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Commerce Department proposes changes to antidumping/countervailing duty rules
June 2023
In brief
The US Department of Commerce’s International Trade Administration (ITA) on May 9 released a set of proposed changes to the antidumping duty (AD) and countervailing duty (CVD) rules, captioned “Regulations Improving and Strengthening the Enforcement of Trade Remedies Through the Administration of the Antidumping and Countervailing Duty Laws.” Comments on the proposed rules are due by July 10, 2023.
The package sets forth a wide range of changes covering 22 topics. This PwC Tax Insight will discuss some of the more important proposed substantive changes, relating to government inaction benefiting foreign producers, determinations of particular market situations (PMSs), and transnational subsidies.
Action item: Taxpayers potentially affected by the proposed regulations if they are finalized, as well as those with concerns about any of the proposed revisions, should consider submitting comments by the July 10 deadline.
For coverage of an ongoing ITA AD/CVD investigation, see PwC Tax Insight, US starts duty investigations regarding tin mill products, April 5, 2023.
In detail
Background
Section 731 of the Tariff Act of 1930 (the Act) directs Commerce to impose an AD order on merchandise entering the United States when it determines that a producer or exporter is selling a class or kind of foreign merchandise into the United States at less than fair value (i.e., dumping), and material injury or threat of material injury to that industry in the United States is found by the US International Trade Commission (ITC).
Section 701 of the Act directs Commerce to impose a CVD order when it determines that a government of a country or any public entity within the territory of a country is providing, directly or indirectly, a countervailable subsidy with respect to the manufacture, production, or export of a class or kind of merchandise that is imported into the United States, and material injury or threat of material injury to that industry in the United States is found by the ITC.
The ITA in 2021 revised its “scope” regulations and issued new “circumvention” and “covered merchandise” regulations. Those regulations became effective November 4, 2021. The ITA subsequently identified needed corrections and improvements to the scope, circumvention, and covered merchandise referral regulations. On November 28, 2022, the ITA issued proposed regulations providing technical amendments to those rules.
The newly proposed changes would provide additional substantive amendments to the scope, circumvention, and covered merchandise rules.
On November 18, 2022, the ITA issued an advanced notice of proposed rulemaking (ANPR) indicating that it was considering issuing regulations that would address the steps taken by the ITA to determine the existence of a PMS that distorts the costs of production. The proposed regulations include rules addressing that issue.
Foreign government inactions that benefit foreign producers
The ITA explains that in addition to governments or other public entities benefiting industries within their borders through direct subsidization (e.g., loans, grants, and loan guarantees), a government may provide a subsidy “through inaction—when the government fails to enforce its regulations, requirements, or obligations by not collecting a fee, a fine, or a penalty that the government should have otherwise collected under those regulations, requirements, or obligations. In that circumstance, the result is that the government has forgone revenue it was otherwise due, therefore benefiting the party not paying the fee, fine, or penalty. A government may also provide a subsidy by carving out circumstances where money, not related to tax revenues, is not due, therefore reducing foreign producers’ cost of complying with regulatory requirements. Such inaction can be considered a financial contribution pursuant to section 771(5)(D)(ii) of the Act.”
The ITA provides numerous examples of governmental inaction that would be deemed to constitute a countervailable subsidy. For example, the ITA explains that foreign government inaction could result in costs and prices that are unreasonably suppressed and create an unlevel playing field between producers and suppliers in countries in which governments provide weak, ineffective, or nonexistent property (including intellectual property), human rights, labor, and environmental protections, and producers and suppliers in countries in which the governments provide and enforce such protections.
Further, the ITA notes, when such standards are not enforced, the lack of enforcement not only lowers production costs, those lower production costs can enable firms to lower prices for their products, which in turn enable these firms to gain market share to the disadvantage of foreign competitors, including US businesses, that pay such costs of compliance. To address this concern, the ITA has proposed certain modifications to the AD/CVD regulations.
The proposed changes therefore would incorporate into the regulations Commerce’s long-standing practice to treat unpaid and deferred fees, fines, and penalties as a countervailable subsidy, even if the government took efforts to seek payment, or otherwise recognized that no payment had been made or indicated to the company that it was permitting a payment to be deferred.
Observation: By expressly recognizing governmental inaction as a countervailable subsidy, the proposed changes could facilitate affirmative CVD findings.
Determination of a PMS
The proposed regulations include a new rule that would address the determination of the existence of a PMS, including a PMS in which the cost of materials and fabrication or other processing of any kind does not accurately reflect the cost of production in the ordinary course of trade. This proposed regulation, which takes into consideration the comments received from the public in response to the PMS ANPR, addresses the elements that the ITA may consider in determining if a market situation exists that likely distorts the cost of production and if the market situation is viewed as “particular.”
The PMS ANPR noted that in 2022, the US Court of Appeals for the Federal Circuit issued a decision (NEXTEEL Co.) that provided guidance on factors that should be considered in determining whether a cost-based PMS exists and how to adjust for that cost-based PMS. In light of that decision, the ITA determined that it was appropriate to issue regulations explaining the procedures to determine if a cost-based PMS exists, and other matters related to a PMS determination.
Note: The Federal Circuit held in NEXTEEL that the ITA finding that a cost-based PMS existed in Korea during the period of review was unsupported by substantial evidence.
The proposed regulations more specifically:
- identify information the ITA may consider in determining if a PMS exists that distorts the costs of production if that information is reasonably available and relevant to the PMS allegation;
- identify information the ITA would not be required to consider when determining if a PMS exists; and
- address adjustments the ITA may make to its calculations when it determines the existence of a PMS, but the record before it does not allow for the precise quantification of cost distortions.
The proposed rule would provide 12 examples of scenarios in which the ITA might determine the existence of a PMS that distorts the cost of production and would require that allegations of a PMS be accompanied on the record by relevant information reasonably available to the interested party making the allegation.
Observation: The proposed changes give Commerce broader discretion in what evidence it will consider or disregard when determining whether a PMS exists. Under the proposed rules, Commerce also can use “any reasonable methodology” to adjust its calculations if it is “unable to precisely quantify distortions in costs based on record information.” This further could increase Commerce’s ability to conclude that a PMS exists. The 12 illustrative examples of PMS provide additional guidance.
Transnational subsidies
The ITA proposes eliminating the current transnational subsidies regulation, but reserving the provision for future consideration.
When the current provision was adopted, the preamble explained that Commerce believed ‘‘neither the successorship of section 701 for Subsidies Code members, nor the repeal of section 303 by the [Uruguay Round Agreements Act], eliminated the transnational subsidies rule” on which it indicated current 19 C.F.R. § 351.527 was based. The preamble also stated that, based on ‘‘past administrative experience…‘the government of a country normally provides subsidies for the general purpose of promoting the economic and social health of that country and its people, and for the specific purpose of supporting, assisting or encouraging domestic manufacturing or production and related activities (including, for example, social policy activities such as the employment of its people).’’ The ITA explains that Commerce’s understanding at the time was that a government ‘‘would not normally be motivated to promote, at what would be considerable cost to its own taxpayers, manufacturing or production or higher employment in foreign countries.’’
Since the current regulation was adopted, the ITA has observed through its administrative experiences that instances in which a government provides a subsidy that benefits foreign production are far more prevalent; therefore, the assumptions underlying the interpretation of section 701 have changed. The ITA now believes that its past interpretation of section 701 was overly restrictive, and that a limitation on its ability to countervail subsidies only if those subsidies were provided to entities of a country solely by the government of that country — when subsidies from other foreign governments otherwise would be determined countervailable under the CVD law and could prove injurious to producers of the domestic like product — is inconsistent with the purpose of the CVD law. The ITA believes that the language of section 701 does not require such a restrictive interpretation. Accordingly, the ITA proposes to eliminate the current regulation preventing consideration of allegations of transnational subsidies, and reserve the provision for future consideration.
Observation: The proposed change could increase the ability of Commerce to impose CVD orders, particularly in cases where China is providing what are considered actionable subsidies to companies in special economic zones located outside of China (i.e., transnational subsidies).
Other proposed changes
The proposed regulations also would address a variety of procedural and definitional issues.
Procedural issues
- References, citations, and hyperlinks made in a submission do not place the referenced underlying information on the official record
- Conducting scope inquiries of merchandise not yet imported, but commercially produced and sold
- Allowing pre-initiation submissions in response to scope ruling applications and circumvention inquiry requests
- Time limit revisions if Commerce seeks clarification on the application or request
- Clarifying what provisions are the ‘‘otherwise specified’’ procedures in which the procedures for the submission and use of factual information in Commerce proceedings do not apply
- Clarifying continued suspension of liquidation with respect to certain segments of Commerce’s proceedings
- Record issues in scope, circumvention, and covered merchandise inquiries for companion AD and CVD orders
- Providing greater detail on scope clarifications, Including the ability to address the governmental exception provision of Section 771(20)(B) of the Act
- Extensions of initiation and preliminary determination time limits
- Procedures for Commerce to place previous analysis and calculation memoranda from other segments or proceedings on the record after written arguments have been submitted but before the final determination or results have been issued
- Notices of subsequent authority
- The CVD adverse facts available hierarchy
- Calculation of ad valorem subsidy rate and attribution of subsidy to a product.
Definitional issues
- Benefit
- Loans
- Equity
- Debt forgiveness
- Direct taxes
- Export insurance.
Observation: The proposed change permitting a party to seek scope rulings post-production and sale, but prior to importation, should provide increased transparency for importers and could enable better planning with lower risk of incurring AD and CVD. The proposed change extending the circumstances in which Commerce can issue a scope clarification — e.g., harmonized tariff structure (HTS) changes, industry standard changes, and changes in origin conferring processes) — would require importers to more frequently review and monitor the scope language in AD and CVD orders for changes impacting their business.
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