66 FR 15839, March 21, 2001
C-508-605
AR 1/01/98-12/31/98
Public Document
MEMORANDUM TO: Bernard T. Carreau, fulfilling the duties of
Assistant Secretary for Import Administration
FROM: Joseph A. Spetrini
Deputy Assistant Secretary
AD/CVD Enforcement Group III
SUBJECT: Issues and Decision Memorandum for the Administrative Review
of Industrial Phosphoric Acid from Israel from January 1,
1998
through December 31, 1998; Final Results
Summary
We have analyzed the comments provided by Rotem Amfert Negev (Rotem) and
the Government of Israel (GOI) in the 1998 administrative review of the
countervailing duty order covering industrial phosphoric acid from Israel.
As a result of our analysis, we have made changes in the countervailable
subsidy rate calculations for these final results of review. We recommend
that you approve the positions we have developed in the Discussion of the
Issues section of this memorandum. Below is the complete list of the
issues in this administrative review for which we received comments in
Rotem's and the GOI's case brief or in their response to the Department's
Change-in-Ownership Memorandum (CIO Memorandum), dated February 9, 2001.
I. Background Information
Change in Ownership
The Department announced its new privatization approach in a remand
determination on December 4, 2000, following the decision of the U.S.
Court of Appeals for the Federal Circuit (CAFC) in Delverde Srl v. United
States, 202 F.3d 1360, 1365 (Fed. Cir. 2000), reh'g en banc denied (June
20, 2000) (Delverde III). The Department has also applied this new
approach recently in Grain-Oriented Electrical Steel from Italy: Final
Results of Countervailing Duty Administrative Review, 66 FR 2885 (January
12, 2001).
Under this approach, the first requirement is to determine whether the
person to which the subsidies were given is, in fact, distinct from the
person that produced the subject merchandise exported to the United
States. If the two persons are distinct, the original subsidies may not be
attributed to the new producer/exporter. The Department would, however,
consider whether any subsidy had been bestowed upon that producer/exporter
as a result of the change-in-ownership transaction. On the other hand, if
the original subsidy recipient and the current producer/exporter are
considered to be the same person, that person benefits from the original
subsidies, and its exports are subject to countervailing duties to offset
those subsidies. In other words, we will determine that a "financial
contribution" and a "benefit" have been received by the "person" that is
the firm under investigation. Assuming that the original subsidy had not
been fully amortized under the Department's normal allocation methodology
as of the period of review (POR), the Department would then continue to
countervail the remaining benefits of that subsidy.
In making the "person" determination, where appropriate and applicable,
we analyze factors such as (1) continuity of general business operations,
including whether the successor holds itself out as the continuation of
the previous enterprise, as may be indicated, for example, by use of the
same name, (2) continuity of production facilities, (3) continuity of
assets and liabilities, and
(4) retention of personnel. No single factor will necessarily provide a
dispositive indication of any change in the entity under analysis.
Instead, the Department will generally consider the post-sale entity to be
the same person as the pre-sale entity if, based on the totality of the
factors considered, we determine that the entity in question can be
considered a continuous business entity because it was operated in
substantially the same manner before and after the change in ownership.
Using the approach described above, we have analyzed the information
provided by the GOI and Rotem to determine whether the subsidies received
by Rotem continued to benefit Rotem during the POI. By applying this
approach to the facts and circumstances of the instant countervailing duty
administrative review of industrial phosphoric acid from Israel and the
relevant privatization of ICL and its subsidiary, Rotem, we find that the
pre-sale and post-sale entities are not distinct persons. Specifically,
Rotem still maintains its plants and uses the same production facilities
to manufacture and sell the same products; continues to rely on the same
suppliers and customer base; and employs largely the same personnel and
management. See the CIO Memorandum for a complete discussion of our
analysis of ICL's and Rotem's privatization. Therefore, we determine that
the subsidies provided to Rotem, prior to the privatization of ICL,
continue to benefit Rotem after ICL's privatization.
II. Subsidies Valuation Information
Grant Benefit Calculation
As a result of our new privatization approach and our determination that
Rotem continues to benefit from subsidies received prior to the
privatization of ICL, the non-recurring subsidies allocated over time in
the instant and previous administrative reviews are no longer reduced by
the pass-through percentages calculated under our old repayment
methodology. Therefore, the full value of the benefit allocable to the
1998 POR from non-recurring subsidies is being used to calculate Rotem's
net subsidy rate.
III. Analysis of Programs
A. Programs Conferring Subsidies
1. Encouragement of Industrial Research and Development Grants (EIRD)
In the preliminary results, we found that the EIRD program did not
provide a benefit to Rotem because the two grants received by Rotem during
the POR were tied to the production downstream products for which IPA is
an input. See Industrial Phosphoric Acid from Israel: Preliminary Results
of Countervailing Duty Administrative Review, 65 FR 53984 (September 6,
2000). However, our findings at verification indicated that one of these
grants was for research into processes that would improve the quality of
phosphate and, hence, IPA production. See the Department's December 14,
2000, Verification Report of Rotem at 7. Rotem was unable to explain how a
grant tied to improving the quality of phosphate rock could not benefit
the production of IPA since phosphate rock is an initial input into the
production of IPA. In the absence of any evidence that demonstrates
otherwise, we find that this program can be tied to the production of IPA
and therefore, provided a benefit to Rotem. The total benefit from this
grant was less than 0.005 percent ad valorem for the POR.
2. Encouragement of Capital Investment Law (ECIL)
Based on the Department's verification and our analysis of the comments,
we determine that no change is warranted in our determination that this
program is countervailable.
3. Infrastructure Grant
Based on the Department's verification and our analysis of the comments,
we determine that no change is warranted in our determination that this
program is countervailable.
B. Programs Determined To Be Not Used
We verified that Rotem did not apply for or receive benefits under the
following programs during the POR.
1. Environmental Grant Program
2. Reduced Tax Rates under ECIL
3. ECIL Section 24 Loans
4. Dividends and Interest Tax Benefits under Section 46 of the ECIL
5. ECIL Preferential Accelerated Depreciation
IV. Analysis of Comments in Case Brief
Comment 1: Allocation of Disbursements made in the POR for Previously
Approved and Allocated Non-Recurring Grants
Rotem and the GOI (hereafter, respondents) argue that it was incorrect
for the Department to expense disbursements of non-recurring grants
received during the POR where those disbursements related to project
grants that were approved and allocated prior to the POR. Specifically,
respondents state that the Department erroneously expensed Project 14, a
grant under the Encouragement of Capital Investment Law (ECIL) program,
and Project 16, an Infrastructure grant. According to respondents, Project
14 and Project 16 were approved in 1993 and 1996, respectively, and all
previous disbursements for these projects have been allocated over the
company's average useful life (AUL). Therefore, the Department should
allocate rather than expense the disbursements related to these projects
during the POR in accordance with section 351.524(b)(2) of the
Department's regulations to avoid overstating the benefit to Rotem.
Department's Position:
We agree with respondents that the disbursements during the POR for the
ECIL and Infrastructure grants related to Project 14 and Project 16,
should be allocated over time consistent with our approach of allocating
grants disbursed during prior administrative reviews. Accordingly, we have
allocated the Project 14 and Project 16 disbursements received by Rotem
during the POR over its AUL to determine the ad valorem benefit.
Comment 2: Infrastructure Grants Net of Value Added Tax (VAT)
Respondents argue that the amount of Rotem's infrastructure grant was
properly reported net of the VAT. According to respondents, Rotem does not
benefit from the reimbursement of VAT since it initially pays the VAT when
it purchases equipment, and is then refunded the VAT amount when the VAT
amount is included in the grant amount disbursed. Therefore, respondents
state that the VAT portion of the transaction is a wash for Rotem, i.e.,
if Rotem had not made the equipment purchase to begin with, it would not
have incurred the VAT applicable to the equipment purchase. Respondents
also state that even if the GOI did not reimburse the VAT to Rotem,
Rotem's customers would have covered the VAT amount when they purchased
Rotem's products. Furthermore, the VAT amount of the transaction is also a
wash for the GOI because it will collect the VAT from the supplier of
Rotem's equipment.
Respondents note that section 351.503(e) of the Department's regulations
concerning "tax consequences" of a benefit, is not relevant to the issue
of whether the VAT portion of the transaction should be included as part
of the countervailable grant. This provision states that the
Department will not consider the tax consequences of a benefit where a
subsidy is reduced as a result of a recipient having to pay higher income
taxes because the subsidy increased taxable income. Respondents argue that
the VAT amount neither reduces nor increases the benefit, but is a wash.
Finally, respondents state that the offset provisions under 19 U.S.C.
§1677 (6) are not applicable to the VAT portion of the transaction.
According to respondents, this provision provides that only certain items
may be deducted from the "gross subsidy" to determine the "net
countervailable subsidy." Respondents claim that in this instance, the
"gross subsidy" and the "net countervailable subsidy" are the same, and
represent the grant monies exclusive of the VAT.
Department's Position
We agree with respondents that neither section 351.503(e) of the
Department's regulations, nor the provisions under 19 U.S.C. §1677(6) are
applicable in the instant case regarding the Department's treatment of the
VAT portion of Rotem's equipment purchases that are eligible for
reimbursement under the infrastructure program. However, we do not agree
with respondent's reasoning that the infrastructure grant should be
measured exclusive of the VAT because the ultimate result is a wash as a
result of the payment to and a rebate from the GOI of the VAT component of
the grant disbursement. Furthermore, we do not find that the VAT owed to
the GOI is paid for from the amount of VAT collected during the course of
Rotem's sales to its customers.
We find that the VAT portion of the infrastructure grant is a relevant
component of the grant. Essentially, the nature of this program is such
that Rotem receives a full reimbursement of costs for approved expenses
covered by the program. Furthermore, this reimbursement includes the total
invoiced amount inclusive of both material costs and the VAT. See
Verification Report of Rotem at 6. Therefore, we recognize that the
countervailable grant amount should reflect the total invoice amount to
reflect Rotem's complete costs of obtaining equipment under this program
at the time of purchase, and we have adjusted our calculations
accordingly.
V. Analysis of Comments on Department's Change in Ownership Memorandum
Comment 3: Delverde III Implications on Change in Ownership
Respondents argue that the Department's new change in ownership approach
is not in keeping with the court's holding in Delverde III. According to
respondents, the Delverde III decision did not rest merely on whether the
pre- and post-sale entities were the same person, but was focused
on whether a benefit from a prior financial contribution to the entity
had or had not passed on to the entity's new purchasers. Respondents state
that the court held that the Department must actually ascertain whether
the benefit stemming from the original subsidies is passed on to the new
purchasers. Furthermore, respondents argue that the court indicated that
whether a benefit is passed on or not depends on whether the purchasers
paid full value for their ownership interest. Respondents contend that
had the Department properly applied this view of Delverde III, the
Department would have found that Rotem's pre-privatization subsidies were
fully extinguished by the privatization of ICL.
Respondents note the Department's attempts to diminish the significance
of the Delverde III decision by suggesting that the court's reasoning was
premised on an erroneous impression that the Delverde III transaction
involved a sale of assets rather than a sale of shares, and by further
making the distinction that the sales of shares are different from sales
of assets. As a result, the Department has established a new per se rule
that suggests that a sale of shares "would most readily reveal no change
in the legal person," according to respondents. See Respondent's Comments
on the Department's Change in Ownership Memorandum, at 6. Such a rule,
respondents argue, fails to recognize how companies are valued when they
are sold, be it through the sales of assets or the sales of shares.
Specifically, it does not address the accepted practice of valuing a
company based on the present value of its future earnings, net of any
loans or other debts that would reduce the value of the company. In the
case of Rotem, respondents contend that its projects were financed by
grants instead of loans, which served to increase the net worth of the
company. Id. at 8. The later sale of Rotem took into account the full
value of the assets purchased with the grants, hence the reasoning in
Delverde III applies to this particular privatization since the GOI sought
and received the highest market price for the company's assets. Id. at 9.
Therefore, Rotem asserts that the grants were essentially repaid in full
to the GOI, and the purchasers received neither a financial contribution
nor a benefit from the prior grants.
Respondents also argue that the Department's change-in-ownership
determination is inconsistent with the recent WTO Dispute Panel's and
Appellate Body's holdings in U.K. Lead Bar (which respondents refer to as
British Steel). See Certain Hot-Rolled Lead and Bismuth Carbon Steel
Products Originating in the United Kingdom, WT/ DS 138R, Report of the
Panel (Dec. 23, 1999) and WT/ DS 138AB/R, Appellate Body Report (May 10,
2000) (U.K. Lead Bar). Similar to their previous argument regarding
Delverde III, respondents contend that the issue of whether a benefit is
passed on or not depends on whether the purchaser paid full value for
their ownership interest. Therefore, the Department should revise its
determination by finding that Rotem's pre-privatization subsidies were
fully extinguished by the privatization of ICL.
Department's Position:
We disagree with respondent's argument that the Department has failed to
follow the Federal Circuit's decision in Delverde III in this case. In
Delverde III, when the Federal Circuit discussed how the Department should
handle changes in ownership, it emphasized the "person" requirement that
appeared in the countervailing duty statute for the first time following
the
enactment of the URAA. In Delverde III itself, however, the Federal
Circuit
did not treat the person issue as in dispute, given its understanding of
the facts. Nevertheless, the Federal Circuit did not explain what criteria
it used to reach its conclusion that the original subsidy recipient was
distinct from the relevant producer/exporter. For that reason, the
Department
has developed criteria for deciding whether or not the firm under
investigation
or review is the same person as the original subsidy recipient.
Consistent with Delverde III, we first examined the facts and
circumstances, including the terms of the transaction, to determine
whether post-sale Rotem, the company under review, was the same person as
the original subsidy recipient, pre-sale Rotem. Because the Department
found that Rotem did not change, the Department was then able to determine
that all of the elements of a subsidy were established with regard to post-
sale Rotem and its analysis of the transaction necessarily ended.
Consequently, because the Department's person inquiry, the first step
contemplated by Delverde III, led to a finding that post-sale Rotem was
not a different legal person from pre-sale Rotem, there was no need to
conduct an analysis of the fair market value nature of the privatization
transaction.
Essentially, respondents contend that the Department should have skipped
this first step in its analysis of the change-in-ownership transaction and
should have examined only whether a subsidy could be considered provided
to post-sale Rotem on the basis that the full value was not paid. We do
not believe that Delverde III stands for such a limited proposition.
Although the Federal Circuit did not seem to view the application of the
"person" requirement as in dispute under the facts before it, it is still
clear from the Federal Circuit's opinion that it was the first inquiry
that must be made by the Department when confronting a change in
ownership.
We disagree with respondents that the Department's change-in-ownership
determination is inconsistent with the WTO Appellate Body's decision in UK
Lead Bar. Although it is not directly relevant here, we note that the
decision in U.K. Lead Bar is consistent with the analysis set forth by the
Delverde III Court, as it sets forth essentially the same two-step
analysis used by the Delverde III Court. Therefore, as explained above,
the Department's change-in-ownership determination is consistent with U.S.
law and our WTO obligations.
Comment 4: The Department's New Change in Ownership Approach
Respondent's contend that the Department's new approach which is based
solely on whether a company is the same or a different person after a
change in ownership, is erroneous.
Furthermore, the factors that are analyzed are irrelevant because
purchasers acquire a successful company to continue its business
operations and retain its name, production facilities, assets and
personnel. According to respondents, the Department has established
a test that virtually assures that no successful company, when sold,
can ever meet the test as a distinct "person," and consequently, no
privatization will ever result in the elimination of earlier-received
subsidies.
Respondents state that the relevant factor to be analyzed is whether
"control" of the company changed as a result of privatization and how that
control changed. In the case of Rotem, respondents argue that not only
were shares sold by the GOI to the Eisenberg Group, but that the GOI gave
the group control of ICL, and thereby, its wholly-owned subsidiary, Rotem.
Respondents contend that the Department did not take this significant
change in "control" into account in its determination that the pre- and
post-sale Rotem were the same entity, and should have found that the
change in control of ICL, and thereby, Rotem, was sufficient to create a
new person.
Department's Position:
We disagree that the Department's approach for determining whether the
firm under investigation is the same person as the original subsidy
recipient in the change-in-ownership context will always lead to a finding
that the benefit from prior subsidies continues. The Department has
developed a fact-based approach that takes into account a number of
factors, including continuity of general business operations, continuity
of production facilities, continuity of assets and liabilities and
retention of personnel. The degree of continuity evidenced by a
consideration of these factors will vary from transaction to transaction,
depending on the facts, and therefore the Department's approach on its
face does not gives rise any predetermined result.
Moreover, we do not believe that a change in control of a company
automatically creates a new person. For example, it is generally accepted
that if a change in ownership is accomplished through a simple sale of
shares, the purchaser steps into the shoes of the company being sold. No
change in the underlying legal personality of the company purchased
necessarily results. If the original subsidy recipient and the current
producer/exporter are the same person, that person benefits from the
original subsidies.
Final Results of Review
For the period January 1, 1998 through December 31, 1998, we determine
the net subsidy rate for Rotem to be 4.98 percent ad valorem.
Recommendation
Based on our analysis of the comments received, we recommend adopting all
of the above positions and adjusting all related subsidy calculations
accordingly. If these recommendations are accepted, we will publish the
final results of review and the final net subsidy rate for the reviewed
producer/exporter of the subject merchandise in the Federal Register.
AGREE ______ DISAGREE ______
_____________________________________
Bernard T. Carreau, fulfilling the duties of
Assistant Secretary for Import Administration
_____________________________________
Date