C-570-913
Investigation
POI: 01/01/06 – 12/31/06
Public Version
O6: SEA
May 2, 2008
MEMORANDUM TO: David M. Spooner
Assistant Secretary for Import Administration
THROUGH: Stephen J. Claeys
Deputy Assistant Secretary for Import Administration
FROM: Barbara E. Tillman
Director, Office 6, AD/CVD Operations
RE: Countervailing Duty Investigation: Off-the-Road Tires from the
People’s Republic of China
SUBJECT: Post-Preliminary Analysis of Non-Tradable Share Reform;
Provision of Water to FIEs for Less than Adequate Remuneration;
Grants to the Tire Industry for Electricity; and Various Provincial/Municipal Programs
______________________________________________________________________________
I. Summary of Allegations
On June 18, 2007, Titan Tire Corporation and United Steel, Paper and Forestry, Rubber,
Manufacturing, Energy Allied Industrial and Service Workers International Union, AFL-CIOCLC
(USW), the petitioners, filed a petition alleging that the Government of the People’s
Republic of China (GOC) provided countervailable subsidies to the manufacturers, producers, or
exporters of certain new pneumatic off-the-road tires (OTR tires) in the PRC. The petition
alleged a number of subsidy programs, including: GOC grants to the tire industry for electricity,
and GOC provision of utilities to foreign-invested enterprises (FIEs) for less than adequate
remuneration. On June 22, 2007 and July 3, 2007, the Department of Commerce (the
Department) issued requests for additional information and clarification of certain areas of the
petition involving general issues concerning the countervailing duty (CVD) allegations. Based
on the Department’s requests, the petitioners filed additional information concerning the petition
on June 27, 2007 and July 5, 2007.
On August 7, 2007, the Department determined that the requirements of section 702 of the Tariff
Act of 1930, as amended (the Act) were met and initiated an investigation of these subsidy
allegations./1/ A full discussion on the Department’s decision to initiate an investigation on these
programs is set forth in the Memorandum to Barbara E. Tillman, Director, AD/CVD Operations,
Office 6, Countervailing Duty Investigation of Certain New Pneumatic Off-the-Road Tires From
the People’s Republic of China, dated August 7, 2007 (Initiation Memo), which is on file in the
Import Administration Central Records Unit (CRU), Room 1117 of the Commerce Department
Building.
On October 23, 2007, petitioners alleged a new subsidy provided by the GOC to one of the three
mandatory respondents in this investigation, Guizhou Tire Co., Ltd. (GTC). The submission
alleged a program of non-tradable share reform in the PRC, pursuant to which the GOC provided
to GTC a countervailable subsidy in the form of non-tradable shares and certain tax exemptions.
On November 2, 2007, petitioners provided additional information in support of their allegation.
On November 14, 2007, the Department determined that the requirements of section 702 of the
Act were met and initiated an investigation of the new subsidy allegation. A full discussion on
the Department’s decision to initiate an investigation on this program is set forth in the
Memorandum to Barbara E. Tillman, Director, AD/CVD Operations, Office 6, Countervailing
Duty Investigation of Certain New Pneumatic Off-the-Road Tires From the People’s Republic of
China: Initiation Analysis for New Subsidy Allegation, dated November 14, 2007 (NTS
Initiation Memo), which is on file in the Import Administration Central Records Unit (CRU),
Room 1117 of the Commerce Department Building.
In its Preliminary Determination in this investigation, the Department stated that it did not have
sufficient time to gather the information necessary to analyze the countervailability of these
programs, and that it would issue an interim analysis describing its preliminary findings before
the final determination of this investigation, giving parties the opportunity to comment on its
findings before the issuance of the final determination./2/
II. Programs Preliminarily Determined to be Countervailable
A. Non-Tradable Share Reform (NTSR)
The petitioners alleged that the GOC’s equity in GTC took the form of “non-tradable shares”
(NTS)/3/ owned by a GOC-controlled asset management company, Guiyang State Assets
Investment Management Company (GAMC). Prior to 1999, the GOC owned approximately 58
percent of GTC./4/ In 1999, the GOC selected GTC to serve as a prototype for the transfer of
NTS to private shareholders through China’s stock exchanges./5/ According to the petitioners,
the GOC’s 1999 divestment in GTC was viewed as a failure insofar as the conversion of NTS to
tradable shares available to the public resulted in an excess supply of tradable GTC stock and, by
some estimates, a price decline of 40 percent./6/
In 2006 (the period of investigation), according to petitioners, the GOC again attempted to sell
some its holding of NTS in GTC. This time, however, the petitioners stated, in order to
compensate existing tradable shareholders for any anticipated price decline due to an increase in
the supply of tradable shares, the GOC first awarded “bonus” shares. The petitioners claimed the
bonus shares probably were intended to equal in value any losses incurred by the existing
shareholders, due to an anticipated decline in the per share price of the shares they already held.
In actuality, claimed petitioners, the bonus shares provided by the GOC over-compensated
existing tradable shareholders, due to the increase in their equity holdings combined with the
increase in share price during the same period. Thus, the petitioners argued that GTC’s tradable
shareholders “likely received a substantial windfall in return for their continued investment in
GTC,” leaving them better off than they were before the GOC’s divestment./7/ Moreover, the
petitioners characterized the benefit as received by both GTC’s private shareholders and GTC
itself, since the NTSR increased the overall equity available to GTC. Finally, petitioners argue
that the compensation might not have been necessary in the first place, as any price decline
should have been expected to last only through the short run. In the long run, they argued, the
share price was expected to increase as the beneficial effects of privatization took effect.
Specificity: The petitioners alleged NTSR is limited to publicly listed companies with substantial
amounts of non-tradable state-owned shares and thus is specific under either section
771(5A)(D)(i) or sections 771(5A)(D)(iii)(I), (II) or (III) of the Act. In particular, the petitioners
also noted that Article 10.2 of the WTO Protocol of Accession of the People’s Republic of China
states that subsidies provided to state-owned enterprises (SOEs) are deemed specific if SOEs are
the predominant recipients or receive a disproportionately large amount of such subsidies./8/
Financial Contribution: The petitioners alleged that NTSR constitutes revenue foregone by the
GOC and thus provides a financial contribution under section 771(5)(D)(ii) of the Act.
Specifically, they argued that the transfer of state-owned NTS to private investors for apparently
no compensation constitutes foregoing revenue (i.e.,the price of the transferred shares) that
would otherwise be due. In addition, the petitioners claimed there may be additional revenue
foregone to the extent that any tax revenue (stamp taxes and income taxes) was not collected
pursuant to the transfer.
Benefit: The petitioners alleged that the program provided a benefit equal to the revenue
foregone by the GOC as a result of the transferred bonus shares, and that the share transfer
sustained and even increased the overall equity in GTC. In addition, the petitioners claimed
there may be an additional benefit to the extent that any stamp taxes and income taxes were not
collected pursuant to the transfer.
In addition, Petitioners noted that in determining whether NTSR is a countervailable subsidy, the
Department is not required to undertake its usual privatization analysis, which was developed to
address whether non-recurring subsidies to a firm are extinguished upon the firm’s full
privatization./9/ However, the petitioners noted that this case involves only a partial or gradual
privatization because the GOC maintained 36 percent ownership of GTC following the transfer
of its shares./10/ Moreover, the petitioners argued, in contrast with privatization cases where the
Department may examine whether concurrent subsidies are reflected in the price paid for a fully
privatized entity,/11/ in this case there is no issue regarding whether the subsidy is reflected in
the price paid because the bonus shares were received free of charge.
1. Information Gathering
On November 14, 2007, the Department issued a new subsidy allegation questionnaire to the
GOC and GTC./12/ In the questionnaire, we requested that the GOC and GTC provide
information related to an alleged countervailable program of NTSR. The GOC and GTC were
asked to provide information including, but not limited to, details of: (i) the non-tradable share
reform announced and initiated by the China Securities Regulatory Commission in 2005, and (ii)
the 2006 transfer of over 44 million shares of GTC from GAMC to existing holders of GTC’s
tradable shares./13/
On December 10, 2007, the GOC and GTC timely submitted their response. In their combined
response, the GOC and GTC denied any benefit to GTC resulted from NTSR or the 2006 transfer
of bonus shares to GTC’s private shareholders. According to the GOC’s response, the current
iteration of NTSR (or “split-share structure” reform) was launched in 2005 as a pilot program for
certain listed companies (in both provinces and municipalities) and involves a wide range of
industries./14/ The program facilitates the exchange of NTS for tradable shares, but the GOC
described it as not involving the listed company’s operations and having no direct impact on the
listed company’s financial interests./15/ Each listed company’s shareholders carry out the NTSR
according to that company’s NTSR plan,/16/ but the company and/or its shareholders are not
required to “apply” for the NTSR process. A Reform Guidance Group exists to provide
guidance and to monitor compliance with the laws and regulations relevant to NTSR, and to
assist parties in assessing their rights, but it does not approve or implement a company’s reform
plan./17/ The GOC explained that NTSR was conducted via the stock exchanges and that
government agencies do not keep records or require applications. The GOC further noted that
any listed company with NTS may participate in NTSR, regardless of whether those NTS were
issued by SOEs, FIEs, or private enterprises.
GTC’s response primarily addressed the transfer of 44,863,286 shares on April 5, 2006, pursuant
to the reform plan approved by GTC’s shareholders on March 24, 2006. The reform plan gave
GAMC the right to convert its NTS into tradable shares, which would then allow GAMC to
retain or sell its GTC shares in the market, subject to certain restrictions./18/ However, due to
the risks faced by GTC’s tradable shareholders post-conversion of GAMC’s NTS (including
dilution of shares and possible decline in value of GTC’s tradable shares), GAMC and GTC’s
tradable shareholders negotiated a business agreement whereby GTC’s private investors would
be compensated for agreeing to undertake such risks. In exchange for the right to float its
previously NTS on the stock exchange, GAMC agreed to transfer 3.6 shares for every 10
tradable shares held by GTC’s tradable shareholders registered by the implementation date.
Since GTC itself did not receive any new or additional shares as part of the transfer, GTC stated
that it had not received any income and thus the GOC did not forego any income tax revenue.
On February 27, 2008, the GOC submitted its response to our third post-preliminary
determination supplemental questionnaire, which included additional information regarding the
organizational control and structure of GAMC (GTC’s sole non-tradable shareholder) and the
NTSR program./19/ The GOC stated that SASAC is the sole owner of GAMC and is a
department of the Guiyang Municipal Government, which authorized and approved GAMC’s
incorporation. However, the GOC noted that the Guiyang branch of SASAC (Guiyang SASAC)
has no relationship with the Guizhou Provincial Government. In analyzing the value of NTS,
GAMC relied on Consideration Level Calculation of Share Split Reform, a January 2006
Financial Advisor Report./20/ The report recommended GTC grant 3 to 4 shares for every 10
tradable shares, a ratio that the report stated was designed to remunerate GAMC for its shares
while also protecting GTC’s tradable shareholders. In addition, the GOC provided
documentation regarding the record of the vote, the purchase and sale of stock (which may
trigger payment of a stamp tax and/or commission), income tax, and daily stock prices for the
POI.
2. Verification
At the national government verification, the Department met with GOC officials from SASAC
(National SASAC), the CSRC, and the Ministry of Finance’s State Administration for Taxation
(SAT), to discuss their respective roles in the “Split-Share Structure Reform of the Listed
Companies,” also known as the “Non-Tradable Share Reform” (NTSR). The Department also
met with local government officials from Guiyang SASAC and GAMC, and with representatives
from GTC, in Guiyang City, Guizhou Province, PRC, to discuss NTSR in relation to GTC
specifically. The information provided during verification by the GOC and GTC with respect to
NTSR is summarized below./21/
State-Owned Assets Supervision and Administration Commission (National SASAC)
National SASAC officials stated that the main purpose of NTSR was to increase liquidity in the
Chinese securities market by converting all NTS to tradable shares, while at the same time
alleviating tradable shareholders’ fears that stock values could decrease with the increased
supply of available shares on the market. The National SASAC officials indicated that it
understood the program was started in 2005 and that the reform was nearly complete.
In its main role as an investor for the GOC, National SASAC officials noted that SASAC
typically invests in the group or parent company that is investing in an individual company.
When a key decision is being made, such as NTSR, the parent company must seek approval from
SASAC. The National SASAC officials stated that there are about 150 enterprises under its
supervision, including publicly-held companies and SOEs.
National SASAC officials stated that CSRC was the main government agency responsible for
NTSR overall, while SASAC was responsible for only a small portion of the companies that
participated in NTSR. For those companies participating in NTSR, National SASAC officials
stated that its role in NTSR was equivalent to that of any other shareholder in a company, which
included voting on whether to take part in the reform, and participating in negotiations regarding
the proper compensation for the tradable shareholders.
The National SASAC officials stated that all of its NTS (including those in GTC) have been
converted to tradable shares, and SASAC has sold some of its newly tradable shares in
companies other than GTC. However, typically there are limits as to how many newly converted
tradable shares the owner may sell within the first three years following the completion of the
reform. As such, the National SASAC officials stated, SASAC has by law been required to hold
some of its newly tradable shares.
China Securities Regulatory Commission
The CSRC officials stated that the CSRC mandated, and was the primary agency responsible for,
NTSR. Prior to NTSR, only shares issued after a company’s initial public offering (IPO) could
be traded on the securities market; shares issued before a company’s IPO could not be traded.
As a result, CRSC officials explained, only one third of domestic shares were available for
purchase on the securities market (i.e., tradable shares). CRSC officials stated that this situation,
referred to as split-share structure, had negative effects on the Chinese capital market and led to
institutional differences between the non-tradable shareholders and tradable shareholders. As a
result of this split-share structure, the NTSR was implemented to improve the development of
the PRC’s capital markets while also protecting the interests of both the non-tradable and
tradable shareholders. Under the NTSR, non-tradable shares are converted into tradable shares,
while at the same time providing compensation to the tradable shareholders for the decline in
share value caused by the increased supply of tradable shares on the securities market. As of
March 2008, CSRC officials stated that more than 1,350 companies had participated in NTSR,
and that 98 percent of eligible companies have completed or are currently in the process of
implementing the reform./22/
CSRC officials stated that the decision to undergo NTSR is solely the decision of the company’s
shareholders; neither the GOC nor the company itself takes part in any of the decisions regarding
the reform. In addition, CSRC officials stated that there is no approval process to participate in
the reform. To initiate the NTSR process, at least two-thirds of the non-tradable shareholders
must request to participate in NTSR. The tradable and non-tradable shareholders then enter into
negotiations to determine the appropriate compensation to the tradable shareholders. CSRC
officials stated that compensation typically involves the non-tradable shareholders providing the
tradable shareholders a portion of the newly converted shares. The tradable shareholders then
vote on the reform plan, which requires approval by two-thirds of the tradable shareholders in
order to be implemented. If the requisite two-thirds threshold is not reached, the transfer of the
NTS will not proceed. The CSRC officials stated that the CSRC’s most important role in the
NTSR process is to ensure that all procedures are followed by the relevant parties taking part in
the reform. CSRC officials stated that the government had an interest in most companies with
NTS (as SOEs), but non-tradable shareholders also included institutional investors and FIEs./23/
State Administration for Taxation
The SAT officials stated that stockholders must pay a stamp tax when purchasing or selling a
stock, and that the stamp tax rate is applied to the stock price./24/ In the primary market, the
issuing company is exempt from the tax and only the buyer pays the stamp tax. However, in the
secondary market, both the buyer and seller must pay the stamp tax. In response to our inquiry
as to whether any parties were exempt from the stamp tax rate (aside from the sellers on the
primary market), the SAT officials stated that securities investment funds are exempt from the
stamp tax. When the Department asked whether participants in NTSR had to pay the stamp tax,
the GOC replied that during the POI neither the non-tradable shareholders nor the tradable
shareholders paid stamp taxes for stocks transferred under the NTSR./25/
State-Owned Assets Supervision and Administration Commission (Guiyang SASAC)
Guiyang SASAC officials stated that all shares issued before GTC’s IPO in 1996 could not be
traded on the securities market. Thus, prior to the implementation of the NTSR, there were two
types of GTC shares: tradable and non-tradable. Guiyang SASAC officials stated that GAMC
was the largest shareholder in GTC, and that all of GAMC’s holdings in GTC were NTS.
Guiyang SASAC officials stated that GTC’s split-share structure was typical of many companies
throughout the PRC. As a result of the split-share structure, there were two groups of
shareholders in the same company who did not have the same interests. Therefore, Guiyang
SASAC officials explained, the GOC initiated the NTSR to convert NTS into tradable shares.
Guiyang SASAC officials stated that GAMC proposed the transfer of the NTS to the tradable
shareholders. An evaluation was then conducted to determine the proper compensation for the
tradable shareholders, which ultimately recommended the non-tradable shareholders provide the
tradable shareholders between three and four newly tradable shares for every ten shares held by
the tradable shareholders./26/ This evaluation prompted negotiations between the tradable
shareholders and non-tradable shareholders, pursuant to which GAMC proposed a 3.6 transfer
ratio to the tradable shareholders. This ratio was approved by the tradable shareholders, and the
NTSR was approved.
GAMC officials stated that, in addition to providing the 3.6 shares for every ten shares held by
the tradable shareholders, GAMC agreed not to sell any of its newly tradable shares on the stock
market for 36 months following the implementation of the NTSR. GAMC officials stated that
there were no trading limitations for shareholders who received the newly converted shares as
compensation.
Guizhou Tire Co., Ltd.
GTC officials stated that the company was formed in 1996 when its predecessor Guizhou Tire
Factory (GTF) was restructured into two operating companies: one continued to operate as GTF,
while the other became GTC. During the POI, GAMC (which is owned by Guiyang SASAC)
owned 33.36 percent of GTC./27/ GTC officials stated that GAMC’s only role in the company
was that of a shareholder. At the Department’s request, GTC officials provided GTC’s Articles
of Association, which stipulated the rights and responsibilities of the shareholders.
GTC officials stated that its shareholders elect the company’s board of directors every three
years. The individuals elected in the most recent shareholder meeting (held in November 2005)
were the directors during the POI. GTC officials stated that the shareholders meet at least once a
year for the general shareholders meeting, though there may be multiple shareholder meetings in
a particular year if necessary. At the Department’s request, GTC officials provided the
Department with notes from the November 2005 shareholders meeting to elect the board of
directors and a list of all shareholders meetings held in 2005 and 2006./28/ The GTC officials
stated that they were required to seek the board of directors’ approval for certain types of
decisions, citing as one example the requisite shareholders’ meeting when GTC undertook the
NTSR.
The Department asked GTC officials to provide an overview of the company’s participation in
NTSR. GTC officials stated that NTSR is a program to convert NTS into tradable shares. GTC
officials stated that GAMC (the holder of GTC’s NTS) proposed participation in the NTSR.
Following negotiations between GTC’s non-tradable shareholders and GTC’s tradable
shareholders, the tradable shareholders voted in favor of the reform. When asked how many
tradable shareholders were present when the vote for this reform was taken and what percentage
of ownership this represented, GTC stated that the number of shareholders was not recorded.
However, GTC officials stated that they did know that of the tradable shareholders who were
present at the meeting, 97 percent voted in approval of the reform.
GTC officials provided the notice stipulating the final terms of the reform, which stated the
amount of shares that GTC’s tradable shareholders would receive (3.6 shares per 10 shares) from
GAMC (i.e., the non-tradable shareholders)./29/ GTC officials also provided documentation
showing that GAMC would own 33.36 percent of the company after the reform.
In response to our inquiry as to how GTC recorded this transaction in its books and records, GTC
officials stated that the transfer is reflected in its financial statements./30/ Noting that GTC’s
financial statements showed that GAMC transferred 44,863,286 shares to the tradable
shareholders with an equity value of 178,066,372.32, the Department asked how the
178,066,372.32 equity value was calculated. GTC officials responded that the equity value was
based as percentage of the total equity (i.e., GTC’s total equity * (stocks transferred/total number
of GTC shares)).
3. Analysis of Program
In determining whether the criteria for finding a countervailable subsidy have been met, we
considered the information provided by the petitioners, and by the GOC and GTC in their written
submissions and during the verification process.
Bonus Share Transfer
The petitioners alleged that the transfer of state-owned bonus shares to private investors for no
compensation constituted a government financial contribution in the form of revenue foregone
(i.e. the price of the transferred shares), pursuant to section 771(5)(D)(ii) of the Act.
Consequently, the petitioners alleged, the NTSR conferred a benefit to GTC equal to the unpaid
compensation otherwise due from the transfer of shares, and the share transfer sustained and
even increased the overall equity in GTC. The GOC countered that the NTSR exists solely to
provide for the exchange of non-tradable shares for tradable shares, has no direct impact on a
listed company’s financial interests, and conferred no benefit to the participating listed
companies./31/
Assuming that the NTSR constitutes a government financial contribution, we find that there is no
benefit to the respondent, within the meaning of section 771(5)(E) of the Act. We note that in
the context of a sale of a company or shares in a company, the Department has not distinguished
between a company and its owners./32/ Consistent with that approach, for purposes of our
preliminary analysis of this program, we are not distinguishing between the company, GTC, and
its shareholders, nor are we distinguishing between individual shareholders (i.e., the governmentcontrolled
GAMC and the private shareholders). Rather, for purposes of this benefit analysis, we
find that the company together with all of its shareholders constitutes the respondent. Under this
approach, the transfer of shares from GAMC, GTC’s largest shareholder, to GTC’s other
shareholders essentially amounted to an intra-company transaction./33/ Although the NTSR
resulted in a change in the nature and liquidity of previously non-tradable shares, the transfer of
shares in GTC from GAMC to other shareholders provided no new equity infusion or other new
resources to the respondent as a whole. /34/ Consequently, since no benefit was conferred on the
respondent, we preliminarily find that the transfer of bonus shares did not constitute a
countervailable subsidy.
Stamp Tax
The petitioners also alleged that the GOC provided a subsidy by not collecting the stamp tax
otherwise applicable to most share transfers in the PRC,/35/ which constitutes a financial
contribution in the form of revenue foregone and confers a benefit to GTC in terms of the tax
savings. As noted earlier, the GOC stated that neither GTC’s tax returns nor its financial
statements reflected any tax benefits from the NTSR./36/ However, during verification, the GOC
indicated that during the POI neither the non-tradable shareholders nor the tradable shareholders
paid stamp taxes for stocks transferred under the NTSR.
Neither GAMC nor GTC’s other shareholders paid a stamp tax to the PRC tax authority when
GAMC transferred bonus shares to GTC’s other shareholders, contrary to the normal
requirements applicable to transfers of shares in the PRC. As stated above, the Department’s
methodology in the context of a sale of a company or shares in a company is not to distinguish
between a company and its shareholders./37/ Accordingly, we preliminarily find that the GOC’s
waiver of stamp taxes otherwise due provided a financial contribution in the form of revenue
foregone within the meaning of section 771(5)(D)(ii) of the Act. Moreover, by foregoing this
revenue, the GOC conferred a benefit to the respondent in the form of tax savings to the extent
that the stamp tax was not paid, pursuant to section 771(5)(E) of the Act. Unlike the situation
discussed above, where the transfer of shares did not result in any new infusion of capital or
other resources into the respondent as a whole, the respondent in this instance received a benefit
by not incurring the costs of those taxes.
Section 771(5A)(D) of the Act outlines the specificity requirements for domestic subsidies. The
GOC claimed that NTSR was not limited to enterprises in particular industries or groups of
industries, but did not address whether it was limited to any enterprises or groups of
enterprises./38/ Nonetheless, the GOC affirmed that the underlying criterion for participation in
NTSR is that listed companies must have NTS, regardless of whether those NTS were issued by
SOEs, FIEs, or private enterprises./39/ Thus, NTSR is necessarily limited to a group of
enterprises, i.e. listed companies that have NTS. Accordingly, we preliminarily determine that
the NTSR, including the stamp tax exemption, is specific within the meaning of section
771(5A)(D)(i) of the Act, in that it was limited to publicly listed companies that were eligible to
participate in the NTSR.
Income Tax
The petitioners alleged that to the extent the GOC did not collect income or capital gains taxes
otherwise applicable to the subsequent sale of GAMC’s newly converted bonus shares, the GOC
provided a financial contribution in the form of revenue foregone and conferred a benefit to GTC
through additional tax savings.
There is insufficient information in the record on which to base a preliminary finding on this
issue, including a calculation of the amount of any benefit. However, we will continue to
examine the income tax issue in any subsequent administrative review, and make a definitive
finding at that time.
4. Calculation of Subsidy
We have determined that the exemption of the stamp tax on the transfer of bonus shares by
GAMC to GTC’s other shareholders constitutes a financial contribution in the form of foregone
revenue and confers a benefit to GTC in accordance with section 771(5)(E)(ii) of the Act.
Pursuant to 19 CFR 351.524(c)(1), the Department will normally treat exemptions of certain
taxes as providing “recurring” benefits. However, 19 CFR 351.524(c)(2) states that the
Department will consider certain criteria in determining whether a benefit is recurring or nonrecurring.
Pursuant to 19 CFR 351.524(c)(2)(i), a benefit may be considered non-recurring if it
“is exceptional in the sense that the recipient cannot expect to receive additional subsidies under
the same program on an ongoing basis from year to year.” As noted above, the GOC granted an
exemption from stamp taxes to companies participating in NTSR. As a result of GTC's
participation in NTSR, all of GAMC's non-tradable shares became tradable. Thus, it is unlikely
that GTC will have reason to participate in NTSR again. As such, GTC could not expect to
receive further or additional tax savings resulting from the waiver of stamp taxes under NTSR.
Thus, consistent with 19 CFR 351.524(c)(2)(i), we are treating the waiver of stamp taxes
received under the NTSR as “non-recurring.” To determine whether the benefits under this
exemption are allocable or expensed in full in the year of receipt, we first conducted the “0.5
percent test.” See 19 CFR 351.524(b)(2). We divided the total amount of stamp tax waived
during the 2006 NTSR by GTC’s sales for 2006. As a result, we found that the amount provided
in 2006 was less than 0.5 percent of relevant sales and should be expensed.
To calculate the countervailable subsidy rate, we divided the benefits attributable to the POI by
the total value of GTC’s total sales during the POI. On this basis, we preliminarily determine the
countervailable subsidy rate to be 0.01 percent ad valorem for GTC.
III. Programs Preliminarily Determined to be Not Countervailable
A. Provision of Water to FIEs for Less than Adequate Remuneration
In our Preliminary Determination, we noted that GTC, Hebei Starbright Tire Company
(Starbright), and Tianjin United Tire and Rubber Company ( TUTRIC) stated that they did not
receive benefits under this program during the POI. In particular, GTC is not an FIE and as such
has reported that it is not eligible for this program./40/ Starbright stated that it pumps water from
its own wells, and therefore the company is not provided water by the GOC./41/ We also stated
that we did not have sufficient information from the GOC to determine whether TUTRIC
received water on a preferential basis.
TUTRIC reported that its water is provided by Tianjin Waterworks Group Co. Ltd. (TWG), a
state-owned company that supplies city water to enterprises and civilians in Tianjin. TUTRIC’s
affiliate, Tianjin Dolphin Carbon Black Co., Ltd. (DCB), pumps water from its own well and
pays a monthly resource fee. In its post-preliminary supplemental questionnaires, the
Department requested copies of all water bills for the POI for TUTRIC and DCB, the total
amount of water purchased during POI by TUTRIC, and DCB’s approval permit to utilize the
underground water it pumps from its well.
At verification, the Department met with officials from Tianjin Price Bureau (TPB) and TWG to
discuss the provision of water in Tianjin. TPB officials stated that, as with electricity, TPB’s
role is only to implement policy established by the National Development and Reform
Commission in Beijing. Also, as with electricity, TPB officials stated that the Tianjin
Development and Reform Commission had no role in the provision of water.
TUTRIC officials provided monthly water invoices for the POI and explained that TUTRIC’s
water fees include a [**************************************] The invoices indicate all
these fees were subject to a 6 percent VAT. There was also a waste water discharge fee of 1.1
RMB/cubic meter not subject to VAT. One of TUTRIC’s two water meters is also billed for a
water hydrant fee of 3 RMB/cubic meter, inclusive of the 6 percent VAT. By dividing the total
of all these fees by the total water consumption in cubic meters per month, TUTRIC officials
were able to tie the water invoice rates to the Tianjin water rate schedule.
Regarding DCB’s underground water pumping and water usage, TWG officials explained that a
company that pumps its own water pays a water resource fee set by the TPB. The fee is [*******]
for customers without access to the “water grid,” and [**************] for customers
with access to the grid who choose to pump their own water. TWG officials stated that special
permits are needed for the company to pump its own water, and a company pays a waste water
surcharge of [************] for non-residential usage.
Based on the information on the record, both TUTRIC and DCB paid water rates and
[**************************] according to the established rates for water users within the
same category. Therefore, we preliminarily determine that the provision of water to TUTRIC
and DCB is neither de jure nor de facto specific. Moreover, the absence of price discrimination
among these users may also support a preliminary finding that water is not being provided to
these producers for less than adequate remuneration. See Countervailing Duties; Final Rule, 63
FR 65348, 65378 (November 25, 1998) (discussing that, where the government is the sole
provider of a good or service, especially in the case of electricity, land or water, the Department
may assess whether the government price was set in accordance with market principles, which
may include an analysis of whether there is price discrimination among the users of the good or
service that is provided and that “{w}e would only rely on a price discrimination analysis if the
government good or service is provided to more than a specific enterprise or industry, or group
thereof.").
On this basis, we preliminarily determine that the GOC’s provision of water does not confer a
countervailable subsidy to TUTRIC.
B. Provincial/Municipal Technology Programs
In our Preliminary Determination, we noted that according to its financial statements, GTC
appeared to receive subsidies for energy./42/ In its February 6, 2008 questionnaire response,
GTC stated that it received a 300,000 RMB grant under the Provincial Key Technology
Renovation Program.
GTC reported that “qualified projects were required to satisfy state industrial policy, including
the technology innovation plan of Guizhou Province. The principal focus of a qualified project
was required to be technological advancement, and had to be approved by the provincial
technology center.” The project also was required to satisfy the relevant regulations governing
the management of funds for major technology improvements in Guizhou Province.
In addition, GTC received a 270,000 RMB grant under the Provincial Promotion Fund for
Technology of Resources Savings and a 270,000 RMB grant under the Municipal Promotion
Fund for Technology of Resources Savings. To qualify for these grants, GTC’s project was
required “to use advanced technology to save energy and reduce consumption quickly with only
a small investment.” GTC also had to demonstrate that it had a strong management system and
finances and agree to report energy consumption on a timely basis. The Municipal Economic
Trade Bureau and the Provincial Economic Trade Committed approved both grants.
Based on our review of information on the record, we preliminarily determine that these
programs are not de jure specific under section 771(5A)(D)(i) of the Act. With regard to de facto
specificity, we find that the record information does not demonstrate that these grants were de
facto specific. However, we note that the record is incomplete in certain respects, e.g., the
amounts distributed to all recipients under these grant programs, as well as the identities of the
recipients and the various industries that they represent. As there is insufficient time remaining
in this investigation to reopen the record for new factual information regarding these grants, we
intend to further examine grants disbursed under this program in any subsequent administrative
review.
IV. Programs Preliminarily Determined not to Confer a Benefit During the POI
A. Municipal Major Technical Innovation Program
As discussed above, we noted in our Preliminary Determination that according to its financial
statements, GTC appeared to receive subsidies for energy./43/ In its February 6, 2008
questionnaire response, GTC stated that it received a 150,000 RMB grant under the Municipal
Major Technical Innovation Program
The program rate is negligible (0.00 percent when rounded to the nearest hundredth decimal
place) and, therefore, we find that GTC received no benefit during the POI.
B. Special Fund for Environmental Protection of 2004
In its February 6, 2008 questionnaire response, GTC stated that in 2006, it received a 108,000
RMB grant under the Special Fund for Environmental Protection of 2004
The program rate is negligible (0.00 percent when rounded to the nearest hundredth decimal
place) and, therefore, we find that GTC received no benefit during the POI.
V. Programs Preliminarily Determined To Be Not Used
We preliminarily determine that GTC, Starbright, and TUTRIC did not apply for or receive
benefits during the POI under the program listed below.
A. Grants to the Tire Industry for Electricity
In our Preliminary Determination, we noted that GTC, Starbright, and TUTRIC stated that they
did not receive benefits under this program during the POI. However, we also noted that
according to its financial statements, GTC appeared to receive subsidies for energy./44/ Thus,
we stated that we did not have sufficient information from the GOC or GTC to determine
whether this assistance received by GTC is a countervailable subsidy.
In its November 27, 2007 response, GTC clarified that it did not “receive grants for electricity
from the central, provincial, or local governments from 2001 to 2006.” Thus, we preliminarily
determine that GTC, Starbright, and TUTRIC did not apply for or receive benefits during the
POI under the Grants to the Tire Industry for Electricity program.
________________     _________________
Agree                               Disagree
______________________________
David M. Spooner
Assistant Secretary for Import Administration
_____________________________
Date

/1/ See Certain New Pneumatic Off-the-Road Tires From the People’s Republic of China: Initiation of
Countervailing Duty Investigation, 72 FR 44122 (August 7, 2007) (Initiation Notice).
/2/ See Certain New Pneumatic Off-the-Road Tires From the People’s Republic of China: Preliminary
Affirmative Countervailing Duty Determination, 72 FR 71360 (December 17, 2007) (Preliminary Determination).
/3/ According to information from the petitioner, in the PRC, a non-tradable share or “split-share” structure
refers to listed Chinese companies that have both tradable shares and NTS, which are typically held by the
government or other state-owned or controlled entities. Although split-share structures are common around the
world, the PRC’s split-share structure is apparently unique in that non-tradable shareholders have the same voting
and cash flow rights as tradable shareholders, but the NTS of a listed company cannot be traded publicly. See “The
Nontradable Share Reform in The Chinese Stock Market,” Nov. 2006, cited in Petitioners’ New Subsidy Allegation
(October 23, 2007 )(Petitioners’ NSA) at Ex. 1. The primary aims of NTS are to maintain government control over
state-owned enterprises floated in the market and to maximize initial public offering proceeds. Ibid.
/4/ See Petitioners’ Supplement to New Subsidies Allegations (November 2, 2007)(Petitioners’
Supplement to NSA) at page 2.
/5/ Id. at Ex. 1.
/6/ Id. at page 2.
/7/ See Petitioners’ NSA at page 4.
/8/ See Petitioners’ NSA at page 5.
/9/ See Petitioners’ Supplement to NSA at page 4.
/10/ Ibid. at page 4. However, in their October 23 submission, the petitioners referenced GTC’s 2006
financial statement in citing the GAMC’s ownership of GTC as decreasing to 33.36 percent. This figure was
confirmed by GTC during verification. See Verification of the Questionnaire Responses Submitted by Guizhou Tire
Co., Ltd. (GTC Verification Report) at page 3.
/11/ The Department defines concurrent subsidies as “subsidies given to facilitate, encourage, or that are
otherwise bestowed concurrent with a privatization.” See Notice of Final Modification of Agency Practice Under
Section 123 of the Uruguay Round Agreements Act, 68 FR 37125, 37136 (June 23, 2003).
/12/ See New Allegation Questionnaire (Non-Tradable Share Reform)(November 14, 2007).
/13/ Ibid.
/14/ See Response of the Government of the People’s Republic of China and Guizhou Tire Co., Ltd. to the
Department’s Non-Tradable Shares Allegations Questionnaire (Initial Response) at pages 4-6. The GOC stated that
the purpose of NTSR was, among other things, to address split-structure share difficulties and increase China’s stock
market liquidity, eliminate institutional differences between non-tradable shareholders and tradable shareholders via
a negotiating mechanism that balances all shareholders’ interests, and assist in the development of China’s capital
markets and protection of investor rights. GTC argued that the purpose of its own reform plan was not to transfer
portions of state-held shares to other shareholders, but rather to provide a market for GAMC’s NTS while also
offering remuneration to GTC’s tradable shareholders for the risk and possible decline in share value resulting from
the NTS change.
/15/ The GOC stated that neither GTC’s tax returns nor its financial statements reflect any tax benefits
resulting from the reform.
/16/ Typically, a company’s reform plan will involve a successful motion for NTSR, a reform plan
negotiated between tradable shareholders and non-tradable shareholders (including a consideration arrangement for
balancing their interests), and the stock exchange’s assistance during the process (e.g. publishing announcements,
providing guidance). The GOC stated that the corporate management does not direct the reform plan.
/17/ The Reform Guidance Group consists of the China Securities Regulatory Commission (CSRC), the
State-owned Assets Supervision and Administration Commission (SASAC), the Ministry of Finance (MOF),
People’s Bank of China (PBC), and the Ministry of Commerce (MOFCOM). For instance, SASAC may review or
approve some elements of a company’s reform plan if the state owns an equity interest in the company. SASAC
performs oversight at the national level of government, but also extends to the local level with respect to its investor
role.
/18/ For instance, original NTS cannot be listed for trading or transferred within 12 months from the day
when the NTSR plan entered into force. See “Chapter IV Selling of Original Non-tradable shares of Companies
after the Reform, Measures for the Administration of the Share-trading Reform of Listed Companies,” Circular of
China Securities Regulatory Commission, September 4, 2005 (NTS Selling Circular), cited in Petitioners’ NSA at
Ex. 2. See also GTC’s Initial Response at GTC-NTS-1. In addition, once the 12 month time limit has expired,
original holders of NTS with 5 percent or more of a listed company’s issued shares are prohibited from trading their
original NTS via stock exchange in an amount exceeding: (i) 5 percent of the company’s total shares within 12
months, and (ii) 10 percent of the company’s total shares within 24 months. See NTS Selling Circular and GTC’s
Initial Response at GTC-NTS-1. However, foreign shareholders’ shares are not subject to these measures. In order
to give tradable shareholders confidence in the market and in the change in NTS, and to reduce volatility in GTC’s
post-transfer stock price, GAMC contractually agreed not to sell its newly tradable shares for three years, after
which GAMC would sell within two years its newly tradable shares for equal or greater than 1.5 times the net asset
value per share (as audited). See GOC’s and GTC’s Initial Response at page 5.
/19/ See Third Post-Preliminary Determination Supplemental Questionnaire (GOC Supplemental
Response) at page 22.
/20/ Id. at Ex. 13. As the sole non-tradable shareholder, GAMC evaluated the value of its NTS,
considering factors such as the commercially accepted fair value of NTS, GTC’s future financial performance, and
the shareholders’ commercial expectations. GAMC then proposed the ratio to the tradable shareholders, who voted
to accept it.
/21/ The Department’s findings at verification are discussed in Verification of the Questionnaire Responses
Submitted by the Government of China (GOC Verification Report), Meetings with the Government of the Guizhou
Province Regarding Guizhou Tire Co., Ltd and Affiliates (GOG Verification Report) and GTC Verification Report.
/22/ See GOC Verification Report at page 17.
/23/ As an example of a non-SOE non-tradable shareholder, the CSRC referenced the shareholders of
Shanghai Zijiang Group Co., Ltd. participating in NTSR in May 2005. The Department reviewed the Notice of
Significant Matter of the Shanghai Zijiang Group Co., Ltd. (Zianjiang Enterprise) (see GOC Verification Exhibit
Page 1269), which provided information relevant to the NTSR, including a breakdown of the company’s
shareholders. The notice indicated that some of the NTS at the time of the reform were held by private investors.
/24/ The SAT officials stated that the stamp tax rate during the POI was 0.1 percent, which went into effect
on January 24, 2005, in accordance with the Notice of the Ministry of Finance and the State Administration of
Taxation on the Adjusting the Stamp Tax Rate of Securities (Stock) Transaction – Notice No. 11[2005]. See GOC
Verification Report at page 18. SAT officials stated that the current stamp tax rate is 0.3 percent, as of May 30,
2007, as promulgated in the Notice of the Ministry of Finance and the State Administration of Taxation on the
Adjusting the Stamp Tax Rate of Securities (Stock) Transaction – Notice No. 84[2007]. Ibid.
/25/ With respect to payments of consideration from a non-circulation stock shareholder to a circulation
stock shareholder during the course of the share-trading pilot reform, the GOC temporarily exempted: (i) the stamp
tax on stock transfers, and (ii) the enterprise income taxes and individual income taxes on the income of shares,
cash, etc. See Notice of the Ministry of Finance and the State Administration of Taxation on the Issue of the
Taxation Policies for the Pilot Reform of Share-trading – Notice No. 103[2005].
/26/ The recommendation was issued in a Financial Advisor Report entitled, “Guizhou Tire Co., Ltd. -
Consideration Level Calculation of Share Split Reform,” January 2006. See GOC Verification Exhibit Pages 1233
to 1252.
/27/ We note that this is consistent with information in the GTC’s financial statements. See GTC’s Initial
Response at GTC-5.
/28/ See GTC Verification Exhibit Pages 00234 to 00241.
/29/ See GTC Verification Exhibit Pages 01011 to 01013.
/30/ See GTC’s Initial Response, at GTC-5. GTC officials also provided a printout from the SAP system
showing the transfer from state-owned shares to public shares. See GTC Verification Exhibit Page 01017.
/31/ See GOC’s Initial Response at pages 6-7, and pages 12-14.
/32/ See Notice of Final Modification of Agency Practice Under Section 123 of the Uruguay Round
Agreements Act, 68 FR 37125, 37137 (June 23, 2003)(Practice Modification Notice). This methodology was
developed in response to an adverse WTO dispute settlement finding. There was also domestic litigation on this
issue. See Allegheny Ludlum Corp. v. United States, 367 F.3d 1339 (Fed. Cir. 2004).
/33/ The fact that GTC as a company would receive the money paid from violation of the selling
arrangement in the agreement negotiated between the A shareholders and GAMC lends support to this view. See
GTC’s Initial Response at GTC-NTS-2.
/34/ GTC’s accounting records show the share transfer as a debit to shared capital-state shares, and a credit
to shared capital-public shares, while GAMC recorded it as a debit to paid-in capital, and credit to a long-term
investment. See GTC’s Initial Response at page 6. Indeed, the petitioners noted that GTC’s 2006 financial
statement indicated that the number of state-owned GTC shares decreased and the number of privately-held GTC
shares increased by the exact same amount during the same period. See Petitioners’ NSA at page 2.
/35/ A stamp tax is owed by those who deal in, inherit, or donate the documentation of transfer of the stock
right of A and B shares. See GOC Supplemental Response at Ex. 15. Thus, subject to limited exceptions, the stamp
tax is applied to most domestic share transfers.
/36/ See GOC’s Initial Response at page 14.
/37/ See Practice Modification Notice.
/38/ See GOC’s Initial Response at page 11.
/39/ The GOC stated that 1,358 listed companies have issued non-tradable shares in the PRC’s A-share
market, more than 97 percent of which have entered into or completed NTSR. See GOC’s Initial Response at
pages 6-7.
/40/ See Response of Guizhou Tire Co., Ltd. to the Department’s Questionnaire (October 15, 2007)(GTC
Questionnaire Response) at page 26.
/41/ See Response of Hebei Starbright Tire Company to the Department’s Questionnaire (October 15,
2007)(Starbright Questionnaire Response) at page 19.
/42/ See Preliminary Determination and GTC Questionnaire Response at GTC-5. We will refer to these
subsidies as Provincial/Municipal Technology Programs, Municipal Major Technical Innovation Program, and
Special Fund for Environmental Protection of 2004.
/43/ See Preliminary Determination and GTC Questionnaire Response at GTC-5.
/44/ See GTC Questionnaire Response at GTC-5.