NOTICES
DEPARTMENT OF COMMERCE
[C-351-006]
Certain Tool Steel Products from Brazil; Preliminary Results of Countervailing Duty Administrative Review and Tentative Determination to Renegotiate or Terminate Suspension Agreement
Thursday, October 30, 1986
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AGENCY: International Trade Administration, Import Administration Commerce.
ACTION: Notice of Preliminary Results of Countervailing Duty Administrative Review and Tentative Determination to Renegotiate or Terminate Suspension Agreement.
SUMMARY: The Department of Commerce has conducted an administrative review of the agreement suspending the countervailing duty investigation on certain stainless steel products from Brazil.
The review covers the period May 1, 1983 through December 31, 1985 and 17 programs.
As a result of the review, the Department has preliminarily determined the net subsidy to be 28.55 percent ad valorem for the period May 1, 1983 through December 31, 1983, 20.97 percent ad valorem for the period January 1, 1984 through December 31, 1984, and 13.41 percent ad valorem for the period January 1, 1985 through December 31, 1985. The suspension agreement requires the Government of Brazil to impose an export tax to offset completely the net subsidy on the merchandise exported to the United States. Because the Brazilian government collected an average export tax of only 18.56 percent ad valorem for the 1983 period, 19.83 percent ad valorem for 1984, and 10.81 percent ad valorem for 1985, and because the suspension agreement contains no mechanism to adjust for the discrepancies between the Brazilian government's collections and the Department's calculations of the net subsidy, we have tentatively determined that the suspension agreement no longer meets the requirements of section 704(b) and (d) of the Tariff Act and that we should therefore renegotiate or terminate the agreement. Interested parties are invited to comment on these preliminary results.
EFFECTIVE DATE: October 30, 1986.
FOR FURTHER INFORMATION CONTACT: Richard C. Henderson or John D. Miller, Office of Compliance, International Trade Administration, U.S. Department of Commerce, Washington, DC 20130; telephone: (202 377-2786).
SUPPLEMENTARY INFORMATION:
Background
On March 21, 1983, the Department of Commerce ("the Department") published in the Federal Register (48 FR 11731) a notice suspending the countervailing duty investigation on certain tool steel products from Brazil. On October 16, 1985 and March 26, 1986, the petitioner, the Specialty Steel Industry of the United States, requested in accordance with § 355.10 of the Commerce Regulations an administrative review of this suspension agreement. We published the initiations on November 27, 1985 and April 18, 1986 (50 FR 48825 and 51 FR 13273). The Department has now conducted that administrative review in accordance with section 751 of the Tariff Act of 1930 ("the Tariff Act").
Scope of Review
Imports covered by the review are shipments of Brazilian stainless steel products, limited to hot-fininished tool steel, cold-finished tool steel, high speed tool steel, chipper knife tool steel, and band saw steel bars and rods. Such merchandise is currently classifiable under items 603.9300, 606.9400, 606.9505, 606.9510, 606.9520, 606.9525, 606.9535, 606.9540, 607.2800, 607,3405, 607.3420, 607.4600, 607.5405, and 607.5420 of the Tariff Schedules of the United States Annotated.
The review covers the period May 1, 1983 through December 31, 1985 and 17 programs: (1) CACEX export financing; (2) an income tax exemption for export earnings; (3) the export credit premium for the IPI; (4) CIC-CREGE 14- 11 financing; (5) incentives for trading companies (Resolution 883); (6) accelerated depreciation for Brazilian-made capital goods; (7) duty-free treatment and tax exemptions on imported equipment; (8) FINEX (Resolutions 68 and 509); (9) funding for expansion through IPI tax rebates; (10) BNDES long- term loans; (11) FINEP long-term loans; (12) BEFIEX; (13) CIEX; (14) FUNPAR; (15) PROEX; (16) PROSIM; and (17) financing for the storage of merchandise destined for export (Resolution 330).
Analysis of Programs
Under this program, the Department of Foreign Commerce ("CACEX") of the Banco do Brasil provides short-term working capital financing to exporters at preferential rates. These loans have a duration of up to one year. During the period of review, producers of certain tool steel products could obtain CACEX financing for up to 20 percent of the value of their previous year's exports. The three producers used this program during the period of review.
Resolution 674, which became effective on June 11, 1983, set a maximum interest rate of 60 percent and required two interest payments, one 180 days after the loan was granted and the other at maturity. Resolution 882, which became effective on January 2, 1984, required the full interest payment at maturity. It also set the maximum interest rate at full monetary correction (calculated as the change in value of readjustable treasury bonds, "ORTN") plus 3 percentage points.
On August 21, 1984, Resolution 950 superseded Resolution 882 and changed the short-term export financing program substantially. Resolution 950, which was made effective retroactively to January 2, 1984, made working capital financing available through commercial banks at prevailing market rates, with interest due upon maturity. It authorized the Banco do Brasil to pay the lending institution an "equalization fee," or rebate, of up to 10 percentage points over the commercial interest rate, which the lending institution can pass on to the borrower. On May 2, 1985, Resolution 1009 increased the equalization fee to 15 percentage points.
To find the interest differential for Resolution 674 and 882 loans, we compared two effective rates. We made the nominal Resolution 674 rate effective by adjusting for the one interest payment required before maturity. The nominal Resolution 882 rate is the same as the effective rate because the full amount of interest is paid at maturity. For our benchmark, we took the national average rate for 30-day discounts of accounts receivable, as reported in Analise/Business Trends. This rate includes the 1.5 percent tax on financial transactions ("IOF"), from which preferential loans are exempt. We then compounded this rate to find the effective annual commercial benchmark.
Since the interest charged on CACEX export financing is now at prevailing market rates, this program would not be countervailable absent the equalization fee and the exemption from the IOF. Therefore, the interest differential for these loans is equal to the equalization fee plus the 1.5 percent IOF. We consider the benefit, or the cash flow effect, from loans to occur when
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the borrower makes the interest payments. For Resolution 674, 882, 950, and 1009 loans on which interest was paid during the period of review, we multiplied the interest differential by the loan principal. We allocated the benefit over each firm's total exports for the review period. On this basis, we preliminarily determine the benefit from this program to be 11.87 percent ad valorem for 1983, 3.25 percent ad valorem for 1984, and 0.36 percent ad valorem for 1985.
(2) Income Tax Exemption for Export Earnings
Under this program, exporters of certain tool steel products are eligible for an exemption from income tax of a portion of profit attributable to export revenue. The Brazilian government calculates the tax-exempt fraction of profit based on the ratio of export revenue to total revenue. Two firms used this program during the review period. We calculated the benefit by multiplying the amount of tax-exempt profit by the corporate tax rate and allocating the result over total exports.
The nominal corporate tax rate in Brazil is 35 percent. However, Brazilian tax law permits companies to reduce their income taxes by investing up to 26 percent of their tax liability in specified companies and funds. This tax credit effectively reduces the nominal 35 percent corporate tax rate. At verification, the firms provided proof that they had made investments inthe specified companies and funds. Therefore, we calculated the benefit for these firms using the effective tax rate. We calculated the effective tax rates by dividing net tax liability by taxable profit. On this basis, we preliminarily determine the benefit from this program to be 0.21 percent ad valorem for 1983, zero for 1984, and 0.04 percent ad valorem for 1985.
(3) The Export Credit Premium for the IPI
Exporters of certain tool steel products are eligible for the maximum IPI export credit premium. The Brazilian government pays exporters in cash a percentage of the f.o.b. price of their exportered merchandise. The payment is made through the bank involved in the export transaction. Until October 31, 1984, the maximum IPI credit premium was 11 percent. The Brazilian government phased out the IPI export credit premium between November 1, 1984, and May 1, 1985, when the program was eliminated. For all but one firm, The Brazilian government paid the maximum IPI export premium during the review period. Through a special provision of the BEFIEX program (see, (12) below), that firm received a 14 precent premium throughout the review period. We allocated the total IPI export credit premium received on this merchandise by each firm the firm's total exports of this merchandise to the United States during the review period. On this basis, we preliminarily determine the benefit to be 11.66 percent ad valorem for 1983, 11.76 percent ad valorem for 1984, and 4.98 percent ad valorem for 1985.
Under its CIC-CREGE 14-11 circular, the Branco do Brasil provides short-term preferential financing to exporters on the condition that they maintain on deposti a minimum level of foreign exchange. The three produers participated in this program during the period of review.
There is no maximum interest rate for this program. Interest payments are normally made quarterly or seimiannually, with the full principal to be repaid at maturity. We calculated the benefit based on the interest payment date in a manner similar to that used for CACEX export financing, using the same benchmark rate. We preliminarily determine the benefit from this program to be 0.83 interest ad valorem for 1983, 0.54 ad valorem for 1984, and 0.36 interest ad valorem for 1985.
(5) Incentive for Trading Companies (Resolution 883)
Under this program, CACEX declares trading companies eligible to receive loans at preferential rates. These loans are subject to the same interest rates as Resolution 882 loans. The term on Resolution 883 loans in approximately 180 days, with interest pain in full at maturity.
During the period of review, the trading company received benefits under this program for the purchase of certain tool steel products for export. We calculated the benefit in a manner similar to that for CACEX export financing, based on the interest payment date. On this basis, we preliminarily determine the benefit from this program to be zero for 1983 and 1984, and 0.04 interest ad valorem for 1985.
(6) Accelerated Depreciation for Brazilian-made Capital Goods
Firms may depreciate Brazilian-made capital equipment at twice the normal rate allowed under Brazilian tax laws if they obtain approval from the Industrial Development Council ("CDI") for a plant expansion project. Two producers used this program during the period of review. To calculate the benefit, we multiplied the amount of accelerated depreciation declared on the income tax returns filed during the review period by the corporate income tax rate and divided the result by total sales in the review period. Since the two firms reduced their nominal corporate income tax rate by directed investments, we used their tax rates to calulate the benefit. On this basis, we preliminarily determine the benefit to be 0.05 percent ad valorem in 1983, zero for 1984, and 0.03 interest ad valorem for 1985.
(7) Duty-Free Treatment and Tax Exemption on Imported Equipment
Under Decree Law 1428, the CDI provides for the exemption of up to 100 percent of the customs duties and up to 100 percent of the IPI tax, a value added tax imposed on domestic sales of certain imported machinery. The machinery can only be used for specific projects in 14 industries approved by the Brazilian government. The recipient must demonstrate that the machinery or equipment is not available from a Brazilian manufacturer.
Decree Law 1726 repealed this program in 1979. However, companies whose projects were approved prior to the repeal continued to receive benefits pending completion of the project. The three producers received benefits under this program during the review period. To calculate the benefit, we divided the total amount of exemption in the review period by total sales in the review period.
We preliminarily determine the benefit to the 0.33 percent ad valorem for 1983, 0.28 percent ad valorem for 1984, and 0.58 percent ad valorem for 1985.
(8) FINEX (Resolutions 68 and 509)
Resolutions 68 and 509 provide that CACEX may draw upon the resources of the Fundo de Financiamento a Exportacao ("FINEX") to subsidize short- and long-term loans for both Brazilian exporters and foreign importers of Brazilian goods. The loans are extended to the importer by a bank in the importer's country or to the exporter by the exporter's bank. The loans have a maximum term of 180 days and bore an annual interest rate of 8 percent in 1983, and 8 to 10 percent in 1984 and 1985.
CACEX provides the lending bank with an "equalization fee," which compensates the bank for the difference between the subsidized interest rate and a commerical rate, calculated as the London Interbank Offer Rate ("LIBOR") plus a spread. In order to encourage
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bank participation in the program, CACEX also pays the lending bank a commission equal to two percent of the loan principal. Exporters and importers were not able to demonstrate the portion of this commission that was retained by the intermediary bank. Therefore, we have assumed that the full commission was passed through to the firm, thereby effectively decreasing the preferential interest rate. The four firms and their U.S. importers used Resolution 509 short-term loans to finance shipments of certain tool steel products during the period of review. We treated benefits to U.S. importers as benefits to their corresponding Brazilian exporters. Neither importers nor exporters used Resolution 68 loans during the
period of review.
Resolution 509 short-term loans to importers are given in U.S. dollars. For each year of the review, we therefore chose as a benchmark interest rate for comparable loans in the United States the average interest rate for commercial and industrial short-term loans as published by the United States Federal Reserve Board. Resolution 509 financing to exporters is also denominated in U.S. dollars but disbursed in Brazilian cruzeiros. Brazilian firms generally do not have access to direct lending from U.S. banks. Since there is no equivalent commerical dollar-denominated financing in Brazil, we chose as a benchmark for each year of the review period the interest rate on U.S. dollar- denominated Resolution 63 loans, which is LIBOR plus a spread, as reported on Analise/Business Trends.
Since the documentation available at the firms on each Resolution 509 loan does not enable us to determine when the interest on those loans is paid, we have assumed that it is pre-paid. Therefore, the benefit occurs on the date of receipt. To measure the benefit, we multiplied the value of the loan received during the review period by the differential between the benchmark rate and the preferential interest rate, minus bank commissions. We divided the result by total exports of the merchandise to the United States during the review period. We preliminarily determine the benefit to be 1.6 percent ad valorem for 1983, 2.09 percent ad valorem for 1984, and 2.97 percent ad valorem for 1985.
(9) Funding for Expansion through IPI Tax Rebates
Decree Law 1547, enacted in April 1977, provides funding for approved expansion projects in the Brazilian steel industry through a rebate of the IPI trax, a value added tax. Originally, the IPI tax applied to all industries. In 1979, the IPI tax was eliminated except for producers in 14 industries. including steel. For steel products, the IPI tax was 5 percent during the period of review. The rebate, which is not in any way connected to exports, is calculated as 95 percent of the 5 percent tax rebate.
Instead of paying the IPI tax directly to the govenment, a Brazilian steel company until 1981 was able to deposit 95 percent of the net IPI tax due in a special account with the Banco do Brazil. When rebated, the firms had to apply the deposits to steel expansion projects.
As a result of Decree Law 1843 (enacted in December 1980), one producer must now pay the full IPI tax to the government, which then rebates 95 percent of Siderurgica Brasileira, S.A. ("SIDERBRAS"), a government-controlled corporation under the jurisdiction of the Ministry of Industry and Commerce, in the form of equity infusions. That producer received direct rebates under this program from 1977 to 1981, while the other two producers received direct rebates from 1977 to 1985. We treated the rebates as grants. Using the grant methodology outlined in the Subsidies Appendix to the notice of "Final Affirmative Countervailing Duty Determination and Order" on certain cold-rolled carbon steel flat-rolled products from Argentina (49 FR 18006, April 26, 1984) ("the Subsidies Appendix"), we allocated the rebates over 15 years, which is the average useful life of capital assets in the steel industry according to the U.S. Internal Revenue Service Class Life Asset Depreciation Range System. For a discount rate, we used the same short-term interest rates used for CACEX export financing. On this basis, we preliminarily determine the benefit to be 2.36 percent ad valorem for 1983, 1.31 percent ad valorem for 1984, and 1.97 percent ad valorem for 1985.
Long-term financing in cruzeiros is available in Brazil only through government-controlled financial institutions, such as the Banco Nacional de Desenvolvimento Economico e Social ("BNDES"). Two producers received long-term BNDES loans between 1975 and 1983. We have determined that BNDES loans are not countervailable, (see, final affirmative countervailing duty determination on certain carbon steel products from Brazil (49 FR 17988, April 26, 1984)).
(11) FINEP/ADTEN Long-Term Loans
Financiadora de Estudos e Projetos ("FINEP"), an agency of the government, is charged with promoting scientific and technological development in Brazil. FINEP generally makes loans available to manufacturing firms and universities through state-owned development banks. Borrowers negotiate the terms of each loan with the regional development banks. FINEP maintains project oversight throughout the life of the loan. Because the Brazilian government did not provide proof that this program is available to more than a specific enterprise or industry, or group of enterprises or industries, we preliminarily determine that it is countervailable. The three producers received long-term FINEP loans between 1976 and 1983. The interest rates on FINEP loans are equivalent to rates charged on long-term loans made by BNDES. FINEP loans are either not indexed or partially indexed to inflation, as measured by the variation in ORTN, whereas equivalent BNDES loans, which the producers received during these years, are fully indexed to ORTN. Both FINEP and BNDES loans bear variable interest rates. We treat variable-rate loans as a series of short-term loans.
Using fully-indexed BNDES loans as benchmarks, we compared principal and interest payments due on the partially-indexed or unindexed FINEP loans in the period of review with principal and interest payments due on fully-indexed BNDES benchmark loans in the period of review. We consider the differential between the total payments in the period of review to be the benefit, which we allocated over each firm's total sales. On this basis, we preliminarily determine the benefit to be 0.08 percent ad valorem for 1983, 0.06 percent ad valorem for 1984, and 0.05 percent ad valorem for 1985.
The Commission for the Granting of Fiscal Benefits to Special Export Programs ("BEFIEX") allows Brazilian exporters, in exchange for export commitments, to take advantage of several types of benefits, such as import duty reductions, an increased IPI export credit premium, and tax exemptions or tax credits. We verified that one firm received an IPI export credit premium of 14 percent of the f.o.b. price, less commission, on all shipments of tool steel products for the entire period of review. We included the benefits from this program in the calculation of the ad valorem subsidy rate in the IPI export credit premium program (see, (3) above).
We also examined the following programs and preliminarily find that
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exporters of certain tool steel products did not use them during the review period:
a. Tax Reductions on Equipment used in Export Production ("CIEX");
b. Export Financing under the Fundo Nacional de Participadoes ("FUNPAR");
c. Export Promotion Financing ("PROEX");
d. Benefits from Import Substitution ("PROSIM"); and
e. Financing for the Storage of Merchandise Destined for Export ("Resolution 330").
Calculation of Net Subsidy
During the review period, one trading company and three producers exported this merchandise to the United States. Even though the trading company may have purchased the manufactured merchandise from producers at arms length, certain subsidies to producers also benefit the merchandise exported by trading companies. See, "Final Affirmative Countervailing Duty Determination" on live swine and fresh chilled and frozen pork products from Canada (June 17, 1985, 50 FR 25097). We added the producers' benefits from all domestic subsidies and from the following export subsidies: CACEX export financing, income tax exemption for export earnings, and CIC-CREGE 14-11 financing, because producers received benefits from these programs on the basis of total export sales, i.e., those made directly by the producers plus those made by the trading company. The total weighted benefit for the trading company was zero for 1983, 0.42 percent ad valorem for 1984, and 0.17 percent ad valorem for 1985.
On March 31, 1983, the Government of Brazil imposed an export tax designed to offset the net subsidy on exports of certain tool steel products to the United States. We allocated the total export taxes collected by the Brazilian government during the period of review over exports of this merchandise to the United States during the period of review. We preliminarily determine the amount of the offset to be 18.56 percent ad valorem for 1983, 19.83 percent ad valorem for 1984, and 10.81 percent ad valorem for 1985. We subtracted the ad valorem amount of offset from the ad valorem subsidy rate.
One firm did not pay export taxes on certain shipments of tool steel made after May 1, 1983, the effective date of the suspension agreement. The Government of Brazil claims that these shipments were not covered by the agreement because they were governed by export licenses issued before May 1, 1983. We however note that under the terms of the agreement, the export taxes apply to all merchandise exported on or after May 1, 1983, regardless of the date of the export license.
We measured the benefit from the uncollected export taxes in a manner similar to that from an interest-free loan, rolled over every 30 days during the review period. We consider the loan to begin on the day the tax was due, which is 45 days after the end of the month of shipment. Using the same benchmarks as in the CACEX export financing program, we preliminarily determine the benefit to be 0.02 percent ad valorem for 1983, 1.26 percent ad valorem for 1984, and 1.23 percent ad valorem for 1985.
Preliminary Results of Review and Tentative Determination to Renegotiate or Terminate Suspension Agreement
As a result of our review, we preliminarily find that the suspension agreement no longer meets the requirements of sections 704(b) and (d) of the Tariff Act. The agreement requires the Government of Brazil to impose an export tax to offset completely the net subsidy on the merchandise exported to the United States. We preliminarily determine the net subsidy to be 28.55 percent ad valorem for the 1983 period, 20.97 percent ad valorem for 1984, and 13.41 percent ad valorem for 1985. The Government of Brazil collected an average export tax of 18.56 percent ad valorem for the 1983 period, 19.83 percent ad valorem for 1984, and 10.81 percent ad valorem for 1985.
Since the suspension agreement does not contain a mechanism to adjust for these collection deficiencies, we intend to terminate the agreement if the Government of Brazil and the Department cannot initiate an agreement which meets the requirements of section 704(b) and (d) of the Tariff Act by October 31, 1986.
If we terminate the agreement, we will issue a countervailing duty order and notify the Customs Service to suspend liquidation on Brazilian shipments of certain tool steel products entered, or withdrawn from warehouse, for consumption on or after the 90th day prior to the effective date of the order. In accordance with our final determination, the Department will also notify the Customs Service to collect cash deposits of estimated countervailing duties in the amount of 18.77 percent, the rate found in the final determination of this case (June 6, 1983, 48 FR 25250), of the f.o.b. value of the merchandise on all shipments entered, or withdrawn from warehouse, for consumption on or after the date of publication of the order. This deposit requirement would remain in effect until publication of the final results of the next administrative review.
Interested parties may submit written comments on these preliminary results by November 14, 1986, and may request disclosure and/or a hearing within 10 days after the date of publication. Any hearing, if requested, will be held on November 14, 1986. Any request for an administrative protective order must be made no later than five days after the date of publication. The Department will publish the final results of this administrative review including the results of its analysis of issues raised in any such written comments or at a hearing.
This administrative review and notice are in accordance with sections 751(a)(1) and 704 of the Tariff Act (19 U.S.C. 1675 (a)(1) and 19 U.S.C. 1671c) and § 355.10 of the Commerce Regulations (August 13, 1985, 50 FR 32556).
Dated: October 23, 1986.
Gilbert B. Kaplan,
Deputy Assistant Secretary, Import Administration.