67 FR 35961, May 22, 2002 C-337-807 Investigation POI: 2000 Public Document MEMORANDUM DATE: May 15, 2002 TO: Faryar Shirzad Assistant Secretary for Import Administration FROM: Richard W. Moreland Deputy Assistant Secretary, Group I Import Administration SUBJECT: Issues and Decision Memorandum for the Final Determination in the Countervailing Duty Investigation of IQF Red Raspberries from Chile ________________________________________________________________________ SUMMARY On October 16, 2001, the Department of Commerce ("the Department") published the preliminary determination in this investigation. (1) The "Analysis of Programs" and "Subsidies Valuation Information" sections below describe the subsidy programs and the calculation methodologies used to calculate the benefits from these programs. We have analyzed the comments submitted by the interested parties in the "Analysis of Comments" section below. We recommend that you approve the positions we have developed in this memorandum. Scope The products covered by this investigation are imports of IQF whole or broken red raspberries from Chile, with or without the addition of sugar or syrup, regardless of variety, grade, size or horticulture method (e.g., organic or not), the size of the container in which packed, or the method of packing. The scope of the investigation excludes fresh red raspberries and block frozen red raspberries (i.e., puree, straight pack, juice stock, and juice concentrate). The merchandise subject to this investigation is classifiable under 0811.20.2020 of the Harmonized Tariff Schedule of the United States ("HTSUS"). Although the HTSUS subheading is provided for convenience and customs purposes, the written description of the merchandise under investigation is dispositive. Background Information This investigation covers three responding companies, Fruticola Olmue S.A. ("Olmue"), Exportadora Frucol Ltda. ("Frucol") and Comercial Fruticola S.A. ("Comfrut") (collectively "the responding companies") and the Government of Chile ("GOC"). Subsidies Valuation Information Benchmarks for Loans To calculate the countervailable benefit from loans, we have used U.S. dollar borrowing rates in Chile, as submitted by the GOC. We have used dollar rates, in accordance with section 351.505(a)(2)(i) of our regulations, because the loans and interest in question were denominated in U.S. dollars. In accordance with the Department's position in Comment 1, below, we have revised our methodology in order to use the correct U.S. dollar interest rate for any loans taken out beginning in 1998. Allocation Period In accordance with section 351.524(d)(2)(i) of our regulations, we have used a 12-year allocation period based on the Internal Revenue Service's 1977 Class Life Depreciation Range System. None of the responding companies disputed this allocation period. Attribution of Subsidies Section 351.525(a)(6) of our regulations directs that the Department will attribute subsidies received by certain affiliated companies to the combined sales of those companies. Based on our review of the responses, we find that "cross ownership" exists with respect to certain companies, as described below, and have attributed subsidies accordingly. Comfrut: Comfrut has responded on behalf of itself and two affiliated companies, Frutas y Hortalizas Del Sur ("Frusur") and Agricosa S.A. ("Agricosa"). Based on the proprietary details of the relationships between these companies, we determine that cross ownership exists with respect to these companies and that subsidies received by the three companies are properly attributed to the combined sales of the three companies. We further determine that cross ownership exists with respect to certain other companies affiliated with one or more of these companies and that those companies did not receive subsidies that were transferred to Comfrut, Frusur, or Agricosa. For a full discussion of these issues, see October 9, 2001 Proprietary Memorandum to the File, entitled "Attribution of Subsidies in CVD Investigation of IQF Red Raspberries from Chile." Frucol: Frucol has responded on behalf of itself and Sociedad Agricola Machicura ("Agricola Machicura"). Based on the proprietary details of the relationships between these companies, we determine that cross ownership exists with respect to these companies and that subsidies received by both are properly attributed to the combined sales of the two companies. We further determine that cross ownership exists with respect to certain other companies affiliated with Frucol and/or Agricola Machicura, and that those companies did not receive subsidies that were transferred to Frucol or Agricola Machicura. For a full discussion of these issues, see October 9, 2001 Proprietary Memorandum to the File, entitled "Attribution of Subsidies in CVD Investigation of IQF Red Raspberries from Chile." Olmue: Olmue has responded on behalf of itself and Tecnofrio Cautin S.A. ("Tecnofrio Cautin"). Based on the proprietary details of the relationships between these companies, we determine that cross ownership exists with respect to these companies and that subsidies received by both are properly attributed to the combined sales of the two companies. However, Olmue reported that Tecnofrio Cautin did not operate during the POI and did not use any of the programs during the POI. Therefore, we have based our calculations only on Olmue's subsidies and sales. We further determine that cross ownership exists with respect to certain other companies affiliated with Olmue and Tecnofrio Cautin, and that those companies did not receive subsidies that were transferred to Olmue or Tecnofrio Cautin. For a full discussion of these issues, see October 9, 2001 Proprietary Memorandum to the File, entitled "Attribution of Subsidies in CVD Investigation of IQF Red Raspberries from Chile." Analysis of Programs Program Determined To Be Countervailable Law No. 18,634 (Deferrals, Credits and Waivers for Capital Goods Purchases) Law Number 18,634, of August 5, 1987, established a three-pronged program related to purchases of capital equipment and subsequent export of products produced with that equipment. Under the first prong, referred to herein as the "duty deferral prong," both exporters and non-exporters are allowed to defer paying duties on designated capital goods that are imported. During the deferral period, the amount of duties owed is treated as a loan on which the producer is required to pay interest. Under the second prong of the program, referred to herein as the "fiscal credit prong," both exporters and non-exporters can apply for a fiscal credit when they purchase the same designated capital goods from domestic suppliers. The fiscal credit also functions as a loan on which the producer is required to pay interest. Under the third prong of the program, referred to herein as "the waiver prong," the deferred duties and fiscal credits, and the accrued interest can be waived. Eligibility for the waivers and the amounts of the waivers are dependent upon exportation. In November 1998, the waiver portion of Law 18,634 was eliminated. However, producers that had applied to receive benefits under Law 18,634 prior to that time continue to be eligible for waivers based on those applications. In Preliminary Negative Countervailing Duty Determination and Alignment of Final Countervailing Duty Determination With Final Antidumping Determination: Fresh Atlantic Salmon from Chile, 62 FR 61803 (November 19, 1997) ("Salmon - Preliminary Determination"), we analyzed the different prongs of Law 18,634 separately. We determined that the duty deferral prong was not specific within the meaning of section 771(5A) and, therefore, did not confer a countervailable benefit. Regarding the second prong, the fiscal credit for purchases of capital equipment produced in Chile, we found specificity and a countervailable subsidy. Our specificity determination was based on the requirement that the producer purchase the capital equipment from domestic sources (see section 771(5A)(C) of the Act). Finally, we found that the waiver prong of Law 18,634 provided a countervailable subsidy. The waivers were specific by virtue of being contingent upon exportation (see section 771(5A)(B) of the Act), and the benefit was a grant in the amount of the waiver. In Final Negative Countervailing Duty Determination: Fresh Atlantic Salmon from Chile, 63 FR 31437 (June 9, 1998) ("Salmon - Final Determination"), we applied a different analysis to Law 18,634. Instead of analyzing the individual prongs, we examined the program in its entirety. We determined that all benefits provided under Law 18,634, when viewed this way, constituted export subsidies because "their overarching purpose ... is to promote exports" (63 FR at 31442). In this proceeding, we are following the analytical framework used in Salmon - Preliminary Determination. This framework is most consistent with section 351.514(a) of our regulations, which states: ... the Secretary will consider a subsidy to be contingent upon export performance if the provision of the subsidy is, in law or in fact, tied to actual or anticipated exportation or export earnings, alone or as one of two or more conditions. Because the subsidies provided under the waiver prong differ from the subsidies provided under the other prongs of Law 18,634 and the eligibility criteria vary under the different prongs, we determine that the duty deferrals and fiscal credits are not contingent upon exportation or anticipated exportation. This is consistent with our treatment of this program in the Preliminary Determination. Duty Deferrals: A Chilean producer who imports capital equipment designated in Decree No. 506 (June 17, 1999) can apply to the Chilean Customs Service for a duty deferral. Payment of the deferred amount is staged, with equal installments due in the third, fifth and seventh years after importation. In addition to paying the deferred amount, the producer also pays interest at a rate set by the Central Bank of Chile. We determine that the duty deferral prong of Law 18,634 is not specific within the meaning of section 771(5)(A) of the Act. Duty deferrals are contingent neither upon exportation nor use of domestic goods as a matter of law, and Law 18,634 does not limit the industries in Chile that can receive duty deferrals. Moreover, information reviewed by the Department at verification indicates that duty deferrals are used by a wide variety of industries in Chile, and that the industry producing the subject merchandise does not receive a predominant or disproportionate share of the deferrals. See March 18, 2002 GOC Verification Report at 4. Therefore, we determine that the duty deferral prong under Law 18,634 does not confer a countervailable benefit. Fiscal Credits: Under this prong, companies purchasing domestically produced capital equipment designated in Decree No. 506 can borrow up to 73 percent of the amount of customs duties that would have been paid on the capital goods if they had been imported. The repayment of this fiscal credit, plus interest, is made according to the same schedule described above for duty deferrals. We determine that the fiscal credit prong of Law 18,634 is specific within the meaning of section 771(5A)(C) of the Act because receipt of the credit is contingent upon the use of domestic goods. We also determine that the fiscal credit is a direct transfer of funds (see section 771(5)(D)(i) of the Act) that provides a benefit in the amount of the difference between the interest the company pays on the fiscal credit and the interest the company would pay for a comparable commercial loan (see section 771(5)(E)(ii) of the Act). Therefore, we determine that the fiscal credit prong of Law 18,634 confers a countervailable subsidy. Olmue had fiscal credits outstanding during the POI. As Olmue reported in its December 5, 2001 submission, and the Department verified, Olmue reported its duty deferrals as fiscal credits and vice-versa. We have corrected our calculations accordingly. To calculate the benefit of these credits to Olmue, we treated the fiscal credits outstanding during the POI as long-term loans taken out at the time of importation. We used the benchmark rate described above in the "Benchmarks for Loans" section as the measure of what the recipient would have paid for comparable commercial loans. Applying the loan methodology described in section 351.505(c)(2) of our regulations, we calculated the interest savings received by Olmue in the POI. Olmue received fiscal credits for two pieces of capital equipment. One piece was used for all products produced by the company. Thus, we have divided the interest savings from this fiscal credit by Olmue's total sales. The other piece of capital equipment was used exclusively to produce non-subject merchandise. Therefore, we have not included the interest savings on this fiscal credit in the calculation of Olmue's benefit. On this basis, we determine that the subsidy under the fiscal credit prong of Law 18,634 is 0.00 percent ad valorem for Olmue. The GOC stated in its response that the fiscal credit prong of Law 18,634 is not an import substitution program. Instead, according to the GOC, this prong of the program is intended to encourage capital investment in Chile and to avoid a preference for imported capital goods resulting from the duty deferral prong. We stated in the preliminary determination that we would consider this claim further for our final determination, but noted that we addressed a similar claim by the GOC in Salmon - Final Determination (66 FR at 31442). In the salmon case, the GOC argued that the Department should look at the duty deferral and fiscal credit prongs of Law 18,634 as a single program. We disagreed, stating that to do so would amount to "picking and choosing which elements of the law should be combined in order to achieve the result that the loans to purchasers of domestic equipment are not specific" (see id.). No party submitted comments on this issue and we continue to find the logic of the salmon case compelling. Waivers: Chilean producers that received duty deferrals and fiscal credits under Law 18,634 can have the duties and credits waived if the producers export merchandise manufactured with the capital equipment covered by the deferral or credit. Comfrut, Frucol and Olmue received waivers during the POI. We determine that the waiver prong of Law 18,634 is specific within the meaning of section 771(5A)(B) of the Act because receipt of the waivers is contingent upon exportation. We also determine that the waiver is a direct transfer of funds (see section 771(5)(D)(i) of the Act) that provides a benefit in the amount of the duty or fiscal credit waived (see section 351.508(a) of our regulations). Therefore, we determine that the waiver prong of Law 18,634 confers a countervailable subsidy. Consistent with Salmon - Preliminary Determination (unchanged in final), we have treated the waivers as recurring benefits (see 62 FR at 61805, and section 351.524( c)(1) of our regulations). Consequently, we have summed the waivers received in the POI and divided these by the appropriate export sales (all exports, all frozen exports, or raspberry exports) for both recipients. On this basis, we determine that the subsidy under the waiver prong of Law 18,634 is 0.16 percent ad valorem for Comfrut, 0.65 percent ad valorem for Frucol and 0.01 percent ad valorem for Olmue. Program Determined Not to Confer a Subsidy During the POI Fund for the Promotion of Agricultural Exports/ProChile Export Promotion Assistance Chile's Fund for the Promotion of Agricultural Exports (FPEA) co-finances up to 50 percent of the cost of export promotion activities. Companies can seek assistance from the FPEA for conducting market surveys and for projects that help the companies enter and remain in particular markets. The types of expenses that the FPEA will co-finance include: advertising and promotion, office space rental, studies, and operating expenses at trade fairs. Between 1995 and 1998, the FPEA operated under the direction of a committee including officials from the Ministry of Agriculture, ProChile (Chile's Export Promotion Bureau), and agricultural associations. Day-to- day operations were centralized at ProChile. Beginning in 1999, the National Contest for Export Promotion ("National Contest") was developed in order to allocate export promotion resources as effectively as possible. The Contest is open to persons exporting (or seeking to export) agricultural products, whether fresh, frozen or at different stages of processing. Once the plans are submitted, they are reviewed and ranked by ProChile, and the best are accepted. At verification, the GOC stated that of the three projects analyzed in the preliminary determination, the first and second were funded prior to the implementation of the procedures of the National Contest. The third project was funded subsequent to implementation of the National Contest, but was funded through the use of discretionary funds rather than being selected under the National Contest procedures. See GOC March 18, 2002 Verification Report at 6. None of the responding companies participated directly in export promotion programs co-financed by the FPEA through ProChile. However, two frozen food trade associations which include the responding companies among their members did participate in projects which were co-financed by the FPEA through ProChile. The first project, in 1998, supported the first meeting of the International Berries Association. The second project, also in 1998, supported publicity for a variety of IQF fruits and vegetables in Europe, Latin America, and North America. The third project, in 1999, supported the travel of three officials (not from the responding companies) to the second meeting of the International Berries Association. The respondents have argued that, because the subsidies in question were given to the industry association representing the responding companies rather than to the companies themselves, there is no financial contribution to the companies and, therefore, no countervailable subsidy. We disagree with respondents and have addressed this argument in Comment 2, below. Under section 351.514(b) of our regulations, government activities to promote exports do not confer a benefit if the activities consist of general informational activities that do not promote particular products over others. Based on the information in the GOC's response, we continue to find that the projects which were co-financed by the FPEA through ProChile promoted specific products, i.e., frozen raspberries. For further discussion, see Comment 2, below. Therefore, we determine that this assistance does not fall within the exception provided by section 351.514(b) of our regulations. Instead, we determine that the co-financing provided by the FPEA through ProChile confers a countervailable subsidy within the meaning of section 771(5) of the Act. The co-financing is specific within the meaning of section 771(5A)(B) of the Act because its receipt is tied to the anticipated exportation of merchandise covered by the project. Also, the co-financing is a direct transfer of funds from the GOC (see section 771(5)(D)(i) of the Act) providing a benefit in the amount granted (see section 351.504(a) of our regulations). We are treating this assistance as "non-recurring" based on the factors identified in section 351.524(c)(2) of our regulations. In particular, each project funded by the FPEA/ProChile requires a separate application and approval, and the projects represent one-time events. This is consistent with our treatment of export assistance provided by ProChile in Salmon - Preliminary Determination (62 FR at 61804-5) (unchanged in final). To calculate the countervailable subsidy, we used the allocation methodology described in section 351.524(b) of our regulations. Because the amounts approved in 1998 and 1999 were less than 0.5 percent of the value of appropriate exports in those years, we expensed the benefits in the years of receipt (see section 351.524(b)(2) of our regulations). We selected, as the "appropriate" exports, total berry exports from Chile for the two grants relating to meetings of the International Berries Association. For the grant related to IQF fruits and vegetables, we used total exports of IQF fruits and vegetables from Chile to Latin America, Europe and the United States. Based on the descriptions of these projects in the responses and our findings at verification, there is no indication that benefits were limited only to the exports of the member companies of the trade associations that received the funding. See March 18, 2002 GOC Verification Report at 8. Because all benefits received under this program were expensed in years prior to the POI, we find no countervailable subsidy to the subject merchandise. Program Determined to Be Not Countervailable Supplier Development Program The Supplier Development Program, which is administered by the Corporacion de Fomento de la Produccion ("CORFO"), was created in 1998. The purpose of the Supplier Development Program is to encourage the creation and consolidation of relationships between large companies and the small companies that supply them or sub-contract from them. Under this program, CORFO co-finances a two-phase project. In the first stage, the diagnostic stage, CORFO will fund up to 60 percent of the cost of analyzing the strengths and weaknesses of the supplier companies, and developing a plan for improvement. In the second phase, CORFO will fund up to 60 percent in the first year and 50 percent in subsequent years of the cost of carrying out the improvement plan. The maximum duration of the development phase is three years for non-agricultural producers and four years for agricultural producers. Despite the difference in the duration of support for agricultural and non-agricultural users, the ceiling for the amount CORFO can contribute to both groups is the same. We determine that the Supplier Development Program is not specific within the meaning of section 771(5)(A) of the Act. The provision of co-financing by CORFO for these projects is neither contingent upon exportation nor upon the use of domestic goods as a matter of law, and the laws or regulations of the program do not limit the industries in Chile that can apply for or receive the co-financing. Moreover, information submitted by the GOC indicates that co-financing under the Supplier Development Program is used by a wide variety of industries in Chile, and that the industry producing the subject merchandise does not receive a predominant or disproportionate share of the deferrals. See Exhibit 13 of the GOC August 20, 2002 questionnaire response and March 18, 2002 GOC Verification Report at 10-11. Therefore, we determine that the Supplier Development Program does not confer a countervailable benefit. Program Determined to Have Been Eliminated CORFO Export Credit Insurance Premium Assistance According to the GOC's response, and as verified by the Department, this program was terminated on January 19, 1998. In anticipation of the termination, CORFO's Credit Allocation Committee stopped granting contracts for this insurance in October 1997. Since the contracts had a one-year duration, all payments under the program would have been made by October 1998. Programs Determined Not To Have Been Used 1. CORFO Export Credit Financing 2. Law No. 18576 (Export Credit Limits) 3. Law No. 18480 (Simplified Duty Drawback) Analysis of Comments Comment 1: Benchmark Interest Rates The respondents argue that the Department applied an incorrect benchmark interest rate for fiscal credits taken out in 1998 and later in calculating the benefit under the fiscal credit portion of Law 18,634. According to the respondents, the fiscal credits under this program are U.S. dollar-denominated. However, the respondents state that the Department inadvertently applied a Chilean peso interest rate in calculating the benefit for this program. After correcting this error, the respondents claim there is no benefit from the program because the fiscal credit lending rate exceeds the benchmark rate. Department's Position: We agree with respondents that, starting in 1998, we used the incorrect benchmark interest rate to calculate the benefit of fiscal credits. We have revised our final calculations accordingly. Comment 2: Countervailability of ProChile Export Promotion Assistance Program The respondents argue that the Department should reverse its preliminary decision that the ProChile Export Promotion Program provided potentially countervailable subsidies to the responding companies in 1998 and 1999. First, the respondents argue that none of the responding companies received the funds in question and, therefore, received no financial contribution from the GOC. Second, respondents contend that two of the projects did not involve export promotion. Lastly, respondents state that the funds are used by a wide range of companies for a wide range of products. With regard to the first issue, respondents argue that while there was a direct transfer of funds, that transfer was between ProChile and FEPACH/AGEPCO (i.e., organizations established to represent the interests of certain agricultural-based industries, including the responding companies), not between ProChile and the responding companies. The respondents also argue that the funds FEPACH/AGEPCO received did not cover costs that otherwise would have been incurred by the responding companies. The respondents also argue that the three projects primarily funded "general informational activities" which, according section 351.514(b) of the Department's regulations, are not considered export subsidies. The respondents state that the Department found at verification that the two projects related to the first and the second meeting of the International Berry Association were not "intended to promote exports of the berries of the specific companies, but rather concentrated on creating a forum to exchange information between producers on issues such as technical problems, standardization, food safety, and sales promotion." March 7, 2002 GOC Verification Report at 6. Lastly, assuming that the Department finds that these projects are not export subsidies, the respondents argue that the Department verified that the funds disbursed under this program are available to a wide variety of industries, many not falling within the traditional "export promotion" category. The respondents argue that the Department examined lists of all the projects from 1995 to 2000 at verification, showing the use by a wide variety of industries. Department's Position: We disagree with respondents' position that there is no countervailable subsidy because the payments are made to the trade associations rather than the producers of the merchandise. At verification, FEPACH/AGEPCO officials stated that it defends and represents the interests of its members and that virtually all Chilean frozen fruit exporters constitute its members and, thus, control its activities. See March 18, 2001 GOC Verification Report at 8. It is reasonable, in our view, to treat funds received by a trade association as benefitting the members of the association and the products they produce. Although we do not believe that we are required to show that the responding companies would have borne the costs incurred by the association and underwritten by the government, international promotion of products is typically a cost that exporting companies face. With regard to the respondents' second point, we disagree that these projects were general informational activities, as that term is used in section 351.514(b) of the Department's regulations. The Department found, based on a review of materials associated with the three projects, that the projects were not intended to promote the specific berries of individual raspberry producers. However, based on the GOC's response and the Department's verification findings, it is clear that all three projects funded specific promotional activities associated with the Chilean frozen raspberry industry. This is in contrast to programs promoting a wide variety of a nation's products, and which the Department has found to be not countervailable because they are considered general export promotion (see, e.g., the Department's treatment of "Summer Harvest," in Salmon - Final Determination, 66 FR at 31441.) Because we have continued to find this program an export subsidy, we have not addressed the respondents' final argument. Recommendation Based on our analysis of the comments received, we recommend adopting all of the above positions and adjusting all related net subsidy calculations accordingly. If these recommendations are accepted, we will publish the final determination in the Federal Register. AGREE ____ DISAGREE ____ ______________________ Faryar Shirzad Assistant Secretary for Import Administration ______________________ (Date) _______________________________________________________________________ footnote: 1. Preliminary Negative Countervailing Duty Determination and Alignment of Final Countervailing Duty Determination With Final Antidumping Duty Determination: IQF Red Raspberries from Chile, 66 FR 52588 (October 16, 2001) (Preliminary Determination).