SUMMARY

Decision

A WTO Panel has upheld the majority of claims advanced by Pakistan against countervailing duties (CVDs) imposed by the European Commission on certain imported polymers.

Significance of Decision

This Panel dealt with some fundamental issues relating to what constitutes a "subsidy" under WTO rules. These issues were addressed in the context of a "duty drawback" scheme, under which domestic producers can obtain reductions of import duties paid on inputs that are consumed in the production of exports.

The WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement) deems a subsidy to exist if there is a "financial contribution" by a government (such as foregone tax revenue) that confers a "benefit" on the recipient. However, the Agreement includes an important qualification to this definition. Footnote 1 to the Agreement provides in part that "the exemption of an exported product from duties or taxes borne by the like product when destined for domestic consumption, or the remission of such duties or taxes in amounts not in excess of those which have accrued, shall not be deemed to be a subsidy".

The Panel in the current dispute named this the "Excess Remissions Principle". The Excess Remissions Principle has been part of the multilateral trading system since mid-1950s, when it was included in an Interpretive Note to the GATT. During the Uruguay Round, it was memorialized in footnote 1 of the SCM Agreement.

In the present case, a Pakistani producer/exporter had obtained remissions of import duties on imported production inputs. The European Commission determined that all duties remitted to this company, "rather than any purported excess remission", constituted a countervailable subsidy. The EU "considered that it was appropriate to countervail all remissions, rather than excess remissions", given the Commission's view that "Pakistan lacked a reliable system" to confirm what inputs the company used in producing its exported products.

The Panel found that this approach violated the EU's obligations under the SCM Agreement. It ruled that the Excess Remissions Principle was "the final word in how remissions under duty drawback schemes… are to be identified as subsidies". Thus, according to the Panel, "even if the exporting Member has no reliable system of tracking inputs consumed in the production of a relevant exported product… investigating authorities should still determine if an excess remission occurred". It rejected the EU's argument that "our decision would require investigating authorities to essentially administer another Member's duty drawback system in the event that the system is found to be deficient", stressing that this was not required under the SCM Agreement.

The Panel thus applied the Excess Remissions Principle strictly, allowing products to be countervailed only to the extent that the remission of duties obtained by a company under a duty drawback scheme is actually in excess of the duties that accrued on imported inputs. More generally, the decision reinforces the requirement that investigating authorities must have an appropriate evidentiary basis for their determinations.

REPORT

Background: Pakistan's duty drawback scheme

This dispute arose from countervailing duties imposed by the EU in 2010 on imports of polyethylene terephthalate (PET) from Pakistan and several other countries.

As the Panel found, Pakistan permits licensed companies to "import duty-free production input materials if such materials are consumed in the production of a product that is subsequently exported". A Pakistani PET producer and exporter named Novatex had obtained remissions of duties on imported PET production inputs. The EU considered that all duties remitted to Novatex, "rather than any purported excess remission", constituted a countervailable subsidy, contingent on export performance, "in the form of revenue forgone otherwise due that conferred a benefit to Novatex". The EU "considered that it was appropriate to countervail all remissions, rather than excess remissions, essentially because Pakistan lacked a reliable system to confirm what inputs Novatex used in producing its exported PET and because Pakistan conducted no further examination regarding that issue". Pakistan challenged this approach as a violation of the SCM Agreement.

Preliminary ruling request rejected

The Panel in this dispute was established in March 2015, and the applicable EU CVDs expired in September 2015. In March 2016, the EU made a preliminary request to the Panel to "terminate its work in this dispute because the purpose of these proceedings has already been fulfilled, i.e. to secure the withdrawal of the challenged measures".

The Panel rejected this EU request. It noted that "the challenged measures expired only after panel establishment" and that "we consider it a reasonable possibility that the European Union could impose CVDs on Pakistani goods in a manner that may give rise to certain of the same, or materially similar, WTO inconsistencies that are alleged in this dispute". It added that "the parties dispute, on a fundamental level, how investigating authorities should determine the extent to which duty drawback schemes… may constitute countervailable subsidies within the meaning of the SCM Agreement".

Duty drawback schemes: the EU "incorrectly identified the existence of a subsidy"

As noted above, Article 1 of the SCM Agreement provides that a "subsidy" will be deemed to exist if there is a "financial contribution" by a government that confers a "benefit" on the recipient. A "financial contribution" includes the situation where "government revenue that is otherwise due is foregone or not collected (e.g. fiscal incentives such as tax credits)". Importantly, footnote 1 of the Agreement provides that "the exemption of an exported product from duties or taxes borne by the like product when destined for domestic consumption, or the remission of such duties or taxes in amounts not in excess of those which have accrued, shall not be deemed to be a subsidy".

The Panel observed that the comparison required under this provision was "between remissions of duties obtained by a company under a duty drawback scheme, on the one hand, and duties that accrued on imported production inputs used by that company to produce a subsequently exported product, on the other hand" [original emphasis]. It added that a "subsidy exists insofar as the former exceeds the latter, i.e. an 'excess' remission occurs representing revenue forgone otherwise due". The Panel dubbed this the "Excess Remissions Principle".

The EU pointed to the context provided by other provisions of the SCM Agreement to argue that "footnote 1 no longer can be interpreted to mean that a subsidy in this context can only exist by reason of excess remissions". The EU argued that "the condition relevant to this dispute is that Pakistan either have a reliable verification system to confirm what inputs Novatex used in producing its exported PET or conduct a further examination regarding that issue". It reasoned that "[b]ecause that condition was unsatisfied in the underlying investigation", the EU was "free to apply other principles to calculate the amount of the countervailable subsidy".

The Panel rejected this position. It found that nothing in footnote 1 or any of the other provisions cited by the EU suggested that the Excess Remissions Principle "is anything but the final word" in how remissions under duty drawback schemes were to be identified as subsidies. The Panel concluded that "the Excess Remissions Principle provides the legal standard under which to determine whether remissions of import duties obtained under a duty drawback scheme constitutes a financial contribution in the form of revenue forgone otherwise due…." Thus, according to the Panel, "even if the exporting Member has no reliable system of tracking inputs consumed in the production of a relevant exported product… investigating authorities should still determine if an excess remission occurred".

The Panel ruled that the EU "offered no reasoned and adequate explanation for why the entire amount of unpaid duties was a financial contribution and that those duties were 'in excess of those which have accrued' within the meaning of footnote 1 of the SCM Agreement…." It noted the EU's "concern that our decision would require investigating authorities to essentially administer another Member's duty drawback system in the event that the system is found to be deficient[.]" However, it stressed that "[t]o be clear, this is not what we believe the SCM Agreement requires". Instead, if an exporting Member's system was "found to be wanting… the amount of the excess remissions would need to be determined on the basis of information available to the investigating authority", including through recourse to "facts available" under the Agreement.

The Panel therefore concluded that "by failing to provide a reasoned and adequate explanation for why the entire amount of remitted duties… was 'in excess of those which have accrued' within the meaning of footnote 1", the EU acted inconsistently with Article 1.1(a)(1)(ii) of the SCM Agreement (i.e., there was no valid determination of a financial contribution in the form of foregone revenue). Moreover, as the EU "incorrectly identified the existence of a subsidy", the Panel also found that the EU "acted inconsistently with Article 3.1(a) by improperly finding the existence of a 'subsidy' that was contingent on export performance".

Government-financed loans: EU's determinations left "serious and systemic doubts"

Pakistan also provided government-financed loans through pre-approved banks. The banks were prohibited from charging interest rates above a specified level, which consisted of a base interest rate determined by the State Bank of Pakistan (SBP), plus a further mark-up. The European Commission determined this loan to be a countervailable subsidy.

Pakistan invoked Article 14(b) of the SCM Agreement, which provides in part that "a loan by a government shall not be considered as conferring a benefit, unless there is a difference between the amount that the firm receiving the loan pays on the government loan and the amount the firm would pay on a comparable commercial loan which the firm could actually obtain on the market".

The Panel noted that Article 14(b) "establishes 'guidelines' for determining whether a loan confers a benefit on a recipient". According to those guidelines, "a benchmark under Article 14(b) is a 'comparable commercial loan', which 'should have as many elements as possible in common with the investigated loan to be comparable' such that the comparison is meaningful".

Thus, a key issue before the Panel was "whether the SBP Rate is associated with a 'comparable commercial loan'." After reviewing the arguments and the evidence, the Panel found that the Commission's determinations "leave serious and systemic doubts regarding comparability in terms of timing, structure, maturity, size, and the identities of relevant borrowers". It ruled that the EU acted inconsistently with Article 14(b) by failing to properly identify what Novatex would have paid on a "comparable commercial loan". It also found that the EU acted inconsistently with Article 1.1(b) of the SCM Agreement.

Causation: breach of the "non-attribution" rule

"Causation" is an important requirement of the SCM Agreement. Under Article 15.5, investigating authorities must demonstrate that the subsidized imports are, through the effects of subsidies, causing injury. This provision also sets out the so-called "non-attribution" rule: "The authorities shall … examine any known factors other than the subsidized imports which at the same time are injuring the domestic industry, and the injuries caused by these other factors must not be attributed to the subsidized imports".

In the current investigation, certain parties argued that the injury to the domestic industry was not due to the imports, but to other factors. In the view of the Commission, none of these factors was found to "break the causal link" between the imports and the injury to the domestic industry.

The Panel noted that "[t]he non-attribution language in Article 15.5 calls for an assessment that involves separating and distinguishing the injurious effects of the other factors from the injurious effects of the subsidized imports and requires a satisfactory explanation of the nature and extent of the injurious effects of the other factors, as distinguished from the injurious effects of the subsidized imports". It added that "no method is prescribed… for satisfying the requirements of the causation analysis of the type contained in Article 15.5 of the SCM Agreement".

The Panel rejected most of Pakistan's claims under Article 15.5, including the challenge to the EU's "break the causal link" methodology. However, it did find two violations arising from the Commission's causation analysis, both relating to non-attribution. The Panel found that the Commission's analysis of competition from non-cooperating producers, and its analysis of oil prices, were both inconsistent with Article 15.5.

Verification visits: Panel defines scope of obligation on investigating authority

Article 12.6 of the SCM Agreement provides in part that "[t]he investigating authorities may carry out investigations in the territory of other Members as required" and that "the authorities shall make the results of any such investigations available, or shall provide disclosure thereof pursuant to [Article 12.8], to the firms to which they pertain and may make such results available to the applicants". Article 12.8, in turn, states that "[t]he authorities shall, before a final determination is made, inform all interested Members and interested parties of the essential facts under consideration which form the basis for the decision whether to apply definitive measures…."

During the investigation, the Commission conducted a verification visit at Novatex's premises. Pakistan claimed that the Commission failed to provide the results of this verification visit to Novatex, in violation of Article 12.6. The Panel upheld this claim.

The Panel observed that neither the SCM Agreement nor any other covered agreement defined the term "results" of verification visits, and that this had not yet been extensively defined in any panel or Appellate Body report. The Panel stated that the main purpose of verification was "to enable investigating authorities to confirm the accuracy of information supplied". Therefore, according to the Panel, "the 'results' of a verification visit should reflect the extent to which information supplied was ascertained to be accurate".

The EU argued that the Panel should interpret the term "results" of verification visits in Article 12.6 in light of the obligation in Article 12.8 to disclose "essential facts". The Panel rejected this view, reasoning in part that "the two provisions are substantively distinct". In the current investigation, the Panel found that the Commission acted inconsistently with Article 12.6 because it failed to adequately provide the "results" of the verification visit to Novatex.

The Report of the WTO Panel in European Union — Countervailing Measures on Certain Polyethylene Terephthalate from Pakistan (DS486) was released on 6 July 2017.