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Lawyers, other representatives, expert(s), tribunal’s secretary

Report of the Panel

I. INTRODUCTION

1.1.
On 10 November 2000, the European Communities requested consultations with the United States under Article 4 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (the "DSU"), Article XXII of the General Agreement on Tariffs and Trade 1994 (the "GATT 1994") and Article 30 of the Agreement on Subsidies and Countervailing Measures (the "SCM Agreement"). The European Communities' request was related to the continued application by the US Department of Commerce of countervailing duties based on its "change in ownership"methodology which consisted of a presumption that non-recurring subsidies granted to a former producer of goods, prior to a change in ownership, "pass through" to the current producer of the goods following the change in ownership.1
1.2.
Consultations took place in Geneva on 7-8 December 2000, but the parties failed to reach a mutually satisfactory solution. On 1 February 2001, the European Communities requested further consultations with the United States.2 Further consultations took place in Geneva on 3 April 2001, but the parties did not reach a mutually satisfactory solution.
1.3.
On 8 August 2001, the European Communities requested the Dispute Settlement Body (the "DSB") to establish a panel, pursuant to Articles 4 and 6 of the DSU, Article 30 of the SCM Agreement and Article XXII of the GATT 1994 with respect to the practice by the United States of imposing countervailing duties on certain products exported from the European Communities "without establishing the existence of a financial contribution or a benefit to the producers under investigation and hence the existence of a countervailable subsidy as defined in the SCM Agreement." These duties had been imposed or maintained notwithstanding privatizations or changes of ownership in reliance, inter alia, on Section 771(5)(F) of the Tariff Act 1930, as amended, (19 USC Section 1677(5)(F)) and according to the European Communities were not based on an analysis of the existence of a countervailable subsidy benefiting the producer concerned during the period of investigation or review.3
1.4.
At its meeting on 10 September 2001, the DSB established a panel in accordance with Article 6 of the DSU. At that meeting, the parties agreed that the Panel should have standard terms of reference. The terms of reference of the panel were, therefore, the following:

"To examine, in the light of the relevant provisions of the covered agreements cited by the European Communities in document WT/DS212/4, the matter referred to the DSB by the European Communities in that document, and to make such findings as will assist the DSB in making the recommendations or in giving the rulings provided for in those agreements."4

1.5.
On 25 October 2001, the European Communities requested the Director-General to determine the composition of the panel, pursuant to paragraph 7 of Article 8 of the DSU. This paragraph provides:

"If there is no agreement on the panelists within 20 days after the date of the establishment of a panel, at the request of either party, the Director-General, in consultation with the Chairman of the DSB and the Chairman of the relevant Council or Committee, shall determine the composition of the panel by appointing the panelists whom the Director-General considers most appropriate in accordance with any relevant special or additional rules or procedures of the covered agreement or covered agreements which are at issue in the dispute, after consulting with the parties to the dispute. The Chairman of the DSB shall inform the Members of the composition of the panel thus formed no later than 10 days after the date the Chairman receives such a request."

1.6.
On 5 November 2001, the Director-General accordingly composed the Panel as follows:

Chairman: Mr. Gilles Gauthier

Members: Ms. Marie-Gabrielle Ineichen-Fleisch

Mr. Michael Mulgrew

1.7.
Brazil, India and Mexico reserved their rights to participate in the panel proceedings as third parties.
1.8.
The Panel met with the parties on 19-21 February 2002 and 20-21 March 2002. It met the third parties on 20 February 2002. The Panel sent questions to the parties on 25 February 2002 and provided additional questions to the parties during the second substantive meeting.
1.9.
The Panel submitted its Interim Report to the parties on 13 May 2002. The Panel submitted its Final Report to the parties on 19 June 2002.

II. FACTUAL ASPECTS

A. UNITED STATES' COUNTERVAILING DUTY DETERMINATIONS COVERED BY THIS DISPUTE

2.1.
The European Communities has requested the Panel to rule on the WTO-consistency of 12 countervailing duty determinations against imports of certain steel products originating in the European Communities. The imposition of countervailing duties in these 12 determinations were based on the application by the US Department of Commerce of two different methodologies (the so‑called "gamma" and "same person" methodologies) used to assess the impact of a change in ownership, (in all 12 cases before the Panel) via privatization, in the determination of the existence of subsidization in respect of the privatized producer; specifically whether non-recurring subsidies bestowed prior to the change in ownership (privatization) remained countervailable against imports from the privatized producer. From these 12 determinations, six are original investigations Stainless Sheet and Strip in Coils from France (C-427-815) (Case No. 1); Certain Cut-to-Length Carbon Quality Steel from France (C-427-817) (Case No. 2); Certain Stainless Steel Wire Rod from Italy (C-475-821) (Case No. 3); Stainless Steel Plate in Coils from Italy (C-475-823) (Case No. 4); Stainless Steel Sheet and Strip in Coils from Italy (C-475-825) (Case No. 5); Certain Cut-to-Length Carbon-Quality Steel Plate from Italy (C‑475-827) (Case No. 6); two are administrative reviews Cut-to-Length Carbon Steel Plate from Sweden (C‑401-804) (Case No. 7); Grain-oriented Electrical Steel from Italy (C-475-812) (Case No. 12) and four are sunset reviews Cut-to-Length Carbon Steel Plate from United Kingdom (C-412-815) (Case No. 8); Certain Corrosion-Resistant Carbon Steel Flat Products from France (C‑427‑810) (Case No. 9); Cut-to-Length Carbon Steel Plate from Germany (C‑428-817) (Case No. 10); and Cut-to-Length Carbon Steel Plate from Spain (C-469-804) (Case No. 11).5 A table describing these determinations is included in Annex A.
2.2.
In two out of these 12 cases, the Court of International Trade (CIT), in prior court appeals, expressly requested that the US Department of Commerce determine if the privatization at issue was at arm's length and for fair market value. The companies involved were British Steel (Case No. 8, Cut-to-Length Carbon Steel Plate from United Kingdom (C-412-815)) and Dillinger AG (Case No. 10, Cut-to-Length Carbon Steel Plate from Germany (C-428-817)). In 1995, in the context of a court remand, the US Department of Commerce determined that the British Steel privatization was at arm's length, for fair market value and consistent with commercial considerations because British Steel shares were offered to private investors world-wide (a) the offering price was based on valuations by independent consultants; (b) private investors purchased nearly the entire share offering; (c) similar findings were made for Dillinger.6
2.3.
Both parties agree that the changes in ownership relevant to this dispute only concern the privatization of state-owned companies, i.e. the change in ownership from government to private hands. All the privatizations concerned by this dispute involved a full change in ownership in the sense that in all these 12 cases, governments had sold all, or substantially all, their ownership interests and, clearly, had no longer any controlling interests over the privatized producers.7
2.4.
The following factual information regarding these 12 countervailing duty determinations and the relevant privatizations is based on evidence submitted by the European Communities commented by the United States, including references from the twelve determinations submitted as exhibits by the European Communities.

1. Original investigations

(a) Original investigations covered by this dispute

(i) United States Countervailing Duties on Imports of Stainless Steel Sheet and Strip in Coils from France (Case No. 1)

2.5.
This case concerns the imposition of countervailing duties on imports of stainless steel sheet and strip in coils from France, produced and exported by Usinor -Sacilor S.A. (Usinor). The US case number is C-427-815; (64 Fed. Reg. 30774 of 29 June 1999). On 8 June 1999, the US Department of Commerce published its final determination imposing a countervailing duty rate of 5.38 per cent ad valorem on imports produced by Ugine S.A., a wholly owned subsidiary of Usinor.8
2.6.
In July 1995 the privatization of Usinor began. Pursuant to the French privatization law, Usinor Sacilor (and shares thereof) was valued for privatization purposes by the French Privatization Commission (the "FPC"), an independent body charged with valuing companies designated for privatization. The FPC's valuation analysis used three methods: (i) comparison to the stock market values of other European steel producers; (ii) evaluation of net liquidity flows; and (iii) estimated value of the company's net re-evaluated assets. Based on the FPC's valuation opinion, the French Minister of Economy and Finance established share prices for the various Usinor share offerings. The Commission's valuation of the company was consistent with the range of values for the company established in a report prepared by Banque S.G. Warburg and Crédit Lyonnais.9 At the same time, Usinor Sacilor offered additional shares for sale in the form of a capital increase. All shares were sold through a public offering of shares which consisted of a French public offering, an international public offering, and an employee offering. In accordance with the French privatization law, a certain portion of the shares were also sold to a group of so-called "stable shareholders", some of which were government-owned banks and other entities.10 After the July 1995 public offering, the French Government held 9.8 per cent of Usinor's shares while Crédit Lyonnais retained approximately 3 per cent.11
2.7.
The privatization continued throughout the years 1996 and 1997. At the end of the privatization, the stable shareholders held approximately 14 percent of Usinor's total shares, 10 per cent of which were held by government- owned or controlled entities.12 During 1997 and 1998 the French Government divested itself of the remaining shares which it held.13
2.8.
The margins found by the US Department of Commerce in its final determination were attributable to non-recurring subsidies found to have been received by the state-owned Usinor Sacilor (as Usinor was then known) in the 1980s. The US Department of Commerce found, on the basis of its gamma methodology14, that these subsidies continued to benefit the company during the 1997 period of investigation. Usinor claimed that it had been privatized in 1995 by means of an arm's length, fair market value sale of shares.15 Usinor further claimed that pre-privatization subsidies accounted for all but 0.10 per cent of the subsidy margin.
2.9.
On 1 October 2000 Usinor challenged aspects of the US Department of Commerce's final determination, including its treatment of Usinor's privatization, in the CIT. During the litigation, the US Department of Commerce requested, and was granted, a remand to reconsider the effect of the US Court of Appeals for the Federal Circuit's decision in Delverde Srl v. United States (Delverde III)16 on the US Department of Commerce's treatment of the effect of Usinor's privatization on prior non-recurring subsidies. On 20 December 2000, the US Department of Commerce reported its final remand redetermination to the CIT, which Usinor challenged. In its remand determination in the ongoing appeal before the CIT, the US Department of Commerce applied the same person methodology and focused on whether the change in ownership of Usinor resulted in a new legal person.17 The US Department of Commerce found that Usinor had received a financial contribution and a benefit notwithstanding the change in ownership because Usinor was the same person before and after the privatization. On 4 January 2002, the CIT issued a remand order in which it found the same person methodology inconsistent with the US statute.18

(ii) United States Countervailing Duties on Imports of Certain Cut-to-Length Carbon Quality Steel Plate from France (Case No. 2)

2.10.
This case concerns the imposition of countervailing duties on imports of certain cut-to-length carbon quality steel plate from France, produced and exported by Usinor Sollac S.A. (Usinor) and GTS Industries S.A. (GTS). The US case number is C-427-817; (64 Fed. Reg. 73277 of 29 December 1999). On 29 December 1999, the US Department of Commerce published its final determination imposing countervailing duties to Usinor and GTS of 5.56 per cent and 6.86 per cent ad valorem respectively.19
2.11.
As regards the margins found by the US Department of Commerce for Usinor in its determination, these were mainly attributable to non-recurring subsidies found to have been received by Usinor during State-ownership in the 1980s. Usinor claimed that it was privatized in 1995 by means of an arm's length, fair market value sale of shares. The US Department of Commerce found, on the basis of its gamma methodology20, that these subsidies continued to benefit the company during the 1998 period of investigation. Usinor claimed that these pre-privatization subsidies accounted for all but 0.10 per cent of the subsidy margin.
2.12.
In the same determination the US Department of Commerce imposed a countervailing duty rate of 6.86 per cent on products exported by GTS Industries (GTS). The US Department of Commerce assigned a countervailing duty rate of 6.86 per cent allocated pro rata to GTS based on financial contributions that were given to the Usinor group of which GTS was a member. The US Department of Commerce concluded that the conversion of the group's consolidated debts owed to the French Government, denominated as "Loans with Special Characteristics" and of "Steel Intervention Fund" bonds into shares of common stock constituted countervailable equity infusions, which were treated as non-recurring grants.21 The US Department of Commerce applied its gamma change in ownership methodology.22 GTS, Usinor, the Government of France, and the European Communities provided evidence that Usinor had been privatized in 1995 at arm's length and for fair market value, but the US Department of Commerce never made any finding on whether the privatization was for fair market value.
2.13.
At the time of Usinor's privatization, GTS was owned 100 per cent by AG der Dillinger Hüttenwerke (Dillinger), and Usinor held 70 per cent of Dillinger's parent company DHS – Dillinger Hutte Saarstahl (DHS). In July 1995, the French Government sold 90.2 per cent of Usinor's shares in a public offering on the French and International Stock Exchanges (described in Case No. 1 above). In April 1996, Usinor reduced its interest in DHS to 48.75 per cent. As a result of this reduction, the US Department of Commerce found in its final determination that GTS was no longer under the control of Usinor but it continued to benefit from the subsidies previously granted to Usinorand thus GTS' products were subject to countervailing duties.
2.14.
On 7 April 2000, GTS filed a complaint with the US CIT On 24 August 2000, the CIT remanded the case to the US Department of Commerce to determine whether the Delverde III decision had any applicability on the GTS proceeding. In its remand determination in the ongoing appeal before the CIT, the US Department of Commerce did not investigate further whether any of the privatization transactions were at arm's length and for fair market value but focused exclusively on whether the change in ownership of Usinor resulted in a new legal person. In this respect the US Department of Commerce concluded that whether the owners of the newly privatized Usinor paid fair market value for the company in an arm's-length transaction based upon commercial considerations was not relevant to its analysis of previously-bestowed subsidies.23 The US Department of Commerce found that Usinor had received a financial contribution and a benefit notwithstanding the change in ownership because Usinor was the same person before and after the privatization. On 4 January 2002, the CIT issued its judgment on the remand redetermination in which it found the same person methodology inconsistent with US statute24.

(iii) United States Countervailing Duties on Imports of Certain Stainless Steel Wire Rod from Italy (Case No. 3)

2.15.
This case concerns the imposition of countervailing duties on imports of Certain Stainless Steel Wire Rod from Italy, produced and exported by Cogne Acciai Speciali S.r.l. (CAS) The US case number is C-475-821; (63 Fed. Reg. 40474 of 29 July 1998). On 7 January 1998, the US Department of Commerce published its final determination imposing a countervailing duty of 22.22 per cent ad valorem on imports of the product concerned from CAS.25
2.16.
Until the early 1990s, the company was owned by the Italian State, at first directly by a Government-owned holding company, Istituto per la Ricostruzione Industriale (IRI) and thereafter by IRI subholding companies, Finsider S.p.A., Deltasider S.p.A. or ILVA S.p.A. On 31 December 1992 (CAS) came into being. All shares in CAS were owned by Cogne S.p.A., also a state-owned company. From this date, CAS assumed the ongoing operations of the Cogne facility. As a part of the privatization, a public offer for the sale of CAS was prepared. Notices were published in Italian and foreign newspapers soliciting purchase offers. The result of this process was that expressions of interest were received from ten private industrial or financial bidders. On 27 December 1993, an agreement was signed between Cogne S.p.A. and GE.VAL. S.p.A. for the purchase of all shares of CAS. The total price paid by GE.VAL. for CAS was higher than the amount that had been independently determined as Cogne's value by an independent expert in 1992. Since the public sale of the company, the Italian State has held no ownership interest of any kind in CAS.
2.17.
The US Department of Commerce assigned a rate of 22.22 per cent ad valorem to CAS based almost exclusively on pre-privatization financial contributions to the ILVA group that were conferred before the creation of CAS. The US Department of Commerce applied its gamma change in ownership methodology.26 According to the US Department of Commerce's calculations provided to CAS, at least 21.74 per cent of the total 22.22 per cent margin was composed of CAS' pro-rata share of subsidies granted to the state-owned ILVA group.

(iv) United States Countervailing Duties on Imports of Stainless Steel Plate in Coils from Italy (Case No. 4)

2.18.
This case concerns the imposition of countervailing duties on imports of Stainless Steel Plate in Coils from Italy, produced and exported by Acciai Speciali Terni S.p.A. (AST).27 The US case number is C-475-823; (64 Fed. Reg. 15508 of 31 March 1999). On 31 March 1999, the US Department of Commerce published its final determination imposing a countervailing duty rate of 15.16 per cent ad valorem on products exported by AST.28
2.19.
In September 1993, Istituto per la Ricostruzione Industriale (IRI) endorsed a plan for the market privatization of ILVA's core businesses, and the ILVA's specialty steels division was separately incorporated, first as a limited liability company (S.r.l.) and then as a stock company (S.p.A.), with all shares in this stock company – AST S.p.A. – initially owned by IRI. IRI's privatization plans were issued under the legal control of the European Commission, which set important conditions for the sale in a binding decision of April 1994. IRI prepared a public offering for the sale of AST. Notices were published in Italian and foreign newspapers soliciting purchase offers. IRI appointed the international investment firm Barclays de Zoete Wedd (BZW) as its financial adviser in the privatization process. It is reported that two other independent financial advisers were retained to conduct financial appraisals of the likely fair market value of AST. The result of this process was that expressions of interest were received from 19 private industrial or financial bidders.
2.20.
A binding offer of purchase was accepted by IRI on 30 June 1994. On 14 July 1994, a purchase agreement was signed between IRI and KAI Italia S.r.l. (a holding company created by a German-Italian consortium for this purpose) for the purchase of all shares of AST S.p.A. The total price paid by KAI for AST was significantly greater than the amounts that had been independently determined as AST's value by each of IRI's independent valuation experts and financial advisers to the privatization.
2.21.
The above duty is reported to be the result of the pro-rata allocation to AST of the pre‑privatization financial contributions to the state-owned ILVA group, of which AST was a member. The determination was made on the basis of the gamma methodology.29 The US Department of Commerce found irrelevant the evidence placed on the administrative record by AST, the Government of Italy, and the European Communities that the company had been privatized in 1994 at arm's length for fair market value when sold at public auction by the Government of Italy to the highest bidder, a private consortium led by German steelmaker Krupp AG Hoesch-Krupp. According to the US Department of Commerce's calculations provided to AST, at least 13.42 per cent of the total 15.16 per cent margin was composed of AST's pro-rata share of the subsidies granted to the state-owned ILVA group, of which AST was a member.
2.22.
The US Department of Commerce's final determination in this investigation was challenged by AST in the CIT on 10 June 1999.30 On 14 August 2000, the CIT remanded AST's appeal back to the US Department of Commerce in light of the Delverde III ruling. The US Department of Commerce applied its new same person test in the remand proceeding and did not consider any evidence regarding the arm's length and fair market value of the privatization of AST.31 The application of the new methodology resulted in an increase of the countervailing duty applicable to AST from 15.16 per cent to 17.25 per cent ad valorem. AST disputed this remand redetermination before the CIT. On 1 February 2002, the CIT rendered its opinion where it rejected the US Department of Commerce's findings.

(v) United States Countervailing Duties on Imports of Stainless Steel Sheet and Strip in Coils from Italy (Case No. 5)

2.23.
This case concerns the imposition of countervailing duties on stainless steel sheet and strip in coils from Italy, produced and exported by Acciai Speciali Terni S.p.A. (AST).32 The US case number is C-475-825; (64 Fed. Reg. 30624 of 8 June 1999). The US Department of Commerce published its final determination imposing a countervailing duty of 12.22 per cent on exports of AST ad valorem.33
2.24.
As in stainless steel plate in coils from Italy the countervailing duty is based in part on pre-privatization financial contributions to the ILVA group, in part on pre-privatization financial contributions to TAS/Terni, and in part on debt relief provided to AST itself during the process of privatization.34 The pre-privatization subsidies were analysed under the gamma methodology by US Department of Commerce.35
2.25.
The US Department of Commerce's final determination in this investigation was timely challenged in the US courts by AST and is now before the CIT.36This appeal has been temporarily stayed pending resolution of the parallel appeal of the US Department of Commerce determination concerning Stainless Steel Plate in Coils from Italy (see paragraph 2.21 above.)

(vi) United States Countervailing Duties on Imports of Certain Cut-to-Length Carbon-Quality Steel Plate from Italy (Case No. 6)

2.26.
This case concerns the imposition of countervailing duties on certain cut-to-length carbon-quality steel plate from Italy, produced and exported by ILVA S.p.A.37 The US case number is C‑475-827; (64 Fed. Reg. 73244 of 29 December 1999). On 29 December 1999, the US Department of Commerce published its final determination imposing a countervailing duty of 26.12 per cent on exports of ILVA (ILP).38 The US Department of Commerce assigned that duty of 26.12 per cent to ILP. This was also based on the gamma methodology.39 According to the US Department of Commerce calculations provided to ILP, at least 22.68 per cent of the total 26.12 per cent margin was composed of subsidies granted to ILVA during that company's period of State ownership.
2.27.
As regards the privatization process, in September 1993, the IRI endorsed a plan for the market privatization of ILVA's core businesses, and ILVA's carbon steel flat products division was separately incorporated as a stock company (S.p.A.), with all shares in this stock company – ILP S.p.A. – initially owned by IRI. IRI's privatization plans were issued under the legal auspices of the European Commission. The IRI prepared a public offering for the sale of ILP. Notices were published in Italian and foreign newspapers soliciting purchase offers. IRI appointed the Italian Bank IMI S.p.A. as its financial adviser in the privatization process. It was reported that two other independent financial advisers (Pasfin Servizi Finanziari S.p.A. and Samuel Montagu Ltd.) were retained to conduct financial appraisals of the likely fair market value of ILP. Expressions of interest were received from 11 private industrial or financial bidders. On 16 March 1995, a purchase agreement was signed between IRI and Riva Acciaio S.p.A.
2.28.
The US Department of Commerce's final determination in this investigation was challenged in the US courts by ILP and is now before the CIT.40 The US Department of Commerce has conducted a remand redetermination in which it has applied the same person methodology.41

(b) The US Department of Commerce's practice in original investigations

2.29.
The United States does not dispute that the original investigations before the Panel are WTO‑inconsistent to the extent that they were based on the gamma methodology and that the underlying determinations did not fully examine whether the pre- and post-change in ownership entities involved were the same legal persons.42

2. Administrative reviews

(a) Administrative reviews covered by this dispute

(i) United States Countervailing Duties on Imports of Certain Cut-to-length Carbon Steel Plate from Sweden (Case No. 7)

2.30.
This case concerns the definitive results of an administrative review which led to the imposition of countervailing duties on certain carbon steel products from Sweden, produced and exported by SSAB Svenskt Stal AB (SSAB), on 7 April 1997. The US case number is C‑401‑804; (62 Fed. Reg. 16551 of 7 April 1997). On 7 April 1997, the US Department of Commerce published its final determination which led to the imposition of the countervailing measures of 1.91 per cent ad valorem.43 This duty was imposed on the basis of [alleged] subsidies which derived from financial contributions made by the Government of Sweden to the State-owned Swedish steel industry prior to the privatization of SSAB, which began in 1987 and was completed on 15 February 1994. In making this determination, the US Department of Commerce based its findings on the gamma methodology.44 The US Department of Commerce admits that the administrative review was WTO‑inconsistent to the extent that the review was based on the gamma methodology and that, therefore, the underlying determination did not fully examine whether the pre- and post-change in ownership entity was the same legal person.45
2.31.
SSAB was privatized in three stages, in 1987, 1989 and 1992. The first stage took place in 1987 when the Government of Sweden which by then was the sole owner of SSAB sold one-third of its shares to a consortium of six institutional investors. The second step took place in 1989, when the Government of Sweden and the international investors sold part of their shares in a public offer. After this offer, the Government of Sweden held 47.8 per cent of the company's shares. Shortly afterwards, SSAB's shares were introduced on the stock exchange. In 1992, in the framework of a general privatization programme, the Government of Sweden floated bonds to which were attached warrants to purchase the remaining shares retained by the Swedish Government. All warrants were exercised by 16 February 1994, thereby completing the SSAB privatization. As a result of the SSAB privatization, the company's shares were distributed to more than 30,000 small shareholders. The sale price of the company was determined in 1987 through negotiations with private institutional investors; share prices were based on estimated average profit levels before tax, at a level considered normal on the Swedish stock market at that time for companies with similar profiles. In 1989, the price of shares was determined by two reportedly independent investment banks appointed by the Government. In 1992, the sale price of the remaining shares was determined with reference to the stock market and resulted in a price slightly higher than the six previous months average price. In the administrative review the United States determined that during the review period, SSAB was completely privatized.46

(ii) Grain-Oriented Electrical Steel from Italy (Case No. 12)

2.32.
This case concerns the preliminary results of an administrative review which led to the continued imposition of countervailing duties on grain-oriented electrical steel from Italy, produced and exported by Acciai Speciali Terni S.p.A. (AST). The US case number is C‑475‑812; (65 Fed. Reg. 41950 of 7 July 2000). On 12 January 2001, the US Department of Commerce published the final results of the administrative review imposing a countervailing duty rate of 14.25 per cent ad valorem on exports of Acciai Speciali Terni S.p.A. (AST)47. This duty is reported to have been based in part on pre-privatization financial contributions to the state-owned ILVA group (allocated pro-rata to a group of producers, including AST), in part on pre-privatization contributions to TAS/Terni, and in part on debt relief provided to AST itself during the process of privatization.
2.33.
The US Department of Commerce applied its same person change in ownership methodology48. In this regard, the US Department of Commerce indeed concluded that AST was the same person because the specialty steel factories in Terni still sold specialty steels, still employed the same workers, still had the same or similar suppliers, and still marketed their products to the same or similar consumers. The US Department of Commerce's final determination in the administrative review of Grain-Oriented Electrical Steel from Italy was challenged in court by AST.49

(b) The US Department of Commerce's practice in administrative reviews

2.34.
Under United States law50, the US Department of Commerce may initiate an administrative review on its own initiative or further to the written request of a domestic interested party, a foreign government, an exporter or producer covered by an order or an importer of the merchandise.51 The US Department of Commerce may rescind an administrative review, in whole or only with respect to a particular exporter or producer, if it concludes that during the period covered by the review, there were no entries, exports, or sales of the subject merchandise, as the case may be.52
2.35.
Pursuant to US Department of Commerce's practice, the appropriate venue for introducing evidence of a privatization as a basis for a change in the countervailable duty is in an administrative review.53

3. Sunset reviews

(a) Sunset reviews covered by this dispute

(i) United States Countervailing Duties on Imports of Cut-to-Length Carbon Steel Plate from the United Kingdom (Case No. 8)

2.36.
This case concerns the definitive results of a sunset review which led to the continuation of the countervailing measures imposed on cut-to-length carbon steel plate from the United Kingdom, produced and exported by British Steel plc. The US case number is C-412-815; (65 Fed. Reg. 18309 of 7 April 2000). On 7 April 2000, the US Department of Commerce published its final determination which led to the continuation of the countervailing measures at a rate of 12.00 per cent, the applicable rate of duty at the time and the same as that found in the original investigation.54 This countervailing duty was originally imposed in 1993, on the basis of subsidies which derived from financial contributions made by the Government of the United Kingdom to the State-owned British Steel Corporation.55 This was prior to the transformation of British Steel Corporation into British Steel plc (BS plc) and its privatization in 1988. In making the above sunset determination, the US Department of Commerce determined on the basis of its gamma methodology that these subsidies continued to benefit British Steel after its privatization.56 The subsidies originally received by British Steel Corporation in this case are the same as those involved in the US – Lead and Bismuth II WTO dispute. However, the US – Lead and Bismuth II WTO dispute covered countervailing duties on imports by UES whereas this dispute involves imports from British Steel plc., a different sucessor to British Steel Corporation.
2.37.
Prior to 1988, British Steel Corporation (BSC) was a Crown corporation without shares which was wholly-owned by the United Kingdom Government. On 26 July 1988, it was reincorporated as a public limited company named British Steel plc (BS plc). All the shares were owned by the United Kingdom Government.
2.38.
The second step in the privatization was the actual public offering of the shares of BS plc. Following a competitive process, the Secretary of State for Trade and Industry appointed a number of independent firms to provide advice on the sale. Two billion ordinary shares of BS plc were offered at a fixed price on 23 November 1988. The final price of £1.25, was determined based upon a recommendation by the main financial adviser for the transaction and produced a total sale price to the United Kingdom Government of 2.5 billion pounds sterling. In determining the sale price, the main financial adviser took into account the forecast dividend yield, the company's forecasted profits, the market conditions and the anticipated level of demand in the UK and overseas.
2.39.
In this case, the US Department of Commerce was expressly requested by a US domestic court to determine if the privatization of British Steel was at arm's length and for fair market value. In 1995, in the context of this court remand, the US Department of Commerce confirmed that the British Steel privatization was at arm's length, for fair market value and consistent with commercial considerations because British Steel shares were offered to private investors world-wide, the offering price was based on valuations by independent consultants, and private investors purchased nearly the entire share offering57.

(ii) United States Countervailing Duties on Imports of Certain Corrosion-Resistant Carbon Steel Flat Products from France (Case No. 9)

2.40.
This case concerns the definitive determination of a sunset review which led to the continuation of the countervailing measures imposed on certain corrosion-resistant carbon steel flat products from France, produced and exported by Usinor SA (Usinor). The US case number is C‑427-810; (65 Fed. Reg. 18307 of 7 April 2000). On 7 April 2000, the US Department of Commerce published its final determination which led to the continuation of the countervailing measures imposed on corrosion-resistant carbon steel flat products from France, produced and exported by Usinor S.A.58 The rate of countervailing duty for Usinor was 15.13 per cent ad valorem; the same as that found in the original investigation, because Usinor had never sought an administrative review.
2.41.
The above countervailing duty was originally imposed in 1993, on the basis of the subsidies which derived from financial contributions made by the French Government to the State owned Usinor SA.59 This was prior to the privatization of Usinor in 1995.60 In making this sunset determination, the US Department of Commerce concluded that these subsidies continued to benefit Usinor after privatization.61

(iii) United States Countervailing Duties on Imports of Cut-to-Length Carbon Steel Plate from Germany (Case No. 10)

2.42.
This case concerns the final determination of a sunset review which led to the continuation of the countervailing measures imposed on cut-to-length carbon steel plate from Germany, produced and exported by AG Dillinger Hüttenwerke Saarstahl (Dillinger). The US case number is C-428-817; (65 Fed. Reg. 47407 of 2 August 2000). On 2 August 2000, the US Department of Commerce published its final determination leading to the continuation of the countervailing measures imposed on Cut-to-Length Carbon Steel Plate from Germany, produced and exported by Dillinger.62 The rate of countervailing duty for these products exported by Dillinger is 14.84 per cent ad valorem. This countervailing duty was originally imposed in 1993, on the basis of the subsidies which derived from financial contributions made by the German Government and the Regional Government of Saarland to Dillinger Hütte Saarstahl and attributed in part to Dillinger.63
2.43.
At the beginning of April 1989, Saarstahl Völkingen GmbH was owned 76 per cent by the Government of Saarland (a German land) and 24 per cent by Arbed Luxembourg though its subsidiary, Arbed-Finanz Deutschland GmbH. On 20 April 1989, Saarland and Arbed reached an agreement with Usinor Sacilor to combine Saarstahl Völkingen GmbH with Dillinger, another Saarland steel producer owned by Usinor Sacilor, under a holding company (DHS). The parties engaged two independent accounting firms (Treuarbeit and KPMG) to appraise the relative values each party would contribute to the combined entity, in order to calculate each party's per centage ownership. On 15 June 1989, after the change in ownership transaction, Usinor Sacilor owned 70 per cent of DHS's shares, Saarland owned 27.5 per cent of DHS's shares and the remaining 2.5 per cent was owned by Arbed. The main subsidy came in the form of debt relief provided to DHS in connection with its creation in 1989.
2.44.
On 30 June 1989, DHS transferred the assets and liabilities of the former Saarstahl Völkingen GmbH into the newly created subsidiary, Saarstahl. Thus DHS became a holding company with two operating subsidiaries, Saarstahl and Dillinger.
2.45.
In the court remand mentioned in Case No. 8, the US Department of Commerce was requested to analyse the change in ownership of certain companies including Dillinger. As a result of this exercise, the US Department of Commerce confirmed that the Dillinger transaction was at arm's length, for fair market value, and consistent with commercial considerations because it occurred between two unrelated parties and each party's percentage shareholding in DHS/Dillinger was based on appraisals performed by two independent accounting firms which took into account the forgiveness of the debt.64
2.46.
The US Department of Commerce determined that it was "not appropriate" to address the privatization issue in the sunset review, the focus of which is on whether subsidization is likely to continue or recur.65 The US Department of Commerce cited the "complexity and fact-intensive nature" of this issue in support of its finding that the sunset review schedule did not allow time for it to analyze the privatization and other changes in law. When this determination was challenged before the CIT, it was pointed out that the statute allows the US Department of Commerce to extend the period for issuing final results by up to 90 days. For this and other reasons, the CIT later remanded the sunset review to the US Department of Commerce for redetermination, taking into account all the evidence submitted by the parties, including that on privatization.66

(iv) United States Countervailing Duties on Imports of Cut‑to‑Length Carbon Steel Plate from Spain (Case No. 11)

2.47.
This case concerns the definitive results of a sunset review which led to the continuation of the countervailing measures imposed on cut-to-length carbon steel plate from Spain, produced and exported by Aceralia SA. The US case number is C-469-804; (65 Fed. Reg. 18307 of 7 April 2000). On 7 April 2000, the US Department of Commerce published its final determination continuing the countervailing measures imposed on cut-to-length carbon steel plate from Spain, produced and exported by Aceralia S.A.67 The rate of countervailing duty was set at 36.86 per cent ad valorem, the same rate of duty as found in the original investigation. The above countervailing duty was originally imposed in 1993, on the basis of the alleged subsidies which derived from financial contributions made by the Spanish Government to CSI Corporación Siderúrgica.68 This was prior to the privatization of CSI in 1997.
2.48.
CSI was privatized through a three-step process by its State-controlled owner AIE (Agencia Industrial del Estado). Phase one involved the selection of a "technological partner" to purchase a 35 per cent share of the company. Phase two involved the selection of a "supporting partner" to purchase between 10 per cent and 25 per cent of the company's shares. In phase three, the remaining shares were sold by an international subscription open to private investors. Prior to its privatization, CSI was valued by experts from the University of Oviedo and Carlos III of Madrid and from the international audit firm of Ernst & Young. Furthermore, a Spanish bank, Banco Central Hispano-Americano, was requested to monitor the privatization in order to ensure that every step was properly carried out. During the process other independent auditors such as Coopers & Lybrand were required to certify the correctness of the privatization. After a fully transparent evaluation process, on 1 August 1997 the Luxembourg company Arbed was finally chosen as the technological partner of CSI. The supporting partner was also selected through an open bid. The only two companies which expressed an interest were Corporacion J.M. Aristrain and Gestamp SL which respectively purchased shares amounting to 11 per cent and 1 per cent of the company's capital (17 October 1997). The privatization was completed by the sale through a public subscription of the remaining shares owned by the Spanish State (March 1998).
2.49.
In its sunset review, the US Department of Commerce determined that the above financial contributions continued to benefit Aceralia.69

(b) The US Department of Commerce's practice in sunset reviews

2.50.
Under United States law, the US Department of Commerce automatically initiates a sunset review on its own initiative within five years of the date of publication of a countervailing duty order.70 The US Department of Commerce conducts these reviews pursuant to published regulations.71 In the sunset review, the US Department of Commerce has the responsibility of determining whether revocation of a countervailing duty order would be likely to lead to continuation or recurrence of subsidization. If the US Department of Commerce's determination is negative, it must revoke the order. However, if the US Department of Commerce's determination is affirmative, it transmits its determination to the U.S. International Trade Commission ("USITC"), along with a determination regarding the magnitude of the net countervailable subsidy that is likely to prevail if the order is revoked. The USITC has the option of considering the magnitude of the net countervailable subsidy when it analyses the likelihood of continuation or recurrence of injury.72
2.51.
The US Department of Commerce informs exporting Members and firms of the initiation of a sunset review in at least four ways. The US Department of Commerce publishes in the Federal Register a sunset review initiation schedule to provide for monthly initiations of so-called "transition orders." In addition, in the month preceding the scheduled initiation date of a sunset review, the US Department of Commerce notifies representatives of the foreign government, the foreign producers, and the domestic producers, by mail, that the sunset review of a particular countervailing duty order will be initiated on or about the first of the following month. The US Department of Commerce subsequently publishes the notice of initiation of the sunset review in the Federal Register. Finally, information concerning, inter alia, the initiation of a sunset review, including the scheduled initiation date, the parties on the service list, and the merchandise covered by the scope of the order is available on the US Department of Commerce's website.73
2.52.
When the US Department of Commerce initiates sunset reviews it requests that any interested parties who wish to participate in the review submit such a request and comments on the likelihood of continuation or recurrence of subsidization.74 The Sunset Regulations set forth, inter alia, the information to be provided by parties participating in a sunset review and the deadlines for required submissions.75 When the exporting producers subject to the countervailing duties do not submit comments, the US Department of Commerce conducts an expedited sunset review. The evidence used in sunset reviews is that already on the record at the US Department of Commerce. The US Department of Commerce position is that unless during the five-year period of the countervailing duty the US Department of Commerce has conducted an administrative review, the only evidence in a sunset review on the likelihood of continuation or recurrence of subsidization will be that coming from the original investigation.76 The United States maintains that the US Department of Commerce is under no obligation, pursuant to Article 21.3 of the SCM Agreement, to convert sunset reviews into full-blown administrative reviews of the respective countervailing duties.
2.53.
While the European Communities does not dispute the accuracy of the US Department of Commerce's description of its practices, the European Communities maintains that the practice is incompatible with Article 21.3 of the SCM Agreement. The European Communities argues that the US Department of Commerce's practice of conducting an expedited review and not taking into account comments submitted by interested parties if the exporting producer does not submit comments is inconsistent with Article 21 of the SCM Agreement.
2.54.
The European Communities notes a distinction between the United States and the European Communities as to the facts. The US Department of Commerce maintains that "in three of the four sunset reviews, the US Department of Commerce received no comments from the European steel companies involved. Accordingly, in those cases and pursuant to its procedures, the US Department of Commerce conducted expedited reviews."77 Both the United States and the European Communities agree that in Countervailing Duties on Imports of Cut-to-Length Carbon Steel Plate from Germany (Case No. 10) the exporting company did participate and a full review was conducted. However, the European Communities asserts that in Countervailing Duties on Imports of Cut-to-Length Carbon Steel Plate from the United Kingdom (Case No. 8), Countervailing Duties on Imports of Certain Corrosion-Resistant Carbon Steel Flat Products from France (Case No. 9) and Countervailing Duties on Imports of Cut‑to‑Length Carbon Steel Plate from Spain (Case No. 11), the US Department of Commerce deliberately ignored comments submitted by the Governments of the United Kingdom, France and Spain as well as by the European Communities.78

B. UNITED STATES' CHANGE IN OWNERSHIP METHODOLOGIES COVERED BY THIS DISPUTE

2.55.
This dispute covers two methodologies used by the US Department of Commerce in order to assess the impact of a change in ownership in the determination of subsidization in respect of privatized companies. These methodologies are the so-called gamma methodology and the same person methodology. In this regard, of the 12 determinations challenged by the European Communities, 11 were initially based on the gamma methodology. In Case No. 12 (Grain-Oriented Electrical Steel from Italy "GOES") the US Department of Commerce used the same person methodology. The same person methodology was first applied in the Final Results of the Administrative Review in this case which was published on 12 January 2001.79 This methodology had earlier also been applied in various remand determinations ordered by CIT within appeal proceedings in four of the above 11 determinations.80 The same person methodology has been challenged before the CIT in all of these remand redeterminations81, and also in the GOES determination.82
2.56.
The United States has admitted that seven (Case Nos. 1 to 7) of these 12 determinations are inconsistent with its WTO obligations to the extent that the US Department of Commerce did not fully examine whether the pre- and post-change in ownership entities were the same legal persons change in ownership.83 These were based on the gamma methodology.

1. The gamma methodology

2.57.
In July 1993, the US Department of Commerce introduced the gamma methodology.84 According to this methodology, after assessing the existence of pre-privatization subsidies, the US Department of Commerce determines to what extent (if any) the privatization transaction price repaid unamortized subsidies, and countervails the remainder (if any). Unlike the pass-through methodology where the totality of prior subsidies passed through, the application of the gamma methodology could, depending on the facts, result in a finding that all, some, or none of the unamortized portion of the pre-privatization subsidies remains countervailable after privatization.
2.58.
The gamma methodology was the methodology applied in the three administrative reviews of countervailing duty determinations covered by the United States – Imposition of Countervailing Duties on Certain Hot Rolled Lead an Bismuth Carbon Steel Products Originating in the United Kingdom ("US – Lead and Bismuth II") dispute and which the Panel and Appellate Body found to be inconsistent with the SCM Agreement.85

2. The same person Methodology

2.59.
In Grain-Oriented Electrical Steel from Italy, the US Department of Commerce applied for the first time the same person methodology which it had developed on remand after the Delverde III judgment. This methodology had first been set out in the draft and then final results of a redetermination pursuant to a court remand in Acciai Speciali Terni v United States.86
2.60.
The same person methodology provides for a two-step test. The first step consists in an analysis of whether the post-privatization entity is the same legal person that received the original subsidies before privatization. For this purpose, the US Department of Commerce examines the following non-exhaustive criteria: (i) continuity of general business operations; (ii) continuity of production facilities; (iii) continuity of assets and liabilities; and (iv) retention of personnel.87 If, as a consequence of the application of these criteria, the US Department of Commerce concludes that the post-privatization entity is a new legal person, distinct from the entity that received the prior subsidies, the US Department of Commerce would not impose duties on goods produced after privatization on account of the pre-privatization subsidies. The US Department of Commerce would, however, proceed to examine in such an event, whether any subsidy had been bestowed upon the post-privatization entity as a result of the change in ownership (by assessing whether the sale was for fair market value and at arm's-length). If as the result of the application of the above criteria the US Department of Commerce concludes that no new or distinct legal person was created, all the subsidy is found to continue to reside in the post-privatization producer and the US Department of Commerce will not assess whether the privatization was at arm's-length and for fair market value.88

C. SECTION 771(5)(F) OF THE US TARIFF ACT OF 1930, AS AMENDED, (19 U.S.C. SECTION 1677(5)(F))

2.61.
Section 771(5)(F) of the US Tariff Act of 1930, as amended, (19 U.S.C. Section 1677(5)(F)), hereinafter "Section 1677(5)(F)", reads as follows:

"a change in ownership of all or part of a foreign enterprise or the productive assets of a foreign enterprise does not by itself require a determination by the administering authority that a past countervailable subsidy received by the enterprise no longer continues to be countervailable, even if the change in ownership is accomplished through an arm's-length transaction."89

III. PARTIES' REQUESTS FOR FINDINGS AND RECOMMENDATIONS

3.1.
The European Communities claims that the old change in ownership methodology applied by the United States in the 12 countervailing duty orders listed in Section IIabove, and the new change in ownership methodology applied, inter alia, in the administrative review in Grain Oriented Electrical Steel from Italy, and more generally the refusal of the United States to correctly apply the SCM Agreement, as interpreted by the Panel and Appellate Body in US –Lead andBismuth II, are inconsistent with the United States' obligations under the WTO Agreement. In particular, but not necessarily exclusively, the European Communities requests the Panel to examine the consistency of these measures with the following provisions:

– Articles 1.1, 10, 14(d) of the SCM Agreement insofar as these Articles require an authority to establish the existence of a financial contribution and benefit (and hence a countervailable subsidy);

– Footnote 36 to Article 10 of the SCM Agreement which provides that countervailing duties may only be imposed in order to offset a subsidy bestowed upon the manufacture, production or export of any merchandise, as provided for in Article VI:3 of GATT 1994;

– Article 19.1 of the SCM Agreement which in particular provides that a countervailing duty may only be imposed if the existence of a subsidy has first been determined ;

– Article 19.3 of the SCM Agreement which in particular requires investigating authorities promptly to establish an individual countervailing duty rate for new exporters who were not subject to the original investigation;90

– Article 19.4 of the SCM Agreement, which provides that no countervailing duty shall be levied on any imported product in excess of the amount of the subsidy found to exist calculated in terms of subsidization per unit of the subsidized and exported product;

– Article 21.1 of the SCM Agreement, which provides that a countervailing duty shall remain in force only as long as and to the extent necessary to counteract subsidization;

– Article 21.2 of the SCM Agreement, which in particular requires investigating authorities to determine whether there is a continuing need for the application of countervailing duties in the light of the information before it;

– Article 21.3 of the SCM Agreement, which in particular provides that countervailing duties are to expire after five years unless it is determined that the expiry of the duty would lead to continuation or recurrence of subsidization and injury;

– Article 32.5 of the SCM Agreement which requires Members to ensure the conformity of their laws, regulations and administrative procedures with the provisions of the SCM Agreement; and

– Article XVI.4 of the WTO Agreement, which requires Members to ensure the conformity of their laws, regulations and administrative procedures with their obligations as provided in the annexed Agreements.91.

3.2.
In addition, the European Communities believes that Section 1677(5)(F) is inconsistent with the SCM Agreement and the WTO Agreement to the extent that it prevents the United States from implementing its WTO obligations such that where a privatization takes place for fair market value and at arm's length, no benefit passes through to the post-privatization entity.92
3.3.
In its first written submission93, and with reference to the Panel's competence under Article 19.1 of the DSU, the European Communities requests the Panel to suggest possible means of implementation on the grounds that the United States has demonstrated a lack of good faith with respect to the previous WTO dispute settlement proceeding. In this regard, the European Communities would like that the Panel suggests the following implementation actions:

– The United States should bring Section 1677(5)(F) into conformity with its WTO obligations;

– The United States should immediately revoke the sunset determinations in Cut-to-Length Carbon Steel Plate from United Kingdom (C-412-815) (Case No. 8) and Cut-to-Length Carbon Steel Plate from Germany (C-428-817) (Case No.10); and,

– The United States should immediately review or amend the remaining determinations brought before the Panel in the present dispute. In doing so, it should apply in good faith the findings of the Panel. If the privatization transactions which are the subject of this dispute have taken place for fair market value and at arm's length, then no more countervailing duties should be levied. In the event that the United States should find that the privatization transactions are not at fair market value and arm's length, the United States should determine that the subsidy amount is the difference between the price actually paid and the fair market value.94

3.4.
In its first oral statement95, the European Communities indicates that, in order to prevent further dispute over this issue, the Panel should issue a clear and unambiguous explanation of the correct interpretation of the relevant provisions of the SCM Agreement. The European Communities also asks the Panel to consider making a suggestion on implementation to assist in resolving this dispute and suggests that one possibility could be:

"The Panel suggests that the US abandon its "same-person methodology" and replace it with another that involves (1) an examination of whether an exporter is in fact benefiting from a financial contribution and (2) provides that a sale of a state-owned company for fair market value and at arm's length means that the privatized company cannot be considered to benefit from any prior financial contribution to the State‑owned company."

3.5.
In its second written submission96, the European Communities respectfully requests that the Panel to reach the findings contained in the European Communities first written submission, and to adopt the suggestions on implementation which the European Communities suggested in its first written submission and in its opening statement to the Panel at the first substantive meeting. In its second oral statement97, the European Communities asks the Panel to make the findings requested in its first written submission, and to issue suggestions for implementation of its Report set out in the conclusion to the oral statement of the European Communities to the first meeting of the Panel.
3.6.
The United States requests that the Panel make the following findings:

– by not self-initiating reviews to reconsider change in ownership situations in light of the Appellate Body's report in US – Lead and Bismuth II, the United States has not acted inconsistently with its obligations under the SCM Agreement;

– the seven US Department of Commerce determinations (six investigations and one administrative review (Case Nos. 1-7) are inconsistent with the United States' obligations under the SCM Agreement only to the extent that US Department of Commerce did not fully examine whether the pre- and post-change in ownership entities involved were the same legal persons;

– the four US Department of Commerce sunset determinations (Case Nos. 8-11) are not inconsistent with the United States' obligations under the SCM Agreement;

– the GOES from Italy administrative review (Case No. 12) is not inconsistent with the United States' obligations under the SCM Agreement;

– the US change in ownership provision, Section 1677(5)(F) is not inconsistent with the United States' obligations under the SCM Agreement and the WTO Agreement; and

– the European Communities' claims regarding the expedited sunset review of the countervailing duty order on cut-to-length steel plate from Sweden are not within the Panel's terms of reference.98

IV. ARGUMENTS OF THE PARTIES

4.1.
This Section includes a summary of the main arguments of the parties which are of relevance to the findings of the Panel.

A. WTO‑COMPATIBILITY OF THE UNITED STATES' SAME PERSON METHODOLOGY

4.2.
The European Communities submits that the same person methodology is inconsistent with the requirement under Article 1.1(b) of the SCM Agreement to determine the existence of a benefit to the post-transaction entity before countervailing duties can be imposed. For that reason, any countervailing duties imposed on the basis of this methodology will be inconsistent with Articles 1, 10, 14, 19.4 and either 19.1 or 21.1, 21.2 or 21.3 (depending whether a review or original investigation is at issue).99
4.3.
The European Communities claims that, in applying the methodology, the US Department of Commerce disregards the instructions set down in Article 14 of the SCM Agreement that any benefit must be calculated with respect to the advantage obtained over what was available in the market. It argues that the factors examined by the US Department of Commerce in determining whether the firm under investigation is the same person as the pre-transaction subsidy recipient bear no relation to the benefit analysis required under the SCM Agreement. The "same person methodology", in not taking into account the price paid by the purchaser of the privatized company and thus failing to analyse the existence of a benefit to the post-transaction entity, is inconsistent with Articles 1.1(b), 10, 14, 19.4 and either 19.1 or 21.1 (depending on the circumstances) of the SCM Agreement. Thus, it concludes, Case 12, Grain-Oriented Electrical Steel from Italy (C-475-812)100, based on the same person methodology involves the imposition of countervailing duties inconsistently with Articles 1.1(b), 10, 14, 19.4, 21.1 and 21.2 of the SCM Agreement.101

1. Whether privatization triggers the need for a re-examination of the existence of benefit

4.4.
The European Communities submits that privatization is a fundamental change in ownership that a fortiori requires a new benefit analysis. It explains that since the government – or a government body – is the owner of any state-owned company, all financial contributions of the State towards a state-owned company must be assessed on the basis of the equity investor standard of Article 14 of the SCM Agreement. This is because in terms of analysis, the European Communities believes there is no meaningful distinction between an equity investment and other forms of financial contribution, such as, for example a cash grant. Whether the government had provided money for the purchase of a factory, or had injected capital, the result is the same; there is an increase in the value of the equity held by the government. Thus, it argues, all subsidies granted by the government to a state‑owned company can be analysed on the basis of the private equity investor standard of Article 14(a). The European Communities further argues that this is not the case for subsidies to private companies, because the government may not have the choice as to the form its subsidization might take; i.e. it may not have the option to purchase equity in the company. It explains that when this equity is sold the basis for the original benefit analysis changes, because the government's equity interest will be re-valued on market terms and in fact repaid.102
4.5.
In its second written submission, the United States indicates that there has never been any dispute before this Panel concerning the fact that a change in ownership triggers an obligation to re‑examine the existence of a subsidy.103 In the view of the United States however, their examination (with regard to previously bestowed subsidies) is complete once an authority concludes that the current producer is the same legal entity that received the earlier financial contribution and benefit. The United States, in the second substantive meeting, also disputed the European Communities' belief that all subsidies granted by the government to a state-owned company can be analysed on the basis of the private equity investor standard..

2. Who is the recipient of the benefit in case of privatization?

(a) Concept of benefit under the SCM Agreement

4.6.
The European Communities points out that Article 1.1 of the SCM Agreement provides that a subsidy will only exist if there is a financial contribution which confers a benefit. The European Communities asserts that the findings by the Appellate Body in Canada – Measures Affecting the Export of Civilian Aircraft ("Canada – Aircraft")clearly state that the focus of the enquiry under Article 1.1(b) is on the recipient, not the government granting the subsidy.104 The European Communities also refers to the Appellate Body decision in Canada – Aircraft to support its contention that a benefit can only "be said to arise if a person, natural or legal, or a group of persons, has in fact received something."105 The European Communities argues that the Appellate Body's interpretation of Article 1.1 of the SCM Agreement in Canada – Aircraft makes it clear that the analysis of the existence of a benefit should be on the value to the recipient, not on the cost to the granting authority.
4.7.
The United States contends that the nature of countervailable benefits is made plain by Articles 1 and 14 of the SCM Agreement. It explains that a countervailable benefit is that part of a financial contribution that is obtained on terms more generous than those the recipient could have obtained commercially. In its view, there is no requirement to analyse the competitive advantage derived by the recipient from the benefit, or the extent to which the recipient succeeds in enjoying the benefit since these concepts are not found in the SCM Agreement. Countervailable benefits are, in essence, simply fixed sums of money, which (in the case of non-recurring benefits) are amortized over time.106
4.8.
The European Communities agrees with the United States that the benchmark for making a calculation of the value of the benefit to the recipient is through comparison to the marketplace. The European Communities refers to the text of the various provisions of Article 14 of the SCM Agreement, which refer to "comparable commercial" practices.107
4.9.
Where the European Communities differs with the United States is in the evaluation of the effect of a change in ownership on the existence of a countervailable benefit. The European Communities argues that any benefit, and hence any benefit stream from non-recurring subsidies, must be viewed from the perspective of a natural or legal person. The benefit does not "attach" to the productive assets. Thus, when the exported product is no longer produced by the same natural or legal person as received the financial contribution and benefit, one must ask whether the current producer also enjoys the same benefit stream.108 This new benefit analysis must be made on the basis of a comparison with a market benchmark in accordance with Article 14 of the SCM Agreement. In US – Lead and Bismuth II the Appellate Body concluded that because UES and BS plc/BSES had paid:

"fair market value for all the productive assets, goodwill, etc., they acquired from BSC and subsequently used in the production of leaded bars imported into the United States in 1994, 1995, and 1996. We, therefore see no error in the panel's conclusion that, in the specific circumstances of this case, the "financial contribution" bestowed on BSC between 1977 and 1986 could not be deemed to confer a "benefit" on UES and BS plc/BSES."109

4.10.
The United States maintains that, because countervailable benefits, once identified and valued, are, essentially, amounts of money, the method by which they may be terminated is straightforward — that amount of money is amortized over time, unless the recipient pays back the remaining unamortized amount. The United States agrees that such a repayment could occur in conjunction with a change in ownership and, under its new methodology, investigates any claim that such a repayment has occurred (or that the subject merchandise is being produced by a different person than the recipient). However, it adds, the SCM Agreement provides no basis for concluding that a change in the ownership of a subsidy recipient, for fair market value or otherwise, automatically eliminates the benefit conferred on the company. The United States argues that if a corporation has received a subsidy — a financial contribution that confers a benefit — the simple transfer of that corporation from one owner to another does not mean that the corporation no longer has the subsidy. Neither the financial contribution nor the benefit has changed, and the corporation is still the same person.110
4.11.
The European Communities argues that since benefits do not reside in the assets themselves a benefit does not continue to flow from untied, non-recurring financial contributions even after changes of ownership. The European Communities believes that the only way to support a finding that the benefit passes through to the new owners would be "if fair market value was not paid for all such productive assets."111
4.12.
The United States submits that the European Communities has not sufficiently explained how "fair market value extinguishes subsidies" nor has it shown where there is any basis for this conclusion in the SCM Agreement.112 The United States maintains that the European Communities has not sufficiently explained how and why the payment of fair market value by the new owner of the subsidy recipient extracts the benefit from the subsidy recipient itself.113
4.13.
The United States' reasoning is based on its interpretation of the Appellate Body's finding in US – Lead and Bismuth II that subsidies are bestowed on legal persons. The United States believes that this means that subsidies continue to reside in the recipient legal person unless they are taken out of that person, or the person is dissolved.114
4.14.
The European Communities disputes the United States notion that subsidies must be "taken out" or "extracted" from a legal person. To the European Communities, it appears that the United States is talking about the extraction of subsidization from productive operations – whether they be workers with enhanced skills, or steel mills which have been built with the help of subsidies. The United States points out that the workers remain the same after privatization, that the steel mills do not change. The Appellate Body in United States – Lead and Bismuth II clearly found that subsidies do not accrue to productive operations, but rather to legal persons. The European Communities relies on the Appellate Body where it rejected the United States' view that benefit should be considered as accruing to productive operations.115:
4.15.
The United States does not dispute that a change in ownership triggers an obligation to re-examine the existence of a subsidy.116 However, it maintains that its current methodology is consistent with the SCM Agreement. Based on its understanding of the fact that subsidies reside in the recipient legal person, the United States believes that what must be considered after a change in ownership has occurred, is whether prior subsidies have been wholly or partly paid back, and whether the change in ownership has created a new producer of the subject merchandise to which no portion of any previously bestowed subsidies can be said to accrue.117 Thus, the US Department of Commerce, following a change in ownership, examines whether the current producer has a financial contribution and a benefit, or whether in conjunction with the change in ownership the contribution or benefit has been repaid or cut off.118

(b) United States' "distinct legal person" concept

4.16.
The United States maintains that the US Department of Commerce's revised change in ownership methodology, i.e. the same person methodology, is consistent with the SCM Agreement, particularly as interpreted by the Appellate Body in United States – Lead and Bismuth II. In this regard, the United States explains that, in its report, the Appellate Body agreed with the Panel (based upon the Appellate Body's own findings in Canada – Aircraft) that a subsidy must be received by the natural or legal person that produced or exported the subject merchandise. The United States alleges that the Appellate Body also accepted the Panel's finding that the privatized company concerned, UES, was a distinct new legal person entitled to an independent subsidy determination (which it had not received from the US Department of Commerce). In addition, it argues, because UES' new owners had paid fair market value for UES, the Appellate Body found no error in the Panel's conclusion that the financial contributions bestowed upon BSC could not be deemed to confer a benefit upon UES. In its view, although the Appellate Body accepted the Panel's conclusion that BSC and UES were distinct legal persons, it did not adopt the Panel's reason for reaching this conclusion. The United States explains that, whereas the Panel found that BSC and UES were distinct legal personspurely because of the change in ownership, the Appellate Body simply stated that, given the changes in ownership leading to the creation of UES, the US Department of Commerce was required to determine whether UES, had itself received a financial contribution and benefit.119 The United States further contends that the Appellate Body did not identify the specific factors dictating that UES must be treated as a distinct legal person, and twice stated that its determination was based on "the particular circumstances of this case."120
4.17.
The United States points out that where the Panel emphasized that the changes in ownership leading to the creation of new legal persons had involved the payment of consideration, the Appellate Body simply stated that, given the creation of these new legal persons (who were, in fact the producers of the subject merchandise) the US Department of Commerce was required to determine whether these new legal persons had received a benefit. In its view, the notion that the Appellate Body simply forgot to cite the payment of fair market value as the reason that the prior subsidies did not transfer to the newly-created companies is further contradicted by the fact that the payment of fair market value was no minor issue – it was one of the EC's central arguments in the proceeding. The United States considers that the Appellate Body did not address this issue explicitly because it understood that the issue had not been fully explored or explained. The United States contends the Appellate Body, having a narrower basis upon which to dispose of the appeal, therefore, did the sensible thing – it decided the case on the narrower basis, without touching upon the more difficult and ill-defined issue.121
4.18.
The European Communities contended that the principle whereby it is the change in ownership which reverses the presumption that a benefit stream continues over the average life of the assets, has been explicitly endorsed by the panel and Appellate Body in US – Lead and Bismuth II.122 For the European Communities, it is quite clear that the Appellate Body considers the change in ownership the crucial factor bringing about the need to reconsider the continuing existence of the benefit stream. The Appellate Body in the same paragraph also quotes approvingly the Panel's statement that:

"the changes in ownership leading to the creation of UES and BS plc/BSES should have caused the US Department of Commerce to examine whether the production of leaded bars by UES and BS plc/BSES respectively, and not BSC, was subsidized."123 (emphasis added)

4.19.
The European Communities considers, therefore, that it was the change in ownership which triggered the need to examine benefit from the perspective of the post-transaction entity. It considers that this conclusion is reinforced by the fact that the Appellate Body repeated the factual findings of the Panel that British Steel Corporation ceased to exist and British Steel plc was created before the actual privatization transaction.124 In other words, at that point, before the privatization had taken place, the legal person exporting the product under investigation was different from the legal person which had received a subsidy.125 It argues that, if the United States were correct in its assertion, this simple change in legal person would have been enough to trigger the need to revisit the subsidy determination. Quite apart from the fact that such an assertion would leave the door wide open for circumvention, this fact was clearly not considered dispositive by either the panel or Appellate Body. The European Communities concludes that what was considered dispositive was the change in ownership, as is evidenced by the clear references to this factual element in the findings of the Panel and the Appellate Body.
4.20.
The United States argues that the European Communities portrays the US Department of Commerce as drawing its new privatization methodology on a blank slate following US – Lead and Bismuth II (and Delverde III). In its view, however, the inquiry into whether the producer in question is the same person that received the subsidy follows directly from the Appellate Body's conclusion that the producer of the subject merchandise in that case (UES) was not the same person that received the subsidy (BSC). The United States notes that the European Communities itself has accepted that, "the Appellate Body agreed that where the change in ownership had lead to the creation of a different legal person from the subsidy recipient any benefit must be assessed from the perspective of the post-transaction entity."126 The United States argues that the US Department of Commerce's new approach simply inquires into the acknowledged premise of the Appellate Body report in US – Lead and Bismuth II – whether the change in ownership has led to "the creation of a different legal person." It contends that, where that basic premise is missing – that is, where a change in ownership has not led to "the creation of a different legal person" – the Appellate Body's reasoning in US – Lead and Bismuth II does not require US Department of Commerce to find that the subsidies were eliminated.127
4.21.
The United States submits that a change in the ownership of a company does not automatically create a distinct new legal person. It argues that the European Communities in GOES from Italy claims that the subsidy determination, which originally was conducted for the subsidy recipient itself (AST), must, purely as a result of the change in ownership, now be conducted anew, not for the subsidy recipient (still AST) but for the new ownersof that recipient (KAI). It is as if, suddenly, KAI, rather than AST, were the respondent company in the countervailing duty investigation and the producer of the Italian steel products subject to investigation. The United States notes that the European Communities itself has acknowledged that a subsidy "resides with the natural or legal person which originally received the subsidy", not the owner of that person.128
4.22.
The United States also submits that in US – Lead and Bismuth II, the Appellate Body found that the presumption that benefits are allocated over time could never be irrebuttable, so that administering authorities were required to demonstrate that the current producer received a benefit under the SCM Agreement.129 The United States believes that its new same person methodology is entirely consistent with this finding. Under this new methodology, it explains that following a change in ownership, the United States examines whether the current producer benefits from a subsidy, or whether that change in ownership has either terminated the subsidy or created a new legal person entitled to its own subsidy analysis.130 To make this determination, the United States considers evidence put forward by respondents that the financial contribution has been repaid or withdrawn and/or that the benefit no longer accrues.
4.23.
The European Communities alleges that the United States intertwines its misinterpretation of the SCM Agreement with a manipulation and distortion of various legal concepts under municipal law. It considers that the assimilation of "ownership changes" to the entirely different concept of the creation of "a new legal entity" is the basis for the United States' misunderstanding of the Appellate Body Report in US – Lead and Bismuth II, which the United States claims is based on a finding of "distinct legal persons". The European Communities maintains that the Appellate Body did not equate the natural or legal person which receives a benefit with the exporting producer subject to investigation.131 Neither the US – Lead and Bismuth II nor the Canada – Aircraft Appellate Body reports addressed the issue of what is meant by "person". The European Communities explains that in Canada – Aircraft the Appellate Body was asked what was the standard for the calculation of benefit – was it cost to the government or benefit to the recipient132; in US – Lead and Bismuth II, the Panel and Appellate Body were examining the question of whether benefit could accrue to productive assets. Thus, in the European Communities' view, neither report supports the United States' assertion that the only natural or legal person relevant to an examination of subsidization is the exporting producer. Thus, it concludes, the United States equation of "natural or legal person" and the exporting producer under investigation is unwarranted.133

(c) Corporate law principles in the interpretation and application of the SCM Agreement

(i) The relevance of the distinction between a company and its owners for the purposes of assessing the benefit

4.24.
The United States invokes corporate law principles to provide logical support for its use of a "distinct legal person" test for its determination of the continuation of a countervailable benefit. The United States contends that the distinction between owners and companies is real and may not be ignored. The United States further submits that it has demonstrated (and the European Communities does not dispute) that the distinction between companies and owners is fundamental in most jurisdictions, including the European Communities. In its view, given this fact, it is not possible to interpret the SCM Agreement as if this distinction did not exist, or as if the WTO Members disavowed it in drafting the SCM Agreement, without giving the slightest indication that they were doing so. The United States contends that not only is the distinction between owners and companies unavoidable, the Appellate Body has confirmed that subsidies are received by legal persons134, not the owners of those persons or "economic entities." It further submits that the European Communities itself has acknowledged that subsidies "reside" in the legal persons that receive them, not in their owners or some all-encompassing "economic entity".135
4.25.
The United States interprets the Appellate Body findings in US – Lead and Bismuth II that subsidies are bestowed on legal persons as meaning that subsidies continue to reside in that person unless they are taken out of that person, or the person is dissolved. The United States asserts that a change in ownership, per se, does neither.136 The United States argues that the only obligation under the SCM Agreement created by a change in ownership is that the investigating authorities should inquire whether, in conjunction with the change in ownership, the subsidies have been paid back or not transferred to the new producer of the subject merchandise (if one has been created). The United States maintains that this position is entirely consistent with the Appellate Body Report in US – Lead and Bismuth II.137
4.26.
The European Communities argues that the United States' suggestion to the effect that a distinction be drawn between the company producing the exported goods and its ownership is contrary to the Panel findings in United States – Lead and Bismuth II. It recalls that the Panel found that such a distinction "elevate[d] form over substance", and had been rejected itself by the US Department of Commerce.138 Moreover, the European Communities does not consider, for the purpose of analysing the existence of subsidization, that a distinction between the company and its owners is appropriate.139 The European Communities goes on to note140 that the distinction which the United States attempts to make between the company and its owners, for the purposes of the application of countervailing duties, is the cornerstone of the United States' argument. While the European Communities accepts that a distinction can be drawn for general purposes of corporate or commercial law, the distinction between owners and the company is not relevant for the imposition of countervailing duties. It is the economic entity which is the subject of the benefit analysis, not simply the exporting producer subject to investigation. This is the analysis used by the United States in general. This analysis flows from the principle, one of the central principles of countervailing duty law, that money is fungible.
4.27.
The United States submits that the European Communities' assertion that no distinction can be made between companies and their owners flouts the corporation laws of both the United States and the European Communities, laws which have as their very cornerstone the concept that companies are legal persons distinct from their owners. It further submits that, although the United States – Lead and Bismuth II Panel arguably endorsed this position, the Appellate Body did not say that no distinction could be drawn between companies and their owners.141 The United States affirms that, even if one were to accept, arguendo, that a privatized company and its new owner must be considered together, it is easy to see why, as a matter of economics, privatization does not extinguish previously bestowed subsidies. What goes into the company initially (say a $3 billion subsidy) yields an artificial competitive advantage. When the company is later sold (say, for $2 billion) what the new owner/company parts with ($2 billion cash) is precisely balanced by something worth $2 billion coming in (stock – an expected earning stream with a net present value of $2 billion). It is no more defensible to find extinguishment of the $3 billion subsidy here than if the owner/company, after receiving the $3 billion, pays the government $2 billion in exchange for $2 billion worth of coal. The coal purchase, a fair market value transaction, obviously does not "repay" $2 billion of prior government aid. Like the stock transaction, it is an exchange of value for equal value.142
4.28.
The European Communities submits that the United States has attempted to suggest that WTO Members did not decide silently to reject the company/owner distinction in the SCM Agreement given that it is a central concept of corporate law. The European Communities, however, believes that the truth is the opposite. In that regard, it explains that it has been well known for many years, and broadly accepted by WTO Members, that subsidies granted to an owner may be attributed to a subsidiary. It explains that the fact that a parent and wholly owned subsidiary may be considered together was accepted by the Appellate Body when it assimilated BS plc and its subsidiary BSES in the statement in its Report in US – Lead and Bismuth II. The European Communities further explains that it has been the practice of the United States to treat parent and wholly-owned subsidiary as one for countervailing duty purposes for a long period of time. In fact, it adds, the United States concluded, when adopting the previous gamma methodology, that the distinction between owners and the company was irrelevant for countervailing duties purposes.143
4.29.
The European Communities contends that, while methodologies might have changed, the basic principles of countervailing duty laws under the SCM Agreement have not. It therefore concludes that the United States has invented the centrality of its company/owner distinction only for the purposes of its same person methodology since it did not apply to its previous change in ownership methodology, nor does the United States currently apply this distinction when it is attributing subsidies.144
4.30.
The United States submits that, because the European Communities cannot explain how the payment of fair market value by the new owner of a subsidized company extracts subsidies from that company, it now asserts that the admitted distinction between owners and companies145 should be disregarded for the purpose of analysing the existence of subsidies because subsidies are received by "economic entities."146 It argues that, although the European Communities has not explained just what it means by "economic entity," the concept presumably is broad enough to encompass both owners and companies — investors and producers. The United States submits that the European Communities wants the Panel to embrace this new concept so that the Panel will treat money taken out of an owner's pocket as having been taken out of the company, potentially eliminating subsidies that reside in the company. If the subsidy is received by an "economic entity"(company/owner unit) instead of the company, it may be repaid by that same "economic entity" (company/owner unit), instead of the owner.147
4.31.
The European Communities considers that countervailing duties are applied without reference to the corporate law distinction between owners and the company; this follows both from the SCM Agreement and US practice. In support of this view, the European Communities quotes the US Department of Commerce's statement in proceedings before the US Court of Appeals for the Federal Circuit; in the case British Steel plc v United States as follows:

"The flaw in the lower court's analysis, plainly stated, is that the CVD law is not based upon principles of corporate law or property law. [T]he CVD law imposes two requirements before Commerce may countervail subsidies: (1) provision of a subsidy with respect to the manufacture, production, or exportation of a class or kind of merchandise; and (2) injury to the relevant US industry by imports of that class or kind of merchandise".148

(ii) Whether countervailing duties are comparable to liabilities for regulatory or tortious (delictual) acts

4.32.
The United States claims that its "same person methodology" is based on the principles of corporate successorship.149 It argues that its same person methodology is the only approach consistent with the principles of corporate successorship – principles of such long standing and so widely accepted that the drafters of the SCM Agreement would never have abrogated them without clearly so indicating. According to the United States there is nothing in the SCM Agreement which requires an authority to treat potential countervailing duty liability differently from other potential regulatory liabilities and tort liabilities. It also argues that there is no legal or economic distinction between potential countervailing duty liability and other potential burdens on the earnings of a company whose outstanding stock changes hands.
4.33.
The European Communities disputes the relevance of the above concepts to countervailing duty determinations. According to the European Communities, whereas regulatory and tortious liability may vest at the time of the act, and liability for environmental damage arises as of the date the action causing the damage was taken, liability for countervailing duties does not arise on the day that the subsidy was granted, but only at the time of importation. Thus, it concludes, a company may choose whether or not to export and thereby incur liability for countervailing duties.150
4.34.
The United States considers that the above argument reveals a thorough misunderstanding of the nature of potential liabilities, i.e. potential burdens on a company's earnings stream. In its view, once a company pollutes, the potential for environmental liability exists and may materialize if someone sues. Alternatively, it explains, the company can take steps to cure the harm by voluntarily undertaking a clean‑up. Likewise, once a company receives an amortizable subsidy, the potential for countervailing duties exists. The United States contends that that potential liability may materialize if someone (an injured industry in an importing country) files a countervailing duty petition. Alternatively, it adds, the company can take steps to cure the harm by voluntarily repaying the subsidy or stopping its injurious exports. The United States submits that there is simply no basis for the European Communities' extraordinary suggestion that the normal rules of corporate law and successorship cease to apply when the liability in question involves exposure to countervailing duties. It adds that the European Communities' argument is particularly vacuous with regard to Usinor, which was actually subject to countervailing duty orders at the time of its privatization.151
4.35.
In response to the Panel's question No. 6 on whether there are any international standards or rules regarding the creation of a new legal entity further to a change in ownership, the United States stated that corporate laws on successor liability (and on what kinds of ownership changes create a new legal entity) are applied in a generally consistent manner although they have not been harmonized internationally.152
4.36.
The European Communities considered, in its response to question No. 6, that the determination of a change in ownership is largely a question of fact, to be determined in accordance with applicable domestic law. It argues that is not aware of any relevant international rules on change in ownership although it pointed out that Article XXVIII (n) of the General Agreement on Trade in Services defines "ownership" and "control" for the purposes of determining which obligations are owed under GATS.153
4.37.
The European Communities agrees that potential countervailing duties do act as a restriction on an exporting producer. It explains that, if an exporting producer is aware that its products might be subject to countervailing duties, an exporting producer might think twice about exporting to a country imposing countervailing duties (such as the United States). However, it adds, as is beyond dispute, simple subsidization is not enough to bring about the imposition of countervailing duties. Moreover, it argues and as distinct from liability for damages caused by pollution, an exporting producer has a choice whether to subject its products to countervailing duties since it can decide whether or not to export. The European Communities explains that a countervailing duty is equivalent to customs duties and submits that it is patently ridiculous to say that liability for customs duties is akin to liability for environmental pollution, and that a corporate successorship test is applicable.154
4.38.
The United States claims that the European Communities argues that, because countervailing duty liabilities do not operate in exactly the same manner as potential tort liabilities, they are not potential liabilities at all.155 The United States contends that the truth is that countervailing duty exposure is very much like potential tort liabilities – they are both potential burdens upon the earnings of the company that a prospective purchaser would take into account just as surely as it would take account of potential tort liabilities. In any event, it argues, the European Communities' attempt to distinguish potential countervailing duty liabilities is not persuasive since both liabilities will become actual only if injured parties in the affected country bring some kind of legal action. Moreover, the United States affirms, just as a subsidized steel producer could avoid countervailing duties by disgorging the subsidies or by ceasing to export to countries with countervailing duty orders, a producer that has caused environmental damage in another country could well escape that potential liability by repairing that damage or by ceasing certain operations in that country. Finally, it argues, countervailing duties are very specific to the subsidized producer, i.e. the amount of the duty is calculated by dividing the subsidy to that producer for the year in which the merchandise is produced by that producer's total production during that year.156
4.39.
The European Communities considers the United States' example of environmental pollution to be erroneous.157 In the example of tortious or delictual liability, liability attaches as of the act causing the damage. The "potentiality" of the liability lies entirely in the hands of the person suffering damages – they have the choice whether to sue. For countervailing duties, the potentiality is entirely in the hands of the exporting producer; it has the choice whether to export, pay back the subsidies or to request that an investigating authority properly examine whether it is receiving a benefit.

(d) "Same person" versus "same activity"

4.40.
The European Communities maintains that the designation given to the United States' new change in ownership methodology, i.e. same person methodology is misleading. It states this because it considers that the term "same person" is a disguise for "same activity". Thus, it argues, this methodology, like the gamma methodology, treats as irrelevant the terms of the sale. In its view, this methodology perpetuates the United States incorrect conception that benefit somehow resides in the assets by examining, not whether the current producer has received any benefit, and hence a countervailable subsidy, but rather whether the assets and business operations of the company can be regarded as the same both before, and after, the transaction. The European Communities considers that this presumption, which could only be rebutted if the post-transaction entity disposed of all of its assets, and started production on another site, with another workforce, and under another brand name, does not involve any examination of the existence of a countervailable benefit. It therefore concludes that the same person methodology is, consequently, as WTO‑inconsistent a presumption, as the presumption the United States adopted in the gamma methodology. The European Communities points out that, in determining the existence of a benefit, the US Department of Commerce treats as irrelevant the nature of the transaction. US Department of Commerce is, in order to avoid such a benefit examination, equating the word "person" with the notion of "productive assets". The European Communities considers that the panel and Appellate Body158 have already rejected the notion that two entities might be the same person simply by virtue of their operations remaining the same.159
4.41.
In reference to the statement by the European Communities to the effect that the US Department of Commerce's same person test is a "same activity" test, which can only be satisfied if "the post-transaction entity disposed of all of its assets, and started production on another site, with another workforce, and under another brand name,"160 the United States considers that this is a distortion of the US Department of Commerce's actual methodology, which is firmly grounded in sound economics and in the principles of corporate successorship that apply in both the United States and the European Communities. Under that test, it explains, one corporate entity may be considered to be the successor of another if, in substance, it is the same person. As the US Department of Commerce explained, the various factors that go into the determination of whether a nominally different company should be treated, in substance, as the same person are just that – factors. The United States claims that there is no basis for asserting that all of the factors must weigh in favour of finding that a new corporate entity was created before such a finding may be made. The United States contends that in US – Lead and Bismuth II, neither the Panel nor the Appellate Body said that two different companies cannot be treated as the same person "simply by virtue of their operations remaining the same"161, as claimed by the European Communities. The United States submits that, faced with the very particular and complex facts of that case, the Panel simply stated (without explanation) that it "had no doubt" that BSC and UES were different companies and the Appellate Body merely stated that "given the changes of ownership leading to the creation of UES, the [US Department of Commerce] was required …. to examine, on the basis of the information before it relating to these changes, whether a "benefit" accrued to UES...." It concludes that there is no indication that the Appellate Body would have required a new subsidy determination had it been confronted with a determination involving the very same corporate entity accompanied by a fully-developed record demonstrating the continuity of that legal person.162
4.42.
The European Communities submits that there can be no doubt that it was the change in ownership which the Appellate Body considered in US – Lead and Bismuth II, triggered the need to examine anew the benefit analysis and that, by ignoring the change in ownership transaction, and focusing on the existence of "same persons", the United States fails to make the benefit determination which is required by Article 1 of the SCM Agreement. It simply assumes that the benefit passes through the transaction, despite the fact that there has been a change in ownership recasting the economic entity, and consideration has been paid for advantages previously received for free. The European Communities considers that the factors examined, which focus on continuity of business activities, do not involve an examination, in any form, of the existence of benefit to the post-privatization entity, they ignore the change in ownership, and the payment of consideration. The European Communities points out that the United States admits that it has never found a pre-privatization and post-privatization entity to be different persons.163 The European Communities believes that the same person methodology focuses on continuity of business activities, including maintenance of assets and liabilities, workforce etc, and is therefore no more than an extended and enlarged focus on continuity of assets, which formed the core of the gamma methodology discredited by the Appellate Body in US – Lead and Bismuth II and by the US Court of Appeals for the Federal Circuit in Delverde III.164
4.43.
The United States asserts that it has not said that subsidies reside in assets. In fact, it argues, it has repeatedly stressed quite the opposite, i.e. that subsidies reside in legal persons. The United States explains that if a subsidy recipient simply transfers its productive assets to a different legal person, the subsidies do not transfer to the person that buys the assets. The United States considers that the European Communities' assertion is astonishing in light of the United States' answer to the European Communities' question 10 that "a sale of bare assets is treated differently from a stock sale. Assuming that the assets are sold to a different person than the person that originally received subsidies, the DOC will not find that the producer that operates the purchased assets is subject to countervailing duties".165
4.44.
The European Communities argues that the use of the same person methodology shows that the United States remains convinced that subsidies reside in productive assets. It considers that the United States finds the methodology economically rational only because of its belief that a company "pumped up" with subsidies cannot be "deflated". The European Communities submits that, even accepting, for the sake of argument, the United States' contention that the Appellate Body based its finding on the fact that the subsidy recipient and the exporting producer were distinct legal persons, the same person methodology is still WTO‑inconsistent. In this regard, it argues that there can be little doubt that an application of the "same person methodology" to the British Steel privatization would indeed find that the companies involved are the same person since all the factors which the United States examines in its same person methodology are present. Thus, it concludes, even on the United States' interpretation of the Panel and Appellate Body's reports, the same person methodology would not be consistent with the WTO because it is not a methodology which can properly distinguish between distinct legal persons.166

(e) European Communities' "economic entity" concept

4.45.
In its second written submission, the European Communities refined its arguments by developing the concept of an "economic entity" as the recipient of the benefit. In this regard, the European Communities argues that the essential issue in this dispute is whether a change in ownership at arm's length and for fair market value, such as a privatization, can bring into question the continued relevance of a "benefit stream" presumed to exist as a result of a non-recurring subsidy. In the European Communities' view, the concept of "benefit stream" is simply an expression of the presumption that a non-recurring financial contribution provides a benefit over an extended period of time. The European Communities considers that a total change in ownership (i.e. where control passes from one entity to another)167 must bring any benefit analysis based on the old group into question for two reasons: first, the benefit must be examined from the perspective of the new economic entity, and, second, what had been received for free has now been paid for.168
4.46.
The European Communities maintains that the appropriate object of a benefit analysis is the economic entity of which the producer of the goods in question forms a part. It explains that this may be a large corporation with a very complex structure or be simply a single company and its controlling owner. According to the European Communities, the economic entity is the object of analysis because subsidies from throughout the economic entity may be attributed to the producer under investigation, and because a subsidy provided to one part of the entity permits resources to be used for other purposes in the economic entity; i.e. money is fungible.169 The European Communities alleges that this is explicitly permitted by the SCM Agreement and is the practice of investigating authorities, specifically the United States, but also the European Communities and others. The European Communities explains that, in the event of a change in ownership, this economic entity changes and thus the "benefit stream" may no longer be presumed to continue.170
4.47.
According to the European Communities, the benefit must "accrue" to the exporting producer. The European Communities explains that this follows from the principle that money is fungible, i.e. that money granted to one part of an economic entity will free up resources for another part of the economic entity. The European Communities further explains that no investigating authority is required to impose countervailing duties on subsidies bestowed on parts of an economic entity which are not responsible for the production of the products under investigation. However, the European Communities adds, GATT Article VI.3 clearly envisages that it would be possible to countervail such subsidies. It contends that this is also clear from the references in Article VI.3 to subsidies which may be bestowed in both the country of origin or of exportation, and also the possibility that a countervailable subsidy could be granted for the "transportation of a particular product". The European Communities claims that this has also been recognized by the Appellate Body in Canada – Aircraft where it stated: "Logically, a 'benefit' can only be said to arise if a person, natural or legal, or a group of persons, has in fact received something."171
4.48.
The United States, in response to the above argument of the European Communities to the effect that the distinction between owners and companies should be disregarded because money is fungible within "economic entities,"172 concedes that, generally speaking, money is fungible. However, it argues, fungibility operates only within groups of entities that may be collapsed and treated as one. It submits that this does not include investors and producers. In its view, to treat money as being fungible between investors and producers, for example, would imply that, if one of the Panel members were to buy shares of IBM, IBM's creditors could attach that Panel member's assets to satisfy a debt of IBM. The fungibility of money does not extend this far.173
4.49.
The United States maintains that the European Communities' new "economic entity" approach suffers from two fundamental defects. First, as the Appellate Body has stated, the recipient of a subsidy "must be a natural or legal person".174 The United States argues that, while the European Communities has not explained what an "economic entity" is, it is clearly intended to be broader than the legal person that received the subsidy. Second, the "economic entity" approach leads to one logical absurdity after another. According to the United States, the European Communities' new economic entity approach results in a situation where: (i) a government gives a subsidy to an "economic entity," consisting of both itself and the legal person to whom the subsidy was given; (ii) the government then sells a portion of the "economic entity" (formerly known as the company) to a new owner. This creates a new "economic entity" consisting of a portion of the pre-privatization entity and the new owner175; and (iii) when the new owner writes the check, it is distinct from the legal person that received the subsidy (otherwise, the subsidy recipient would be buying itself from itself). The instant the transaction is complete, however, the subsidy recipient is merged with the new owner into a new post-transaction "economic entity," which has never received a subsidy.176
4.50.
The European Communities argues that the existence of a subsidy is not, as the United States claims, something that can be irrebutably presumed until it is demonstrably "extracted" from the assets of the "legal person" in which the US Department of Commerce has deemed it to "reside". It is something that has to be determined to exist in the light of all the circumstances. Since the actual ownership of a company and the fact that it is government-owned are circumstances that influence the existence of a subsidy, the European Communities argues, this needs to be re-assessed when these circumstances change.
4.51.
The United States considers that the European Communities has coined the new term "economic entity" to obscure the simple fact that a privatization consists of a sale by a government of a subsidy recipient to a new owner. It argues that the fact that the sale is not a sale of some other entity is demonstrated by the price paid – the fair market value of the legal person that received the subsidy; it is not the fair market value of some other, larger "economic entity." The United States submits that calling the subsidy recipient different "economic entities" before and after the sale, cannot change this simple fact: the legal person that received the subsidy does not necessarily change simply as the result of the sale.177
4.52.
The European Communities submits that the United States itself explicitly uses the economic entity approach. In this regard, they refer to § 351,525(b)(6) of the US Department of Commerce's Countervailing Duties; Final Rule which sets out a number of methods for allocating subsidies granted to one part of a group to other parts of the group.178 The European Communities contends that this allocation of subsidies depends on relationships of control; i.e. can one company control the use of assets of the other. The European Communities argues that these principles become entirely irrelevant where the United States insists on the need to analyse whether the "legal person" before the privatization is the same as the "legal person" after the privatization. The European Communities considers that, when ownership changes, the economic entity of which the exporting producer formed a part cannot continue to be subject to countervailing measures on the same basis and that it must be determined, in an investigation, whether benefits which accrued to or were attributed to the exporting producer under investigation, can still be attributed in the same manner. The European Communities further notes that in its response to part (e) of its question 12, the United States explains that if the parent company then acquired a new company, the United States could impose countervailing duties on imports from that company as well, on the same basis as it had attributed them, to pre-existing subsidiaries. Thus, the European Communities concludes that, for the United States, the existence of ownership is relevant when it may wish to increase the possibilities of imposing countervailing duties, but is not relevant when it might require a renewed examination of the existence of subsidization.179 In its view, the US Department of Commerce ignores the distinction between companies and owners, so that, in effect, it applies an "economic entity" approach itself.180
4.53.
The United States contends that the above statement by the European Communities is a gross misstatement.181 It submits that an accurate description of the US Department of Commerce's practice is that, as a general rule, the US Department of Commerce treats companies and owners as completely distinct, but that it sometimes allocates subsidies to different producers within the same corporate group. As regards the general rule, the US Department of Commerce does not allocate to producers, subsidies that are given to investors; nor does it allocate to investors, subsidies that are given to producers. It adds that the US Department of Commerce also necessarily distinguishes between owners and companies each time it finds that a government has provided a subsidy to a government-owned company – not to do so would be to imply that the government subsidized itself. As regards the exceptions, the United States points out that the very existence of carefully crafted exceptions to the rule that legal persons are treated as distinct entities itself demonstrates the existence of the general rule. It explains that the most obvious exception is where subsidies are nominally granted to a holding company that simply acts as a conduit for subsidies to one or more of its producing subsidiaries.182 If the subsidies were allocated strictly within the holding company, they would never apply to the production in question, negating the remedy that countervailing duty regimes are intended to provide. In spite of this, the United States indicates, the allocation of subsidies to the members of the group does not imply that there is no distinction between the various legal persons – it implies that, in giving the subsidy to the holding company, the government was making an indirect grant to the various operating units.183 The United States explains that where the US Department of Commerce does allocate subsidies across the combined production of a closely related corporate group, it is because the various members of that group are all engaged in production of similar merchandise and essentially, function as one entity184, or, if the firm that received an untied financial contribution is a holding company, including a parent corporation with its own production, then the US Department of Commerce would attribute the subsidy to the consolidated sales of the holding company and its subsidiaries.185 The United States clarifies that when there is an insufficient identity of interests between the parent and the subsidiary to warrant treating the entities as one, the US Department of Commerce follows its general rule and does not allocate subsidies to the entire group.186

3. Whether the benefit passes through when the privatization transaction takes place for fair market value and at arm's length

4.54.
The European Communities maintains that where the change in ownership has taken place for fair market value and at arm's length, the entity will not have any benefit and hence any subsidy. Consequently, it argues, it is only if the company has received subsidies after the transaction (by virtue of attribution), either through membership of a different economic entity or through a privatization taking place at an undervalue that the exports of the post-transaction entity can be subject to countervailing duties.187
4.55.
The European Communities considers that these two concepts are also facets of the economic entity analysis. In its view, a change in ownership transaction will not involve two different economic entities, if the parties to the change in ownership transaction are not at arm's length. In a similar sense, it adds, one would intuitively expect two different economic entities to negotiate, in order to arrive at the fair market value of the object of sale. If a transaction did not take place at fair market value then there must be a supposition that the two parties are related or are not at arm's length.188
4.56.
The European Communities argues that the concept of the economic entity is also relevant for establishing whether value has been paid for that which had previously been received for free. The European Communities argues that a subsidy offered to a company also has an effect on the owner of the company. In its view, rather than invest in the company, the owners' financial resources are free for other investments. This is because money is fungible. The European Communities explains that when a company is sold, the value which the subsidies have brought is incorporated in the value of the company. A new owner buying at fair market value will not have received a benefit, because it has received nothing for free. That is, the economic entity which produces the goods after the change in ownership has not received anything for free; rather all assets which it is in a position to control have been fully paid for.189 The European Communities claims that its understanding that it is the change in ownership which reverses the presumption that a benefit stream continues over the average life of the assets, has been explicitly endorsed by the panel and Appellate Body in US – Lead and Bismuth II..190 The European Communities claims that this conclusion is reinforced by the fact that the Appellate Body repeated the factual findings of the panel that British Steel Corporation ceased to exist and British Steel plc. was created before the actual privatization transaction.191 In other words, the European Communities argues, at that point, before the privatization had taken place, the legal person exporting the product under investigation was different from the legal person which had received a subsidy.192 Were the United States correct in its assertion, this simple change in legal person would have been enough to trigger the need to revisit the subsidy determination. The European Communities contends that this fact was clearly not considered dispositive by either the Panel or Appellate Body. It submits that what was considered dispositive was the change in ownership, as is evidenced by the clear references to this factual element in the findings of the Panel and the Appellate Body.193
4.57.
The European Communities explains that it has referred to the "pass through" of a benefit rather than whether that benefit is "extinguished" or "survives" the privatization. It clarifies that this is because a benefit does not necessarily simply "disappear"; it resides with the natural or legal person which originally received the subsidy. In its view, a privatization transaction will only lead to the "extinction" of a countervailable subsidy where the pre-transaction subsidy beneficiary no longer exists.194
4.58.
The United States maintains that the European Communities fails to explain how the payment of fair market value for a company extracts a subsidy from that company. It submits that the European Communities should admit that it has not made out even a prima facie case that a payment for fair market value extracts subsidies from a company, and it should admit that the only consequence of such a payment is that the purchasers themselves have not obtained a separate, new benefit.195 In reference to the European Communities' argument that the purchaser for fair market value and at arm's length of previously subsidized production does notpersonally obtain any benefit, the United States submits that there is no dispute about this proposition since all parties agree that new owners who pay fair market value (for anything, including a subsidized company) personally obtain no benefit. The new owners give equal value for what they obtain, and so do not personally receive any benefit – their financial circumstances are unchanged. It further submits that there is no new subsidy in such a case, since the purchasers simply become the owners of the entity or "person" in which the subsidy has always resided, and continues to reside. The United States considers that what the European Communities is really suggesting with this argument is that, somehow, when the new owners pay fair market value for a company, not only they do not personally obtain a benefit, but the benefit from any previous subsidies is somehow extracted from the company. The United States considers that there are two problems with this approach: First, it is inconsistent with the European Communities' main explanation that the "post privatization entity" is a new and distinct person from the recipient of the subsidy. If that is so, then the original subsidy is not there to be extracted from the "post-transaction" entity by its owners. Second, it argues, the European Communities' theory is based on pure speculation since there is no basis whatsoever on either the record before the US Department of Commerce or before this Panel, for assuming that AST's new owners will extract some extra margin of profit from the company. The United States argues that prices are set by supply and demand and, therefore, the new owners cannot simply increase the price of the goods; nor can they simply increase production without further pushing prices downward. Put simply, no matter how profit-minded they are, they can extract no more from the company than could the prior owners. It mentions that this is particularly true in the steel industry, which is plagued with chronic overcapacity that frustrates the efforts of even the most ravenous investor to realize a reasonable profit.196
4.59.
The United States claims that, since the Appellate Body found in US – Lead and Bismuth II that subsidies are bestowed on legal persons (i.e., the company producing subject merchandise), these continue to reside in that person unless they are taken out of that person, or the person is dissolved. It submits that a change in ownership, per se, does neither. Accordingly, the United States requests that the Panel find that changes in ownership of subsidized companies do not automatically extract the subsidies from those companies, but that investigating authorities should simply inquire whether, in conjunction with the change in ownership, the subsidies have been paid back or not transferred to the new producer of the subject merchandise.197
4.60.
The European Communities argues that when the United States uses the word "extract", it appears to be talking about the extraction of subsidization from productive operations – whether they be workers with enhanced skills, or steel mills which have been built with the help of subsidies. In the European Communities' view, the Appellate Body in US – Lead and Bismuth II clearly found that subsidies do not accrue to productive operations, but rather to legal persons.198 The European Communities submits that the United States misrepresents and manipulates the Appellate Body findings with its new same person methodology since an analysis of the factors used in this same person methodology, shows that it is in reality an examination of continuation of productive operations.199 The European Communities therefore considers that the focus on continuity of business activities, including maintenance of assets and liabilities, workforce etc, is no more than an extended and enlarged focus on continuity of assets, in which, it seems, the United States is convinced subsidization resides200. It argues that this is clearly contrary to the Appellate Body's findings firstly, that a benefit is calculated with respect to a natural or legal person, and secondly, that a change in ownership accomplished at fair market value and arm's length means no subsidization passes through.201

B. US DEPARTMENT OF COMMERCE'S PRACTICE IN ADMINISTRATIVE REVIEWS

4.61.
The European Communities does not challenge the procedures in administrative reviews in Countervailing Duties on Imports of Certain Carbon Steel Products from Sweden (Case No. 7) or Grain-Oriented Electrical Steel from Italy (Case No. 12), but rather the methodology applied. However, the European Communities points out a problem of circular logic in the US Department of Commerce's practice whereby the appropriate venue for introducing evidence of a privatization as a basis for a change in the countervailing duty is in an administrative review. The European Communities contends that exporting companies often do not participate in the US Department of Commerce's investigations because of the "prohibitive costs of co-operating and [the] awareness that US Department of Commerce's applicable change in ownership methodology would mean that the privatization would not be taken into account."202 It also submits that in both Cut-to-Length Carbon Steel Plate from Germany (Case No. 10) and Cut-to-Length Carbon Steel Plate from Spain (Case No. 11) the exporting producers were "precluded from asking it because the US Department of Commerce prohibits the review of an order if a foreign manufacturer has made no shipments to the United States during the relevant period of review."203
4.62.
The United States maintains that, with respect to each of the 12 measures the European Communities has challenged, it has given each responding steel company, for each of the countries and products involved, every opportunity to request an administrative review of the pertinent countervailing duty order, where the jurisdictional grounds to do so exist as a matter of domestic law.204 The United States disputes the assertion by the European Communities that companies do not participate because the process is lengthy and expensive. The United States points out that three European steel companies have requested reviews, one of which is completed and two of which are ongoing. The United States feels that the European Communities' assertion is "pure speculation, unsupported by evidence on any administrative record."205

C. OBLIGATIONS OF THE MEMBERS IN SUNSET REVIEW INVESTIGATIONS

4.63.
The European Communities claims that the US Department of Commerce's practice as regards sunset reviews is inconsistent with the SCM Agreement to the extent that the US Department of Commerce fails to examine the existence of a benefit after a change in ownership on the basis that it is not required to take into account evidence before it, other than from the original investigation, where there have been no administrative reviews since the original investigation.206

1. Scope of the obligations of Members under Article 21.3 of the SCM Agreement

4.64.
The European Communities argues that Articles 21.1 and 21.3 of the SCM Agreement read together clearly create a presumption that countervailing duties should be terminated five years after the imposition of the original duty unless the investigating authority first initiates a review and second, determines, in that review, that there is a likelihood of continuation or recurrence of subsidization and injury. In its view, the general rule embodied in Article 21.1 is given concrete expression in Article 21.3.207 The European Communities contends that, because Article 21.1 of the SCM Agreement requires a countervailing duty to be levied only for as long as, and to the extent which injurious subsidization exists, Article 21.3 of the SCM Agreement must be interpreted as requiring an investigating authority to examine the existence of subsidization, as part of its determination of the likelihood of continuation or recurrence of subsidization.
4.65.
The European Communities submits that an investigating authority cannot determine whether there is a likelihood of continuation or recurrence of subsidization without considering whether, and the extent to which, a benefit continues to accrue and that this requires it to carry out a new, detailed investigation, in which it determines, on the basis of positive evidence, the likelihood of continuation or recurrence.208 The European Communities explains that in all four of the sunset reviews included in this dispute, the US Department of Commerce based its decision to continue the countervailing duty orders just on information from the original investigation.209 In its view, the investigating authority cannot simply presume such a likelihood just because certain interested parties have not responded to a notice of initiation.210
4.66.
The United States considers that an investigating authority need not revisit ex officio its subsidy determination, in a sunset review under Article 21.3 of the SCM Agreement. In its view, the determination in a sunset review under Article 21.3 concerns future behaviour, i.e. the likelihood of continuation or recurrence of subsidization _ not whether, or to what extent subsidization currently exists. In its final results of the sunset review in Case No. 10, the US Department of Commerce stated that:

"a sunset review is not the appropriate proceeding in which to examine a complicated privatization transaction and to consider new privatization methodology. In light of the complexity and fact-intensive nature of this issue, it is imperative that the issues be fully developed on the record."211

4.67.
The United States points out that nothing in the SCM Agreement requires consideration of the magnitude of subsidization in determining the likelihood of continuation or recurrence.212 Furthermore, the United States considers that where there have been no administrative reviews of a countervailing duty order, the only evidence which an investigating authority can take into account is evidence from the original investigation. The United States submits that in the four sunset reviews covered by this dispute, the US Department of Commerce was under no obligation, pursuant to Article 21.3, to convert its sunset reviews into full-blown administrative reviews of the respective countervailing duty orders.213
4.68.
The European Communities disagrees with the United States' position. It contends that administrative reviews, under Article 21.2 of the SCM Agreement are facultative; interested parties may, or may not, choose to request reviews, and investigating authorities may, or may not, consider it justified to initiate an investigation. Under Article 21.2, it is for the interested party to provide substantiated information, which the investigating authority is, according to the Appellate Body, obliged to fully examine. The European Communities argues that, under Article 21.3, it is for the investigating authority to make a determination of continuing injurious subsidization. In this regard, it indicates that to premise examination of evidence in a determination under Article 21.3 on the evidence having been examined in a review under Article 21.2 is a pure invention, not founded on any provision of the SCM Agreement. The European Communities points out that the CIT reached the same conclusion in the Dillinger case when it found that the US Department of Commerce is not entitled to base its findings in sunset reviews only on evidence gathered in the initial investigation.214 The CIT also pointed out to the US Department of Commerce that in the case of "extraordinarily complicated" sunset reviews the Secretary of Commerce may extend the period for issuing final results by up to 90 days.215

2. Obligation of examination

4.69.
For the European Communities, it is for the importing Member to re-examine whether countervailing duties are still justified and considers this requires it to carry out a new, detailed investigation, in which it determines, on the basis of positive evidence, the likelihood of continuation or recurrence.216 The European Communities contends that, if no existing subsidization can be identified, an investigating authority must be under an obligation to adduce positive evidence supporting its determination of the likelihood of recurring subsidization. It further indicates that, in a sunset review under Article 21.3, it is for the authorities to determine, and not for the respondent to disprove, that there is a likelihood of continuation or recurrence.217 The European Communities submits that the fact that in three of the reviews the exporting producers did not respond to the notice of initiation, cannot be used by the United States as an excuse for reversing the burden of proof in a sunset review. The investigating authority cannot just simply presume that there is a likelihood of continuation or recurrence of injurious subsidization because certain interested parties have not responded to a notice of initiation. According to the European Communities, this reversal of the burden of proof is inconsistent with Article 21.3 of the SCM Agreement.218
4.70.
The United States contests the nature of the sunset review obligation. The United States feels, that absent an administrative review, the only evidence it is required to evaluate in order to determine the likelihood of continuation or recurrence of the countervailable subsidies is that contained in the original investigation. The United States maintains, insofar as benefits streams from amortizable subsidies addressed in the original investigation are concerned, that sunset reviews are not the appropriate place to evaluate new evidence.
4.71.
The European Communities points to the CIT ruling in Dillinger where the Court held that:

"The statute, however, does not charge any interested party with the ultimate burden of persuasion, or otherwise create a presumption that a countervailable subsidy is or is not likely to continue or recur if the order is revoked. …. Because there is no presumption as to the likelihood of continuation or recurrence it follows that there is no presumption that the countervailable subsidies will continue at the specific rate determined in the original investigation."219

4.72.
The European Communities submits that the United States, through its practice of limiting evidence in sunset reviews, absent an administrative review, to the evidence in the original investigation, has created an irrebuttable presumption of continuation or recurrence at the specific rate determined in the original investigation.

D. ARGUMENTS RELATING TO THE WTO COMPATIBILITY OF SECTION 771(5)(F) OF THE US TARIFF ACT OF 1930, AS AMENDED, (19 U.S.C. 1677(5)(F))

4.73.
The European Communities maintains that Section 1677(5)(F) prevents the US Department of Commerce from adopting the principle laid down in the SCM Agreement, and confirmed by the Panel and Appellate Body in US – Lead and Bismuth II, that a benefit must be assessed with respect to the market benchmark and that consequently a fair market value, arm's-length transaction means that any pre-transaction benefit stream is not enjoyed by the post-transaction entity. The European Communities considers that Section 1677(5)(F) is thus inconsistent with Articles 1.1(b), 10, 14 and 32.5 of the SCM Agreement in addition to Article XVI.4 of the WTO Agreement.220
4.74.
For the European Communities, Section 771(5)(F) of the Tariff Act 1930, as amended, (19 U.S.C. Section 1677(5)(F)) (hereinafter Section 1677(5)(F)), as interpreted by the US Court of Appeals for the Federal Circuit, prevents the United States recognizzing the principle that an arm's length, fair market value transaction does not pass through any benefits from pre-transaction financial contributions to the post-transaction entity. The European Communities is of the view that, Section 1677(5)(F) was specifically designed to prevent the US Department of Commerce applying a "rule" that a benefit stream does not survive a fair market value, arm's-length transaction. The European Communities argues that the wording and legislative history of Section 1677(5)(F) and the intent to overrule the identical principle as developed by the CIT in the Saarstahl I decision, prove that it was designed so as to ensure that in situations of fair market value change in ownership, benefits of the subsidies are never considered not to have been passed to the new owner.221 It quotes the US Department of Commerce in its findings in the Court remand redetermination in the Delverde case:

"Section 771(5)(F) only acts to preserve the ability of the Department to exercise its discretion, and it accomplishes this goal by overturning the approach ordered in Saarstahl I, which had mandated that the Department find that an arm's-length transaction, in and of itself, precludes any pass-through to the purchaser."222

4.75.
The United States contends that Section 1677(5)(F) does not mandate an either/or approach to the question of whether pre-privatization subsidies benefit a post-privatization entity.223 On the contrary, it argues, the plain language of Section 1677(5)(F) demonstrates its discretionary nature. In this regard, the United States contends that the text of Section 1677(5)(F) clearly provides that a change in ownership does not by itself means that a past countervailable subsidy is no longer countervailable, nor does it mean that it is countervailable. The United States argues that the statute leaves the investigating authority discretion to make its decision. It further argues that the Statement of Administrative Action ("SAA") also supports the view that Section 1677(5)(F) is discretionary and not mandatory. In this regard, the SAA states that the purpose of Section 1677(5)(F) is to clarify that "the sale of a firm at arm's length does not automatically, and in all cases, extinguish any prior subsidies conferred", and that it is the Administration's intent that "Commerce retains the discretion to determine whether, and to what extent... previously conferred countervailable subsidies" are eliminated,224
4.76.
The European Communities alleges that it is unable to determine whether the US Department of Commerce requires this discretion as a finder of fact – to determine whether a transaction has taken place at fair market value and arm's length, or whether the US Department of Commerce requires this discretion to allow it to determine that, even after a fair market value, arm's-length transaction, the "benefit stream" from pre-transaction non-recurring subsidization might continue to flow. The European Communities indicate that it can accept that a privatization transaction is often very complex and might require detailed examination. However, the European Communities cannot accept that an investigating authority might require discretion to determine that benefit from pre-transaction subsidization passes through an arm's length, fair market value transaction. In the view of the European Communities, such discretion would clearly be inconsistent with Article 1.1 of the SCM Agreement which requires the existence of benefit for subsidization to be found and countervailing duties imposed, and permits no exception.225
4.77.
In its response to question No. 18 from the European Communities, the United States indicates that if an evaluation of all the facts and circumstances of a particular privatization or a change in ownership warrants a finding that as a result of an arm's length, fair market value privatization, the post-sale company does not enjoy a benefit from past subsidies, then such a finding can be made. In the United States' view, there is nothing in the language of the change in ownership provision, or in the legislative history of that provision which would prevent the US Department of Commerce from making such a finding.
4.78.
The European Communities interprets the above statement as meaning that the United States is saying that, even if the "legal person" after the transaction is not a different "legal person" from the subsidy recipient under its "same person methodology", Section 1677(5)(F) would allow the US Department of Commerce to find that where it had determined, as a matter of fact, that the change in ownership had taken place at arm's length and for fair market value, it could conclude that no benefit passes through. The European Communities however claims that the United States has not explained whether the US Department of Commerce could apply the logic of this statement to every change in ownership transaction with which it is faced, issue methodology setting out this intention, and still act consistently with Section 1677(5)(F).226

V. ARGUMENTS OF THE THIRD PARTIES

5.1.
From the three third-parties to this proceeding, i.e. Brazil, India and Mexico, only Brazil filed its comments within the 28 January 2002 deadline. Brazil and Mexico presented oral statements during the third-party session. India reserved its rights to participate as a third-party in eventual appeal proceedings.

A. BRAZIL

1. Arguments relating to the United States change in ownership methodology

(a) The existence of a benefit in the post-privatization entity

5.2.
Brazil argues that the existence and value of countervailable benefits can change as a result of events that occur after the initial financial contribution. Brazil also notes that in US – Lead and Bismuth II the Appellate Body determined that a change in ownership necessarily triggers an examination of whether a benefit received prior to the change in ownership continues to benefit the new owners. The Appellate Body also concluded in US – Lead and Bismuth II that whether a financial contribution confers a benefit depends on "whether the recipient has received a financial contribution on terms more favourable than those available to the recipient in the market."227 Brazil contends that under the United States' same person methodology, the price paid by the new post-privatization owners is irrelevant to the determination of whether the post-privatization entity continues to enjoy the benefits of the pre-privatization subsidies. Brazil contends that this is contrary to the finding in US – Lead and Bismuth II, which made clear that the essential determination of whether a post-privatization entity continues to enjoy the benefits of the pre-privatization entity is whether or not the new owners paid fair market value in the transaction transferring ownership. Brazil maintains that theUnited States' same person methodology does not address the issue of whether the transaction transferring ownership was at fair market value, but rather only inquires whether the pre-privatization and post-privatization entities are the same. While Brazil concedes that the Panel and the Appellate Body in US – Lead and Bismuth II found there must be a "recipient" of a subsidy benefit and, therefore, that subsidy benefits can only reside in natural or legal persons, it argues that this finding "does not mean either that subsidy benefits cannot be transferred from one legal entity to another or that the entity originally receiving the subsidy retains the benefit for as long as it remains the same legal entity."228 Rather, Brazil interprets US – Lead and Bismuth II to mean that the relevant question is not whether the entity originally receiving the subsidy is the same legal person as the post-privatization entity, but whether the "benefit" has been transferred in the sale to new owners. Thus, Brazil argues that the central issue to be examined according to US – Lead and Bismuth II is the nature of the transaction transferring ownership.

(b) Determination of countervailability under Article 14 of the SCM Agreement

5.3.
Brazil argues that a financial contribution can only confer a countervailable "benefit" if the financial contribution received is "on terms that are more favorable to the recipient than the terms available in the market."229 Brazil also contends that such contributions only remain countervailable so long as they are provided on terms more favorable than those available in the market. Brazil maintains that Article 14 of the SCM Agreement makes clear that the "existence and magnitude of countervailable subsidies are always determined by reference to "commercial" or "market" criteria"230 and that the same criteria apply in determining the existence of "benefits" from the provision of capital.
5.4.
Brazil argues that "countervailable subsidies can change over time, both in terms of their existence and their magnitude."231 Brazil holds that market factors are the criteria for determining whether provisions of capital, such as loans and equity are financial contributions that confer a subsidy benefit. For a loan, Brazil contends that the measure is whether the interest charged for the loan capital is consistent with the interest charged in the market; for equity, the measure is whether the equity is valued properly based on the expectations that the recipient entity will generate adequate returns. Brazil argues that the existence of a benefit is based on the terms on which the capital is provided and will change if those terms change.
5.5.
Citing Article 14(a) of the SCM Agreement, Brazil states that equity capital can be a financial contribution which confers a benefit only if the provision of that equity capital is on terms "inconsistent with the usual investment practice of private investors." Brazil argues that in a financial contribution to an non equity-worthy recipient on terms inconsistent with usual investment practices of private investors ceases to be a countervailable benefit when the capital is no longer available on terms inconsistent with usual investment practices of private investors. Therefore, Brazil concludes that in the case of equity, the transaction governing the sale of equity is the key event which must be analysed to determine whether or not the equity, continues to be provided on terms inconsistent with market terms. Brazil contends that the United States' methodology ignores the question of whether there are changes to the terms of capital provision resulting from a sale of the equity. Brazil maintains that once the equity has been transferred to a private party in an arm's-length transaction at market value, the expectation (and, therefore, the terms of its provision) is that the equity will maintain or increase in value and earn a return for the investors or the company will no longer be able to raise equity capital.

(c) Resource misallocation and countervailing duties

5.6.
Brazil believes that the true objective of the United States' same person methodology is to ensure that events which take place after the initial financial contribution are not allowed to affect the ability of the United States to impose countervailing duties on the original financial contribution and the benefits conferred by that original financial contribution. Brazil notes that the United States argues that even if an arm's-length transaction does not confer a benefit to the new owners and the new company, a market distortion remains and must be redressed. Brazil argues that the logic of the United States' argument is that any methodology that does not allow Members to address the supposed macroeconomic effects of a subsidy, is not consistent with the object and purpose of the SCM Agreement. However, Brazil notes that the SCM Agreement does not provide Members with a broad‑based authorization to redress all actions that the Member feels distort the market. Brazil contends that the SCM Agreement requires a financial contribution which confers a benefit as a condition for imposing countervailing duties, nothing more, nothing less.

2. Arguments relating to Section 1677(5)(F)

5.7.
Brazil contends that the United States law prevents the adoption of a methodology to determine the existence of post-privatization benefits which would be consistent with the Panel and Appellate Body reports in US – Lead and Bismuth II. Brazil argues that Section 1677(5)(F) renders the consideration of whether the transfer in ownership was an arm's-length transaction at fair market value irrelevant to the determination of whether the new owners continued to enjoy the subsidy benefit. As an illustration, Brazil claims that not a single factor in the "totality of circumstances" test applied in the United States' same person methodology looks at whether the transaction is an arm's-length transaction for fair market value. While Brazil recognizes that under the new methodology, the benefits are no longer determined to adhere only to the physical assets of the privatized entity, one of the rationales for the gamma methodology which led to the Panel and Appellate Body rejection of that methodology in US – Lead and Bismuth II, they now adhere, in effect, to a more broadly defined set of assets which include the name, the personnel, the customers, the management, and the business relationships of the entity. Thus, the new same person methodology is only a variation of the rejected gamma methodology and still fails to consider the effects of a change in ownership as required by US – Lead and Bismuth II.
5.8.
Brazil believes that, in light of the United States' failure to implement the US – Lead and Bismuth II determinations, the Panel should, in addition to finding that the United States actions inconsistent with its WTO obligations, suggest how the substantive standard addressing privatization should be implemented and that the United States should initiate and conduct reviews of all existing countervailing measures.

B. MEXICO

1. Arguments relating to the United States change in ownership methodology

5.9.
Mexico submits that the revised US Department of Commerce same person methodology is used by the United States in its latest attempt to continue applying countervailing duties on goods produced by privatized firms, while avoiding the determination of whether a previously bestowed subsidy continues to confer a benefit. Mexico claims that the SCM Agreement and the GATT 1994 require two essential prerequisites to be fulfilled for the imposition of countervailing duties, as was made clear in US – Lead and Bismuth II, which is a direct precedent for this dispute. First, demonstration of the existence of a subsidy is required. In accordance with Articles 19.1, 19.4 and 21 of the SCM Agreement and Article VI:3 of the GATT 1994, an investigating authority may not impose or maintain countervailing duties on an imported product without determining the existence of a subsidy bestowed, directly or indirectly, upon the manufacture, production or export of any merchandise. Second, determination of the existence of a "benefit" by reference to a market benchmark. As shown by the Panels and the Appellate Body in Canada – Aircraft232 and US – Lead and Bismuth II233, a "benefit" is determined by reference to the terms on which a "financial contribution" would have been made available to the recipient in the marketplace. In addition, in accordance with Article 1.1 (and Article 21) of the SCM Agreement, "the investigating authority must establish the existence of a 'financial contribution' and 'benefit' during the relevant period of investigation or review".
5.10.
Mexico submits that the US Department of Commerce same person methodology is inconsistent with the United States' obligations as a WTO Member. Under the new US Department of Commerce methodology, if the privatized company has been determined as remaining the same person as the firm on which the subsidy was originally bestowed, it is unduly assumed that the benefit conferred by that subsidy has passed through to that company. Mexico contends that such an assumption, without a concrete determination on the continued existence of a benefit, cannot be regarded as valid under the SCM Agreement as interpreted in US – Lead and Bismuth II. Moreover, the same person methodology, like US Department of Commerce preceding methodologies, is entirely unrelated to the market benchmarks referred to by the panels and the Appellate Body, since according to the US Department of Commerce criteria, practically any privatized company would be found to be the same person. Mexico argues that under no economic logic would it be reasonable to expect that a private investor who buys a public enterprise (e.g. a steel company), to have to change its name, facilities, line of production, customers, etc. and to fire hundreds of qualified workers, just to avoid the imposition of antidumping duties. In this context, Mexico contends that this US Department of Commerce criteria used to assume the transfer of the subsidies granted prior to the privatization, may respond to the United States' corporate law principles, but not to the United States' obligations as a WTO Member to make an adequate determination of the continued existence of a "benefit" by reference to a market benchmark, and hence, due demonstration that a countervailable subsidy has been bestowed, directly or indirectly, on the production of goods by the privatized company.
5.11.
Mexico contends that, in the case of a change in ownership involving the payment of consideration, a distinction must be drawn between the pre-privatization company that originally received the subsidy and the post-privatization entity, for the purpose of reviewing continuity of the benefit conferred by a subsidy. Mexico claims that this has also been recognized by the Panel in US – Lead and Bismuth II.234 According to Mexico, it is the change in ownership and the ensuing payment of consideration for the productive assets that calls for a new determination of benefit conferred by a subsidy. Thus, Mexico considers that the SCM disciplines do not release the United States from the obligation to determine the continued existence of a benefit to a privatized company, on the sole grounds that it deems the new firm to be "not distinct" from the original firm. Thus, Mexico contends that the same person methodology and the investigations and reviews based on that methodology are not consistent with Article VI:3 of the GATT 1994 and Articles 14, 19.1, 19.4 and 21 of the SCM Agreement.

2. Arguments relating to Section 1677(5)(F)

5.12.
Mexico maintains that a concrete determination of the continued existence of a benefit is necessary in all cases involving a change in ownership accomplished through an arm's-length transaction. A change in ownership through an arm's-length transaction is an event of such relevance as to require, by itself, a concrete finding regarding the continuation of the benefit conferred by the subsidy granted to the privatized firm before the privatization. Mexico claims that Section 1677(5)(F) directly contravenes this requirement, since it clearly fails to stipulate the need for such a benefit determination. Therefore, this Section violates the United States' obligations under Articles 1, 10, 19, 21 and 32.5 of the SCM Agreement and Article XVI:4 of the WTO Agreement.

VI. INTERIM REVIEW235

6.1.
On 8 April 2002, pursuant to Article 15.1 of the DSU, the Panel issued the draft descriptive part of its Report. As agreed, on 18 April 2002 both parties commented on the draft descriptive part. The Panel issued its Interim Report on 13 May 2002. On 27 May 2002, pursuant to Article 15.2 of the DSU, the United States and the European Communities provided comments and requested the revision and clarification of certain aspects of the Interim Report. None of the parties requested that the Panel hold a further meeting with the parties. In the absence of a meeting and further to paragraph 16 of the Panel's Working Procedures236, the parties were given until 5 June 2002 to submit further written comments on the other party's Interim Review's comments. Both parties filed further comments on that date.
6.2.
Following the comments of the parties, the Panel has reviewed the claims, arguments and evidence submitted by the parties during the panel process. Where it considered it appropriate to ensure clarity and avoid misunderstandings, the Panel revised its findings, including the correction of typographical and editorial mistakes. The Panel has addressed the following concerns raised by the parties.
6.3.
Generally, the United States' allegations concern the factual description of the Panel Report. The United States makes a point of repeating that the Panel did not include several of its 18 April requests to amend the descriptive part of the Panel Report. The United States' comments seem to want to give the impression that the Panel intentionally, or without due diligence, refused to accept or refer to evidence or arguments that the United States submitted to the Panel during the panel process. Before it addresses any specific allegation, the Panel notes that most of the United States' requests and comments made in its 18 April communication were accepted by the Panel and were reflected in the Interim Report. In its 18 April comments, the United States often did not point to submissions or communications where the concerned factual or legal allegations could be located. The Panel notes, however, that the present dispute is generally not concerned with factual matters but rather with the legal consequences of privatizations, which occurred in all 12 cases before it. This is the factual basis upon which the Panel's findings and conclusions are made. Nonetheless, where factual allegations were made by the European Communities, it was for the United States to refute them.237 On occasion, the Panel has explicitly invited the United States to comment on the European Communities' description of the twelve determinations238; the United States did not respond fully to the Panel's questions. However, because it wants to take into account the United States' concerns to the extent permitted by WTO law, the Panel has reviewed the record for the facts that the United States requests be added to the descriptive part of the Panel Report. To the extent possible, and with a view to favour transparency of the circumstances of those cases, the Panel has revised some of the paragraphs of the Panel Report to include references to data contained in the actual 12 determinations submitted by the European Communities as exhibits. As noted later, these additional factual data, are not necessarily relevant to the limited terms of reference of this Panel, including those relating to allocation and attribution of subsidies. In all cases, the Panel has refused to amend the descriptive part of its Report where it would involve the introduction of new evidence or new arguments not submitted during the panel process.
6.4.
The United States makes some general remarks regarding what it considers as "errors of particular significance"; namely: (1) "that the Panel considers that all sizable subsidies at issue in the challenged cases were pre-privatization subsidies (some were not); (2) "that in all cases disregarding the pre-privatization subsidies would have left only a de minimis benefit (for several cases this is not true)"; (3) "that all of the privatizations were full privatizations (some were not)"; (4) "that all of them at issue occurred at fair market value (some likely did not and others have not been sufficiently investigated to permit a finding one way or the other)"; and (5) "that the EC’s factual characterizations reproduced in sections II-IV were "not rebutted" by the United States (many were vigorously rebutted)".239
6.5.
As regards the United States' allegations Nos. (1) and (2), the Panel fails to understand why the United States considers that the Panel has ignored that, in some of the determinations affected by this Panel, the US Department of Commerce may have countervailed post-privatization subsidies. We have never, contrary to what the United States has claimed, made such statements or assumptions in our Panel Report. What the Panel has done is to delimit the scope of its ruling according to its mandate; namely to assess the WTO-compatibility of the US change-in-ownership methodologies which allow non-recurring pre-privatization subsidies to be countervailed after privatization has taken place without any prior WTO‑compatible determination of benefit vis-à-vis the privatized producer, as applied in the 12 countervailing duty determinations before it. In this regard, the Panel recalls its findings in paragraph 7.39 (6.39 of the Interim Report).
6.6.
Paragraph 7.39 does not exclude the possibility of post-privatization subsidies or even recurring pre-privatization subsidies. These are not, however, relevant to our analysis. Our analysis only focuses on the treatment of pre-privatization non-recurring subsidies under the SCM Agreement following a change in ownership, more specifically on the effect of such treatment on the privatized producer.
6.7.
The Panel understands that its request for the termination of the countervailing duty orders may not have been sufficiently clear and may have led the United States to believe that the Panel had wanted to ignore the possible existence of post-privatization subsidies in some of the 12 determinations which, the Panel believes, is not an issue before it. Accordingly, the Panel has amended paragraphs 7.87, 7,100, 7,116 and 7,117 to improve the clarity of the Panel's recommendations.
6.8.
As regards the United States' allegation No. (3) that the 12 determinations did not concern full privatizations, the United States alleges that in the case of Usinor, the subsidy recipient in the three French cases, the Government of France continued to maintain a "substantial level" of government ownership. The Panel notes that the Government of France divested itself of the remaining shares in Usinor in 1997-1998, that is before the countervailing duty order was issued in the three cases.240 As the US Department of Commerce's own record reflects after privatization, so-called "stable shareholders" held approximately 14 per cent of Usinor's total shares; 10 per cent of these stable shareholders were claimed by the United States to be government-owned or controlled entities.241 To accommodate the United States, the Panel has added this information from the United States Federal Register into the factual description of the relevant French cases. The Panel uses the term "full privatization" to refer to a change in ownership where the government has divested itself of all, or substantially all, of its ownership interest in the privatized company, and clearly could no longer exert a controlling interest On the basis of the evidence submitted by the parties by the close of the second substantive meeting, the Panel still considers that in the 12 determinations before it, the governments had severed their control over the state-owned producers upon privatization and the privatized producers could no longer rely on government financing for their operations and could no longer receive things for free. For the Panel these are full privatizations. In order to facilitate the understanding, the Panel has expanded its discussion on what it understands as (full) privatization for the purpose of these panel proceedings. To take into account the United States' concern, the Panel has deleted the term "full", as this does not affect the Panel's considerations and reasoning applicable to all 12 determinations before it, as in all the twelve determinations, the governments had, upon privatization, severed all, or substantially all, their ownership interests over the state-owned enterprises in favour of the privatized producers and their shareholders.
6.9.
As regards the United States allegation No. (4), the Panel is surprised at this comment since it has never stated that all 12 privatizations have taken place for fair market value. On the contrary, the Panel has specified that only as regards two determinations (Case Nos. 8 and 10) had the US Department of Commerce itself found that the privatizations at issue taken place for fair market value. The Panel would like to refer to paragraph 2.2 of the Report which is very clear on this matter. The Panel's findings do not assume that all privatizations were for fair market value. Although the European Communities has made allegations to this effect, the Panel does not prejudge those privatizations where the US Department of Commerce has not actually found that the privatization was done for fair market value,. The Panel does consider, however, that the US Department of Commerce's practice, not to examine whether a privatization took place for fair market value and at arm's length in its change in ownership methodology, unless the privatized producer is a distinct legal person from the state-owned producer, is contrary to the SCM Agreement. Except for Case Nos. 8 and 10, whether the specific privatizations were for fair market value is of no relevant to this Panel as long as the US Department of Commerce fails to undertake the examination itself.
6.10.
As regards the United States' allegation (5), the Panel does not agree with the United States' statement to the effect that it has vigorously rebutted the factual characterization by the European Communities reproduced in Sections II to IV of the Panel Report. Up to the interim review stage, the United States has scarcely contested the factual data provided by the European Communities. For example, the United States did not rebut the factual data provided by the European Communities in its Annex to question No. 11 of the Panel where it describes the various privatizations. Only at the review stage of the descriptive part (in its communication of 18 April), has the United States attempted to contest these facts generally, often without pointing to any specific evidence on the record which the Panel may have ignored.
6.11.
The United States argues that in paragraph 2.1 of its Report, the Panel had inaccurately described the question before the Panel, by implying that any subsidy existing after a privatization, must arise out of the privatization itself. The Panel recalls that its terms of reference are limited to the issues raised by the European Communities in its request for the establishment of a panel. In particular, the European Communities' claims concern the legal consequences of a change in ownership from wholly-owned state enterprises to privatized producers and whether the imports from the privatized producers in the 12 determinations can continue to be countervailed for subsidies bestowed to state-owned producers prior to the privatizations. In any event, the Panel has clarified the wording of paragraph 2.1 in the hope that it will leave no doubt as to the Panel's mandate and intent.
6.12.
The United States considers that paragraph 2.3 inaccurately states that all of the privatizations before the Panel involved a full change in ownership; because, in fact, the French privatization featured in 3 out of the 12 cases involved a 'substantial level of continued government ownership' through GOF-owned "stable shareholders". The European Communities in its 5 June 2002 comments suggests that the Panel change the word "ownership" to "control". The Panel refers to its statement in paragraph 6.8 above. Yet, even if the United States is correct in stating that the French Government maintained a minority indirect ownership interest in Usinor, the Panel is of the view that all the determinations before it, including the three French cases, involved changes in ownership leading to a privatization of the state-owned enterprises, in the sense that the government had divested itself of all, or substantially all its ownership interest and clearly no longer had any controlling interest in the privatized companies. After privatization, the privatized producers could no longer rely on government financing for its operations and could no longer receive things for free. The Panel believes that under its definition, Usinor's privatization qualifies as a full privatization. Nonetheless, the Panel has revised the text of paragraph 2.6 to reflect the findings regarding "stable shareholders" made by the US Department of Commerce in Final Affirmative Countervailing Duty Determination: Stainless Steel Sheet and Strip in Coils from France..242 The Panel believes that this change responds to both the United States' comments of 27 May 2002 and the European Communities' comments of 5 June 2002.
6.13.
With regard to paragraph 2.6, in its comments of 18 April, the United States was not able to point to any evidence it had submitted to the Panel during the panel proceedings and which the Panel had ignored, set aside or misinterpreted. Yet the Panel has attempted to clarify further its point.
6.14.
In paragraph 2.10, the United States disagrees with the use of the term "judgment" to refer to the remand redetermination from the CIT in the AST case, as no final judgment has been issued. The European Communities, in its 5 June comments, suggests using the word "decision" for judgment. The Panel has replaced substituted the word "judgment" with the word "order".
6.15.
The United States claims that paragraph 2.13 still fails to state that the US Department of Commerce's pro rata allocation of the Usinor group's subsidies to all group producers, including GTS, has not been challenged (either by the European Communities in the present dispute or by the respondents during the US Department of Commerce investigation). The United States considers that, as written, paragraph 2.11 implies that whether GTS "received" a portion of the original French Government subsidies is a subject of dispute. The Panel has no evidence before it of whether the allocation concerned was challenged or not. The Panel agrees with the European Communities' comments of 5 June 2002 that the issue of attribution is not within the terms of reference of the Panel. In order to accommodate the United States' concerns, the Panel has revised the relevant paragraph to reflect the limited terms of reference of this Panel.
6.16.
As regards paragraph 2.14, the United States claims that it does not correctly describe the facts of Usinor's evolving ownership interest in GTS, nor does it correctly describe the US Department of Commerce's analysis of those facts. Further to the United States comments on 18 April, the Panel did change the wording of its old paragraph 2.12 but did not agree with the United States' characterization of its determination and preferred its own language. The Panel recalls that the pro-rata allocation of subsidies and related percentage of countervailing duties is not a matter before this Panel. The United States claims that paragraph 2.13 continues to inaccurately describe the US Department of Commerce's remand investigation and redetermination. The United States alleges that it was at GTS' request that the US Department of Commerce focused its analysis on changes in Usinor's (as opposed to GTS') ownership. The Panel did not accept the United States' comment because it had not been presented with any evidence to support the United States' assertion that GTS requested such an analysis. Moreover the Panel does not see how this is relevant to the present dispute.
6.17.
The United States considers that paragraph 2.18 contains errors in the description of the subsidy bestowal, the change in ownership transaction, and the US Department of Commerce's analysis regarding ILVA and CAS and refers to its comments of 18 April. The Panel has reviewed the evidence within the United States Federal Register, submitted by the European Communities. In particular, Federal Register (63 Fed. Reg. 810) indicates that "[i]n 1989, the Aosta operations were transferred to ILVA. In December 1989, Cogne S.r.l. was created as a wholly-owned subsidiary of ILVA S.p.A., which held the Aosta operations. Cogne S.r.l. was later named Cogne Acciai Speciali S.p.A. (Cogne S.p.A.)." (emphasis added). Therefore, the Panel stands by its previous decision not to accept the United States' request. However, the Panel has amended the text of this paragraph to show more fully the evidence in the Federal Register.
6.19.
The United States maintains that paragraphs 2.22, 2.23, and 2.25 do not accurately describe the subsidies in Stainless Steel from Italy and that paragraphs 2.32 and 2.33 do not accurately describe the facts of Case No. 12 regarding GOES from Italy, because they do not contain details relating to the pro-rata allocation of subsidies among the relevant corporate groups. The Panel, with a view to clarifying its Report, has decided to adjust the text of paragraph 2.22 according to the relevant Federal Register; adjust the text of paragraph 2.23, and accept the United states comments on paragraph 2.25. The European Communities points out that the allocations made by the US Department of Commerce have been contested in domestic proceedings in the United States and argues that therefore the changes requested by the United States should not be made. The Panel is merely correcting its statement to reflect more accurately what the US Department of Commerce concluded in this case. The Panel does not take any position on the validity of the US Department of Commerce's determinations on such pro-rata allocation and their relevance, if any, as this is for another forum, and constitutes a matter outside the terms of reference of this Panel.
6.20.
As regards paragraph 2.31, the United States also claims that the Panel did not accept all its suggestions. The Panel did accept most of the United States suggestions of 18 April and has changed the word "findings" for "review" to respond to any remaining concerns by the United States.
6.21.
As regards former paragraphs 2.33, 2.34 and 2.35, the United States would like the Panel to delete them since they do not deal with factual aspects, but instead reflect the arguments of the parties. The Panel has reviewed its previous position and has moved the relevant paragraphs to a new section IV.B ("US Department of Commerce's practice in administrative reviews") in the arguments part. The Panel has substituted the relevant paragraphs in the factual part (now 2.34 and 2.35) with some summarized information regarding the US Department of Commerce's relevant practice available in the "Countervailing Duties; Final Rule" quoted in footnote 50.
6.24.
The United States considers that the assertions by the European Communities as to why exporters did not request administrative reviews should be deleted from paragraph 2.48 (now 2.47), footnote 64 (now 67). The Panel has already responded to the United States' comments of 18 April by amending the text of the footnote in question (now footnote 67) and sees no need to further amend the text; what is stated there is factually correct and was not challenged by any party.
6.25.
The United States claims that paragraph 2.59 (now 2.57) contains an inaccurate description of the gamma methodology and its results. The Panel already responded to the United states' comments of 18 April by amending the text of the paragraph in question. To take into account the United States' concern, while noting that the United States had admitted that the gamma methodology was inconsistent with the SCM Agreement, the Panel has revised the text accordingly.
6.26.
The United States refers to paragraph 2.60 (now 2.58) and claims that it inaccurately describes the panel and Appellate Body decisions in US – Lead and Bismuth II. According to the United States, these decisions found three particular countervailing duty determinations, rather than the gamma methodology itself, to be WTO-inconsistent. The Panel directs the United States to paragraph 12 of its first written submission where it states that, in US – Lead and Bismuth II "the panel and the Appellate Body rejected the gamma methodology as inconsistent with the SCM Agreement."243 The Panel also notes that in other parts of this proceeding, the United States has stated that it accepted that its gamma methodology was inconsistent with the SCM Agreement, because it did not establish that the requirements of the SCM Agreement had been satisfied with respect to the current (privatized) producer.244 To take into account the United States' concern, the Panel has revised its text.
6.27.
The United States claims that paragraph 2.61 (now 2.60) mistakenly states that under the same person methodology, prior subsidies are "presumed" to "pass through" to the post change-in-ownership producer. The Panel has reconsidered the United States' concerns and has changed the text of the relevant paragraph to read "found to continue to reside in".
6.28.
The United States claims that in paragraph 4.5, the Report omits its principal rebuttal to the European Communities's arguments on the subject of whether privatization triggers the need for a re-examination of the existence of benefit. The Panel recalls that the United States has admitted that a change in ownership triggers the obligation to review the conditions of application of the SCM Agreement. The Panel has stated on numerous occasions the United States' argument and has added another reference to it following the United States request of 18 April. The United States also requires that we introduce a new argument regarding its belief that no distinction should be made between privatization and any other change in ownership.245 In the Panel's view, the United States wants to introduce a new argument at this late stage in the panel process which does not add to its main claims and arguments. The United States has not been able to point to any communications during the panel process where it would have argued that privatizations were not distinct from any other change in ownership for the reasons mentioned in its communication of 14 May. The Panel is also well aware of the United States' argument that only a change of legal personality of the producer (not any change in ownership or privatization) extinguishes the benefit vis-à-vis the privatized producer or, to put it differently, that unless the privatized producer is a distinct legal person from the state-owned enterprise, a countervailable subsidy continues to reside in the person upon whom it was originally bestowed.
6.29.
The United States considers that paragraph 4.22 inaccurately summarizes the United States' position on subsidies and changes in ownership and its interpretation of US – Lead and Bismuth II. The Panel has added to its description to take into account the United States' concerns.
6.30.
As regards the United States comments on paragraph 4.32, the Panel has considered the United States' proposal and revised the text as suggested by the United States.
6.31.
The United States comments on paragraph 6.6 (now 7.6) to the effect that the US Department of Commerce examines the "circumstances of the privatization," including all terms of the transaction, in determining whether the person under investigation or review is the same legal person that received the subsidy. The Panel recognizes the United States' point and has revised the description of the United States' argument. The Panel maintains, however, that the US Department of Commerce does not look to the issue of whether the privatization took place at arm's length and for fair market value, in making its analysis of whether the privatized producer has received a benefit from the subsidy bestowed to the state-owned producer, unless that privatized producer is a distinct legal person from the state-owned producer.
6.32.
As regards the United States' claim that paragraph 6.14 (now 7.14) contains an inaccurate description of the US Department of Commerce's test, the Panel has reconsidered the United States' concerns and has changed the text of the relevant paragraph to read "found to continue to reside in".
6.33.
The United States points out some errors in the chart attached to the Interim Report as Annex A. The Panel has updated the chart to reflect the United States' comments on the data included for Case Nos. 7 and 10 and the French cases. The Panel has also considered the United States' comments regarding the use of the % symbol rather than the term "percentage points" in the column concerning alleged countervailable subsidies in Annex A. The Panel notes that this was not raised in the United States' 18 April comments on the draft descriptive part, which contained Annex A. The Panel is unclear as to the value of using the term "percentage points" rather than the percentage symbol. The reason the Panel used the % symbol was to reduce the amount of text in Annex A. However, in an effort to respond to the United States' concerns the Panel has amended the text of the column in question to duplicate the text in the corresponding portions of the descriptive part, to which the United States has not raised any objections.
6.34.
With regard to paragraph 6.90 (now 7.90), the Panel has adjusted the text to reflect the Panel's terms of reference.
6.35.
The United States argues that the Panel's statement that the sunset reviews in question "should be terminated" reflects several errors of law and fact. The Panel does not necessarily agree with the United States' comments. However, to accommodate the United States' concerns, the text of paragraphs 6,117 and 6,118 (now 7,116 and 7,117) have been amended to clarify that the Panel was referring only to the termination or removal of the (share of the) countervailing duty order which derived from non-recurring pre-privatization subsidies, for which no WTO-compatible determination of benefit has taken place vis-à-vis the privatized producer. The Panel makes no findings on recurring subsidies or post-privatization subsidies and their countervailability, as these are not within the terms of reference of the Panel.
6.36.
The European Communities suggested that paragraph 6,130 (now 7,129) be revised by changing the word "purchaser" in the first line to "producer." The Panel agrees with the United States' comment of 5 June that this change would make the sentence incomprehensible and therefore has maintained the original version.
6.37.
The United States notes that in three separate places, the Panel states that the United States took the position that Case No. 7 (the administrative review involving steel from Sweden) was not within the Panel's terms of reference because it was finalized prior to the Appellate Body Report in US – Lead and Bismuth II (paras. 6.5, 6.27, and 6.99 of the Interim Report). The United States claims that it never put forward this argument and that any reference to it should be struck from the report. The Panel points out that in paragraph 99 of its first written submission the United States contents: "[t]he European Communities' claims regarding the expedited sunset review of the CVD order on cut-to-length plate from Sweden are not within the Panel's terms of reference."246 Since the Panel is now aware that the inclusion of this claim was an error, the Panel will therefore delete the requested passages.
6.38.
The United States makes a variety of arguments against the Panel's factual findings regarding Section 1677(5)(F). First, the United States claims that the Panel erred in attempting to establish the meaning of the legislation, as a factual element, by examining the "internal elements" relevant to the construction of the statute – its legislative and judicial history. The Panel repeats its discussion contained in its findings. The Appellate Body Report in India – Patents stated that: where the alleged violation at issue is domestic legislation, an examination of the relevant aspects of municipal law is essential to determining whether a Member has complied with its obligations.247 The panel in US – Section 301 Trade Act provided guidance for panels interpreting domestic law when it stated that: "a Panel should not interpret the law "as such", but rather establish the meaning of the disputed legislation as a factual element and determine whether the factual element constitutes conduct by the respondent Member contrary to its WTO obligations."248 The Panel also feels that it was appropriate to use the legislative and judicial history of Section 1677(5)(F) in establishing the meaning of the legislation. The panel – upheld by the Appellate Body – in US – 1916 Act, stated that even if the text of the law in question were clear on its face, it was necessary to examine the domestic application of that law, its historical context and legislative history and subsequent declarations of US authorities in order to asses its compatibility with WTO law.249 Based on the jurisprudence, the Panel maintains that it was correct for it to examine the relevant aspects of the United States' law and to establish the meaning of the legislation as a factual element.
6.40.
The United States also contends that the Panel erred in finding that the same person methodology had also been condemned by the US Court of Appeals for the Federal Circuit's reasoning when it condemned the "gamma methodology." The Panel has never claimed that the US Court of Appeals for the Federal Circuit has ruled specifically on the legality of the same person methodology under Section 1677(5)(F); the Panel also feels that this is not relevant. In the context of its examination of the gamma methodology, the US Court of Appeals for the Federal Circuit discussed and analysed Section 1677(5)(F) and found that a per se methodology would violate the statute. It is to this discussion and finding to which the Panel is referring. The Panel notes that the US Department of Commerce has itself argued that "the Federal Circuit in Delverde III was quite clear that 19 U.S.C. Section1677(5)(F) precludes per se rules, including one that would automatically treat the change in ownership as extinguishing prior subsidies."254 The Panel again maintains its reasoning, that the effect of the interpretation of the statute by the US Court of Appeals for the Federal Circuit, is to make Section 1677(5)(F) inconsistent with the United States' WTO obligations.
6.41.
The United States argues that the fundamental problem with the Panel's analysis is that it ignores the fact that under the United States' legal system, courts develop the law on a case-by-case basis. The Panel understands that law in a common law legal system is continuously evolving. However, the current state of the law in the United States today is that expressed by the US Court of Appeals for the Federal Circuit in Delverde III. The United States has provided no evidence of other dispositive decisions by the US Court of Appeals for the Federal Circuit or the United States Supreme Court (the only higher court), that would alter the binding nature of the US Court of Appeals for the Federal Circuit's holding in Delverde III or the Panel's understanding of what that decision requires of the United States Department of Commerce.255 The United States also contends that all that can be fairly said at this time is that the US Court of Appeals for the Federal Circuit has found the gamma methodology to be unlawful, and has yet to opine on whether the type of methodology proposed by the Panel would be permitted under the United States' statute. The Panel would like to point out that in no way is it proposing that any particular methodology be adopted by the United States. The Panel examined Delverde III, not to assess or discuss the compatibility of the gamma methodology but to understand the nature and legal effects of Section 1677(5)(F), as interpreted by the US Court of Appeals for the Federal Circuit, in the context of its examination of the gamma methodology. Since the United States itself has argued that the Delverde III ruling clearly precludes per se rules, including one that would automatically treat the change in ownership as extinguishing prior subsidies256, the Panel continues to believe that the current interpretation of Section 1677(5)(F) by the US Court of Appeals for the Federal Circuit, which is binding upon the CIT and the US Department of Commerce, would prevent the United States from applying Section 1677(5)(F) in a manner consistent with the SCM Agreement.
6.42.
The United States believes that the Panel should explain more precisely in paragraph 7.1 (now para. 8.1) why the United States' measures in question are inconsistent with, or violate, Articles 1, 10, 14, 19.1, 19.4, 21.1, 21.2, 21.3 and 32.5 of the SCM Agreement and Article XVI:4 of the WTO Agreement. In particular, the Panel agrees with the United States that stricto sensu, Article 1 being a definitional provision, cannot be violated as such. The Panel understands the concerns of the United States and has therefore expanded its explanation and conclusion, of the reasoning behind each of the various violations.
6.44.
The Panel notes that, on 4 June 2002, the CIT ruled on AST's challenge to the US Department of Commerce's final determination of the administrative review in GOES from Italy (Case No. 12).257 In its opinion, the Court upheld the same person methodology as being consistent with Section 1677(5)(F), in particular with the US Court of Appeals for the Federal Circuit's decision in Delverde III. Since this CIT decision was issued after the interim review stage, the Panel has not taken it into account within the descriptive part or the findings. Nevertheless, the Panel wishes to comment on the paragraphs of this Report on which the decision by the CIT might have some bearing.
6.45.
In particular, paragraph 2.33, which indicates that AST has challenged the US Department of Commerce's final determination of the administrative review in GOES from Italy258, could be completed by adding the following text:

"… On 4 June 2002, the CIT ruled on AST's challenge to the US Department of Commerce's final determination of the administrative review. The Court remanded the case to the US Department of Commerce to 'further explain whether post-sale AST or KAI [the purchaser] become legally responsible for all of pre-sale AST's assets and liabilities.'259 The Court upheld the same person methodology as being consistent with Section 1677(5)(F), in particular with the US Court of Appeals for the Federal Circuit's decision in Delverde III."

6.46.
Paragraph 7.79 quotes a 4 January 2002 decision of the CIT260 which concluded that the same person methodology was inconsistent with Section 1677(5)(F). This paragraph could be expanded to completely cover the current CIT jurisprudence on the same person methodology by noting that in the 4 June 2002 CIT decision261, the Court concluded that the same person methodology is consistent with Delverde III and Section 1677(5)(F).262 While the Panel accepts that, in the 4 June 2002 case, the CIT seems to validate the same person methodology, this does not change the reasoning of this Panel to the measures before us. In our view, the CIT is equating countervailing duty liability to other corporate liabilities, which can be inherited by the new owner. However, a countervailing duty liability can only exist if there is countervailable subsidization under the terms of the SCM Agreement. Therefore, the Panel considers that since, in its view, the subsidy benefit ceases to accrue to the privatized producer through the payment of fair market value for the shares of stock, there is no longer a countervailable subsidy under the SCM Agreement. In the view of this Panel, as there is no subsidy to countervail, there is therefore no outstanding importers' liability in respect of countervailing duties on the imported goods produced by the privatized producer.
6.47.
Another paragraph which could benefit from reference to the 4 June 2002 CIT decision is paragraph 7,153. In this paragraph, the Panel indicates that the current interpretation of Section 1677(5)(F) by the US Court of Appeals for the Federal Circuit, which is binding upon the CIT and the US Department of Commerce, prevents the United States from applying Section 1677(5)(F) in a manner consistent with the SCM Agreement. The 4 June 2002 CIT decision supports the conclusion of the Panel that the US authorities are unable to consistently implement the SCM Agreement through Section 1677(5)(F), as interpreted by Delverde III.263 In its decision, the CIT concurred with the argument put forward by the United States, in evidence submitted before this Panel264, that "the Statute [Section 1677(5)(F)] prohibits a per se rule for determining whether a subsidy continues to be countervailable to a new owner following a change in ownership"265 and thus upheld the same person methodology as being consistent with Section 1677(5)(F), in particular with the US Court of Appeals for the Federal Circuit's decision in Delverde III. The CIT concluded that Section 1677(5)(F) does not require the US Department of Commerce to conduct a second benefit determination if the entity that originally received the subsidy is the same person being reviewed after privatization.266 This indicates that, pursuant to Section 1677(5)(F), the US Department of Commerce will not be required, [or even able] to make, an independent benefit assessment vis-à-vis the privatized producer nor will it be able to conclude that when the privatization is at arm's length and for fair market value that the benefit no longer accrues to the privatized producer.267

VII. FINDINGS

A. CLAIMS OF THE PARTIES

7.1.
The European Communities has requested the Panel to rule on the WTO-consistency of 12268 countervailing duty determinations listed in paragraph 2.1 above. Six of these countervailing duty determinations occurred in the context of original investigations269, two in the context of administrative reviews270, and four others in the context of sunset reviews271, as further detailed in that paragraph.
7.2.
The European Communities claims generally that the United States has not respected its obligations pursuant to the SCM Agreement in the 12 listed determinations and that the countervailing duties in place are, therefore, inconsistent with the United States' obligations pursuant to the SCM Agreement and the Marrakesh Agreement Establishing the World Trade Organization (the WTO Agreement).272 According to the European Communities, a change in ownership, such as a privatization, creates a mandatory obligation on the investigating authority to examine the conditions of the change in ownership transaction in order to determine whether any benefit accrues to the new economic entity.273 The European Communities argues that when a privatization takes place at arm's length and for fair market value274, the benefit of the subsidy to the previous state-owned producer does not continue to accrue to the post-privatization economic entity. The European Communities asserts that the investigating authority's obligation to examine whether the benefit continues to accrue to the privatized producer exists for all types of countervailing duty proceedings, regardless of whether they are original investigations, administrative reviews, or sunset reviews. The European Communities claims that with both the gamma methodology and the same person methodology, the US Department of Commerce does not examine the conditions of the transaction and thus fails to determine whether a benefit continues to accrue to the current producer contrary to the requirements of Articles 1, 10, 14, 19, and 21 of the SCM Agreement.
7.3.
The European Communities also claims that Section 771(5)(F) of the US Tariff Act of 1930, as amended (19 U.S.C. §1677(5)(F)) ("Section1677(5)(F)") "as such" prohibits the US Department of Commerce from systematically assessing benefit in cases of privatizations in a manner consistent with the SCM Agreement and it is, thus, also inconsistent with Article XVI:4 of the WTO Agreement.
7.4.
The United States replies that the primary issue to examine when a change in ownership occurs is not whether the transaction was at arm's length and for fair market value, but whether it resulted in a change of the legal personality of the producer, i.e. whether the privatized producer is a "distinct legal person" from the pre-privatization state-owned producer. The United States maintains that a change in ownership or privatization does not necessarily result in a change of the legal personality of the producer and as such, should not change any prior determination of benefit assessed when the subsidy was bestowed to the state-owned producer, since the subsidy resides in the same legal person as before the privatization. For the United States, unless the post-privatization producer has become a new distinct legal person after the privatization, the importing Member can attribute the non-amortized part of a non-recurring subsidy provided to the state-owned producer to the privatized producer. Therefore, in its view, exports from the privatized producer can be countervailed or continue to be countervailed after the privatization pursuant to the SCM Agreement.
7.5.
The United States admits that in Case Nos. 1 to 7, where the gamma methodology was applied, its determinations are WTO‑inconsistent but only to the extent that it did not reconsider them under its new "same person" methodology.
7.6.
The United States maintains that its same person methodology, which is a two-step process looking first to whether the post-privatization producer is a new distinct legal person and only making a benefit assessment after a determination that the post-privatization producer is a new legal person, is consistent with its WTO obligations. The United States asserts that if the post-privatization producer is not a new legal person, the benefit attributed to the state-owned producer automatically accrues to the privatized producer. The United States also states that arms length's transactions for fair market value do not necessarily result in no benefit accruing to the post-privatization producer. In addition, the United States argues that sunset reviews are an inappropriate forum for analysing complex privatization transactions. The United States believes that it is not obligated, in a sunset review, to examine any evidence regarding subsidization that is not already on the record. In its view, in the absence of an administrative review, the only evidence of subsidization to be examined in a sunset review, will be that of the original investigation.
7.7.
As to the WTO‑compatibility of Section 1677(5)(F), the United States argues that Section 1677(5)(F) only maintains the US Department of Commerce's discretion to determine whether or not the benefit continues to reside in the company even after a change in ownership (privatization) at arm's length and for fair market value. The United States maintains that the SCM Agreement provides no basis for concluding that a change in the ownership of a subsidy recipient, for fair market value or otherwise, automatically eliminates the benefit conferred on the company. Therefore Section 1677(5)(F) is WTO‑compatible.

B. THE MEASURES AT ISSUE

1. Evolution of change in ownership methodologies applied by the US Department of Commerce

7.8.
It is reported that the issue of the effect of a change in ownership as a consequence of privatization for fair market value and at arm's length was first addressed by the US Department of Commerce in the administrative review of the countervailing duty order on Lime from Mexico in 1989.275 It is also reported that in that review, the US Department of Commerce determined first, whether an actual sale took place, and second, whether subsidies paid to the government-owned company continued to provide benefits to the owners of the privatized company.276 Having determined that there was an actual sale, the US Department of Commerce came to the conclusion that the price paid for the privatized company reflected its market value and that "therefore no benefits to [the government‑owned company] passed through to [the privatized company]".277 In 1992, in a preliminary determination in the US – Lead and Bismuth II investigation, the US Department of Commerce followed the approach taken in Lime from Mexico finding that a fair market value privatization did not provide any benefit to the post-privatization entity.278 However, in the Final Determination of 27 January 1993 in that case, the US Department of Commerce used the "pass‑through" methodology to conclude that all pre-privatization countervailable subsidies passed through to the privatized company and can continue to be countervailed.279 This pass-through methodology was replaced first by the so-called "gamma methodology" and then by the so-called "same person methodology", both of which are challenged in this dispute.

2. Change in ownership methodologies challenged in this dispute

7.9.
This dispute covers two methodologies used by the US Department of Commerce in order to assess the impact of privatization in the determination of subsidization vis-à-vis the post-privatization companies. These methodologies are the gamma methodology and the same person methodology. In this regard, of the 12 determinations challenged by the European Communities, 11 were initially based on the gamma methodology. In Case No. 12 (Grain‑Oriented Electrical Steel from Italy "GOES"280) the US Department of Commerce used the same person methodology. The same person methodology was first applied in the final results of the administrative review in this case which were published on 12 January 2001.281 This methodology had been applied earlier in various remand determinations ordered by the CIT within appeal proceedings in four of the above 11 determinations.282 The same person methodology has been challenged before the CIT in all of these remand redeterminations283, (and also in the GOES determination).284 The United States has admitted that seven (Case Nos. 1 to 7) of these 12 determinations are inconsistent with its WTO obligations to the extent that the gamma methodology was used in the determination and that the US Department of Commerce did not fully examine whether the pre- and post- change in ownership entities were the same legal persons.285

(a) The gamma methodology

7.10.
In July 1993, the US Department of Commerce introduced the gamma methodology.286 According to this methodology, after assessing the existence of pre-privatization subsidies, the US Department of Commerce determines to what extent (if any) the privatization transaction price repaid unamortized subsidies, and countervails the remainder (if any). Thus, unlike the pass-through methodology where the totality of prior subsidies passed through, in the gamma methodology only a portion of such subsidies may pass through.
7.11.
In 2000, the US Court of Appeals for the Federal Circuit found that the gamma methodology was inconsistent with Section 1677(5)(F).287 The Court found that the gamma methodology, in presuming that some benefit passed through, meant that the US Department of Commerce had adopted a per se rule that a pre-privatization subsidy would always pass through despite an arm's-length, fair market value transaction.288 The Court found that Section 1677(5)(F) prevents the adoption of a per se rule either that a subsidy continues to be countervailable despite an arm's-length transaction or that the subsidy is no longer countervailable as a result of a such a transaction.289
7.12.
The gamma methodology was the methodology applied in the three administrative reviews covered by the US – Lead and Bismuth II dispute and which the Panel and Appellate Body found to be inconsistent with the SCM Agreement.290

(b) The same person methodology

7.13.
In GOES from Italy291, the US Department of Commerce applied for the first time the same person methodology, which it had developed on remand after the Delverde III judgment. This methodology had first been set out in the preliminary and then final results of a redetermination pursuant to a court remand in Acciai Speciali Terni v United States.292
7.14.
The same person methodology provides for a two-step test. The first step consists of an analysis of whether or not the state-owned producer and privatized producer are distinct legal persons. For this purpose, the US Department of Commerce examines the following non-exhaustive criteria: (i) continuity of general business operations; (ii) continuity of production facilities; (iii) continuity of assets and liabilities; and (iv) retention of personnel. If, as a consequence of the application of these criteria, the US Department of Commerce concludes that the post-privatization entity is a new legal person, distinct from the entity that received the prior subsidies, the benefit of a prior subsidy would not be found to continue to reside in the post-privatization producer and the US Department of Commerce would proceed to examine whether any new subsidy has accrued to the privatized producer as a result of this change in ownership (and it would do so by assessing whether the sale was at arm's length and for fair market value). If, as the result of the application of the above criteria, the US Department of Commerce concludes that no new or distinct legal person was created, all the subsidy is found to continue to reside in the post-privatization producer and the US Department of Commerce will not assess whether the privatization was at arm's length and for fair market value.
7.15.
In response to Panel question No. 13293, the United States informed the Panel that, until now, there have been no cases where the application of the same person methodology in the context of a given privatization has resulted in the US Department of Commerce finding that no benefit continued to accrue to the privatized producer.

(c) Section 1677(5)(F)

7.16.
The European Communities also requests the Panel to find Section 1677(5)(F) of Title 19 of the US Code inconsistent with the United States' WTO obligations. Section 1677(5)(F) reads as follows:

"a change in ownership of all or part of a foreign enterprise or the productive assets of a foreign enterprise does not by itself require a determination by the administering authority that a past countervailable subsidy received by the enterprise no longer continues to be countervailable, even if the change in ownership is accomplished through an arm's-length transaction."294

7.17.
The legislative history of this statute is discussed hereafter in Section F.

C. THE IMPACT OF PRIVATIZATION ON THE DETERMINATION OF SUBSIDIZATION AND RELATED COUNTERVAILING DUTIES

1. Parties' claims and arguments

(a) The European Communities' claims and arguments

(i) The gamma methodology

7.18.
The European Communities claims that the gamma methodology applied by the United States in 11 of the countervailing duty determinations before the Panel, and the same person methodology applied, inter alia, in the administrative review in GOES from Italy, are inconsistent with the SCM Agreement. For the European Communities, the United States refuses to correctly apply the SCM Agreement as interpreted by the Panel and Appellate Body in US – Lead and Bismuth II. Since the United States admits that the gamma methodology is WTO‑inconsistent, the European Communities focused its argumentation on the WTO‑compatibility of the same person methodology.

(ii) The same person methodology

7.19.
The European Communities submits that the same person methodology is inconsistent with Article 1.1(b) of the SCM Agreement which requires a determination of the existence of a benefit before countervailing duties can be imposed.295 The European Communities claims that this methodology disregards criteria set down in Article 14 of the SCM Agreement that any benefit must be calculated with respect to the advantage obtained over what was available in the market.
7.20.
For the European Communities, when a change in ownership takes place at arm's length and for fair market value, the benefit attributed to the prior financial contributions (subsidization) does not continue to accrue to the new economic entity. The European Communities submits that privatization is a fundamental change in ownership that a fortiori requires a new benefit analysis.296 The European Communities believes that the standard for determining whether a countervailable benefit continues to accrue after privatization is not whether the new entity is the "same legal person" as before, but rather whether the transaction took place at arm's length and for fair market value. Basing its argument on the reasoning of the Panel and the Appellate Body reports in US – Lead and Bismuth II, the European Communities contends that since the benefit does not reside in the assets themselves, a benefit does not continue to flow from untied, non-recurring financial contributions after a change in ownership for fair market value at arm's length. The European Communities submits that the only way to support a finding that the benefit passes through to the new economic entity would be "if fair market value was not paid for all such productive assets."(emphasis added)297

"Benefit" under the SCM Agreement

7.21.
The European Communities asserts that, contrary to the ruling of the Panel in US – Lead and Bismuth II, as upheld by the Appellate Body, the United States, through its methodology, is creating a nearly irrebuttable presumption that the benefit of non-recurring countervailable subsidies resulting from financial contribution to the state-owned enterprise always passes through to the post-privatization economic entity. The European Communities believes that this United States' presumption could only be rebutted if the post-transaction entity disposed of all of its assets, and started production on another site, with another workforce, and under another brand name. The European Communities claims that the same person test does not involve any examination of the existence of a countervailable benefit: therefore it is as WTO‑inconsistent as the gamma methodology.298
7.22.
In response to the United States' argument that a change in ownership or privatization does not "extract" the subsidy or the benefit from the company, the European Communities argues that when the United States uses the word "extract", it appears to be talking about the extraction of subsidization from productive operations – whether they be workers with enhanced skills, or steel mills which have been built with the help of subsidies. In its view, the Appellate Body in US – Lead and Bismuth II clearly found that subsidies do not accrue to productive operations, but rather to legal persons.299

Distinct legal persons

7.23.
The European Communities considers that the term same person is a disguise for "same activity". The European Communities argues that this new methodology continues to treat as irrelevant the terms of the sale, just as the gamma methodology did. The European Communities believes that the United States is persisting in applying its misconception that the benefit somehow resides in the assets by examining, not whether the current producer has received any benefit, and hence a countervailable subsidy, but rather whether the assets and business operations of the company can be regarded as the same before and after the transaction.

Corporate law principles

7.24.
The European Communities rejects the parallels with corporate law and the distinction between owners and company invoked by the United States to maintain its position that only when the subsidy is paid back by the company recipient itself and not by its owners (shareholders) can it consider that the benefit has been extinguished. For the European Communities, countervailing duties are applied without reference to the corporate law distinction between owners and the company; this follows both from the SCM Agreement and the United States' practice. While the European Communities accepts that a distinction between owners and the company can be drawn for general purposes of corporate or commercial law, this distinction is not relevant for the imposition of countervailing duties since it is the economic entity which is the subject of the benefit analysis, not simply the exporting producer subject to investigation.
7.25.
In response to the United States's analogy between corporate liability and potential liability for countervailing duties, the European Communities argues that unlike regulatory and tort law where liability may vest at the time of the act and liability for environmental damage which arises as of the date of the action causing the damage, liability for countervailing duties does not arise on the day that the subsidy was granted but only arises at the time of importation. A subsidized producer may decide not to export and avoid countervailing duties, while a company cannot simply avoid liability once the act has been committed. The European Communities explains that a countervailing duty is equivalent to customs duty and submits that it is inappropriate to say that liability for customs duties is akin to liability for environmental pollution, or that a corporate successorship test is applicable.

(b) The United States' claims and arguments

7.26.
The United States claims that its same person methodology is consistent with the SCM Agreement and the WTO Agreement and that nothing in the SCM Agreement provides that upon a change in ownership at arm's length and for fair market value, the benefit accruing to the state-owned producer when it was provided with a subsidy does not continue to accrue to the new owner(s).

(i) The gamma methodology

7.27.
The United States admits that, based on the ruling of the Appellate Body in US – Lead and Bismuth II and the ruling of the US Court of Appeals for the Federal Circuit in Delverde III, the gamma methodology was not consistent with either the SCM Agreement or with the United States' law. Therefore, the United States agrees that the original six investigations and one administrative review (Case Nos. 1‑7), to the extent that the underlying determinations did not fully examine whether the pre- and post-change in ownership entities involved were the same legal person, are inconsistent with its WTO obligations. The United States claims to be prepared to bring these determinations into conformity, to the extent that it has not already done so. The United States points out that all six of the original investigations challenged by the European Communities that were determined under the gamma methodology are currently in litigation before the CIT.300 The US Department of Commerce adds that although it was not obligated to do so by the Appellate Body in US –Lead and Bismuth II, it has, in the context of the domestic litigation, revised its determinations in the four cases (Case Nos 1, 2, 4 and 6) which are proceeding, applying its new same person methodology. Since the United States claims that the European Communities has not challenged the four remand determinations before the WTO Panel, it asserts that the Panel's review is limited to the six original determinations in which the US Department of Commerce applied its old methodology.301

(ii) The same person methodology

7.28.
The United States submits that its new same person methodology is consistent with the SCM Agreement and was specifically designed to take into account the Panel and Appellate Body rulings in US – Lead and Bismuth II and the US Court of Appeals for the Federal Circuit ruling in Delverde III. The United States reminds the Panel that the only case before it where the same person methodology was applied by the US Department of Commerce is G from Italy (Case No. 12).
7.29.
The United States maintains that the same person methodology is firmly grounded in sound economics and in the principles of corporate successorship that apply in both the United States and the European Communities. Pursuant to the methodology, one corporate entity may be considered to be the successor of another if, in substance, it is the same legal person. As the US Department of Commerce explained, the various criteria that go into the determination of whether a nominally different company should be treated, in substance, as the same person, are just "factors" (which include: (i) continuity of general business operations; (ii) continuity of production facilities; (iii) continuity of assets and liabilities; and (iv) retention of personnel). The United States claims there is no basis for asserting that all of the criteria must weigh in favour of finding that no new corporate entity was created before such a finding is actually made.
7.30.
The United States finds support for its same person methodology in the wording of the SCM Agreement, the Appellate Body ruling in US – Lead and Bismuth II, in corporate law principles and draws parallels with corporate liabilities.

"Benefit" in the SCM Agreement

7.31.
The United States contends that the nature of countervailable benefits is made plain by Articles 1 and 14 of the SCM Agreement. It explains that a countervailable benefit is that part of a financial contribution that is obtained on terms more generous than those the recipient could have obtained commercially. In its view, countervailable benefits are, in essence, simply fixed sums of money, which (in the case of non-recurring benefits) are amortized over time.302
7.32.
The United States maintains that, because countervailable benefits, once identified, and valued, are essentially, amounts of money, the method by which they may be terminated is straightforward: that amount of money is amortized over time, unless the recipient pays back the remaining non-amortized amount. The United States agrees that such a repayment could occur in conjunction with a change in ownership and, under its new methodology, it would investigate any claim that such a repayment has occurred. However, it adds, the SCM Agreement provides no basis for concluding that an arm's length and fair market value change in the ownership of a subsidy recipient, automatically eliminates or extracts the benefit conferred on the company.
7.33.
The United States submits that the European Communities has not sufficiently explained how "fair market value extinguishes subsidies", nor has it shown where there is any basis for this conclusion in the SCM Agreement.303 The United States' reasoning is based on its interpretation of the Appellate Body's finding in US – Lead and Bismuth II that subsidies are bestowed on legal persons. The United States believes that this means that subsidies continue to reside in the recipient legal person unless they are taken out of that person, or the person is dissolved.304 The United States notes that the European Communities itself has acknowledged that a subsidy "resides with the natural or legal person which originally received the subsidy," not the owner of that person.305 Based on its understanding of the fact that subsidies reside in the recipient legal person, the United States believes that what must be determined after a change in ownership has occurred is whether the subsidies have been paid back or not transferred to the new producer of the subject merchandise. The United States maintains that its current methodology examines just that; it is therefore consistent with the SCM Agreement.306

"Distinct legal person"

7.34.
The United States maintains that the US Department of Commerce's revised change in ownership methodology, i.e. the same person methodology, is consistent with the SCM Agreement, particularly as interpreted by the Appellate Body in US – Lead and Bismuth II. In this regard the United States explains that, in its report, the Appellate Body agreed with the Panel (based on the Appellate Body's own findings in Canada – Aircraft) that a subsidy must be received by the natural or legal person that produced or exported the subject merchandise. The United States notes that the European Communities itself has accepted that, "the Appellate Body agreed that where the change in ownership has lead to the creation of a different legal person from the subsidy recipient any benefit must be assessed from the perspective of the post-transaction entity."307 The United States contends that, where that basic premise is missing – that is, where a change in ownership has not led to "the creation of a different legal person" – the Appellate Body's reasoning in US – Lead and Bismuth II does not require the US Department of Commerce to find that the subsidies were eliminated.308 The United States contends, that in reaching the conclusion that the conditions of application of the SCM Agreement had to be re-examined, the Appellate Body has put more emphasis on the fact that the privatized producers were distinct legal persons from the state-owned producer, than on the fact that there was a change in ownership for consideration. In particular, the United States insists on the fact that the Appellate Body, when quoting and upholding the Panel's conclusion, did not make any reference to change in ownership "for consideration". For the United States, this is evidence that the change in ownership for fair market value was not the dispositive criteria for the Appellate Body's reasoning.

Corporate law principles

7.35.
The United States invokes corporate law principles to provide logical support for its use of a "distinct legal person" test and its consideration that fair market value payment by the shareholders (the owners) of the privatized company for the purchase of the state-owned enterprise does not extinguish a prior benefit attributed to that state-owned enterprise. The United States contends that the distinction between owners and companies is real and cannot be ignored. The United States further submits that it has demonstrated (and the European Communities does not dispute) that the distinction between a company and its owners is fundamental in most jurisdictions, including the European Communities. In its view, given this fact, it is not possible to interpret the SCM Agreement as if this distinction does not exist, or as if the WTO Members disavowed it in drafting the SCM Agreement, without giving the slightest indication that they were doing so.
7.36.
For the United States, the distinction between owners and companies is unavoidable, and this is confirmed by the fact that the Appellate Body has established that subsidies are received by legal persons, not by the owners of those persons or "economic entities".309 The United States submits that the European Communities' assertion that no distinction can be made between companies and their owners flouts the corporation laws of both the United States and the European Communities, which have as their very cornerstone the concept that companies are legal persons distinct from their owners. It further submits that while the Panel in US – Lead and Bismuth II may have endorsed the European Communities' position, the Appellate Body did not say that no distinction could ever be drawn between companies and their owners.310
7.37.
The United States submits that, because the European Communities cannot explain how the payment of fair market value by the new owner of a subsidized company extracts subsidies from that company, it now asserts that the admitted distinction between owners and companies should be disregarded for the purpose of analysing the existence of subsidies, because subsidies are received by "economic entities."311 The United States submits that the European Communities wants the Panel to embrace this new concept so that the Panel will treat money taken out of an owner's pocket as having been taken out of the company, potentially eliminating subsidies that reside in that company.
7.38.
The United States contends that countervailing duty exposure is very much like potential tort liabilities – both are potential burdens upon the earnings of the company that a prospective purchaser would take into account just as surely as it would take account of potential tort liabilities. As with other corporate liabilities, the United States argues that once a company receives a non-recurring subsidy, the potential for countervailing duties exists. The United States contends that that potential liability may materialize if someone (an injured industry in an importing Member) files a countervailing duty petition. Alternatively, it adds, the company can take steps to cure the harm by voluntarily repaying the subsidy or stopping its injurious exports. Moreover, the United States affirms, just as a producer that has caused environmental damage in another country could well escape that potential liability by repairing that damage or by ceasing certain operations in that country, a subsidized steel producer could avoid countervailing duties by disgorging the subsidies or by ceasing to export to countries with countervailing duty orders..312

2. Evaluation by the Panel

7.39.
The main issue before the Panel is to assess the legal consequences, under the SCM Agreement, of a change in ownership leading to the privatization of state-owned producers. More precisely, the 12 countervailing duty determinations being contested all relate to a change in ownership from wholly-owned state enterprises to private producers – i.e., privatization. In all these cases, a countervailable non-recurring subsidy had been granted prior to the privatization. The non-recurring subsidy had been allocated over time (e.g., 12 years) and the privatization took place before the non-recurring subsidy had been fully amortized. In short, the question before us is whether an arm's-length privatization for fair market value can extinguish an otherwise countervailable subsidy, and if so, what are the implications for the 12 determinations at issue.
7.40.
We should therefore begin our examination by reviewing the object and purpose of the SCM Agreement, and in particular the conditions of application of countervailing duties. The core legal question before us is the determination of the existence of "benefit" within the meaning of the SCM Agreement following a change in ownership through privatization.313 In particular, the Panel will have to determine to whom the benefit accrues – more specifically whether a distinction must be made between the "benefit to the owners" of the company and the "benefit to the company itself" – and how the existence of a benefit must be established when privatization has taken place.

(a) Objective and conditions for applying countervailing duties under the SCM Agreement.

7.41.
In the WTO, subsidies are regulated, and so is the use of countervailing duties imposed to offset the impact of subsidization. Article VI of GATT 1994 and footnote 36 of Article 10 of the SCM Agreement314, specify the purpose of countervailing duties. In particular, Article VI.3 states:

"The term 'countervailing duty' shall be understood to mean a special duty levied for the purpose of offsetting any bounty or subsidy bestowed, directly or indirectly, upon the manufacture, production or export of any merchandise."

7.42.
We note at the outset that countervailing duties are not designed to counteract all market distortions or resource misallocations which might have been caused by subsidization.
7.43.
Article 10 provides that countervailing duties may only be imposed consistently with the SCM Agreement, and, in particular, specifies that a countervailing duty may be imposed to offset any subsidy bestowed. The SCM Agreement provides that countervailing duties may be imposed on imported goods provided that three basic conditions are fulfilled, namely: (i) imported products are subsidized; (ii) there is injury to the domestic industry producing the like products; and (iii) there is a causal link between the subsidized imports and the injury. The focus of this dispute is mainly concerned with the fulfilment of the first condition, i.e. the determination of subsidization and in particular that of a "benefit".

(b) The existence of a "benefit"

7.45.
However, the SCM Agreement does not define "benefit". In its Canada – Aircraft Reportthe Appellate Body held that benefit should be understood as a benefit to a "recipient", i.e. a natural or legal person:

"A 'benefit' does not exist in the abstract, but must be received and enjoyed by a beneficiary or a recipient. Logically, a 'benefit' can be said to arise only if a person, natural or legal, or a group of persons, has in fact received something. The term "benefit", therefore, implies that there must be a recipient."316

7.46.
As the Appellate Body has found, any "benefit", and hence the benefit stream from non-recurring subsidies, must be viewed from the perspective of a natural or legal person. The benefit is not to be determined with reference to "cost to government"317 and does not reside in or attach to the productive assets:

"The United States argues, on the basis of footnote 36 to Article 10 of the SCM Agreement and Article VI:3 of the GATT 1994, that the relevant "benefit" is a benefit to a company's productive operations, rather than, as the Panel held, a benefit to legal or natural persons. It is true, as the United States emphasizes, that footnote 36 to Article 10 of the SCMAgreement and Article VI:3 of the GATT 1994 both refer to subsidies bestowed or granted directly or indirectly "upon the manufacture, production or export of any merchandise". In our view, however, it does not necessarily follow from this wording that the "benefit" referred to in Article 1.1(b) of the SCM Agreement is a benefit to productive operations."318

7.47.
Indeed, in US - Lead and Bismuth II the Appellate Body rejected the United States' argument that the subsidy "resides" in the productive operations of the company. The benefit determination is concerned with the advantage319 to the producer exporting the goods subject to a countervailing duty investigation or order. This provides textual support for the view that the focus of the inquiry under Article 1.1(b) should be on the recipient and not on the granting authority.320 We believe that the enquiry should be on the benefit to a natural or legal person, and not on the "productive operations or the products".321