71 FR 47174, August 16 ,2006
C-560-819
Investigation
Public Document
Office 1: CH/DL/DEN
MEMORANDUM TO: Joseph A. Spetrini
Acting Assistant Secretary
for Import Administration
FROM: Stephen J. Claeys
Deputy Assistant Secretary
for Import Administration
DATE: August 9, 2006
SUBJECT: Issues and Decision Memorandum for the Final Determination in
the Countervailing Duty Investigation of Certain Lined Paper
Products from Indonesia
Background
On February 13, 2006, the Department of Commerce (the Department) published the preliminary
determination in this investigation. See Preliminary Affirmative Countervailing Duty
Determination: Certain Lined Paper Products from Indonesia, 71 FR 7524 (Preliminary
Determination). The “Analysis of Programs” and “Subsidies Valuation Information” sections
below describe the subsidy programs and the methodologies used to calculate the benefits from
these programs. We have analyzed the comments submitted by the interested parties in their case
and rebuttal briefs in the “Analysis of Comments” section below, which also contains the
Department’s responses to the issues raised in the briefs. We recommend that you approve the
positions we have developed in this memorandum. Below is a complete list of the issues in this
investigation for which we received comments and rebuttal comments from parties:
Comment 1: Application of Adverse Facts Available
Comment 2: Attribution of Subsidies Received by Cross-owned Companies on Input
Products
Comment 3: Are Subsidized Logs “Primarily Dedicated” to Certain Lined Paper
Products?
Comment 4: Provision of Standing Timber at Preferential Rates
Comment 5: Government Ban on Log Exports
Comment 6: Subsidized Funding of Reforestation (Hutan Tanaman Industria (HTI)
Program)
Comment 7: Loan Guarantee
Comment 8: Calculation of Subsidy Denominator
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Subsidies Valuation Information
Allocation Period
Pursuant to 19 CFR 351.524(b), non-recurring subsidies are allocated over a period
corresponding to the average useful life (AUL) of the renewable physical assets used to produce
the subject merchandise. Section 351.524(d)(2) of the Department’s regulations creates a
rebuttable presumption that the AUL will be taken from the U.S. Internal Revenue Service’s
1977 Class Life Asset Depreciation Range System (the IRS Tables). The AUL period in this
proceeding is 13 years according to the IRS Tables. No party in this proceeding has disputed this
allocation period.
Attribution of Subsidies
The Department’s regulations at 351.525(b)(6)(i) state that the Department will normally
attribute a subsidy to the products produced by the corporation that received the subsidy.
However, 19 CFR 351.525(b)(6) directs that the Department will attribute subsidies received by
certain other companies to the combined sales of those companies if (1) cross-ownership exists
between the companies, and (2) the cross-owned companies produce the subject merchandise, are
a holding or parent company of the subject company, produce an input that is primarily dedicated
to the production of the downstream product, or transfer a subsidy to a cross-owned company.
According to 19 CFR 351.525(b)(6)(vi), cross-ownership exists between two or more
corporations where one corporation can use or direct the individual assets of the other
corporation(s) in essentially the same ways it can use its own assets. This section of the
Department’s regulations states that this standard will normally be met where there is a majority
voting interest between two corporations or through common ownership of two (or more)
corporations. The Preamble to the Department’s regulations further clarifies the Department’s
cross-ownership standard. (See Countervailing Duties; Final Rule, 63 FR 65348, 65401
(November 25, 1998) (Preamble).) According to the Preamble, relationships captured by the
cross-ownership definition include those where
the interests of two corporations have merged to such a degree that one
corporation can use or direct the individual assets (or subsidy benefits) of
the other corporation in essentially the same way it can use its own assets
(or subsidy benefits). . . Cross-ownership does not require one corporation
to own 100 percent of the other corporation. Normally, cross-ownership
will exist where there is a majority voting ownership interest between two
corporations or through common ownership of two (or more) corporations.
In certain circumstances, a large minority voting interest (for example, 40
percent) or a “golden share” may also result in cross-ownership.
1 See Letter from Wiley Rein & Fielding to Secretary of Commerce regarding Petition for the Imposition of
Antidumping and Countervailing Duties: Certain Lined Paper School Supplies from India, Indonesia, and the
People’s Republic of China (September 8, 2005) (Petition) at Exhibits VI-1, VI-11, and VI-12.
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See Preamble 63 FR at 65401.
Thus, the Department’s regulations make clear that the agency must look at the facts presented in
each case in determining whether cross-ownership exists.
The Court of International Trade (CIT) has upheld the Department’s authority to attribute
subsidies based on whether a company could use or direct the subsidy benefits of another
company in essentially the same way it could use its own subsidy benefits. See Fabrique de Fer
de Charleroi v. United States, 166 F.Supp 2d, 593, 603 (CIT 2001) (Fabrique). Our findings
regarding cross-ownership and attribution follow.
In this final determination, we are basing our findings on total adverse facts available
(AFA). See Comment 1 below. Based on information in the Petition,1 we find that PT Pabrik
Kertas Tjiwi Kimia (TK) is part of a group of pulp and paper, and forestry companies linked by
varying degrees of common ownership involving the Widjaja family. These companies and
others are commonly referred to as the Sinar Mas Group (SMG). As adverse facts available, we
have determined that TK is cross-owned with the logging and pulp companies that are part of
SMG.
Equityworthiness
Section 771(5)(E)(i)(f) the Tariff Act of 1930, as amended (the Act), and 19 CFR 351.507 state
that, in the case of a government-provided equity infusion, a benefit is conferred if an equity
investment decision is inconsistent with the usual investment practice of private investors.
According to 19 CFR 351.507, the first step in determining whether an equity investment
decision is inconsistent with the usual investment practice of private investors is to examine
whether, at the time of the infusion, there was a market price for similar, newly-issued equity. If
so, the Department will consider an equity infusion to be inconsistent with the usual investment
practice of private investors if the price paid by the government for newly-issued shares is greater
than the price paid by private investors for the same, or similar, newly-issued shares.
If actual private investor prices are not available, then, pursuant to 19 CFR 351.507(a)(3)(i), the
Department will determine whether the firm funded by the government-provided infusion was
equityworthy or unequityworthy at the time of the equity infusion. In making the
equityworthiness determination, pursuant to 19 CFR 351.507(a)(4), the Department will
normally determine that a firm is equityworthy if, from the perspective of a reasonable private
investor examining the firm at the time the government-provided equity infusion was made, the
firm showed an ability to generate a reasonable rate of return within a reasonable time. To do so,
the Department normally examines the following factors: 1) objective analyses of the future
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financial prospects of the recipient firm; 2) current and past indicators of the firm’s financial
health; 3) rates of return on equity in the three years prior to the government equity infusion; and
4) equity investment in the firm by private investors.
Section 351.507(a)(4)(ii) of the Department’s regulations further stipulates that the Department
will “normally require from the respondents the information and analysis completed prior to the
infusion, upon which the government based its decision to provide the equity infusion.” Absent
an analysis containing information typically examined by potential private investors considering
an equity investment, the Department will normally determine that the equity infusion provides a
countervailable benefit. This is because, before making a significant equity infusion, it is the
usual investment practice of private investors to evaluate the potential risk versus the expected
return, using the most objective criteria and information available to the investor.
As AFA, we are treating TK and its cross-owned companies as uncreditworthy. See our
discussion of the Hutan Tanaman Industria (HTI) program in the “Analysis of Programs” section
below.
Creditworthiness
The examination of creditworthiness is an attempt to determine if the company in question could
obtain long-term financing from conventional commercial sources. See 19 CFR 351.505(a)(4).
According to 19 CFR 351.505(a)(4)(i), the Department will generally consider a firm to be
uncreditworthy if, based on information available at the time of the government-provided loan,
the firm could not have obtained long-term loans from conventional commercial sources. In
making this determination, according to 19 CFR 351.505(a)(4)(i), the Department normally
examines the following four types of information: 1) the receipt by the firm of comparable
commercial long-term loans; 2) present and past indicators of the firm’s financial health; 3)
present and past indicators of the firm’s ability to meet its costs and fixed financial obligations
with its cash flow; and 4) evidence of the firm’s future financial position.
With respect to item number one, above, pursuant to 19 CFR 351.505(a)(4)(ii), in the case of
firms not owned by the government, the receipt by the firm of comparable long-term commercial
loans, unaccompanied by a government-provided guarantee (either explicit or implicit), will
normally constitute dispositive evidence that the firm is not uncreditworthy. However, according
to the Preamble to the Department’s regulations, in situations, for instance, where a company has
taken out a single commercial bank loan for a relatively small amount, where a loan has unusual
aspects, or where we consider a commercial loan to be covered by an implicit government
guarantee, we may not view the commercial loan(s) in question to be dispositive of a firm’s
creditworthiness. See Preamble 63 FR at 65367.
As AFA, we are treating TK and its cross-owned companies as uncreditworthy. See our
discussion of the HTI program in the “Analysis of Programs” section below.
2 See Petition at Exhibits VI-14 and VI-15, page 67.
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Benchmark for Interest Rates
Although our regulations at 19 CFR 351.505(a)(3)(iii) state that the Department will calculate an
uncreditworthy benchmark/discount rate, we have relied on petitioner’s calculation in this case,
as AFA. See our discussion of the HTI program in the “Analysis of Programs” section below.
Benchmark for Stumpage
Section 771(5)(E)(iv) of the Act and 19 CFR 351.511(a) govern the determination of whether a
benefit has been conferred from subsidies involving the provision of a good or service. Pursuant
to section 771(5)(E)(iv) of the Act, a benefit is conferred when the government provides a good
or service for less than adequate remuneration. Section 771(5)(E) further states that the adequacy
of remuneration:
shall be determined in relation to prevailing market conditions for the good or service
being provided . . . in the country which is subject to the investigation or review.
Prevailing market conditions include price, quality, availability, marketability,
transportation, and other conditions of sale.
Section 351.511(a)(2) of the Department’s regulations sets forth three categories of comparison
benchmarks for determining whether a government good or service is provided for less than
adequate remuneration. These potential benchmarks are listed in hierarchical order by
preference: (1) market prices from actual transactions within the country under investigation; (2)
world market prices that would be available to purchasers in the country under investigation; or
(3) an assessment of whether the government price is consistent with market principles. This
hierarchy reflects a logical preference for achieving the objectives of the statute.
The most direct means of determining whether the government received adequate remuneration
is by comparison with private transactions for a comparable good or service in the country.
Thus, the preferred benchmark in the hierarchy is an observed market price for the good, in the
country under investigation, from a private supplier (or, in some cases, from a competitive
government auction) located either within the country, or outside the country (the latter
transaction would be in the form of an import). This is because such prices generally would be
expected to reflect most closely the commercial environment of the purchaser under
investigation.
The Department has found that there were no market-determined prices in Indonesia upon which
to base a “first tier” benchmark. GOI owns all harvestable forest land,2 and there is no indication
of any private sales of standing timber in Indonesia.
3 See Preamble, 63 FR at 65377.
4 Id. 63 FR at 65378
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The “second tier” benchmark relies on world market prices that would be available to the
purchasers in the country in question, though not necessarily reflecting prices of actual
transactions involving that particular producer. In selecting a world market price under this
second approach, the Department will examine the facts on the record regarding the nature and
scope of the market for that good to determine if that market price would be available to an incountry
purchaser. As discussed in the Preamble to the regulations, the Department will
consider whether the market conditions in the country are such that it is reasonable to
conclude that a purchaser in the country could obtain the good or service on the world
market. For example, a European price for electricity normally would not be an
acceptable comparison price for electricity provided by a Latin American government,
because electricity from Europe in all likelihood would not be available to consumers in
Latin America. However, as another example, the world market price for commodity
products, such as certain metals and ores, or for certain industrial and electronic goods
commonly traded across borders, could be an acceptable comparison price for a
government-provided good, provided that it is reasonable to conclude from record
evidence that the purchaser would have access to such internationally traded goods.3
We note that we have insufficient evidence of world market prices for standing timber on the
record of the investigation. Consequently, we are not able to conduct our analysis under tier two
of the regulations. Therefore, consistent with the hierarchy, we have measured the adequacy of
remuneration by assessing whether the government price is consistent with market principles.
This approach is set forth in 19 CFR 351.511(a)(2)(iii), which is explained further in the
Preamble:
Where the government is the sole provider of a good or service, and there are no
world market prices available or accessible to the purchaser, we will assess
whether the government price was set in accordance with market principles
through an analysis of such factors as the government’s price-setting philosophy,
costs (including rates of return sufficient to ensure future operations), or possible
price discrimination.4
The regulations do not specify how the Department is to conduct its analysis of consistency with
market principles. By its nature the analysis depends upon available information concerning the
market sector at issue and, therefore, must be developed on a case-by-case basis.
In our preliminary determination, we reached certain conclusions and made certain assumptions
about the appropriate benchmark for timber harvested by the cross-owned harvesters in the SMG.
5 See Notice of Final Results of Countervailing Duty Administrative Review and Rescission of Certain
Company-Specific Reviews: Certain Softwood Lumber Products From Canada, 69 FR 75917 (December 20, 2004)
and accompanying Issues and Decision Memorandum (Lumber First Review) (Issues and Decision Memorandum at
16).
6 The petitioner in this investigation is the Association of American School Paper Suppliers and its
individual members (MeadW estvaco Corporation; Norcom, Inc.; and Top Flight, Inc.) (petitioner).
7 See Memo from David Layton and David Neubacher, International Trade Compliance Analysts, through
Constance Handley, Program Manager, to the File regarding Calculations for the P reliminary Determination for PT .
Pabrik Kertas Tjiwi Kimia Tbk (February 6, 2006) (Preliminary Analysis Memo) at Attachment 7.
8 Specifically, we have used the value of “other tropical” roundwood exports from Malaysia during the
POI, as reported in the World Trade Atlas (classified as “Wood in the rough, stripped or not stripped, other tropical
not treated” (HTS 440349)).
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First, we found in the preliminary determination that it is generally accepted that the market
value of timber is derivative of the value of the downstream products. The species, dimension
and growing condition of a tree largely determine the downstream products that can be produced
from a tree; the value of a standing tree is derived from the demand for logs produced from that
tree and the demand for logs is in turn derived from the demand for the products produced from
these logs.5 We continue to find that it is appropriate to use log values as the starting point for
determining a stumpage benchmark. See Comment 4, Part C below in which we consider the
respondents’ suggestion regarding the use of chip prices as an alternative benchmark.
Second, we preliminarily found that the log price used by the petitioner,6 the price of red meranti,
was inappropriate because red meranti is more commonly used in the production of flooring,
paneling, furniture, joinery, mouldings, plywood, turnery and carving,7 than for pulp. We have
received no information to contradict this and, therefore, have continued to reject red meranti log
prices as the basis for calculating the stumpage benchmark.
Also consistent with our preliminary determination, we are continuing to use Malaysian prices.
The forest conditions, climate, geographic position and tree species are similar in Indonesia and
Malaysia. Moreover, Malaysian log export prices provide the best available measure of
consistency with market principles in this instance because the prices are from private
transactions between Malaysian log sellers and log buyers in the international market and are,
thus, market-determined prices. See 19 CFR 351.511(a)(2)(iii).
In a change from our preliminary determination, however, we are no longer using the price of
acacia and eucalyptus logs exported from Malaysia as the starting point for calculating the
stumpage benchmark. Instead, because we are relying on AFA (see, Comment 1 below), we
have used the higher price of mixed tropical hardwood (MTH) logs.8 The petitioner has provided
a study by Christopher Barr entitled, “Banking on Sustainability: Structural Adjustment and
Forestry Reform in Post-Suharto Indonesia” which reports that one of the logging companies
9 See Petitioner’s October 20, 2005 Submission (Petitioner’s October 20th subm ission) at Exhibit 1,
Christopher Barr “Banking on Sustainab ility: Structural Adjustment and Forestry Reform in Post-Suharto
Indonesia” (Center for International Forestry Research, 2001) (“Banking on Sustainability”) at 72.
10 In its January 30, 2006 submission, TK provided the financial statements of one of its affiliated log
producers and some data on affiliated logger harvests and pulp producers log purchases. See TK January 30, 2006
response at Exhibits TK-LER-2 and 3, TK-A-4, and TK-S-3.
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affiliated with TK harvested MTH and supplied it to one of TK’s affiliated pulp suppliers.9 On
the basis of this information, we determine, as AFA for the final determination, that TK’s crossowned
loggers exclusively harvested MTH to use as the pulp log input during the POI. We are
using tropical roundwood export data, excluding meranti and semi-processed roundwood such as
poles, to approximate market prices for the mixed tropical hardwood timber harvested in
Indonesia because we are assuming that in clear cutting operations conducted by TK’s crossowned
log suppliers, the entire harvest goes to pulp producers, even if some of the logs might be
suitable as sawlogs.
We adjusted the average unit value of the Malaysian MTH logs to reflect prevailing market
conditions in Indonesia. We did this by deducting amounts for the Indonesian logging
operation’s extraction costs and profit. These amounts were taken from the Petition, as the
information provided in the responses was incomplete and not verifiable.10 The result of these
adjustments is a derived stumpage price that is consistent with market principles. Respondents
claim that the Department should make certain adjustments to the Malaysian log export prices.
We disagree that the information on the record supports making these adjustments. Therefore,
we have not done so. See Comment 4 below.
Analysis of Programs
Based upon our analysis of the Petition, we determine the following:
I. Programs Determined to Be Countervailable During the POI
A. Provision of Standing Timber at Preferential Rates
We find that the GOI’s provision of a good, logs, to the cross-owned forestry companies in the
SMG confers a countervailable subsidy on TK. The provision of the logs provides a financial
contribution, as described in section 771(5)(D)(iii) of the Act (providing goods or services other
than general infrastructure). Moreover, as explained below, we determine that this good was
provided for less than adequate remuneration. See 771(5)(E)(iv) of the Act. We also determine
that there is a de facto limitation of the stumpage subsidy to a group of industries, namely pulp
and paper mills, saw mills and remanufacturers. They are the predominant users of timber and
receive a disproportionate amount of the subsidy. Therefore, the subsidy is specific as a matter
of fact to this group of industries. See sections 771(5A)(D)(iii) (II) and (III) of the Act. Also, see
11 We note that the figure used in the petition was also used in the companion antidumping duty
investigation, and had been revised in that proceeding. At the request of the Department, the petitioner placed the
updated number and supporting documentation on the record of the CVD investigation on July 20 and 21, 2006.
12 See Petition at Exhibit VI-1, pages 7, 23, 24, 28, and 44.
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Comment 4, Part A.
To determine the existence and extent of the benefit, we adversely assumed that the logs used for
pulp were obtained from clear-cutting land that was designated for plantation use and,
consequently, that the cross-owned logging companies did not pay any stumpage fees. See
Comment 1 below. In addition, we adversely assumed that the cross-owned logging companies
did not replant. Therefore, the benefit equaled the stumpage benchmark described above. Id.
We converted the benefit per-cubic-meter of wood to a benefit per-metric-ton of pulp, to a
benefit per-metric-ton of paper, using conversion factors from the Petition. We then compared
this benefit to a U.S. price for subject paper contained in the Petition.11 The margin was
calculated as the ratio between the benefit and the U.S. price for subject paper. See
Memorandum from David Layton, Import Compliance Analyst to Susan Kuhbach, Director,
Office 1, regarding Final Determination in the Countervailing Duty Investigation of Certain
Lined Paper Products (CLPP) from Indonesia: Corroboration of Total Adverse Facts-Available
Rate (August 9, 2006). For a more detailed description of the calculation, see Memorandum
from David Layton and David Neubacher, International Trade Compliance Analysts, to the File
regarding Calculations for the Final Determination for PT. Pabrik Kertas Tjiwi Kimia Tbk
(August 9, 2006).
On this basis, we find a countervailable subsidy of 39.37 percent ad valorem.
B. Subsidized Funding of Reforestation (HTI)
According to information in the Petition, the GOI entered into agreements with private forestry
companies for the establishment of joint-venture companies that would operate HTI forest
plantations. In the creation of the joint-venture company, the private company and the GOI each
contributed equity capital and the GOI also provided a zero-interest loan.
Based on information in the Petition,12 we determine that the HTI program provides a financial
contribution and is specific because the loans and equity are limited to forestry or pulp
companies. See sections 771(5)(D)(I) and 771(5a)(D)(iii)(I) of the Act. Also based on the
Petition, we further determine that TK and its cross-owned companies were uncreditworthy and
unequityworthy. Therefore, the program confers benefit in the amount of the interest savings and
the GOI equity infusion (See 19 CFR 351.505(a)(3)(iii) and 351.506(a)(6)).
13 See, e.g., Petition at attachment 1, Table 4, and Letter from Wiley Rein & Fielding to Secretary of
Commerce regarding Certain Lined Paper School Supplies from Indonesia: Response to the Request for Information
by the U.S. Department of Commerce (September 22, 2005) (Petition Supplemental) at Attachment 1, Table 7.
14 See Memorandum from David Neubacher and David Layton, International Trade Compliance Analysts,
to the File regarding Calculation for the Final Determination (August 9, 2006).
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To calculate the benefit, we generally relied on the calculation and methodology provided in the
Petition and updated Petition Supplemental.13 However, we substituted the combined POI sales
of TK and its cross-owned corporations (excluding local affiliated sales) derived from their 2004
financial statements for the denominator used by the petitioner (Asia Pulp & Paper’s (APP’s)
1999 sales from its financial statements).14 See Comment 8 below. Also, see “Attribution of
Subsidies” section, above.
On this basis, we find a countervailable subsidy of 1.18 percent ad valorem.
II. Programs Determined to Be Not Countervailable
A. Accelerated Depreciation
The Indonesian tax code allows two options for calculating depreciation for tax purposes, straight
line depreciation or double declining balance depreciation (DDBD). Companies elect which
method to use. Also, according to the Indonesian tax code, all companies that have tangible
capital assets with a useful life of more than one year are eligible for the DDBD. It is calculated
using the GOI’s issued tax depreciation schedule.
Based on our review of the public laws and regulations implementing this program, we have
determined that the program was not specific within the meaning of section 771(5A) of the Act
and, therefore, is not countervailable during the POI.
III. Programs Determined Not To Have Been Used or Not To Have Provided Benefits During
the POI
A. Government Ban on Log Exports
The petitioner alleged that the GOI bans the export of logs and that this export ban works handin-
hand with the subsidized stumpage rates to provide downstream users with artificially lowcost
raw materials.
Although TK claimed that its cross-owned companies purchased some logs from unaffiliated
suppliers, we are not relying on this unverified claim in this final determination. Instead, we are
treating all logs used by TK’s cross-owned suppliers as having been cut by forestry companies in
the SMG.
15 See Petition Supplemental at 13.
16 See Petitioner’s October 20th submission at Exhibit 3, page 42-43.
17 See Memorandum from Susan Kuhbach, Director, to Stephen J. Claeys, Deputy Assistant Secretary for
Import Administration, regarding New Subsidy Allegation (February 10, 2006).
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As the petitioner has acknowledged, the log-ban and stumpage programs “work in conjunction to
achieve the same benefit.”15 This is reflected in the methodology used by the Department in
calculating the subsidy conferred through the GOI provision of logs, i.e., the methodology treats
every log as being subsidized. Therefore, we are treating the log export ban as not used during
the POI. See Comment 5 below.
B. One-time Loan Guarantee
According to the Petitioner’s October 20th submission, in 1999, SMG/APP’s affiliated bank,
Bank Internasional Indonesia (BII), qualified for a GOI recapitalization program run by the
Indonesian Bank Restructuring Agency (IBRA). As part of the recapitalization agreement, IBRA
took majority ownership of BII and all SMG/APP debt owed to BII was restructured. A
subsequent debt restructuring agreement was signed by SMG/APP, BII and IBRA the following
year. In February 2001, SMG/APP negotiated a new restructuring agreement on its debt to BII.
The terms of the agreement stated that BII would retain SMG/APP’s debt on its books, but the
GOI extended a loan guarantee on the debt. SMG/APP also agreed to put up assets equaling 145
percent of the value of the debt as collateral.
Based on publicly available record information, BII transferred SMG/APP’s debt to IBRA in
November 2001.16 When this occurred, record information indicates that the loan guarantee
ceased to exist. Therefore, we determine that the loan guarantee was not used during the POI.
Although we are finding the guarantee to have been terminated prior to the POI, we note that
certain information on the record indicates that the guarantee was just one aspect of a much
longer, more comprehensive process of restructuring of the respondent's debts. Although we did
not investigate the petitioner’s allegation of subsequent debt forgiveness,17 in any future reviews
of this order we will continue to evaluate whether any additional allegations from parties or other
evidence merits initiating an investigation into this subsequent debt restructuring.
Analysis of Comments
Comment 1: Application of Adverse Facts Available
The petitioner argues that the Department should assign AFA to the GOI and TK in light of their
conscious decision to not participate further in the Department’s investigation. The petitioner
notes that on February 10, 2006, TK filed a letter indicating that it was withdrawing from the
18 See Letter from TK to the Department (February 10, 2006) (TK withdrawal letter).
19 See Letter from the GOI to the Department (February 24, 2006).
20 See, e.g., Honey from Argentina: Final Results of Countervailing Duty Administrative Review, 69 FR
29518, (M ay 24, 2004) and accompanying Issues and Decision Memorandum at comment 2; Final Affirmative
Countervailing Duty Determination: Certain Cut- to-Length Carbon-Quality S teel Plate from Indonesia, 64 FR
73155,73156-6 (December 29, 1999).
21 See, e.g., China Steel Corp. v. United States, 28 CIT_, 306 F. Supp. 2d 1291 (2004); Valkia Ltd. v.
United States, CIT Slip. Op. 2004-71 (June 18, 2004).
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investigation as an active participant.18 On February 4, 2006, the GOI informed the Department
that it would be unable to provide any further company-specific confidential information and
would not be able to respond to questionnaires containing these types of requests.19 The
petitioner therefore maintains that the respondents are not participating fully in the investigation.
The petitioner argues that, section 776(a)(2) of the Act mandates the use of facts available for the
GOI and TK. According to the petitioner, it is without question that the respondents withheld
information, failed to respond to portions of the Department’s request for information or to
provide complete information by established deadlines, impeded the investigation of the
allegation regarding subsidized inputs, and provided information that could not be verified. In
keeping with Department precedent in past proceedings, the petitioner argues that an adverse
inference is warranted.20
According to the petitioner, the failure of the respondents to provide timely company-specific
information prior to the preliminary determination prevented the Department from analyzing
whether PT Arara Abadi (AA) and PT Wirakarya Saktimeet (WKS) meet the criteria for
establishing cross-ownership. Since that time, the petitioner contends, TK, its affiliates, and the
GOI have extended their lack of cooperation to all of the programs in this investigation, thereby
impeding and, in fact, forcing an end to the Department’s investigation of the three programs at
issue. Therefore, the petitioner maintains that the use of facts available is warranted for all three
programs.
The petitioner states that the Department has never found, nor could it find, that a party that has
withdrawn from an investigation has acted to the best of its ability to comply. According to the
petitioner, the courts have fully supported the Department’s approach. While the courts have
been willing to excuse a failure in cases where an active respondent can demonstrate that the
requested information does not actually exist, or that it is in the hands of an entity that the
respondent cannot compel to disclose it, the petitioner argues that the courts have made clear that
any number of other “hardships,” including bankruptcy, outdated computer systems, and sale of
the companies’ assets, do not permit a company to fail to provide documentation, and yet comply
with the “best of its ability” standard.21
22 See Nippon Steel Corp. v. United States, 337 F.3d 1373, 1381-83 (Fed. Cir. 2003)(Nippon Steel)
23 See Mannesmannrohren-Werke AF v. United States, 23 CIT 826,838 (1999).
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Further, the petitioner argues that the Department should reverse its preliminary determination
that the GOI’s loan guarantee to SMG/APP provided no countervailable benefit. The petitioner
points out that the Department requested numerous documents on the Loan Guarantee Program
and the GOI and TK failed to respond. Therefore, the petitioner maintains that the only proper
course of action is to presume that the loan guarantee program did provide a financial
contribution and a benefit, and that it was specific, and therefore, countervailable.
Finally, the petitioner contends that TK and the GOI engaged in inappropriate behavior by
blaming the Department for their failure to respond, demanding the right to verify the
Department and engaging in bargaining with the Department by offering to provide additional
information only after assurance from the Department that it would refrain from applying AFA in
the countervailing duty investigation. The petitioner maintains that the Department should not
reward the respondents’ failure to participate by returning to the 33.31 percent margin calculated
in the preliminary determination. Because certain key information was not verified, such as the
estimated pulp log harvest by Sinar Mas forestry companies, the stumpage fees paid by the crossowned
companies, and the net sales of the cross-owned companies, the petitioner maintains that
the Department should rely on the Petition’s subsidy calculations.
The respondents argue that during the course of the investigation they provided the Department
with extensive reliable information proving that the GOI does not provide any subsidy to lined
paper. According to the respondents, the unauthorized disclosure of their confidential data to
unauthorized parties made it impossible for TK or the GOI to provide additional confidential
information.
The respondents contend that in order to apply an adverse inference, the Department must make
two distinct findings. First, section 776(a) of the Act provides that if “necessary information is
not available on the record” or an interested party “withholds information” or “significantly
impedes a proceeding,” the Department may make its determination on the basis of “facts
otherwise available.” However, the respondents argue that the Department may make an adverse
inference only under circumstances in which it was reasonable for the Department to expect that
more forthcoming responses should have been made.22 The respondents argue that in order to
arrive at this conclusion, the Department must 1) “articulate why it concluded that a party failed
to act to the best of its ability” and 2) “explain why the absence of this information is of
significance to the progress of its investigation.”23
The respondents maintain that unlike in Honey from Argentina, where the Government of
Argentina admitted on that record that it did have the ability to provide the information but failed
to respond, in this case, the petitioner has set forth no facts upon which to base a finding that TK
or the GOI failed to respond to the best of its ability. According to the respondents, both TK and
24 See Letter from Stephen J. Claeys, Deputy Assistant Secretary for Import Administration to the
respondents (April 26, 2006) (Claeys’ Letter).
25 See, e.g., Mitsui & Co. v. United States, 18 CIT 185, 202-03 (1994); Am. Silicon Tech. v. United States,
24 C.I.T. 612, 624-25 (2000) (Am. Silicon).
26 See Hyundai Pipe v. United States Dep’t of Commerce, 11 CIT 238, 241 (1987) (Hyundai Pipe).
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the GOI cooperated with this investigation right up until the Department’s improper release of
the company’s highly sensitive business proprietary information and subsequent failure to take
adequate measures to address the release. Therefore, the respondents maintain that the
Department may not make an adverse inference.
The respondents argue that they placed extensive information on the record with regard to the
issue of cross-ownership including the most recent audited financial statements of every
requested entity, information about TK’s input suppliers and information about the forestry
companies’ supplies of inputs to TK and Lontar. The respondents maintain that the Department
has extensive information available from which to decide the issue of cross-ownership, as well as
an understanding of the real efforts undertaken by TK to gather the remainder of the information
requested. The respondents argue that even if the timing of TK’s January 30, 2006 submission,
did not permit the Department to fully utilize it in the preliminary determination, there was no
basis for finding that TK was uncooperative.
According to the respondents, it was only after learning that the Department had released
previously submitted proprietary information to an ineligible entity that TK and the GOI were
forced to cease making further disclosures of confidential information. The respondents argue
that despite their explaining to the Department that their efforts at cooperation had been crippled
by this incident, the Department did not respond for over ten weeks. Further, when it did
respond, the respondents assert that the Department did not offer the respondents anything in the
way of reasonable alternative or even concrete assurances that the company’s business
proprietary information would be better protected in the future.24 The respondents argue that in
such unusual cases of extenuating circumstances, the Court of International Trade has held that
the Department may not use adverse inferences.25 In fact, the respondents claim that this is a
much weaker case than Am. Silicon, (where the Department made an adverse inference regarding
respondent’s failure to respond when it was in the process of being acquired), in that the
Department itself caused TK’s and the GOI’s inability to respond.
The respondents state that not only would the application of AFA in this case be purely punitive,
but it would give rise to doubts about the Department’s “commitment to the appearance of
concern for the preservation of confidentiality.”26 According to the respondents, the CIT has
recognized that the “disclosure of sensitive materials to an adversary” has a “chilling effect” on
parties’ “willingness to provide the confidential information essential to {the Department’s} fact
27 Id. at 242.
28 See Sacilor, Acieries et Laminoirs De Lorraine v. United States, 3 CIT 191, 194 (1982); see also
Hyundai Pipe, 11 CIT at 243.
29 See World Finer Foods v. United States, 24 CIT 541,547 (2000) (World Finer Foods).
30 See Notice of Final Determination of Sales at Less than Fair Value - Stainless Steel Bar from Italy, 67
FR 3155, 3158 (January 23, 2002) (finding that the verification standard was satisfied even though security concerns
prevented the Department from conducting the amount of verification originally planned.) (SS Bar from Italy).
31 See Final Determination of Sales at Less Than Fair Value: Certain Frozen and Canned Warmwater
Shrimp From the Socialist Republic of Vietnam, 69 FR 71005, December 8, 2004 and Accompanying Issues and
Decision Memorandum at Comment 1 (Shrimp from Vietnam).
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finding process.”27 The respondents maintain that the Department’s “failure to honor” these
“basic statutory safeguards” inflicted an injury that courts have concluded, “cannot be repaired by
conventional legal remedies.”28 Given that the Department took ten weeks to respond to the
respondents’ concerns, and that when it did, it defended the very practices that resulted in the
initial improper disclosure, the respondents contend that the Department cannot possibly hold the
reasonable expectation the TK or the GOI would turn over more proprietary information.
Moreover, the respondents maintain that the Department’s failure to remedy the situation runs
afoul of its “obligation to assist interested parties experiencing difficulties. . .”29
Under these circumstances, the respondents believe that the Department should rely on TK’s and
the GOI’s submitted information in the final determination. According to the respondents, it is
well established that audited financial statements, such as TK’s, are self-verifying and considered
extremely reliable. The respondents maintain that the documentation and data from the GOI are
of equal caliber. In fact, the respondents assert, the Department has the authority to, and should
in this case, treat all of TK’s and the GOI’s submissions as self-verifying.30 In a situation where
routine business records, published reports, official laws, regulations and decrees make up the
factual record, the respondents argue that there is no reason to set aside these data. According to
the respondents, all of these data would be used without question by the Department if it had
found them on its own initiative. Further, the respondents contend that there is no remotely
equivalent alternative data that the Department could reasonably argue reflect the facts here.
The respondents state that in the absence of verified information, the Department may rely on
secondary information. See 19 CFR 351.308(c). According to the respondents, the Department
has relied heavily on publicly available, published data, because “they have been accepted by the
market as having some validity and by their very nature invite public discourse as to their
reliability.”31 Where, however, confidential information is the best source of accurate
information, the respondents contend that the Department must use it, even absent an on-site
32 See Notice of Final Determination of Sales at Less Than Fair Value: Live Cattle from Canada, 64 FR
56738 (October 21, 1999) (Cattle from Canada).
33 Id. 64 FR at 56743-44.
34 See World Finer Foods, 24 CIT at 547.
35 See Memorandum from Susan Kuhbach, Director, to the File regarding Conversation with Counsel for
PT. Pabrik Kertas Tjiwi Kimia Tbk.: Respondent’s Withdrawal from Active Participation (March 17, 2006).
36 See Memorandum from Constance Handley, Program Manager to Stephen J. Claeys, Deputy Assistant
Secretary, regarding Verification of Government of Indonesia Information (April 19, 2006).
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verification.32 In Cattle from Canada, the Department explained that it possesses the “inherent
power” to “protect the integrity of {the} proceedings” which required consideration of the
withdrawing respondent’s submissions.33 According to the respondents, the Cattle from Canada
holding must be applied here because the integrity of these proceedings has been undermined by
the Department’s improper release of business proprietary information to an ineligible entity, and
its failure to take steps to improve data protection or provide any concrete proof as to the lack of
any adverse consequences from the deficient procedures.
Because TK’s and the GOI’s submissions were made with the understanding that they would be
verified, the respondents believe that they should be considered probative and reliable. By
contrast, the respondents contend, the uncorroborated petition allegations are considered to be
among the least reliable sources of information.34 Because even the facts found through the use
of an adverse inference must be reasonably accurate, the respondents argue that the Department
should base its determinations on the information submitted by the GOI and TK.
Department’s Position: As an initial matter, we find that the criteria for the use of facts
available enumerated in section 776(a) of the Act are satisfied. Both TK and the GOI withheld
information that was requested by the Department, thereby significantly impeding the
proceeding. Further, the information which was provided could not be verified, as provided in
section 782(i) of the Act, because TK withdrew from active participation in the investigation.35
The GOI stated it would not provide any proprietary information in the context of verification, a
position which would have resulted in the verification process being meaningless. As a result,
the Department was forced to cancel verification of the GOI’s response.36
Moreover, we determine that the use of an adverse inference, pursuant to section 776(b), is
warranted in this case. The respondents have cited to the release by the Department of their
business proprietary information as justification for failing to provide the information requested
by the Department. According to the respondents, given this alleged failing by the Department,
they did act to the best of their ability. We disagree.
37 See Claeys’ Letter at 4.
38 Id. at 5, citing Nippon Steel (explanation of “best to its ability” standard as laid out within 19 USC
1677e(b)).
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First, the respondents claim that the Department waited for ten weeks to address their concern.
This is not the case. While the Department did not immediately respond in writing to the
submission by the GOI and TK on this issue, it acted as soon as it was alerted to the concern by
respondents’ counsel. In fact, the Department acted even though respondents’ concern was
expressed well after the ten-day period for making an objection to an APO access request as
described in 19 CFR 356.10(c)(2) and even though the respondents declined the opportunity to
make a formal submission regarding this matter.37 After receiving a call from the respondents’
counsel, the Department immediately contacted the law firm whose client’s status as an
interested party the respondents had questioned. The law firm responded that it had made an
error, that its client was not, in fact, an interested party in the cases involving Indonesia, but
rather only in the cases involving China and India. The law firm promptly withdrew its
application for APO access in the cases involving Indonesia and certified destruction of all APO
material it had received related to the Indonesia cases. The respondents did not express concern
about any other party with APO access.
During the course of this investigation, the respondents have been under the same APO rules as
every other company in every other case conducted by the Department. They have had the same
access to all legal means of redress, should they believe their information to have been
compromised. Also, consistent with 19 CFR 351.305(b), access to TK’s confidential
information was only granted to counsel for the possibly ineligible interested party, not the
possibly ineligible interested party itself. Because our investigations rely upon the submission of
information, parties cannot unilaterally cease to cooperate to remedy a concern about the APO
process. Under the Department’s regulations, authorized APO applicants acknowledge that the
Department may sanction an authorized applicant pursuant to 19 CFR 354.6 for any disclosure of
business proprietary information obtained under APO to any other person who is not an
authorized applicant. Therefore, the fact the respondents at one point in the investigation had a
concern about counsel for a possibly ineligible interested party cannot serve as an excuse to cease
cooperation with the Department’s investigation, especially given that the law firm in question
immediately removed itself from the APO. The parties have at no time indicated that they were
unable to provide the requested information because of a physical or legal incapability;38 rather,
they chose not to provide it to the Department.
Citing to Hyundai Pipe, the respondents have claimed that the Department’s failure to respond to
their concerns regarding their business proprietary information makes an adverse inference
purely punitive, because of the “chilling effect” of the disclosure of proprietary information to an
adversary. Hyundai Pipe does not support this position. In that case, the respondent objected to
the release of its information under APO to a certain law firm which it understood may have
violated the terms of an APO and disclosed confidential information in another case. The
39 See Hyundai Pipe, 11 CIT at 239.
40 See World Finer Foods, 24 CIT at 542-43 & 544.
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allegation in the other case was still under investigation at the time.39 Further, in Hyundai Pipe,
the respondent made its objection as soon as the application for protective order was filed. The
judge issued a preliminary injunction prior to any information being released under APO. The
respondent was still obliged to respond to the Department’s request for information. In this case,
neither TK nor the GOI formally objected to the law firm’s application until after the Department
sought additional information from the firm. By the time they officially objected, the firm had
withdrawn from the APO and certified to the destruction of all documents relating to the
investigation. Again, because in this case, the Department immediately took steps to prevent the
release of any additional APO materials to the law firm whose interested party status the
respondents challenged, it is unclear how or why the respondents believe that their continuing to
cooperate in this investigation could have resulted in their proprietary information being
disclosed to an adversary.
With regard to the respondents’ citation to World Finer Foods, to support their position that the
Department was obliged to help them because they were experiencing difficulty complying with
the Department’s request for information, we find this citation to be inapposite. In that case, the
respondent notified the Department of its inability to comply with the requirements of the
questionnaire due to financial resource constraints but it did offer to supply “limited information
that {the Department} felt might be worthwhile or helpful.”40 In this case, the respondents did
not indicate they could not respond, but rather they would not respond. Further, by taking steps
to ensure that its APO regulations regarding interested party status were being correctly followed,
the Department did, in fact, help the respondents to comply with its requests for information.
The respondents have not made a convincing argument that there was anything more the
Department could or should have done to assist them. Therefore, we find the instant case to be
more similar to Honey from Argentina, where the respondent had the ability to provide the
information, but failed to do so. In Honey from Argentina, the Department found the use of an
adverse inference to be justified.
TK’s withdrawal from active participation in the proceeding was tantamount to refusing
verification. The GOI refused to participate in a full and comprehensive verification. By
refusing verification, the respondents effectively nullified their responses. The absence of
verified information is significant to the progress of the investigation because section 782(i)(1) of
the Act specifies that the Department “shall verify all information relied upon in making a final
determination in an investigation.”
The respondents have suggested that, given the circumstances, the Department should rely on
their submitted information. With the limited exception of certain publicly available audited
financial statements as described in comment 8 below, we believe that relying on the unverified
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submitted information would be inappropriate in this case. In the case cited by the respondents
in support of their position, Cattle from Canada, the Department used the information of the
uncooperative respondents in order to prevent the manipulation of the “all others” rate. No such
circumstances exist in this case. Nor does the situation in SS Bar from Italy, where security
concerns prevented the Department from conducting a full verification of a cooperative
respondent, bear any similarity to this case, where uncooperative respondents refused complete
verifications. The Department applies AFA "to ensure that the party does not obtain a more
favorable result by failing to cooperate than if it had cooperated fully." See Statement of
Administrative Action (SAA) accompanying the Uruguay Round Agreements Act, H. Doc. No.
316, 103d Cong., 2d Session, Vol. 1 (1994) at 870. The only parties who stand to benefit from
the wholesale use of the unverified information in this case are the uncooperative parties
themselves. Given that fact, the issue of whether the Department has the ability to consider the
responses “self-verifying” is moot - the Department has no reason to do so in this case.
In addition, we disagree with the respondents’ argument that there is no equivalent alternative
data that reflects the facts in this case. Sections 776(b)(1) and (4) of the Act permit the
Department to use information from the Petition or any other information placed on the record as
adverse facts available, provided that the Department corroborates, to the extent practicable, that
information from independent sources reasonably at its disposal. See section 776(c) of the Act.
For a discussion of the information used in determining the margin, see the comments related to
each subsidy allegation below.
Comment 2: Attribution of Subsidies Received by Cross-owned Companies on Input
Products
The respondents argue that 19 CFR 351.525(b)(6)(iv) reflects an erroneous interpretation of the
Act. 19 CFR 351.525(b)(6)(iv) reads:
If there is cross-ownership between an input supplier and a downstream producer, and
production of the input product is primarily dedicated to production of the downstream
product, the Secretary will attribute subsidies received by the input producer to the
combined sales of the input and downstream products produced by both corporations
(excluding the sales between the two corporations).
The respondents claim that this regulation acts as a conclusive presumption, attributing upstream
subsidies to downstream products in the cases of cross-ownership. According to the respondents,
this is contrary to the Act and may not, therefore, be applied against TK.
Under the Act, the Department may impose a countervailing duty if it makes the determination
that a particular class or kind of merchandise is receiving the benefit directly or indirectly of a
subsidy. See section 701(a)(1) of the Act. The respondents argue that in Delverde, SRL v.
United States, 202 F.3d 1360,1364 (Fed. Cir. 2000) (Delverde) the Court of Appeals for the
Federal Circuit explained that, in cases of alleged indirect subsidies, the Act “does not allow
41 See Corus Staal BV v. Department of Commerce, 395 F.3d. 1343,1347 (Fed. Cir. 2005) (citing Murray
v. The Schooner Charming Betsy, 6 U.S. (2 Cranch) 64,118(1804)).
42 See Appellate Body Report, United States - Final Countervailing Duty Determination with Respect to
Certain Softwood Lumber from Canada, ¶¶ 141-42, WT/DS257/AB/R (January 19, 2004).
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Commerce to presume conclusively that” a given subsidy is “automatically ‘passed through’ to
subject merchandise.” Id.
According to the respondents, the Trade and Tariff Act of 1984 (1984 Act), Pub.L.No.98-573, 98
Stat. 2948, (which broadened the coverage of subsidy laws by including a specific rule for cases
where a benefit is bestowed on a product at an earlier stage of manufacture), was intended
specifically to address cases of allegations like those before the Department in this case. The
respondents state that under the Act, as amended, the Department is now required to include any
“upstream subsidy” in its determination of the amount of the subsidy at issue. See sections 706
and 771A(a) of the Act. The respondents claim that the use of a conclusive presumption, such as
the one used in this case on the basis of 19 CFR 351.525(b)(6)(iv), circumvents the safeguards
required by sections 706 and 771A(a) of the Act, i.e., that the alleged subsidy in fact is shown to
have a significant effect on the cost of manufacturing or producing the subject merchandise, and
that it in fact confers a benefit on that merchandise.
Further, the respondents argue that the Act must be interpreted “whenever possible, in a manner
consistent with international obligations.”41 The respondents contend that Article VI of the
General Agreement on Tariffs and Trade (GATT) proscribes the imposition of a duty except to
the extent that a subsidy directly or indirectly inures to the benefit of the subject merchandise.
See GATT Article VI(3). According to the respondents, the conclusive presumption in 19 CFR
351.525(b)(6)(iv) purports to empower the Department to impose a duty in excess of the subsidy
that actually affected the manufacture, production or export of the subject merchandise, because
as a factual matter, the subsidy may not have flowed through. The respondents claim this
interpretation was backed up in the World Trade Organization (WTO) Appellate body
determination in Softwood Lumber from Canada, where it stated “If countervailing duties are
intended to offset a subsidy granted to the producer of an input product, but the duties are to be
imposed on the processed product . . it is not sufficient for an investigating authority to establish
only for the input product the existence of a financial contribution and the conferral of a benefit
to the input producer.”42
According to the respondents, Congress intended that upstream subsidy investigations should not
generally extend more than one stage up the chain of commerce. Section 771A(a)(1) of the Act
defines an upstream subsidy as one where the “input product” itself “is used . . . in the
manufacture of {the subject} merchandise.” The respondents contend that the House Ways and
Means Committee limited the scope of the inquiry, permitting attribution across intermediate
products only where there is evidence of a benefit flowing though to the subject merchandise,
recognizing “the administrative burdens and inherent difficulties of applying the statute to such
43 See Report of the House Committee on Ways and Means, H.R. Rep. No. 98-725 (1984) at 23-24, and 34.
(HCWM Report).
44 See Witman v. Am. Trucking Ass’ns, 531 U.S. 457, 481 (2001).
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subsidies.”43
The respondents argue that no inherent authority empowers the Department to use the 19 CFR
351.525(b)(6)(iv) presumption. In addition to the preexisting requirements under sections
701(a)(1) and 771(5) in the 1984 Act, the respondents state that Congress added the requirements
that the Department 1) have “reasonable grounds” before commencing an upstream subsidy
allegation; 2) make a specific finding that the subsidy bestows a competitive benefit on the
subject merchandise; and 3) make the further finding that the subsidy has a significant effect on
the cost of manufacturing or producing the subject merchandise. See section 771A(a) of the Act.
The respondents contend that the Department cannot interpret these requirements out of
existence for the subset of upstream subsidies involving cross-ownership.
Finally, the respondents maintain that even if the Act were ambiguous as to how to handle cases
of cross-ownership, the conclusive presumption in 19 CFR 351.525(b)(6)(iv) would not reflect a
reasonable interpretation. While the respondents do not question the Department’s right to
reasonably interpret the statute in places where ambiguity exists, they argue that when the
Department’s interpretation goes beyond the limits of what is ambiguous and contradicts the
statute, it becomes unlawful.44 The respondents conclude that the Department’s reliance on 19
CFR 351.525(b)(6)(iv) is invalid because it allows the Department to skirt the requirements of
sections 701(a)(1) and 771(5) Act.
The petitioner rebuts that there is no conflict between 19 CFR 351.525(b)(6)(iv) and the Act, and
that 19 CFR 351.525(b)(6)(iv) does not operate as a conclusive presumption. Pursuant to section
771(5)(B), the Department may impose countervailing duties so long as it finds that a
government has provided, directly or indirectly, a subsidy related to the manufacture, production
or export of the subject merchandise. Contrary to respondents’ claims, the petitioner maintains
that there is nothing in 19 CFR 351.525(b)(6)(iv) that even suggests that the Department may
impose countervailing duties without making the requisite findings that a government has
provided, directly or indirectly, a subsidy related to the manufacture, production, or export of the
subject merchandise.
The petitioner maintains that in order to apply 19 CFR 351.525(b)(6)(iv) the Department must
determine that 1) cross-ownership exists; 2) the input product in question was used for the
production of the subject merchandise and 3) the input producer received subsidies.
Accordingly, the petitioner argues, the Department must make factual findings, including those
required under sections 701(a)(1) and 771(5) Act. Therefore, the petitioner sees no conflict
between the regulation and the Act, because the Department cannot apply this regulation without
making the requisite statutory findings first.
45 See Fabrique, 166 F. Supp 2d at 603.
46 See Preamble, 623FR at 65401.
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Further, the petitioner argues that the Department did make the required findings on financial
contribution, benefit and specificity. Therefore, the petitioner claims that the respondents’ cite to
Delverde, which concerned attribution under a change in corporate ownership, is misplaced.
Because the Department found cross-ownership between TK and its affiliated input suppliers, the
petitioner concludes that there was no need to find the pass-through described in Delverde
because the pass-through requirement does not apply in the case of cross-owned companies. The
petitioner states that Delverde, like privatization cases, addresses the situation where a company
is subsidized and then transferred (via the sale of assets or ownership) in an arm’s-length
transaction for fair market value. The question is then whether the benefit is extinguished by the
sale. In this case, the petitioner maintains, there is no sale or transfer of assets at arm’s length
and for fair market value, and therefore no intervening event to extinguish the financial
contribution and the benefit provided to the single cross-owned entity. Because 19 CFR
351.525(b)(6)(iv) requires the Department to make findings of a subsidy (i.e., a financial
contribution, a benefit to the recipient, and specificity), the petitioner asserts it does not conflict
with the courts holding in Delverde.
In addition, the petitioner states that the Court of International Trade has upheld the
Department’s cross-ownership approach, and in particular, the Department’s authority to attribute
subsidies received by one company to the total sales of a related company.45
According to the petitioner, the respondents have attempted to cast 19 CFR 351.525(b)(6)(iv) as
a way to bypass the requirements of an upstream subsidy allegation. However, the petitioner
maintains that the Preamble46 underscores that the intent was to acknowledge that a financial
contribution conferred upon an input to downstream products would benefit the downstream
products when cross-ownership exits, just as if the production of the input and the downstream
products occurred within an integrated corporation. The petitioner argues that in this
investigation, the record indicates that TK is cross-owned with pulp producers Lontar Papyrus
Pulp & Paper Industry (Lontar) and PT. Indah Kiat Pulp & Paper Tbk (IK) and with PT. Satria
Perkasa Agung (SPA), which supplies logs to WKS. Further, the facts available indicate that TK
is cross-owned with the forestry companies AA and WKS. Under these circumstances, with all
of AA’s and WKS’ logs flowing to TK’s pulp producers, the petitioner contends that it is
reasonable to assume that a subsidy to the input producers under common control with TK and
its pulp producers benefits the production of both the input and the downstream products just as
if the input and the downstream products were produced by a single corporation.
The petitioner states that the discussion in the House Ways and Means Committee related to the
“chain of commerce” does not apply. As an initial matter, the petitioner claims that this
argument is irrelevant, as the Department is not investigating an upstream subsidy, and the
upstream subsidy regulations do not apply in cases of cross ownership. However, even if the
47 Id., 63 FR at 65390.
48 See Creswell Trading Co. v. United States, 783 F.Supp. 1418, 1420 (CIT 1992).
49 See PPG Industries, Inc. v. United States, 928 F.2d 1568, 1571 (Fed. Cir. 1991).
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upstream subsidy provision did apply, the petitioner maintains that the legislative history does
not prohibit the Department from extending its analysis beyond the first chain of commerce in an
upstream subsidies investigation. The Preamble, the petitioner states, speaks to this issue: “in
those circumstances where a party is able to demonstrate the significance of subsidies at earlier
stages, we will investigate accordingly.”47
Further, the petitioner maintains that, if the upstream subsidy provision did apply, the subsidies at
issue would qualify as upstream subsidies and could be attributed to TK. According to the
petitioner, the stumpage and log export ban programs administered by the GOI reduce the price
of logs, which are an input in the production process of the paper subject to this investigation.
The provision of logs at less than adequate remunerative value thereby confers a competitive
benefit. Finally, though TK’s withdrawal from the proceeding prevented the Department from
gathering all the available information, since pulp makes up more than half of TK’s cost of sales,
even according to unverified data, there is no question that the subsidies at issue have a
significant effect on the cost of manufacturing the subject merchandise. Thus, the petitioner
contends all three prongs of the test set out in section 771A(b) of the Act have been met.
Finally, the petitioner contends that the Department’s treatment of the subsidies is consistent with
the GATT and WTO agreements. Contrary to the respondents’ claims, the petitioner argues that
19 CFR 351.525(b)(6)(iv) does not allow the Department to randomly determine the amount of
the countervailing duty. The Department’s power to determine the amount of the countervailable
subsidy is defined by section 771 of the Act. In the preliminary determination, the Department
explained the methodology that was used to estimate or calculate the benefit that the input
suppliers received from the government, which was then used to calculate the amount of the
subsidy. The petitioners maintain that the Department did not, therefore, assign a duty in excess
of the subsidy actually used in the manufacture, production, or export of the merchandise. In
addition, the petitioner argues that the respondents cite to the WTO decision in Softwood Lumber
is in apposite, as that case did not deal with cross-owned companies.
Department’s Position: We disagree with the respondents. Pursuant to section 771(5) of the
Act, the Department considers whether a subsidy exists without regard to whether the subsidy is
provided directly or indirectly on the manufacture, production, or export of merchandise. The
Court has recognized that section 771(5) of the Act gives broad discretion to the Department in
determining what constitutes a countervailable subsidy.48 It is well settled that the Department
possesses great discretion in administering the countervailing duty law.49 Accordingly, the
50 Id.
51 See HCWM Report at 7, 33 -34; see also Respondents’ Case Brief at 8 (May1, 2006).
52 See Melamine Chem., Inc. v. United States, 732 F.2d 924 (Fed. Cir. 1984) (Melamine Chem.)
53 Id. at 928.
54 See, eg., Hoogovens Staal BV v. United States, 4 F.Supp.2d 1213, 1216 (CIT 1998); see also RSI (India)
PVT., LTD., v. United States, 687 F.Supp. 605, 610 (CIT 1988) (RSI) (Court must accord substantial weight to an
agency’s interpretation of the statute it administers).
55 See Fabrique, 166 F. Supp. 2d at 573.
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Department’s interpretation of the statute is entitled to deference.50
There is no indication that the statutory provision for upstream subsidies was intended to be the
only provision that addresses input subsidies. The Department’s regulations at 351.525 provide
that, if there is cross ownership between an input supplier and the producer of a downstream
product and the input product is primarily dedicated to production of downstream product, the
subsidy to the input supplier is attributed to sales of both the input and the downstream product.
The Department also possesses authority to conduct upstream subsidy investigations pursuant to
19 U.S.C. 1677-1, which the Department has implemented by 19 CFR 351.523. Upstream
subsidy investigations examine inputs purchased from affiliates “used in the production of the
subject merchandise.” See 19 CFR 351.523. Further, the legislative history cited by the
respondents makes it clear that the intent of Congress in enacting the Trade and Tariff Act of
1984 was to broaden the Department’s ability to examine upstream subsides when companies are
not cross-owned, not to restrict the Department’s abilities to countervail subsidies received by
cross-owned companies.51
When the issue is the validity of a regulation issued under a statute an agency is charged with
administering, it is well established that the agency’s construction of the statute is entitled to
great weight.52 In Melamine Chem. the Court stated “{A}gency regulations are to be sustained
unless unreasonable and plainly inconsistent with the statute.”53 Thus, the question is whether
regulation is based on a permissible construction of the statute.54
Section 351.525(b)(6) is not inconsistent with the statute. As the Court noted in Fabrique (citing
Countervailing Duties; Final Rule, 63 Fed. Reg. 65348, 65401 (November 25, 1998)), “{t}he
underlying rationale for attributing subsidies between two separate corporations {with cross
ownership} is that the interests of those two corporations have merged to such a degree that one
corporation can use or direct the individual assets (or subsidy benefits) of the other corporation in
essentially the same ways it can use its own assets (or subsidy benefits).”55
56 See Proposed Rules: Countervailing Duties, Part II, 62 FR 8818, 8843 (February 22, 1997) (Preamble
to Proposed Rules).
57 See Preamble, 63 FR at 65390.
58 See Preamble to Proposed Rules, 62 FR at 8845.
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The Department specifically considered the proper treatment of cross-owned companies relative
to the upstream subsidy provision of the statute. In the preamble to the Department’s proposed
CVD regulations, the term “cross ownership” was applied in the context of upstream subsidy
investigations.56 In the preamble to the final regulations, however, the Department explained it
was specifically changing the standard for upstream subsidy investigations from cross ownership
to affiliation, noting attribution and cross ownership were addressed in a different provision of
the final regulations.57 As the Department explained, it re-examined the initial upstream-subsidy
regulation based upon numerous objections that the Department was elevating form over
substance. Focusing upon inputs purchased from affiliates and used to produce subject
merchandise in upstream subsidy investigations is strictly consistent with the statute.
There are two significant differences between attribution and upstream subsidies. First, upstream
subsidies relate to affiliates (and unaffiliated suppliers). The Preamble to Proposed Rules states
“{a}ffiliation describes a wide range of business relationships, while cross ownership describes a
much narrower range of relationships. . . {W}here cross ownership exists one corporation can
use or direct the individual assets of the other corporation in essentially the same ways it can use
its own assets. Where the interests of the two parties have merged to this degree, we believe it is
reasonable to presume that subsidies to one corporation may also benefit another corporation.”58
Second, the upstream subsidy regulation expressly refers to “subject merchandise,” whereas the
attribution regulation speaks of a “downstream product.” The term “downstream product” is not
synonymous to the term “subject merchandise.”
As accepted by the Court, the attribution between cross-owned companies does not exceed the
Department’s authority to investigate upstream subsidies. Rather, our attribution regulation
addresses a separate situation, i.e., where one corporation can use or direct the individual assets
of the other. Here, TK’s withdrawal from active participation in the case led the Department to
draw an adverse inference of cross-ownership. Contrary to its current claim, when refusing to
respond to the Department’s questions regarding cross-ownership, TK did not claim it was
unable to provide the requested information. Rather, it disagreed with the Department’s
interpretation of the agency’s regulation and refused to provide the requested information.
With regard to attribution, in the final regulation, the Department explained that
The main concern we have tried to address is the situation where a
subsidy is provided to an input producer whose production is
dedicated almost exclusively to the production of a higher value
59 See Preamble, at 63 FR 65401.
60 Id.
61 See Zenith Radio Corp. v. United States, 437 U.S. 443, 455-56 (1978).
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added product - - the type of input that is merely a link in the
overall production . . . Accordingly, where the input and
downstream production takes place in separately incorporated
companies with cross-ownership and the production of the input is
primarily dedicated to the production of the downstream product,
paragraph (b)(6)(iv) requires the Department to attribute the
subsidies . . . to the combined sales of the input and downstream
product.59
Respondents’ reliance upon Delverde ignores that, here, we are not dealing with a sale between
separate, unrelated companies. Delverde dealt specifically with the issue of “pass-through” in
instances where a company changed ownership. “Pass-through” is not an issue here because we
are addressing companies that are cross-owned. The subsidies in question are not passed from
one independent or affiliated entity to another; rather the benefit is received by the cross-owned
companies, which the Department views as a single entity. As stated in the preamble, attribution
relates to inputs that are “merely a link.”60 The Department finds that pulp logs are primarily
dedicated to the production of pulp, which is primarily dedicated to the downstream product,
paper, including CLPP. For further discussion of this issue, see Comment 3 below.
Respondents maintain that the Act must be interpreted consistent with our international
obligations. As a preliminary matter, the Act is fully consistent with the international obligations
of the United States. In any event, the Department is governed by U.S. law, and, as we have
explained, our interpretation of the attribution regulations is fully consistent with the statute.
Respondents’ reading of the WTO appellate body decision in US – Softwood Lumber has no
bearing upon these proceedings. The Department’s decision is governed by, and consistent with,
U.S. law.
Countervailing duties are intended to offset the unfair competitive advantage that foreign
producers would otherwise enjoy from subsidies paid by their governments.61 The narrow
reading given to the statute by respondents would undermine the purpose of the statute by
allowing a company to “avoid countervailing duty exposure for input subsidies by separately
incorporating the division that makes the input,” while retaining the ability to control the
division’s assets. Therefore, we have continued to apply 19 CFR 351.525(b)(6)(iv) in this case.
62 See Certain Pasta from Italy: Preliminary Results and Partial Rescission of the Seventh Countervailing
Duty Administrative Review, 69 FR 45676, 45679 (July 30 , 2004); see also Final Negative Countervailing Duty
Determination: Live Swine from Canada, 70 FR 12186 (March 11, 2005) and Accompanying Issues and Decision
Memorandum at Attribution of Subsidies.
63 See Preamble, 63 FR at 65401.
64 See NEC Corp. v. Department of Commerce and International Trade Commission, 36 F. Supp. 2d 380,
387 (CIT 1998) (NEC Corp).
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Comment 3: Are Subsidized Logs “Primarily Dedicated” to Certain Lined Paper
Products?
The respondents argue that the criteria set forth in 19 CFR 351.525(b)(6)(iv), which states that
the allegedly subsidized input product must be “primarily dedicated to the production of the
downstream product” and that there must be “cross-ownership between {the} supplier and {the}
downstream producer,” are not satisfied in this case. First, the respondents contend that pulp
logs are not primarily dedicated to the production of the subject merchandise. In past cases, the
respondents allege, the Department has consistently maintained that under 19 CFR
351.525(b)(6)(iv) “the downstream product” to which the input is primarily dedicated must be
the subject merchandise.62 According to the respondents this interpretation is consistent with the
discussion in the Preamble where the Department stated “The main concern we have tried to
address is the situation where a subsidy is provided to an input producer whose production is
dedicated almost exclusively to the production of a higher value-added product - the type of input
product that is merely a link in the overall production chain.”63 The respondents argue that in the
preliminary determination, the Department erroneously deviated from this practice when it
determined the first prong of the test was met because pulp was primarily dedicated to the
production of paper in general.
According to the respondents, the Department’s regulations do not contain a definition of
“product,” necessitating that the Department use the term in a way that accords with its plain
meaning. The respondents argue that both Congress and the Department consistently have used
the term “product” in a way that accords with the plain meaning, emphasizing specificity and
looking for clear dividing lines between different products. For example, section 771(10) of the
Act defines the term “domestic like product” as “a product which is like, or in the absence of
like, most similar in characteristics and uses with, the article subject to investigation.”
The respondents state that the Department examines six factors to determine if two groups of
merchandise constitute a single like product: 1) physical characteristics and uses; 2)
interchangeability; 3) channels of distribution; 4) common manufacturing facilities; 5) customer
or producer perceptions; and 6) price.64 The purpose of this analysis, respondents maintain, is to
determine if there is a “clear dividing line” between the characteristics and uses of one product
and the other. In this case, the respondents argue that “paper” is a large family of many products
because it includes many clearly divided types of merchandise.
65 See Respondents’ Case Brief at 27.
66 See, e.g., Initiation of Antidumping Duty Investigation: Solid Fertilizer Grade Ammonium Nitrate from
the Russian Federation, 64 FR 45226 (August 19, 1999); Dismissal of Antidumping and Countervailing D uty
Petitioner: C ertain Crude Petroleum Oil Prod ucts from Iraq, Mexico, Saudi Arabia & Venezuela, 64 FR 44480
(August 16, 1999).
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The respondents argue that paper products have many different physical characteristics and uses,
and that the products are not interchangeable (e.g., writing paper, sanitary products, calendars,
shopping bags). According to the respondents, paper products reach the market through
divergent channels of distribution and tend to be manufactured in different facilities. Finally, the
respondents maintain that studies show that prices vary dramatically among different paper
products.65
Further, the respondents argue that the Department has found “clear dividing lines” between far
more similar classes and kinds of merchandise than the myriad paper products at issue here.66
The respondents claim that the Department used the term “product” in this way throughout its
regulations. See, e.g., 19 CFR 351.523(a)(1)(ii)(B): “the price for the subsidized input product is
lower than the price that the producer of the subject merchandise would otherwise pay another
seller in an arm’s -length transaction for an unsubsidized input product.” The respondents assert
that such a price comparison would be meaningless unless the Department intended to require a
comparison of virtually identical items, interchangeable goods, with similar uses and physical
characteristics, with prices that the Department would expect to be similar absent some subsidy.
Finally, the respondents note that the scope of this investigation includes references to multiple
paper “products.” Indeed the title of the case, Certain Lined Paper Products, indicates that paper
is not a single product.
The respondents state that pulp logs and pulp are not primarily dedicated to any particular
product. The four separate corporations involved in the analysis produce a wide variety of
products including packaging materials (e.g., corrugating medium, containerboard, paper tubes),
tissue paper, writing paper, sanitary products (e.g., facial tissue, toilet rolls, napkins) etc. In
addition, the companies sell pulp to third-parties. Because the input product, pulp, is not
dedicated to the production of any single product within the meaning of 19 CFR
351.525(b)(6)(iv), the respondents argue the provision is inapplicable to TK and the Department
must find that TK receives no advantage or benefit from the allegedly subsidized stumpage used
by other companies.
Second, the respondents argue that the second prong of the test in 19 CFR 351.525(b)(6)(iv) has
not been met, as the Department erred in applying AFA to determine that TK was cross-owned
with its pulp suppliers and their pulp log suppliers. For a discussion of the respondents’
arguments regarding the use of AFA, see Comment 1, above.
67 See Countervailing Duties; Final Rule, 63 FR 65348 (November 25, 1998) (Final Rule) (Includes the
Preamble and Regulations).
68 See Preamble, 63 FR at 65401.
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The petitioner disputes the respondents’ interpretation of 19 CFR 351.525(b)(6)(iv), arguing that
the respondents’ interpretation would render the most blatant, market-distorting and costly
subsidies off limits to U.S. CVD law. The petitioner points out that the term “subject
merchandise” appears 47 times in the Final Rule,67 whereas the term “downstream product(s)”
appears 19 times. According to the petitioner, there is no evidence that the Department used the
terms interchangeably. The use of the term “downstream product(s)” occurs almost exclusively
in the context of attribution and cross-ownership. Therefore, the petitioner maintains that if the
Department had intended to confine attribution to the subject merchandise, it would have used
that term instead of the term “downstream product(s).”
19 CFR 351.525(b)(3) provides that the Department “normally will attribute domestic subsidies
received by the firm to all the products sold by the firm.” The petitioner concludes that the word
“product” as used in the regulations and the Act unequivocally encompasses more items than just
the subject merchandise. The petitioner argues that the respondents’ interpretation of the term
“primarily dedicated” would permit subsidies of certain commodities to escape the discipline of
the countervailing duty law by virtue of the fact the subsidized input is used to produce a wide
range of downstream products. This loophole, the petitioner contends, was not the intent of
Congress when it sought to establish clear limitations on upstream subsidies in 1984.
Further, the petitioner maintains that the respondents have misinterpreted the Preamble which
uses the analogy of plastic inputs into automobiles and appliances as an analogy for input
products which are not primarily dedicated to downstream products.68 The petitioner contends
that the plastic referred to in this analogy is vastly different from the pulp logs at issue. Plastic is
used in thousands of widely disparate downstream products produced by vastly different
industries (e.g., the automobile and appliance industries), but accounts for an extremely small
amount of the value added in producing appliances and automobiles. In this case, the pulp logs
are used by the paper industry, and paper is a primary input, accounting for well over half of the
cost of production of the subject merchandise. The petitioner concedes that other non-subject
paper products may receive a similar benefit, however, the fact that they are also subsidized is
immaterial to the investigation, except to the extent they are also produced by the cross-owned
firms and thereby included in the denominator of the calculation.
Finally, the petitioner claims that the Department is justified in its use of AFA with regard to the
cross-owned companies. For further discussion of the petitioner’s arguments regarding the uses
of AFA, see Comment 1, above.
69 See, e.g., Initiation of Antidumping Duty Investigation: Certain Polyester Staple Fiber from the People's
Republic of China, 71 FR 41201 (July 20, 2006).
70 See, e.g., Notice of Final Determination of Sales at Less Than Fair Value: Certain Softwood Lumber
Products from Canada, 67 FR 15539 (April 2, 2002) and Accompanying Issues and Decision Memorandum at III,
Scope Issues.
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Department’s Position: We disagree with the respondents. First, we find the respondents’
reliance on NEC Corp. to be misplaced. The reference point from which the Department’s
domestic like product analysis begins is with “the article subject to an investigation, (i.e., the
class or kind of merchandise to be investigated, which normally will be the scope as defined in
the Petition).”69 Moreover, the criteria used by the Department in conducting a class or kind
analysis were laid out in Diversified Products Corp. v. United States, 6 CIT 1555 (1983)
(Diversified Products), and differ from those used by the International Trade Commission (ITC),
which were enumerated in NEC Corp. However, we do not find that a discussion of Diversified
Products is relevant to this issue. The Department uses Diversified Products when determining
whether a product is in the scope of an order. See 19 CFR 351.225(k)(2). It also uses Diversified
Products in determining whether products within the scope of an order belong to the same class
or kind of merchandise.70 The question at hand is not whether all paper products are subject
merchandise, but whether “downstream product(s)” as used in 19 CFR 351.525(b)(6)(iv), can
encompass more than the subject merchandise.
The respondents have argued that the Department must use the term “product” in a way that
accords with the “plain meaning.” Yet it is clear that the word “product” does not have a
standard meaning that indicates exactly how similar goods must be to fall under the definition of
a product. For example the word “product” could be applied to motor vehicles, cars, Ford cars,
Ford Focus, or green 2006 model Ford Focus, depending on the level of specificity the user
wants to convey. Even the name of this case indicates that CLPP consists of multiple products,
although for the purposes of this investigation, CLPP compromises a single domestic like
product. Therefore, in interpreting the meaning of “downstream product” as used in the
regulations, the Department must look to the purpose of the regulation and the use of the term
elsewhere in the regulations. As discussed in Comment 2 above, the courts have ruled that the
Department is entitled to deference when interpreting the statute and its regulations.
The Department’s regulations at 351.525 deal with the attribution of countervailable subsidies.
Section 351.525(b)(3) indicates that normally the Department will attribute domestic subsidies
received by the firm to “all the products sold by the firm.” We only attribute a firm’s subsidy to
a particular product produced by that firm if the subsidy is shown to be tied to solely to that
product. By avoiding the use of the term “subject merchandise,” the regulation leaves open the
possibility that the “products” benefitting from the subsidy may include subject and non-subject
merchandise. Given that the terms “downstream products” or “products” are used in 19 CFR
351.525 several times in discussing the proper attribution of subsidies, and in those instances
there is no indication that the Department intended to limit the attribution of the subsidy to only
subject merchandise, we find it reasonable that the use of the terms “downstream product” in 19
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CFR 351.525(b)(6)(iv) is consistent in meaning with that term as used in other subsections of 19
CFR 351.525.
The Department may someday face a case in which the downstream products produced from the
subsidized input could include products as disparate as the automobiles and appliances, as in the
example from the Preamble cited by both petitioner and respondents. However, we disagree
with respondents that the paper products it has described are as disparate as automobiles and
appliances. Pulp logs are used to make pulp which, in turn, is used to make paper. The two
upstream products have one purpose - as inputs to paper. Thus, by applying 19 CFR
351.525(b)(6)(iv), we are recognizing that subsidies at any step of the process, benefit every step
of the process. Accordingly, consistent with the preliminary determination, we determine that
the logs harvested by the logging companies in the SMG and sold to the SMG pulp producers,
are primarily dedicated to the production of pulp and, thus, to the production of the TK’s
downstream product, paper, which includes CLPP.
Comment 4: Provision of Standing Timber at Preferential Rates
A. Specificity
The respondents assert that GOI’s provision of goods and services from the public forests does
not meet the legal standard for specificity, which is a statutory prerequisite for a countervailable
subsidy. The respondents claim that facts on the record demonstrate that the GOI’s forest
program is not limited to a specific enterprise, or a specific industry or group of industries. They
argue that the public documentation that they have placed on the record shows that the public
forests of Indonesia produce a diversity of goods and also are made available by the GOI for
different services as well (e.g., ecotourism). The respondents stress the economic,
environmental, social and cultural importance of the non-timber forest products in Indonesia.
They also cite the diverse services offered by the GOI in its forests, including tourism and
outdoor sports. In the timber sector specifically, the respondents highlight the vast array of
timber species that grow in the Indonesian forests and the variety of applications for which they
are used other than pulp and paper. They also cite the large number of Indonesians that work
with non-wood forest products. On the basis of the diversity of the Indonesian forest uses shown
on the record, the respondents contend that provision of forest resources is neither de jure nor de
facto specific.
The petitioner asserts that the Department was correct in finding that the GOI’s provision of
roundwood at preferential rates is de facto specific to pulp and paper mills, sawmills and
remanufacturers because these industries are the predominant users and receive a
disproportionate amount of the subsidy as described in section 771(5A)(D)(iii)(II) and (III) of the
Act. The petitioner rejects the respondents’ contention that the diversity of products coming out
of Indonesia’s forests by itself prohibits a finding of specificity. The petitioner argues that it
demonstrated in the Petition that the total forestry industry in Indonesia accounts for only a small
71 See Petition at 12 and Exhibit VI-17.
72 SAA at 930.
73 See January 12, 2006 GOI Supplemental Response at Exhibit GOI-S-1 at 10 (Table 1).
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percentage of the country’s GDP.71 It asserts that according to the SAA, the specificity test is
meant “to function as a rule of reason and to avoid the imposition of countervailing duties in
situations where, because of the widespread availability and use of a subsidy, the benefit is
spread throughout the economy.”72
The petitioner argues that a subsidy that is available to the forest industries, which account for
one percent of the gross domestic product (GDP), is not spread throughout the economy.
Moreover, as the petitioner noted in its case brief, information provided by the GOI on the record
indicates that timber generates 90 percent of the forest revenue.73 The petitioner asserts that this
ratio by itself demonstrates that the industries using wood, as opposed to the non-wood products
from Indonesia’s forests are the predominant users of the stumpage benefit. The petitioner
argues, thus, that the stumpage benefit is specific.
Department’s Position: We disagree with the focus of the respondents’ argument. Specifically,
they claim that the GOI makes available its public forests for a diverse collection of goods and
services. The Department’s inquiry does not, however, relate to the breath of goods (or services)
provided by the GOI. Instead, we are asking whether one particular good (standing timber for
harvest) is being provided to a specific enterprise or industry or group thereof.
For the final determination, we find that the provision of standing timber for harvest is specific
within the meaning of section 771(5A)(D) of the Act, based on adverse facts available.
B. Cross-Ownership
The petitioner supports the Department’s preliminary finding based on adverse facts available
that TK, its pulp suppliers and ultimately, the affiliated log suppliers are cross-owned companies,
and on this basis, the benefit from the provision of timber can also be attributed to TK’s CLPP
production. The petitioner notes that nothing has changed regarding the respondents’ failure to
provide definitive information regarding the cross-ownership of the companies.
The respondents argue that none of the programs involving the provision of goods from the forest
are applicable to TK because TK is not cross-owned with the forestry companies, AA and WKS,
which supply logs to TK’s pulp suppliers. The respondents contend that 19 CFR
351.525(b)(6)(vi) clearly defines cross-ownership as including only those relationships “where
the interests of two corporations have merged to such a degree that one corporation can use or
direct the individual assets (or subsidy benefits) of the other corporation in essentially the same
74 See Preamble, 63 FR at 65401.
75 See TK’s and the GOI’s Rebuttal Brief at 32-34 (May 9, 2006).
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ways it can use it own assets (or subsidy benefits).”74 The respondents claim that in the
Preamble, the Department emphasized that the term cross-ownership as it is used in this
regulation clearly differs from what is meant by affiliation. They point out that “{n}ormally,
cross-ownership will exist where there is a majority voting ownership between two corporations
or through common ownership of two (or more) corporations.” Id. The respondents assert that
the record does not support this standard for cross-ownership in the case of the Indonesian
respondent.
According to the respondents, the record demonstrates TK’s lack of control over the forestry
companies in question. They highlight certain proprietary information on the record which in
their view demonstrates that TK cannot “use or direct the individual assets” of AA or WKS.75
They contend that in light of TK’s inability to use or direct the individual assets of the forestry
companies, it is immaterial that the forestry companies AA and WKS supply all their pulp logs to
IK and Lontar under “long-term pulpwood purchase agreements” or that TK is cross-owned with
pulp producers IK and Lontar, who supply TK. They maintain that the existence of supply
contract sheds no light on the issue of cross-ownership between TK and the forestry companies
because unaffiliated, affiliated and cross-owned companies all engage in this sort of transaction.
They argue that since pulp producers IK and Lontar are both parties to major {debt} restructuring
agreements, they are subject to significant control by their creditors and, thus, would be unlikely
to cede any control to a forestry company. The respondents assert that even if the Department
was to establish that TK’s pulp suppliers are cross-owned with the forestry companies in
question, this would not mean that TK is cross-owned with the forestry companies. The
respondents cite the model provided in the Preamble whereby “cross-ownership exists where
corporation A owns corporation B (or vice versa), or where A and B are both owned by
corporation C.” See Preamble, 63 FR 65401. They conclude that there is no evidence in the
record regarding cross-ownership that would support the Departments’ application of 19 CFR
351.525(b)(6)(vi).
Department’s Position: In the Preliminary Determination our analysis of this issue was based,
in part, on information provided by TK. However, as stated above in the “Attribution of
Subsidies” section above, for the final determination we have based our finding on total adverse
facts available. We have, therefore, used publicly available information in the Petition in our
analysis. This information shows that TK is part of a group of pulp and paper and forestry
companies linked by varying degrees of common ownership involving the Widjaja family. These
companies and others are commonly referred to as the SMG. Publicly available information
shows affiliation between the companies in the SMG. Because TK has withdrawn from the
investigation, there is no verified information on the level of control which exists between the
companies. Therefore, we have adversely inferred that the interests of relevant corporations of
the SMG have “merged to such a degree that one corporation can use or direct the individual
76 See Preamble, 63 FR at 65401.
77 See Certain Softwood Lumber from Canada, USA-CDA-2002-1904-03, Panel Decision (August 13,
2003).
78 See Appellate Body Report, United States - Final Countervailing Duty Determination with Respect to
Softwood Lumber from Canada, ¶108, WT/DS257/AB/R (Jan. 19, 2004) (Lumber from Canada WTO AB Report).
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assets (or subsidy benefits) of the other corporation in essentially the same way it can use its own
assets (or subsidy benefits)”76 and, therefore, we find that these companies are cross-owned
pursuant to 19 CFR 351.525(b)(6)(vi).
C. Use of Out-of-Country Benchmark
The respondents argue that the Department failed to make a valid finding that a subsidy benefit
was conferred by the GOI’s provision of standing timber. Specifically, they argue that the
Department’s measurement of the benefit against a market price in Malaysia was both legally and
factually incorrect. They note that the Act at section 771(5)(E)(iv) requires that benchmarks
reflect “prevailing market conditions.” Citing to the 2003 NAFTA panel decision in the case of
sotftwood lumber from Canada, the respondents argue that, as a legal matter, the Malaysian
benchmark cannot be used, since it does not reflect the prevailing market conditions in Indonesia,
the legal jurisdiction where the forests are located, and the only place where there is a market for
Indonesian standing trees.77 The respondents assert that since standing timber is a resource tied
to the ground, it is very much a product subject to local conditions. Thus, they argue that
common sense dictates that the markets in Indonesia and Malaysia will not be comparable. The
respondents argue that standing timber is analogous to real estate in that its value as a nonmoveable
good will vary significantly depending on its location. To support their position, the
respondents cite to the decision of the WTO Appellate Body regarding the Department’s use of
an out-of-country benchmark in the Lumber from Canada WTO AB Report.78 The report cited
the difficulties of adjusting for differences in two different national markets.
The respondents additionally assert that there is no evidence to support the Department’s use of a
Malaysian log benchmark. Furthermore, the respondents find fault with the specific facts
surrounding the log prices that the Department used to calculate the Department’s preliminary
benchmark. The respondents argue that since the Department’s log price data involved only a
small volumes of logs, they cannot be representative. They also contend that the prices for each
of the two different species used are highly discrepant. They claim that the price for one of
benchmark species is 230 percent higher than the price for the other benchmark species although
they are ostensibly used for identical purposes. They also argue that evidence on the record casts
serious doubt on the reliability of Malaysian customs data, citing to an article in the ITTO
Tropical Forest Update that indicates, according to the respondents, that non-pulp log items such
79 See April 7, 2006 GOI Supplemental Response at 7 and E xhibit GOI-LER-6. The cited article actually
only refers to roundwood.
80 Id. at Exhibit GO I-LER-6.
81 Id. at Exhibit GO I-LER-4.
82 See Respondents’ Case Brief at page 46 and April 7, 2006 GO I Supplemental Response at Exhibit GOILER-
4.
83 See Respondents’ Case B rief at 52 and at Appendix C showing conversion methodology for chips.
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as high-value wood mouldings were included in Malaysia’s pulp log classification.79
The respondents also argue that the Malaysian pulp log prices fail to adjust for cost differences
between the Indonesian timber on the stump and the costs of preparing the Malaysian logs for
export. The respondents assert that the Malaysian log prices need to be adjusted for the
additional costs of debarking and chipping costs before these prices can be used as a benchmark
and suggest this may be one reason the Department’s Malaysian benchmark appears high
compared to chip prices and other pulp log prices found by the respondents. The respondents
estimate a cost for one cubic meter of Malaysian dried chips at U.S. $19.80 They compare this
chip price to the Department’s pulp log prices of U.S. $28 and $66. They also compare the
Department’s benchmark prices to hardwood pulp log prices in Australia which, based on the
respondents’ calculations, are much lower than those of the Malaysian logs ranging from
Australian $13.50 to Australian $20.00 in 2000.81 Alternatively, the respondents estimate an
Australian hardwood pulp log stumpage rate of between Australian $4.56 and Australian $6.46
for 2000.82 Therefore, the respondents conclude that the Department’s use of Malaysian acacia
and eucalyptus pulp log prices yields an inappropriate and inflated benchmark. The respondents
suggest that an alternative benchmark such as chip prices, backed out to a stumpage basis, would
be a more reasonable benchmark.83
The petitioner defends the Department’s calculation of the benefit from the stumpage program,
addressing two central points of the respondents’ arguments. First, the petitioner rebuffs the
respondents’ argument that the Department’s use of a foreign country benchmark is “legally and
factually deficient” because the foreign benchmark could not adequately reflect the prevailing
market conditions in Indonesia as demanded by section 771(5)(E)(iv) of the Act. The petitioner
contends that the respondents are wrong to suggest that the statute directs the Department to
choose a benchmark from Indonesia because the section cited merely directs the Department to
select a benchmark “in relation to prevailing conditions.”
In the petitioner’s view, this means selecting a benchmark in relation to market conditions based
upon price quality, availability and marketability. The petitioner argues that these prerequisites
do not necessarily limit this selection to benchmarks in one country. The petitioner accuses the
respondents of not only taking the statute out of context, but also of misinterpreting the NAFTA
84 See Respondents’ Case Brief at 42-44 referencing Certain Softwood Products from Canada, USA-CDA-
2002-1904-03, Panel Decision (August 13, 2003).
85 See GOI April 7, 2006 Response at Exhibit GOI-LER-5, ITTO Tropical Forest Update, “Why don’t the
trade numbers add up?.”
86 See Petitioner’s Factual Submission (April 24, 2006) at Exhibit 7.
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panel determination on softwood lumber from Canada. The petitioner claims that, contrary to the
respondents’ assertions, the NAFTA panel determination does not find that the use of a crossborder
benchmark is contrary to law. The petitioner argues that the respondents ignored
paragraph 103 of the same NAFTA decision which stated the following:
We find, instead, that an investigating authority may use a benchmark other than the
private prices of the goods in question in the country of provision, when it is established
that those private prices are distorted, because of the predominant role of the government
in the market as the provider of the same or similar goods.84
The petitioner contends that this paragraph demonstrates that the cited NAFTA decision ruled
squarely against the proposition for which the respondents cite it, concluding that the Department
had the authority to select a benchmark other than private prices in the subsidizing country if
those prices were found to be distorted.
The petitioner argues that the respondents failed to support their contention that $3 million of the
Malaysian log exports is too small an amount to be used as a benchmark. The petitioner notes
the respondents’ concern that the average unit value (AUV) of the acacia is so much higher than
the AUV of the eucalyptus. The petitioner argues if anything is unreliable, it is the small quantity
of eucalyptus and suggests that it be excluded. The petitioner also responds to the respondents’
concern that the Malaysian export data are defective because, according to respondents, they
include products other than logs.85 The petitioner argues that any distortion caused by the alleged
inclusion of high-value mouldings under the roundwood category would be offset by alleged
inclusion of the low-value chips and that, in any case, the respondents have not demonstrated that
data on acacia logs is defective. The petitioner asserts that information it supplied on Malaysian
exports of light hardwood logs including acacia, also indicates that the benchmark used by the
Department was reasonable.86
The petitioner disputes the respondents’ assertion that data on Malaysian chip exports to Japan
indicate that the benchmark data on Malaysian logs are too high. It notes that the respondents
have converted the export price of chips from a dollars-per-green-metric-ton basis to an ovendried-
metric-ton export price of $19 per cubic meters, but assert this is wrong because both
Malaysian chips and logs data are reported on a green basis thus obviating the need to convert to
an oven-dried basis. Second, data provided by the respondent indicate the metric price of green
Australian pulpwood at port ranges from Australian $69.93 per cubic meter to Australian $83.43
per cubic meter, which when converted to U.S. dollars is not much different from the
87 See GOI April 7, 2006 Response at Exhibit GOI-LER-7, “Growing Tasmanian Blue Gum for Pulpwood;
the Profit Po tential ” at Table 5.
88 See Respondents’ Case Brief at 46.
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Department’s benchmark.87 The petitioner argues that the reported price for Malaysian chip
exports to Japan (U.S. $38.00 per metric ton) is lower because chips are a byproduct of logs and,
thus, discounted. The petitioner also maintains that the chip data are difficult to compare with
acacia and eucalyptus logs in any event because they include chips made from other nonconiferous
species.
The petitioner also reviews the respondents’ claim that hardwood pulp log stumpage in Australia
typically represents 24 to 34 percent of the green chip value.88 The petitioner asserts that the
Australian data do not undermine the Department’s benchmark because as indicated above, the
green metric ton prices correspond to the amount of the Department’s benchmark. Furthermore,
the Australian chip prices are four time as high as the Malaysian chip prices which leads the
petitioner to conclude that Malaysian prices used by the respondents to discredit the Malaysian
log prices may themselves be aberrational. Regarding the respondents’ calculation of certain
Australian hardwood prices at Australian $13.50 to Australian $20, the petitioners insist that it is
not clear how the respondents arrived at these averages and further note that Australian stumpage
values varied wildly.
The petitioner dismisses respondents’ effort to introduce chip prices as alternative benchmarks as
an effort to muddy the waters and maintains that green logs, not chips, have the prices that best
reflect prevailing market conditions.
Department’s Position: We disagree with the respondents’ position that section 771(5)(E)(iv)
of the Act requires the Department to use benchmarks exclusively from the country which is
subject to the investigation. Such a narrow interpretation of the statutory requirement would
severely limit the Department’s ability to take remedial action against programs that provide
goods and/or services at less than adequate remuneration in jurisdictions where the government
controls the price of the particular good or service. While it is the Department’s preference to
select a market price benchmark from the same country, see 19 CFR 351.511(a)(2), the
Department’s regulations also provide a benchmark selection hierarchy for situations where
benchmarks in the same country are not available. We have applied the regulation here in a
manner consistent with the statutory requirement that the benchmark reflect the prevailing market
conditions. See discussion in benchmark section above regarding our selection of market prices
in Malaysia as a means of assessing whether the Indonesian government price is consistent with
market principles.
As we state in Comment 2 above, respondents’ reading of the WTO appellate body decision in
US – Softwood Lumber, as well as the NAFTA Panel Decision in the context of this comment,
have no bearing upon these proceedings. The Department’s decision is governed by, and
89 Petitioner’s Rebuttal Brief at 45-47.
90 Id. at 46.
91 See April 7, 2006 GOI Supplemental Response at GOI-LER-7, “Forest Products Measurements and
Conversion Factors.”
92 Id. at GOI-LER-7, “Forest Products Measurements and Conversion Factors”and “A Collection of Log
Rules”).
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consistent with, U.S. law. While NAFTA panel decisions are of no precedential value, we note
that the 2003 NAFTA Panel Decision cited by respondents does not in any way invalidate our
selection of Malaysian data as a benchmark for Indonesian stumpage.89 Paragraph 103 of this
same NAFTA decision, cited by the petitioner, recognizes that a government’s predominant role
in the market as a provider of the same or similar goods may create a situation where the
Department may use benchmarks other than private prices of the goods in question in the country
of provision.90
Because we are no longer using eucalyptus and acacia prices as the benchmark, comments
regarding the appropriateness of using those prices are rendered moot.
D. Technical Data Adjustments to Benchmark
The respondents argue that the Department failed to make a number of technical adjustments to
the Malaysian log benchmark. The respondents contend that if these technical adjustment had
been made, the Department would have found no benefit even if it had persisted in its use of the
Malaysian log benchmark. The respondents point out that, because the Department used the
export prices for Malaysian logs as its starting point for creating the stumpage benchmark, it was
necessary to convert the log data into a standing timber equivalent. The respondents contend that
the Department failed to make a series of critical adjustments in converting the export log prices
to standing timber equivalents.
First, the respondents argue, the Department, in using an actual cubic meter measure for the
benchmark volume, failed to adjust for the form of cubic meter measure which they assert is
commonly used in the Malaysian forest industry, the “Hoppus” cubic meter. The respondents
base this assertion on a reference in a University of Washington College of Forest Resources
paper, “Forest Products Measurements and Conversion Factors With Special Emphasis on the
U.S. Pacific Northwest,” in a section entitled “Log Rules for Indonesia, Malaysia, and the
Philippines” which states that “{i}n Sabah {part of Malaysia}, the quarter-girth (Hoppus)
formula is used in the metric form.”91 The respondents provide documentation to demonstrate
that the Hoppus cubic meter measure understates the actual volume of wood being measured by
21.5 percent. They argue that to obtain the real prices for the wood in standard cubic meters, the
Department would have to reduce the reported price by 21.5 percent.92
93 See Preliminary Analysis Memo at Attachment 5, FAO Yearbook at xxi.
94 Id. at GO I-LER-7 in two studies; “Acacia M angium Plantations in PT Musi Hutan Persad, South
Sumatera, Indonesia” and “Growing Tasmanian Blue Gum for Pulpwood – the Profit Potential” used a conversion
factor for converting green logs to pulp.
95 See Preliminary Analysis Memo at Attachment 4, Tab B.
96 See January 20, 2006 TK Supplemental Response at TK-l-7 in Volume 3, Asia Pulp & Paper (APP)
Sustainability Action Plan Sustainability Action Plan at 16.
97 See April 7, 2006 GOI Supplemental Response at 7-8.
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The respondents argue that the Department also increased the margin unfairly when it failed to
adjust for bark. They claim that the Department’s own disclosure documents indicate that the
statistics for exported pulp logs are given “excluding bark.”93 They contend that the price of the
Malaysian benchmark logs must be adjusted downward to account for the volume/weight of the
bark in order to make a comparison with the standing trees. The respondents cite papers
demonstrating that when logs are debarked about eight percent of the log’s weight is lost.94 They
argue that a deduction for bark would necessarily decrease the unit price of the benchmark logs.
The respondents also maintain that the Department erred in using a general green wood factor for
converting pulp metric tons to cubic meters of standing timber (1 metric ton of pulp to 4.9 cubic
meters of wood).95 They argue that a conversion factor for metric tons of pulp back to cubic
meters of wood can be calculated from the actual experience of two TK pulp suppliers, IK and
Lontar.96 They state that the conversion factor based on actual experience produces a total
number of green cubic meters that is lower that the Department’s calculated figure.
In addition, the respondents assert that the Department erred in its benchmark calculation when it
failed to adjust for differences in moisture content between the export logs, which they contend
were sold in a dry state, and the standing trees in Indonesia. They cite to articles on the record
that indicate, according to respondents, that “Oven Dried Metric Tons (ODMT),” also called
bone dry tons, are a standard unit for pricing pulpwood exports whether in chip or log form.
They argue that trees cut in the tropics have a substantial amount of moisture in them and that the
price of a export pulp log sold in either oven dried or air dried tons cannot be compared to the
price of a standing tree without an adjustment for moisture. They observe that drying a log
reduces its weight substantially and thus affects the log measurement and also the price
consumers are willing to pay since green logs are more difficult to transport.97
The respondents state that information on the actual moisture in the logs purchased by TK’s pulp
suppliers, the appropriate conversion factor to an ODMT basis and the measurement of bark loss
are included in the January 30, 2006 response at Exhibit TK-LER–4. They claim that these data
provide precise documentation of the substantial difference between green logs with bark and
dry, debarked logs and show how to convert between these measurements.
98 See GOI January 12, 2006 Response at Exhibit GOI-S-7, “Standard Establishment Cost for Forest
Plantation.”
99 See GOI April 7, 2006 Response at Exhibit GOI-LER-7, “Growing Tasmanian Blue Gum for Pulpwood;
the Profit Po tential.”
100 See Petition at Exhibit 1, pages 7, 8 and 24.
101 See Respondents’ Case Brief at 53.
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The respondents assert that the Department’s benefit calculation for stumpage is also distorted by
the Department’s failure to take into account in any realistic fashion the cost of growing trees on
an HTI plantation. The respondents note that the Department had access to published
information on the record regarding the minimum cost of developing an HTI used in the ordinary
course of business by the GOI such as Decree 126/1999, “Standard Establishment Cost for Forest
Plantation.”98 The respondents also note more general information they had provided on the cost
of developing tree plantations.99 Additionally, they cite to a study provided with the Petition,
“Profits on Paper,” which included a table reporting the funds the government contributed for
several HTI license areas. Using the areas of the concessions and projected per hectare cubic
meter yields, also found in the paper, petitioner calculated a total per cubic meter in-kind cost.100
The respondents state that the “Profits on Paper” study indicated that the government
contributions represented about half of the cost of developing the HTIs and on this basis, the
respondents calculated an average HTI development cost of US$7.55 per cubic meter of timber
harvested for companies in the table. Finally, the respondents reference the GOI’s narrative
description of HTI obligations as well some aggregate reported forestry costs specific to one TK
affiliate which were reported in the GOI January 12, 2006 and TK January 30, 2006 responses,
respectively, including expenses for various forestry activities reported in 2004 financial
statements.101 In light of this documentation, the respondents assert that the $1.50/cubic meter
proxy that the Department used as a proxy for forestry cost was ludicrous.
The respondents argue that if the Department still believes it needs to calculate a benefit, it
should abandon the log benchmark it used in the preliminary results and apply what the
respondents consider to be a more reasonable benchmark. The respondents suggest that chip
prices backed out to stumpage basis would provide a more reasonable benchmark. In Appendix
A of their May 1, 2006, case brief, the respondents provide sample calculations of stumpage
benchmarks derived from chip prices which yield negative benefits (cost) of -U.S. $24.856/m3
for Indonesian chip exports) or -US $29.109/m3 for Malaysian chip exports. In calculating these
chip-based benchmarks, the respondents make adjustments for moisture content, bark content,
loss in chipping, loss in storage and breakage, chipping costs, HTI (plantation) costs, extraction
costs, chip transport costs, log transport costs and profit.
The petitioner argues that the Department lacks sufficient information to assume, as the
respondents have suggested, that Malaysian export data were recorded in Hoppus cubic meters.
It notes that the study cited by the respondents applied specifically to Sabah in 1994. It argues
102 See Petition Supplemental at Exhibit VI-Supp-1 (International T ropical Timber Organization, Tropical
Timber Market Report).
103 See Respondents’ Case Brief at 49.
104 See Respondents’ Case Brief at 50.
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that more contemporaneous data submitted with the petitioner’s September 22, 2005 submission
suggest that logs from Sarawak and Peninsular Malaysia are not priced according to the Hoppus
rule.102
The petitioner also disputes the respondents’ assertion that Malaysian log export volumes are
reported in cubic meter underbark. To support their claim, the respondents referred to the FAO
Yearbook’s reporting methodology, but, the petitioner points out, the Department did not use
export data from the FAO Yearbook, but rather from the World Trade Atlas. The petitioner
notes that the FAO Yearbook obtains some of its trade data from the UN Comtrade database in
which export data are reported in kilograms. The petitioner thus asserts that if the FAO is indeed
reporting logs in volume underbark, it must be converting the Comtrade data, reported kilograms,
to cubic meters underbark. Therefore, the petitioners maintain that the fact that FAO reports its
data underbark to match its production data, does not mean that Malaysia’s trade statistics are
reported underbark. The petitioner argues, moreover, that information on the record indicates
that debarking takes place in the pulping mill.103
Therefore, the petitioner concludes that there is no information on the record that indicates that
the Malaysian logs are being reported in underbark volumes and, thus, no adjustment should be
made. Furthermore it states that the respondents’ green-wood-to-pulp conversion factors should
not be used because in the wake of the withdrawal they cannot be verified.
The petitioner similarly argues that the respondents have provided no evidence to support their
claim that adjustments should be made to the reported Malaysian log volumes for drying and
chip conversions. The petitioner reiterates that the relevant comparison is between green logs
that are not chipped because APP companies chip their own green logs that contain bark.104 The
petitioner concludes that the Malaysian export AUV for acacia logs that contain bark and are not
dried offers the most appropriate benchmark if the Department decides not to use petition rates.
Department’s Position: We have not made the adjustments requested by the respondents
because the information on the record does not support their claims. First, contrary to the
respondents’ suggestion that the Malaysian log export volumes are actually in Hoppus cubic
meters (and, thus, need to be converted), we find no evidence that would indicate that the cubic
meters used in the Malaysian trade statistics are anything other than standard cubic meters. The
World Trade Atlas, from which the Malaysian log prices were taken, lists the unit of measure as
“cubic meters,” which is a universally used and understood unit of measure. There is no mention
of this unit of measure, as used to report logs, being anything other than a standard cubic meter.
105 See April 7, 2006 GOI Supplemental Response at GOI-LER-7, “Forest Products Measurements and
Conversion Factors.”
106 Id., “Forest Products Measurements and Conversion Factors” at 2.
107 Id., “Forest Products Measurements and Conversion Factors” at 8.
108 See Petition Supplemental at Exhibit VI-Supp-1 (International T ropical Timber Organization, Tropical
Timber Market Report).
109 Id.
110 See Preliminary Analysis Memo at Attachment 5, page xx.
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The respondents have cited to the paper “Forest Products Measurements and Conversion Factors
With Special Emphasis on the U.S. Pacific Northwest,” which discusses industry-specific
approaches to measuring logs volumes.105 The paper describes log scaling as “the process of
estimating the weight or volume of a log while allowing for features that reduce product
recovery.”106 Although the article makes a reference to a standard conversion for U. S. logs for
customs clearance in Japan,107 the article’s reference to the use of the quarter-girth (Hoppus)
formula in Sabah does not describe how volumes are reported for Malaysian trade statistics. The
petitioner has correctly pointed out that more recent information concerning log sales in other
regions of Malaysia indicates that logs are also reported in standard cubic meters.108 As the
petitioner has noted, the Tropical Timber Market Report specifies when volumes reported are
based on the Hoppus formula.109 Therefore, we have not made this adjustment.
With regard to whether the statistics are for logs with or without bark, we agree with petitioner
that the fact that the FAO Yearbook reports pulpwood in cubic meters underbark does not mean
that the Malaysian export volumes are reported the same way. The Malaysian logs in question
are reported under the Harmonized Tariff Classification 440399 which covers wood in the rough
whether or not stripped (emphasis added). The FAO Yearbook explanation cited by the
respondents recognizes this fact, defining the roundwood component of pulpwood as “all wood
removed {from the forest} with or without bark,” consistent with the tariff classification.110
Because there are no data on the record that specifically demonstrate that the Malaysian statistics
provide underbark volumes, we are treating these as overbark volumes. Additionally, we are
treating the Malaysian log exports as green because the respondents have not provided, nor has
the Department found, clear evidence that the logs in the World Trade Atlas export statistics
were dried or, if so, to what degree.
The respondents have claimed that the Department failed to give any meaningful credit for inkind
costs related to the HTI plantation concessions incurred by cross-owned log suppliers and
cite specific information on the record that they contend could form the basis for valuing these
in-kind costs. Because TK has withdrawn from the investigation and there is no verified
information on the record regarding what costs, if any, were incurred by TK’s cross-owned
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forestry companies, we have made the adverse inference that the forestry companies did not
replant and, therefore, incurred no expenses. Therefore, the parties’ comments on this issue are
moot.
Finally, with regard to the respondents’ suggestion that the Department use Malaysian wood chip
export prices as a benchmark, rather than Malaysian log prices, we disagree that this would result
in a more accurate calculation. First, wood chips are a product which is even further removed
from a standing tree, necessitating backing out even more value added and making additional
assumptions related to that value added. Second, the wood chips in question, as defined by the
HTS are byproducts and, therefore, may not reflect the value of a pulp log, which is purchased
specifically to chip. Therefore, we have continued to use Malaysian log prices as our benchmark.
Comment 5: Government Ban on Log Exports
The petitioner asserts that the GOI’s ban on log exports works in concert with subsidized
stumpage to provide downstream users with artificially low-cost raw materials. The petitioner
notes that the Department did not make a full-fledged analysis of the log export ban in its
Preliminary Determination because TK failed to provide on a timely basis the information
necessary to assess whether TK’s supplier harvested or purchased logs. The petitioner also notes
that TK withdrew from the proceeding before the Department had an opportunity to verify the
relevant proprietary information that was provided. The petitioner argues that on this basis, the
Department should treat all pulp used by TK as subsidized pulp.
The petitioner contends that a financial contribution exists as a result of the GOI’s log export ban
because this constraint depresses the domestic prices of the logs by forcing domestic producers to
sell to only a limited number of domestic consumers of logs at depressed prices. In doing this,
the petitioner contends that the GOI’s log export ban entrusts or directs domestic log suppliers to
make a financial contribution in the form of the provision of goods and services, other than
general infrastructure, as described in section 771(5) (B)(iii) of the Trade Act. The petitioner
claims that the updated record continues to supports this finding. The petitioner disputes the
respondents’ contention that because wood chips are freely traded there is, de facto, no log export
ban, arguing that the chips are a byproduct and, therefore, not analogous to logs. The petitioner
also argues that because the amount of Indonesian exports of chips in 2005 was so small
compared to the amount of wood that TK’s pulp suppliers purchased, it is ludicrous to argue that
the chip export volumes nullify the effects of the log export ban.
The petitioner maintains that the benefit of the log export ban is de facto specific to a group of
industries, those that use logs as an input. The petitioner asserts that no information has been
provided to indicate that the benefit of the log export ban would be conferred on industries other
than pulp and paper, sawmills and remanufacturers. The petitioner argues that as with the
stumpage subsidy, these industries are the predominant users of timber affected by the ban and
they receive a disproportionate amount of the subsidy as described in sections 771(5A)(D)(iii)(II)
and (III) of the Tariff Act.
111 See Report of the Panel, United States — Measures Treating Export Restraints as Subsidies,
WT/DA194/R (June 29, 2001).
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The petitioner notes that in the Preliminary Determination, the Department treated all pulp used
by TK as subsidized due to lack of sufficient information on purchased logs from cross-owned
companies. The petitioner argues that this was consistent with its own analysis that for
calculation purposes, the log export ban and the provision of stumpage at preferential rates may
overlap in instances where the producer obtains logs from cross-owned companies. The
petitioner notes that TK has provided some information on AA’s and WKS’ purchases of logs
from unaffiliated companies. It argues, however, that this information cannot be verified by the
Department and, therefore, cannot be used to calculate the benefit of the log export ban program
independently of the stumpage benefit. The petitioner observes that, in a similar vein, the GOI
provided some information that is relevant to the stumpage paid by the forestry companies found
preliminarily to be cross-owned. The GOI has also notified the Department that it would not
participate in a full investigation of company-specific data and the Department has, thus, been
unable to verify the data provided by the GOI. The petitioner asserts that under these
circumstances the Department would be justified in calculating the stumpage benefit using the
same methodology that we used in the Preliminary Determination.
The respondents argue that the log export ban is not a subsidy for several reasons. First, with
regard to TK, the GOI claims that the lined paper producer does not buy logs and, their
comments are summarized in Comments 2 and 3, the U.S. law on subsidy attribution and crossownership
precludes any attribution of any alleged log subsidies to TK (See Comment 2 & 3).
Second, the respondents contend that the export ban cannot be a subsidy under WTO rules which
governs the United States internationally and are the guiding principles of U.S. law. According
to the respondents, the WTO Dispute Settlement Panel has ruled that an export ban does not
provide the “financial contribution” legally necessary to make a given program a countervailable
subsidy.111 Third, the respondents state that the GOI has placed export bans on a variety of
products and, therefore, the log export ban cannot be deemed specific to one enterprise or
industry. Finally, the respondents maintain that the export ban has not had an impact on paper
producers because it did not directly target pulp wood which commonly is shipped in chip form,
a product that is freely exportable from Indonesia. They reject the petitioner’s argument that the
relatively low volume of chip export nullifies their position.
Department’s Position: In its January 31, 2006, submission, which was not used for the
Preliminary Determination, TK stated publicly that certain affiliated forestry companies
purchased some of their logs from unaffiliated timber operations. See January 31, 2006
Submission at 2. However, we were unable to verify this information and, therefore, have not
relied on this information for our final determination.
Instead, as in the Preliminary Determination, the methodology we have employed treats all pulp
logs and pulp used by TK as subsidized by virtue of the GOI’s stumpage program. Therefore, we
are treating the log export ban as “not used” and do not need to reach the issues raised in the
112 See Preliminary Determination, 71 FR at 7533.
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parties’ comments.
Comment 6: Subsidized Funding of Reforestation (Hutan Tanaman Industria (HTI)
Program)
The petitioner requests that the Department continue to find the HTI program countervailable in
the final determination and also argues that the Department’s subsidy calculation should be
adjusted. First, the petitioner contends that the Department should continue to find that the
program is specific as a matter of law and, therefore, countervailable.112 The petitioner also
asserts that the Department incorrectly calculated the benefit from the zero-interest loan as if it
had the same repayment structure and annual payment terms as the benchmark loan. The
petitioner notes that the zero-interest loan was to begin repayment in the tenth year and,
therefore, operated under a different repayment schedule. The petitioner argues the Department
should calculate the benefit pursuant to 19 CFR 351.505(c)(3)(i), using the formula set forth in
19 CFR 351.524(d)(1) and the parameters defined in 19 CFR 351.505(c)(3)(ii).
Regarding the equity infusions, the petitioner accepts the Department’s rationale for not finding a
subsidy. But, given the nature of the HTI program, the petitioner argues that it may be possible
that the logs supplied to IK and Lontar from unaffiliated companies may be harvested on similar
HTI plantations and provide a benefit to TK. Therefore, the petitioner requests that the
Department make this explicit in its financial contribution analysis with regard to the GOI’s
equity infusion and the private equity infusions.
In rebuttal comments, the respondents argue that the HTI program is not countervailable. The
respondents assert that their information on the record shows that the HTI program was enacted
by the GOI to promote the transmigration of labor from larger cities to other areas of Indonesia.
In addition, the respondents note that the private companies were required to participate in the
HTI program under the direction of the GOI. The program entailed the creation of a jointventure
whereby the participating company put up a majority of the financing and agreed to the
terms of the HTI program, while actual control of the joint-venture rested in the hands of the
GOI. Therefore, the respondents argue that the HTI program should not be found countervailable
as the participating company in the joint-venture contributed land, equity and other support to the
government controlled joint-venture and received no subsidy from the program. The respondents
further argue that the zero-interest loan also cannot be considered a subsidy as it was considered
part of the required equity provided by the GOI.
Finally, the respondents argue that the petitioner’s request regarding the equity infusions is
misplaced. First, the respondents note that the petitioner agreed with the Department’s
Preliminary Determination analysis of the equity infusions. Second, the respondents argue that
the petitioner has not provided any information on the record that proves that any potential
subsidy from the HTI program passed through by virtue of log purchases from an independent
113 See Preliminary Determination, 71 FR at 7533.
114 See TK’s December 28, 2006 Response at Exhibit TK-L-3, note 1f, pages 41-42.
115 See Respondents’ Rebuttal Brief at 26-27.
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third party.
Department’s Position: As the Department has previously noted, we have applied total adverse
facts in our analysis of this program. See “Analysis of Programs” section and Comment 1,
above. The Department based its findings and subsidy calculation on information in the Petition.
Because we did not use any of the respondents’ information, all comments based on the use of
that information are rendered moot.
Comment 7: Loan Guarantee
The petitioner requests that the Department reverse its preliminary decision and find the GOI’s
loan guarantee to SMG/APP to be countervailable. The petitioner asserts the Department
requested information from both the GOI and TK on the loan guarantee and both parties failed to
respond. Based on the respondents’ failure to respond, the petitioner argues that the Department
should presume that the loan guarantee provides a financial contribution and a benefit, is specific
and, therefore, is countervailable. Finally, the petitioner notes that it has provided information on
the record supporting an affirmative decision on this program.
In its rebuttal comments, the respondents contend that ample information on the record shows
that the loan guarantee did not benefit any manufacturer of subject merchandise or, as the
Department stated in the Preliminary Determination, ceased to exist during the POI.113
The respondents assert that the purpose of IBRA was to shore up the country’s financial system
from collapse. IBRA, in pursuit of stabilizing BII, provided a loan guarantee on the Sinar
Mas/AP&P debt owed to the bank. As IBRA’s functions and priorities shifted focus, it
eventually took over the debt from BII and the loan guarantee ceased to exist. The respondents
argue that the facts surrounding the loan guarantee support their position that the sole purpose of
the loan guarantee was to stabilize BII and the eventual takeover of the debt was to place BII in a
better financial status.114 As such, the loan guarantee benefitted BII rather than SMG/APP. The
respondents note that information on the record supports their position as well as the argument
that the loan guarantee ceased to exist before the POI and, therefore, could not be
countervailable.115
The respondents further contend that they have cooperated to the best of their ability to provide
the Department with requested information. The respondents point to the extensive information
placed on the record by the GOI and TK. The respondents also note that they had already
explained to the Department their difficulty in obtaining documentation from IBRA, as the
116 See Petitioner’s October 20th Submission at Exhibit 3, page 42-43.
117 Id.
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agency no longer exists, and from other sovereign creditors, from whom they would need
permission to provide related loan guarantee documents. However, the respondents argue that
their inability to provide the requested documents should not cause the Department to presume
the loan guarantee was a subsidy as there is still sufficient information on the record to find that
the loan guarantee is not countervailable.
The respondents finally argue that even if the loan guarantee were active during the POI, it would
not fit the criteria of a countervailable subsidy. The respondents reiterate IBRA’s role to stabilize
the country’s financial system. In that capacity, IBRA controlled 60 percent of Indonesia’s GDP
in 2000 and held a sizeable portfoilo of loans and guarantees in all sectors of the economy.
IBRA’s far reaching role and diverse portfolio, the respondents claim, show that IBRA’s actions
were non-specific in regards to the loan guarantee. In addition, they argue that there was no
financial contribution as the terms of the loan were settled prior to the loan guarantee and note
information on the record shows the debt amount owed by TK did not diminish during this
period. Finally, the respondents argue that the information on the record clearly shows that the
purpose of the loan guarantee was to benefit BII, not SMG/APP.
Department’s Position: We agree with the respondents, in part, and find that the loan guarantee
ceased to exist prior to the POI. Therefore, we find no subsidy. See “Analysis of Programs”
section, above. The respondents did not provide all of the information requested by the
Department in regards to this program and the respondents’ information was unverified and
unreliable. See Comment 1, above. However, the BII 2001 audited financial statements,
submitted by petitioner, clearly state that the guarantee was effective from April 30, 2001, and
would expire on October 7, 2003, or that the guarantee would expire in proportion to amount of
the debt paid by Sinar Mas/AP&P, sold off to third parties or transferred to IBRA.116 The total
amount of the debt was transferred to IBRA on November 5, 2001.117 Therefore, based on the
petitioner’s information, the Department continues to find that the guarantee ceased to exist prior
to the POI.
Comment 8: Calculation of Subsidy Denominator
The GOI and TK assert that the Department omitted sales from the calculation of the
denominator used to calculate the subsidy rates in the Preliminary Determination. The
respondents argue that if the Department continues to find a stumpage subsidy, it should correct
the denominator for the final determination by including additional sales.
PT. Pindo Deli Pulp and Paper Mills (Pindo Deli), the parent of Lontar, was found to be crossowned
with IK, Lontar and TK in the Preliminary Determination. However, its sales were not
included in the denominator. The respondents contend that as Pindo Deli is included in the
118 The respondents provide a methodology to exclude these tiny amount of sales from all related party sales
in their case brief. See Respondents’ Case Brief at page 56, footnote 32.
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group of cross-owned companies, any downstream product produced by Pindo Deli from the pulp
input should be included. The GOI and TK claim that Pindo Deli’s 2004 financial statements
clearly state that Pindo Deli purchases pulp from Lontar, a company that was included in the
original denominator calculation. Therefore, as Pindo Deli’s paper is derived from the pulp that
received the stumpage subsidy, the company’s sales data should be included in the denominator.
To correct this error, the respondents suggest that the Department add Pindo Deli’s net sales to
Lontar’s third-party sales and remove “eliminations” and sales to IK and TK.
The respondents also assert that the Department erroneously removed all paper product sales to
related parties from IK’s sales data. The respondents argue that IK’s 2004 financial statements
show that the company uses related party distributors to sell its paper products internationally and
within Indonesia. To correct this omission, the respondents suggest that the Department include
all of IK’s paper products sales, except for tiny amounts of related party sales,118 in the
denominator.
The petitioner contends that the Department correctly identified sales of pulp by Lontar to Pindo
Deli as related party transactions and appropriately limited its denominator calculation to third
party sales. The petitioner also claims that Pindo Deli’s 2004 financial statements show the
company supplying the raw materials to Pindo Deli purchased inputs from a variety of suppliers.
If the Department were to include Pindo Deli sales, the petitioner argues the Department would
need to make adjustments in the numerator to account for the purchase of raw materials from
other companies. As TK withdrew from the investigation and the Department has not been able
to obtain information on these sales or the other companies providing the raw material, the
petitioner argues that it is not reasonable for the Department to make this adjustment.
The petitioner also contends that in the Preliminary Determination, the Department explicitly
sought to remove all affiliated sales from the sales denominator calculation. As such, the
petitioner argues that the Department followed its methodology and the respondents have failed
to provide any information on the record that supports their proposition to include affiliated party
sales in the denominator.
Department’s Position: We agree, in part, with the respondents and the petitioner. As noted
above, the Department has applied total adverse facts to the countervailable programs in this
investigation. See “Analysis of Programs” section and Comment 1. In the Preliminary
Determination, we stated that “TK did not provide financial information to derive 2004 sales for
its cross-owned concession holder companies” and, therefore, we used, as facts available, TK’s
submitted sales information and the 2004 financial statements from its cross-owned companies to
“calculate a sales value that encompasses total sales by all companies involved in the production
119 See Memorandum from David Layton and David Neubacher, International Trade Compliance Analysts,
to the File regarding Calculations for the Preliminary Determination for PT. Pabrik Kertas Tjiwi Kimia Tbk
(February 6, 2006) at 2.
120 See, e.g., Letter from Arnold & Porter to Secretary of Commerce, TK’s Response to the Department’s
October 20, 2005 Questionnaire (December 5, 2005) (TK’s December 5th Response) , at Exhibit TK-G-2, TK’s 2004
financial statements, at pages 34, note 21 and 39, note 28d-e; and Letter from Arnold & Porter to Secretary of
Commerce, TK’s Response to the Department’s December 23, 2005 Questionnaire (January 12, 2006) (TK’s
January 12th Response) at Exhibit TK-A-3, Pindo Deli’s 2004 financial statements, at pages 34, note 24b and 35,
note 24g; Lontar’s 2004 financial statements at pages 26 - 27, note 25, and IK’s 2004 financial statements at pages
36, note 22 and 47, note 33a.
121 See TK’s January 12th Response, IK’s 2004 financial statements at page 47, note 33a.
122 See TK’s December 5th Response, TK’s 2004 financial statements at page 39, note 28d-e
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of paper that received the countervailable benefit.”119 For final determination, we find that, as the
2004 financial statements submitted by TK were independently audited and are publicly available
documents, we will continue to use the 2004 financial statements in the calculation of our sales
denominator.
Upon examination of TK’s and its cross-owned companies’ 2004 financial statements, we find
that we are unable to determine the final customer for sales to local related parties. In each of the
submitted 2004 financial statements for TK and the cross-owned companies, the Department
found statements that the company sold pulp and/or paper products to local related parties and
also purchased pulp and/or paper from the same local related parties.120 For example, IK sold its
pulp and paper products to PT Cakrawala Mega Indah (CMI), PT Sinar Duniamakmur (SD), and
PT Supra Veritas (Veritas).121 However, TK purchased pulp and paper products from the same
related parties.122 Based on this information, we can only presume that the local related parties
had multiple sales and purchase transactions of pulp and paper products among all of the crossowned
companies, but do not have the means to distinguish at which point sales from any crossowned
company to any local related party were further sold to a third party. Given the large
amount of sales and purchases between the cross-owned companies and the obvious possibility
of double-counting sales, we do not have sufficient information on the record (e.g., 2004
financial statements from the local related parties) to confirm which local related party sales were
further sold to third parties. Therefore, we have continued to exclude IK’s and other crossowned
companies’ local related party sales from the sales denominator.
Based on the same information from the 2004 financial statements, however, we believe that
sales to export related parties should be included in the sales denominator as the financial
statements show that all of the related parties listed under export related party sales operate
outside Indonesia, making it highly unlikely that the same sales/purchase issue occurs with
export party sales. Therefore, we included IK’s and other cross-owned companies’ export related
party sales in the sales denominator.
123 See TK’s January 12th Response at Exhibit TK-A-3, Pindo Deli’s 2004 financial statements, at page 6,
note 1a.
124 Id. at page 35, note 24g.
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In regards to Pindo Deli, its 2004 financial statements state that it currently engages in the sale of
paper for local and export markets.123 The financial statements also indicate that it is receiving
its raw materials from local related parties to produce the paper products it sells.124 In the
Preliminary Determination, the Department calculated a sales denominator that included sales of
all cross-owned companies involved in the production and sale of paper that received the
countervailable benefit and excluded affiliated party sales and we continue to follow this
methodology for the final determination.
Based on the Department’s interpretation of the cross-owned companies’ 2004 financial
statements, local related parties engage in the selling and purchasing of pulp and/or paper
products among themselves and the cross-owned companies. Given this situation, the
Department acknowledges that the purchase of pulp from related parties most likely came from
Lontar, as argued by the respondents, and other cross-owned companies. Therefore, the paper
sold by Pindo Deli did receive the countervailable benefit the Department is measuring and its
sales to local third parties and export sales have been included in the sales denominator in the
final determination.
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Recommendation
Based on our analysis of the comments received, we recommend adopting all of the above
positions and adjusting all related countervailable subsidy rates accordingly. If these
recommendations are accepted, we will publish the final determination in the Federal Register.
AGREE ____ DISAGREE ____
__________________________________
Joseph A. Spetrini
Acting Assistant Secretary
for Import Administration
__________________________________
(Date)