(6) The subsidization is massive

8.57 The European Communities have calculated the amount of total ad valorem subsidization on the basis of data supplied by Indonesia and in accordance with the provisions contained in Annex IV of the SCM Agreement. The results of that calculation are summarized in the table below:

8.58 A detailed explanation of the calculation of the amount of subsidization is provided below:

(a) Methodology

8.59 In accordance with Paragraph 1 of Annex IV of the SCM Agreement, the amount of the subsidies must be calculated "in terms of cost to the granting government".

8.60 In the present case, the "cost to the granting government" is the amount of the import duties and of the Sales Tax on Luxury Goods not collected by the Indonesian Government pursuant to the National Car Programme. ⁴³⁶

8.61 In principle, the rate of ad valorem subsidization must be calculated by expressing the subsidy amount as a percentage of the sales value of the products benefiting from the subsidy. Nevertheless, by way of exception, Paragraph 4 of Annex IV provides that where the recipient firm is in a start-up situation the following rule shall apply instead:

8.62 According to Footnote 65, start-up situations include

8.63 The incentives provided in respect of the finished cars imported from Korea and in respect of the cars assembled at Tambun Plant are transitional measures until PT TPN starts its own production at Karawang Plant. In view of this, it may be considered that PT TPN is still in a "start-up situation" in the sense of Paragraph 4, which situation began with the incorporation of PT TPN in November 1995 and will run until one year after production starts at Karawang Plant (i.e. until the end of April 1999). On that assumption, the rate of ad valorem subsidisation received by PT TPN would have to be calculated by expressing the total amount of the subsidies to be received by PT TPN during the said start-up period as a percentage of PT TPN�s estimated total invested funds.

8.64 If it was considered that PT TPN is not in a "start-up situation" within the meaning of Paragraph 4, the ad valorem subsidisation rate would have to be calculated by expressing the amount of each subsidy as a percentage of the relevant sales value in accordance with the rules contained in Paragraphs 2 and 3 of Annex IV.

8.65 In the case of the exemption from the Sales tax on Luxury Goods, this calculation seems unnecessary. Since the Sales Tax on Luxury Goods takes the form of an ad valorem tax on the net sales value of the cars, the ad valorem rate of subsidisation may be considered to equal the rate at which that tax is generally applied to the category of products concerned, i.e. 35 per cent.

8.66 As regards the subsidy in the form of import duty relief, Paragraph 3 of Annex IV provides that where a subsidy is tied to the production or sale of a given product, the relevant sales denominator for the calculation of the rate of ad valorem subsidisation shall be:

8.67 In the present case, however, PT TPN did not sell any motor vehicles in the period preceding the granting of the subsidies. This makes it impossible to establish the sales denominator in accordance with the rule contained in Paragraph 2. In view of this, it is considered appropriate to use instead the sales data made available by Indonesia for the period October 1996-June 1997.

8.68 The generally applicable import duty rate on CBU passenger cars is higher than the applicable import duty rate on imports of parts and components, including CKD kits. Furthermore, it can be expected that the customs value of the CBU Timors S-515 imported from Korea will be higher than the customs value of the parts and components imported from Korea for assembly in Indonesia. As a result, the ad valorem subsidisation of the cars imported from Korea by PT TPN and sold during the period October 1996-June 1997 is likely to be higher than the rate of subsidization of the cars assembled at Tambun Plant as from June 1997 and at Karawang Plant as from May 1998.

8.69 For the above reasons, it seems appropriate to calculate separately the subsidization rate of the cars imported from Korea and the subsidisation rate of the cars assembled in Indonesia. Since production at Karawang Plant has not started yet and Indonesia has not made available the necessary data with respect to the production at Tambun Plant, the calculation of the subsidization rate of the cars assembled in Indonesia must necessarily be based on the estimates for the amount of subsidization and for the sales value of the cars to be assembled at Karawang Plant provided by Indonesia in the framework of the Annex V Procedure.

(b) Calculation based on invested funds during the "start-up" period

8.70 According to PT TPN�s investment permit, the estimated total investment by PT TPN is Rp. 975,800 million.

8.71 The total amount of subsidization received by PT TPN during the start-up period may be estimated as follows:

*Total amount of uncollected duties as calculated in 3.1+35 per cent of total sales value mentioned under point 3.1
**Based on Attachment A-28

8.72 Thus, on this basis, the ad valorem amount of subsidization would be:

(c) Calculation based on value of sales

(i) Subsidies on imported passenger cars

8.73 The amount of subsidization of the cars imported by PT TPN from Korea equals the amount of customs duties not collected upon importation into Indonesia plus the amount of uncollected luxury taxes.

8.74 The applicable customs duty on imports of CBU passenger cars is 200 per cent. ⁴³⁷ Thus, the amount of uncollected customs duties will be the amount that results from applying that percentage to the total import value of the cars.

8.75 According to Indonesia�s Response to the European Communities Questionnaire in the Annex V Procedure ⁴³⁸, the import value of the cars was the following:

8.76 The amount of uncollected import duties may thus be estimated as follows:

8.77 In turn, according to Indonesia�s Response ⁴⁴⁰, the sales value of the imported cars was the following:

8.78 The ad valorem subsidisation rate corresponding to the non collection of import duties is thus the following:

8.79 The total ad valorem subsidization rates which result from adding the above percentages to the rate of subsidization corresponding to the exemption from the Sales Tax on Luxury Goods (35 per cent) are:

8.80 The above calculation does not make any adjustment for the fact that as of 30 June 1997, 28,391 cars had not been sold yet out of 39,727 cars imported. In view of that, it is perhaps more appropriate to calculate the amount of ad valorem subsidization on the basis of the average unit import value for the period June 1996/June 1997 and the average unit sales value for the period October 1996/June 1997.

8.81 On the basis of the data provided in Indonesia�s Response, the unit import value for the period June 1996/June 1997 was US$9,275.

8.82 Accordingly, the uncollected amount of import duties per unit was US$9,275 x 200% = US$18,550 (= Rp.44,520,000).

8.83 In turn, the unit sales value for the period October 1996/June 1997 was Rp. 36,716,781.

8.84 On this basis, the ad valorem rate of subsidization resulting from the non collection of import duties would be:

8.85 This percentage, added to the subsidization rate corresponding to the exemption from the Sales Tax of Luxury Good, results in a total ad valorem subsidization rate of:

(ii) Subsidies on Passenger cars assembled at Karawang Plant

8.86 In the Attachment A-28 to its Response in the Annex V Procedure (AV/3), Indonesia has estimated the amount of the subsidies to be granted in respect of the assembly of passenger cars at Karawang Plant as follows:

8.87 In the same Attachment, Indonesia gives the following estimate of the sales value of those cars:

8.88 On the basis of the above estimates, the total rate of ad valorem subsidisation would be the following :

8.89 In response to a question from the United States, Indonesia has stated that "Items 3 to 8 of Attachment A-28 are also applicable to the Tambun Plant". ⁴⁴¹ Accordingly, the above calculation may be considered to constitute also an accurate estimate of the total subsidisation rate of the cars assembled at Tambun Plant.

8.91 As shown below, the subsidies provided as a result of Presidential Decree No. 42/1996, alone, are well above the 5 per cent threshold. The authorization to import CBU Kia Sephia sedans free of Indonesia�s 200 per cent tariff on CBU passenger cars resulted in a subsidy of 122 percent, assuming that the entire amount of the subsidy is attributed solely to the one-year period in 1996-97 for which the authorization was in effect. ⁴⁴²

8.92 However, it would not be appropriate to allocate this subsidy solely to this one-year period, because of the tremendous size of the subsidy and the fact that the one-year authorization is a "non-recurring" subsidy. Therefore, this subsidy must be allocated over several years. The United States submits that in the absence of specific guidance in the SCM Agreement regarding the mechanics of subsidy allocation over time, the recommendations made by the Informal Group of Experts established under the auspices of the SCM Committee offer a reasonable basis for dealing with this issue. ⁴⁴³

8.93 By way of background, footnote 14 to Article 6.1(a) provides that "[t]he total ad valorem subsidization shall be calculated in accordance with the provisions of Annex IV". Annex IV to the SCM Agreement is entitled "Calculation of the Total Ad Valorem Subsidization (Paragraph 1(a) of Article 6)". Although Annex IV contains some general principles regarding subsidy calculation, footnote 62 to Annex IV provides: "An understanding among Members should be developed, as necessary, on matters which are not specified in this Annex or which need further clarification for purposes of paragraph 1(a) of Article 6." To that end, on 13 June 1995, the SCM Committee established an Informal Group of Experts ("IGE") to make recommendations concerning calculation rules for purposes of Annex IV and Article 6.1(a). ⁴⁴⁴ On 25 July 1997, the IGE submitted to the SCM Committee its recommendations. ⁴⁴⁵

8.94 Recommendation 1 of the IGE Report deals with the question of "expensing" (allocating subsidies to the year of receipt) versus "allocating" (allocating subsidies over two or more years). Paragraph 2 of Recommendation 1 states that "non-recurring subsidies should be presumptively allocated ...". The IGE provided the following explanation for this recommendation: ⁴⁴⁶

8.95 The SCM Committee has not yet adopted the recommendations of the IGE, and those recommendations, of course, are not binding on this Panel. However, in light of Annex IV, paragraph 7, as well as the Tokyo Round Committee Guidelines, the IGE�s recommendations regarding the allocation of non-recurring subsidies make sense, and should be followed in this case. The one-year tariff exemption provided to TPN on imports of Korean-made Kia Sephia sedans was a huge subsidy, the Government of Indonesia has asserted that this subsidy will not recur, and this tremendous gift of money frees up a comparable amount of TPN�s funds to purchase assets for its Indonesian production/assembly facility.

8.96 The next question is how to allocate the one-year tariff exemption over time. In this regard, Recommendation 2, paragraph 1, of the IGE Report states: "As a general principle, the average useful life of assets should be used as the allocation period for subsidies subject to allocation." Paragraph 2 of Recommendation 2 then sets out a hierarchy of bases from which to determine the average useful life of assets, ranging from "Information for the individual firm or firms receiving the subsidy" to "Information for other firms producing the product outside the country in question." Paragraph 3 of Recommendation 2 sets forth a formula for calculating the average useful life of assets.

8.97 The United States does not have information for the firms in question, and has not been able to develop information based on the formula set forth in paragraph 3 of Recommendation 2. Therefore, as a reasonable surrogate, the United States has used a 12-year allocation period based on the class life of assets for manufacturers of motor vehicles as set forth in the regulations of the US Internal Revenue Service. ⁴⁴⁷ Using a 12-year, straight line allocation method, this results in a subsidy of 10.18 per cent for the one-year period during which the duty-free authorization was in effect. (See below.) Although this method underestimates the size of the subsidy⁴⁴⁸, the amount is still well in excess of the 5 per cent threshold.

(3) The inclusion of the other subsidies provided under the National Motor Vehicle programme simply increases the amount by which the total ad valorem subsidization exceeds 5 per cent

8.98 As demonstrated, a consideration of merely one component of the National Motor Vehicle programme establishes that the level of subsidization is in excess of 5 percent and that a serious prejudice case may be brought against Indonesia. However, for the sake of completeness, the United States notes, as shown below, that the exemption of the Timor Kia Sephia from the luxury tax results in a subsidy of 44 per cent for 1997 ⁴⁴⁹ and an estimated subsidy of 35 percent for 1998 and 1999. ⁴⁵⁰ The exemption under the National Motor Vehicle programme from import duties on parts results in an estimated subsidy of 14 per cent for 1998 and 9 per cent for 1999. ⁴⁵¹ Finally, the government-directed $690 million loan results in a conservatively calculated estimated subsidy of 7.1 per cent in 1998, 28.95 per cent in 1999, and 5.3 per cent in 2000. ⁴⁵²

To continue with Calculation of subsidization from the one-year tariff exemption

⁴³⁶ In the Report by the Informal Group of Experts to the Committee on Subsidies and Countervailing measures (G/SCM/W/415) it is recommended that:

(recommendation 12, at para A. 1)

⁴³⁷ AV/3, at point 23.

⁴³⁸ Id. at point 21.

⁴³⁹ All amounts in US$ have been converted into Rp at the rateUS$1 = Rp. 2,400.

⁴⁴⁰ AV/3 at point 22.

⁴⁴¹ AV/16 at point 12.28.c

⁴⁴² See Table 13.

⁴⁴³ Although Annex IV does not provide detailed calculation rules on this particular point, it clearly contemplates the allocation of subsidies over time, because paragraph 7 refers to "[s]ubsidies . . . the benefits of which are allocated to future production ... ." In addition, the Tokyo Round Subsidies Code Committee adopted "Guidelines on Amortization and Depreciation" that also called for the allocation of certain subsidies over time. BISD 32S/154.

⁴⁴⁴ G/SCM/5 (22 June 1995).

⁴⁴⁵ Report by the Informal Group of Experts to the Committee on Subsidies and Countervailing Measures, G/SCM/W/415 ("IGE Report").

⁴⁴⁶ IGE Report, p. 5, para. 11.

⁴⁴⁷ See Table 14 and accompanying note.

⁴⁴⁸ This method underestimates the subsidy attributable to the one-year tariff exemption, because Recommendation 3, paragraph 1, of the IGE Report provides the following: "It is recommended, where subsidies are allocated over time, that subsidy amounts be adjusted fully for inflation and include a portion of the �real� interest rate." If this adjustment were made, the amount of the subsidy would increase.

⁴⁴⁹ See Table 15.

⁴⁵⁰ See Table 16.

⁴⁵¹ See Table 17.

⁴⁵² See Table 21.