subsidy; or

a voluntary commitment by the foreign exporter and/or the producer that they will increase their prices or will cease exporting to the Philippines at the subsidized price.

An offer of price undertaking shall be made only after a preliminary affirmative determination of subsidization and injury to the domestic industry.

6. What are the stages of a countervailing investigation?

 Prima Facie Determination

        The DTI-BIS or DA, upon receipt of the properly documented petition, has ten (10) days to examine the accuracy and adequacy of the petition and to determine whether there is sufficient evidence to justify the initiation of an investigation.

The following information are to be provided in a petition for the levy of countervailing duty:

- identity of the applicant and a description  of the volume and the value of his domestic production of the like product;

- a  list of all known domestic producers of the like product and, if possible;

- a description of the volume and value of the domestic production of the like product accounted for by such producers (if the application is made on behalf of the domestic industry);

- a description of the allegedly subsidized product;

- names of the exporting countries, each known exporter or foreign producer, and a list of the importers of the product;

- estimated aggregated or cumulative quantity, the port and the date of arrival, the import entry declaration of the allegedly subsidized product;

- the nature, extent and estimated amount of the alleged subsidy;

- number of persons employed by the affected domestic industry;

- total capital invested, production and sales volume, and aggregate production capacity of the domestic industry;

- effect of the price of the allegedly subsidized product on the price of the like product in the domestic market; and

- consequent impact of the importation of the allegedly subsidized product on the domestic industry as demonstrated by relevant factors and indices having a bearing on the state of the domestic industry as enumerated in Section 12 of the IRR.

> prices at which the product is sold in the domestic market of the exporting country and export prices;

> injury and causality;

> volume of subsidized imports; and

> adverse effects of such imports on domestic prices and on domestic industries.

Upon acceptance of a properly documented application and before initiating an investigation, the Secretary of DTI or DA shall notify the government of the country of export or origin about the impending countervailing investigation and provide it a copy of the non-confidential summary of the application.       

        Upon notification, the government of the country of export or origin shall also be invited for consultation with the objective of clarifying the situation as to matters referred to in the application and arriving at a mutually agreed solution.

        Preliminary Determination

        Once a prima facie case has been established, DTI-BIS or DA initiates the investigation and makes a preliminary determination (on whether or not a provisional measure may be imposed) not later than twenty (20) days from receipt of the answer of the respondents and other interested parties.

Upon a preliminary affirmative finding, the Secretary of DTI or DA issues a Department Order for the imposition of a provisional countervailing duty in the form of a cash bond equivalent to the amount of provisionally calculated dumping margin.   

The requirement of the dumping bond shall be made not sooner than sixty (60) days from the date of initiation of the investigation.  The date of the initiation of the investigation shall be the date the Secretary publishes such notice in two (2) newspapers of general circulation.

The provisional countervailing duty may be imposed for a period not exceeding four (4) months. 

The Secretary of DTI or DA shall immediately terminate the countervailing investigation upon finding that:

- the amount of subsidy is de minimis or where the volume of the subsidized product, or the injury is negligible; or

- the volume of imports from a particular country is less than three percent (3%) of all imports of like product.  However, this rule does not apply when countries with individual shares of less than 3% collectively account for more than  7% of imports of the product under investigation  (in the case of developing countries the subsidized imports are less than 4% of total imports of the importing country). However, this rule does not apply when developing countries with individual shares of less than 4% collectively account for more than 9% of total imports); or

- the injury is negligible.

          Final Determination

In the conduct of its final determination, the Tariff Commission notifies all interested parties, receives representations and/or other submissions, and holds preliminary conference and public consultations. Investigators conduct ocular plant inspection and examination of books of accounts of all concerned parties domestically and in the exporting countries.   

The Tariff Commission has 120 days from receipt of the advice from the Secretary of DTI/DA to complete its own inquiry and submit its report of findings to either Secretary.  

                                    Issuance of Department Order

The DTI or DA Secretary shall, within ten (10) days from receipt of the affirmative final determination by the Commission, issue a Department Order imposing a definitive countervailing duty on the subsidized product, unless he has earlier accepted a price undertaking from the foreign exporter, producer or government of the country of export or origin.

In case of a negative finding by the Commission, and after the lapse of the period for the petitioner to appeal to the Court of Tax Appeals, the Secretary shall issue, through the Secretary of Finance, an Order for the Commissioner of Customs to immediately release the cash bond to the importer.  All the parties concerned shall also be duly notified of the dismissal of the case.

7.         What are the economic factors to be taken into account in determining material injury  to the domestic industry?

         actual or potential decline in output, sales, market share, profits, productivity, return on investments, or utilization of capacity;

         effects on domestic prices; and

         actual or potential effects on cash flow, inventories, employment, wages, growth, and ability to raise capital or investments.

An additional factor to be taken into account is whether there has been an increased burden on government support programs.

8.         In determining  the existence of a threat of material injury, what factors does the Commission consider?

the nature of the subsidy in question and the trade effects likely to arise therefrom;

a significant rate of increase in the importation of the subsidized product into the domestic market indicating the likelihood of substantially increased importations;

sufficient freely disposable, or an imminent, substantial increase in, production capacity of the foreign exporter indicating the likelihood of substantially increased subsidized exports in the domestic market, taking into account the availability of other export markets to absorb any additional exports;

whether such subsidized products are entering at prices that will have a significantly depressing or suppressing effect on domestic prices, and will likely increase demand for further importation of the subsidized products; and

                                  inventories of the product being investigated.

9. What  factors other than subsidized imports would cause the non-levy of countervailing duties?

contraction in demand or changes in the patterns of consumption;

trade restrictive practices of, and competition between, foreign and domestic producers;

developments in technology and export performance; and

productivity of the domestic industry.

10.       What can the investigating authorities do if the exporting enterprises refuse to cooperate during the investigation?

           The authorities can decide on the basis of the best information available.

11.       What is meant by  “disclosure of essential facts”?

           Before making the final determination, the Commission is required to disclose to the interested parties (e.g. exporters or producers, their governments, and importers) the essential facts on which the decision to apply the duty is to be made.  The parties are given five (5) days from the date of receipt of the essential facts to defend their interests in writing.

E.  MEASURES

1. What are the remedies/measures imposed against subsidization?

Provisional Measure  -  takes the form of a provisional duty in the form of a cash bond, in addition to any other duties, taxes and charges imposed by law on the allegedly subsidized product.   It is applied only after the DTI-BIS  or DA has made a preliminary affirmative determination and no sooner than 60 days from the initiation of the case.

Definitive Duty - final countervailing duty imposed, in addition to the regular duty and other charges, on a protested product imported from a specific exporter, following an affirmative final determination.

2.            What is the “lesser duty rule”?

After it had been established that subsidized imports are causing injury to the domestic industry, the decision on whether the amount of duty should be the full amount of subsidy or less  is made by the authorities. If a lesser duty is adequate to remove the injury to the domestic industry, such duty should be levied.  

F.       DURATION OF MEASURES

1. What is the lifetime  of each countervailing measure?

Provisional countervailing duty    four (4) months

Definitive countervailing duty     – five (5) years from  imposition

2. What is meant by  “sunset review”?

             It is a review that may be  initiated by any interested party or upon own motion of the Commission before the “sunset date”, i.e., the 5th year, to determine whether the expiry of the duration of the countervailing duty imposition would lead to a continuation or recurrence of subsidization and injury.

3. What is an interim review?

           It is a review conducted by the Commission, motu proprio, or upon the direction of the Secretary or upon petition of any interested party to determine whether:

the imposition of the countervailing duty is no longer necessary to offset subsidization, taking into consideration the need to protect the existing domestic industry against dumping. 

the existing duty is not sufficient to counteract the subsidization which is causing injury.  

At least one (1) year should have elapsed since the imposition of the countervailing duty before an interim review can be initiated.

G.  JUDICIAL REVIEW

What are the actions available to the aggrieved and/or interested party?

Within 30  days  from  receipt of  notice  of the final ruling, a petition for review of such ruling  may be filed with the Court of Tax Appeals by any party in a countervailing investigation who is adversely affected by the final ruling on the imposition of a countervailing duty. 

The filing of such petition for review shall not in any way stop or suspend the imposition and collection of the countervailing duty.

H.        PHILIPPINE COMMITMENTS VIS--VIS THE WTO AGREEMENT ON SUBSIDIES AND COUNTERVAILING MEASURES

What previously WTO-inconsistent provisions in the old countervailing law (Section 302) have been amended/revised by the new law to align these with the  WTO Agreement?

lack of provisions for notification of/consultation with the government of the exporting country;

withholding of the release of questioned importation pending the determination of a prima facie case of subsidization;

imposition of provisional measure immediately upon the finding of a prima facie case, effective up to the final determination of subsidization;

indeterminate period of the imposition of the countervailing bond;

inclusion of substitutes in the definition of  “like products”; and

country-specific application of the countervailing duty.

I.         STRENGTHENING OF THE COUNTERVAILING MECHANISM

What provisions in the new countervailing duty law strengthen the mechanism against subsidized imports?

    proactive implementation by concerned authorities, including commercial and agricultural attaches;

    prescription of a statutory period of 120 days for the Commission to complete its formal investigation and submit its report of findings to the Secretary of DTI/DA;

    creation of a Special Unit within the implementing agencies to undertake the tasks mandated under the Countervailing Duty Act of 1999; and

    earmarking of the countervailing duty collected for the capacity building/strengthening of the implementing agencies.

J.         EFFECTIVENESS OF THE COUNTERVAILING DUTY LAW

How effective is the implementation of the new countervailing duty law perceived?

Strengthened might be the countervailing duty law, it can only be as effective as the implementing authorities are.  Trade, agriculture or finance attaches and other consular officials need to be very proactive and vigilant in detecting/monitoring subsidization by foreign governments. It must be recognized that subsidies extended by governments are non-transparent and therefore should be monitored closely. 

In view, however, of the inherent nature of subsidization (i.e.,  a grant by a government), the Philippines,  in pursuing a countervailing case,  necessarily pits herself against the protested foreign government, thereby  opening the possibility of a diplomatic row.

            Further improvements have been introduced in the procedural aspects of investigation to expedite the resolution of countervailing cases. Accordingly, the Commission has adopted the following procedures:

verification/ocular inspection is immediately conducted upon receipt of the case from DTI or DA;

preparation of the staff report within fifty (50) days from receipt of the case;

designation of an alternate counsel so that in the event that the lead  counsel is not available, motion for resetting of hearings will no longer be necessary;

conduct of summary proceedings, similar to regular court procedures. Rather than hearing the testimony of witnesses, their affidavits are submitted to the opposing party at least three (3) days before the scheduled hearing to afford the opposing party time to study said affidavits and formulate clarificatory questions to be asked during the hearing;

conduct of 5-day marathon hearings; and

disallowance of dilatory tactics or unnecessary/unjustified delays.

K.         BUSINESS IMPLICATIONS

What are the implications for business of RA 8751?

For business persons, knowledge of the complex rules on the levy of countervailing duty is essential in their capacities as domestic producers whose interests may be adversely affected by the subsidization of foreign producers and exporters by their respective governments.

Since 1969, only three (3) countervailing cases have been successfully pursued by the national authorities involving:  wheat flour from France and Germany, spanners and wrenches from India and  transmission and conveyor belts from India. The dearth of countervailing cases  filed against subsidized imports  could be attributed to the extreme difficulty of  proving subsidization by foreign governments and the possible straining of intra-state relations that may arise from the filing of a countervailing case.

On the other hand, Philippine exporters are finding out that as their exports of manufactured products rise, there are mounting pressures from industries in the importing countries for the levy of countervailing duty on the ground that the goods are being subsidized.  One such instance happened in August 1995 when Philippine desiccated coconut was imposed a 121.5% countervailing duty by Brazil.  The Philippines complained that the imposition of the countervailing duty violated Article VI of the GATT 1994, charging that there was no basis for Brazil’s action because instead of subsidies granted to desiccated coconut processing, development assistance was provided to coconut farmers through a levy collected from those farmers. 

Under such circumstances, it has become essential for enterprises to be familiar with the rules applicable in this area.  An understanding of the rules of the WTO Agreement on Subsidies and Countervailing Measures could, for instance, enable an exporting enterprise to take precautionary steps to avoid countervailing actions in foreign markets where there are increasing pressures from industrial and other groups for such actions. It would be in the interest of the local exporting enterprise not to allow its exports to rise in a market where it is apprehensive of a petition for countervailing action. Instead, where possible, it should diversify its trade to other markets.

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