C-122-839 Administrative Review POR: 4/1/02-3/31/03 GI/O1: JCortes x3986 PUBLIC VERSIONOctober 22, 2004
MEMORANDUM TO: James J. Jochum Assistant Secretary for Import Administration
THROUGH: Jeffrey May Deputy Assistant Secretary for Import Administration
Susan Kuhbach Director, AD/CVD Enforcement Office 1
FROM: Jesse Cortes Case Analyst, AD/CVD Enforcement Office 1
RE: Certain Softwood Lumber Products from Canada
SUBJECT: New Subsidy Allegation: British Columbia Private Forest Land Tax Program
Background
On June 14, 2004, the Department of Commerce (“Department”) issued the preliminary results of the countervailing duty review of certain softwood lumber products from Canada. See Notice of Preliminary Results of Countervailing Duty Administrative Review: Certain Softwood Lumber Products from Canada, 69 FR 33203 (June 14, 2004) (“Preliminary Results”). On November 18, 2003, the petitioner submitted an additional new subsidy allegation, claiming that the Government of British Columbia (“GBC”) was providing a countervailable subsidy to lumber producers in the form of preferential tax rates to one of two classes of private forest land during the period of review (“POR”) in this segment of the proceeding./i/ Initial comments were submitted by the GBC and the petitioner on December 23, 2003, and January 22, 2004, respectively. After initiating an investigation of this additional allegation, the Department issued a questionnaire to the GBC, to which the GBC responded on May 24, 2004. The GBC subsequently submitted a further response on October 5, 2004, pursuant to a supplemental questionnaire from the Department.
Analysis
Under the GBC’s property tax system, there are two classes of private forest land – Class 3, “unmanaged forest land,” and Class 7, “managed forest land”– and the two classes have incurred different tax rates since the 1990s through the POR. Evidence submitted by both the petitioner and the GBC show considerably lower property tax rates for Class 7 than for Class 3 land, and that the same preferential treatment is imposed at all levels of tax authority for most, though not all, taxes. At the provincial level, Class 7 land incurs rates of C$0.50 and C$2.30 per C$1,000 of assessed land value – or 0.05 and 0.23 percent – for the general rural tax and the school tax, respectively; while Class 3 land incurs rates of C$4.50 and C$12.00 per C$1,000 of assessed land value, or 0.45 and 1.20 percent. See Petitioner 11/18/2003 Allegation at Exhibit 8 through Exhibit 10. See, also, GBC 5/24/04 Response, Exhibit BC-T-11, Taxation (Rural Area) Act Regulation (2003), at 3, and Exhibit BC-T-14, Order on Council 403 and Order on Council 296. Similarly, the various municipal and district level authorities impose generally lower rates for Class 7 than for Class 3 land. See Petitioner 11/18/2003 Allegation at Exhibit 8 through Exhibit10. See, also, GBC 5/24/04 Response, Exhibit BC-T-11 at 3 and Exhibit BC-T-12, Municipal Tax Rates – 2002 and 2003, at Tabs A-C.
This differential tax program is encoded in several laws, of which the most salient is the 1996 Assessment Act (and subsequent amendments). See GBC 5/24/04 Response at Exhibits BC-T-18. The Assessment Act contains forest land classification language at Section 24 under a provision entitled, “Classification and valuation of forest land.” This provision reads, in relevant part, as follows:
24 (1) In this section:
“managed forest land” means land, other than farm land, (a) that is (i) forest reserve land, or (ii) agricultural reserve land as defined in the Forest Land Reserve Act, (b) that is being used for the production and harvesting of timber, (c) that is managed in accordance with (i) the Forest Land Reserve Act, or (ii) the Forest Practices Code of British Columbia Act, (d) with respect to paragraph (c)(i), for which the commissioner receives, by October 31 of the year in which the assessment roll is completed, notification under section 34.4 of the Forest Land Reserve Act that the requirements of that Act and the regulations made under that Act are being met, (e) that is land for which (i) a management plan has been approved under the Forest Act, or (ii) a management commitment has been submitted that meets the requirements of the Forest Land Reserve Act, and (f) that is classified under subsection (2) as managed forest land;
“unmanaged forest land” means forest land that is (a) other than managed forest land, and (b) classified under subsection (3) as unmanaged forest land. (2) The assessor must classify as managed forest land any land that meets the requirements of paragraphs (a) to (e) of the definition of “managed forest land” in subsection (1). (3) The assessor must classify as unmanaged forest land any land described in paragraph (a) of the definition of “unmanaged forest land” in subsection (1). (4) The assessor must declassify all or part of a parcel of land as managed forest land if (a) the commissioner receives, by October 31 of the year in which the assessment roll is completed, notification under section 29.3 of the Forest Land Reserve Act that the land is not being managed in accordance with the requirements of that Act and the regulations made under that Act, or (b) the assessor is not satisfied, on October 31 of the year in which the assessment roll is completed, that the land meets all requirements to be defined as “managed forest land”.
See GBC 5/24/04 Response, Exhibit BC-T-4 at 30-31.
Section 771 of the Act sets forth various elements that must be present for the Department to find a countervailable subsidy. Because the tax authorities impose two different tax rates on private forest land, the governments are foregoing revenue when they collect taxes at the lower rate. Thus, the program results in a financial contribution as defined in section 771(5)(D)(ii) of the Act. It also confers a benefit in the form of tax savings within the meaning of section 771(5)(E) of the Act and 19 CFR 351.509 of the Department’s regulations. The parties raise various arguments regarding these elements of a subsidy determination, but place most of their emphasis upon specificity, as that element is set forth in section 771(5A)(D) of the Act.
The classification language in the Assessment Act imposes a requirement, stated expressly at subsection (b) under the managed forest land definition above, that the land be “used for the production and harvesting of timber.” Additionally, as stated at subsection (4)(b) above, it requires that the assessor declassify any managed forest land that does not meet all the requirements for managed forest land classification (one of which, as noted above, is the production and harvesting of timber). Amendments to the provision enacted from 1996 through 2003, retain the same language stating these two conditions. See GBC 5/24/04 Response, Exhibit BC-T-19, Forest Land Reserve Amendment Act, 1999, at 18-19, and Exhibit BC-T-33, Bill 88: Private Managed Forest Land Act (2003), at 24-25. Thus, the law as published during the POR requires that, for private forest land to be classified, and remain classified, as managed forest land, it had to be “used for the production and harvesting of timber.”
The petitioner pointed to the classification language in arguing that the preferential tax rates for Class 7 land specifically benefitted private forest landowners who commercially harvest timber for lumber production and, hence, conferred a countervailable subsidy to the British Columbia lumber industry during the POR. See Petitioner 11/18/03 Allegation at 38-39. The GBC asserted that the Class 7 tax rate was applied regardless of timber activity and that any private land was eligible for managed forest land status. See GBC 12/23/03 Comment at 16-17. Other evidence provided by the GBC demonstrates that Class 7 landowners who own or operate a sawmill were the majority users of the subsidy during the POR. See BC Private Forest Land Tax Program: Preliminary Calculation Memorandum, October 22, 2004 (“BC Tax Preliminary Calculation”) a copy of which is on file in Room B099 of the main Commerce Department building. The petitioner argued that it was difficult to reconcile the GBC’s assertions with the provision of the law that defines managed forest land as forest land that is being used for the production and harvesting of timber. See Petitioner 1/22/04 Comment at 5. In its initial questionnaire response, the GBC repeated its assertions, saying that the Class 7 tax rates were not tied to timber harvesting or lumber production; that there was no requirement that Class 7 landowners produce lumber or harvest timber; or that no provision of the Assessment Act or subsequent legislation has required landowners to harvest timber or produce lumber as a contingency for obtaining Class 7 status. See, variously, GBC 5/24/04 Response at 2, 9, 11, 13, 22, 37.
In the Department’s supplemental questionnaire, the GBC was asked to explain the contradiction between the GBC’s contentions and the plain language in the Assessment Act that indicates that there was a requirement for Class 7 land to be used for the production and harvesting of timber. In response, the GBC stated that the language of the law did not reflect a strict legal requirement that landowners actually harvest timber or produce lumber to obtain or retain Class 7 status. See GBC 10/5/04 Response at 1. Whether the landowner harvested timber was not dispositive and the fact that a Class 7 landowner ceased to harvest timber did not by itself affect the retention of Class 7 status. Id. at 2. The GBC further explained that the objective behind the Assessment Act always was, and continues to be, to encourage private landowners to adopt reforestation and resource management practices. Id. at 2. In support of these contentions, the GBC submitted an affidavit of Craig Sobering, a Research Officer of the Provincial Agricultural Land Commission, attesting that timber harvesting was never used as a determining factor for Class 7 eligibility. Id. at Exhibit BC-T-39. The GBC also submitted an affidavit of Gregg Paton, Manager of Assessment Valuation Services for B.C. Assessment, attesting that B.C. Assessment has never declassified Class 7 land due solely to cessation of harvesting activities on the land. Id. at Exhibit BC-T-40. Additionally, [ ********************************************** ****************************************************************************** ************************************************** ].
Section 771(5A) of the Act requires us to determine whether a subsidy is specific. Subsidies contingent upon export performance or the use of domestic goods over imported goods are by definition deemed to be specific in accordance with sections 771(5A)(A), (B) and (C) of the Act. For other subsidies, in accordance with section 771(5A)(D)(i) of the Act, if the law enacting the program expressly limits the subsidy program to an enterprise or industry, the program is de jure specific. However, when the law enacting the program does not expressly limit the subsidy program to an enterprise or industry, the Department applies the criteria listed under section 771(5A)(D)(iii) of the Act to determine whether the program is specific based upon the actual manner in which the program is used. Such an examination is referred to as a de facto specificity analysis.
Based on the record evidence, we preliminarily find that the B.C. private forest land tax program is not contingent upon export performance or the use of domestic goods over imported goods. Accordingly, we preliminarily find that it is not an export subsidy or an import substitution subsidy and, thus, is not specific within the meaning of section 771(5A)(B) or (C) of the Act. However, we preliminarily find that the B.C. private forest land tax program is de jure specific within the meaning of section 771(5A)(D) of the Act, which reads, in relevant part:
Where the authority providing the subsidy, or the legislation pursuant to which the authority operates, expressly limits access to the subsidy to an enterprise or industry, the subsidy is specific as a matter of law.
See Section 771(5A)(D)(i) of the Act. British Columbia’s Assessment Act, as published from 1996 through the POR, expressly requires that tax-preferred Class 7 land be “used for the production and harvesting of timber,” and additionally requires the assessor to declassify any Class 7 land not meeting all the Class 7 conditions, of which timber use is one. Hence, in accordance with section 771(5A)(D)(i) of the Act, we preliminarily find that the B.C. private forest land tax program is specific as a matter of law, i.e., de jure specific, to private forest landowners who harvested or produced timber during the POR.
A determination that a subsidy is de jure specific concludes the Department’s analysis. As noted above, the GBC has argued that it provided evidence that, in practice, and notwithstanding the language of the law, timber harvest or production was not a dispositive requirement for obtaining or retaining managed forest land status, and that the Class 7 rolls included landowners who did not harvest or produce timber. However, having preliminarily determined that the language of the Assessment Act expressly limits access to the program to private forest landowners who harvested or produced timber such that the B.C. tax program is de jure specific under section 771(5A)(D)(i) of the Act, we are not required to undertake a factual analysis under section 771(5A)(D)(iii) of the Act.
To fully measure the benefit received under this program, the Department must assess the tax savings enjoyed by Class 7 sawmill landowners at all levels of tax authority in British Columbia, i.e., the provincial authority, as well as the numerous district and municipal authorities. The benefit exists to the extent that the tax paid by Class 7 sawmill landowners as a result of the program is less than the tax they would have paid in the absence of the program. See 19 CFR 351.509(a). In practical terms, the amount of the benefit is the difference between the tax paid under the Class 7 tax rates and the tax paid under the tax rates without Class 7 status, i.e., for private forest land, the Class 3 tax rates.
With regard to the provincial tax, B.C. Assessment calculates an assessed value consisting of the land value and a formula-based valuation of the timber harvested from the land in the prior year. The tax is levied by applying the tax rate to this assessed value. The Department does not currently have data on the timber value. Additionally, the GBC submitted data on the various municipal and district tax rates, but the Department currently lacks information connecting those data to the available information on sawmill ownership. Consequently, for this preliminary determination, the Department has calculated the tax benefit only at the provincial level and based solely on the land value. Using the POR value of British Columbia sawmill softwood shipments as the denominator, and adjusting for British Columbia’s share of the total POR Canadian sawmill softwood shipments, we preliminarily determine a tax benefit to the Class 7 sawmill landowners of 0.09 percent ad valorem during the POR. See BC Tax Preliminary Calculation.
______ ______ Agree Disagree
____________________________ James J. Jochum Assistant Secretary for Import Administration
____________________________ Date
/i/ The petitioner had submitted other new subsidy allegations earlier on August 14, 2004, which the Department addressed in the Preliminary Results. The Department initiated an investigation of this additional new subsidy allegation but did not address it in the Preliminary Results. See Memoranda to Melissa G. Skinner from Margaret Ward, “New Subsidy Allegations,” dated April 19, 2004, which are in the public file in Room B099 of the main Department of Commerce building.