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CUSTOMS BENEFITS FOR EXPORTERS

Drawback of customs duties

Drawback is a form of tax relief in which a lawfully collected customs duty is refunded or remitted wholly or in part because of the particular use made of the commodity on which the duty was collected. U.S. firms that import materials or components that they process or assemble for reexport may obtain drawback refunds of all duties paid on the imported merchandise, less 1 percent to cover customs costs. This practice encourages U.S. exporters by permitting them to compete in foreign markets without the handicap of including in their sales prices the duties paid on imported components.

The Trade and Tariff Act of 1984 revised and expanded drawbacks. Regulations implementing the act have been promulgated in 19 CFR Part 191. Under existing regulations several types of drawback have been authorized, but only three are of interest to most manufacturers:

  1. If articles manufactured in the United States with the use of imported merchandise are exported, then the duties paid on the imported merchandise that was used may be refunded as drawback (less 1 percent).
  2. If both imported merchandise and domestic merchandise of the same kind and quality are used to manufacture articles, some of which are exported, then duties that were paid on the imported merchandise are refundable as drawback, regardless of whether that merchandise was used in the exported articles.
  3. If articles of foreign origin imported for consumption after December 28, 1980, are exported from the United States or are destroyed under the supervision of U.S. Customs within three years of the date of importation, in the same condition as when imported and without being "used" in the United States, then duties that were paid on the imported merchandise (less 1 percent) are refundable as drawback. Incidental operations on the merchandise (such as testing, cleaning, repacking, or inspection) are not considered to be "uses" of the article.

To obtain drawback, the U.S. firm must file a proposal with a regional commissioner of customs (for the first type of drawback) or with the Entry Rulings Branch, U.S. Customs Headquarters, at the address in the following paragraph (for other types of drawback). These offices may also provide a model drawback proposal for the U.S. company.

Drawback claimants must establish that the articles on which drawback is being claimed were exported within five years after the merchandise in question was imported. Once the request for drawback is approved, the proposal and approval together constitute the manufacturer's drawback rate. For more information contact Entry Rulings Branch, Room 2107, U.S. Customs Headquarters, 1301 Constitution Avenue, N.W., Washington, DC 20229; telephone 202-566-5856.

U.S. foreign-trade zones

Exporters should also consider the customs privileges of U.S. foreign-trade zones. These zones are domestic U.S. sites that are considered outside U.S. customs territory and are available for activities that might otherwise be carried on overseas for customs reasons. For export operations, the zones provide accelerated export status for purposes of excise tax rebates and customs drawback. For import and reexport activities, no customs duties, federal excise taxes, or state or local ad valorem taxes are charged on foreign goods moved into zones unless and until the goods, or products made from them, are moved into customs territory. This means that the use of zones can be profitable for operations involving foreign dutiable materials and components being assembled or produced here for reexport. Also, no quota restrictions ordinarily apply.

There are now 180 approved foreign-trade zones in port communities throughout the United States. Associated with these projects are some 200 subzones. These facilities are available for operations involving storage, repacking, inspection, exhibition, assembly, manufacturing, and other processing.

More than 2,100 business firms used foreign-trade zones in fiscal year 1990. The value of merchandise moved to and from the zones during that year exceeded $80 billion. Export shipments from zones and subzones amounted to some $12 billion.

Information about the zones is available from the zone manager, from local Commerce district offices, or from the Executive Secretary, Foreign-Trade Zones Board, International Trade Administration, U.S. Department of Commerce, Washington, DC 20230.

Foreign free port and free trade zones

To encourage and facilitate international trade, more than 300 free ports, free trade zones, and similar customs-privileged facilities are now in operation in some 75 foreign countries, usually in or near seaports or airports. Many U.S. manufacturers and their distributors use free ports or free trade zones for receiving shipments of goods that are reshipped in smaller lots to customers throughout the surrounding areas. Information about free trade zones, free ports, and similar facilities abroad may be found in Tax-Free Trade Zones of the World, published by Matthew Bender & Co., International Division, 1275 Broadway, Albany, NY 12204; telephone 800-424-4200.

Bonded warehouses

Bonded warehouses can also be found in many locations. Here, goods can be warehoused without duties being assessed. Once goods are released, they are subject to duties.

FOREIGN SALES CORPORATIONS

One of the most important steps a U.S. exporter can take to reduce federal income tax on export-related income is to set up a foreign sales corporation (FSC). This tax incentive for U.S. exporters replaced the domestic international sales corporation (DISC), except the interest charge DISC. While the interest charge DISC allows exporters to defer paying taxes on export sales, the tax incentive provided by the FSC legislation is in the form of a permanent exemption from federal income tax for a portion of the export income attributable to the offshore activities of FSCs (26 U.S.C., sections 921-927). The tax exemption can be as great as 15 percent on gross income from exporting, and the expenses can be kept low through the use of intermediaries who are familiar with and able to carry out the formal requirements. A firm that is exporting or thinking of exporting can optimize available tax benefits with proper planning, evaluation, and assistance from an accountant or lawyer.

An FSC is a corporation set up in certain foreign countries or in U.S. possessions (other than Puerto Rico) to obtain a corporate tax exemption on a portion of its earnings generated by the sale or lease of export property and the performance of some services. A corporation initially qualifies as an FSC by meeting certain basic formation tests. An FSC (unless it is a small FSC) must also meet several foreign management tests throughout the year. If it complies with those requirements, the FSC is entitled to an exemption on qualified export transactions in which it performs the required foreign economic processes.

FSCs can be formed by manufacturers, nonmanufacturers, or groups of exporters, such as export trading companies. An FSC can function as a principal, buying and selling for its own account, or as a commission agent. It can be related to a manufacturing parent or it can be an independent merchant or broker.

An FSC must be incorporated and have its main office (a shared office is acceptable) in the U.S. Virgin Islands, American Samoa, Guam, the Northern Mariana Islands, or a qualified foreign country. In general, a firm must file for incorporation by following the normal procedures of the host nation or U.S. possession. Taxes paid by an FSC to a foreign country do not qualify for the foreign U.S. tax credit. Some nations, however, offer tax incentives to attract FSCs; to qualify, a company must identify itself as an FSC to the host government. Consult the government tax authorities in the country or U.S. possession of interest for specific information.

A country qualifies as an FSC host if it has an exchange of information agreement with the United States approved by the U.S. Department of the Treasury. As of February 20, 1991, the qualified countries were Australia, Austria, Barbados, Belgium, Bermuda, Canada, Costa Rica, Cyprus, Denmark, Dominican Republic, Egypt, Finland, France, Germany, Grenada, Iceland, Ireland, Jamaica, Korea, Malta, Mexico, Morocco, Netherlands, New Zealand, Norway, Pakistan, Philippines, Sweden, and Trinidad and Tobago. Since the Internal Revenue Service (IRS) does not allow foreign tax credits for foreign taxes imposed on the FSC's qualified income, it is generally advantageous to locate an FSC only in a country where local income taxes and withholding taxes are minimized. Most FSCs are incorporated in the U.S. Virgin Islands or Guam.

The FSC must have at least one director who is not a U.S. resident, must keep one set of its books of account (including copies or summaries of invoices) at its main offshore office, cannot have more than 25 shareholders, cannot have any preferred stock, and must file an election to become an FSC with the IRS. Also, a group may not own both an FSC and an interest charge DISC.

The portion of the FSC gross income from exporting that is exempt from U.S. corporate taxation is 32 percent for a corporate-held FSC if it buys from independent suppliers or contracts with related suppliers at an "arm's-length" price _ a price equivalent to that which would have been paid by an unrelated purchaser to an unrelated seller. An FSC supplied by a related entity can also use the special administrative pricing rules to compute its tax exemption. Although an FSC does not have to use the two special administrative pricing rules, these rules may provide additional tax savings for certain FSCs.

Small FSCs and interest charge DISCs are designed to give export incentives to smaller businesses. The tax benefits of a small FSC or an interest charge DISC are limited by ceilings on the amount of gross income that is eligible for the benefits.

The small FSC is generally the same as an FSC, except that a small FSC must file an election with the IRS designating itself as a small FSC -- which means it does not have to meet foreign management or foreign economic process requirements. A small FSC tax exemption is limited to the income generated by $5 million or less in gross export revenues.

An exporter can still set up a DISC in the form of an interest charge DISC to defer the imposition of taxes for up to $10 million in export sales. A corporate shareholder of an interest charge DISC may defer the imposition of taxes on approximately 94 percent of its income up to the $10 million ceiling if the income is reinvested by the DISC in qualified export assets. An individual who is the sole shareholder of an interest charge DISC can defer 100 percent of the DISC income up to the $10 million ceiling. An interest charge DISC must meet the following requirements: the taxpayer must make a new election; the tax year of the new DISC must match the tax year of its majority stockholder; and the DISC shareholders must pay interest annually at U.S. Treasury bill rates on their proportionate share of the accumulated taxes deferred.

A shared FSC is an FSC that is shared by 25 or fewer unrelated exporter-shareholders to reduce the costs while obtaining the full tax benefit of an FSC. Each exporter-shareholder owns a separate class of stock and each runs its own business as usual. Typically, exporters pay a commission on export sales to the FSC, which distributes the commission back to the exporter.

States, regional authorities, trade associations, or private businesses can sponsor a shared FSC for their state's companies, their association's members, or their business clients or customers, or for U.S. companies in general. A shared FSC is a means of sharing the cost of the FSC. However, the benefits and proprietary information are not shared. The sponsor and the other exporter-shareholders do not participate in the exporter's profits, do not participate in the exporter's tax benefits, and are not a risk for another exporter's debts.

For more information about FSCs, U.S. companies may contact the assistant secretary for trade development (telephone 202-377-1461); the Office of the Chief Counsel for International Commerce, U.S. Department of Commerce (202-377-0937); or a local office of the IRS.

COMMERCE ASSISTANCE RELATED TO MULTILATERAL TRADE NEGOTIATIONS

The Tokyo Round Trade Agreements, completed in 1979 under General Agreement on Tariff and Trade (GATT) auspices, produced significant tariff reductions and established several nontariff trade barrier (NTB) agreements or codes. The codes currently in effect address the following NTBs:

  1. Countervailing measures to offset trade-distortive subsidies.
  2. Antidumping duties used to counter injurious price discrimination.
  3. Discriminatory government procurement.
  4. Technical barriers to trade (e.g., product standards).
  5. Uniform and equitable customs valuation for duty purposes.
  6. Import licensing procedures.
  7. Trade in civil aircraft (both tariff and nontariff issues).

An important benefit for U.S. exporters stemming from the Tokyo Round is the GATT Government Procurement Agreement opening many foreign government procurement orders to U.S. suppliers. Commerce's TOP has been designated the primary clearing point for tenders generated under this agreement. Information on the TOP can be obtained by contacting the local Commerce district office or Trade Opportunity Program, U.S. Department of Commerce, Export Promotion Services, Washington, DC 20230; telephone 202-377-4203.

Users can also access TOP leads by tapping in directly to the EBB, a data base service of the Department of Commerce. Subscriptions to this service can be obtained by mail from U.S. Department of Commerce, National Technical Information Service, 5285 Port Royal Road, Springfield, VA 22161.

Other data base information on foreign tenders can be obtained from the Commerce Business Daily, available from the U.S. Government Printing Office, Washington, DC 20402; telephone 202-783-3238. Brief summaries of leads also appear in the Journal of Commerce.

In 1991, negotiators were engaged in achieving a successful conclusion of the Uruguay Round of multilateral trade negotiations. U.S. objectives included (1) a substantial market access agreement covering tariffs and nontariff measures and (2) improvement in GATT to cover trade in such new areas as services, intellectual property rights, and trade-related investment measures. General information on the Uruguay Round can be obtained from the Office of Multilateral Affairs, H3513, U.S. Department of Commerce/ITA, Washington, DC 20230.

BILATERAL TRADE AGREEMENTS

The United States has concluded bilateral trade agreements with several Eastern European countries, the Soviet Union, and Mongolia. These congressionally approved agreements are required by the Trade Act of 1974 for these countries to receive most-favored nation (MFN) treatment. In addition to an article providing for reciprocal MFN status, the agreements contain guarantees on intellectual property rights and business facilitation. Such guarantees as the right to establish commercial representation offices in a country by no more than a simple registration process, the right to serve as and hire agents, the right to deal directly with customers and end users of products and services, and the right to hire employees of a company's choice are all included in the agreements. The intellectual property rights provisions include protection for computer software and trade secrets. Trade agreements are in effect with Hungary, Czechoslovakia, and Romania (the MFN provisions of this agreement have been suspended). As of August 14, 1991, the trade agreements with the Soviet Union, Mongolia, and Bulgaria have been signed and submitted to the Congress for approval.

INTELLECTUAL PROPERTY RIGHTS CONSIDERATIONS

The United States provides a wide range of protection for intellectual property (i.e., patents, trademarks, service marks, copyrights, trade secrets, and semiconductor mask works). Many businesses -- particularly high-technology firms, the publishing industry, chemical and pharmaceutical firms, the recording industry, and computer software companies -- depend heavily on the protection afforded their creative products and processes.

In the United States, there are five major forms of intellectual property protection. A U.S. patent confers on its owner the exclusive right for 17 years from the date the patent is granted to manufacture, use, and sell the patented product or process within the United States. The United States and the Philippines are the only two countries that award patents on a first-to-invent basis; all other countries award patents to the first to file a patent application. As of November 16, 1989, a trademark or service mark registered with the U.S. Patent and Trademark Office remains in force for 10 years from the date of registration and may be renewed for successive periods of 10 years, provided the mark continues to be used in interstate commerce and has not been previously canceled or surrendered.

A work created (fixed in tangible form for the first time) in the United States on or after January 1, 1978, is automatically protected by a U.S. copyright from the moment of its creation. Such a copyright, as a general rule, has a term that endures for the author's life plus an additional 50 years after the author's death. In the case of works made for hire and for anonymous and pseudonymous works (unless the author's identity is revealed in records of the U.S. Copyright Office of the Library of Congress), the duration of the copyright is 75 years from publication or 100 years from creation, whichever is shorter. Other, more detailed provisions of the Copyright Act of 1976 govern the term of works created before January 1, 1978.

Trade secrets are protected by state unfair competition and contract law. Unlike a U.S. patent, a trade secret does not entitle its owner to a government-sanctioned monopoly of the discovered technology for a particular length of time. Nevertheless, trade secrets can be a valuable and marketable form of technology. Trade secrets are typically protected by confidentiality agreements between a firm and its employees and by trade secret licensing agreement provisions that prohibit disclosures of the trade secret by the licensee or its employees.

Semiconductor mask work registrations protect the mask works embodied in semiconductor chip products. In many other countries, mask works are referred to as integrated circuit layout designs. The Semiconductor Chip Protection Act of 1984 provides the owner of a mask work with the exclusive right to reproduce, import, and distribute such mask works for a period of 10 years from the earlier of two dates: the date on which the mask work is registered with the U.S. Copyright Office or the date on which the mask work is first commercially exploited anywhere in the world.

The rights granted under U.S. patent, trademark, or copyright law can be enforced only in the United States, its territories, and its possessions; they confer no protection in a foreign country. The protection available in each country depends on that country's national laws, administrative practices, and treaty obligations. The relevant international treaties set certain minimum standards for protection, but individual country laws and practices can and do differ significantly.

To secure patent and trademark right outside the United States a company must apply for a patent or register a trademark on a country-by-country basis. However, U.S. individuals and corporations are entitled to a "right of priority" and to "national treatment" in the 100 countries that, along with the United States, are parties to the Paris Convention for the Protection of Industrial Property.

The right of priority gives an inventor 12 months from the date of the first application filed in a Paris Convention country (6 months for a trademark) in which to file in other Paris Convention countries _ to relieve companies of the burden of filing applications in many countries simultaneously. A later treaty to which the United States adheres, the Patent Cooperation Treaty, allows companies to file an international application for protection in other member states. Individual national applications, however, must follow within 18 months.

National treatment means that a member country will not discriminate against foreigners in granting patent or trademark protection. Rights conferred may be greater or less than provided under U.S. law, but they must be the same as the country provides its own nationals.

The level and scope of copyright protection available within a country also depends on that country's domestic laws and treaty obligations. In most countries, the place of first publication is an important criterion for determining whether foreign works are eligible for copyright protection. Works first published in the United States on or after March 1, 1989 _ the date on which U.S. adherence to the Berne Convention for the Protection of Literary and Artistic Works became effective _ are, with few exceptions, automatically protected in the more than 80 countries that comprise the Berne Union. Exporters of goods embodying works protected by copyright in the United States should find out how individual Berne Union countries deal with older U.S. works, including those first published (but not first or simultaneously published in a Berne Union country) before March 1, 1989.

The United States maintains copyright relations with a number of countries under a second international agreement called the Universal Copyright Convention (UCC). UCC countries that do not also adhere to Berne often require compliance with certain formalities to maintain copyright protection. Those formalities can be either or both of the following: (1) registration and (2) the requirement that published copies of a work bear copyright notice, the name of the author, and the date of first publication. The United States has bilateral copyright agreements with a number of countries, and the laws of these countries may or may not be consistent with either of the copyright conventions. Before first publication of a work anywhere, it is advisable to investigate the scope of and requirements for maintaining copyright protection for those countries in which copyright protection is desired.

Intellectual property rights owners should be aware that after valuable intellectual property rights have been secured in foreign markets, enforcement must be accomplished through local law. As a general matter, intellectual property rights are private rights to be enforced by the rights owner. Ease of enforcement varies from country to country and depends on such factors as the attitude of local officials, substantive requirements of the law, and court procedures. U.S. law affords a civil remedy for infringement (with money damages to a successful plaintiff) and criminal penalties (including fines and jail terms) for more serious offenses. The availability of criminal penalties for infringement, either as the exclusive remedy or in addition to private suits, also varies among countries.

A number of countries are parties to only some, or even none, of the treaties that have been discussed here. Therefore, would-be U.S. exporters should carefully evaluate the intellectual property laws of their potential foreign markets, as well as applicable multilateral and bilateral treaties and agreements (including bilateral trade agreements), before making a decision to do business there. The intellectual property considerations that arise can be quite complex and, if possible, should be explored in detail with an attorney.

In summary, U.S. exporters with intellectual property concerns should consider taking the following steps:

  1. Obtaining protection under all applicable U.S. laws for their inventions, trademarks, service marks, copyrights, and semiconductor mask works.
  2. Researching the intellectual property laws of countries where they may conduct business. The US&FCS has information about intellectual property laws and practices of particular countries, although it does not provide legal advice.
  3. Securing the services of competent local counsel to file appropriate patent, trademark, or copyright applications within priority periods.
  4. Adequately protecting their trade secrets through appropriate confidentiality provisions in employment, licensing, marketing, distribution, and joint venture agreements.

ARBITRATION OF DISPUTES IN INTERNATIONAL TRANSACTIONS

The parties to a commercial transaction may provide in their contract that any disputes over interpretation or performance of the agreement will be resolved through arbitration. In the domestic context, arbitration may be appealing for a variety of reasons. Frequently cited advantages over conventional courtroom litigation include potential savings in time and expense, confidentiality of the proceedings, and expertise of the arbitrators.

For export transactions, in which the parties to the agreement are from different countries, additional important advantages are neutrality (international arbitration allows each party to avoid the domestic courts of the other should a dispute arise) and ease of enforcement (foreign arbitral awards can be easier to enforce than foreign court decisions).

In an agreement to arbitrate (usually just inserted as a term in the contract governing the transaction as a whole), the parties also have broad power to agree on many significant aspects of the arbitration. The arbitration clause may do the following:

  1. Specify the location (a "neutral site") where the arbitration will be conducted, although care must be taken to select a country that has adopted the UN Convention on the Recognition and Enforcement of Foreign Awards (or another convention providing for the enforcement of arbitral awards).
  2. Establish the rules that will govern the arbitration, usually by incorporating a set of existing arbitration rules such as the UN Commission on International Trade Law (UNCITRAL) Model Rules.
  3. Appoint an arbitration institute to administer the arbitration. The International Chamber of Commerce based in Paris, the American Arbitration Association in New York, and the Arbitration Institute of the Stockholm Chamber of Commerce in Sweden are three such prominent institutions.
  4. Choose the law that will govern procedural issues or the merits of the dispute, for example, the law of the State of New York.
  5. Place certain limitations on the selection of arbitrators, for example, by agreeing to exclude nationals of the parties to the dispute or by requiring certain qualifications or expertise.
  6. Designate the language in which the arbitral proceedings will be conducted.

For international arbitration to work effectively, the national courts in the countries of both parties to the dispute must recognize and support arbitration as a legitimate alternative means for resolving disputes. This support is particularly crucial at two stages in the arbitration process. First, should one party attempt to avoid arbitration after a dispute has arisen, the other party must be able to rely on the judicial system in either country to enforce the agreement to arbitrate by compelling arbitration. Second, the party that wins in the arbitration proceeding must be confident that the national courts will enforce the decision of the arbitrators. This will ensure that the arbitration process is not ultimately frustrated at the enforcement stage if the losing party refuses to pay or otherwise satisfy the arbitral award.

The strong policy of U.S. federal law is to approve and support resolution of disputes by arbitration. Through the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards (popularly known as the New York Convention), which the United States ratified in 1970, more than 80 countries have undertaken international legal obligations to recognize and enforce arbitral awards. While several other arbitration treaties have been concluded, the New York Convention is by far the most important international agreement on commercial arbitration and may be credited for much of the explosive growth of arbitration of international disputes in recent decades.

Providing for arbitration of disputes makes good sense in many international commercial transactions. Because of the complexity of the subject, however, legal advice should be obtained for specific export transactions.

THE UNITED NATION SALES CONVENTION

The UN Convention on Contracts for the International Sale of Goods (CISG) became the law of the United States on January 1, 1988. It establishes uniform legal rules to govern the formation of international sales contracts and the rights and obligations of the buyer and seller. The CISG is expected to facilitate and stimulate international trade.

The CISG applies automatically to all contracts for the sale of goods between traders from two different countries that have both ratified the CISG. This automatic application takes place unless the parties to the contract expressly exclude all or part of the CISG or expressly stipulate to law other than the CISG. Parties can also expressly choose to apply the CISG when it would not automatically apply.

At present, the following nations apply the CISG: Argentina, Australia, Austria, Bulgaria, Byelorussian Socialist Republic, Chile, China, Czechoslovakia, Denmark, Egypt, Finland, France, Germany, Hungary, Iraq, Italy, Lesotho, Mexico, Norway, Spain, Sweden, Switzerland, Syria, Ukrainian Soviet Socialist Republic, USSR, United States, Yugoslavia, and Zambia. The CISG will enter into force in the Netherlands on January 1, 1992, and in Guinea on February 1, 1992.

The United States made a reservation, the effect of which is that the CISG will apply only when the other party to the transaction also has its place of business in a country that applies the CISG.

Convention provisions

The provisions and scope of the CISG are similar to Article 2 of the Uniform Commercial Code (effective in the United States except Louisiana). The CISG comprises four parts:

  1. Part I, Sphere of Application and General Provisions (Articles 1-13), provides that the CISG covers the international sale of most commercial goods.
  2. Part II, Formation of the Contract (Articles 14-24), provides rules on offer and acceptance.
  3. Part III, Sale of Goods (Articles 25-88), covers obligations and remedies of the seller and buyer and rules governing the passing of risk and damages.
  4. Part IV, Final Provisions (Articles 89-101), covers the right of a country to disclaim certain parts of the convention.

Applying (or excluding) the CISG

U.S. businesses can avoid the difficulties of reaching agreement with foreign parties on choice-of-law issues because the CISG text is available as a compromise. Using the CISG may decrease the time and legal costs otherwise involved in research of different unfamiliar foreign laws. Further, the CISG may reduce the problems of proof and foreign law in domestic and foreign courts.

Application of the CISG may especially make sense for smaller firms and for American firms contracting with companies in countries where the legal systems are obscure, unfamiliar, or not suited for international sales transactions of goods. However, some larger, more experienced firms may want to continue their current practices, at least with regard to parties with whom they have been doing business regularly.

When a firm chooses to exclude the CISG, it is not sufficient to simply say "the laws of New York apply," because the CISG would be the law of the State of New York under certain circumstances. Rather, one would say "the provisions of the Uniform Commercial Code as adopted by the State of New York, and not the UN Convention on Contracts for the International Sale of Goods, apply."

After it is determined whether or not the CISG governs a particular transaction, the related documentation should be reviewed to ensure consistency with the CISG or other governing law. For agreements about to expire, companies should make sure renewals take into account the applicability (or nonapplicability) of the CISG.

The CISG can be found in the Federal Register (Vol. 52, p. 6262, 1987) along with a notice by the U.S. Department of State, and in the pocket part to 15 U.S.C.A. app. at 29. To obtain an up-to-date listing of ratifying or acceding countries and their reservations call the UN at 212-963-3918 or 212-963-7958. For further information contact the Office of the Assistant Legal Adviser for Private International Law, U.S. Department of State (202-653-9851), or the Office of the Chief Counsel for International Commerce, U.S. Department of Commerce (202-377-0937).

EXPORT REGULATIONS, CUSTOMS BENEFITS AND TAX INCENTIVES

This chapter covers a wide range of regulations, procedures, and practices that fall into three categories: (1) regulations that exporters must follow to comply with U.S. law; (2) procedures that exporters should follow to ensure a successful export transaction; and (3) programs and certain tax procedures that open new markets or provide financial benefits to exporters.

EXPORT REGULATIONS

Although export licensing is a basic part of exporting, it is one of the most widely misunderstood aspects of government regulations for exporting. The export licensing procedure may appear complex at first, but in most cases it is a rather straightforward process. Exporters should remember, however, that violations of the Export Administration Regulations (EAR) carry both civil and criminal penalties. Export controls are administered by the Bureau of Export Administration (BXA) in the U.S. Department of Commerce. Whenever there is any doubt about how to comply with export regulations, Department of Commerce officials or qualified professional consultants should be contacted for assistance.

The EAR are available by subscription from the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20401; telephone 202-275-2091. Subscription forms may be obtained from local Commerce Department district offices or from the Office of Export Licensing, Exporter Counseling Division, Room 1099D, U.S. Department of Commerce, Washington, DC 20230; telephone 202-377-4811.

Types of license

Export License

For reasons of national security, foreign policy, or short supply, the United States controls the export and reexport of goods and technical data through the granting of two types of export license: general licenses and individually validated licenses (IVLs). There are also special licenses that are used if certain criteria are met, for example, distribution, project, and service supply. Except for U.S. territories and possessions and, in most cases, Canada, all items exported from the United States require an export license. Several agencies of the U.S. government are involved in the export license procedure.

General License

A general license is a broad grant of authority by the government to all exporters for certain categories of products. Individual exporters do not need to apply for general licenses, since such authorization is already granted through the EAR; they only need to know the authorization is available.

Individually Validated License_

An IVL is a specific grant of authority from the government to a particular exporter to export a specific product to a specific destination if a general license is not available. The licenses are granted on a case-by-case basis for either a single transaction or for many transactions within a specified period of time. An exporter must apply to the Department of Commerce for an IVL. One exception is munitions, which require a Department of State application and license. Other exceptions are listed in the EAR.

Determining which license to use

The first step in complying with the export licensing regulations is to determine whether a product requires a general license or an IVL. The determination is based on what is being exported and its destination. The determination is a three-step procedure:

  1. Determine the destination. Check the schedule of country groups in the EAR (15 CFR Part 770, Supp. 1) to see under which country group the export destination falls.
  2. Determine the export control commodity number (ECCN). All dual-use items (items used for both military and civilian purposes) are in one of several categories of commodities controlled by the Department of Commerce. To determine what ECCN applies to a particular commodity, see the Commodity Control List in the EAR (15 CFR Part 799.1, Supp. 1).
  3. Determine what destinations require an IVL. Refer to the specified ECCN in Part 799.1 of the EAR. Look under the paragraph "Validated License Required" to check which country groups require an IVL. If the country group in question is not listed there, no IVL is required. If it is listed there, an IVL is required unless the commodity meets one of the technical exceptions cited under the ECCN.

To avoid confusion, the exporter is strongly advised to seek assistance in determining the proper license. The best source is the Department of Commerce's Exporter Counseling Division. Telephone or write to Exporter Counseling Division, Room 1099D, U.S. Department of Commerce, Washington, DC 20230; telephone 202-377-4811. Or the exporter may check with the local Commerce district office. An exporter can also request a preliminary, written commodity classification opinion from the Office of Technology and Policy Analysis, U.S. Department of Commerce. P.O. Box 273, Washington, DC 20044.

Shipments under a general license

If, after reviewing the EAR or after consulting with the Department of Commerce, it is determined that an IVL is not required, an exporter may ship its product under a general license.

A general license does not require a specific application. Exporters who are exporting under a general license must determine whether a destination control statement is required. (See the "Antidiversion, Antiboycott, and Antitrust Requirements" section of this chapter.)

Finally, if the shipment is destined for a free-world destination and is valued at more than $2,500 or requires a validated export license, the exporter must complete a shipper's export declaration (SED). SEDs are used by Customs to indicate the type of export license being used and to keep track of what is exported. They are also used by the Bureau of Census to compile statistics on U.S. trade patterns.

Shipments under an individually validated license

If an IVL is required, the U.S. exporter must prepare a Form BXA-622P, "Application for Export License," and submit it to BXA. The applicant must be certain to follow the instructions on the form carefully. In some instances, technical manuals and support documentation must also be included.

If the application is approved, a Validated Export License is mailed to the applicant. The license contains an export authorization number that must be placed on the SED. Unlike some goods exported under a general license, all goods exported under an IVL must be accompanied by an SED.

The final step in complying with the IVL procedure is recordkeeping. The exporter must keep records of all shipments against an IVL. All documents related to an export application should be retained for five years. Section 787.13 of the EAR covers recordkeeping requirements.

Avoiding Delays in Receiving an Individually Validated License

In filling out license applications, exporters commonly make four errors that account for most delays in processing applications:

  1. Failing to sign the application.
  2. Handwriting, rather than typing, the application.
  3. Responding inadequately to section 9b of the application, "Description of Commodity or Technical Data," which calls for a description of the item or items to be exported. The applicant must be specific and is encouraged to attach additional material to explain the product fully.
  4. Responding inadequately to section 12 of the application, where the specific end use of the products or technical data is to be described. Again, the applicant must be specific. Answering vaguely or entering "Unknown" is likely to delay the application process.

In an emergency, the Department of Commerce may consider expediting the processing of an IVL application, but this procedure cannot be used as a substitute for the timely filing of an application. An exporting firm that feels it qualifies for emergency handling should contact the Exporter Counseling Division.

Additional Documentation_

Certain applications for an IVL must be accompanied by supporting documents supplied by the prospective purchaser or the government of the country of ultimate destination. By reviewing Part 775 of the EAR, the exporter can determine whether any supporting documents are required.

The most common supporting documents are the international import certificate and the statement of ultimate consignee and purchaser. The international import certificate (Form ITA-645P/ATF-4522/DSP-53) is a statement issued by the government of the country of destination that certifies that the imported products will be disposed of responsibly in the designated country. It is the responsibility of the exporter to notify the consignee to obtain the certificate. The import certificate should be retained in the U.S. exporter's files, and a copy should be submitted with the IVL application.

The statement of ultimate consignee and purchaser (BXA Form 629P) is a written assurance that the foreign purchaser of the goods will not resell or dispose of goods in a manner contrary to the export license under which the goods were originally exported. The exporter must send the statement to the foreign consignee and purchaser for completion. The exporter then submits this form along with the export license application.

In addition to obtaining the appropriate export license, U.S. exporters should be careful to meet all other international trade regulations established by specific legislation or other authority of the U.S. government. The import regulations of foreign countries must also be taken into account. The exporter should keep in mind that even if help is received with the license and documentation from others, such as banks, freight forwarders or consultants, the exporter remains responsible for ensuring that all statements are true and accurate.

ANTIDIVERSION, ANTIBOYCOTT, AND ANTITRUST REQUIREMENTS

Antidiversion clause

To help ensure that U.S. exports go only to legally authorized destinations, the U.S. government requires a destination control statement on shipping documents. Under this requirement, the commercial invoice and bill of lading (or air waybill) for nearly all commercial shipments leaving the United States must display a statement notifying the carrier and all foreign parties (the ultimate and intermediate consignees and purchaser) that the U.S. material has been licensed for export only to certain destinations and may not be diverted contrary to U.S. law. Exceptions to the use of the destination control statement are (1) shipments to Canada and intended for consumption in Canada and (2) shipments being made under certain general licenses. Advice on the appropriate statement to be used can be provided by the Department of Commerce, the Commerce district office, an attorney, or the freight forwarder.

Antiboycott regulations

The United States has an established policy of opposing restrictive trade practices or boycotts fostered or imposed by foreign countries against other countries friendly to the United States. This policy is implemented through the antiboycott provisions of the Export Administration Act enforced by the Department of Commerce and through the Tax Reform Act of 1977 enforced by the Department of the Treasury.

In general, these laws prohibit U.S. persons from participating in foreign boycotts or taking actions that further or support such boycotts. The antiboycott regulations carry out this general purpose by

  1. prohibiting U.S. persons from refusing to do business with blacklisted firms and boycotted friendly countries pursuant to foreign boycott demands;
  2. prohibiting U.S. persons from discriminating against other U.S. persons on the basis of race, religion, sex, or national origin in order to comply with a foreign boycott;
  3. prohibiting U.S. persons from furnishing information about their business relationships with blacklisted friendly foreign countries or blacklisted companies in response to boycott requirements;
  4. prohibiting U.S. persons from appearing to perform any of these prohibited acts;
  5. providing for public disclosure of requests to comply with foreign boycotts; and
  6. requiring U.S. persons who receive requests to comply with foreign boycotts to disclose publicly whether they have complied with such requests.

The antiboycott provisions of the Export Administration Act apply to all U.S. persons, including intermediaries in the export process, as well as foreign subsidiaries that are "controlled in fact" by U.S. companies and U.S. officials.

The Department of Commerce's Office of Antiboycott Compliance (OAC) administers the program through ongoing investigations of corporate activities. OAC operates an automated boycott-reporting system providing statistical and enforcement data to Congress and to the public, issuing interpretations of the regulations for the affected public, and offering nonbinding informal guidance to the private sector on specific compliance concerns. U.S. firms with questions about complying with antiboycott regulations should call OAC at 202-377-2381 or write to Office of Antiboycott Compliance, Bureau of Export Administration, Room 6098, U.S. Department of Commerce, Washington, DC 20230.

Antitrust laws

The U.S. antitrust laws reflect this nation's commitment to an economy based on competition. They are intended to foster the efficient allocation of resources by providing consumers with goods and services at the lowest price that efficient business operations can profitably offer. Various foreign countries -- including the EC, Canada, the United Kingdom, Federal Republic of Germany, Japan, and Australia -- also have their own antitrust laws that U.S. firms must comply with when exporting to such nations.

The U.S. antitrust statutes do not provide a checklist of specific requirements. Instead they set forth broad principles that are applied to the specific facts and circumstances of a business transaction. Under the U.S. antitrust laws, some types of trade restraints, known as per se violations, are regarded as conclusively illegal. Per se violations include price-fixing agreements and conspiracies, divisions of markets by competitors, and certain group boycotts and tying arrangements.

Most restraints of trade in the United States are judged under a second legal standard known as the rule of reason. The rule of reason requires a showing that (1) certain acts occurred and (2) such acts had an anticompetitive effect. Under the rule of reason, various factors are considered, including business justification, impact on prices and output in the market, barriers to entry, and market shares of the parties.

In the case of exports by U.S. firms, there are special limitations on the application of the per se and rule of reason tests by U.S. courts. Under Title IV of the Export Trading Company Act (also known as the Foreign Trade Antitrust Improvements Act), there must be a "direct, substantial and reasonably foreseeable" effect on the domestic or import commerce of the United States or on the export commerce of a U.S. person before an activity may be challenged under the Sherman Antitrust Act or the Federal Trade Commission Act (two of the primary federal antitrust statutes). This provision clarifies the particular circumstances under which the overseas activities of U.S. exporters may be challenged under these two antitrust statutes. Under Title III of the Export Trading Company Act (see chapter 4) the Department of Commerce, with the concurrence of the U.S. Department of Justice, can issue an export trade certificate of review that provides certain limited immunity from the federal and state antitrust laws.

Although the great majority of international business transactions do not pose antitrust problems, antitrust issues may be raised in various types of transactions, among which are

  1. overseas distribution arrangements;
  2. overseas joint ventures for research, manufacturing, construction, and distribution;
  3. patent, trademark, copyright, and know-how licenses;
  4. mergers and acquisitions involving foreign firms; and
  5. raw material procurement agreements and concessions.

The potential U.S. and foreign antitrust problems posed by such transactions are discussed in greater detail in chapter 16. Where potential U.S. or foreign antitrust issues are raised, it is advisable to obtain the advice and assistance of qualified antitrust counsel.

For particular transactions that pose difficult antitrust issues, and for which an export trade certificate of review is not desired, the Antitrust Division of the Department of Justice can be asked to state its enforcement views in a business review letter. The business review procedure is initiated by writing a letter to the Antitrust Division describing the particular business transaction that is contemplated and requesting the department's views on the antitrust legality of the transaction.

Certain aspects of the federal antitrust laws and the Antitrust Division's enforcement policies regarding international transactions are explored in the Department of Justice's Antitrust Enforcement Guidelines for International Operations (1988).

FOREIGN CORRUPT PRACTICES ACT (FCPA)

The FCPA makes it unlawful for any person or firm (as well as persons acting on behalf of the firm) to offer, pay, or promise to pay (or to authorize any such payment or promise) money or anything of value to any foreign official (or foreign political party or candidate for foreign political office) for the purpose of obtaining or retaining business. It is also unlawful to make a payment to any person while knowing that all or a portion of the payment will be offered, given, or promised directly or indirectly, to any foreign official (or foreign political party, candidate, or official) for the purposes of assisting the person or firm in obtaining or retaining business. Knowing includes the concepts of conscious disregard and willful blindness. The FCPA also contains provisions applicable to publicly held companies concerning financial recordkeeping and internal accounting controls.

The Department of Justice enforces the criminal provisions of the FCPA and the civil provisions against "domestic concerns." The Securities and Exchange Commission (SEC) is responsible for civil enforcement against "issuers." The Department of Commerce supplies general information to U.S. exporters who have questions about the FCPA and about international developments concerning the FCPA.

There is an exception to the antibribery provisions for "facilitating payments for routine governmental action." Actions "similar" to the examples listed in the statute are also covered by this exception. A person charged with violating the FCPA's antibribery provisions may assert as a defense that the payment was lawful under the written laws and regulations of the foreign country or that the payment was associated with demonstrating a product or performing a contractual obligation.

Firms are subject to a fine of up to $2 million. Officers, directors, employees, agents, and stockholders are subject to a fine of up to $100,000 and imprisonment for up to five years. The U.S. attorney general can bring a civil action against a domestic concern (and the SEC against an issuer) for a fine of up to $10,000 as well as against any officer, director, employee, or agent of a firm or stockholder acting on behalf of the firm, who willfully violates the antibribery provisions. Under federal criminal law other than the FCPA, individuals may be fined up to $250,000 or up to twice the amount of the gross gain or gross loss if the defendant derives pecuniary gain from the offense or causes a pecuniary loss to another person.

The attorney general (and the SEC, where appropriate) may also bring a civil action to enjoin any act or practice whenever it appears that the person or firm (or a person acting on behalf of a firm) is in violation or about to be in violation of the antibribery provisions.

A person or firm found in violation of the FCPA may be barred from doing business with the federal government. Indictment alone can lead to a suspension of the right to do business with the government.

Conduct that constitutes a violation of the FCPA may give rise to a private cause of action under the Racketeer-Influenced and Corrupt Organizations Act.

The Department of Justice is establishing an FCPA opinion procedure to replace the current FCPA review procedure. The details of the opinion procedure will be provided in 28 CFR Part 77 (1991). Under the opinion procedure, any party will be able to request a statement of the Department of Justice's present enforcement intentions under the antibribery provisions of the FCPA regarding any proposed business conduct. Conduct for which Justice has issued an opinion stating that the conduct conforms with current enforcement policy will be entitled in any subsequent enforcement action to a presumption of conformity with the FCPA.

FOOD AND DRUG ADMINISTRATION (FDA) AND ENVIRONMENTAL PROTECTION AGENCY (EPA) RESTRICTIONS

In addition to the various export regulations that have been discussed, rules and regulations enforced by FDA and EPA also affect a limited number of exporters.

Food and Drug Administration

FDA enforces U.S. laws intended to assure the consumer that foods are pure and wholesome, that drugs and devices are safe and effective, and that cosmetics are safe. FDA has promulgated a wide range of regulations to enforce these goals. Exporters of products covered by FDA's regulations are affected as follows:

  1. If the item is intended for export only, meets the specifications of the foreign purchaser, is not in conflict with the laws of the country to which it is to be shipped, and is properly labeled, it is exempt from the adulteration and misbranding provisions of the Federal Food, Drug, and Cosmetic Act (see 801(e)). This exemption does not apply to "new drugs" or "new animal drugs" that have not been approved as safe and effective or to certain devices.
  2. If the exporter thinks the export product may be covered by FDA, it is important to contact the nearest FDA field office or the Public Health Service, Food and Drug Administration, 5600 Fishers Lane, Rockville, MD 20857.

Environmental Protection Agency

EPA's involvement in exports is limited to hazardous waste, pesticides, and toxic chemicals. Although EPA has no authority to prohibit the export of these substances, it has an established notification system designed to inform receiving foreign governments that materials of possible human health or environmental concern will be entering their country.

Under the Resource Conservation and Recovery Act, generators of waste who wish to export waste considered hazardous are required to notify EPA before shipping a given hazardous waste to a given foreign consignee. EPA then notifies the government of the foreign consignee. Export cannot occur until written approval is received from the foreign government.

As for pesticides and other toxic chemicals, neither the Federal Insecticide, Fungicide, and Rodenticide Act nor the Toxic Substances Control Act requires exporters of banned or severely restricted chemicals to obtain written consent before shipping. However, exporters of unregistered pesticides or other chemicals subject to regulatory control actions must comply with certain notification requirements.

An exporter of hazardous waste, unregistered pesticides, or toxic chemicals should contact the Office of International Activities, U.S. Environmental Protection Agency, 401 M Street, S.W., Washington, DC 20460; telephone 202-382-4880.

IMPORT REGULATIONS OF FOREIGN GOVERNMENTS

Import documentation requirements and other regulations imposed by foreign governments vary from country to country. It is vital that exporters be aware of the regulations that apply to their own operations and transactions. Many governments, for instance, require consular invoices, certificates of inspection, health certification, and various other documents.