subsidy calculationsjadsc.gov.jm/.../03/...module-4b-subsidy-calculations.march2015.pdf ·...

Subsidy Calculations

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http://www.starsnurses.com/intro 3.htm

http://www.starsnurses.com/intro 3.htm

Finding Subsidies

Notifications of subsidies (to be filed annually

with the WTO – ASCM Article 25.1);

Gov’t Ministries, Departments and Agencies;

Legislation;

Internet;

Stock exchange;

Credit agencies;

Filings with relevant regulatory bodies.

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Signs Of A Subsidy

Financial contributions from government or a

public body such as grants, loans, revenue

foregone, equity injection and input subsidies;

A benefit is conferred. The cost (by itself) to

government or the public body is not sufficient;

Subsidy is specific and not generally available;

Pass through benefits can also be signs of a

subsidy. This is an indirect form of subsidy.

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Subsidy Test

WTO Agreement on Subsidies & Countervailing

Measures (ASCM) Article 14 requires calculation

of the amount of a subsidy in terms of the benefit

to the recipient. In summary, test for subsidies:-

1. Establish that there was a financial

contribution by government or a public body;

2. Establish that a benefit was conferred;

3. Establish that 1 & 2 are specific;

4. Calculate the amount of the subsidy.

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Case Study – Orange Industry

A case study of the orange juice industry

demonstrates subsidy calculations for:

– Grants;

– Loans;

– Revenue Foregone;

– Equity Injection; and

– Input Subsidies.

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BoDMAS

Sequential order of a formula:

1. Brackets ( )

of

2. Division /

3. Multiplication x

4. Addition +

5. Subtraction - 6


In 2012, members of the Jamaica Orange

Industry (JOI), who are Jamaican manufacturers

who produce orange juice for sale on the

domestic market, complained to Jamaica’s

Subsidies Investigative Authority (JSIA) that

subsidized orange juice imported in 2010 and

2011 (2 years) from Juice Supreme (JS) in

Bahar, adversely affected their sales and profits

and appears to be threatening further injury.

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It takes 1/4 gallon of puree to produce one

gallon of orange juice;

A 1/4 gallon of puree costs $80 but subsidies

from the Bahar Government lowers it to $30;

JS produced 100,000 gallons of orange juice;

Production cost was $178/gallon;

JS sales were 100,000 gallons at $250/gallon;

30,000 gallons of orange juice were exported

to Jamaica at a reduced price of $200/gallon.

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BElec is the monopoly supplier of electricity in

Bahar and is 100% owned by the Government;

Electricity sales: 60% to Industry at $10/kwh &

40% to others at a profitable rate of 40/kwh;

BElec buys gas to produce electricity from

BGas - also 100% owned by Government;

BElec has settled 5% of its BGas Receivables;

BGas pays dividends to Gov’t who gives BElec

a loan below market rates to repay BGas debt. 9

Grants

JSIA’s investigation found that during 2010

and 2011 in Bahar, Jamaica’s second largest

trading partner, Juice Supreme (JS) received

a grant of $1,000,000 from the Government of

Bahar to modernize its Production Plant. The

prevailing commercial bank interest rates in

Bahar were 12% and the average life cycle of

JS’ Production Plant is 10 years.

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Subsidy Calculation: Grants

The following equation can be used to calculate

the amount of subsidy provided by a Grant:

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i 1

i ] l)– y/n)(k (– [y y/n Sk

Where:

Sk = the amount of subsidy countervailable in year k K = number of years under review y = the face value of the grant n = the average life cycle of the plant i = the standard (prevailing) market interest rate


The calculation of a cash value subsidy in 2011

of a 10 year Grant begun in 2010 is:

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714,185$1.12

208,000 Sk

0.12 1

1)]0.12-/10)(2(1,000,000– [1,000,000 101,000,000/ Sk


The subsidy as a percentage of sales:

100,000 gallons x $250/gallon

= $25,000,000. Therefore,

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%74.010025,000,000

714,185 cent per Subsidy

Loans

Further investigations found that JS received:

A $3,000,000 loan in 2010 at a preferential

rate of 6% from a government owned bank;

The standard market interest rate was 12%;

The loan is repayable over a period of 10

years in equal instalments.

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Loans

Benefits from loans under circumstances

that they would not normally be granted

may be deemed to be a subsidy;

Loans made at preferential rates,

compared to market rates, can be deemed

to be a subsidy;

The subsidy is the difference in the market

and preferential interest rate annualised

over the loan term at the discount rate.

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Subsidy Calculation: Loans

The amount of subsidy from the loan:

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ny /)i - (i1

)i - (i l)]-(y/n)(k -[y +y/n Sk

am

am

Where: Sk = the amount of subsidy countervailable in year k k = the year under review y = the face value of the loan n = the period over which the loan has to be repaid im = market interest rate ia = the actual interest rate paid on the loan


The subsidy countervailable at year 2 can

be calculated as follows:

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849,135$Sk

10/000,000,30.06)-(0.12 + 1

0.06)-1)](0.12-/10)(2(3,000,000 - [3,000,000 + 103,000,000/ Sk


The Subsidy as a percentage of total sales:

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%54.010025,000,000


Revenue Foregone

JS was also granted “approved entity” status

by the Bahar Government;

As an approved entity, a minimum of 60% of

the value of the company’s raw material used

must be of domestic content;

As a result, JS received a tax credit thus its

export earnings are exempt from corporate tax

but domestic earnings are taxed at 20%;

The export tax subsidy is therefore 20%.

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Subsidy Calculation: Revenue Foregone

Revenue foregone subsidy formula:

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tEc) - (Ep S

Where: S = subsidy amount Ep = export price Ec = export cost t = tax rate


30,000 gallons were exported, so the total

value of the subsidy, or revenue foregone, is

30,000 x $4.40 = $132,000;

Where,

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gallonper $4.40 20% 178) - (200 S


The revenue foregone as a percentage of

the export price is:

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%%

%

20.2200

20)178200( cent per Subsidy

Ep

)( cent per Subsidy

tEcEp

Equity Injection

The Bahar Government purchased 200,000

ordinary shares at an agreed price of $20 per

share. JS’ share price on the Bahar Stock

Exchange at the time of the transaction was

$18.

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Subsidy Calculation: Equity Injection

The Bahar Government’s purchase of

200,000 ordinary shares above market

price is an equity injection. The formula is:

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NeMe) - (Ae Se

Where: Se = Subsidy benefit of the equity injection Ae = Agreed purchase price of the equity Me = Market price of the equity Ne = Number of the equity


The value of the subsidy for the equity

injection is:

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$400,000 200,000 18) - (20 Se


The subsidy by equity injection as a

percentage of total sales is:

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%60.110025,000,000


Input Subsidies

A quarter gallon of puree costs $80. The

government subsidises puree used by JS

thereby lowering its purchase cost to $30

per quarter gallon;

This is a financial contribution by the

government and a benefit is conferred via

the lower purchase cost of the puree. This is

an input subsidy to the manufacturer.

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Subsidy Calculation: Input Subsidies

The formula can be written as:

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To

PvSc - Mc S%

Where:

S% = Subsidy percentage

Mc = Material cost

Sc = Subsidised cost

Pv = Production volume

To = Turnover (sales revenue)

Subsidy Calculation: Input Subsidies

The input subsidy percentage is:

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20% S%

000,000,25

000,100$30 - $80 S%

Causation

Having established that a subsidy exists and

calculated the amount, before seeking dispute

resolution and countervailable measures, one

must examine other factors causing injury;

Injury causation to the domestic industry may not

be solely attributable to the subsidy;

WTO ASCM Article 11.7: “…subsidy and injury

shall be considered simultaneously (a) in the

decision…to initiate an investigation and

(b)…during the course of the investigation….”

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De Minimis

WTO ASCM Article 11.9: “…There shall be

immediate termination in cases where the amount

of a subsidy is De Minimis, or where the volume of

subsidized imports, actual or potential, or the

injury, is negligible;

…the amount of the subsidy shall be considered to

be De Minimis if the subsidy is less than 1 per cent

ad valorem.” If more, calculate countervailing duty;

ASCM Article 19.4: “No countervailing duty shall

be levied..in excess of the amount of the subsidy..”

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Countervailing Duty (CVD)

JS Orange Juice Export Volume (Gallons) 30,000

JOI Orange Juice Market Price ($ Per Gallon) 300

Market Value of Imported Orange Juice ($) 9,000,000.00

Subsidies

CVD CVD

% $ $/Gallon

Grants 0.74 66,600.00 2.22

Loans 0.54 48,600.00 1.62

Revenue Foregone 2.20 198,000.00 6.60

Equity Injection 1.60 144,000.00 4.80

Input Subsidies 20.00 1,800,000.00 60.00 Total 25.08 2,257,200.00 75.24

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