Import Administration, International Trade Administration, Department of Commerce.
Request for public comment.
On January 8, 2003, the Dispute Settlement Body (DSB) of the World Trade Organization (WTO) adopted the report of the WTO Appellate Body in United States—Countervailing Measures Concerning Certain Products from the European Communities, WT/DS212/AB/R (December 9, 2002), that recommends that the United States bring its administrative practice regarding privatization, both as such and as applied in twelve challenged administrative determinations, into conformity with its obligations under the WTO Subsidies and Countervailing Measures Agreement (Subsidies Agreement). Section 123 of the Uruguay Round Agreements Act (URAA) governs changes in the Department of Commerce's (Department) practice when a dispute settlement panel or the Appellate Body of the World Trade Organization finds such practice to be inconsistent with any of the Uruguay Round agreements. Consistent with section 123(1)(g)(C), we are hereby publishing the proposed modification and the explanation for the proposed modification of the Department's privatization methodology, and are providing opportunity for public comment.
Written affirmative comments must be received by 5 p.m. on April 11, 2003. Written rebuttal comments must be received by 5 p.m. on the 28th day after the date of publication of this notice. If the applicable time limit expires on a non-business day, comments that are filed by 5 p.m. on the next business day will be accepted.
Submission of Comments: Parties should submit four written copies and an electronic copy (in WordPerfect, MS Word, or Adobe Acrobat format) of all affirmative and rebuttal comments to Jeffrey May, Director of Policy, Central Records Unit, Room B-099, Import Administration, U.S. Department of Commerce, 14th Street and Constitution Avenue, NW., Washington, DC 20230. Attention: Privatization Methodology. Each party submitting comments is requested to include his or her name Start Printed Page 13898and address, and give reasons for any recommendation. Affirmative comments must be double-spaced and limited, in total, to twenty-five pages. Rebuttal comments must be double-spaced and limited, in total, to ten pages. All comments will be made available for public viewing in the Department's Central Records Unit, which is located in room B-099 of the main Department building.Start Further Info
FOR FURTHER INFORMATION CONTACT:
Greg Campbell, Office of Policy, Import Administration, U.S. Department of Commerce, Room 3712, 14th Street and Constitution Avenue, NW., Washington, DC 20230; telephone: (202) 482-2239.End Further Info End Preamble Start Supplemental Information
Unless otherwise indicated, all citations to the statute are references to the Tariff Act of 1930, as amended (the Act). Citation to “section 123” refers to section 123 of the URAA.
On February 2, 2000, the U.S. Court of Appeals for the Federal Circuit in Delverde Srl v. United States, 202 F.3d 1360, 1365 (Fed. Cir. 2000), reh'g granted in part (June 20, 2000) (Delverde III), rejected the Department's application of its change-in-ownership methodology, as explained in the General Issues Appendix, to the facts before it in that case. The Federal Circuit held that the Act, as amended, did not allow the Department to presume conclusively that the subsidies granted to the former owner of Delverde's corporate assets automatically “passed through” to Delverde following the sale. Rather, where a subsidized company has sold assets to another company, the Court held that the Act requires the Department to examine the particular facts and circumstances of the sale and determine whether the purchasing company directly or indirectly received both a financial contribution and benefit from the government. Delverde III, 202 F.3d at 1364-1368.
Pursuant to the Federal Circuit's finding, the Department developed a new change-in-ownership methodology, first announced in a remand determination on December 4, 2000, following the Federal Circuit's decision in Delverde III, and also applied in Grain-Oriented Electrical Steel from Italy; Final Results of Countervailing Duty Administrative Review, 66 FR 2885 (January 12, 2001). The first step under this methodology was to determine whether the legal person to which the subsidies were given was, in fact, distinct from the legal person that produced the subject merchandise exported to the United States. If we determined that the two persons were distinct, we then analyzed whether a subsidy was provided to the purchasing entity as a result of the change-in-ownership transaction. If we found, however, that the original subsidy recipient and the current producer/exporter were the same person, then we determined that the person continued to benefit from the original subsidies, and its exports were subject to countervailing duties to offset those subsidies.
This “same-person” privatization methodology is currently the subject of appeals to the Federal Circuit in three cases: Acciai Speciali Terni S.p.A. v. United States, Ct. No. 01-00051; Allegheny Ludlum Corp. v. United States, Ct. Nos. 03-1189 and 03-1248; and GTS Industries, S.A. v. United States, Ct. Nos. 03-1175 and 03-1191.
On August 8, 2001, the European Communities requested that the DSB establish a dispute settlement panel to examine the practice of the United States of imposing countervailing duties on certain products exported from the European Communities by privatized companies. A panel was established, the case was briefed and argued, and the Panel circulated its final report on July 31, 2002. United States—Countervailing Measures Concerning Certain Products from the European Communities, WT/DS212/R (July 31, 2002) (Panel Report). The United States appealed certain findings and conclusions in the Panel Report, and the Appellate Body circulated its report on December 9, 2002. United States—Countervailing Measures Concerning Certain Products from the European Communities, WT/DS212/AB/R (December 9, 2002) (AB Report). The AB Report, and the Panel Report as modified by the AB Report, were adopted by the DSB on January 8, 2003. On January 27, 2003, the United States informed the DSB that it would implement the recommendations and rulings of the DSB in a manner consistent with its WTO obligations.
Section 123 of the URAA is the applicable provision governing the actions of the Department when a WTO dispute settlement panel or the Appellate Body finds that a regulation or practice of the Department is inconsistent with any of the Uruguay Round agreements. Specifically, section 123(g)(1) provides that, “[i]n any case in which a dispute settlement panel or the Appellate Body finds in its report that a regulation or practice of a department or agency of the United States is inconsistent with any of the Uruguay Round Agreements, that regulation or practice may not be amended, rescinded, or otherwise modified in the implementation of such report unless and until * * * (C) the head of the relevant department or agency has provided an opportunity for public comment by publishing in the Federal Register the proposed modification and the explanation for the modification; * * *.” Accordingly, consistent with section 123(g)(1)(C), we are publishing this proposed modification and the explanation for the proposed modification of the Department's privatization methodology, and are providing opportunity for public comment.
To provide a context for the discussion of changes to our new privatization methodology, we first review the statutory provisions governing the Department's analysis of changes in ownership in the countervailing duty context, as explained in the Statement of Administrative Action (SAA) and interpreted by the Court. The statute provides, at section 771(5)(F), that “[a] change in 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 administering authority 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 explains that “* * * 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.” SAA, at 258. The SAA further explains that
[s]ection 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. * * * 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 Start Printed Page 13899of the appropriate methodology to be applied.
The Federal Circuit reviewed the statute's change-in-ownership provisions in Delverde III. In that decision, in striking down the Department's previous “gamma” privatization methodology on the basis that, inter alia, it was a per se rule, the Federal Circuit opined
Had Commerce fully examined the facts, it might have found that [the respondent] paid full value for the assets and thus received no benefit from the prior owner's subsidies, or Commerce might have found that [the respondent] did not pay full value and thus did indirectly receive a ‘financial contribution’ and a ‘benefit’ from the government by purchasing its assets from a subsidized company ‘for less than adequate remuneration.’ * * * Commerce might have reached the conclusion that [the respondent] indirectly received a subsidy by other means.
Delverde III, 202 F.3d at 1368.
In light of the SAA and the Court's findings, we believe the statute grants the Department flexibility and discretion in the countervailing duty context for analyzing changes in ownership, including privatizations.
WTO Findings and Recommendations
We now turn to the findings of the Panel and Appellate Body. At the outset, the Panel clarified that its findings apply only to changes in ownership that involve privatizations in which the government retains no controlling interest in the privatized producer and transfers all or substantially all the property. Panel Report at para. 7.62; noted in AB Report at paras. 85 and 117, footnote 177. The Panel then stated that, “[w]hile Members may maintain a rebuttable presumption that the benefit from prior financial contributions (or subsidization) continues to accrue to the privatized producer, privatization at arm's length and for fair market value is sufficient to rebut such a presumption. Panel Report at para. 7.82, upheld at AB Report at para 126. This finding led the Panel to hold, inter alia, that the Department's same-person methodology is contrary to the requirements of the Subsidies Agreement.
While the Appellate Body agreed with the Panel that the same-person methodology is contrary to the requirements of the Subsidies Agreement, it clarified that
[p]rivatization at arm's length and for fair market value may
result in extinguishing the benefit. Indeed, we find that there is a rebuttable presumption that a benefit ceases to exist after such a privatization. Nevertheless, it does not necessarily do so. There is no inflexible rule requiring that investigating authorities, in future cases, automatically determine that a ‘benefit’ derived from pre-privatization financial contributions expires following privatization at arm's length and for fair market value. (Emphasis in original)
AB Report at para. 127.
The Appellate Body identified examples of circumstances where the conditions necessary for “market prices” to fairly and accurately reflect subsidy benefits are not present, or are “severely affected” by the government's economic and other policies:
Markets are mechanisms for exchange. Under certain conditions (e.g., unfettered interplay of supply and demand, broad-based access to information on equal terms, decentralization of economic power, an effective legal system guaranteeing the existence of private property and the enforcement of contracts), prices will reflect the relative scarcity of goods and services in the market. Hence, the actual exchange value of the continuing benefit of past non-recurring financial contributions bestowed on the state-owned enterprise will be fairly reflected in the market price. However, such market conditions are not necessarily always present and they are often dependent on government action.
Of course, every process of privatizing public-owned productive assets takes place within the concrete circumstances prevailing in the market in which the sale occurs. Consequently, the outcome of such a privatization process, namely the price that the market establishes for the state-owned enterprise, will reflect those circumstances. However, governments may choose to impose economic or other policies that, albeit respectful of the market's inherent functioning, are intended to induce certain results from the market. In such circumstances, the market's valuation of the state-owned property may ultimately be severely affected by those government policies, as well as by the conditions in which buyers will subsequently be allowed to enjoy property.
The Panel's absolute rule of “no benefit” may be defensible in the context of transactions between two private parties taking place in reasonably competitive markets; however, it overlooks the ability of governments to obtain certain results from markets by shaping the circumstances and conditions in which markets operate. Privatizations involve complex and long-term investments in which the seller—namely the government—is not necessarily always a passive price taker and, consequently, the “fair market price” of a state-owned enterprise is not necessarily always unrelated to government action. In privatizations, governments have the ability, by designing economic and other policies, to influence the circumstances and the conditions of the sale so as to obtain a certain market valuation of the enterprise.
AB Report at paras. 122-124.
Accordingly, the Appellate Body reversed the Panel's conclusion that once an importing Member has determined that a privatization has taken place at arm's length and for fair market value, it must reach a conclusion that no benefit resulting from the prior financial contribution continues to accrue to the privatized producer. AB Report at paras. 161(b). However, the Appellate Body nevertheless found the Department's same-person privatization methodology to be inconsistent with the WTO obligations of the United States because, under that methodology, where the entity that produced the subject merchandise was the very same entity that received the subsidy, the Department could not find that an arm's-length, fair market value privatization transaction extinguished the pre-privatization subsidy benefit. Accordingly, the Appellate Body recommended that the DSB request the United States to bring its measures and administrative practice (i.e., the same-person methodology) into conformity with its obligations under the Subsidies Agreement. AB Report at para. 162.
Pursuant to the statement of the United States to the DSB that we would implement the recommendations and ruling of the DSB in this matter, and in light of the Department's flexibility and discretion under the statute in analyzing changes in ownership, we propose the following new privatization methodology that is fully consistent with the statute.
This proposed methodology is structured as a sequence of rebuttable presumptions, reflecting the conclusions of the Panel and Appellate Body. The “baseline presumption” is that non-recurring subsidies can benefit the recipient over a period of time (i.e., allocation period) normally corresponding to the average useful life of the recipient's assets. However, an interested party may rebut this baseline presumption by demonstrating that, during the allocation period, a privatization occurred in which the government sold its ownership of all or substantially all of a company or its assets, retaining no controlling interest in the company or its assets, and the sale was an arm's-length transaction for fair market value.
Our first point of inquiry under this proposed methodology, therefore, is whether the change in ownership in fact involves a government's sale to a private party of all or substantially all of a subsidized company or its assets, with Start Printed Page 13900the government retaining no controlling interest in the company or its assets. If we determine that the government has not transferred, as a result of the sale, ownership and effective control over all or substantially all of the company or its assets, then our analysis of the transaction will stop and the baseline presumption of a continuing benefit will not be rebutted. Otherwise, we will proceed to a consideration of whether the sale was at arm's length for fair market value.
In considering whether the evidence presented demonstrates that the transaction was conducted at arm's length, we will be guided by the SAA's definition of an arm's-length transaction, noted above, as 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.
With regard to an analysis of the transaction price, there is no statutory definition of fair market value, nor does the SAA give any guidance in this area. We note, however, that in the context of several recent remand redeterminations in privatization cases before the Court of International Trade (CIT), the Department has applied a process-oriented approach to analyzing the facts and circumstances of particular privatizations and the resulting value paid. Given that certain of these redeterminations are now on appeal before the Federal Circuit, our approach and findings in these remand redeterminations may or may not reflect the full extent of the analysis of the transaction appropriate under this proposed new methodology. However, the CIT remand redeterminations may provide a useful initial framework for an approach to determining whether a transactions price was fair market value.
The basic question before us in analyzing fair market value is whether the government, in its capacity as seller, sought and received, in the form of monetary or equivalent compensation, the full amount that the company or its assets were actually worth under existing market conditions. Accordingly, in determining whether the evidence presented, including, inter alia, information on the process through which the sale was made, demonstrates that the transaction price was fair market value, we propose the following non-exhaustive list of factors that might be considered.
(1) Artificial barriers to entry: Did the government impose exclusions on foreign purchasers or purchasers from other industries, or overly burdensome/unreasonable bidder qualification requirements that artificially suppressed demand for the company? 
(2) Independent analysis: Did the government perform due diligence in determining the appropriate sales price, and did it follow the recommendations of any independent analysis, indicating that maximizing its return was the primary consideration?
(3) Highest bid: Was the highest bid accepted and was the price paid in cash or close equivalent (and not, e.g., with an imbalanced bond-for-equity swap), again indicating that maximizing its return was the government's primary consideration?
(4) Committed investment: Were there price discounts or other inducements in exchange for promises of additional future investment that private, commercial sellers would not normally seek (e.g., retaining redundant workers, building or maintaining unwanted capacity), indicating that maximizing its return was not the government's primary consideration?
If we determine that the evidence presented does not demonstrate that the privatization was at arm's length for fair market value, then we will find that the company continues to benefit from subsidies. Otherwise, if it is demonstrated that the privatization was at arm's length for fair market value, any subsidies will be presumed to be extinguished and, therefore, to be non-countervailable.
However, a party can rebut this presumption of extinguishment by demonstrating that, at the time of the privatization, the broader conditions necessary for the transaction price to fairly and accurately reflect the subsidy benefit were not present, or were severely distorted by government action (or, where appropriate, inaction). In other words, although in our analysis we may find that the sale price was a “market value,” parties can demonstrate that the market itself was so distorted by the government that there is a reasonable basis for believing that the transaction price was meaningfully different from what it would otherwise have been absent the distortive government action. A non-exhaustive list of factors that might be considered in determining whether these broader market distortions existed might include:
1. Basic Conditions: Are the basic requirements for a properly functioning market present in the economy in general as well as in the particular industry or sector, including unfettered interplay of supply and demand, broad-based and equal access to information, decentralization of economic power including effective safeguards against collusive behavior, effective legal guarantees and enforcement of contracts and private property?
2. Related Incentives: Has the government used the prerogatives of government in other areas to facilitate, or affect the outcome of, a sale in a way that a private seller could not, e.g., by using its authority to tax or set duty rates to make the sale more attractive to potential purchasers generally, or to particular (e.g., domestic) purchasers?
3. Legal requirements: Where there special regulations pertaining to this privatization (or privatizations generally) affecting worker retention, etc., that distorted the market price of the company or its assets?
4. Creation/Maintenance: Did the presence of other heavily subsidized companies severely distort the market price of the company or its assets in that industry?
Where a party demonstrates that the broader market or economic environment was severely distorted by government action such that there is a reasonable basis for believing that the transaction price was meaningfully different from what it would otherwise have been absent the distortive government action, the presumption of extinguishment will be rebutted. Where a party does not establish a reasonable Start Printed Page 13901basis for believing that the transaction price was meaningfully different from what it would otherwise have been absent the distortive government action, we will find all subsidies to be extinguished and, therefore, to be non-countervailable.
We recognize that there are many important details of this proposed new methodology that require further elaboration. We encourage parties, in their comments, to provide suggestions on these details and, in particular, to address the following issues:
1. Continuing benefit amount: In those instances where we determine that the privatization did not result in the extinguishment of the benefits of pre-privatization subsidies, how should we quantify the amount of the benefit from those subsidies that the privatized company continues to enjoy?
2. Concurrent subsidies: The Department has long wrestled with the issue of subsidies given to encourage, or that are otherwise concurrent with, a privatization. Should a subsidy, e.g., debt forgiveness, given to a company to encourage or facilitate a privatization be considered a “pre-privatization” subsidy that can be extinguished during the privatization, or a new subsidy to the new owner(s)?
3. Private sales: Our proposed methodology only addresses government-to-private sales of all or substantially all of a company or its assets. However, changes in ownership can take a variety of forms, for instance, private-to-private transactions. In Delverde III, the Federal Circuit stated that there are significant differences between privatization and private-to-private sales and that a case involving privatization does not necessarily govern a private-to-private situation. Can a private-to-private sale extinguish pre-sale subsidy benefits?
4. Partial or gradual sales: What, if any, percentage of shares or assets sold should the threshold be for triggering application of this proposed methodology? How should our proposed methodology be applied in situations where assets or shares are sold incrementally over months or years? What if certain incremental sales are for fair market value and others are not?
5. Effective control: What factors should be considered in determining whether the government has relinquished effective control over the company or assets sold? One possibility here is to apply a standard similar to the “use or direct” standard of our cross-ownership provision, though that standard may not be fully applicable in the case of a government-to-private sale for both theoretical and practical reasons. In analyzing any transfer of control, however, we would propose examining closely any mechanisms (e.g., special or “golden” shares) that allow the government to retain effective (if implicit) control over the company's commercial decisions after the privatization regardless of the explicit share of the government's ownership in the property.
6. Holding or parent companies: Another complicated change-in-ownership variation we have encountered is the situation where the ownership changes occur at a level several times removed from the actual respondent in a particular countervailing duty case. Should application of our methodology be triggered when a partial owner of a holding company that, in turn, owns another holding company that owns the recipient, sells its shares?Start Signature
Dated: March 17, 2003.
Acting Assistant Secretary for Import Administration.
1. Final Affirmative Countervailing Duty Determination: Certain Steel Products from Austria, 58 FR 37217, 37225 (July 9, 1993).Back to Citation
2. We encourage parties to include in their comments specific suggestions on what, if any, explicit definition of fair market value the Department should adopt in the context of a countervailing duty proceeding.Back to Citation
3. See, e.g., Results of Redetermination Pursuant to Remand, Allegheny Ludlum Corp. v. United States, CIT No. 99-09-00566 (January 4, 2002); Results of Redetermination Pursuant to Remand, GTS Industries, S.A. v. United States, CIT No. 00-03-00118 (January 4, 2002).Back to Citation
4. One possible standard to apply here may be whether the government, in its capacity as seller, acted in a manner consistent with the usual sales practices of private, commercial sellers in that country.Back to Citation
5. We propose below various factors that might be considered at each stage of inquiry under this new methodology. These are not meant to represent an exhaustive list of all factors that should be considered, and we invite comment on any additional factors that might be considered. Moreover, we encourage comment on any factors that might more appropriately be considered under a different stage of inquiry than the stage proposed here.Back to Citation
6. The fundamental consideration here is not necessarily the number of bidders per se but, rather, whether the market is contestable, i.e., anyone who wants to buy the company or its assets has a fair and open opportunity to do so.Back to Citation
7. We would generally be concerned here only with the actions of government in its role “as government,” and not the actions of the government in its role as the seller to the extent its actions as seller are consistent with the normal commercial practices of a private seller.Back to Citation
8. Neither the parties nor the Department would be required to quantify by how much the actual transaction price differed from an “undistorted market” value.Back to Citation
9. We encourage comment on how this analysis might intersect with the Department's practices regarding nonmarket economies in the subsidies and countervailing duty context.Back to Citation
10. Speaking to this issue in the Preamble to the CVD Regulations (63 FR 65348, 35355), the Department stated that
[w]hile we have not developed guidelines on how to treat this category of subsidies, we note a special concern because this class of subsidies can, in our experience, be considerable and can have a significant influence on the transaction value, particularly when a significant amount of debt is forgiven in order to make the company attractive to prospective buyers. As our thinking on changes in ownership continues to evolve we will give careful consideration to the issue of whether subsidies granted in conjunction with planned changes in ownership should be given special treatment.Back to Citation
[FR Doc. 03-6846 Filed 3-20-03; 8:45 am]
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