NOTICES

                        DEPARTMENT OF COMMERCE

                    International Trade Administration

   Leather Wearing Apparel From Argentina; Final Affirmative Countervailing Duty
                              Determination

                          Thursday, April 23, 1981

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 AGENCY: International Trade Administration, Department of Commerce.

 ACTION: Final Affirmative Countervailing Duty Determination.

 SUMMARY: On January 15, 1981, the U.S. Department of Commerce ("the Department")
 published a preliminary notice finding that the Government of Argentina provides
 subsidies within the meaning of the countervailing duty law on exports of leather
 wearing apparel.

 On March 13, 1981, the Department entered into a Suspension Agreement with the
 Government of Argentina. We continued the investigation at the request of the
 Government of Argentina.

 The Department has determined that the Government of Argentina provides benefits on
 the manufacture, production, 

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 and exportation of leather wearing apparel that
 constitute subsidies within the meaning of the countervailing duty law.

 EFFECTIVE DATE: April 23, 1981.

 FOR FURTHER INFORMATION CONTACT:

 Vince Kane, Import Administration Supervisor, Office of Investigations, International
 Trade Administration, Department of Commerce, 14th Street and Constitution
 Avenue, N.W., Washington, D.C. 20230, (202) 377-5414.

 SUPPLEMENTARY INFORMATION:

 Procedural Background

 On October 14, 1980, the Department received a petition in proper form from Ralph
 Edwards Sportswear, Inc., Cape Girardeau, Missouri. On behalf of U.S. producers of
 leather wearing apparel, the petitioner alleged that the Government of Argentina
 provides to manufacturers, producers, and exporters of leather wearing apparel certain
 benefits that are bounties or grants ("subsidies") within the meaning of Section 303 of the
 Tariff Act of 1930 (19 U.S.C. 1303) ("the Act"). In response, on November 14, 1980, the
 Department published a notice (45 FR 75251) stating that we were initiating a
 countervailing duty investigation of these imports. We added that because
 Argentina is not a "country under the Agreement" within the meaning of Section 701(b)
 of the Act (19 U.S.C. 1671(b)), Section 303 of the Act applies to this investigation and
 because leather wearing apparel imports are dutiable, there will be no injury
 determination by the International Trade Commisison (ITC).
 On January 15, 1981, the Department published a notice of "Preliminary Affirmative
 Countervailing Duty Determination" (46 FR 3582), finding that the "Reembolso" or
 payment of export and preferential financing programs were subsidies within the meaning
 of the countervailing duty law. The aggregate net amount of benefits was preliminarily
 determined as 33.99 percent ad valorem for leather wearing apparel and 23.99 percent
 ad valorem for parts and pieces of leather wearing apparel.
 On February 5, 1981, the Department and the Government of Argentina agreed to terms
 for a Suspension Agreement, including the continuation of the investigation. After the 30
 days required by the Department's regulations for consultation, the Suspension
 Agreement became effective.

 Imports Investigated

 The merchandise covered by this investigation is leather wearing apparel, currently
 classified in item number 791.76 of the Tariff Schedules of the United States (TSUS). This
 merchandise includes men's, boys', women's and girls' leather coats, jackets and other
 leather apparel (such as vests, pants, and skirts), as well as parts and pieces thereof.

 Programs Investigated

 The petitioner has alleged that exports of leather wearing apparel from Argentina to the
 United States benefit from four programs: a "reembolso" or payment on exports of leather
 wearing apparel and parts and pieces thereof; a reembolso or payment on exports of
 tanned leather; an income tax reduction plan; and a preferential financing program.
 We noted in our preliminary determination that manufacturers of leather wearing apparel
 were not eligible for the reembolso on exports of tanned leather and that the income tax
 reduction program had been abolished. We have since confirmed that these two programs
 are not in effect or used by the leather wearing apparel industry.

 Programs Found To Result in Payment of a Subsidy

 1. "Reembolso" program.

 The reembolso program was established in 1971. It authorized a refund, by cash payment
 on export, of taxes "that bear directly or indirectly" on exported products and/or their
 component raw materials for the purpose of promoting exports. The amount of the
 reimbursement is based on a percentage of the f.o.b. price of export shipments and varies
 by product. For leather wearing apparel, the reimbursement is 20% of the f.o.b. value; for
 parts and pieces of leather wearing apparel, it amounts to 10% of the f.o.b. value.
 In our preliminary determination in this case, we ruled that the reembolso was an export
 subsidy. At the time, we did not have detailed information upon which we could find the
 reembolso program a bona fide rebate of indirect taxes. Since our preliminary
 determination, we have collected and vertified more extensive information on the
 application of the reembolso to exports of leather wearing apparel. In light of this
 additional information, we have reexamined the contention of the Government of
 Argentina that the reembolso involves a refund of indirect taxes to exporters.
 Under U.S. countervailing duty law, the non-excessive rebate of indirect taxes borne
 by an exported product or on items physically incorporated into that product is not a
 subsidy. In order to determine whether a cash payment on export can be considered an
 indirect tax rebate, we look to see whether (1) the program involved operates for the
 purpose of rebating indirect taxes; (2) whether there is a clear link between eligibility for
 payments on exports and indirect taxes paid; and (3) whether the government has
 reasonably calculated and documented the actual tax incidence borne by the product
 concerned and has demonstrated a clear link between such tax incidence and the amount
 paid on export.
 The reembolso program is designed to refund taxes that "bear directly or indirectly on
 export products." The formulation is ambiguous; as a rule, we view taxes borne by a
 product as indirect and taxes on income, labor, etc. as direct. Further, under our
 countervailing duty law the rebate of only those indirect taxes which are assessed on
 the exported product on items physically incorporated into the exported product is
 permissible.
 Based on our review of the total tax incidence which the reembolso is designed to rebate,
 we are satisfied that the reembolso operates 'for the purpose of rebating indirect taxes'
 and therefore meets our first test. However, had the actual tax programs involved been
 more heavily weighted toward taxes, which may not be rebated on export without
 involving a subsidy, our conclusion might have been different.
 The fact that the Government of Argentina has designed the reembolso program for the
 express purpose of promoting exports does not affect our conclusion. We have
 consistently ruled that what a government may or may not hope to accomplish by a cash
 payment on export does not determine whether that cash payment operates as an
 indirect tax rebate. There is nothing contradictory about rebating indirect taxes for the
 express purpose of strengthening export performance.
 More difficult issues are posed, in this case, in the application of the second and third
 criteria that we apply to determine whether a program such as the reembolso can
 properly be considered an indirect tax rebate.
 The current rates for the reembolso were set in 1976. At the time, the Government of
 Argentina analyzed the steps of production, and value added at each stage, for each
 major sector (including leather wearing apparel) of Argentinian industry. The reembolso
 rate for each sector was then based on the estimated indirect tax incidence derived from
 this analysis. If an industry believed that the reembolso rate for its 

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 products was
 too low, a procedure was established under which that industry could petition for a rate
 increase. The petition has to include a detailed study of the taxes levied on the exports of
 the products involved. Before granting any rate increase, the Government would verify
 the tax analysis submitted.
 Our first question is whether this methodology for setting the reembolso rate establishes,
 of itself, the necessary linkage between (1) eligibility for the reembolso and indirect taxes
 paid, and (2) the amount of the reembolso and a reasonably calculated and documented
 tax incidence. We have concluded that it does not. The analysis done in 1976 by the
 Government of Argentina provided only a general model upon which the tax incidence
 for specific sectors could be estimated. Without more precise evidence of the indirect
 taxes levied on leather wearing apparel, we would not find that the requisite link exists
 between indirect taxes actually paid and the reembolso payments.
 Supplemental information has been provided. The Government of Argentina has
 prepared, and provided to the Department, detailed studies (one in 1978 and one in
 1980) of the tax incidence on leather wearing apparel products. When considered in
 conjunction with the more general 1976 study, these detailed reviews of specific taxes
 levied on leather wearing apparel products provide at least a minimum basis for our
 determination that the reembolso program does involve a bona fide tax rebate.
 The supplemental information which has been submitted shows that the taxes levied on
 finished leather wearing apparel products which the reembolso is designed to rebate total
 26.91% of the f.o.b. value of a typical leather garment. The taxes involved, and their rates,
 are identified with particularity.
 According to the submission of the Government of Argentina, the taxes break down in
 the following way for finished apparel:
 Taxes are claimed at five stages of production before the apparel manufacturing stage.
 Taxes on the livestock producers, herd collector, meat packer, hide buyer, and tanner
 amounted to 15.04 percent of the value of the apparel.
 the taxes and their rates are: 4.0% tax on agricultural production; 2.2% gross turnover
 tax paid at each stage; 1.0% to 1.5% municipal tax at each stage; 1.0% tax to national meat
 board; 0.8% Animal Health tax paid twice at different stages of production; A 40.37%
 weighted average of import duties paid by the tanner for raw materials (dyes, finishes,
 chemicals); 24.54% salary taxes paid by the tanner.
 Taxes are claimed at the apparel producing stage in the amount of 11.87% of the value of
 the exported garment. The taxes and their rates are: a 58.19% weighted average of import
 duties on components and materials; 24.54% salary taxes paid by apparel manufacturer;
 5% tax on administrative and overhead expenses; 1.3% municipal tax; 3.0% exportation
 taxes; 0.6% tax on foreign currency sales; 1.0% statistics tax; 0.2% contribution to
 Merchant Marine Fund, 1.0% for export contract's stamp tax, 0.2% for miscellaneous
 excise taxes and insurance.
 Under U.S. countervailing duty law (and the Subsidies/Countervailing Measures Code
 negotiated under auspices of the GATT in the Tokyo Round of multilateral trade
 negotiations) prior stage cumulative indirect taxes may be remitted only if such taxes are
 levied on the exported goods or goods that are physically incorporated in the exported
 product. Not all of the taxes identified by the Government of Argentina meet that test.
 The reembolso involves a rebate of prior stage cumulative indirect taxes. Of the taxes
 listed, the rebate of salary taxes at the tannery and apparel manufacturing stage and
 administrative and overhead expense taxes at the apparel manufacturing stage--a total of
 4.62% of the f.o.b. value of finished leather wear apparel--do not meet this physical
 incorporation standard.
 We have also disallowed claims for duty paid on certain raw materials. In their tax
 calculations, the Government of Argentina assumed that 100% of most raw materials
 used in producing leather wearing apparel were imported and subject to import duties.
 However, certain of these materials are produced locally. Where we believe that a raw
 material is produced in Argentina and we have seen no evidence that Argentina's
 leather wearing apparel industry relies primarily on imports, we have not accepted the
 assumption upon which the Government of Argentina has based its calculations. On this
 basis, we have disallowed 5.31% of the claimed tax incidence.
 Thus, of the total 26.91% tax incidence claimed by the Government of Argentina on
 finished apparel, we have disallowed 9.93% and allowed 16.98%. While we accept the
 reembolso as a program to rebate indirect taxes, we have also found that, as it applies to
 exports of finished leather wearing apparel, it clearly involves a subsidy element.
 Based upon Commerce Department policy most recently applied in the case of Certain
 Textiles and Textile Mill Products from India, the subsidy element is the amount by which
 the reembolso payment exceeds the total of allowable indirect taxes, which in this case is
 3.02 percent for finished leather wearing apparel. In the case of parts and pieces
 receiving a 10% reembolso, the Department has determined that the allowable indirect
 tax level is 16.91%. Based on this analysis there is no subsidy element on exports of parts
 and pieces under the reembolso program.
 We have followed precedent in this case by limiting the subsidy amount of the reembolso
 to the amount by which the reembolso rate exceeds the total incidence of allowable
 indirect taxes we have found covered by the program. However, insofar as such an
 approach assumes (without any factual basis for doing so) that the reembolso is meant to
 rebated such allowable taxes in their entirety rather than rebate the allowable taxes in the
 proportion that such taxes bear to the total taxes covered by the program, we risk
 backing into an offset policy.
 Accordingly, we are considering a policy for future cases (and subsequent reviews of
 existing cases) under which programs like the reembolso (i.e., programs designed to
 rebate a pool of taxes, some of which are "allowable" but others of which are not
 "allowable") would involve a subsidy element equal to that portion of the export payment
 which the amount of "disallowable" taxes covered by the program bears to the total taxes
 covered. Thus, for example, if a payment on export of $12 were designed to rebate an
 aggregation of $20 taxes of which one third were not indirect taxes which are rebatable
 under our countervailing duty law, the subsidy element of the $12 payment would be
 $4.

 Preferential Financing Program

 Argentina has a export financing program providing a preferential interest rate for U.S.
 dollar denominated loans at 1% interest. When converted to a local currency loan, with
 adjustment for exchange rate devaluation, the preferential interest rate was 24.43% in
 1980.
 This program makes available to exporters pre-export funds, for a period of up to 180
 days, to finance production. The funds are provided by the Central Bank Argentina and
 administered through private commercial banks to individual corporate borrowers. The
 Central Bank limits its financial participation to a percentage of the export's f.o.b. value.
 For leather wearing apparel, the percentage is 55 percent. The repayment must come
 from export 

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 sales and, for leather wearing apparel, must take place within 60
 days of the effective export date.
 To calculate the actual benefit of this financing program we compared the relative costs of
 loans under the program to loans available from banks at existing commercial rates. For
 most firms, this involved the rate for loans in local currency. For one, we found that U.S.
 dollar financing was commercially available. We then multiplied the difference in rates by
 the loan amount used under the program. This total was then divided by total exports to
 the U.S. yielding an ad valorem benefit rate.
 We have determined that commercially available loans in local currency had an interest
 rate of 100.4 percent in 1980. Comparing this with the 23.43% preferential financing rate
 when the dollar denominated loan is converted to a peso loan, we have found an effective
 interest rate benefit of 75.97 percent. This rate, annualized, multiplied by the loan
 amount made available to exporters to the U.S., and divided by total leather wearing
 apparel exports to the U.S., yields an ad valorem benefit of 4.86% percent.
 We found that one firm, Comercio Internacional, has alternative foreign commercial
 sources of financing pegged to the U.S. dollar.
 Interest rates for these loans are U.S. prime plus two percentage points for intermediation
 charges. In 1980, this rate was 13 percent. We deduct 1.0 percent (adjusted nominal cost
 of the dollar denominated loans under the preferential financing) to calculate the benefit
 to borrowers under the program. Multiplying this the dollar-pegged, beneficial interest
 rate, as we did the loans domestically available, we calculated a benefit of .77 percent ad
 valorem.

 Final Determination

 In accordance with Section 303 of the Act (19 U.S.C. 1303, 1671e) and 355.36 of the
 Department of Commerce Regulations (19 CFR 355.36) I hereby determine that
 Government of Argentine provides manufacturers, producers, and exporters of leather
 wearing apparel subsidies within the meaning of Section 303 of the Tariff Act.
 The aggregate net amount of these subsidies equals 7.88 percent on leather wearing
 apparel to the United States and 4.86 percent on parts and pieces, consisting of the
 following subsidy amounts:
 TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE   
 The subsidy for Comercio Internacional yielded a lower rate due to the lower financing
 subsidy. For Comercio Internacional the total amount of the subsidies equals 3.99
 percent for leather wearing apparel and .77 percent for parts and pieces of leather
 wearing apparel.
 In the event the March 13, 1981, Suspension Agreement is not adhered to by the
 Government of Argentina, countervailing duties in the amount of 7.88 percent for
 leather wearing apparel and 4.86 percent for parts and pieces of leather wearing apparel
 will be assessed exports except those from Comercio Internacional. Exports from
 Comercio International will be assessed at 3.99 percent for leather wearing apparel and
 .77 percent for parts and pieces of leather wearing apparel.

 John D. Greenwald,

 Acting Assistant Secretary for Trade Administration.

 April 20, 1981.

 [FR Doc. 81-12222 Filed 4-22-81; 8:45 am]

 BILLING CODE 3510-25-M