COVID-19 Relief Measures Pose Countervailing Duty Risks

Governments are adopting extensive support measures in an effort to avert economic collapse due to the COVID-19 crisis. At the same time, there has been an increasing prevalence of anti-subsidy — that is, countervailing duty (CVD) — investigations around the globe, and that trend will continue as domestic industries look for ways to maintain their viability in the current economic environment. These factors mean that export-oriented businesses that accept COVID-19 support may be at a greater risk of onerous CVD investigations in their export markets. Such businesses should evaluate the risk that the COVID-19 support they are considering is countervailable under the domestic laws of their export markets and the World Trade Organization (WTO) agreements.

CVD laws in individual countries have their own nuances, but they generally follow the principles established by the WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement). The SCM Agreement defines countervailable subsidies to be government measures that provide a “financial contribution,” confer a “benefit,” and are “specific.” Generally, a “financial contribution” involves a government transfer of funds (e.g., grants, loans, equity infusions, loan guarantees), government revenue that is foregone (e.g., tax credits), government provision of goods or services at less than adequate remuneration or government purchase of goods at more than adequate remuneration. Furthermore, a “benefit” is conferred when the recipient obtains the financial contribution on terms better than available on the market. Finally, a subsidy is “specific” when either the legislation at issue explicitly limits access to certain enterprises (de jure specificity) or the factual circumstances indicate that access is limited to certain enterprises (de facto specificity).

COVID-19 support measures likely easily satisfy the “financial contribution” and “benefit” elements of the countervailable subsidy definition. Whether such measures are countervailable therefore depends in large part on whether they may be considered “specific.” Most support legislation, however, is drafted to avoid any explicit semblance of specificity, so the answer to this question turns on the particular factual circumstances and implementation of the measures at issue.

Most major countries have adopted some form of COVID-19 support for their economies. For example, in the United States, Congress enacted the Coronavirus Aid, Relief and Economic Security Act (CARES Act) on March 27, 2020. The CARES Act contains numerous measures that likely provide a “financial contribution” and “benefit,” such as

• a payroll tax credit for 50 percent of the wages paid to employees, up to $10,000 per employee, during any period in which such employers were required to close due to COVID-19 (Section 2301)
• modified rules relating to net operating losses to allow taxpayers to carry back net operating losses in 2018-20 for up to five years, and to offset 100 percent of their income with losses in taxable years beginning before 2021 (Section 2303)
• a modified tax credit for the prior year minimum tax liability of corporations to allow immediate refundability of credit amounts (Section 2305)
• increased limitation on the deductibility of business interest for taxable years beginning in 2019 and 2020 (Section 2306)
• classification of qualified improvement property (certain improvements to the interior of nonresidential real property) as 15-year property for depreciation purposes (Section 2307)
• authorization of $500 billion in funding for low-interest loans, loan guarantees and other investments by the U.S. Department of the Treasury in support of eligible businesses, states and municipalities, with $454 billion reserved for businesses not involved in the air transportation industry and not critical to national security (Section 4003)
• appropriation of $9.5 billion for the U.S. Department of Agriculture to provide assistance to agricultural producers affected by COVID-19 (Division B, Title I)

In each of these instances, although the CARES Act may be drafted to make these measures appear generally available, they may nonetheless be considered “specific” for CVD purposes depending on how they are implemented. For example, if the aforementioned tax incentives are disproportionately received by certain enterprises, they may be considered “specific” and therefore countervailable. In addition, if the Department of the Treasury or Department of Agriculture provides loans or grants particularly to certain enterprises, they may again be considered “specific” and therefore countervailable.

The United States continues to consider additional COVID-19 support measures as well, such as the Health and Economic Recovery Omnibus Emergency Solutions Act (HEROES Act) passed by the House of Representatives on May 15, 2020, and currently under consideration in the Senate. The HEROES Act may provide additional grants, loans and tax credits to eligible businesses that, depending on the circumstances, may be considered countervailable subsidies.

Other countries have also enacted and/or are considering COVID-19 support measures. For example, the European Union has modified state aid rules and state aid packages to provide for grants of up to €800,000 per company to address urgent liquidity needs, state guarantees for loans taken by companies from banks and public loans to companies with favorable interest rates.¹ Canada has adopted wage subsidies, tax deferrals, interest-free loans and loan guarantees.² Japan has decided to support its businesses through additional purchases of commercial paper and corporate bonds.³  Depending on how these various measures are implemented, they too may be considered “specific” and thus countervailable subsidies.

In sum, export-oriented businesses should be aware of the risks of countervailing duties should they accept COVID-19 support from their governments. U.S. producers that export face the risk of CVD investigations in their export markets if they accept assistance under the CARES Act or future measures such as the HEROES Act. Similarly, foreign producers that export to the United States (and their corresponding U.S. importers) face the risk of CVD investigations by the U.S. Department of Commerce and U.S. International Trade Commission if they accept COVID-19 assistance from their home governments. An analysis of these risks is a highly fact-intensive exercise. Sidley attorneys are available to help businesses evaluate their risk of exposure to countervailing duties from the available COVID-19 relief measures.