Preparation of an effective cost response is a very difficult exercise. The company accountants usually do not know anything about the requirements of the anti-dumping law. The lawyers usually do not know anything about the company's accounting systems. The two groups need to teach each other a great deal of complex information in a short period of time, making the task even more difficult.

 

This section first provides an overview of the cost questionnaire, to help clarify the scope of information that is necessary. It then sets forth a step-by-step strategy for effectively preparing a cost response.

 

Overview of the cost questionnaire and suggested strategies

 

The major problem confronting foreign companies when they first review the cost questionnaire is the level of detail required. To a company that has not been involved in a cost investigation before, the level of detail seems impossible. This section therefore reviews the major sections of the cost questionnaire, and offers some general suggestions concerning the level of detail that is necessary. It also contains advice on issues and tactics a foreign company should consider for each topic. The questionnaire does not offer suggestions on how to lower costs. Although companies involved in a particular investigation should follow the specific advice of their lawyers, these general comments will help a foreign company understand the general nature and magnitude of the task that they face.

 

General information

 

At the beginning of each cost questionnaire, the Commerce Department asks basic questions about the company and its manufacturing process. The Commerce Department wants to know about the corporate structure of the company, especially the structure of any subsidiary companies. The objective is to discover whether there are any company relationships that might raise problems later in the investigation. The questionnaire also asks about the manufacturing process. The objective of this section is to help ensure that all of the costs for each manufacturing stage are reported to the Commerce Department, and that all transactions with related parties are identified. The descriptions do not need to be exhaustive. A few pages on each topic should be sufficient.

 

The Commerce Department also asks about both the financial accounting practices and the cost accounting system of the company. For financial accounting, the Commerce Department is interested principally in any deviations from foreign GAAP; if a company follows foreign GAAP consistently, very brief explanations of financial accounting practices normally satisfy the Commerce Department. The explanation of the cost accounting system, however, needs to be more detailed. Since this topic is one of the crucial parts of the investigation, the Commerce Department wants to understand the basic system as completely as possible. The company should use as much space as necessary to explain fully the operation of the cost accounting system.

 

Specific cost information

 

The questionnaire asks for a great deal of information about the various elements of cost. When preparing this information, the company should remember two important general principles.

 

First, the company should always keep in mind the delicate balance between what information to provide in the response, and what information to provide at the verification. Since the 1990s, there has been a trend for the Commerce Department to demand more and more detail in the response itself. To the extent possible, however, the foreign company should try to present partial information in the response, and save the detailed explanations for the verification, or at least for delayed submission in supplemental responses.

 

The response must be complete — otherwise the Commerce Department may resort to 'facts available' — but sensitive topics often can and should be saved until the verification. The best balance for a particular investigation should be chosen based on the facts of that investigation.

 

Second, the company should remember that very few cost methodologies are firm rules that must be followed in all circumstances. There is virtually no 'law' in this area, only Commerce Department practices and policies. The major consideration is whether the lawyers can persuade the Commerce Department to accept a certain methodology. Because of this flexibility, cost investigations present many opportunities for creative arguments. The company staff and lawyers together should develop the most favourable methodologies, and arguments to persuade the Commerce Department to accept the methodologies.

 

Materials and labour

 

Although the Commerce Department needs complete information on material costs, it often does not really mean what the questionnaire says. Part of the problem is that the Commerce Department drafts the questionnaire without knowing the type of cost accounting system the company uses. The questions sometimes do not make sense, given the nature of the product and of the particular accounting system. The foreign company should therefore not hesitate to explain why a certain question is irrelevant or cannot be answered.

 

For example, the questionnaire asks for a detailed material-by-material, part-by-part breakdown of material costs. For a complex product with thousands of parts, such a request is unreasonably burdensome. In most cases, the Commerce Department allows a sample breakdown of materials and parts for one product — to illustrate the nature of the material costs — and then accepts aggregate information for the remaining products under investigation. Much depends on the nature of the product and the constraints imposed by the company's accounting system. If the product is simple and the accounting system already records a detailed breakdown, the Commerce Department may ask for details. If the product is complex and the accounting system records only aggregate information, the Commerce Department may accept less detailed information.

 

The same principles apply to labour costs. The Commerce Department needs to understand the breakdown of labour costs, but the response need not itemize every labour cost element for every product. If the response makes clear that all elements of labour cost have been included, and illustrates with an example, the Commerce Department should be satisfied. Of course, during the verification the Commerce Department may investigate whether in fact all of the labour costs have been included. The response, however, does not need to be as detailed as the verification materials.

 

Material and labour costs are usually well-defined elements in the accounting system, and therefore there are fewer opportunities to lower these costs. If the company has well-defined accounting categories for material and labour costs, and then submits in its response material and labour costs that are significantly lower, the Commerce Department becomes extremely suspicious. The company needs extremely good reasons for reporting lower costs_

 

Overhead costs

 

The questionnaire describes various categories of overhead, and draws distinctions between fixed and variable overhead. The company need not reclassify all of its overhead expenses into these various categories. The response should explain how the company's normal accounting system includes all of these elements, and then present that data in a form that traces easily back to the actual accounting records. Reclassifying expenses not only is unnecessary, but can be dangerous. If a company reclassifies its expenses and then has trouble tracing them back to the actual accounting records during the verification, the company may fail verification.

 

Overhead expenses usually present more opportunities to lower costs. First, the company should examine its allocation of overhead among various products. It is sometimes possible to develop alternative allocations that shift some of the overhead expenses to other products that are not under investigation. Of course, there must be some rational basis for the allocation. Sometimes the Commerce Department changes the company's normal allocation methodologies, with the result that overhead costs of the products under investigation increase. When the company itself departs from its normal methodologies, the Commerce Department becomes quite suspicious. If the company has a persuasive rationale, however, the Commerce Department may accept the change.

 

Second, the company should consider carefully its treatment of R&D expenses. Especially for high technology products, this cost element can be a major proportion of total costs. Recall that the Commerce Department treats product-specific R&D as an overhead expense, but treats general R&D as a general and administrative expense. The more that can be shifted to general and administrative, the better. Foreign companies often include R&D expenses for unprofitable products with the R&D expenses for more profitable products — accounting decisions can be very political and managers sometimes try to protect their favourite projects. If the company can document that R&D expenses relate to other products, the Commerce Department may allow the company to exclude them. If the expenses are normally included in the accounts for a particular product, however, the burden of proving that the expenses really relate to another product is very high.

 

It is sometimes possible to shift R&D expenses outside of the period under investigation. The Commerce Department often capitalizes R&D expenses and forces the company to include an allocation of R&D expenses from early periods. To the extent possible, the company should try to avoid this problem. If the Commerce Department insists on capitalizing the expenses, the company should develop a rationale for using the longest possible amortization period, to minimize the costs that are allocated to the period under investigation.

 

General and administrative expenses

 

The questionnaire is not very helpful in explaining what it means by 'general and administrative' expenses. This area is one of the most contentious parts of the cost response, and the Commerce Department wants to leave itself the maximum flexibility. The questionnaire therefore asks for everything, and the Commerce Department sorts out the various details later.

 

In addition, the Commerce Department expects a breakout of selling expenses. This is relatively easy since selling expenses are usually just taken from the price response. If normal value is based on prices in the home market, the selling expenses should be for sales in the home market. If normal value is based on third country prices, the selling expenses in that third country should be used.

 

In an attempt to lower G&A expenses, a foreign company should study its non-operating income and expenses carefully. As explained earlier, the Commerce Department includes non-operating income that can be linked to the products under investigation, and excludes non-operating expenses that can be linked to products not under investigation. Developing such documentary evidence is very time consuming, and the burden of proof on the company is quite high. Nevertheless, if the possibility for significant cost savings exists, the company should explore this possibility.

 

The company should also watch for surprise Commerce Department alterations of cost items, especially G&A expenses. The Commerce Department sometimes ignores foreign GAAP and significantly alters certain expenses. A foreign company should be sensitive to such issues as it prepares its response. An important part of lowering overall costs is to avoid having the Commerce Department raise them.

 

Initial meetings with the defence team

 

After the company has received the cost questionnaire, and reviewed the requests being made by the Commerce Department, it is time to schedule an initial meeting for the defence team. At least some of the people who were involved in preparing the price response should also be part of the team that prepares the cost response. The key addition to the team will be the company's cost accountants.

 

General guidelines from the lingers

 

To facilitate the initial meetings, the lawyers should prepare a general memorandum on two topics. First, the memorandum should review for the company the basic principles of a cost investigation, applying those principles to the particular circumstances of the particular investigation. In the course of preparing the price response, the lawyers should have learned a great deal about the company, its accounting system, and its products. This knowledge should be used to help focus the way the general principles will apply to the particular company.

 

Second, the memorandum should comment on the cost questionnaire. Based on the conduct of the investigation to date, the Commerce Department staff members who have been assigned to work on the cost investigation, and the lawyers' experience, the lawyers should advise the company, in general terms, what information should be prepared. As part of this process, the lawyers can contact the Commerce Department for clarification about what the Commerce Department staff really wants to know. Sometimes the Commerce Department staff members will cooperate, and focus their requests more precisely to limit the burden on the company.

 

 Preparation of background it formation by the company accountants

 

Based on this initial memo and the cost questionnaire, the company's cost accountants should begin preparing background information for the initial meetings. It is a mistake to wait until the lawyers arrive to begin preparing information. If the laiAyers spend the first few days, or even weeks, just helping the company to collect the basic information, the defence team will not have time to focus on analysing the information and developing creative arguments to make on behalf of the company.

 

Some examples of the type of background information needed are:

 

- Explanations of the accounting system. Foreign companies often have a detailed explanation of their cost accounting system that was prepared for some other purpose, such as an internal audit. If these materials are translated and sent to the lawyers prior to the meetings, the lawyers can more quickly understand the system and begin to ask more detailed questions. Waiting until the lawyers arrive to begin such translations significantly delays the process.

- Internal cost analysis. Companies often have a great deal of internal analysis of their costs of production. Although much of this information is not in a format that the Commerce Department will accept, it can be very useful to the lawyers trying to make decisions about how best to present the cost information. The cost accountants should review their files to remind themselves of any studies that have already been done. Otherwise the accountants may spend hours collecting certain information, only to learn later that the information already existed in someone else's files.

- Samples of the documents. In addition to the basic overview of the system, the lawyers will have to immerse themselves in the details of the system. There is no substitute for carefully reviewing the actual documents. If the company maintains a summary sheet of the component costs for each product, an example should be prepared. The underlying supporting documents for a few sample entries on the summary sheet should also be prepared. At this stage, the purpose is to illustrate the system.

 

Preparation of the draft cost response and cost calculations

 

Once the background information has been prepared, it is time to have a meeting between the lawyers and the accountants. Sometimes there is only time for one long meeting, at which the basic information is reviewed and the cost response prepared. Other times it is possible to have an initial meeting to clarify everyone's understanding of the legal requirements, the cost accounting system, and the information that must be prepared, and then later have another meeting to prepare the cost response.

 

At this meeting, it is important that the appropriate accounting personnel be present to answer questions. It is usually necessary to have manager or general manager level accounting staff attend these meetings. They are usually the only ones who have a broad enough overview and understanding of the cost accounting system to answer the variety of questions that may arise during the discussions. More junior staff responsible for specific topics can be called into the meetings as necessary. It is sometimes difficult to have senior managers trapped in long meetings with the lawyers, since these same managers have many other responsibilities. Unfortunately, there is usually little alternative.

 

The response is usually drafted simultaneously by the lawyers and the accountants. The lawyers prepare the first draft of the text - the narrative that answers the various questions and explains how the response has been prepared. At the same time, the accountants prepare the first draft of the exhibits — the tables and charts summarizing the cost information to be submitted to the Commerce Department. The lawyers work with the accountants to develop a format that will satisfy the Commerce Department, but that also minimizes the burden on the accountants to reformat information which already exists in the company's accounting records. The drafting is an interactive process, with the lawyers and accountants consulting each other as they proceed.

 

Revisions to the cost calculations

 

As the response is being drafted, the cost calculations are normally revised several times. This process is very frustrating for the accountants, who bear the burden of revising them. Unfortunately, there is no way to avoid revisions without hurting the company's defence. There is no single 'correct' way to calculate costs. The principles discussed earlier are simply the framework within which the Commerce Department proceeds. Depending on the particular circumstances at a company, there may be alternative ways to calculate costs.

 

The only way to find the most favourable method is to experiment with different alternatives. The company should undertake a preliminary analysis of the initial cost response; in other words, perform a rough calculation to determine whether a particular approach is helpful or not. If the rough calculation suggests one methodology produces higher costs than some other methodology, abandon the methodology that produces the higher costs. Many accountants find it difficult to perform such rough calculations. Their training is to stress accuracy and completeness. Unfortunately, the time pressures of an anti-dumping investigation do not always allow the luxury of detailed and careful calculations. The accountants must therefore do their best to work with the lawyers in performing rough preliminary calculations to assess alternative methodologies.

 

Finalizing the cost response

 

Finalizing the response involves several steps. First, the lawyers and accountants should carefully review the response for substantive accuracy. Have all of the questions been answered? Are all of the explanations complete, and understandable? Have all of the important issues been considered?

 

The second step is for the lawyers to coordinate with the lawyers for other companies under investigation. This coordination takes place throughout the process, but it is especially important when finalizing the response. To the extent possible, the different foreign companies involved in an anti-dumping case should take consistent positions. If one company claims that certain information is not available, but another company provides it, the Commerce Department becomes quite suspicious. Sometimes companies are forced to take opposing positions, in which case coordination is not possible. Companies should at least avoid unnecessary and unintentional conflicting positions.

 

Third, the company staff should carefully recheck the accuracy of the response. Arithmetic and transcription errors are embarrassing. Too many errors may lead the Commerce Department to reject the response and use 'facts available' instead. The sooner such mistakes are found and corrected, the better. The best time to correct them is before the response is submitted to the Commerce Department.

 

Finally, once the company has finished with its work, the lawyers must return to Washington DC and prepare confidential and non-confidential versions of the response. Preparing these different versions takes several days, depending on the complexity of the response and the number of documents that require non-confidential summaries.

 

 Considerations after filing the cost response

 

Although preparing the cost response is the most important stage in defending a cost investigation, there are other considerations that a foreign company should keep in mind after filing the cost response. First, the company should anticipate and plan for a longer and more complex verification.

 

Verifications are always difficult, but the need to verify both a price response and a cost response is especially challenging. Chapter 11 discusses the work involved at a verification. The company should begin its preparations much earlier to allow for the extra work.

 

Second, the company and its lawyers must be alert to the need for coordination between the price response and the cost response. The foreign company usually has no trouble coordinating the preparation of the responses — since the same company and same lawyers are doing the work — but the Commerce Department often has trouble coordinating its understanding of the responses. The Commerce Department staff working on the price response and the staff working on the cost response often do not communicate. The person handling the cost response often does not even read the price response. At a minimum, the company should answer any questions the Commerce Department staff might have about the different parts of the overall response.

 

Moreover, the company should anticipate any problem areas where a misunderstanding about the price response could lead to mistaken cost calculations, and explain them to the Commerce Department staff. The most common problem is for the staff person handling the price response to subtract certain expense items that the staff person handling the cost response includes in the cost calculations. Such a mistake greatly increases the risk that the Commerce Department will find the sales prices to be below cost. Alerting the Commerce Department staff to areas where this problem might occur can reduce the risk.

 

Source: Business Guide to Trade Remedies in the United States: Anti-dumping, countervailing and safeguards legislation practices and procedures