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World
Trade Organization |
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TN/RL/W/146 |
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(04-1067) |
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Negotiating Group on Rules |
Original: English |
Proposal on Issues related to Affiliated Parties
Paper from Brazil; Colombia; Costa Rica; Hong Kong, China;
This proposal
concerns the issues
related to affiliated parties. These issues have been identified in document TN/RL/W/10. Other Members have also
referred to this issue in documents TN/RL/W/66, TN/RL/W/81, TN/RL/W/86 and TN/RL/W/130.
This proposal indicates one way to overcome and resolve the problems resulting from the lack of clear definitions of affiliated parties and the problems resulting from the absence of rules in the treatment of affiliated transactions. The discussions in the Negotiating Group may assist in improving this proposal. Consequently, we reserve our right to modify or complement the proposal as appropriate.
In preparing and/or analyzing specific provisions, it is clear that amendment of the existing text may have an impact on other Articles of the AD Agreement, which have so far not been explicitly addressed. These links cannot be fully addressed until we have seen a comprehensive overview of proposed amendments. Consequently, we also reserve the right to make proposals on provisions which may not have been explicitly addressed so far for clarification or improvement.
Issues: Definition of “Affiliated
Party” Transactions and Their Relevance in Determining
Relevant
Provisions: Articles
2.2 and 2.3.
Description
of the Problems
The issue of
“affiliation” arises in various places in the Anti-Dumping Agreement (“AD
Agreement”), i.e., the
calculation of normal value and the use of constructed export price (CEP), and plays a crucial role in the determination of dumping margins.[1] Yet the AD Agreement does not provide a clear
and concrete set of criteria for determining when parties should be considered
“affiliated” and does not adequately address those situations in which the
existence of possibly affiliated parties affects the calculation of dumping
margins.
Given the importance of these issues, it is important to rethink the
issue of affiliation and ensure that the AD Agreement clearly and appropriately
defines these various issues.
Authorities often conduct substantial
investigations on transactions between a responding party and what are
variously termed “related”, “associated” or “affiliated” parties in determining
margins of dumping. For example,
· Authorities
often request that a responding party submit all data related to sales in the
exporting country by both the responding party and its associated purchasers, alleging
that sales by the responding party to its associated purchasers might not be at
arm’s length, or not “in the ordinary course of trade” within the meaning of
Article 2.
· In
other cases, the authorities allege that purchases of raw materials or services
from affiliated suppliers do not “reasonably reflect the costs associated with
the production and sales of the product under consideration”. The authorities request affiliated suppliers’
costs of production or services, in addition to prices of the responding party’s
individual purchases from both affiliated and unaffiliated suppliers.
· In
other cases, the authorities request the responding party to submit resale and
cost data of a purchaser in the importing country to use CEP only on the
grounds that the responding party has some equity stakes in the purchaser in
the importing country.
· The
authorities sometimes demand that the responding party combine or “collapse”
the data of production and sales by “affiliated” parties with those by the
responding party in order to establish a single margin of dumping for these
entities.
In
many of these cases, the authorities expand these inquiries far beyond what
they need to determine the margin of dumping for the responding party. The authorities often request information on
an “affiliated” party, over which the responding party has, in fact, no control
at all. In other cases, the authorities
request unnecessarily extensive data maintained by such “affiliated” parties in
a prescribed format. These inquiries put
excessive and unnecessary burdens on the responding party. In many cases, the responding party is simply
unable to respond to all these inquiries, resulting in application of “adverse”
facts available.
Some authorities have applied
special rules increasing or lowering the sales prices and costs recorded in a
responding party’s normal financial and cost accounting system because of
alleged affiliation between parties. For
example,
· Upon
finding a relation of affiliation between a responding party and a purchaser,
the responding party is requested to submit resale data by the purchaser to
independent parties, indifferent to whether the price of the responding party’s
sales is reliable or not. Such practice
of negating the reliability of actual data has no rationale but just creates
opportunities for the authorities to resort to facts available and calculate
artificially high dumping margins.
· Sales expenses for transportation services
provided by an affiliated party, which are to be deducted from invoice prices
in calculating normal value at ex-factory level, are rejected even if that affiliated
service provider is providing similar services at the same price to independent
parties. Such rejection also results in
increase of the normal value and creation and increase of the dumping margin.
·
Similarly, the responding party’s cost of
production is increased to the highest of the
costs of the affiliated supplier, the purchase price from its unaffiliated
suppliers, or the actual purchase price from the affiliated
supplier. Such methodology has no rationale other than to increase the responding party’s costs of production to the highest possible level that one can imagine, resulting in creation and increase of the
dumping margin.
· In other cases, the authorities
disregard export prices when such prices are higher than the export prices to
independent importers, but take them when such prices to an associated importer
are lower than the export prices to an independent buyer. Such practice is just a misuse or abuse of the
discretion pertaining to the use of CEP.
The combination of an overly expansive
definition of associated, affiliated or related parties (some authorities deem
respondents to be affiliated with suppliers or purchasers based on an ownership
interest of as little as 5%) and the absence of rules on the treatment of
transactions between such parties, has led to excessive burdens and distorted
results. The
definition of affiliated parties should be applied consistently in all
situations, and specific rules should be applied both in determining affiliation
and in the proper treatment of affiliated party transactions.
Elements of the Solution
1. Definition
of “Affiliated Party”
Proposal:
Add
a provision (or separate annex) defining “affiliated parties” to be applied in
all determinations of dumping where parties are related, associated or
affiliated, and where the prices in transactions between such parties could be unreliable. The proposed definition is as follows:
An
“affiliated party” shall be any party, which is considered to, directly or
indirectly, control or be controlled by another party or which is under the
common control of a third party. For the
purposes of this definition, control is the power to govern the financial and operating policies of an
enterprise by having:
(a) more
than one half of the voting power of an enterprise;
(b) power
over more than one half of the voting rights by virtue of an agreement with
other investors;
(c) such power under a statute or an
agreement;
(d) power
to appoint or remove the majority of the members of the board of directors or
equivalent governing body; or
(e) power
to cast the majority of votes at meetings of the board of directors or
equivalent governing body.
The
term “association” in
Article 2.3 should be replaced by “affiliated parties” and should
follow the single unified definition.
Explanation:
Article
2.2 of the AD Agreement provides no specific reference to association or
relationship between parties in connection with the determination of normal
value. Article
2.3 of the AD Agreement
establishes that when there is no export price or where
it appears to the authorities concerned that the export price is unreliable
because of an association or compensatory arrangement between the exporter and
the importer or a third party, the export price may be constructed, but
provides no clear guidance on what kinds of affiliation require
this use of constructed export price (“CEP”).
The
concern in relation to affiliated parties is that one party may make
transactions with another party on other than commercial terms. In market economies, one assumes that one party
does not confer a gift on another party in the form of non-commercially priced
sales. Indeed, the assumption must be
that unless there is a substantial identity of economic interests between the
entities involved, the price of the transaction will be an arm’s length price. This, in turn, implies that the identity of
economic interests is dependent on the degree of common ownership and the
ability of the owners of one party to control the actions of the other party.
The
issue of the extent of the relationship necessary to constitute an identity of
economic interests and confer control has been extensively analyzed in the
context of corporate accounting practices and incorporated into International
Accounting Standard 27 (IAS 27), “Consolidated Financial Statements and
Accounting for Investments Subsidiaries”.
We believe that the criteria in IAS 27, which we hereby adopted into
this proposal, are well established and accepted, and thus, provide the most reliable
basis to address the issue of affiliation between two entities. In addition, adopting these criteria into the
AD Agreement has the benefit of enhancing
the transparency and predictability of the AD regime and ensuring consistency
among Members in applying antidumping rules.
Practically, this proposal defines affiliated parties to be similar to
those that are consolidated into a consolidated financial statement, into which
a responding party also would be consolidated, in accordance with the
accounting standards in many countries.
It
should be noted that the ability of one party to influence the prices of another is not an appropriate standard for
determining the “affiliated party.” For
example, a buyer with a long-term commercial relationship or which buys in
large quantities may use its buying power to influence the seller to provide a
better price. Such influence is the very
essence of the ordinary course of business, and is not evidence of “control”
over the other party.
2. Calculation of Dumping
Margins where Affiliated Parties are Involved
(1) Sales to Affiliated Parties for Determining
Proposal:
·
Amend Article 2.2 to clarify that the authorities shall exclude all sales
by the responding party to its affiliated parties from the sales in the
exporting country (or to the third country) for determining the normal value,
only if the weighted average price of sales by the responding party to the
affiliated party varies by more than W percent[2]
from the weighted average price of sales to all the unaffiliated parties
(average-to-average comparison) and the weighted average price of sales by the
responding party to the affiliated party is more than the highest of the
weighted average price of sales to each unaffiliated party or less than the
lowest of the weighted average price of sales to each unaffiliated party based
on a company-by-company comparison.
·
Furthermore, clarify that such comparison shall be done for the same
products sold at the same level of trade, taking into account differences in
product mix.
· Furthermore, clarify that when the
authorities exclude such sales under the condition mentioned above, the
excluded data shall not be replaced with any data.
·
Furthermore, clarify that in case there are no or too few unaffiliated
parties with respect to sales by the responding party to make the
above-mentioned comparisons, the sales prices to its affiliated parties shall
be replaced by the weighted average price of sales of the same product by other
responding parties which are regarded as reliable. In case there are no other
responding parties, the authorities shall use all the sales prices into the
calculation of the normal value.
·
Amend Article 2.2 to clarify that in no event shall the authorities request
that a responding party submit information in connection with sales by the
affiliated parties to third parties.
·
Furthermore, clarify that the authorities do not have any discretion
whether or not to follow the above-mentioned procedures on a case-by-case
basis.
Explanation:
This proposal is intended
to clarify and simplify the rules on the treatment of sales by a responding
party to its affiliated parties for determining normal value. Article 2.2 of the AD Agreement provides no specific
reference to the treatment of sales between association or affiliated parties in
connection with the determination of normal value. In such absence of explicit rules in the AD
Agreement, Members have developed various tests to examine whether sales to affiliated
parties were reliable or not. Members also
have developed rules on the treatments of sales to affiliated parties, where
these sales were found not to be at arm’s length. As the AD regime has developed, these tests
and rules also have become so complicated that they have made the results
unpredictable and at the same time, have created excessive burdens on
responding parties. To solve such
problems, clarifying the basic concept that affiliation by itself is not a
sufficient condition to deem unreliable the price of such transactions, our
proposal is intended to streamline the rules so that they can be implemented by
all Members without any difficulties, to reduce the burden on both the
authorities and responding parties, and to increase the predictability of the
AD regime for all international business participants. For example, certain authorities request a
responding party to submit detailed data pertaining to the resale by the
purchaser, but such practice should be explicitly prohibited because it is too
burdensome for both the authorities and respondents and is considerably
unfortunate for both to resort to facts available.
(2) Sales Expenses by Affiliated Service
Providers
Proposal:
Add
provisions to clarify that a responding party’s sales
expenses (i.e., sales
expenses that are the subject of due allowance made in the comparison between
the export price and the normal value at the same level of trade) for services that are provided by affiliated parties shall be based
on the actual price charged to the responding party by the affiliated supplier, unless the sales expense
is a major expense and the evidence on the record shows that charges by the
affiliated supplier for the service significantly differ from the comparable
charges by unaffiliated service providers for the same service or from the
comparable charges by the affiliated supplier for the same service to
unaffiliated parties, and that the difference materially affects the price
comparison. Even in case there exist no
comparable charges, the sales expense by affiliated suppliers shall be based on
the actual price charged to the responding party by the affiliated supplier,
unless the major expense is below the cost incurred at the affiliated supplier
for providing that service. More
specifically:
·
The actual price charged by the affiliated supplier shall be used, unless the sales expense is a major expense;
·
In case the sales expenses is a major expense and:
(i) when the responding party is sourcing the
same service from both an affiliated supplier and an unaffiliated supplier, the
authorities shall substitute the comparable price charged by the unaffiliated
supplier for the actual sales expense charged by the affiliated supplier, only
if the actual sales expense by the affiliated supplier varies by more than Y
percent from the comparable price charged by the unaffiliated supplier for
providing the same service; otherwise,
the actual price charged by the affiliated supplier shall be used.
(ii)
when the responding party is NOT
sourcing the same service from an unaffiliated supplier, the authorities shall
request that the responding party submit the cost data incurred at the
affiliated supplier for providing that service.
(a) In this case, the responding party may submit a comparable price
charged by the affiliated supplier for the same service to unaffiliated
parties. In such case, the authorities
shall substitute the comparable price charged by the affiliated supplier to
unaffiliated parties for the actual sales expense by the affiliated supplier,
only if the actual sales expense by the affiliated supplier varies by more than
Y percent from the comparable price charged by the affiliated supplier for the
same service to unaffiliated parties; otherwise, the actual price charged by the affiliated supplier
shall be used.
(b) If the responding party does not submit the comparable price
mentioned above, the authorities shall substitute the cost incurred at the
affiliated supplier for the actual sales expense by the affiliated supplier,
only if the actual sales expense by the affiliated supplier is below the cost
incurred at the affiliated supplier for providing that service; otherwise, the actual price
charged by the affiliated supplier shall be used.
Further add a provision to clarify that the rules that we are proposing in connection with the costs data shall apply to sales expense data of affiliated suppliers of the major expense.
Furthermore,
clarify that the authorities do not have any discretion whether or not to
follow the above-mentioned procedures on a case-by-case basis.
Explanation:
This
proposal intends to avoid overly burdensome calculations of sales expenses (i.e., sales
expenses that are the subject of due allowance made in the comparison between
the export price and the normal value at the same level of trade, normally at
the ex-factory level). Sales expenses,
such as transportation expenses, charged by an affiliated party are sometimes
put under an extensive scrutiny by the authorities but more often than not,
they end up with relatively minor adjustment to the prices in a respondent’s
accounting record. This proposal clarifies that the authorities should not impose unnecessary
burdens on a respondent when the detailed examination of such expenses is
likely to result only in a minor adjustment and therefore does not materially
affect the margin of dumping for the respondent, regardless of whether the
sales expenses is for the due allowance to the normal value or export prices. Furthermore, the authorities should respect
the prices actually charged by an affiliated party and recorded in a respondent’s
accounting statement, unless the sales expenses significantly differ from the
comparable ones enough to be deemed unreliable.
This proposal also clarifies that the authorities should not force a
respondent to submit additional data pertaining to the affiliated party as long
as there is a comparable expense to examine the reliability of the recorded
expenses.
(3) Costs
by Affiliated Suppliers
Proposal:
With respect to costs (costs of
production, and administrative, selling, and general costs as provided in
Article 2.2.1), amend Article 2.2.1.1 to clarify that a responding party’s
costs for inputs provided by affiliated suppliers shall be based on the actual
prices charged to the responding party by the affiliated suppliers, unless the
input is a “major input” and the evidence on the record shows that the price of
the major input significantly differs from the comparable price charged by
unaffiliated suppliers for the same input or from the comparable price charged
by the affiliated supplier for the same input to unaffiliated parties, and that
the difference materially affects the costs calculation. Even in case there exist no comparable
prices, the price charged by affiliated suppliers shall be based on the actual
price charged to the responding party by the affiliated suppliers, unless the
major input is sold to the responding party at a price below the cost incurred
at the affiliated supplier for providing that input. More specifically:
(i) when the responding party is sourcing the
same input from both an affiliated supplier and an unaffiliated supplier, the
authorities shall substitute the comparable price charged by the unaffiliated
supplier for the actual price charged by the affiliated supplier, only if the actual
price charged by the affiliated supplier varies by more than T percent from the
comparable price charged by the unaffiliated supplier for providing the same
input; otherwise, the
actual price charged by the affiliated supplier shall be used.
(ii) when the responding party is NOT sourcing the same input from an
unaffiliated supplier, the authorities shall request that the responding party
submit the cost data incurred at the affiliated supplier for providing that
input.
(a) In this case, the responding party may submit a comparable price
charged by the affiliated supplier for the same input to unaffiliated
parties. In such case, the authorities
shall substitute the comparable price charged by the affiliated supplier to
unaffiliated parties for the actual price charged by the affiliated supplier,
only if the actual price charged by the affiliated supplier varies by more than
T per cent from the comparable price charged by the affiliated supplier
for the same input to unaffiliated parties; otherwise, the actual price charged by the
affiliated supplier shall be used.
(b) If the responding party does not submit the comparable price
mentioned above, the authorities shall substitute the cost incurred at the
affiliated supplier for the actual price charged by the affiliated supplier,
only if the actual price charged by the affiliated supplier is below the cost
incurred at the affiliated supplier for providing that input; otherwise, the actual price
charged by the affiliated supplier shall be used.
Further amend Article 2.2.1.1 to clarify that the rules that we are proposing in connection with the costs data shall apply to cost data of affiliated suppliers of the major inputs.
Furthermore, clarify that the authorities do not have any discretion whether or not to follow the above-mentioned procedures on a case-by-case basis.
Explanation:
Responding
parties have borne heavy burdens to respond to the authorities’ unnecessarily
extensive questions on their affiliated suppliers. The burden on a responding party must be balanced with the need of the authorities for additional information.
In the same way as sales expenses, in order to balance the burden on a
responding party with the authorities’ need for additional information, we are
proposing that the AD Agreement shall clarify the conditions for the
authorities to request additional cost data; the major
input accounts for at least a specified percentage of the total costs
under consideration and
the price charged for the major input significantly differs from a comparable
price charged by unaffiliated parties. Such examination should not be done by the authorities arbitrarily
categorizing the cost items, but should be done in accordance with the cost
accounting system adopted by the responding party, which is supposed to be in
accordance with the GAAP. This proposal also provides the responding party with the alternative of
using another cost data which the
affiliated party charges to unaffiliated parties for the same supply, should the responding party choose not to submit the relevant cost
information. The goal should be to find
a reliable but easier way
to obtain an alternative, and not to maximize the
burdens on respondents.
(4) Export
to Affiliated Parties (CEP)[3]
Proposal:
Explanation:
Under the
current practice, the excessive use of CEP has led to greater burdens on respondents
and more frequent abuses by authorities in making asymmetrical comparisons.
In order to clarify conditions where CEP should be used, this proposal
is intended to specify what examination should be conducted with respect to the
export sales to an affiliated party. The
main idea of this proposal is similar to that for the home market sales to an
affiliated party, and thus, export sales to an affiliated party should be under
the examination that we propose for the purpose of analyzing the reliability of
the prices of affiliated party transactions, because the affiliation by itself
is not a sufficient condition to deem unreliable the prices of such
transactions. Since the export sales are
the very subject of anti-dumping investigation, however, they should not be
excluded from the calculation of dumping margins, although they should be in
the case of home market sales. The
export sales, instead, should be constructed based on the basis of the price at
which the imported products are first resold to an independent buyer, as is set
forth in Article 2.3. Thus, this
proposal clarifies the condition where CEP should be used, and is intended to
avoid the excessive use of CEP.
(5) Treatment of Two Affiliated
Parties into a Single Responding Party (So-Called “Collapsing”)
Proposal:
Add a provision to prohibit the
establishment of a single margin of dumping for two or more affiliated parties by treating such parties as if they were a single responding party.
Explanation:
There are circumstances in
which affiliated companies produce the same product to export to the importing
Member. In such a case, certain
authorities treat these affiliated entities as if they were a single responding
party. In other words, the authorities
“collapse” them to establish a single margin of dumping for these entities. In many cases, however, the two entities have
independent operations with independent decision-making with respect to
production, pricing and exporting. The
entities sometimes actually compete with each other. In such cases, there is no reason to
investigate these entities collectively and establish a single margin of
dumping for them. As such, collapsing is
not appropriate and shall be prohibited.
__________
[1] The issue of affiliation in relation to the definition of domestic industry is not within the scope of this proposal.
[2] The appropriate level of the percentage figures in this document (“W”, “Y”, “T” and “V”) will be discussed at a later stage in the negotiation.
[3] The existence of a “compensatory arrangement” between two parties is unrelated to whether such parties are “affiliated”. The issue of the calculation of the normal value and the export price in a case where there is a compensatory arrangement or other contractual arrangements, which could affect the reliability of the price, whether between affiliated or unaffiliated parties, is not within the scope of this proposal and will be discussed in a separate paper.