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[C-557-701]
Final Affirmative Countervailing Duty Determination and Countervailing Duty
Order; Carbon Steel Wire Rod From Malaysia
Friday, April 22, 1988
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AGENCY: Import Administration, International Trade Administration, Commerce.
ACTION: Notice.
SUMMARY: We determine that certain benefits which constitute bounties or grants within the meaning of the countervailing duty law are being provided to manufacturers, producers, or exporters in Malaysia of carbon steel wire rod (wire rod) as described in the "Scope of Investigation" section of this notice. The estimated net bounty or grant is 17.71 percent ad valorem for all manufacturers, producers, or exporters in Malaysia of wire rod.
We are directing the U.S. Customs Service to suspend liquidation of all entries of wire rod from Malaysia that are entered, or withdrawn from warehouse, for consumption on or after the date of publication of this notice, and to require a cash deposit on entries of these products in the amount equal to the estimated net bounty or grant.
EFFECTIVE DATE: April 22, 1988.
FOR FURTHER INFORMATION CONTACT: Carole Showers or Gary Taverman, Office of Investigations, Import Administration, International Trade Administration, U.S. Department of Commerce, 14th Street and Constitution Avenue NW., Washington, DC 20230; telephone: (202) 377-3217 or 377-0161.
SUPPLEMENTARY INFORMATION:
Final Determination
Based on our investigation, we determine that benefits which constitute bounties or grants within the meaning of section 303 of the Tariff Act of 1930, as amended (the Act), are being provided to manufacturers, producers, or exporters in Malaysia of wire rod. For purposes of this investigation, the following programs are found to confer bounties or grants:
- Export Credit Refinancing.
- Pioneer Status Under the Investment Incentives Act of 1968.
We determine the estimated net bounty or grant to be 17.71 percent ad valorem for all manufacturers, producers, or exporters in Malaysia of wire rod.
Case History
Since the last Federal Register publication pertaining to this investigation [Preliminary Negative Countervailing Duty Determination: Carbon Steel Wire Rod from Malaysia (Wire Rod II) (53 FR 3413, February 5, 1988)], the following events have occurred. We conducted verification in Malaysia from February 25 to March 5, 1988, of the questionnaire responses of the Government of Malaysia, Amalgamated Steel Mills Bhd. (ASM), Perdama Corporation Sdn. Bhd. (Perdama), and Tejana Trading Corporation Sdn. Bhd. (Tejana). A supplemental reponse based on information reviewed at verification was submitted by the respondents on March 18, 1988. Prehearing briefs were filed on March 30, 1988. A public hearing was held on March 31, 1988. Posthearing briefs were filed on April 8, 1988.
Scope of Investigation
For purposes of this investigation, the term "carbon steel wire rod" covers a coiled, semi-finished, hot-rolled carbon steel product of approximately round soild cross-seciton, not under 0.20 inch in diameter, not over 0.74 inch in diameter, tempered or not tempered, treated or not treated, not manufactured or partly manufactured, and valued over or under 4 cents per pound. Wire rod is currently classified under items 607.1400, 607.1710, 607.1720, 607.1730, 607.2200, and 607.2300 of the Tariff Schedules of the United States Annotated and under items 7213.20.00, 7213.31.30, 7213.31.60, 7213.39.00, 7213.41.30, 7213.41.60, 7213.49.00, and 7213.50.00 of the Harmonized System.
Analysis of Programs
Throughout this notice, we refer to certain principles applied to the facts of the current investigation. These general principles are described in the "Subsidies Appendix" attached to the notice of Cold-Rolled Carbon Steel Flat- Rolled Products from Argentina: Final Affirmative Countervailing Duty Determination and Countervailing Duty Order (49 FR 18006, April 26, 1984).
For purposes of this final determination, the period for which we are measuring bounties or grants ("the review period") is calendar year 1986. Based upon our analysis of the petition, the responses to our questionnaire, verification, and written comments from respondents and petitioners, we determine the following:
I. Programs Determined To Confer Bounties or Grants
We determine that bounties or grants are being provided to manufacturers, producers, and exporters in Malaysia of wire rod under the following programs:
The Bank Negara Malaysia, the central bank of Malaysia, provides short-term export credit refinancing through commerical banks. The Export Credit Refinancing (ECR) programs, as revised in January 1986, provided pre- and post- shipment financing of exports for periods of up to 90 days. In December 1986, the maximum periods for financing under these programs were extended to 120 and 180 days, respectively. Currently, ECR offers order-based pre- and post- shipment financing and "certificate of performance" (CP) based pre-shipment financing. Order-based financing is provided on specific sales to specific markets. CP-based financing, which is a line of credit based on the previous 12 months' export performance, cannot be tied to specific sales in specific markets.
We verified that all three respondents received financing under the order- based ECR loan programs and that, of the three companies, only ASM received financing under the CP-based ECR loan program. Because only exporters are eligible for ECR loans, we determine that they are countervailable to the extent that they are provided at preferential rates.
In order to determine whether these loans were provided at preferential rates, we compared the interest rate charged to a benchmark interest rate. As a benchmark for short-term loans, it is our practice to use the most comparable, predominant commercial rate for short-term financing. For purposes of this determination, we are using the 90-day Bankers' Acceptance (BA) rate as the most comparable and commonly used alternative source of short-term financing. Based on this comparison, we find that ECR loans are provided at preferential rates and, therefore, are countervailable.
To calculate the benefit from ECR loans on which interest was paid in 1986, we used our short-term loan methodology, as set forth in the Subsidies Appendix. Because the order-based ECR loans were shipment specific, we included only those loans which financed exports of wire rod to the United States. For the order-based
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ECR loans, we calculated the amount of interest that would have been paid using the BA benchmark and subtrated the amount of interest that was actually paid. We cumulated the interest benefits of the three respondents and divided by wire rod exports to the United States. The total value of wire rod exports to the United States is equal to the value of ASM's wire rod sales to the United States, which include sales made through Perdama and Tejana, plus the appropriate trading company markup.
Because the CP-based ECR loans were not shipment specific, we included interest paid on all loans outstanding in 1986. We calculated the amount of interest that would have been paid using the BA benchmark and subtracted the amount of interest that was actually paid. We divided this interest benefit by total exports to all countries, including only the trading company markup for wire rod sales to the United States since this was the only product on which trading company markup was provided and verified.
Adding the benefits from the order- and CP-based financing, we calculated an estimated net bounty or grant of 0.49 percent ad valorem.
B. Pioneer Status Under the Investment Incentives Act of 1968
In accordance with the Investment Incentives Act of 1968, as amended, pioneer status is available to companies producing a product (1) with favorable prospects of further development, including deveopment for export, or (2) currently being producred in insufficient quantities to meet the development needs of Malaysia, including export. Benefits granted under pioneer status include exemptions on the portion of income derived from sales of the pioneer product from the following: (1) the 40 percent corporate income tax, (2) the five percent development tax, (3) the three percent excess profits tax, and (4) the 40 percent dividend tax. Pioneer status benefits are available for a period of up to five years. The Investment Incentives Act also provides for extension of benefits for a period of up to three years. We verified that pioneer status was granted to ASM for wire rod production for the five-year period from July 1, 1979 to June 30, 1984. ASM received an extension of its pioneer status benefits through the 1987 tax year.
In our preliminary determination, we stated that additional information was needed to determine whether pioneer status conferred bounties or grants on the manufacture, production, or exportation of wire rod from Malaysia. In order to determine if the provision of pioneer status constitutes a countervailable subsidy, we must determine if the benefits provided are limited to a specific enterprise or industry, or group of enterprises or industries, in accordance with section 771(5)(B) of the Act. We typically consider three factors when making this determination: (1) the extent to which a foreign government acts (as demonstrated in the language of the relevant enacting legislation and implementing regulations) to limit the availability of a program; (2) the number of enterprises, industries, or groups thereof that actually use a program, which may include the examination of disproportionate or dominant users; and (3) the extent, and manner in which, the government exercises discretion in making the program available.
With respect to the first factor outlined above, the language of the Investment Incentives Act does not appear to limit pioneer status benefits to specific industries or companies. For example, Part II, Chapter 1, Section 4(1) of this Act states: "Any company . . . being desirous of establishing or participating in a pioneer industry for the purpose of producing any pioneer product or products and intending that a factory be constructed in Malaysia for that purpose, may make an application in writing to the Minister for a pioneer certificate * * *."
With respect to factor two, at verification we reviewed a Malaysian Industrial Development Authority computer printout, organized by industrial classification, which listed all companies that received pioneer status from January 1980 through November 1987. According to the printout, pioneer status benefits have been approved for hundreds of companies and almost as many products cutting across numerous industrial sectors. We learned at verification, however, that approximately 40 percent of those companies that apply for pioneer status have been rejected.
With respect to the third factor--government discretion in administering the subsidy program--the Investment Incentives Act does not give specific guidelines to be followed when either approving or denying pioneer status. It is our general policy when verifying domestic programs to review the procedures for approving or rejecting applications for benefits. In Certain Refrigerator Compressors from the Republic of Singapore: Preliminary Results of Countervailing Duty Administrative Review (50 FR 6025, February 13, 1985, see also the public verification report of November 19, 1984, for this review C- 559-001), we asked for and received documentation showing the reasons for approval or rejection of applications for a training grant program. This documentation was requested even though thousands of applications covering a wide range of industries were approved yearly. Based on the review of that information, we found that program to be not countervailable. We followed similar procedures in Final Affirmative Countevailing Duty Determination: Certain Fresh Cut Flowers from the Netherlands (52 FR 3301, February 3, 1987). In that case we examined a program involving benefits provided by the European Community (EC) for the creation of cooperative organizations, and found that the Government of the Netherlands limited its selection of programs and projects to be sent to the EC for consideration. We also stated that we were unable to verity any standard criteria applied by the EC in the approval process of member status' sectoral programs and the individual investment project applications under the sectoral programs. As we stated in that case "because we saw no evidence of standard criteria applied in the approval of programs by the EC" we found that program to be limited to a specific group of enterprises or industries within the agricultural sector of the Netherlands and therefore countervailable. (See also Final Affirmative Countervailing Duty Determination: Live Swine and Fresh, Chilled and Frozen Pork Products from Canada (50 FR 25097, June 17, 1985).)
We must examine relevant documents to ensure that a situation does not exist where a program, which based on the statute appears to be available to all companies in a country, is being administered in a manner that is distortive. For example, the government could use its discretion in administering a program that is on its face available to all companies in a country to favor some applicants over others. Or the government might favor companies in a region requiring development over companies in more prosperous areas. In both cases, the domestic program would favor "specific" enterprises or industries. Accordingly, it is important for the Department to determine in each case the criteria used for granting or denying applications for domestic programs. In this case, the government did not provide information that would have allowed the Department to make this determination.
In this investigation, the Department recognized in its preliminary determination that government standards for approving or rejecting
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applications could only be determined through review of approval and denial documentation and that, with the information available at the time of that determination, it was not even possible to determine on what basis ASM's original designation as a pioneer company was based. We thus notified the Government of Malaysia in our verification outline that it should be prepared to discuss the purpose and the provisions of the pioneer status program and provide application and approval files for review.
During verification, we askd to review information explaining the reasons for granting or denying a company's request for pioneer status. The Government of Malaysia denied us access to this information. We were eventually permitted, less than one week prior to this final determination, to view two documents which purported to demonstrate why ASM was granted pioneer status. The information shown to us at this very late date applied only to ASM. We could not verify this information not tie it to other documents. We still have not seen, however, any supporting documentation demonstrating the general approval process and guidelines followed that would allow us to determine the standards under which pioneer status is granted or denied. We were told at verification, however, that another wire rod company (a company that did not export to the United States) was rejected for pioneer status benefits. Three days prior to this determination, respondent told us that the statement made at verification about this company was incorrect. These apparent contradictory statements underscore the importance of reviewing at verification all relevant documentation pertaining to the program.
Because we were not able to review documents pertaining to the approval or rejection of applications for this program, we are unable to determine that the provision of pioneer status is non-specific. Therefore, we determine the program to be countervailable. Because we find the original granting of pioneer status to be countervailable, we also determine that any extension of such benefits is countervailable.
To calculate the benefit conferred by pioneer status, we applied the corporate tax rate of 40 percent and the development tax rate of five percent to the total tax-exempt income, as claimed on ASM's amended 1986 tax return, derived from the sales of wire rod, the designated pioneer status product. We next applied the excess profits tax rate of three percent to the tax-exempt income over two million ringgit. We then applied the dividends tax rate to the amount of dividends paid as reported in ASM's 1986 (amended) tax return. Finally, we added the benefits derived from each of the tax-exempt benefits and divided that amount by total sales of wire rod to arrive at a bounty or grant rate of 17.22. percent. The total value of wire rod sales is equal to the value of ASM's wire rod sales, which include export sales made through Perdama and Tejana, plus the appropriate trading company mark-up.
II. Programs Determined Not to Confer Bounties or Grants
We determine that bounties or grants are not being provided to manufacturers, producers, or exporters in Malaysia of wire rod under the following programs:
A. Loans from Malaysian Industrial Development Finance Corporation (MIDF)
MIDF, a public company incorporated under the Companies Act of Malaysia, was established in 1960 by the Malaysian government to provide a source of long- term financing for industrial development in Malaysia. Government holdings in MIDF account for 43.81 percent of total issued capital.
MIDF is not a bank; rather, it borrows money on the open market and then lends this money at a fixed rate above its own cost of borrowing. It provides long-term loans for purchasing machinery, building factories, and expanding existing manufacturing facilities. MIDF funds are only available for the financing of fixed assets. In Malaysia, MIDF is the prime lender of fixed-rate loans. We verified that one respondent, ASM, obtained long-term loans from MIDF that were outstanding during the review period.
At verification, we learned that in almost every case, MIDF financing was made through, and in conjunction with, commercial bank participation. For example, in the case of ASM, MIDF financing was one component of a loan package assembled by a Malaysian commercial bank. Once a loan package is developed, the commercial bank contacts MIDF on behalf of its client to apply for MIDF financing. MIDF relies on the initial screening done by the banks in order to provide financing to commercially-sound companies. The main guideline for receiving MIDF financing is the commercial-viability of the project and company. MIDF does its own internal assessment of the applicant focusing on (1) background, (2) management, (3) credit worthiness, (4) marketing, and (5) technical, financial, and economic benefits. At verification, we saw no evidence that such guidelines were not followed.
We have verified that MIDF financing has been provided to a wide variety of industries, including, among others, the food, steel, non-ferrous metals, machinery, wood products, textile, rubber, chemical and paper industries. Further, in contrast to our treatment of benefits provided under the Pioneer Status program, we have verified that MIDF financing is provided in accordance with guidelines which are followed by both the MIDF and commercial banks when reviewing projects for commercial feasibility. As such, we determine that these loans are not limited to a specific enterprise or industry, or group of enterprises or industries, and are not countervailable.
The Bank Negara Malaysia administers the New Investments Fund (NIF), providing long-term loans to promote further investment in, and development of, new productive capacity in the manufacturing, agriculture, tourism, and mining sectors. This program has been in effect since September 1985. NIF interest rates are variable and are tied to movement in the "basic lending rate." At verification, we found that this program was terminated as of December 29, 1987.
NIF guidelines were established by the Bank Negara, with advice from the Association of Malaysian Banks. These guidelines were then published and distributed to all commercial banks. NIF loans are provided to companies that have qualified for financing from commercial lending institutions. As with MIDF financing, NIF loans are given in connection with other commercial bank financing. We verified that ASM obtained an NIF loan in 1986 to finance modernization of its facilities. This NIF loan was made in connection with several other long-term loans from commercial banks.
At verification, we reviewed the process by which NIF loans are either approved or rejected for each industrial sector. We found no evidence that the published guidelines were not consistently applied. We also verified that NIF loans were provided to a wide range of industries in the manufacturing, agriculture, tourism, and mining sectors. As such, we determine that these loans are not limited to a specific enterprise or industry, or group of enterprises or industries, and are not countervailable.
C.Duty Drawback and Duty Exemptions
The Government of Malaysia allows for duty drawback and duty exemption
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on imported materials physically incorporated into exported products, and for duty exemption on certain imported machinery. We verified that ASM received duty drawback and duty exemption on imported scrap and billets, and duty exemption for machinery imported into Malaysia in 1986.
Non-excessive import duty drawback and duty exemption on items physically incorporated into the final exported product are not countervailable. At verification, we reviewed the control systems used by the government to assure that duty drawback and duty exemption on imported scrap and billet met the two criteria outlined above. Because we found that these two criteria were met, we determine that duty drawback and duty exemption on physically incorporated inputs of wire rod are not excessive and, therefore, do not confer bounties or grants to manufacturers or producers of wire rod in Malaysia.
In accordance with section 771(5)(B) of the Act, duty exemption on imports of machinery is not countervailable if the benefits provided are not limited to a specific enterprise or industry, or group of enterprises or industries. At verification, we learned that machinery can be exempted from duty if it is not produced in Malaysia. Such machinery is contained on a list published by the Ministry of Finance and followed by Ministry of Customs officials at each port. We found that there is no application process for receiving these benefits. If an item is contained on the list, no duty is required. This list includes machinery used in a wide range of industries. We verified that each piece of duty-exempt machinery imported by ASM during 1986 was contained on the published list. We also verified that this exemption was not tied to any export requirement.
Because duty exemption of machinery is not limited to a specific enterprise or industry, or group of enterprises or industries, we determine that this program does not confer bounties or grants to manufacturers, producers, and exporters of wire rod in Malaysia.
D. Initial and Annual Depreciation Allowance
ASM, Perdama, and Tejana used the depreciation allowances contained in section 3 of the Income Tax Act of 1967. This section provides for a fixed initial depreciation allowance of 20 percent. This initial allowance is taken in conjunction with the annual depreciation allowance in the first year for recurring qualifying plant expenditures. Annual allowances are provide for in Schedules A & B of the Income Tax Act. The allowance is taken on a straight- line basis and is not to exceed 100 percent of the value of the asset. These are the standard depreciation allowances permitted in Malaysia; they are not tied to specific industries. Malaysian depreciation allowances are based on the useful life of the asset. There is no evidence on the record that annual allowances for steel are excessive or do not reflect the useful life of the assets. Therefore, we determine that initial and annual allowances are not countervailable.
III. Programs Determined Not To Be Used
We determine, based on verified information, that manufacturers, producers, or exporters in Malaysia of wire rod did not apply for, claim, or receive benefits during the review period for exports of wire rod to the United States under the following programs. These programs were described in Wire Rod II, supra, unless otherwise noted:
A. Export Tax Incentives
(This program was listed as an abatement program in Wire Rod II.)
(This program was listed as an abatement program in Wire Rod II.)
4. Double Deduction For Export Credit Insurance.
5. Double Deduction for Export Promotion.
6. Industrial Building Allowance.
C. Government Financial Assistance
1. Long-Term Loans from the Industrial Development Bank of Malaysia (IDBM).
2. Long-Term Loans from the Development Bank of Malaysia (DBM).
D. Other Tax Incentives
1. Pioneer Status Under the Promotion of Investments Act of 1986.
2. Investment Tax Credit/Investment Tax Allowance.
3. Accelerated Depreciation Allowance.
The Income Tax Act of 1967, as amended in 1979, provides for accelerated depreciation to manufacturing and processing industries. Subsequent revisions of this allowance extended eligibility to the non-manufacturing sectors, as well as excluding certain types of plant and equipment. Under this program, the current annual allowance is set at 40 percent of the qualifying plant expenditures. Pioneer designated companies are ineligible to receive accelerated depreciation. We verified that none of the companies under investigation claimed allowances under this program during the review period.
Section 133A of the Income Tax Act of 1967 provides for a reinvestment allowance of 25 percent for capital expenditures on a factory, plant, or machinery for any approved project. Companies with pioneer status are ineligible to use this allowance. We verified that none of the companies under investigation claimed benefits under this program during the review period.
5. Reduction in the Cost of State Land for New Industry and Agriculture.
Individual state government authorities in Malaysia have control over prices charged on purchases of land in their respective states. We verified that none of the respondents received government-sponsored price reductions on their land.
IV. Programs Determined Not To Exist
We determine, based on verified information, that the following programs do not exist. These programs were described in Wire Rod II:
B. Abatement of Taxable Income Based on a Percentage of the Value-Added of Exported Products
Interested Party Comments
Comment 1: Petitioners argue that the Department should use the average of the banker's acceptance (BA) rate and the overdraft rate as the benchmark for the ECR program. In support of their contention, petitioners cite Oil Country Tubular Goods from Argentina; Preliminary Results of Countervailing Duty Administration Review (OCTG) (51 FR 41649, November 18, 1986) where the Department used a weighted-average of several types of short-term financing as its benchmark.
Respondents contend that BA financing is the commercial equivalent of ECR financing and, therefore, the BA rate should be used as the benchmark for calculating benefits from ECR financing. Respondents further contend
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that the use of the 90-day BA rate overstates the benefit from ECR financing and that the Department should use either the 30- or 60-day BA rates as a benchmark depending on the number of days the loan was outstanding. Finally, respondents state that no current benefit from ECR financing is being provided to Malaysian exporters since the commercial rate for BA financing is now less than the ECR financing interest rate.
DOC Position: In calculating benefits from short-term loans, the Subsidies Appendix states that the Department will use "the most appropriate national average commercial method of short-term financing". In OCTG, the Department found that there was no predominant alternative form of short-term financing comparable to the program under review. Therefore, we used as a benchmark a weighted-average of short-term commercial lending rates. In this case, however, BA financing is the predominant alternative form of financing in Malaysia for trade financing. Therefore, we consider the BA interest rate as the most appropriate rate to use as our benchmark.
As already stated, these loans are granted for up to 90 days. Further, the only BA rates contained in the questionnaire response were the 90-day rates. Respondents did not submit information concerning 30- and 60-day rates until several weeks after verification had ended, information which was not verified. Therefore, we have used the 90-day BA rate as our benchmark.
Finally, when calculating the benefit from a loan program, we look at the interest rates in effect during the review period. Only when a government has made a program-wide change prior to our preliminary determination that can be verified and measured do we take those changes into account. Fluctuating benchmark interest rates do not constitute a program-wide change. Therefore, we are not making any adjustment to our benefit calculation for the ECR program.
Comment 2: Petitioners argue that for the ECR loan received by ASM on a U.S. wire rod order which was subsequently cancelled, the Department should use the value of exports of wire rod to the United States as the denominator for valuing this subsidy since the loan benefits U.S. sales activities.
Respondents assert that, although the loan was granted based upon an export order of wire rod to the United States which was subsequently cancelled, any benefit received from that loan was not linked to any shipment to the United States during the review period. Respondents believe that the Department should exclude any benefit on the cancelled sale in their calculations or, at most, attribute any benefit accrued to total exports of all products.
DOC Position: We recognize that the sale to the United States on which this loan was based was cancelled. However, the funds were received by ASM and must be accounted for in our subsidy calculation. While respondents would have us allocate the benefits from this loan over total exports, we could only consider following that methodology if we had complete information on all loans received on cancelled sales. Since we do not have that information, we have allocated the benefit from the loan in question only over exports to the United States.
Comment 3: Petitioners argue that, since the Malaysian Government denied the Department access to documents relating to the exercise of discretion in granting or denying pioneer status, the Department must make adverse inferences regarding this program and determine that this program confers a bounty or grant. Petitioners further claim that respondents offered only circumstantial evidence and general explanations during the verification concerning this program.
Petitioners assert that there are two bases for finding pioneer benefits under the Investment Incentive Act of 1968 (the 1968 Act) countervailable. They state that under the 1968 Act, the Malaysian Government may grant pioneer status for export purposes. Alternatively, they contend that the initial granting of pioneer status may be characterized as a countervailable domestic subsidy limited to a specific group of industries or companies.
Respondents content that the Department saw every document at verification relating to pioneer status with the exception of an inter-agency memorandum recommending ASM's approval. Respondents argue that the Malaysian Government operates under legal constraints similar to those under which the U.S. Government will not release inter-agency memoranda. Furthermore, respondents state that the Department gave no notice to the Government of Malaysia before or during verification that disclosure of this particular document would ne necessary.
Respondents believe that benefits under pioneer status are not limited to any sector or region of the Malaysian economy, nor are they provided exclusively to companies that export.
Respondents state that export potential is just one of many factors considered in granting pioneer status; the program is not limited to exporters. They also state that pioneer benefits apply equally to both domestic and export sales.
DOC Position: See section I.B. of this notice.
Comment 4: Petitioners argue that, even if the Department finds the granting of pioneer status not countervailable, ASM's receipt of an additional year of pioneer benefits for producing a priority product is a countervailable benefit. They state that most pioneer products are not priority products, and that many of those products on the priority list have export requirements. Petitioners believe that respondents have admitted to the significant discretion the Government exercises in the designation of products as priority products. They further argue that ASM's eligibility for benefits denied to other sectors of the steel industry illustrates the program's discrimination with regard to different products within specific industries and the targeted nature of the priority product extension.
Respondents contend that the extension of pioneer status for priority products is automatic and applicable to virtually all manufactured products in Malaysia. Respondents assert that the designation "priority product" has been applied to products from virtually every sector of the economy. They believe that, given the breadth of industries and products receiving priority status, the extension for priority products should not be considered countervailable.
DOC Position: Given that we have found the initial provision of pioneer status to be countervailable, extensions of those benefits are also countervailable. See section I.B. of this notice.
Comment 5: With respect to calculation of benefits derived from the granting of pioneer status, petitioners state that the exemptions from payment of the income tax, development tax, dividend tax, and the excess profits tax should be countervailed and valued at what would have been paid during the review period.
Respondents contend that, even if pioneer status and/or its extension were found to be countervailable, ASM received no benefit during the review period. ASM's original pioneer status benefits ended in the 1985 tax year, and either with or without the extension, ASM was not liable for the payment of any taxes in the 1986 tax year. Therefore, according to respondents, the extension of pioneer status benefits had no effect on ASM's tax liability.
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Respondents finally argue that, if the Department does consider pioneer status benefits to be countervailable, then it should recognize that ASM's eligibility will expire after the 1987 tax year and follow its policy to take into account changes in programs and eligibility.
DOC Position: When calculating the benefit from an income tax program, we generally compare the amount of tax paid when a company uses the program to the amount of tax it would pay absent the program. In this case, we saw that ASM would have paid no taxes during the review period even absent the program. However, the reason it would not have paid taxes is due at least in part, if not solely, to the fact that the carried-forward capital allowances it applied against taxable income were much larger than they would have been if ASM had not enjoyed pioneer status in prior years. Therefore, we determined that the capital allowances used to offset income in 1986 were due to ASM's pioneer status in previous years and found the total exemption on income from the pioneer status product in that year to be a benefit. See section I.B. of this notice.
As stated above, when calculating a benefit for a tax program we look at benefits received during the review period. Only when a government has made a program-wide change prior to our preliminary determination that can be verified and measured do we take those changes into account. In this case, we do not consider ASM's change in eligibility status to constitute a program-wide change. Therefore, we are not making any adjustment to our benefit calculation for the pioneer status program.
Comment 6: Petitioners argue that ASM benefitted from an abatement of five percent of taxable income under section 29 of the Investment Incentive Act of 1968. They state that in its prior investigation of wire rod from Malaysia, the Department verified that Angkasa Marketing, an ASM subsidiary, claimed this abatement for U.S. exports in the 1985 and 1986 years of assessment.
Petitioners argue that the difference in corporate identity should be ignored since the ASM owns 100% of Angkasa, Angkasa and ASM share the same board of directors and general manager, the financial results of Angkasa are consolidated with ASM, ASM controls Angkasa's export activities, and ASM directly benefits financially from benefits received by Angkasa. In support of its argument, petitioners cite the Department's remand determination in Remand of Carbon Steel Wire Rod from Saudi Arabia (Saudi Wire Rod) February 1, 1988, before the Court of International Trade) where the Department said the activities of a subsidiary may benefit its parent. Furthermore, according to petitioners, in the Final Affirmative Countervailing Duty Determination: Brass Sheet and Strip from France) (Brass Sheet) (52 FR 1218, January 12, 1987), the Department ruled that a subsidy granted to the parent corporation, which did not export during the period of investigation, was found to have benefitted the subsidiary that did export, even where the companies paid taxes separately and maintained separate financial records.
Petitioners believe Angkasa and ASM must be treated as a single entity to prevent the evasion of the countervailing duty law. They believe that a company may attempt to evade an order by exporting to the United States through different subsidiaries. If the Department does not reverse its preliminary decision, petitioners state that it will invite the circumvention of the countervailing duty law. Petitioners assert that the Department should conclude in its final determination that section 20 benefits claimed by Angkasa are countervailable and benefitted ASM.
Respondents contend that, since Angkasa did not export to the United States during the review period, it should not be under investigation. Respondents further contend that Angkasa and ASM are separate entities and should be so considered by the Department because they file separate tax returns, maintain separate financial statements and accounting records, and operate from separate office buildings. Respondents argue that the Department has rejected the argument that money is fungible and that benefits to other products and other related parties necessarily flow to the product and company under investigation. Respondent cites Final Affirmative Countervailing Duty Determination: Iron Ore Pellets from Brazil (51 FR 21961, June 17, 1986) to support this contention.
Respondents state that the standard methodology of the Department is to treat individual corporate entities separately unless there is a suspicion of a specific transfer of benefits. In this investigation, nothing suggests that benefits flowed from Angkasa to ASM. Furthermore, the Department learned at verification that it is impermissible to transfer such tax benefits to another company.
Respondents request that the Department continue its established practice of treating corporate entities separately and only investigate those companies that export to the United States during the review period. Furthermore, respondents believe that since Angkasa has not exported wire rod since 1986 or accrued any additional export allowance, the Department has no need to make an affirmative determination and set a deposit rate for a program that can no longer be used. Respondents suggest that even if the Department imputes Angkasa's export allowance to ASM, the subsidy would be zero.
DOC Position: Although Angkasa is wholly-owned by ASM, each company files separate income tax returns. The two companies report separate incomes, and there is no evidence that Angkasa passes on a benefit that it receives on its income to ASM. In fact, Malaysian law prohibits the transfer of income tax benefits.
In the past, the Department has not normally considered a company and its wholly-owned subsidiaries as one company for purposes of determining countervailing duties. For example, in Brass Sheet, although the Department recognized that money can pass from a parent to its subsidiaries and vice- versa, the benefits found in that case were attributed solely to the sales of the subsidiary. Saudi Wire Rod, cited by the petitioners deals with the transfer of ownership of a subsidiary of a government-owned company to another government-owned company. It does not address how benefits given directly to that subsidiary would be allocated.
Petitioners have raised the very troubling prospect of a subsidiary and its parent evading duties by alternating the years in which they apply for tax benefits or in which they export to the United States. At this time, we see no evidence of such a pattern developing between ASM and Angkasa. We will carefully monitor the activities of ASM and Angkasa during an administrative review, if one is requested, to ensure that transfer of benefits is not occurring. Because Angkasa is not being excluded from this determination, if it should resume exporting wire rod to the United States, any subsidies it receives in connection with such exports would be reflected in any countervailing duties assessed.
Verification
Except where noted, we verified the information used in making our final determination in accordance with section 776(a) of the Act. We used standard verification procedures including meeting with government and company officials, examination of relevant accounting records, and examination of original source
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documents of the respondents. Our verification results are outlined in detail in the public versions of the verification reports which are on file in the Central Records Unit (Room B-099) of the Main Commerce Building.
Suspension of Liquidation
We are directing the U.S. Customs Service to suspend liquidation on all entries of wire rod from Malaysia which are entered, or withdrawn from warehouse, for consumption on or after the date of publication of this notice in the Federal Register. In accordance with section 706(a) of the Act (19 U.S.C. 1671e), we are directing the U.S. Customs Service to require a cash deposit equal to 17.71 percent ad valorem for each entry of the subject merchandise. This suspension of liquidation will remain in effect until further notice.
This determination is published pursuant to section 705(d) of the Act [19 U.S.C. 1671d(d)].
April 18, 1988.
Joseph A. Spetrini,
Acting Assistant Secretary for Import Administration.