2.19 The so-called February 1996 programme consists of a series of decrees and regulations published in February and March 1996.

(1) Presidential Instruction No. 2/1996

2.20 Presidential Instruction No. 2/1996 ("The Development of the National Automobile Industry") was issued on 19 February, 1996.¹⁰ The purpose of Presidential Instruction No. 2/1996 is "to continue to strengthen the self-reliance of the nation, particularly in providing means of land transportation in the form of the production of a national car . . . " Presidential Instruction No. 2/1996 directs the Minister of Industry and Trade, the Minister of Finance, and the State Minister for the Mobilization of Investment Fund/Chairman of Capital Investment Coordinating Board to implement a series of "provisions."

2.21 First, Presidential Instruction No. 2/1996 directs these ministers collectively to implement "measures in close coordination to realize as fast as possible the development of the national car industry, which meets the following criteria: (a) the use of a brand name of its own; (b) domestically produced; (c) the use of components which are domestically produced."

2.22 Second, Presidential Instruction No. 2/1996 directs the Minister of Industry and Trade "to foster, guide and grant facilities, in accordance with the use of provisions of laws in effect such that the national car industry: (a) uses a brand name of its own; (b) uses components produced domestically as much as possible; (c) is able to export its products."

2.23 Third, Presidential Instruction No. 2/1996 directs the Minister of Finance to "grant the following facilities in the field of taxation in accordance with regulations in force: (a) import duty exemption for importation of components produced domestically as much as possible which still need to be imported; (b) the assessment of the Value Added Tax at the rate of 10 per cent upon the delivery of the produced automobiles; (c) payment of the Sales Tax on Luxury Goods which is owed upon the delivery of the produced automobiles will be borne by the Government."

(2) Decree No. 31/1996

2.24 Also on 19 February 1996, Indonesia issued Minister of Industry and Trade Decree No. 31/MPP/SK/2/1996 ("The National Motor Vehicle").¹¹ Decree No. 31/1996 identifies its purpose as "to implemen[t] Presidential Instruction No.2 of 1996 on the Development of the National Car Industry ... in the framework of promoting industry ... ."

2.25 Decree No. 31/1996 sets forth the requirements for designation as a "national motor vehicle". Specifically, national motor vehicles are those which:

The Decree also provides that "the motor vehicle industrial enterprise which produces national motor vehicles in accordance with the requirements set forth in Article 1 will be granted the status of 'Pioneer enterprise'."

2.26 Decree No. 31/1996 sets forth a schedule of local content rates to be achieved by a "national motor vehicle industrial enterprise given 'Pioneer status'":

(3) Decree No. 82/1996

2.27 The third measure issued on February 19, 1996, was Decree of the Minister of Finance No. 82/KMK.01/1996 ("The Improvement of the Decree of the Minister of Finance No. 645/KMK.01/1993 on the Grant of Import Duty Relief to Certain Parts and Components of Motor Vehicles for the Assembly Purposes and/or Manufacture of Motor Vehicles as Previously Improved by the Decree of the Minister of No. 223/KMK.01/1995").¹² Decree No. 82/1996 establishes that parts and components imported by a producer/assembler of National Cars, for assembly or manufacture of National Cars fulfilling the local content rates identified above, are exempted from import duties.

(4) Government Regulation No. 20/1996

2.28 The final measure issued on February 19, 1996, was Government Regulation No. 20 ("The Amendment of Government Regulation No. 50 of 1994 Regarding the Implementation of Law No. 8 of 1983 on Value Added Tax on Goods and Services and Sales Tax on Luxury Goods as Amended by Law No. 11 of 1994").¹³ By this regulation, National Cars fulfilling the specified requirements, including local content rates, were exempted from luxury tax.

2.29 Thus, Regulation No. 20/1996 established the following luxury tax structure:

(5) Decree of the State Minister for Mobilization of Investment Funds/Chairman of the Investment Coordinating Board No. 01/SK/1996

2.30 On 27 February 1996, Indonesia issued Decree of the State Minister for Mobilization of Investment Funds/Chairman of the Investment Coordinating Board No. 01/SK/1996 ("Investment Regulations Within the Framework of the Realization of the Establishment of the National Automobile Industry").¹⁴ The decree provided that "to realise the establishment of [a] national car industry, the investment approval will be issued to the automobile industry sector with tax facilities in accordance with legal provisions enacted specifically for that purpose."

(6) Ministry of Industry and Trade Decree No. 002/SK/DJ-ILMK/II/1996

2.31 On 27 February 1996, Decree No. 002/SK/DJ-ILMK/II/1996 of the Ministry of Industry and Trade was issued.¹⁵ This Decree designated PT Timor Putra Nasional ("TPN") as "a pioneer national motor vehicle enterprise." On 5 March 1996, Decision No. 02/SK/1996 of the State Minister for the Mobilization of Investment Funds/Chairman of the Capital Investment Co-ordinating Board was issued. This decision designated TPN "to establish and produce a National Car."

2.32 The National Car, the "Timor", was to be based on the design and other technology of the Kia Sephia, model produced by Kia Motors of Korea. The Timor was to be produced initially in knock-down form in Korea by Kia Motors, for export to Indonesia, where it was to be assembled at TPN's facility at Karawang, Indonesia. (At the time that the February 1996 programme was announced, construction of this facility had not yet begun.) TPN was to gradually increase the level of local content of the Timor.

(b) "The June 1996 Programme"

2.33 The so-called June 1996 programme comprises a series of decrees issued in June 1996.

(1) Presidential Decree No. 42/1996

2.34 On 4 June 1996, Presidential Decree No. 42/1996 ("The Production of National Cars") was issued.¹⁶ This Decree No. 42/1996 stated that:

In other words, National Cars in fully built-up form could be imported free of duty and luxury tax, if they were made by Indonesian personnel and fulfilled the local content requirements for the National Car.

2.35 This Decree also provided that this tax and duty exemption would be granted only once for a maximum period of one year, and would involve a total number of vehicles to be stipulated by the Minister of Industry and Trade. In Minister of Industry and Trade Decree No. 1410/MPP/6/1996 (30 June 1996)¹⁷, TPN was authorized to import 45,000 Timors pursuant to Decree No. 42/1996.

(2) Regulation No. 36/1996

2.36 Also on 4 June 1996, Indonesia issued Government Regulation No. 36/1996 ("The Amendment of Government Regulation No. 50 of 1994 on the Implementation of Law No. 8 of 1983 on Value Added Tax on Goods and Services and Sales Tax on Luxury Goods as Amended by Law No. 11 of 1994, as Lastly Amended by Government Regulation No. 20/1996").¹⁸ Regulation No. 36/1996 made further revisions to the luxury tax on motor vehicles, which, as discussed, had been most recently revised on 19 February 1996, in Regulation No. 20/1996.

2.37 Regulation No. 36/1996 established the following luxury tax schedule:

(3) Decree No. 142/1996

2.38 As indicated, Presidential Decree No. 42/1996 permitted the "national motor vehicle" to be produced abroad for a period of one year and still receive the duty and tax benefits of the National Motor Vehicle programme, if the local content requirements for the National Car (20 per cent local content for the first year) were met and the car was produced by Indonesian personnel.

2.39 The Decree of the Minister of Industry and Trade No. 142/MPP/Kep/6/1996, issued 5 June 1996 ("The Production of the National Cars")¹⁹ established guidelines for meeting the local content requirement referred to in Decree 42/1996. Decree No. 142/1996 provides that "the production of national cars can be carried out overseas ... on the condition that Indonesian parts and components are used", and then states further that "[t]he procurement of Indonesian-made parts and components shall be performed through the system of counter purchase of parts and components of motor vehicles by the overseas company carrying out the production and reexporting of national cars to Indonesia." In addition, the decree states that "[t]he value of the counter purchase ... shall be fixed at the minimum of 25% (twenty-five per cent) of the import value of the national cars assembled abroad (C&F value)."

2.40 In other words, counter purchases by the overseas producer of the National Car of Indonesian motor vehicle parts and components worth at least 25 per cent of the C&F import value of the imported National Cars would satisfy the local content requirements for the National Car.

(4) Audit of TPN's performance under Decree 142/1996

2.41 Indonesia has submitted a letter to the Panel dated January 1998, containing the results of an audit of TPN's compliance with the counterpurchase requirement of Decree No. 142/1996. The letter indicates that TPN was found in the audit not to have met the counterpurchase requirement.

3. The US$690 million loan to TPN

2.42 The United States' claims include one additional measure, which it characterizes as a further component of the National Car Programme: a loan provided on 11 August 1997. According to the United States, at the direction of the Indonesian Government a consortium of four government-owned banks and twelve private banks decided to disburse US$650 million in ten-year loans to TPN to carry out the national car project. The United States also asserts that one of the Government-owned banks involved previously had disbursed a US$40 million bridging loan to TPN, bringing the total loan amount to US$690 million. According to the United States, the loans reportedly will carry an annual interest rate of 3 per cent over the 3-6 month deposit rate, a maturity of 10 years, and a grace period of 3 years, and the four government-owned banks will provide one-half of the $650 million loan.

2.43 On 25 February 1998, Indonesia notified the Subsidies Committee that, as of 21 January 1998, it had terminated all subsidies previously granted under the National Car programme. On 2 March 1998, Indonesia notified the Panel and requested the Panel to terminate the dispute settlement proceeding, at least as it relates to the 1996 National Car programme measures.

C. Notifications by Indonesia to WTO Committees

2.44 On 23 May 1995, Indonesia made a notification with respect to the 1993 Incentive System to the TRIMs Committee under Article 5.1 of the TRIMs Agreement (G/TRIMS/N/1/IDN/1). On 28 October 1996, Indonesia notified the TRIMs Committee that it was "withdrawing" its notification related to automobiles because it considered that its programme was not a TRIM (G/TRIMS/N/1/IDN/1/Add.1); on the same day Indonesia made a notification with respect to its 1993 Incentive System and its 1996 National Car programme to the SCM Committee (G/SCM/N/16/IDN).

To Continue with Findings and Recommendations Requested by the Parties.

¹⁰Indonesia Exhibit 1.

¹¹Indonesia Exhibit 2.

¹²Indonesia Exhibit 21.

¹³Indonesia Exhibit 20.

¹⁴Indonesia Exhibit 4.

¹⁵Indonesia Exhibit 41.

¹⁶Indonesia Exhibit 6.

¹⁷Indonesia Exhibit 13.

¹⁸Indonesia Exhibit 3.

¹⁹Indonesia Exhibit 7.