RESTRICTED
WORLD TRADE G/SCM/Q2/KOR/9
17January 1997
ORGANIZATION(97-0141)
Original: English Committee onSubsidies andCountervailing Measures
SUBSIDIES
Replies from KOREA to
Questions posed byJAPAN1,THAILAND2,ARGENTINA3,POLAND4,
UNITED STATES5,CANADA6andtheEUROPEAN COMMUNITY7
Thefollowing communication, dated 10January 1997, hasbeenreceived fromthePermanent
Mission ofKorea.
_______________
QUESTIONS POSED BYJAPAN
(1) V.A. Reserves forexport losses
Paragraph 1(b)ofthenotification defines thepolitical purpose ofthisscheme as"tocompensate
forthelossofexport business". Inthisconnection, could Korea answer thefollowing questions?
(2) V.B. Reserves foroverseas market development
Paragraph 1(b)ofthenotification defines thepolitical purpose ofthisscheme as"topromote
theoverseas market development ofabusiness earning foreign currency". Inthisconnection, could
Korea answer thefollowing questions?
Question
Dothese programmes constitute anexport subsidy provided forinArticle 3.1(a) and
paragraph 1(e)oftheAnnex (taxconcession) totheSCM Agreement?
Answer
Yes, these schemes areprohibited subsidies according toArticle 3.1oftheWTO SCM
Agreement.
Question
Willthisprogramme benotified under Article 28.1oftheSCM Agreement?
1G/SCM/Q2/KOR/3 &Rev.1 (English only),2G/SCM/Q2/KOR/2,3G/SCM/Q2/KOR/6,
4G/SCM/Q2/KOR/5,5G/SCM/Q2/KOR/7,6G/SCM/Q2/KOR/1,7G/SCM/Q2/KOR/4 &
G/SCM/Q2/KOR/8.G/SCM/Q2/KOR/9
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Willthissubsidy bephased outinaccordance withArticle 28.1oftheSCM Agreement?
Answer
Korea isoftheviewthatArticle 28.1concerning thenotification oftheprohibited subsidies
andtheirabolition within threeyears isapplicable onlytodeveloped countries, whereas fordeveloping
countries, therelevant provision would beArticle 27which stipulates special anddifferential treatment
fordeveloping country members.
Since Korea participated intheUruguay Round negotiations asadeveloping country, itis
implementingtheURAgreementsasadevelopingcountry.ThereforeKoreaisnotsubjecttoArticle28.1
oftheAgreement.
However, Korea isdoing itsutmost toexpedite itsimplementation oftheURAgreements in
linewithitscapabilities. Inparticular, these schemes willbeabolished bytheendof1998.
(3) V.C. Facility investment loans provided bytheSMEs foundation formation fund
Paragraph 1(b)ofthenotification defines thepolitical purpose ofthisscheme as"toincrease
exports andenforce theinternational competitiveness ofSMEs bypromoting export-related investments
infacilities". Thecriterion forqualification isprovided forin1(d)(ii) ofthenotification as"theSMEs
thatneedfacilities fundinorder toproduce export goods ormaterials andparts". Inthisconnection,
could Korea answer thefollowing questions?
Question
Does thisprogramme constitute anexport subsidy provided forinArticle 3.1oftheSCM
Agreement?
Answer
Yes,thisscheme isaprohibited subsidy according toArticle 3.1oftheAgreement andwill
beabolished bytheendof1996.
Question
What arethecriteria oftheSMEs andtheeligibility forthisprogramme?
Answer
TheSMEs Fundamental ActanditsImplementation Decree define SMEs onthebasis ofthe
number ofemployees andthetotalamount ofassets, which aredifferent foreachindustry. The
Implementation Decree oftheSMEs Fundamental Actdescribes thenumber ofemployees andthetotal
amount ofassets for150different industries.
With regard tothemanufacturing sector, SMEs aredefined asfirms which havefewer than
300-1,000 employees andlessthan20billion -80billion woninassets. Theexact limits aredifferent
forspecific industries.
These loans areavailable tothesmall andmedium enterprises defined asSMEs intheSmall
andMedium Enterprises Fundamental Act,ortothose agricultural, fishery, forestry enterprises which
havefewer than500employees andwhich engage inexporting activities, when suchenterprises buildG/SCM/Q2/KOR/9
Page3
orextend afactory, orpurchase domestic machinery inorder toexport goods ortoproduce import-
substituting materials andparts.
(4) V.E. Taxreduction andexemption forforeign invested enterprises
Paragraph 1(d)(ii) ofthenotification usestheterm"foreign invested enterprises entering free
export zones". Could Korea answer thefollowing questions?
Question
What isthedefinition of"free export zones" indetail?
Answer
Korea 'sFreeExport Zones areaimed atfacilitating economic development byinducing foreign
investment, technology transfer, andpromoting exports.
These wereestablished inMasan, onthesoutheast coast ofKorea, andinIksan, inthecentral
western region ofKorea. Themain industries established inMasan andIksan are:electronics and
electronic products, metal products, precision products, textile products, etc.
Asstated intheKorean notification, taxconcessions areprovided tothose foreign-invested
enterprises thatenter freeexport zones. Thedetails areasfollows:
- Income taxorcorporation tax:100percenttaxexemption forthetaxyearincluding
thedayofthecommencement ofbusiness andthenextthree years, anda50percent
reduction forthetwoyears thereafter.
- Acquisition tax,property taxandaggregate landtax:a50percentreduction forthe
same period astheincome taxorthecorporation tax.
- Customs duties, special excise taxandvalue added tax:a50percentreduction.
Question
Does thisprogramme constitute anexport subsidy provided forinArticle 3.1(a) and
paragraph 1(e)oftheAnnex (taxconcession) totheSCM Agreement?
Answer
Korea 'sscheme offreeexport zones doesnotinvolve obligatory export requirements andtax
concessions arenotcontingent upon export performance. They areprovided toallforeign-invested
enterprises thatenter freeexport zones regardless oftheir export performance. Inaddition, the
enterprisesinFEZscaneitherexporttheirproductsorsellthemfordomesticconsumptionintheterritory
ofKorea outside thefreeexport zones.
Thus, thisscheme isnotanexport subsidy according totheterms oftheSCM Agreement.
(5) V.F. Reduction incustoms dutyonparts ofaircraft andvessels
Could Korea explain thefollowing points about theabove-mentioned scheme?G/SCM/Q2/KOR/9
Page4
Question
What isthecoverage of"Vessels"? Do"Vessels" include ships andautomobiles?
Answer
Vessels eligible foracustoms duties reduction areships which navigate overseas. They do
notinclude automobiles.
Question
Isthissubsidy available foraircraft andvessels forexport?
Answer
These customs duties reductions arenotavailable toaircraft orvessels forexport.
Question
Isthere anydiscrimination among theexporting countries ofparts?
Answer
There isnodiscrimination among theexporting countries ofparts.
(6) V.H. Assistance programme topromote thespread ofdomestically produced mini-computers
Paragraph 1(b)ofthenotification defines thepolitical purpose ofthisscheme as"topromote
theuseofthedomestically manufactured mini-computer".
Question
Does thisprogramme constitute asubsidy contingent upon theuseofdomestic overimported
goods, provided forinArticle 3.1(b)?
Answer
Thisscheme isaprohibited subsidy according toArticle 3.1oftheAgreement andwillbe
abolished bytheendof1997.
Question
What isthecoverage of"mini-computers"?
Answer
Amini-computer isamain computer withaCPU speed of6MIPS-1,000MIPS andamain
memory capacity of16MB-2GB.G/SCM/Q2/KOR/9
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Question
What istheexamination criteria fortheloan?
Answer
Theprogramme assists universities, public entities, andfirms thatwanttousedomestically
manufactured mini-computers ona"first-come, first-served" basis.
QUESTIONS POSED BYTHAILAND
V.C. Facility Investment Loans provided bytheSMEs Foundation Formation Fund
Q1. Please explain theoperation andsources oftheSME'sFoundation Formation Fund andits
relationship withtheMinistry ofFinance andEconomy andtheMinistry ofTrade, Industry
andEnergy.
A1. (Operation oftheLoans)
These loans areavailable tosmall andmedium enterprises defined asSMEs intheSmall and
Medium Enterprises Fundamental Act,ortothose agricultural, fishery, forestry enterprises which have
fewer than500employees andwhich engage inexporting activities, when suchenterprises build or
extend afactory, orpurchase domestic machinery inorder toexport goods ortoproduce import-
substituting materials andparts.
Loans upto100% ofthecostsareprovided withaninterest rateof9.0% foramaximum period
of10years.
(Source ofthefund)
Thefundisfinanced bythegovernment budget.
(Relationship withMOFE andMOTIE)
Ministry ofFinance andEconomy provides financial funds totheMinistry ofTrade, Industry
andEnergy, which inturnestablishes boththebasic anddetailed plan, implements it,andprovides
loans totheSMEs.
Q2. Thiskindofsubsidy iscontingent onexport performance andtheloanrate(9percent)granted
bygovernment islower thananaverage commercial rate(12.3 percent). WillKorea terminate
theprogramme by1997?
A.2 Thisscheme isaprohibited subsidy according toArticle 3.1oftheAgreement andwillbe
abolished bytheendof1996.
Subsidy programmes notnotified totheWTO
Q3. Please givedetails ofKorean FreeTrade Zones.
A3. Korea 'sFreeExport Zones areaimed atfacilitating economic development byinducing foreign
investment, technology transfer, andpromoting exports.G/SCM/Q2/KOR/9
Page6
These wereestablished inMasan, onthesoutheast coast ofKorea, andinIksan, inthecentral
western region ofKorea. Themain industries established inMasan andIksan are:electronics and
electronic products, metal products, precision products, textile products, etc.
Asstated intheKorean notification, taxconcessions areprovided tothose foreign-invested
enterprises thatenter freeexport zones. Thedetails areasfollows:
- Income taxorcorporation tax:100% taxexemption forthetaxyearincluding thedayofthe
commencement ofbusiness andthenext3years, anda50%reduction for2years thereafter.
- Acquisition tax,property taxandaggregate landtax:a50%reduction forthesame period
astheincome taxorthecorporation tax.
- Customs duties, special excise taxandvalue added tax:a50%reduction.
QUESTIONS POSED BYARGENTINA
1. Korea hasnotified anumber ofsubsidy programmes formanufacturing industry, including:
1.1 Reserves forExport Losses.
1.2 Reserves forOverseas Market Development.
Question
Korea states thatthisprogramme willlastuntil31December 1998. Does Korea intend to
increase thelevels ofsubsidies under thisprogramme? CanKorea statewhether itwilldefinitively
eliminate theprogramme afterthatdate, inaccordance withtheguidelines laiddown inArticle 27.4
oftheSubsidies Agreement?
Answer
There isnoplantoincrease thesubsidy levelofsuchsupport programmes.
These subsidies areprohibited subsidies according toArticle 3.1oftheWTO SCM Agreement
andwillbeabolished bytheendof1998.
1.3 TaxCredit forInvestment inFacilities
Question
Korea describes sixdifferent modalities ofthissubsidy programme. Withrespect totheduration
ofthese programmes, itonlystates thatoneofthese -"taxcredits forinvestments infacilities for
increasing productivity andspecial equipment" -willexpire on31December 1996. DoesKorea intend
toincrease thelevels ofsubsidies under thismodality ofthisprogramme? CanKorea statewhether
itwilldefinitively eliminate thismodality oftheprogramme afterthatdate, inaccordance withthe
guidelines laiddown inArticle 27.4oftheSubsidies Agreement? Withrespect totheother modalities,
noexpiry dateisgiven. Could Korea specify adatefortheelimination ofthese modalities ofthis
programme, inaccordance withtheguidelines laiddown inArticle 27.4oftheSubsidies Agreement?G/SCM/Q2/KOR/9
Page7
Answer
Taxcredit forinvestment infacilities (except those forincreasing productivity facilities and
special equipment which areineffect until31December 1996) willbeineffect until31December 1998,
thetimelimitattached totherelated law. Wehavemade thatclear inournotification.
Wewillrevise ourtaxcredit forinvestment infacilities inorder tomake itcompatible with
theWTO SCM Agreement bythetimelimitattached totherelated law.
1.4 Facility Investment Loans provided bytheSMEs Foundation Formation Fund, TaxReduction
andExemption forForeign Invested Enterprises, Support Programme forMaintenance ofFarm
Machinery, Assistance Programme toPromote theSpread ofDomestically Produced Mini-
computers, andSupporting Fund forStone Industry
Question
Withregard toalltheseprogrammes, Korea states thattheyhavenotime-limits, insomecases,
orgivesnoinformation inthisrespect inother cases. Could Korea specify thedates fortheelimination
ofthese programmes, inaccordance withtheguidelines laiddown inArticle 27.4oftheSubsidies
Agreement?
Answer
Article 27.4oftheSCM Agreement provides fortheabolition oftheprohibited subsidies of
developing countries. Wewillabolish orrevise those prohibited subsidies among theabove-mentioned
subsidies bytheendof1998, thatisFacility Investment Loans provided bytheSMEs Foundation
Formation Fund andAssistance Programme toPromote theSpread ofDomestically produced Mini-
computers. However, other measures arenotcovered byArticle 27.4, andtherefore wecannot specify
thedates fortheirelimination.
Question
These programmes provide forareduction ininterest rates onloans toenterprises suchas
companies producing farmmachinery andmini-computers. Thisreduction constitutes asubsidy included
intheListinAnnex I.Willthemargin ofsubsidy bereduced orwillitbemaintained asitis?
Answer
Even ifaprogramme provides forareduction intheinterest onloans toenterprises, when
aloantoenterprises isnotcontingent upon export performance, itdoesnotconstitute aprohibited
subsidy included intheListofAnnex I.
Atpresent, ithasnotyetbeendetermined whether ornotthemargin ofsubsidy willbereduced
ormaintained asis.
2. Korea notifies anumber ofresearch anddevelopment programmes: Research andDevelopment
Activities forLow-Emission Autovehicle, Research andDevelopment Activities Supported
bytheInformation andCommunication Promoting Fund, Environmental Engineering and
Technological Development Programme, andPromotion Fund forScience andTechnology.
Could Korea provide information inaccordance withArticle 8.2(a) oftheSubsidies Agreement
onthefollowing:G/SCM/Q2/KOR/9
Page8
Question
2.1 What percentages ofthecosts oftheresearch activities arecovered byeachofthesubsidies
listed above?
Answer
Research andDevelopment Activities forLowEmission Autovehicle: thisprogramme provides
aloanoflessthanKRW 1billion perproject, andthere isnopre-determined percentage ofthecosts
oftheresearch activities thatistobecovered bythesubsidy.
Research andDevelopment Activities Supported bytheInformation andCommunication
Promoting Fund: thisprogramme covers thecosts ofresearch activities byaloanoflessthan80%
ofthetotalamount required fortheproject.
Environmental Engineering andTechnological Development Programme: there isnopre-
determined percentage ofthecostsofresearch activities thatmaybecovered bythesubsidy. However,
thecurrent government subsidy isonaverage 40%ofthetotalcost.
Promotion Fund forScience andTechnology: thisprogramme covers thecostsoftheresearch
activities byaloanoflessthan80%ofthetotalamount required foraproject.
Question
2.2 What items ofthefirms'research business activity arecovered byeachofthesubsidies listed
above, suchasstaffcosts, instrument costs, consultancy costs, etc.?
Answer
Inprinciple, eachofthesubsidies covers staffcosts, instrument costs, consultancy costs and
additional overhead costs incurred directly asaresult oftheresearch activity intheareaofindustrial
research orpre-competitive development activities, inaccordance withArticle 8.2(a) oftheSCM
Agreement.
However, intheitems covered byassistance forresearch activities, ifthere areanypartsthat
arenotcompatible withArticle 8.2(a) oftheSCM Agreement, weareplanning torevise them.
QUESTIONS POSED BYPOLAND
Reserves forExport Losses andReserves forOverseas Market Development
Question
Wefindboththese schemes aprohibited subsidy stipulated inArticle 3oftheSCMAgreement
asinbothcases theamount ofaid(hereataxconcession) isconnected indirectly withexport performance
oftheenterprise. Ifyes,hasKorea notified these subsidies pursuant toArticle 28.1oftheSCM
Agreement? Prohibited subsidies aretobebrought intoconformity withtheprovisions oftheSCM
Agreement within three years, while Korea wants toapply these schemes untiltheendof1998, could
Korea present itsinterpretation ofthese schemes which makes itpossible tomaintain theminforce
untilDecember 1998?G/SCM/Q2/KOR/9
Page9
Answer
Yes, these schemes areprohibited subsidies according toArticle 3.1oftheWTO SCM
Agreement.
Korea isoftheviewthatArticle 28.1concerning thenotification oftheprohibited subsidies
andtheirabolition within threeyears isapplicable onlytodeveloped countries, whereas fordeveloping
countries, therelevant provision would beArticle 27which stipulates special anddifferential treatment
fordeveloping country members.
Since Korea participated intheUruguay Round negotiations asadeveloping country, itis
implementing theURAgreements asadeveloping country. Therefore, Korea isnotsubject to
Article 28.1oftheAgreement.
However, Korea isdoing itsutmost toexpedite itsimplementation oftheURAgreements in
linewithitscapabilities. Inparticular, these schemes willbeabolished bytheendof1998.
QUESTIONS POSED BYTHE UNITED STATES
I. QUESTIONS ONNOTIFIED PROGRAMMES
Question
A. Forthefollowing notified programmes, please provide:
(i) theperiod covered bythenotification; and
(ii) theduration ofthesubsidy and/or anyother timelimits attached toit,including date
ofinception/commencement.
Answer
1. Foodgrain Management Programme
- RiceandBarley: 1950-
- Soya beans andLegumes (Redbeans andGreen beans): 1986-
- Corn: 1989-
2. Livestock Support Programme
- Support forKorean Native Cattle (Hanwoo) onKanghwa Island: 1978-
- Support forPigmeat Production: 1988-
3. Sericulture Development Programme: 1988-
4. Government Purchase ofRapeseed: 1991-
5. Marketing Improvement Programme forFruits andFlowers: 1990-
6. Plywood andBoard Assistance Programme: 1994-
7. Forest Products Utilization Assistance Programme: 1987-
8. Support forDevelopment ofDeep-Sea Fishery: 1988-
9. Support forFishProducts Processing Development: 1981-
10. Fund forSupporting Fishing Activities: 1963-
11. Support forDeveloping Aquaculture Fishery: 1992-
12. Reduction inLocal Taxation onBuilding andAcquisition ofVessels forDeep-Sea Fishery:
1982-1997
13. Support Programme fortheCoalIndustry: 1983-G/SCM/Q2/KOR/9
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14. Reserves forExport Losses: 1973-1998
15. Reserves forOverseas Market Development: 1969-1998
16. Facility Investment Loans Provided bytheSMEs Foundation Formation Fund: 1994-1996
17. TaxCredit forInvestment inFacilities: 1972-1998
18. TaxReduction andExemption forForeign Invested Enterprises: 1996-
19. Reduction inCustoms Duty onParts ofAircraft andVessels: 1975-1997
20. Support Programme forMaintenance ofFarm Machinery: 1981-
21. Assistance Programme toPromote theSpread ofDomestically Produced Mini-Computers:
1993-1997
22. Supporting Fund forStone Industry: 1989-
23. Research andDevelopment Activities forLowEmission Autovehicles: 1994-
24. Research andDevelopment Activities supported bytheInformation andCommunication
Promoting Fund: 1993-
25. Environmental Engineering andTechnology Development Programme: 1992-2001
26. Promotion Fund forScience andTechnology: 1992-
Thenotification isbased onthelistofnotifiable subsidies which wereinforce asoftheend
of1995. Thestatistical dataofnotified subsidies arefrom 1992-1994.
Question 14
Reserves forExport Losses
(Note: TheUnited States hasfound thissubsidy tobecountervailable inthreeCVDproceedings
concerning certain steelproducts, oilcountry tubular goods andcertain stainless steelcooking ware
fromKorea. However, inthese cases, Articles 22,23and24oftheTaxExemption andReduction
Control Actwere cited asthelegal basis fortheprogramme. InKorea 'snotification, however,
Articles 14-17 werecitedasthelegislative authority. Could Korea please clarify this?)
Answer
BeforetherevisionoftheTaxExemptionandReductionControlActin31.12.1993,Articles22,
23and24provided taxincentives forexport. However, since therevision, Articles 14to17have
become thelegalbasis fortheprogramme.
B. Agricultural Programmes
Question
WenoteKorea 'sreference tothe"Marketing Programme forFruits andFlowers" andwould
appreciate further description oftheprocessing andtransportation subsidies paidbytheAgriculture
andFishery Marketing Corporation.
Answer
Theagricultural products exported withsupport areapples, pears andflowers. Thecontents
ofthissubsidy hasbeenmodified toimplement theWTO Agreement onAgriculture from 1995. It
includes theprocessing costs ofsorting andpacking, andcosts ofinternational andinternal transport
andfreight according totheterms ofArticle 9.1(d) and(e)oftheAgreement onAgriculture.G/SCM/Q2/KOR/9
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Question
Regarding the"Food Grain Management Programme", wequestion theassertion thatthe
Government 'sintervention inthegrain market hasinsignificant effects ontrade. Inthecaseofrice,
Korea 'scurrent stocks drawdown (tounprecedented lowlevels) inresponse tofalling production appears
tobedesigned toreduce orpreclude imports. Could Korea explain whyithasnotconsidered other
lesstrade distorting measures torespond totheshortfall?
Answer
Thestock management ofriceunder theFoodgrain Management Programme isoperated for
reasons ofsecurity inbasic foodstuffs andforthemaintenance ofabuffer stock forthestabilization
ofdomestic consumer prices.
Itistruethatthegovernment stock hasdiminished recently. Thisisaresult ofnotonlyafall
inproduction duetonatural disasters in1993 and1995 butalsotheeffects oftheadjustments made
infoodgrain management policy torevitalize thefunction ofthedomestic market mechanism.
Theessence ofourstock management system istobeflexible indetermining theappropriate
stock forthatyear, reflecting thesupply anddemand situation aswellastheprospects forthatyear.
Inother words, therecent stock drawdown hasbeentheresult ofsuchasystem inoperation, nota
result ofadesign toreduce orpreclude imports.
Question
3. Withrespect tothe"Government Purchase ofRapeseed" Programme, wenotetheabsence of
Korea 'sanalysis oftheprogramme 'seffects ontrade. Could Korea confirm thatthisprogramme has
nonegative effect ontrade?
4. Regarding the"Livestock Support Programme", wequestion Korea 'sassertion thattheeffect
ontrade ofthepigmeat production subsidy isinsignificant. Wenotethattheprogramme costrose
significantly during the1992-1994 reporting period. What wasthecostin1995andwhatisthebudget
for1996?
Answer
(Theeffect ontrade)
Ceteris paribus support programmes havehadtheeffect ofincreasing domestic production
andfarmers'income,aswellasreplacingtheconsumptionofimportswithdomesticproducts.However,
since these notified programmes havebeendomestic support measures, therehasbeensome difficulty
inevaluating thetrade effect ofthese programmes.
ItistruethatKorea isprimarily animporter ofthese products andthequantity affected by
government intervention isonlyasmall portion ofthetotalproduction. Taking intoconsideration
thefixed purchasing priceofthepastseveral years, theintervention prices cannot besaidtohavebeen
sufficient asasupport forfarmers 'incomes. Sodespite government support, totalproduction trends
havecontinued todecline.
From thispoint ofview, Korea perceives itsnotified support programmes ashaving hadan
insignificant effect ontrade.G/SCM/Q2/KOR/9
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(Theamount oftheLivestock Support Programme)
Weincreased oursupport forpigmeat production under theLivestock Support Programme
during 1992-1994.
Wegranted pigbreeding farmers asubsidy ofKRW 7,667.7 million in1995 andpigmeat
processing companies aloanofKRW 9,997 million. Ourbudget forsubsidizing pigmeat production
in1996 wasKRW 10,800 million ingrants andKRW 16,500 million inloans.
Question
5. Inrecent years, Korea hasproduced surpluses ofleaftobacco asaresult ofhighguaranteed
prices paidbytheKorean Tobacco &Ginseng Corporation, themonopoly producer ofcigarettes.
Although Korean prices haveremained stable since 1992, domestic prices stillexceed world prices.
Exports, while declining, appear tomove intointernational trade atprices below those paidtofarmers.
Please explain whythiswasnotincluded inthenotification.
Answer
Atpresent, thecultivation andthepurchase ofleaftobacco iscarried outbyacontract between
theKoreanTobacco&GinsengCorporationandKoreanfarmers.Thecontractisamereprivatebusiness
transaction between twoequal parties.
C. Other
Question
1. Could Korea clarify thedifference between theprogrammes identified as"Reserves forExport
Losses" and"Reserves forOverseas Market Development"?
Answer
Programme identified as"Reserves forExport Losses" isdifferent initspurpose andobject
ofapplication from theprogramme identified as"Reserves forOverseas Market Development".
(Purpose)
- Thepurpose of"Reserves forExport Losses" istocompensate forlosses incurred intheexport
business.
- Thepurposeof"ReservesforOverseasMarketDevelopment"istocompensateforcostsincurred
inexploring overseas markets.
(Object ofapplication)
- "Reserves forExport Losses" isapplied tobusinesses intheexport industry, theindustry for
overseas services, thetourist industry, etc.
- "Reserves forOverseas Market Development" isapplied tothose whoareregistered fortrade
orwhoprovide particular services (engineering business, tourist industry, overseas harbour
business) toforeign countries.G/SCM/Q2/KOR/9
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Question
2. Could Korea clarify thedifference between theprogrammes identified as"Facility Investment
LoansProvidedbytheSMEsFoundationFormationFund"and"TaxCreditforInvestmentinFacilities"?
Answer
Thedifferencesbetween"FacilityInvestmentLoansProvidedbytheSMEsFoundationFormation
Fund"(hereinafterreferredtoasFacilityInvestmentLoans)and"TaxCreditforInvestmentinFacilities"
(hereinafter referred toasTaxCredit) areasfollows:
- With regard tobeneficiaries, theFacility Investment Loans areprovided onlytothose SMEs
engaged inexporting orexpecting toexport, while theTaxCredit ismade available toall
enterprises.
- With regard tofacilities targeted bythese programmes, theFacility Investment Loans are
provided toSMEs forthepurchase orinstallation ofdomestic machinery facilities, while the
TaxCredit isprovided toenterprises forthepurchase offacilities fortechnology andmanpower,
facilities forincreasing productivity, business assets ofSMEs andhouses foremployees.
- With regard totheform ofassistance provided, theFacility Investment Loans areprovided
asloans withaninterest rateof9%,while theTaxCredit isprovided intheform ofatax
concession amounting to3%-10% oftheinvestment.
Question
3. Could Korea clarify thecriteria fordetermining theaward oftaxcredits under itsprogramme
"Tax Credit forInvestment Facilities"?
Answer
Inthecaseofinvestment infacilities, taxcredits areawarded tothose facilities thatarequalified
fortheapplication oftaxcredits.
Thescope ofeligible facilities isdetailed intheTaxExemption andReduction Control Law,
theDecreeofTaxExemptionandReductionControlLaw,theEnforcementOrdinanceofTaxExemption
andReduction Control Law. Therateoftaxcredits isdetermined onthebasis ofwhether ornotthe
facility isforeign ordomestic.
Thespecific scope ofeligible facilities isasfollows:
(1) Taxcredit forinvestments infacilities fordeveloping technology andmanpower: facilities
fordeveloping technology andmanpower include those forresearch andexperiment, those
fortraining trainees, andthose forapplying newtechnology.
(2) Taxcredit forinvestments infacilities forincreasing productivity andspecial equipment:
facilities forincreasing productivity include thosefortheimprovement oftheproduction process
andautomation, theapplication ofhigh-technology andthereplacement ofworn-out equipment
andspecial equipment including facilities forenergy saving, promoting anti-pollution, and
modernizing thedistribution industry.G/SCM/Q2/KOR/9
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(3) Taxcredit forinvestments infacilities forsmall andmedium enterprises: taxcredit isapplied
toallkinds ofbusiness assets owned bysmall andmedium enterprises. Thescope ofsmall
andmedium enterprises thatqualify forthistaxcredit isprescribed byacriteria ofthenumber
ofemployees andthetotalamount ofassets asstated intheDecree ofTaxExemption and
Reduction Control Law.
(4),(5),(6)arethesame astheprevious notification.
Question
4. Could Korea clarify through explanation andillustration thebasisandcriteria fordistinguishing
"industrialresearch"and"pre-competitivedevelopmentactivities"referredtoinitsprogramme"Research
andDevelopment Activities Supported bytheInformation andCommunication Promoting Fund"?
Answer
Indistinguishing "industrial research" and"pre-competitive activities", wefollow thedefinition
provided inArticle 8.2oftheWTO Subsidies Agreement.
Question
5. Could Korea clarify thedistinction between "environmental engineering" and"technology
development" astheyrelate tothe"Environmental Engineering andTechnology Development
Programme"?
Answer
There isnosignificant distinction between "environmental engineering" and"technology
development" since theyarebothcovered byoneproject.
Question
6. Could Korea explain thebasisonwhich ithasdetermined thatthe"Promotion FundforScience
andTechnology" doesnothaveanysignificant trade effect?
Answer
TheScience andTechnology Promotion Fund isafundcreated tosupport thetechnology
development initiatives ofprivate industries.
Itisdifficult tomeasure thetrade effect ofthefundsince thefundisprovided tobusinesses
strictly intheform ofloans asopposed todirect grants, andthesizeofthefundisrelatively small.
Therefore, statistical datashowing thetrade effect ofthefundisnotavailable.
II. QUESTIONS ONPROGRAMMES NOT REPORTED INTHE NOTIFICATION
Question
A. Please indicate whether thefollowing programmes have been reported aspartofanother
programme. Ifso,please indicate under which reported programme itfalls. Forthose programmes
listedbelowwhichwerenotnotified,pleaseprovidetheinformationrequestedintheapprovednotification
format orexplain thebasis onwhich Korea determined thatthesubsidy wasnotnotifiable.G/SCM/Q2/KOR/9
Page15
(Note: TheUnited States hasfound certain ofthefollowing programmes toprovide countervailable
subsidies inavariety ofCVD proceedings, including certain steelproducts; certain stainless steel
cookingware; offshore platform jackets andpiles; andoilcountry tubular goods.)
Government Equity Infusions inaSteelCompany
Legal Basis: Supplied through theMinistry ofFinance andtheKorea Development Bank
Answer
TheKorean Government hasprovided equity infusions toPoohang Iron&SteelCorporation
(hereinafter referred toasPOSCO) from thetimeofitsestablishment tothemid-1980s.
Article 14(a) oftheSCM Agreement stipulates thatagovernment 'sprovision ofequity capital
shallnotbeconsidered astheconferring ofabenefit unless theinvestment decision canberegarded
asbeing inconsistent withtheusual investment practice ofprivate investors intheterritory ofthat
Member.
Inviewofthefollowing facts, theequity infusions inPOSCO were entirely consistent with
theusual investment practices ofprivate investors inKorea:
- First, theKorean Government made alarge profit when POSCO offered stock tothepublic
inJune1988.
- Second,POSCOhascontinuedtomakesubstantialdividendpaymentstotheKoreanGovernment.
Since a"benefit" according toArticle 14oftheAgreement wasnotconferred, these equity
infusions cannot beconsidered asubsidy andaretherefore notsubject tothenotification requirements.
2. Loans inconsistent withcommercial considerations/Preferential access toforeign loans forthe
steelindustry
Answer
There isnospecific loanprogramme forthesteelindustry. Rather, therearemany loans from
various sources, i.e.commercial loans anddirect foreign loans, which areavailable toandusedby
allsectors oftheeconomy. Some ofthese loans areprovided tothesteelindustry; however, they
areoperated byseparate bodies andoffered onthebasis ofdifferent criteria. These loans arenot
available onlytothesteelindustry buttoallsectors oftheeconomy.
Infact,theGovernment isnotinvolved inproviding commercial loans anddirect foreign loans.
Thetimeandtheperson towhom theloanismade isdetermined bythestandards ofthelenders. Thus,
Korea believes thatthisisnotafinancial contribution bytheGovernment according toArticle 1.1(a)(1)
oftheAgreement, anditdoesnotfallwithin thenotification requirements.
3. Government infrastructure assistance atKwangyang Bay
Answer
TheKorean Government funded theconstruction ofKwangyang Bay'sinfrastructure: itsports,
raillines, roads andwater system. However, thewater forindustrial useispartoftheintegrated waterG/SCM/Q2/KOR/9
Page16
system covering theentire region andusedbycitizens andother industries. Ports arealsousedby
other industries andenterprises.
Considering these facts, theGovernment Infrastructure Assistance atKwangyang Bayisnot
aspecific financial contribution made bytheGovernment toPOSCO butrather ageneral expenditure
oninfrastructure. Thus, according toArticle 1.1(a)(1), itisnotasubsidy anddoesnotfallwithin
thenotification requirements.
4. Reserve forinvestment
Answer
Reserve forinvestment isaprogramme forencouraging investment infacilities. Reserves set
asideforinvestment inbusiness assets bysmall andmedium enterprises, investment insocial overhead
capital, andenergy-saving facilities arecounted aslosses, within certain limits, when calculating taxable
income.
Reserves forinvestment related tosmall andmedium enterprises andenergy-saving facilities
arenotspecific subsidies andtherefore theywere notmentioned intheKorean notification.
Inaddition,reserveforinvestmentinsocialoverheadcapitalisasupportgiventotheconstruction
industry, aservice sector, which isnotcovered bythisagreement. Asforreserve forinvestment in
business assets owned byenterprises inrural areas, itwasabolished inDecember 1993.
5. Unlimited deduction ofoverseas entertainment expenses
Legal basis: Article 18-2oftheCorporation TaxAct
Answer
Thisscheme wascompletely abolished withtherevision oftheCorporation TaxLawin
December 1995.
6. Export credit financing andguarantees from theExport-Import Bank ofKorea
Legal basis: Export-Import Bank ofKorea Act(Law No.2122; 28July1969)
Answer
Thedeferred payment loan(post-shipment loan)extended bytheExport-Import BankofKorea
isanexport credit, which complies withtheArrangement onGuidelines forOfficially Supported Export
Credits. Therefore itshould notbeconsidered aprohibited subsidy notifiable totheWTO according
toAnnex 1(k)oftheSCM Agreement.
TheAgreement onSubsidies andCountervailing Measures saysthatanexport credit practice
which isinconformity withtheprovisions oftheOECD Arrangement shallnotbeconsidered asan
export subsidy prohibited bythisAgreement.
Inaddition, Korea alsosubmitted aformal request letter inorder toparticipate intheExport
Credits andCredit Guarantee Group (ECG) oftheTrade Committee oftheOECD, andinthe
Arrangement onGuidelines forOfficially Supported Export Credits inJuly1996.G/SCM/Q2/KOR/9
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Regarding guarantees, theExport-Import Bank ofKorea doesnotprovide export guarantees,
thatmight bedeemed assubsidies. Itonlyprovides advance payment guarantees andperformance
guarantees which areauxiliary totheexport credit.
7. Accelerated depreciation
Legalbasis:Article25ofthe"ActConcerningtheRegulationofTaxReductionandExemption"
Answer
Thisscheme wasstipulated inArticle 25oftheTaxExemption andDeduction Control Law
(before therevision ofDecember 1993). However, itwasabolished inDecember 1994.
8. Taxincentives forexporters
Legal basis: Articles 22,23and24ofthe"ActConcerning theRegulation ofTaxReduction
andExemption"
Answer
These incentives were stipulated inArticles 22-24 ofthatlawbefore itsrevision in
December 1993.
- Article 22was"Reserves forExport Losses" (Notification V-A)
- Article 23was"Reserves forOverseas Market Development" (Notification V-B)
- Article 24was"Reserves forPrice Fluctuation" anditwasabolished inDecember 1988.
9. Exception from theacquisition tax
Legal basis: LawforthePromotion ofIncome Sources inRural Areas
Answer
Exception from theAcquisition Taxforenterprises moving intorural areas under theLaw
forthePromotion ofIncome Sources inRural Areas wasalready abolished in1988.
10. Loans topromising small andmedium enterprises
Answer
These loans areprovided tothepromising small andmedium-sized enterprises described in
theSMEs Fundamental Act,andmore specifically toenterprises thathavefewer than150employees.
Theobjective oftheloans istoenable these firms togrow independently.
Themain points oftheeligibility criteria areasfollows:
- enterprises which havehigh-technology orpatents
- technology-intensive andstart-up enterprises
- enterprises participating in"regional consortium fortechnology development among business
community, academia andresearch organization"G/SCM/Q2/KOR/9
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Localgovernments,banksandtheSmallandMediumIndustryPromotionCorporation(SMIPC)
provide loans onthebasis ofthese criteria.
Most oftheloans areprovided bycommercial banks inaccordance withtheirowncriteria.
Thus, itdoesnotinvolve afinancial contribution from theGovernment andisnotasubsidy.
Loans from local governments andSMIPCs donottarget specific industries andaremade
available toallSMEs based onanobjective criteria. Thus, itisnotaspecific subsidy anddoesnot
fallwithin thenotification requirements.
11. Short-term export financing
Answer
According totheplanforliberalizing interest rates, interest ratesonpolicy loanswereliberalized
inJuly1995. Currently, commercial banks areallowed tofreely determine theinterest ratesforShort-
termExport Financing.
Therefore withregard toShort-term Exporting Financing, there isnointerest ratebenefit
accorded toabeneficiary inthemanner prescribed byArticle 1.1(b) oftheAgreement. Soitisnot
asubsidy according totheterms oftheSCM Agreement.
12. Preferential utility rates
Answer
With regard toelectricity charges, theKorean Government applies different ratestovarious
sectors inorder toinduce energy conservation intheconsumption sector, aswellastoprovide support
forindustrial andeducational sectors withlower rates.
Lowelectricity ratesareavailable toallindustrial users ofelectricity. Lowelectricity rates
arenotspecific, sothissystem doesnotfallwithin thenotification requirements.
13. FreeExport Zone Programme
Answer
Korea 'ssystem of"Free Export Zones" wasalready notified totheWTO asapartofthe"Tax
Reduction andExemption forForeign Invested Enterprises".
Korea 'sFreeExport Zones areaimed atfacilitating economic development byinducing foreign
investment, technology transfer, andpromoting exports.
These wereestablished inMasan, onthesoutheast coast ofKorea, andinIksan, inthecentral
western region ofKorea. Themain industries established inMasan andIksan are:electronics and
electronic products, metal products, precision products, textile products, etc.
Asstated intheKorean notification, taxconcessions areprovided tothose foreign-invested
enterprises thatenter freeexport zones. Thedetails areasfollows:
Income taxorcorporation tax: 100% taxexemption forthetaxyearincluding thedayof
commencement ofbusiness andthenext3years, anda50%reduction for2years thereafter.G/SCM/Q2/KOR/9
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Acquisition tax,property taxandaggregate landtax:a50%reduction forthesame period
astheincome taxorthecorporation tax.
Customs duties, special excise taxandvalue added tax:a50%reduction.
14. Foreign Capital Inducement Law
Answer
Under theForeign Capital Inducement Law, reduction inandexemption fromthecorporation
tax,theproperty tax,customs duties andsoonareavailable toforeign invested enterprises accompanied
byhightechnology orthose entering freeexport zones inorder tofacilitate foreign investment.
Thisscheme hasalready beennotified intheV.E.TaxReduction andExemption forForeign
Invested Enterprises, andthere arenospecific subsidies other thantheabove-mentioned subsidy.
15. Tariff reductions onplant andequipment
Legal basis: Article 28oftheCustoms Law
Answer
Thetariff reduction onplants andequipment ofkeyindustries wasalready abolished in
December 1993.
16. Export credit insurance
Answer
TheKorean Export Insurance Corporation operates anexport insurance system forexporters,
manufacturers andfinancial institutions tocompensate them forlosses thattheymight incur incases
where itisimpossible toreceive payment ortoexport asaresult oftrading risks.
Export insurance isclassified intotwotypes: export insurance andguarantees, andoverseas
investment insurance.
Annex 1(j)oftheAgreement stipulates thattheprovision ofexport insurance programmes by
governments atpremium rateswhich areinadequate tocover long-term operating costs andlosses of
theprogrammes isanexport subsidy.
TheExport Insurance ActofKorea stipulates thatthepremium ratestableshould bedetermined
withaview tomaintaining abalance between therevenue andexpenditure oftheexport insurance
business. ThishasbeenthecaseinKorea.
Korea isoftheopinion thatitsexport insurance system isnotanexport subsidy illustrated
inAnnex Iandnotasubsidy according toArticle 1.1oftheAgreement. Thus, anotification according
toArticle 25.2oftheAgreement isnotrequired.G/SCM/Q2/KOR/9
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17. Subsidies under Biotech 2000
Answer
TheBiotech 2000Project mainly supports industrial research andpre-competitive development
activities.TheKoreanGovernmentgrantspartsoftheR&Dexpenditurestoprojectperforminginstitutes.
Theproject isnotspecific because there isnolimitonaccess totheproject. Anyresearch
institution oruniversity which isselected toperform aunitresearch project through opencompetition
cantakepartintheproject.
18. TheIndustrial Technology Development Fund
Answer
TheIndustrial Technology Development Fund youreferred toseems tobeeither theGeneric
Industrial Technology Development Fund ortheIndustry Development Fund.
TheIndustrial Technology Fund, based ontheIndustrial Development Law, isactually divided
intotwokinds offunds: thegeneric industrial technology development fund, andtheprototype and
high-technology development fundknown astheIndustry Development Fund from 1986-1995.
Genericindustrialtechnologydevelopmentfundsareavailabletofirmsandresearchorganizations
conducting generic technology development programmes which arenecessary totheindustrial field.
Grants areprovided tothose firms andresearch organizations foranamount ofuptohalfofthetotal
cost.
Prototype andhigh-technology development funds areavailable tofirms andresearch
organizations which intend todevelop prototypes ofcapital goods andhightechnology products. This
programme wasfunded bytheIndustry Development Fund until1995. Itwasprovided asaloanwith
a2-year grace period anda3-year repayment planat6.5% interest in1995.
Theprocedure forselection isasfollows:
- Government makes public notice oftheapplicable projects covering allmanufacturing sectors.
- Firms orresearch organizations apply forfunding bysubmitting adevelopment plan.
- Selection ismade among theapplications taking intoconsideration theimportance, content,
method ofconducting research, etc.
ThisFund doesnottarget specific enterprises orindustries andisavailable toallindustries.
Since itisnotspecific, itisnotsubject tothenotification requirements stipulated inArticle 25.2of
theAgreement.
19. TheSoftware Industry Start-Up andCultivation Centre
Answer
TheSoftware Industry Start-up andCultivation Centre isrunbytheKorean Software Industry
Association, aprivate association, which provides private facilities andinformation tothefounders
ofsoftware companies toenhance theircompetitiveness.G/SCM/Q2/KOR/9
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TheseprogrammesarenotsubsidiesstipulatedintheAgreementonSubsidiesandCountervailing
Measures Article 1.1(a)(1), sincetheyareprivate businesses thatdonotreceive financial contributions
from thegovernment.
20. TheSoftware Export Consulting Centre
Answer
TheSoftware Export Consultation isrunbytheKorean Software Industry Association, aprivate
association, which provides information totheindustry tohelpincrease theexport ofsoftware.
TheseprogrammesarenotsubsidiesstipulatedintheAgreementonSubsidiesandCountervailing
Measures Article 1.1(a)(1), sincetheyareprivate businesses thatdonotreceive financial contributions
from thegovernment.
21. TheCombined Software Industry Support Centre
Answer
TheCombined Software Industry Support Centre intends tostrengthen theviability ofsoftware
enterprises bycreating anenvironment thatfacilitates software R&D andpromotes thepopularization
ofsoftware R&D.
Thisprogramme isstillintheplanning stage. Itissupposed toestablish R&D infrastructure
andprovide technology information forallindividuals andsmall andmedium enterprises.
22. TheHighly Advanced National Project
- TheProduct Technology Development Project
- TheFundamental Technology Development Project
Answer
TheHighly Advanced National Project supports thebasic research, industrial research, and
pre-competitive development activity ofresearch institutes anduniversities.
Theproject isnotspecific according toArticle 2oftheSCM Agreement. Theproject aims
toobtain generic technologies forallindustries, asopposed toproviding assistance toaspecific industry.
There arenorestrictions onwhomayparticipate intheproject. Anyresearch institute oruniversity
thathasbeenselected through open competition toconduct aunitresearch project cantakepartin
theproject.G/SCM/Q2/KOR/9
Page22
QUESTIONS POSED BYCANADA
I.A: Foodgrain Management Programme
Question
1. Based onthestatistics provided inTable 1,"Statistics offoodgrain production, consumption
andtrade", itwould seem thatKorea 'slevel ofself-sufficiency ingrain production for1994 is
understated. What formula wasusedincalculating self-sufficiency?
Answer
The"Statistics offoodgrain production, consumption andtrade" provided inTable 1represent
onlythose products operated bytheFoodgrain Management Programme. Andinthecaseofbarley,
itrepresents onlyedible products.
However, theself-sufficiency ratedescribed inthetrade effect ofthissubsidy programme is
notcalculated byTable 1.Rather, itiscalculated bytaking intoaccount allgrains, beans andpotatoes,
etc.classified asfoodgrain according totheFoodgrain Management Law. Thus, theself-sufficiency
rateisnotunderstated, because thesupply anddemand situation ofallfoodgrains inKorea isrepresented.
Section I.A.
Question
2. PursuanttosectionI.A.,dotheorganizationschargedwithexecutingtheFoodgrainManagement
Programme restrict theirpurchases toKorean farmers orareother suppliers eligible? Ifthelatter,
whoelseiseligible andhowarepurchases allocated?
Answer
Organizations charged withexecuting theFoodgrain Management Programme asnotified in
section I.A.purchase theirfoodgrains from Korean farmers.
However, thetariffquota imports forriceexecuted bytheMinistry ofAgriculture andForestry
according totheURnegotiations, andforredbeans executed bytheAgriculture andFishery Marketing
Corporation, which wasnotnotified inthissection, areadministered under thestate-trading andm.f.n.
principles ofGATT.
III.A: Support forDevelopment ofDeep-Sea Fishery
Question
3. Whatisthedurationoftheprogrammesdescribedandwhataretheprojectedallocationsbudgeted
forsame?
Answer
(Duration oftheprogrammes)
- Support foroverseas resources production: 1992 -nofixed termination date
- Support forfishery cooperation projects withcoastal countries: 1994-1995G/SCM/Q2/KOR/9
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- Support fortheantarctic ocean development: 1988-2008
(Amount ofloans andestimated subsidies)
- Support foroverseas resources production
(1995) 105,000 KRW 4,200 million
(1996) 155,000 KRW 6,200 million
- Support forfishery cooperation projects withcoastal countries
(1995) 588 KRW 28million
- Support fortheantarctic ocean development: 1988-2008
(1995) 713 KRW 29million
(1996) 660 KRW 26million
III.C: Fund forSupporting Fishing Activities
Question
4. CanKorea clarify whatismeant bymaintenance ofastable fishing operation, andalleviation
ofthefinancial burden offishermen; i.e.whattypes ofactivities arecovered bytheprogramme? What
aretheeligibility criteria fortheprogramme? What istheduration oftheprogrammes described therein
andwhataretheprojected allocations budgeted forsame?
Answer
(Meaning ofmaintenance ofastable fishing operation andalleviation ofthefinancial burden of
fishermen.)
Maintenance ofastable fishing operation means astable andcontinuous operation inviewof
financial considerations.
Thealleviation ofthefinancial burden offishermen means thattheFund lightens thatpartof
afisherman 'sburden which comes from private loans. Lack ofamortgage forces them totakeout
aloanfrom theprivate sector instead ofthebank. Wethink thatthisisacommon phenomenon in
developing countries.
(Types ofactivities covered bytheprogramme)
Thisprogramme covers allactivities involved inthefishing industry, suchasrepairing fishing
vessels andnets,purchasing iceandfishboxes, etc.
(Eligibility criteria fortheprogramme)
Anyfisherman whodirectly engages infishing iseligible.
(Duration andamount oftheprogramme)
Begun in1963, thisprogramme hasnofixed termination date.G/SCM/Q2/KOR/9
Page24
Theamount ofloanandestimated subsidy areasfollows:
- (1995) 749,559 KRW 24,225 million
- (1996) 850,000 KRW 27,696 million
III.E: Reduction inLocal Taxation onBuilding andAcquisition ofVessels forDeep-Sea Fishery
Question
5. What isthenormal ratefortheacquisition andproperty taxinKorea? What isthenumber,
tonnage andvalue ofships which havebenefitted fromthisprogramme?
Answer
Thenormal ratefortheacquisition taxis20%ofthevessel 'svalue and3%fortheproperty
tax.
Wedon'thaveanydetails onthenumber, tonnage andvalue ofthevessels thathavebenefitted
from thisprogramme.
IV.A: Support Programme fortheCoalIndustry
Question
6. Howdoestheprice support tofreeze coalprices forthestability andprotection oflow-income
households (grants) work (i.e.towhom arethegrants given andonwhat criteria? What arethe
production, trade andconsumption figures forthecoalindustry?
Answer
(Beneficiaries andcriteria ofcoalprice support)
Coalprice support aimsatstabilizing prices andprotecting low-income households through
afreezing ofthecoalprice atthe1988 level.
Beneficiaries arelow-income households thatusethecoalbriquet forheating. Thegovernment
subsidizes the20%difference between thesalesprice andtheproduction cost.
(Production, consumption, andstockpile figures forthecoalindustry)
Duetoincreasing household incomes, thepattern ofenergy consumption isshifting towards
theconsumption ofcleaner energy. Thedemand forcoalasaheatsource forhomes hasrapidly
decreased afterthelate1980s.
Theproduction ofcoalhasfallen from7,483,000 tonsin1994to5,720,000 tonsin1995, and
thedemand hasdeclined from6,925,000 tonsin1994to5,485,000 tonsin1995. Stocks ofcoalhave
increased from 7,723,000 tonsin1994 to8,508,000 tonsin1995.G/SCM/Q2/KOR/9
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V.C: Facility Investment Loans Provided BySMEs Foundation Formulation Fund
Question
7. Could Korea provide clarification ofhowSMEs aredefined forthepurposes ofeligibility under
thisprogramme? Does Korea maintain adefinition ofwhatconstitutes anSMEinlaw,regulation,
orsome other form?
Answer
TheSMEs Fundamental ActanditsImplementation Decree define SMEs onthebasis ofthe
number ofemployees andthetotalamount ofassets, which aredifferent foreachindustry. The
Implementation Decree oftheSMEs Fundamental Actdescribes thenumber ofemployees andthetotal
amount ofassets for150different industries.
With regard tothemanufacturing sector, SMEs aredefined asfirms which havefewer than
300-1,000 employees andlessthan20billion-80 billion woninassets. Theexact limits aredifferent
forspecific industries.
These loans areavailable tothesmall andmedium enterprises defined asSMEs intheSmall
andMedium Enterprises Fundamental Act,ortothose agricultural, fishery, forestry enterprises which
havefewer than500employees andwhich engage inexporting activities, when suchenterprises build
orextend afactory, orpurchase domestic machinery inorder toexport goods ortoproduce import-
substituting materials andparts.
V.D: TaxCredit forInvestment inFacilities
Question
8. Based ontheformula usedinsection V.D.2. forcalculating theamount ofsubsidy, would it
notbereasonable toestimate thatimports would havebeenreduced by,forinstance, approximately
KRW 1,465,700 million in1994? Since benefits would bereceived onlyininstances where purchases
were switched from imported todomestic products, andtaxconcession forthatyearamounted to
KRW 102,600 million, andfurther since thetaxreduction would beapproximately 7%orless,the
result isadecline inimports ofKRW 1,465,700 million ormore. Isthiscorrect?
Answer
Taxcredit forinvestment infacilities isapplied toallkinds offacilities including those for
imported goods, andisnotlimited tocases where imported goods arereplaced bydomestic goods.
IntheKorean notification, wetriedtocalculate theimplied subsidy elements infavour of
domestically produced goods asopposed toimported goods. Thiswaswhatwereferred toas"tax
concession" inournotification.
Such subsidy elements canbecalculated byusing thevariable difference between taxcredit
ratesforinvestment using domestically produced goods andthose forinvestment using foreign made
ones. Inother words, theamount ofthissubsidy isequal tothedecrease ingovernment revenue if
theratesoftaxcredits forforeign goods areraised tothelevels ofthose fordomestic goods.
Itisnotappropriate toestimate theamount offoregone imports solely onthebasis ofthese
subsidy elements.G/SCM/Q2/KOR/9
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VI.B: R&D Activities supported bytheInformation andCommunication Promoting Fund
Question
9. CanKorea provide further information ontheeligibility criteria forprivate firms applying for
assistance under theprogramme?
Answer
After thenecessity oftheR&D, feasibility, contents, system andeffectiveness hasbeentaken
intoconsideration, firms which desire todevelop information andtelecommunications technology are
eligible.
Question
10. What typeofR&D wasfunded in1993and1994? Arepayments forprojects approved in1993
and1994 continuing tobemade?
Answer
Wesupported R&D projects thatrange from"basic research" to"development ofapplications
technology". Forexample:
- 1993: development offilter fordigital mobile communication;
- 1994: development ofinformation retrieval software technology bynatural language,
development ofEMIfilter forsignal ware.
Thepayments forprojects approved in1993 and1994 havebeencompleted.
QUESTIONS POSED BYTHE EUROPEAN COMMUNITY
I. NOTIFIED SUBSIDY PROGRAMMES
(a) Reserves forexport losses
Question
Could Korea provide more detailed information onthesectors which havebenefited fromthis
taxconcession?
Answer
Thequalified sectors arebusinesses inindustries liketheexport industry, businesses thatprovide
overseas services, tourist businesses, etc.thatearnforeign currency.
Question
Koreastatesthattheprogrammewillendon31December1998.However,sincethisprogramme
wasnotnotified under Article 28oftheWTO Subsidies Agreement, itseems clearly incompatible with
Article 3.1oftheSubsidies Agreement. CanKorea explain whythisprogramme isstillinforce?G/SCM/Q2/KOR/9
Page27
Answer
Thisscheme isaprohibited subsidy according toArticle 3.1oftheWTO SCM Agreement.
Korea isoftheviewthatArticle 28.1concerning thenotification oftheprohibited subsidies
andtheirabolition within threeyears isapplicable onlytodeveloped countries, whereas fordeveloping
countries, therelevant provision would beArticle 27which stipulates special anddifferential treatment
fordeveloping country members.
Since Korea participated intheUruguay Round negotiations asadeveloping country, itis
implementingtheURAgreementsasadevelopingcountry.ThereforeKoreaisnotsubjecttoArticle28.1
oftheAgreement.
However, Korea isdoing itsutmost toexpedite itsimplementation oftheURAgreements in
linewithitscapabilities. Inparticular, thisscheme willbeabolished bytheendof1998.
Question
Could Korea provide amore detailed analysis ofthecalculation ofthetaxconcession, in
particular howthe"reserves asloss" areoffset totaxable income?
Answer
Reserves arecounted asalossincalculating thetaxable income, andtheamount allocated to
suchreserves willbeadded backtothegains inthree-year instalments fromthesecond yearafterthe
yearinwhich thereserves were counted asaloss.
Theeffect ofreserves corresponds tothatoflending anamount equivalent tothatofthereduced
taxgenerated bycounting thereserves asalossincalculating thetaxable income fortheinstalment
period withzerointerest. Theamount ofsubsidy isequivalent totheinterest ontheamounts oftax
reduced bycounting thereserves asalossforaninstalment period offouryears.
(b) Reserves foroverseas market development
Question
CanKorea elaborate ontheeligibility criteria?
Answer
Thisprogramme isonlyapplied tothose whoareregistered intradeorwhoprovide particular
services (engineering business, tourist industry, overseas harbour business) toforeign countries.
Question
What ismeant bya"business earning foreign currency"? Isthisequivalent toexport activity?
Answer
Themeaning of"businesses earning foreign currency" isanexport business orabusiness
providing particular services toforeign countries.G/SCM/Q2/KOR/9
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Question
Could Korea provide amore detailed analysis ofthecalculation ofthetaxconcession, in
particular howthe"reserves asloss" areoffset totaxable income?
Koreastatesthattheprogrammewillendon31December1998.However,sincethisprogramme
wasnotnotified under Article 28oftheWTO Subsidies Agreement, itseems clearly incompatible with
Article 3.1oftheSubsidies Agreement. CanKorea explain whythisprogramme isstillinforce?
Answer
Theanswer isthesame asthatforReserves forExport Losses.
(c) Facility investment loans
Question
Could Korea provide thecriteria foreligibility? Isexport activity theonlycriterion?
Answer
These loans areavailable tothesmall andmedium enterprises defined asSMEs intheSmall
andMedium Enterprises Fundamental Act,ortothose agricultural, fishery, forestry enterprises which
havefewer than500employees andwhich engage inexporting activities, when suchenterprises build
orextend afactory, orpurchase domestic machinery inorder toexport goods ortoproduce import-
substituting materials andparts.
Question
Korea states thattheprogramme hasnodateofexpiration. However, since thisprogramme
wasnotnotified under Article 28oftheWTO Subsidies Agreement, itseems clearly incompatible with
Article 3.1oftheSubsidies Agreement. CanKorea explain whythisprogramme isstillinforce?
Answer
Thisscheme isaprohibited subsidy according toArticle 3.1oftheAgreement andwillbe
abolished bytheendof1996.
Theanswer concerning thenotification under Article 28isthesame asthatforReserves for
Export Losses.
(d) Taxcredit forinvestment infacilities
Question
Could Korea clarify whether thesixforms oftaxcredits canbecumulatively granted toan
eligible company?
Answer
Ifacompany satisfies thecriteria forallsixtaxcredits, thenitcanbecumulatively granted
allsixtaxcredits. Butonlyonetaxcredit isavailable forthesame investment.G/SCM/Q2/KOR/9
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Question
Isexport activity acriterion foroneofthesixcategories oftaxcredit?
Answer
Regardless ofexport activity, taxcredit forinvestments infacilities isapplicable toallindustries.
(e) Assistance programme topromote thespread ofdomestically produced mini-computers
Question
Could Korea provide thecriteria foreligibility?
Answer
Theprogramme assists universities, public entities, andfirms which desire tousedomestically
manufactured mini-computers ona"first-come, first-served" basis.
Question
Thisprogramme aimstopromote theuseofthedomestically manufactured mini-computer.
Itseems toconfer abenefit fortheuseofdomestic overimported computers andisconsequently
prohibited byArticle 3.1(b) oftheWTO Subsidies Agreement. Could Korea comment onthisissue?
Answer
Thisscheme isaprohibited subsidy according toArticle 3.1(b) oftheSCM Agreement.
II. SUBSIDY PROGRAMMES NOT NOTIFIED TOWTO
Question
TheCommunityexaminedthedifferentpoliciesoftheKoreanauthoritieswithrespecttoincentives
tothelocalindustry. Inthisrespect, thefollowing programme isavailable inKorea andwasnotnotified
totheWTO.
TheCommunity requests, ifappropriate, foreachofthese programmes anotification using
thequestionnaire format.
(a) Deferred export financing fund
TheExport-Import Bank ofKorea manages thedeferred export financing fund. Thisbankis
apubliccorporationdealingmainlywithpreferentialloansforexports,importsandoverseasinvestments.
Thefundprovides bridge financing forexporters foraperiod ofsixmonths totenyears. Exceptions
areforeseen forspecific sectors. Thelending rates willbe8%forforeign currency loans and10%
forWonloans.
Theproducts orprojects eligible forthisfinancing areindustrial facilities, ships, railway
equipment, rawmaterials, machinery, steel, copper andallexports where payment isreceived more
thansixmonths aftershipment.G/SCM/Q2/KOR/9
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Answer
Thedeferred payment loan(post-shipment loan)extended bytheExport-Import BankofKorea
isanexport credit, which complies withtheArrangement onGuidelines forOfficially Supported Export
Credit. Therefore itshould notbeconsidered aprohibited subsidy notifiable totheWTO according
toAnnex 1(k)oftheSCM Agreement.
TheAgreement onSubsidies andCountervailing Measures saysthatanexport credit practice
which isinconformity withtheprovisions oftheOECD Arrangement shallnotbeconsidered asan
export subsidy prohibited bythisAgreement.
Inaddition, Korea alsoconveyed itsformal request letter inorder toparticipate intheExport
Credits andCredit Guarantee Group (ECG) oftheTrade Committee oftheOECD, andinthe
Arrangement onGuidelines forOfficially Supported Export Credits inJuly1996.
(b) Incentives forstrategic items
TheMinistry ofFinance andEconomy hasdeveloped aprogramme where 105strategic items
willbepromoted through favourable loans fromtheIndustrial Development Fund. These 105items
havebeenidentified bytheKorean Government asbeing ofinterest forlocalization ofproduction.
For1995 thetotalbudget oftheprogramme wasKRW 75billion. Thebenefit fortheeligible
companies consist ofatwo-year grace period andthree-year repayment ata6.5% interest rate. The
maximum loanamount isKRW 0.5billion perproject. The105items which aretobepromoted can
bedivided intoseven main categories: general machinery, precision machinery (e.g. measuring
apparatus),transportationmachinery(e.g.bearings,injectionsystemsforcars),electronicsandelectronic
goods (e.g.electronic control devices forcars), ironandsteel, fabrics (yarns).
Answer
Theincentives theECreferred toistheprototype development programme provided fromthe
Prototype andHigh-Technology Development Fund. Thisprogramme provides financial assistance
intheformofloans tothose firms thatintend tomake prototypes ofcapital goods andhigh-technology
products. In1995, themaximum amount ofassistance provided was75%ofthecostwiththeinterest
rateat6.5%.
Asstated intheEC'squestion, 105strategic items were selected aseligible items and
KRW 75billion wasallocated from theIndustry Development Fund with amaximum limit of
KRW 0.5billion perproject.
Itwasprovided from theIndustry Development Fund in1995 andthePrototype andHigh-
Technology Development Fund from 1996.
Themajor projects which areeligible areasfollows:
- Projects thatdevelop strategic items under thepolicy ofdeveloping capital goods.
- Detailed projects contained intheFive-Year Technological Infrastructure Expansion
Plan. (Inparticular, thisplancontains more than600projects covering allthe
industries.)
- Projects included intheIndustrial Infrastructure Technology Development Programme.G/SCM/Q2/KOR/9
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The105strategic items indicated bytheECarejustsome oftheeligible projects. Another
311items were added totheexisting 105items in1996.
Theprocedure forselection isasfollows:
- Government makes public notice oftheeligible projects, terms ofloans andapplication
procedures.
- Firms orresearch organizations inalmost allindustries canapply fortheloans.
- Selections aremade among theapplications after taking intoconsideration the
importance, content, method ofconducting research, etc.
Thus, thisPrototype andHigh-Technology Development Fund isnottargeted or
disproportionately usedforsome sectors, andisgenerally available. Thus, itisnotspecific, andit
isnotsubject tothenotification requirements ofArticle 25.2oftheAgreement.
(c) Freeexport zoneprogramme
Companies located infreeexport zonereceive exemption fromcorporate, residence, defence
andproperty taxes. Korea isrequested togivethelocation ofthese zones andthemain industries
established inthem.
Answer
Korea 'ssystem of"Free Export Zones" wasalready notified totheWTO asapartofthe"Tax
Reduction andExemption forForeign Invested Enterprises".
Korea 'sFreeExport Zones areaimed atfacilitating economic development byinducing foreign
investment, technology transfer, andpromoting exports.
These wereestablished inMasan, onthesoutheast coast ofKorea, andinIksan, inthecentral
western region ofKorea. Themain industries established inMasan andIksan are:electronics and
electronic products, metal products, precision products, textile products, etc.
Asstated intheKorean notification, taxconcessions areprovided tothose foreign-invested
enterprises thatenter freeexport zones. Thedetails areasfollows:
- Income taxorcorporation tax:100% taxexemption forthetaxyearincluding the
dayofthecommencement ofbusiness andthenextthree years, anda50%reduction
fortwoyears thereafter.
- Acquisition tax,property taxandaggregate landtax:a50%reduction forthesame
period astheincome taxorthecorporation tax.
- Customs duties, special excise taxandvalue added tax:a50%reduction.
(d) Accelerated depreciation
TheActconcerning theRegulation ofTaxReduction andExemption (Article 25)permits
corporations earning morethan50%oftheirtotalturnover inforeign exchange toincrease theirnormal
depreciation by30%.G/SCM/Q2/KOR/9
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Answer
Thisscheme wasstipulated inArticle 25oftheTaxExemption andDeduction Control Law
(before therevision ofDecember 1993). However, itwasabolished inDecember 1994.
(e) High technology financing
Korea established aprogramme providing aidtocompanies andinstitutions forthedevelopment
ofhightechnological products. Eligible projects canobtain upto50percentfinancing fromtheKorean
authorities. Thefinancing isalsoapplicable tothecommercialization oftheproducts concerned.
Korea created theKorea Technology Banking Corporation which isexclusively competent for
theselection andfinancing ofprojects. Thefinancing includes subsidized loans, capital participation
orestablishment ofproduction facilities.
Answer
TheHighly Advanced National Project supports thebasic research, industrial research, and
pre-competitive development activity ofresearch institutes anduniversities.
Theproject isnotspecific according toArticle 2oftheSCM Agreement. Theproject aims
toobtain generic technologies forallindustries, asopposed toproviding assistance toaspecific industry.
There arenorestrictions onwhomayparticipate intheproject. Anyresearch institute oruniversity
thathasbeenselected through open competition toconduct aunitresearch project cantakepartin
theproject.
TheKorea Technology Banking Corporation (KTB), which isapublic company listed onthe
Korea Stock Exchange (KSE), supports thetechnology development initiatives ofprivate industries
through itsfinancial services.
Thefinancial services offered bytheKTB, which include bothequity anddebtfinancing, are
targeted fortechnology development, commercialization andthegrowth ofprivate industries. Being
private sector-led services, theywere notnotified totheWTO since theyarenotsubsidies pursuant
toArticle 25.2oftheSubsidies Agreement.
(f) Interest subsidies
Korea 'smonetary policy andartificially highinterest ratelevelaimtoconfer animportant
benefit tothedomestic industry. Thecommercial market interest ratesarearound 18-19%. TheBank
ofKorea (through commercial banks) setspreferential ratesforexport activity anddomestic activity.
Commercial bankinterest rates forindustry arecurrently down to13%fornormal bankloans, 10%
forpolicy loans and7%forforeign exchange loans.
TheCommunity considers thatthedifference ininterest rates effectively constitute asubsidy,
since thedepression ofpreferential rates mustinvolve afinancial contribution fromthegovernment.
Theinterest ratedifferentials described above giveaclear benefit toexporting industries; thebenefit
becomesespeciallytransparentwhenleadtimesarelongandpricesaredenominatedinstrongcurrencies.
Answer
InKorea, thecommercial market interest ratesarecurrently down to11-12%, andcommercial
bankinterest ratesonnormal loans are12-13%.G/SCM/Q2/KOR/9
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According totheplanforliberalizing interest rates, interest ratesonpolicy loanswereliberalized
inJuly1995.
Commercial banks make foreign exchange loans tofirms thatwould otherwise beunable to
secure loans fromabroad. Commercial banks freely decide theinterest ratesonforeign exchange loans
while taking intoconsideration thecostofforeign currency fundraising, andtheborrowers takeon
theriskoffuture fluctuation intheexchange rate. Theinterest ratesofforeign exchange loans cannot
becompared withthatofdomestic currency loans andtherefore these types oftransactions cannot be
classified assubsidies.
Since foreign exchange loaninterest ratesareconsistent withinterest ratesfound abroad, they
areclearly notgovernment subsidies.
(g) Industrial Rationalization Fund
TheIRFwasestablished forreplacing worn-out facilities ofsmall- andmedium-sized
manufacturing companies.
Thisfundgivesloans atpreferential ratestosmall andmedium sizedenterprises. Intheperiod
1989-1992 theFund gaveKRW 118.2 million inloans atpreferential rates (7%).
Answer
Theobjective oftheIndustrial Rationalization Fund wastosupport thesmooth structural
adjustment ofindustries which continued tobeuncompetitive foraconsiderable period oftimeasa
result ofchanges inKorea 'sindustrial structure. Thisfundwasprovided intheform ofloans with
aninterest rateof7.05% foraperiod ofuptotenyears.
Itwasterminated in1992. Korea 'snotification relates tosubsidy programmes which have
beeninforce asof1995, thusitdidnotnotify theIRF.
REPLIES TOFOLLOW-UP QUESTIONS FROM THE EC
1. TaxCredit forInvestment inFacilities
Question
Does thisscheme provide better treatment ininstances where domestic goods areusedinstead
ofimports? Ifso,whatplans arethere tophase itout?
Answer
Thisscheme isaprohibited subsidy according toArticle 3.1(b) oftheWTO SCM Agreement.
Wewillrevise ourtaxcredit forinvestment infacilities tobecompatible withtheWTO SCM Agreement
bytheendof1998, thetimelimitattached totherelated law.G/SCM/Q2/KOR/9
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2. Deferred Export Financing Fund
Question
Under thisscheme, itisunderstood thattheExport-Import Bank ofKorea provides uptoten
years preferential bridging loans forexporters. Could Korea explain howthiscanbeinconformity
withtheOECD guidelines?
Answer
ItistruethattheExport-Import Bank ofKorea provides export loans toKorean exporters for
amaximum oftenyears.
However, sinceten-year export loans areonlygiven toCategory IIcountries assetbytheOECD
guidelines shown below, thisisinconformity withtheOECD guidelines.
- Article 10(orparagraph 4.a): maximum repayment term
Themaximum repayment termvaries according totheclassification ofthecountry
ofdestination.
- ForCategory Icountries, themaximum repayment term isfiveyears; withthe
possibility ofagreeing eight-and-a-half years when theprocedures forpriornotification
setoutinArticle 43arefollowed.
- ForCategory IIcountries, themaximum repayment termistenyears.
InjoiningtheGrouponExportCreditandCreditGuaranteeoftheOECDon12December1996,
wehaverenewed ourcommitment tocomplying withtheOECD guidelines.
3. Prototype andHigh Tech Development Fund
Question
Underthisscheme,ithasbeenannouncedthattheMinistryofFinanceandEconomywillpromote
105strategic items. Thiswould seem torender thesubsidy specific. WillKorea notify itunder
Article 25?
Answer
Inorder tosupport thedevelopment ofadvanced technology andproducts andtopromote all
industrial sectors including machinery, electricity, electronics, information, chemistry, fabrics andso
on,thePrototype andHigh-Technology Development Fund provides financial assistance intheform
ofloans through twotypes offunds, thePrototype Development Fund andtheHigh-Technology
Development Fund.
Thepromotion ofstrategic items thattheEChasreferred toisjustsome oftheprojects eligible
forthePrototype Development Fund. Under thisscheme, 105strategic items wereselected in1995
aseligible items andanother 311items were added in1996.
Themajor projects which areeligible under thePrototype Development Fund arefrom all
industrial sectors, including theabove-mentioned strategic items andthefollowing:G/SCM/Q2/KOR/9
Page35
- Projects thatdevelop strategic items under thepolicy ofdeveloping capital goods.
- Detailed projects contained intheFive-Year Technological Infrastructure Expansion
Plan.
- Projects included intheIndustrial Infrastructure Technology Development Programme.
- Projects thatdevelop theindustrial design technology.
Allprojects areobjectively operated under thesame condition andprocedure. Thisscheme
isnottargeted ordisproportionately usedforsome sectors. Itisgenerally available andnotspecific,
soitisnotsubject tothenotification requirements ofArticle 25.2oftheAgreement.
4. Interest subsidies
Question
CanKorea explain whytheBank ofKorea isabletoofferpreferential interest ratesforexport
activities compared tothedomestic rates available fromcommercial banks?
Answer
TheBankofKorea doesnotitselfoffertradefinancing. Itdoes, likeothercentral banks, provide
refinancing facilities tocommercial banks. Therediscount ofthecentral bank, including tradefinancing
through commercial banks, isaform ofrefinancing tocommercial banks andageneral function of
central bank.
Access totherediscount window iscontrolled byanaggregate credit ceiling under which
allocations aremade toindividual banks onthebasisoftheirperformance record. Aspartofthegeneral
financial liberalization, thesystem wasintroduced inMarch 1994 toreplace theprevious system of
automatic rediscounts. Thisceiling isbeing gradually lowered step-by-step. InNovember 1996, a
particularly large reduction ofKRW 1.9trillion wasmade.
Atthesametime,allinterest ratesontradefinancing, regardless ofthesource, werederegulated
inJuly1995andarenowsetbycommercial banks onthebasisoftheirindividual business judgement.
Inconclusion, theBankofKorea doesnotprovide direct assistance forexport activities through
preferentialinterestrates,andaccordingtoderegulationofinterestratesontradefinancing,therediscount
ofthecentral bank tocommercial banks doesnotconfer aparticular benefit toexport activities.
Therefore itdoesnotconstitute asubsidy according totheWTO SCM Agreement.