1 April 2016
EU Court Rules that Tax Incentive Benefits are not Sufficient Grounds for Denying MET to Mainland Chinese Producers
In an important judgment of 16 March 2016, the EU’s General Court has denounced the European Commission’s practice in anti-dumping investigations of denying market economy treatment to mainland Chinese producers that have benefited from certain tax incentives.
Xinyi PV Products Holdings Ltd., a mainland Chinese producer of solar glass, challenged the imposition (by means of Regulation 470/2014) of definitive anti-dumping duties on its products before the General Court, on the grounds that the company had been denied market economy treatment.
Traders will recall that, as long as mainland China is not recognised as a market economy, mainland Chinese producers involved in EU anti-dumping investigations will not obtain a dumping margin calculated on the basis of their own figures, unless they can demonstrate that they operate on the basis of market economic conditions.
In order to obtain market economy treatment (so-called “MET”), producers must demonstrate that they comply with a set of five criteria defined in Article 2(7)(c) of the Basic Anti-Dumping Regulation: 1) business decisions are made in response to market conditions, without significant State interference, and costs reflect market values; 2) firms have one clear set of basic accounting records which are independently audited; 3) there are no significant distortions carried over from the former non-market economy system; 4) legal certainty and stability is provided by bankruptcy and property laws; and 5) currency exchanges are carried out at the market rate.
In the solar glass anti-dumping investigation, Xinyi PV Products Holdings Ltd. was denied MET on the sole ground that it did not meet one of the five criteria, because it benefited from certain income tax breaks (including the High-Tech Enterprises tax regime). The Commission considered this to be a violation of the criterion that a company should demonstrate that “its costs and financial situation are not subject to distortions carried over from the former non-market economy”.
The solar glass producer challenged this approach before the General Court, arguing that the tax incentives are unrelated to a centralised and planned economic system, since in a large number of market economies they are equally commonplace in order to attract foreign investment and encourage certain economic activities. This is, in particular, the case within the European Union.
In its judgement, the General Court sided with the mainland Chinese producer, stating that it cannot be held that the tax incentives at issue are carried over from a former non-market economy system, in the sense that “they result from it or are a consequence of it”.
The Court further noted that it is common knowledge that market economy countries also give tax incentives and that the objectives of attracting foreign investment or supporting certain business sectors, such as the high-tech sector, constitute a legitimate objective in a market economy.
The Court thus held that the Commission made a manifest error when assessing Xinyi PV Products Holdings Ltd.’s request for MET. It therefore annulled the Regulation imposing duties on solar glass, in so far as Xinyi PV Products Holdings Ltd is concerned.
This judgment is a significant victory for mainland Chinese producers in EU anti-dumping investigations. In such investigations, it has proven nearly impossible for companies from mainland China to obtain MET, resulting in the imposition of higher anti-dumping duties on their products.
Following the 16 March 2016 judgment, the Commission will no longer be able to deny MET solely on the ground that companies benefit from certain tax incentives. In addition, the judgment may also influence the interpretation of the other conditions of Article 2(7)(c) of the Basic Anti-Dumping Regulation. This will impact all future dumping investigations and may result in more mainland Chinese producers obtaining MET and, consequently, lower anti-dumping margins.
It is no surprise that the fact that the conditions to obtain MET may be relaxed in future anti-dumping investigations is particularly relevant, in view of the continued uncertainty around mainland China’s market economy status after 2016. At this moment it still remains unclear if and when the Commission will amend its legislation in this matter. It can therefore not be excluded that the requirement for mainland Chinese producers to demonstrate that they operate on the basis of market economy conditions will continue to remain in force, even well after December 2016.