[C-557-701]

Preliminary Negative Countervailing Duty Determination; Carbon Steel Wire Rod

From Malaysia

Friday, February 5, 1988

AGENCY: Import Administration, International Trade Administration, Commerce.

ACTION: Notice.

SUMMARY: We preliminarily determine that de minimis countervailable benefits are being provided to manufacturers, producers or exporters in Malaysia of carbon steel wire rod (wire rod) as described in the "Scope of Investigation" section of this notice. The estimated net bounty or grant is 0.45 percent ad valorem. Since this rate is de minimis, our preliminary countervailing duty determination is negative. If this investigation proceeds normally, we will make a final determination on or before April 18, 1988.

EFFECTIVE DATE: February 5, 1988.

FOR FURTHER INFORMATION CONTACT: Steven Morrison, Ross Cotjanle, or Gary Taverman, Office of Investigations, Import Administration, International Trade Administration, U.S. Department of Commerce, 14th Street and Constitution Avenue NW., Washington, DC 20230; telephone: (202) 377-0189, 377-3534, or 377-0161.

SUPPLEMENTARY INFORMATION:

Preliminary Determination

Based on our investigation, we preliminarily determine that de minimis countervailable benefits which constitute bounties or grants within the meaning of section 303 of the Tariff Act of 1930, as amended (the Act), are being provided to manufacturers, producers or exporters in Malaysia of wire rod. For purposes of this investigation, the program on export credit refinancing is preliminarily found to be countervailable. We preliminarily determine the estimated net bounty or grant to be 0.45 percent ad valorem. Although we have determined this program to be countervailable, the respondents received de minimis benefits during the review period, calendar year 1986. Therefore, we preliminarily determine that no benefits which constitute bounties or grants within the meaning of section 303 of the Act are being provided to manufacturers, producers or exporters in Malaysia of wire rod.

Case History

Since the Federal Register publication pertaining to this investigation [the Notice of Initiation (52 FR 36601, September 30, 1987)], the following events have occurred. On October 15, 1987, we presented a questionnaire to the government of Malaysia in Washington, DC, concerning petitioner's allegations. On November 30, 1987, we received a response from the government of Malaysia and a response from Amalgamated Steel Mills Bhd. (ASM), Perdama Corporation Sdn, Bhd. (Perdama), and Tejana Trading Corporation Sdn. Bhd. (Tejana), the respondents identified by the government of Malaysia. ASM is the sole manufacturer of wire rod in this page 3414

investigation; Perdama and Tejana are trading companies.

On December 24, 1987, and January 7, 1988, we delivered supplemental/deficiency questionnaires to the government and the respondent companies, and received responses on January 7, 13, 22, and 25, 1988.

On November 2, 1987, the petitioners filed a request that the preliminary determination be postponed for 49 days. Pursuant to section 703(c)(1)(A) of the Act, we postponed the preliminary determination to no later than January 15, 1988 (52 FR 43633, November 13, 1987). On January 4, 1988, petitioners requested that we further postpone the preliminary determination by an additional 16 days. Accordingly, we extended the period for the preliminary determination to February 1, 1988 (53 FR 942, January 14, 1988).

Scope of Investigation

For purposes of this investigation, the term "carbon steel wire rod" covers a coiled, semi-finished, hot-rolled carbon steel product of approximately round solid cross-section, not under 0.20 inch in diameter, not over 0.74 inch in diameter, tempered or not tempered, treated or not treated, not manufactured or partly manufactured, and valued over or under 4 cents per pound. Wire rod is currently classified under items 607.1400, 607.1710, 607.1720, 607.1730, 607.2200, and 607.2300 of the Tariff Schedules of the United States Annotated and under items 7213.20.00, 7213.31.30, 7213.31.60, 7213.39.00, 7213.41.30, 7213.41.60, 7213.49.00, and 7213.50.00 of the Harmonized System.

Analysis of Programs

Throughout this notice, we refer to certain principles applied to the facts of the current investigation. These general principles are described in the "Subsidies Appendix" attached to the notice of Cold-Rolled Carbon Steel Flat- Rolled Products from Argentina: Final Affirmative Countervailing Duty Determination and Countervailing Duty Order (49 FR 18006, April 26, 1984).

Consistent with our practice in preliminary determinations, when a response to an allegation denies the existence of a program, receipt of benefits under a program, or eligibility of a company or industry under a program, and the Department has no persuasive evidence showing that the response is incorrect, we accept the response for purposes of the preliminary determination. All such responses, however, are subject to verification. If the response cannot be supported at verification, and a program is otherwise countervailable, the program will be considered a bounty or grant in the final determination.

For purposes of this preliminary determination, the period for which we are measuring bounties or grants ("the review period") is calendar year 1986. Based upon our analysis of the petition and the responses to our questionnaire, we preliminarily determine the following:

I. Program Preliminarily Determined to Confer Bounties or Grants

We preliminarily determine that bounties or grants are being provided to manufacturers, producers or exporters in Malaysia of wire rod under the following program:

According to the responses, the Bank Negara Malaysia, the central bank of Malaysia, administers programs to provide export credit refinancing through commercial banks. The Export Credit Refinancing (ECR) programs, as revised in January 1986, provide pre- and post-shipment financing of exports for periods of up to 92 days. In December 1986, the maximum periods for financing under these programs was extended to 120 and 180 days, respectively.

The eligibility criteria for financing under these programs require that the product either include 30 percent value added or use 60 percent local materials or employ lesser amounts of value added in combination with fewer local materials. The revised ECR program limits financing to a specific percentage of the value of each purchase order or export bill.

A new pilot program for pre-shipment financing was introduced in October 1986 to co-exist with the revised pre-shipment program. The pilot program was not used by the respondent companies for exports of wire rod to the United States during the review period.

According to the responses, all three respondent companies received short-term financing under the ECR loan programs. Because only exporters are eligible for these loans, we preliminarily determine that they are countervailable to the extent that they are provided at preferential rates. As a benchmark for short- term loans, we use the national average short-term commercial rate or the most comparable, predominant commercial rate for short-term financing. According to the government response, the Bankers' Acceptance (BA) is the most comparable and commonly used alternative source of short-term financing for imports and exports. The government response lists the monthly average BA rates for 1986. Based on this comparison, we found that ECR loans are provided on terms more favorable than are available for conventional commercial financing. Therefore, we preliminarily determine that ECR loans are countervailable.

To calculate the benefit from the ECR loans in 1986, we used our short-term loan methodology, as set forth in the Subsidies Appendix. Because the ECR loans were shipment specific, we included only those loans which financed exports of wire rod to the United States. We calculated the amount of interest that would have been paid using the BA benchmark and subtracted the amount of interest that was reported as paid. We cumulated the interest saved by ASM and the respondent trading companies. We divided total interest saved on ECR loans by wire rod exports to the United States. We calculated an estimated net bounty or grant of 0.45 percent ad valorem.

II. Program Preliminarily Determined Not to Confer Bounties or Grants

We preliminarily determine that bounties or grants are not being provided to manufacturers, producers or exporters in Malaysia of wire rod under the following program:

Loans From Malaysian Industrial Development Finance (MIDF)

MIDF was established in 1960 by the Malaysian government and several private investors. The original purpose of MIDF was to provide a source of long-term financing for industrial development in Malaysia. The government of Malaysia originally provided funding and some direction to MIDF, but it currently has no direct ownership in MIDF nor does it provide any funding for MIDF loans. It does, however, indirectly own shares in MIDF through the National Equity Corporation for the Bumiputra (native Malaysians).

MIDF is not a bank; rather, it borrows money from other sources and then lends this money at a fixed rate above its own cost of borrowing. One respondent, ASM, had long-term loans from MIDF that were outstanding during the review period.

According to the government response, MIDF provides long-term loans for purchasing machinery, building factories, and expanding existing manufacturing facilities. The government of Malaysia has provided the Department with a list of industries receiving MIDF loans with the number of enterprises in each industry receiving such loans and the aggregate value of MIDF loans disbursed by industry.

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These industries include, among others, the food, steel, non-ferrous metals, machinery, wood products, textile, rubber, chemical and paper industries. Because MIDF loans are available to virtually all Malaysian industries, we preliminarily determine that these loans are not limited to a specific enterprise or industry, or group of enterprises or industries.

III. Programs Preliminarily Determined Not To Be Used

We preliminarily determine that the following programs were not used by manufacturers, producers or exporters in Malaysia of wire rod during the review period:

A. Export Tax Incentives

1. Abatement of Taxable Income Based on the Ratio of Export Sales to Total Sales and of Five Percent of the Value of Indigenous Materials Used in Exports. Section 36 of the Promotion of Investments Act of 1986, as amended by section 19 of the Promotion of Investments (Amendment) Act of 1986, allows abatement of adjusted income equal to (a) 50 percent of the ratio of export sales to total sales and (b) five percent of the value of indigenous Malaysian materials that are incorporated into the manufacture of the exported product. According to the responses, none of the respondent companies claimed benefits under this program on the tax return filed during the review period.

2. Abatement of Net Taxable Income Under Section 29 of the Investment Incentives Act of 1968. Section 29 of the Investment Incentives Act of 1968 provided for an export allowance of eight percent of the increase in the gross income derived from the export of products incorporating more than 50 percent local content, or an allowance of five percent if local content was less than 50 percent. This provision applied to income in tax years prior to 1979. Section 29 was amended in 1980 by the Investment Incentives Act of 1980. Section 29, as amended by this Act, allowed for a deduction of two percent of the ex-factory value of exports from taxable income and a deduction of ten percent of the increase in export value from the preceding year. According to the responses, none of the respondent companies claimed benefits under either version of this program on the tax return filed during the period of review. The further evolution of section 29, as amended in 1983, is discussed in the program immediately below.

3. Abatement of Taxable Income of Five Percent for Trading Companies Exporting Malaysian-made Products. Effective in 1984, the government of Malaysia again amended section 29 of the Investment Incentives Act of 1968, (see section III.A.2. of this notice) to provide a flat deduction of five percent of the f.o.b. value of export revenues from taxable income to most manufacturing companies. This amendment applied to tax returns filed in assessment years 1985 and 1986. The Promotion of Investments Act of 1986 repealed the Investment Incentives Act of 1968, effective January 1, 1986. The Promotion of Investments Act of 1986, as amended, allows the same five percent of export sales as an abatement of taxable income, but limits use in this provision to resident trading companies and agricultural companies. According to the responses, none of the respondent companies claimed benefits under either version of this program on the tax return filed during the review period.

4. Double Deduction For Export Credit Insurance. Beginning in 1985, the Income Tax Rules provided for an additional tax deduction of the cost of premiums for export credit insurance in addition to the deduction allowed from the company income statement, i.e., the starting point for determining taxable income. According to the responses, none of the respondent companies claimed benefits under this program on the tax return filed during the review period.

5. Double Deduction For Export Promotion. The Promotion of Investments Act of 1986 authorizes the Minister of Finance to establish tax rules allowing the deduction of expenses incurred in the promotion of exports for such activities as market research, overseas advertising, participation in foreign trade exhibitions, overseas sales offices, and other specified activities. The Income Tax Rules allow eligible export-related expenses to be deducted twice. According to the responses, none of the respondent companies claimed benefits on the tax return filed during the review period.

6. Industrial Building Allowance. The Income Tax Act of 1967 established a depreciation allowance of ten percent initially and two percent annually thereafter, for buildings constructed or purchased for manufacturing. In 1984, the government of Malaysia extended the Industrial Building Allowance to warehouses and bulk storage installations used for storing goods either finished and ready for export or for imported goods to be incorporated into finished goods for export. According to the responses, none of the respondent companies claimed benefits under this program on the tax return filed during the review period.

B. Other Export Incentives

Export Insurance Program. The Malaysian Export Credit Insurance Bhd. provides export insurance to cover commercial and political risks at premium rates allegedly inadequate to cover the long-term operating costs and losses of the insurance program. Commercial insurance includes coverage of bankruptcy of the foreign buyer, protracted default of the foreign buyer, and non-acceptance of goods by the foreign buyer after the goods have been shipped. According to the responses, none of the respondent companies used this program during the review period.

C. Government Financial Assistance

1. Long-Term Loans--a. Industrial Development Bank of Malaysia (IDBM). I provides long-term financing to all sectors of the Malaysian economy, particularly for the expansion of the productive capacity of capital-intensive and high technology industries. According to the responses, none of the respondent companies had IDBM long-term loans on which principal or interest was outstanding during the review period.

b. Development Bank of Malaysia (DBM). DBM's purpose is to meet the fiancing needs of Bumiputra entrepreneurs and to promote Bumiputra equity participation in commerce and industry. According to the responses, none of the respondent companies had DMB long-term loans on which principal or interest was outstanding during the review period.

D. Other Tax Incentives

1. Pioneer Status Under the Promotion of Investments Act of 1986. According to the government response, there are two pioneer status programs, one under the Investment Incentives Act of 1968 and the other under the Promotion of Investments Act of 1986.

The responses indicate that ASM participated in the pioneer status program of the Investment Incentives Act of 1968 during the period of review (see Section V.C. of this notice); no respondent used pioneer status under the 1968 Act.

2. Investment Tax Credit Allowance. The Investment Tax Credit (ITC) program, now rescinded, was provided for under the Investment Incentives Act of 1968. It provided tax benefits, ranging from 25 to 100 percent, for qualifying capital expenditures. In 1986, a new program, the Investment Tax Allowance (ITA), replaced the ITC. The ITA retains many ITC provisions, but does not have supplemental tax

credits allowed by the ITC for location in development areas, for priority products, and for the amount of Malaysian content in the product. According to the responses, none of the companies under investigation have participated in this program.

IV. Programs Determined not to Exist

We preliminarily determine that the following programs do not exist:

A. Abatement of Taxable Income of Five Percent of the Value of Malaysian Made Inputs Incorporated Into Exports

As originally enacted, section 36 of the Promotion of Investments Act of 1986 allowed an abatement equal to a percentage of the value of the Malaysian inputs incorporated into the exported product. The response of the government of Malaysia states that this provision was never implemented and was subsequently eliminated under section 19 of the Promotion of Investments (Amendment) Act of 1986.

B. Abatement of Taxable Income Based on a Percentage of the Value-Added of Exported Products

A. New Investments Fund

According to the responses, the government of Malaysia provides long-term loans under the New Investments Fund (NIF). This program is administered by the Bank Negara Malaysia and has been in effect since September 1985. NIF loans are provided to companies that have qualified for financing from commercial lending institutions. The response states that NIF's purpose is to promote further investment in, and development of, new productive capacity in the manufacturing, agriculture, tourism, and mining sectors. However, the petition included a recent publication of the Malaysian Industrial Development Authority, which states that funds under NIF are also available for working capital for export industries.

ASM has reported in its response that it obtained an NIF loan in 1986. This NIF loan was made by a consortium of banks in connection with several other long-term loans from commercial banks. ASM's response did not indicate the purpose of the NIF loan.

To determine the purpose of the loan under NIF to ASM, we are requesting all loan application documents to the commercial banks, MIDF, and the Bank Negara Malaysia made in connection with the extension of credit from the NIF and the commercial portions of ASM's 1986 long-term loan. Further, to determine if benefits granted under the NIF are limited in any way, it is necessary for use to receive previously requested information including: (1) The eligibility criteria for receiving NIF loans; (2) a translated copy of all provisions of laws and regulations applicable to NIF; and (3) the loan application documents.

B. Duty Drawback and Duty Exemptions

According to the responses, the government of Malaysia allows for duty drawback and duty exemption/waiver on imported materials physically incorporated into exported products, and for duty exemption on certain imported machinery. ASM reported that it did receive duty drawback and duty exemption on imported scrap and billets, but did not receive any duty exemption for machinery ASM imported into Malaysia in 1986.

Duty drawback for imported materials physically incorporated into the exported product is not countervailable under U.S. law if it is not excessive. To determine if excessive duty drawback was given, to determine if the imported materials with duty exemption were physically incorporated into exported products, and to determine whether or not imported materials receiving a duty exemption also received duty drawback upon exporation, the Department is requesting information concerning:

(1) The control system used by the government to assure that duty drawback is not excessive; (2) the control system used by the government to assure that materials with duty exemption are not diverted for domestic use nor receive duty drawback; and (3) machinery and/or raw materials acquired or used by ASM in 1986, which was imported by others, and was exempt from any duty.

C. Pioneer Status Under the Investment Incentives Act of 1968

According to the government response, there are two pioneer status programs, one under the Investment Incentives Act of 1968 and the other under the Promotion of Investments Act of 1986 (see Section III.D.1. of this notice). Benefits granted under the pioneer status of 1968 include exemption from the 40 percent company income tax on pioneer status product income, exemption from the five percent development tax on the portion of the net taxable company income derived from pioneer production, exemption from excess profits tax, and exemption to shareholders on dividend income derived from pioneer status profits. Under the 1968 Act, pioneer status may have been granted to increase export capacity.

Pioneer status was granted to ASM for wire rod production for a five year period, July 1, 1979 to June 30, 1984. The response of the government of Malaysia in this investigation states that one-year extensions for pioneer status were available for each of the following criteria met by a company: (1) The production of a "priority product;" (2) the Malaysian content of the product is at least fifty percent; or (3) location in a designated area. The government reported that ASM's initial tax return, filed in April 1986, did not claim pioneer status. However, ASM filed a tax return in 1987 amending the tax return filed in 1986, based on a claim of pioneer status. According to the responses, ASM received a two-year extension based upon the status of wire rod as a priority product and the percentage of Malaysian content in the product. The respones also state that neither of the trading companies received pioneer status under the 1968 Act.

We are not able, with information now available, to conclude whether the original designation of ASM as a pioneer company was granted based on export considerations, or whether extensions of pioneer status are limited to a specific industry or enterprise, or group of industries or enterprises, or are tied to exporting activities.

To determine why ASM received pioneer status in 1979 and priority status in 1986, we are requesting all applications and approvals for these benefits. To determine whether extensions of priority status are limited, we are requesting a breakdown by industry and location of the companies receiving priority status for other than an export purpose. Further, we will request quantitative information on the increase, if any, in deductions carried forward due to ASM's claiming pioneer status on the amended tax return filed in 1987.

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Verification

In accordance with section 776(a) of the Act, we will verify the information used in making our final determination.

Public Comment

In accordance with 19 CFR 355.35, we will hold a public hearing, if requested, to afford interested parties an opportunity to comment on this preliminary determination on March 18, 1988, at 2:00 p.m. at the U.S. Department of Commerce, Room 3708, 14th Street and Constitution Avenue, NW., Washington, DC 20230. Individuals who wish to participate in the hearing must submit a request to the Assistant Secretary for Import Administration, Room B-099, at the above address within ten days of the publication of this notice in the Federal Register.

Requests should contain: (1) The party's name, address, and telephone number; (2) the number of participants; (3) the reason for attending; and (4) a list of the issues to be discussed. In addition, ten copies of the business proprietary version and seven copies of the nonproprietary version of the pre-hearing briefs must be submitted to the Assistant Secretary by March 11, 1988. Oral presentations will be limited to issues raised in the briefs. In accordance with 19 CFR 355.33(d) and 355.34, written views will be considered if received not less than 30 days before the final determination is due or, if a hearing is held, within ten days after the hearing transcript is available.

This determination is published pursuant to section 703(f) of the Act (19 U.S.C. 1671b(f)).

Gilbert B. Kaplan,

Acting Assistant Secretary for Import Administration.

February 1, 1988.