Tag: Trade

Prepared for the Border Adjustment Tax? A U.S. and Global Perspective

border adjustment taxWe have been monitoring the potential impact of the Border Adjustment Tax (BAT) across a number of jurisdictions.

In our 14 February 2017 update, we commented that issues regarding the legality of BAT and the serious and significant international implications of its application meant that the introduction of BAT was uncertain.

In this further update we consider further the issues being raised in the United States about the BAT, look at potential challenges to the BAT by the World Trade Organization (WTO) and consider what the BAT may mean for jurisdictions outside the U.S. trading with U.S. business.

U.S. concerns

The BAT is part of a comprehensive tax reform plan that would shift the U.S. system from an income tax to a cash-flow destination based consumption tax. It would operate by exempting gross receipts from exports from U.S. federal income tax, and denying any deductions for the cost of imports. The BAT would apply to sales and imports of products, services and intangibles, and affect all forms of businesses, including corporations, “pass-throughs” and sole proprietorships.

The blueprint is vague as to whether the BAT applies to financial transactions and advice. The expectation is that financial transactions will be exempted from the BAT base in some form, but that investment management services would be included in the base.

The policy of the BAT is to incentivize business activity in the U.S. by effectively penalizing imports and subsidizing exports. It is intended to discourage corporate inversions and erosion of the U.S. tax base by making transfer pricing issues moot. It also is estimated to pay for one-third of the cost of the overall tax reform bill.

The U.S. business community is pushing for tax reform in order to make U.S. companies more competitive in a global marketplace. However, because the BAT rewards exporters and punishes importers, the proposal has ironically divided the very business community that is driving reform. While importers could potentially have a larger tax liability than book income, exporters could potentially experience a negative tax situation, since their costs would remain fully deductible (assuming they were not imported). The controversy extends beyond the business community. Consumer groups fear the BAT will result in higher prices. Importers fear U.S. consumers would work around the tax by buying directly from offshore vendors. The BAT could spur increased mergers and acquisitions, as net exporters seek companies with income sufficient to offset negative taxable incomes.

House Republicans, who proposed the BAT, say the value of the U.S. dollar will increase concomitantly with the tax increase, effectively increasing the buying power of importers and thus mitigating the impact of the BAT. Economists and other analysts are mixed in their reaction as to how the dollar will react. Since many international contracts are denominated in the U.S. dollar and because many currencies are not free floating, it is unclear to what extent any fluctuation in the dollar will offset the impact of the BAT.

Further, it is unclear whether the Trump Administration will endorse the BAT. There have been mixed messages from the White House, but President Trump has made it clear he would like to impose some sort of levy on imports to level the playing field for U.S. businesses and to bring jobs back to the U.S.

WTO Implications

While the focus has been on the impact on U.S. businesses and consumers, there are significant and serious international implications of the BAT. It is unclear whether the BAT would violate WTO protocols and a challenge from the WTO seems almost certain.

The WTO’s Agreement on Subsidies and Countervailing Measures (SCM Agreement) only allows border adjustability for taxes imposed on products, the most common of these being value added taxes, sales tax and stamp duties. Whilst there seems to be some argument that a BAT is similar to a value added tax as it is focused on destination based consumption, the majority of commentators disagree with this analysis saying that the proposed BAT is a true corporate tax which in effect imposes a discriminatory subsidy in favour of net exporters. Further, the SCM Agreement prohibits the subsidizing of exports and of the use of domestic over imported goods.

Article II of the General Agreement on Tariffs and Trade (GATT) prohibits charging tariffs in excess of those in each country’s tariff schedule. The denial of deductions for the cost of imports could be considered equivalent to a tax on the imports themselves. In WTO terms, this could be viewed as the imposition of tariffs in excess of those provided for in the U.S. schedule or might violate the Article II requirement not to impose “other” duties or charges on imports. Article III of the GATT, which sets forth what are known as “national treatment” principles, generally requires that imports be treated no less favorably than domestically-produced goods. To the extent the BAT permits certain deductions (such as the cost of domestic wages), and thus generates lower tax rates for domestically-produced goods, while denying the same deductions for the same imported products, it would seem to violate the basic national treatment rules of the WTO.

The Effects of the BAT will extend far beyond the U.S. border

The European Union (EU) has already clarified it will not stand by without taking responsive action. Officials from jurisdictions like Canada, Mexico and Germany, have indicated their disapproval and concerns about the BAT. The impact on tax treaties, intended to prevent double taxation, is unclear. Many think a U.S. exemption from taxation of exports will result in a shift of the location of taxation, with non-U.S. jurisdictions taking custody of the income and taxing it. Countries around the world are concerned about how the denial of a deduction for the cost of imports and the strengthening of the U.S. dollar will affect the demand for their products, and their ability to afford products from the U.S.

Being a destination based cash flow tax, the BAT is not consistent with a corporate tax system, it goes against current principles of international taxation underlying the double tax treaties, and is not in alignment with the more recent global Base Erosion and Profit Shifting Rules (BEPS) initiatives launched by the Organisation for Economic
Co-operation and Development (OECD), Australia and the European Union.

Initial observations as to the BAT:

  • Granting a corporate income tax exemption on income derived from exports leads to a reduction of the income tax base and qualifies economically as a subsidy.

  • Disallowing a deduction for expenses relating to imports from the U.S. corporate tax base is effectively an increase of the tax base.

  • Due to its nature as a destination-based (cash-flow) tax, it is often compared to the European style value added tax (VAT) or the Australian goods and services tax (GST). However, the proposed BAT substantially differs from VAT and GST, e.g., in that:

    • VAT and GST is typically economically neutral for most businesses; and

    • end-consumers bear the same VAT burden irrespective of whether the services and supplies originate from the domestic market or from abroad.

  • Materially, the BAT appears to be a customs duty collection tool dressed in an income tax garment.

Economically, it has been said that BAT will eventually be trade neutral, due to the expected increase of the value of the U.S. dollar, however the value of a currency is also influenced by many other factors. In addition, it may be questioned whether (potential) effects on the exchange rate can be taken into consideration when analyzing and discussing the application of existing domestic and international tax law.

It is too early to finally assess the potential reaction of other countries on a potential enactment of the BAT by the U.S. In case of an enactment, many details will have to be better understood such as whether and how cross-border income payments from outside the U.S. (e.g., interest, royalties, dividends) will be subject to tax but exempted or rather be excluded from tax. In case of substantial frictions with the current tax systems, the reaction in Europe for example, may be a combination of both, a reaction at EU level as well as consequences drawn by individual member states.

Some states may question the income tax nature of the BAT or deny certain benefits such as treaty benefits based on applicable “subject-to-tax” clauses or alike. Whether or not certain states will go beyond that by requesting changes to the existing Double Taxation Treaties or their interpretation remains to be seen. Why for example should a country apply reduced withholding tax rates on royalties or alike if the respective income is not taxed in the U.S. for reasons of impeding the free trade between the U.S. and that particular country?

BAT may well also impact the current approach to globally harmonize the common understanding of fair international taxation, including the battle against the so-called BEPS which was triggered by biased rules governing international taxation.

Australia

Australia has been an early adopter for many of the OECD BEPS measures. It has recently passed legislation to implement a diverted profits tax, similar to that in the United Kingdom, a “Netflix” tax being a GST on intangible supplies via a digital platform operator by non-resident suppliers to Australian consumers. It has also introduced the Multinational Anti Avoidance Law to combat tax avoidance by multinational companies operating in Australia.

These measures show an increasing focus on cross border flows of business, and a move toward a destination model of taxing rather than an origination model. That is consistent with the BAT principles. However, given that the U.S. is Australia’s biggest trading partner and a destination of choice for many Australian companies seeking to expand globally, the impact of the BAT for Australian business cannot be underestimated.

While much of the focus in the U.S. has been on the impact of BAT on the import and expect of manufactured goods and products, cross border utilisation of intellectual property, intangibles, and management and head office charges are likely to be an area of ongoing focus as the BAT works its way through the legislative agenda.

France

The BAT could jeopardise the application of the tax treaty entered into by the U.S. and France. According to the most recent case law of the French high administrative court (Conseil d’Etat), treaty benefits must only be granted where there is an effective double taxation. If a French company pays a royalty to a U.S. company, such royalty will be exempt in the U.S. and the French revenue may take the view that the treaty does not apply. French domestic withholding tax of 30% may apply accordingly.

The BAT would clearly contradict some of the provisions of this treaty. By way of example, Article 7 provides that in determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are reasonably connected with such profits, whether incurred in the State in which the permanent establishment is situated or elsewhere.

Germany

Germany has also been an early adopter of the BEPS rules – to the extent such rules were not already enacted before as German rules fighting cross-border base erosion and profit shifting were already rather sophisticated.

A mere reduction of the U.S. corporate income tax rate itself should generally not be of a concern from a German tax perspective. However, for purposes of the application of the Controlled Foreign Corporation (CFC) and Passive Foreign Investment Company (PFIC) rules pursuant to the German Foreign Tax Act, there will be an issue where the effective corporate income tax burden in the U.S. drops below 25%, measured by German tax standards.

However, Germany would certainly not welcome substantial single-sided impediments on the free trade imposed by BAT or other means.

United Kingdom

For United Kingdom businesses that export to the U.S., the introduction of a BAT could have far reaching consequences for sales, FX strategy and business organisation.

One area of particular difficulty relates to cross-border financial services (UK outbound and inbound): it is not yet clear how a BAT would deal with these (VAT systems are themselves complex in this area). Useful practical strategies may be drawn by U.S. businesses in conjunction with advisers both in the U.S. and jurisdictions with VAT systems, like the United Kingdom, as and when any BAT reform is rolled out in detail.

On a more general level, tax issues have gained a higher profile in the UK over the last few years. Like many other jurisdictions the UK is actively adopting the recommendations of the OECD’s BEPS initiative and actively encouraging EU policy to endorse the same. The UK’s implementation of these OECD recommendations has resulted in the UK seeking to tax profits created in UK, and trying to ensure that where value has been created in the UK that value is not artificially diverted for tax purposes to offshore jurisdictions.

The current UK Government’s enthusiasm for these OECD initiatives (and the automatic exchange of tax information including private tax rulings) is a continuation from the previous administration, faces little or no political opposition and is not in any way contaminated by BREXIT.

It can be noted that the OECD BEPS initiative’s overarching economic goal to ensure that value is taxed where it is created (not located) in fact, with increased attribution to human resource (rather than capital or IP), is not necessarily incompatible with the political objective of the Blueprint to increase value creation in the U.S. (and taxing it there).

Global high brand value service and product suppliers, and other businesses which are head-quartered outside of the UK, argue that the value of their sales derives from their domestic jurisdictions where their global high value brand products or IP was developed and where their technicians, designers, board etc. are based. As a result, value is not derived from a UK based sales centre, the services of which, if outsourced, would only cost a small amount in fees or commissions. It will be interesting to see how the lobby groups for U.S. based multinationals and a post-BREXIT UK each respond to the EU Commission’s state aid challenges, which were aimed at preventing low EU tax on EU sales. It may prove harder to resist greater taxation in the EU if there is no domestic tax in the U.S. in relation to the EU operations.

In addition to the policy arguments there are also technical issues with how the UK’s value based approach will sit with the proposed destination based approach in the US. For example, the U.S.-UK double tax treaty currently deals with direct taxes (such as federal profits, income and gains taxes) and is predicated on traditional tax bases such as residence and source and does not address indirect taxes (like VAT) at all. How this will be applied in the context of the U.S.-UK double tax treaty is not clear.

Conclusion

Given both the uncertainty regarding the intricacies and workings of the BAT as well as how it will interact with existing Double Tax Treaties, the introduction and operation of the BAT remains unclear

The impact of the proposed tax on net importers vs net exporters divides the business community and creates further uncertainty in an already uncertain economy. The same applies to the consequences on the application and interpretation of domestic tax and international tax law outside the U.S. It is hoped that detailed legislation as well as commentary addressing the concerns of the U.S. domestic and international community will go some way in resolving these issues in a time efficient manner.

ARTICLE BY Betsy-Ann Howe, Mary Burke Baker, Rainer Schmitt, Bertrand Dussert, Giles Bavister & Stacy J. Ettinger of K&L Gates

Copyright 2017 K & L Gates

NAFTA and the New Trump Administration: Your Top Ten Questions Answered

With the recent U.S. election finally reaching its close, the unexpected election of Mr. Trump has left many multinational companies wondering how the change in administration will impact their business operations. One of the chief issues of concern is Mr. Trump’s campaign rhetoric that the United States should withdraw from the North American Free Trade Agreement (NAFTA) or, perhaps, substantially renegotiate it (with Mr. Trump taking both positions at times).

Many multinational companies have structured their operations on the assumption that the free trade of goods within the NAFTA region was a given, and understandably are nervous regarding the future of the agreement. To help deal with this insecurity, this client alert presents the “top ten” questions every company that relies on NAFTA should be thinking about. Future client alerts will deal comprehensively with all international trade and regulatory areas where significant change could occur under the new administration.

The Top 10 NAFTA Questions

1. What has President-elect Trump promised?

2. Is the promised repeal of NAFTA a real possibility or just campaign rhetoric?

3. Can the Trump administration just withdraw from NAFTA on its own?

4. Will Congress have any role in the withdrawal or be able to alter the way in which any withdrawal occurs?

5 .What are the most likely options — withdrawal, amendment, or no change?

6. Are there limits to how high tariffs could go if there is a full withdrawal?

7. If there is a full withdrawal, what will be the consequences in addition to higher tariffs?

8. Are there countries other than Mexico that are potentially a target for major changes in U.S. trade policy?

9. If NAFTA withdrawal is part of a “war on international trade,” what are some other types of international trade issues I should be monitoring?

10. The possibilities sound pretty scary. What can my company do to help mitigate the risk of a NAFTA exit?

The Top Ten NAFTA Questions Answered (or, What to Do If the New Administration Plays the NAFTA Trump Card)

1. What has President-elect Trump promised?

After calling NAFTA “the worst trade deal maybe ever signed anywhere,”1 Mr. Trump stated that he either would seek a full repeal of the agreement or would seek to renegotiate it to remove incentives to transfer manufacturing and jobs to Mexico. Mr. Trump’s “100-day action plan to Make America Great Again” confirmed that NAFTA would be a focus of the early days of the administration, as it promised that within 100 days of taking office, Mr. Trump would “announce my intention to renegotiate NAFTA or withdraw from the deal under Article 2205.”2 Action on NAFTA likely will be a priority of the Trump administration.

2. Is the promised repeal of NAFTA a real possibility or just campaign rhetoric?

The election of Mr. Trump ran straight through such manufacturing states as Wisconsin, Ohio, and Pennsylvania. In each of these states, anger about lost manufacturing jobs, and their often high wages, was a deciding factor for key swing voters. It is fair to say that discontent about the loss of manufacturing jobs in general, and the accompanying anger with NAFTA in particular, likely tipped these closely contested states — and therefore the election — to Mr. Trump.

With the high visibility given to NAFTA, it is highly likely that there will be either a NAFTA withdrawal or at least enough of a renegotiation of its terms that Mr. Trump can claim that his administration has “fixed” NAFTA. Certainly the Mexican and Canadian governments believe Mr. Trump is serious: Leaders of both countries have stated they are open to renegotiating the terms of NAFTA, although Mexico stated its willingness was more along the lines of having a “discussion” of potential changes.3

3. Can the Trump administration just withdraw from NAFTA on its own?

Article 2205 of NAFTA provides that “{a} party may withdraw from this Agreement six months after it provides written notice of withdrawal to the other Parties. If a Party withdraws, the Agreement shall remain in force for the remaining Parties.” Thus, withdrawal could potentially be effective as early as the summer of 2017. In all likelihood, however, there would initially be a period where renegotiation is attempted, thus delaying any unilateral withdrawal. The likelihood of a withdrawal by this summer accordingly is very small. Further, as noted below, duties would not change for likely a year or more after any withdrawal occurs.

4. Will Congress have any role in the withdrawal or be able to alter the way in which any withdrawal occurs?

Although NAFTA was approved by Congress, it is technically not a treaty. Rather, it is a congressional-executive agreement approved by a majority vote of each house of Congress, as are the World Trade Organization (WTO) agreements). NAFTA was put in place pursuant to the Trade Act of 1974, which gives the president authority to negotiate agreements dealing with tariff and non-tariff barriers. Section 125 of the 1974 act gives the right to terminate and withdraw solely to the president, after giving appropriate notice (six months, as specified in NAFTA).4

5 .What are the most likely options — withdrawal, amendment, or no change?

Although Mr. Trump has repeatedly criticized NAFTA (as well as other trade agreements, such as the WTO agreements), he did not state that he was against all trade agreements. Instead, he stated his view that many existing free trade agreements (FTAs) were poorly negotiated, and thus were not in the interest of the United States and U.S. manufacturers. This position opens up several possibilities regarding NAFTA, ranging from complete withdrawal to severe or even moderate renegotiation. The criticism of NAFTA thus could be used as a way of creating negotiating leverage to allow for the targeted reopening of the agreement.

Despite the campaign rhetoric, millions of U.S. jobs depend on trade between the United States, Canada, and Mexico. Canada and Mexico are, respectively, the first and second largest export markets for the United States. (Although China is a larger overall trading partner, China trade is heavily weighted towards exports to the United States.)5 Much of the trade with Mexico, in particular, involves the shipment of U.S. goods to Mexico for assembly and then the return of the downstream products to the United States. Eliminating NAFTA without any replacement would create tremendous upheaval in these international supply chains. This would lead to significant job losses in the short term and the stranding of significant investments that were made based on the promise of free trade benefits.

As a result, impacted companies likely will exert tremendous pressure on Mr. Trump to amend, rather than repeal, NAFTA. Significant changes to NAFTA would support Mr. Trump’s claim that business negotiators would be able to achieve better FTAs than “career diplomats,” while still allowing him to claim that he has carried through on his NAFTA promises.

There are also strong reasons on the partner side to believe that renegotiation, rather than withdrawal, is most likely to occur. Since Canada shares concerns about the transfer of jobs to Mexico, it would not be surprising if Canada were to align with the United States on certain issues that it would prefer to see amended. As for Mexico, NAFTA is too important to the Mexican economy for Mexico to give up its free trade access to the United States without a fight. Even if Mexico would prefer that the agreement remain as written, giving up trade concessions would be far preferable to risking the likely recession and economic upheaval that would accompany withdrawal and the shift of U.S. multinational companies to other locations.

The effect of NAFTA withdrawal also could have the side effect of increasing illegal immigration — another Trump signature issue. Upheaval in the Mexican economy and any recession as a result would almost certainly lead to an increased desire for Mexican workers to leave Mexico for the much stronger U.S. economy. Avoiding a large increase in illegal immigration from Mexico (which actually has been falling in recent years) may pressure Mr. Trump to amend, rather than eliminate, NAFTA.

6. Are there limits to how high tariffs could go if there is a full withdrawal?

As a general matter, the Trade Act of 1974 provides that after any withdrawal from a covered agreement, impacted tariff rates will remain unchanged for one year. This is to allow businesses time to adjust to any change. The president is allowed to raise tariffs more quickly if there is a need for expeditious action, so long as Congress is notified and a public hearing is held, but this option is unlikely to be triggered.6 Thus, for all intents and purposes, there will be no increase in tariffs for at least 18 months (the six-month notice period plus the additional year of frozen duty rates).

Beyond that, if the United States withdraws from NAFTA, there are two sets of default options that come into play. The U.S.-Canada Free Trade Agreement — which preceded NAFTA — is still in effect, as it was only suspended when NAFTA came into force. So withdrawal from NAFTA would likely bring the U.S.-Canada FTA back into play. Although not automatic, reinstatement of that U.S.-Canada FTA likely would be politically acceptable, both because Mr. Trump did not focus any attention on Canada in particular when criticizing NAFTA, and because the trade deficit with Canada itself is quite small when compared to the deficit with Mexico. Further, with Canada often exporting natural resources such as petroleum to the United States, its exports are not viewed as displacing U.S. manufacturing jobs. Indeed, with there being some concern in Canada that its own manufacturing base has been hollowed out in recent years, Canada might even join the United States in seeking certain modifications to NAFTA.

If the U.S.-Canada FTA is brought out of suspension, trade between the two countries may be a lot like it is under NAFTA. The tariff rates under the U.S.-Canada FTA are often the same as the rates under the NAFTA (i.e., often zero). The U.S.-Canada FTA also includes many of the same types of FTA protections as contained in NAFTA, such as providing the means of appealing disputes to special arbitrator panels. Thus, the impact of repeal with regard to dealings with Canada is limited because the fallback position is another FTA.

It is trade with Mexico that could potentially see more changes. NAFTA is the only FTA possibility in place between the United States and Mexico. Without any type of FTA in place, the tariffs between the United States and Mexico would be based on pre-NAFTA levels. The extent of the rise is dictated by two different legal documents:

  • Under U.S. law, tariffs are allowed to rise to a level that is between 20 and 50 percent higher than the rates in effect on January 1, 1975.7 Because tariff rates were much higher in 1975, this would allow for very large tariff increases.

  • This degree of increase would not occur, however, because the extent of any increase in tariffs is limited by the WTO agreements, which are multilateral agreements that are independent of NAFTA. Due to the operation of the most favored nation (MFN) tariff rules, tariffs for Mexico and the United States would be set based upon the average tariff rates in place for each country. The United States has a low MFN rate, which means that even though U.S. law otherwise allows for large increases based on 1975 tariff levels, existing WTO rules would limit the increase to a general maximum of 3.5 percent.

The irony is that the increase in Mexican tariffs would be much greater than 3.5 percent. The Mexico MFN rate is much higher than the U.S. rate, meaning that Mexican duties could increase to as much as 36 percent. This means that the tariff impact of NAFTA withdrawal would actually be felt more acutely on the U.S. side of the border, as the rate levied by Mexico on exports from the United States would rise to a much greater degree than the rate that could be levied by U.S. Customs & Border Patrol on imports from Mexico. Withdrawal, supposedly intended to aid U.S. manufacturing, would asymmetrically result in much higher tariffs for U.S. exports.

7. If there is a full withdrawal, what will be the consequences in addition to higher tariffs?

Including negotiated annexes, NAFTA is more than 2,000 pages long. In addition to a full phase-out of tariffs, NAFTA also eliminated a variety of non-tariff barriers (import licenses, local-content requirements, export-performance requirements, and other non-tariff barriers). NAFTA helped unify customs procedures and regulations, provided uniform investment rules, established fair and open procurement procedures, and gave firms the right to repatriate profits and capital, among other trade and investment provisions. It also provided a mechanism for settlement of many bilateral disputes. All of these investments in trade stability could disappear if NAFTA is no longer in force.

Another wild card is the impact of any withdrawal of the maquiladora rules. The maquiladora rules pre-date NAFTA, and provide for special tariff rates and other advantages for companies in the maquiladora region (generally, within 75 miles of the U.S. border, although they can be located elsewhere). Such industries as the automotive, aerospace, medical devices, and electronics industries have turned the maquiladora region into a sophisticated manufacturing hub, making maquiladora operations essential parts of the complex supply chains established by U.S. companies that operate within this region. There was no discussion of the maquiladora special tariffs during the campaign, and it is unknown whether there will be any changes in these rules. Although it is a program run by Mexico, its growth in use has been spurred by NAFTA, and the United States has cooperated in many aspects of the maquiladora program. It is unknown whether the rules will change in light of any NAFTA modifications or withdrawal.

8. Are there countries other than Mexico that are potentially a target for major changes in U.S. trade policy?

Equal to the criticisms of NAFTA (which are largely criticisms of trade with Mexico, not Canada) were criticisms of China. China is a juicy target for campaign rhetoric, since it not only is a large trade partner, but also is a country that frequently exports while importing far less. Far more manufacturing jobs depend on exports to Mexico than to exports to China.

The 100-day plan states that Mr. Trump will “direct my Secretary of the Treasury to label China a currency manipulator.”8 This designation takes advantage of a law passed this year that allows for retaliation against countries that manipulate currencies to give their goods an artificial advantage. Any such designation might be accompanied by other actions against China, such as designating currency manipulation as a countervailable subsidy in countervailing duty investigations and administrative reviews or taking action against Chinese imports in other ways, such as through safeguard actions. Mr. Trump’s 7-Point Plan to Rebuild the American Economy by Fighting for Free Trade also vowed to raise tariffs on Chinese imports and to bring cases against China for any violations of international trade agreements, as well as to incorporate the campaign promise to label China a currency manipulator.9

China also is not a member of any FTA with the United States, and thus is reliant on its membership in the WTO to provide what trade protections are available to it. Any attempts to lower the trade deficit have to include China, as trade with China represents more than 40 percent of the overall trade deficit.10 Yet proposals by Mr. Trump to place high tariffs on imports from China likely would run afoul of WTO rules, which may mean that fights against Chinese imports need to take place using international trade litigation (described below).

Looking past China and Mexico, there are three other countries with significant trade deficits with the United States: Japan, South Korea, and Germany. None of these countries was singled out the way Mexico and China were during the campaign; nonetheless, the trade deficit represented by these countries is also significant. There is a heightened probability that these countries will, at the very least, be singled out through such international trade remedies as antidumping, countervailing duty, and safeguard actions, as discussed below.

9. If NAFTA withdrawal is part of a “war on international trade,” what are some other types of international trade issues I should be monitoring?

Regardless of whether NAFTA is terminated, there is a wide variety of international trade actions that can be taken to limit the amount of imports from Canada, Mexico, and other countries that are not parties to NAFTA. These include:

  • Section 301 proceedings. Section 301 of the Trade Act of 1974 gives the U.S. trade representative, at the direction of the president, the ability to impose tariffs based on “an act, policy, or practice of a foreign country that is unreasonable or discriminatory and burdens or restricts U.S. commerce.” One of the remedies that can be imposed is higher tariffs on imports from a chosen country.

  • Section 122 balance-of-payment proceedings. Section 122 of the Trade Act of 1974 authorizes the president to deal with “large and serious United States balance-of-payments deficits” by imposing temporary import surcharges or temporary quotas or a combination of both. This relief is limited and temporary, however, as it can only last 150 days, and the charge cannot exceed 15 percent of the ad valorem value of the imported goods.

  • Section 232(b) national security actions. Where there is a deemed threat to national security, Section 232(b) of the Trade Expansion Act of 1962 authorizes the secretary of commerce to investigate imports and then take actions to limit or restrict them, or to “take such other actions as the president deems necessary to adjust the imports of such articles so that such imports will not threaten to impair the national security.”

  • International trade remedies (safeguard proceedings and antidumping/countervailing duty investigations). These forms of international trade remedies focus on relief for individual products, types of products, or industries. They do not provide the same type of general relief as afforded by a wholesale increase in customs duties, but can offer powerful relief in a more targeted fashion. Duties in antidumping and countervailing duty proceedings often exceed 10 – 20 percent of the entered value of subject merchandise (depending upon the information submitted in lengthy and detailed questionnaire submissions). If non-U.S. companies do not respond to the detailed requests for information, the duties imposed are based upon “facts available,” which is intended to be punitive and can result in duties that exceed the value of the goods themselves by more than 100 percent. Safeguard proceedings can result in targeted duties on entire industries as well.

  • Section 337 unfair trade practices proceedings. These proceedings target unfair trade practices, including the abuse of patent and trademark rights. In some recent cases, U.S. companies have created novel theories that would allow the International Trade Commission to reach a wide variety of conduct, thereby expanding the use of the section 337 process to address perceived unfair trade practices.

The potential increase in international trade remedies is a complicated subject in and of itself. This is especially true for certain industries of concern to Mexico and Canada, such as the steel and softwood lumber industries. (In this regard, antidumping and countervailing duty petitions on softwood lumber from Canada were filed on November 25, 2016.) This topic will be explored in a future client alert devoted to international trade remedies under the Trump administration.

10. The possibilities sound pretty scary. What can my company do to help mitigate the risk of a NAFTA exit?

As noted above, there is a wide set of possibilities, ranging from moderate (or even no) change to complete revocation of the agreement. Predicting the exact impact of any change to NAFTA can be difficult. Multinational corporations with operations in Mexico should, however, consider the following topics when determining how best to cope with the uncertainty of a potential NAFTA exit:

  • Customs Issues

    • Assess which party is the importer of record. Because of the absence of duties, many companies in the NAFTA region paid little attention to which company acts as the importer of record. Because the importer of record is responsible for the payment of duties, a review of the entity that is acting as the importer of record, and assessing whether this arrangement makes sense in a post-NAFTA world, could help avoid unpleasant surprises.

    • Assess whether processing outside the customs territory can be used. Depending on which way the trade is occurring and the form of the transaction, there are various types of warehousing and manufacturing options that are deemed to be outside the customs territory of the country at issue, such as through the use of foreign trade zones (FTZs). Goods that are in an FTZ are considered not to have entered into the customs territory of the country, thus delaying any payment of duties. If the goods are later shipped to a different country — even the originating country — then no duties are ever paid, even if the goods were further manufactured while in the FTZ. This is a valid option to consider for goods that require processing before they are shipped to another country or back to the originating country.

    • Assess whether other customs options exist. In addition to FTZs, there are additional options for goods that can delay or eliminate duties, including the use of customs bonded warehouses or Temporary Importation Under Bond. Such options become more valuable if NAFTA tariff relief is eliminated.

    • Assess whether refunds of duties are possible. For goods that are involved in a round trip, there can be options where duty refunds can occur, including the use of the American Goods Returned program (where the goods are not further improved while abroad), Mexican and U.S. duty drawback procedures, and other refund programs. Eligibility can vary and depends upon the exact form of the importation pattern.

    • Determine if all customs valuation options are being used. When the tariff rate is zero, the precise value of the goods entered is of little moment. But in a tariff environment, strategies such as the first-sale doctrine (which allows for value to be entered based on the first sale to a middle man, rather than the final price) become more valuable as a means of minimizing duties.

  • Supply Chain Options

    • Assess the supply base and what alternatives exist. Companies that have the option of using NAFTA generally have found Mexico to be the cheapest option, due not only to NAFTA regional preferences, but also due to inexpensive transportation options between the two countries. Companies should assess whether Mexico-sourcing still makes sense in a post-NAFTA world, and be prepared with a contingency plan if NAFTA exit becomes a reality. Options would include taking advantage of other FTAs, reshoring manufacturing options, or some of the other customs alternatives outlined above.

    • Assess maquiladora manufacturing options. NAFTA withdrawal might not impact all operations equally, due to the fact that the maquiladora benefits (which are granted by Mexico) will likely remain. The benefits of the maquiladora program include the ability to temporarily import goods and services that will be manufactured, transformed, or repaired, and then re-exported back to the United States, without paying taxes, being subject to compensatory quotas, and other designated benefits. For companies whose operations qualify, these benefits may make continuing Mexican operations profitable, even if duties increase. Companies that are not taking advantage of these cost-saving opportunities might want to consider them as a means of potentially offsetting some measure of any increased tariffs.

  • Political Options

    • Consider seeking miscellaneous tariff bill options. From time to time, Congress passes a Miscellaneous Tariff Bill (MTB), which allows for the grant of customs duty forbearance for specific products. Companies that operate in Mexico have not needed to pay attention to this repeated Washington rite, because their products already enjoyed duty-free status. In a post-NAFTA world, the MTB might become an option worth monitoring and pursuing for products that meet the requirements for consideration.11

    • Consider options for political pressure. NAFTA represents a trillion dollars of annual bilateral trade. Any actions to up-end that arrangement are going to be contentious, heavily lobbied, and feature winners and losers. Companies that are part of well-connected industries and trade associations will be able to enhance their ability to come out on top if the agreement is renegotiated.

  • International Trade Litigation Issues

    • Assess if trade litigation is likely to impact important products and inputs. Regardless of how NAFTA changes, the likelihood of increased trade frictions in the form of international trade litigation is highly likely. Antidumping and countervailing duty actions are likely to increase in the new administration, as potentially will Section 337 and safeguard actions. To deal with this possibility, companies that deal with goods from other countries, including Canada and Mexico, should consider monitoring rumors of potential filings, assessing whether important goods are in industries where trade actions are common (steel products, chemicals), products where there are rumors regarding potential filings (various steel products, softwood lumber from Canada, and so forth), and monitoring whether imports are of products where imports have been sharply rising, especially if at low prices. Import trends can be monitored for any Harmonized Tariff System number on the website of the International Trade Commission.12

    • Consider going on offense. It is widely anticipated that the new administration will be more receptive to the filing of antidumping and countervailing duty actions, safeguard proceedings, and other forms of international trade remedies. If a case can be made that products are being sold at low prices in the United States by foreign producers or are receiving subsidies, and these imports are causing material injury to the U.S. industry producing the same product, it may make sense to consider filing a petition to seek import relief. Questionnaires to help assess whether such an action has a potential basis are available by contacting the author at the contact information listed at the end of this alert.

The issues outlined in this alert are only the tip of the international trade iceberg. Companies that have significant operations that could be impacted by the potential NAFTA changes should consider lining up counsel to monitor ongoing developments in the area, suggest coping strategies, and take other measures to mitigate the risk of a NAFTA exit. Billions of dollars of exports, and millions of manufacturing jobs, will be impacted based on how the NAFTA withdrawal/renegotiation is handled. With that much money at stake, it behooves companies with operations, sales, imports, and exports that depend on or are impacted by NAFTA to closely monitor any changes in the Agreement.

ARTICLE BY Gregory Husisian of Foley & Lardner LLP

1 See http://money.cnn.com/2016/09/27/news/economy/donald-trump-nafta-hillary-clinton-debate/?iid=EL.

2 See https://assets.donaldjtrump.com/_landings/contract/O-TRU-102316-Contractv02.pdf.

3 See http://abcnews.go.com/International/wireStory/canadian-immigration-website-crashes-amid-trump-victory-43413321 and https://www.yahoo.com/news/mexico-says-ready-modernize-nafta-trump-181527988.html.

4 NAFTA was negotiated under the fast-track authority of the Omnibus Trade and Tariff Act of 1988, which made the termination and withdrawal provisions of Section 125 of the 1974 Act applicable to NAFTA.

5 See https://www.census.gov/foreign-trade/statistics/highlights/top/top1312yr.html.

6 See Trade Act of 1974, Public Law 93-618 as amended), P.L. 114-125, § 125 (available at https://legcounsel.house.gov/Comps/93-618.pdf).

7 See Trade Act of 1974, Public Law 93-618 as amended), P.L. 114-125, § 125(c) (available at https://legcounsel.house.gov/Comps/93-618.pdf).

8 See https://assets.donaldjtrump.com/_landings/contract/O-TRU-102316-Contractv02.pdf.

9 See https://www.donaldjtrump.com/policies/trade.

10 See https://www.census.gov/foreign-trade/statistics/highlights/top/top1312yr.html.

11 See The International Trade Commission, Miscellaneous Tariff Bill Petition System (MTBPS) (available at https://mtbps.usitc.gov/external/).

12 See https://dataweb.usitc.gov/.

Elections 2016, Trans Pacific Partnership, TTIP: Trade Talk 7-13 November 2016

meting trade globe Trans Pacific PartnershipDonald Trump won the U.S. presidential election against former Secretary of State Hillary Clinton on 8 November in what many are describing as an upset. President-Elect Trump’s transition team is now tasked with vetting possible Cabinet officials and lower-level appointees, receiving background briefings from the Obama Administration, and crafting policy proposals based on his campaign promises.  President-Elect Trump will be sworn-in as the 45th President of the United States on 20 January.

TPP – No-Go.  President-Elect Trump remains opposed to the TPP agreement in its current form, and lawmakers on both sides of the aisle continue to express concerns with certain issues in the final deal that reportedly have not yet been addressed by the Obama Administration. Ongoing concerns with the TPP deal include longer intellectual property protections for biologic drugs and concerns with the tobacco industry’s carve-out from the deal’s investor-state dispute resolution mechanism. Shortly after the elections, Republican Congressional leaders in both chambers issued statements indicating the deal will not be brought up for a vote before the end of 2016 and must be revisited after President-Elect Trump takes office. According to a draft 100-day plan leaked by Politico, Trump advisors are proposing the U.S. withdraw from the deal soon after Trump takes office – however, other TPP countries are likely to keep advocating for the deal with the next Administration.

TTIP – On Hold.  With the uncertainty surrounding President-Elect Trump’s trade priorities, European Union Trade Commissioner Cecilia Malmström said of the Transatlantic Trade and Investment Partnership (TTIP) negotiations on 11 November:

For quite some time TTIP will be in the freezer. What happens when it’s defrosted, I think we’ll have to wait and see.”

The EU and United States are not expecting to schedule any more formal negotiating rounds this year.

JCCT Meeting Ahead.  U.S. Secretary of Commerce Penny Pritzker and U.S. Trade Representative Michael Froman will host the 27th session of the U.S.-China Joint Commission on Commerce and Trade (JCCT) next week in Washington.  Vice Premier of the State Council Wang Yang will lead the Chinese delegation.  U.S. Secretary of Agriculture Tom Vilsack is also expected to join the JCCT meeting to address bilateral agricultural trade issues.  President-Elect Trump made it clear during the campaign that China’s perceived unfair trade practices will be addressed in his Administration, including labeling the country as a currency manipulator.

ARTICLE BY International Trade Practice at Squire Patton Boggs

© Copyright 2016 Squire Patton Boggs (US) LLP

Espionage and Export Controls: iPhone Hack Highlights New World of Warfare

iPhone HackLast week, researchers at Citizen Lab uncovered sophisticated new spyware that allowed hackers to take complete control of anyone’s iPhone, turning the phone into a pocket-spy to intercept communications, track movements and harvest personal data. The malicious software, codenamed “Pegasus,” is believed to have been developed by the NSO Group, an Israeli company (whose majority shareholder is a San Francisco based private equity firm) that describes itself as a “leader in cyber warfare” and sells its software — with a price tag of $1 million – primarily to foreign governments. The software apparently took advantage of three previously unknown security flaws in Apple’s iOS software, and was described by experts as “the most sophisticated” ever seen on the market. Apple quickly released a patch of its software, iOS 9.3.5, and urged users to download it immediately.

Citizen Lab learned about Pegasus from Ahmed Mansoor, a UAE human rights activist, who received text messages baiting him to click on a link to discover “new secrets about the torture” of Emirati prisoners. Mr. Mansoor had been prey to hackers before, so he contacted Citizen Lab. When researchers tested the link, they discovered software had been remotely implanted onto the phone, and brought in Lookout, a mobile security firm, to reverse-engineer the spyware. Citizen Lab later identified the same software as having been used to track a Mexican journalist whose writings have criticized Mexico’s President. Citizen Lab and Lookout also determined that Pegasus could have been used across Turkey, Israel, Thailand, Qatar, Kenya, Uzbekistan, Mozambique, Morocco, Yemen, Hungary, Saudi Arabia, Nigeria, and Bahrain, based on domains registered by NSO.

NSO Group, the architect of Pegasus, claims to  provide “authorized governments with technology that helps them combat terror and crime,” insisting that its products are only used in lawful ways., NSO spokesperson Zamir Dahbash told reporters that the company “fully complies with strict export control laws and regulations.” The Citizen Lab researcher who disassembled the malicious program, however, compared it to “defusing a bomb.” All of which raises the question – what laws or regulations govern the export of cyber-weapons by an Israeli firm (likely controlled by U.S. investors) to foreign governments around the world?

Cyber weapons are becoming increasingly interchangeable with traditional weapons. Governments (or terrorists) no longer need bombs or missiles to inflict large-scale destruction, such as taking down a power grid, since such attacks can now be conducted from anywhere there is a computer. Do export controls – which have long been used as foreign policy and national security tools, and which would regulate the transfer of traditional weapons – play any real role in regulating the transfer of weapons of cyber-surveillance or destruction? In fact, the legal framework underlying current export controls has not caught up (and maybe never will) to the capabilities of technological tools used in cyberwarfare. Proposals to regulate malware have been met with resistance from the technology industry because malware technology is often dual-use and the practical implications of requiring licenses would impede technological innovation and business activities in drastic ways.

The Wassenaar Arrangement

The Wassenaar Arrangement (WA) was established in 1996 as a multilateral nonproliferation regime to promote regional security and stability through greater transparency and responsibility in the transfer of arms and sensitive technologies. The United States is a member. Israel is not, but has aligned its export controls with Wassennaar lists.

In December 2013, the list of export controlled technologies under WA was amended to include commercial surveillance software, largely to curb human rights abuses by repressive governments’ use of spyware on citizens. Earlier this year, the Department of Commerce issued recommendations that the definition of “intrusion software” in the WA be modified to encompass the concept of “authorization” so that malware such as Pegasus, in which the user does not truly understand the nature of the consequences, would be controlled. Those proposals have not been implemented.

U.S. Export Controls of Malware

In 2015, following data breaches at the Officer of Personnel Management and several private companies, the Department of Commerce published proposed rules to harmonize concepts embedded in the WA into the U.S. regulatory framework for export controls. One critical proposal was a definition of “intrusion software” to require a license for the export and use of malware tools. But the definition covered much more than malware. Cybersecurity experts were alarmed by the rule’s over-inclusive and vague language. The rules would have impeded critical business activities, stifled international research and cross-border exchanges of technology, and hindered response to cyber threats.

NSO Group has been described by researchers as “incredibly committed to stealth, and  reportedly has close partnerships with other Israeli surveillance firms that seek to sell spyware, suggesting an inevitable increase in cyber mayhem. As malware becomes more sophisticated, widespread, and threatening, the need for strictly tailored export controls is not going to go away.

Regulating software is challenging at least in part, because there is no workable legal definition of what constitutes a cyber weapon. Because malware is largely dual-use, the only way to determine whether particular software constitutes a cyber weapon is retroactively. If software has been used as a weapon, it is considered a cyber weapon. But that definition arrives far too late to control the dissemination of the code. Moreover, controlling  components of that software would likely be over-inclusive, since the same code that can exploit flaws to break in to devices can also have benign uses, such as detecting vulnerabilities to help manufacturers like Apple learn what needs patching. Another challenge is that requiring  export licenses can take months, which, in the fast-moving tech world is as good as denial.

The revelation of the Pegasus iPhone spyware highlights questions that have perplexed national security and export control experts in recent years. As the use and sophistication of malware continue their explosive growth, not only must individuals and governments face the  chilling realities of cyber warfare, but regulators must quickly understand the technological issues, address the risks, and work with the cyber security and technological communities to find a path forward.

ARTICLE BY Fatema K. Merchant & Laura E. Jehl  of Sheppard, Mullin, Richter & Hampton LLP
Copyright © 2016, Sheppard Mullin Richter & Hampton LLP.

Considerations for Travel to Iran to Explore Relaxed Trade Opportunities

travel trade opportunities IranBefore booking your airfare, be mindful of these potential issues.

In light of liberalized trade with Iran made possible by the Office of Foreign Assets Control’s (OFAC’s) General License H and the relaxation of US secondary sanctions, personnel of a non-US company, whether or not owned or controlled by a US parent, may be considering travelling to Iran to explore potential business opportunities. Here are some key points to consider as you make your plans.

Travel to Iran by US Persons Is Permitted

An OFAC General License provided in 31 CFR § 560.210(d) authorizes travel to Iran from the United States or by US Persons (US citizens and US permanent resident aliens]) from outside the United States to do market research or gather business opportunity information. This authorization includes

  • importation or exportation of accompanied baggage for personal use;

  • maintenance within Iran, including payment of living expenses;

  • acquisition of goods or services for personal use in Iran; and

  • arrangement or facilitation of such travel, including air, sea, or land voyages.

US State Department Warning for Travel to Iran

On August 22, the US Department of State (State Department) reissued a travel warning for Iran that reiterates and highlights US citizens’ risk of arrest and detention, particularly dual national Iranian Americans. Iranian officials continue to detain or prevent foreigners (in particular, dual nationals of Iran and western countries, including the United States) from leaving Iran. The State Department says US citizens traveling to Iran should very carefully weigh the risks of doing so and consider postponing their travel. The State Department additionally instructs US citizens who reside in Iran to closely follow media reports, monitor local conditions, and evaluate the risks of remaining in the country.

The State Department advises that Iranian authorities continue to unjustly detain and imprison US citizens, including students, journalists, business travelers, and academics, on charges that include espionage and posing a threat to national security. Iranian authorities have also prevented a number of Iranian American citizens who traveled to Iran for personal or professional reasons from departing, in some cases for months.

The US government does not have diplomatic or consular relations with Iran, and therefore cannot provide protection or routine consular services to US citizens in Iran. The Swiss government, acting through its embassy in Tehran, serves as a protecting power for US interests in Iran. The Foreign Interests Section at the Swiss Embassy provides a limited range of consular services that may require significantly more processing time than at US embassies or consulates.

The Iranian government does not recognize dual citizenship and will not allow the Swiss to provide protective services for US citizens who are also Iranian nationals. The Iranian authorities determine a dual national’s Iranian citizenship without regard to the dual national’s personal wishes. Consular access to detained US citizens without dual nationality is often denied as well.

Loss of Visa Waiver Privileges for Entry into the United States by Non-US Citizens

The US Visa Waiver Program (VWP) Improvement and Terrorist Travel Prevention Act of 2015 (the Act), which took effect in January 2016, has adversely affected some travelers to Iran who wish to enter the United States. Under the Act, travelers in the following categories are no longer eligible to travel or be admitted to the United States under the VWP:

  • Nationals of VWP countries who have traveled to or been present in Iran, Iraq, Sudan, or Syria on or after March 1, 2011 (with limited exceptions for travel for diplomatic or military purposes in the service of a VWP country)

  • Nationals of VWP countries who are also nationals of Iran, Iraq, Sudan, or Syria

These individuals will still be able to apply for a visa using the regular immigration process at US embassies or consulates.

As of January 21, 2016, travelers who currently have valid Electronic System for Travel Authorizations (ESTAs) and who have previously indicated that they hold dual nationality with one of the four countries listed above on their ESTA applications will have their current ESTAs revoked.

The US Department of Homeland Security’s secretary may waive these restrictions if he determines that such a waiver is in the law enforcement or national security interests of the United States. Such waivers will be granted only on a case-by-case basis. As a general matter, categories of travelers who may be eligible for a waiver include

  • individuals who traveled to Iran, Iraq, Sudan, or Syria on behalf of international organizations, regional organizations, and subnational governments on official duty;

  • individuals who traveled to Iran, Iraq, Sudan, or Syria on behalf of a humanitarian nongovernmental organization on official duty;

  • individuals who traveled to Iran, Iraq, Sudan, or Syria as a journalist for reporting purposes;

  • individuals who traveled to Iran for legitimate business-related purposes following the conclusion of the Joint Comprehensive Plan of Action (July 14, 2015); and

  • individuals who traveled to Iraq for legitimate business-related purposes.

The Department of Homeland Security does not specifically define what travel to Iran for “legitimate business-related purposes” means, how the department applies the definition, or what evidence is necessary to sustain such a claim and successfully receive relief. Anecdotal evidence suggests that administrative avenues for relief from the Act’s provisions to enter the United States after travel to Iran for “legitimate business-related purposes” are obscure. Travelers to Iran who want to enter the United States and require a visa to do so should apply through the routine visa application process at their appropriate US embassy or consulate and not expect rapid administrative agency relief for the effects of the Act.

ARTICLE BY Louis Rothberg, Margaret M. Gatti & Marynell DeVaughn of Morgan, Lewis & Bockius LLP
Copyright © 2016 by Morgan, Lewis & Bockius LLP. All Rights Reserved.

Made in the USA (For the Most Part)

made in the USANewspaper headlines report a new economic trend—manufacturing is returning to the United States. The country’s industrial production grew by 0.7 percent in July, its biggest jump since November 2014. This number represents everything made by factories, mines, and utilities. Before companies start slapping “Made in the USA” labels on their wares, they need to make sure they are familiar with the legal requirements to do so.

The Federal Trade Commission (the FTC) monitors the marketplace and aims to keep businesses from misleading consumers. Within the FTC’s jurisdiction is regulating “Made in the USA” claims.

If a product is labeled as “Made in the USA,” without any qualification, it must be “all or virtually all” made in the United States. “[A]ll significant parts and processing that go into the product must be of U.S. origin. That is, the product should contain no – or negligible – foreign content.” The FTC contemplates the site of final assembly or processing, the proportion of manufacturing costs paid to the U.S., and how detached the foreign material is from the finished product. For many businesses, this standard can be hard, if not impossible, to meet.

Since January 2015, the FTC has issued 46 letters to companies asserting misleading U.S. origin claims on a wide range of products, such as cookware, snow blowers, auto parts and pet products.

For example, the FTC recently determined that Shinola—a Detroit-based manufacturer of high-end watches, bicycles, and leather goods—did not meet it. Shinola advertises its products with the slogans “Built in the USA” and “Built in Detroit.” But in June of this year, the FTC called this labeling misleading because “100 percent of the cost of materials used to make certain watches . . . [and] more than 70 percent of the cost of the materials used to make certain belts” goes to imported materials. For example, Shinola’s watches incorporate Swiss-made timekeeping components.

Shinola’s founder had a good reason for why his company incorporated foreign parts:  many of the components are unavailable in the U.S. The components are imported to Detroit where Shinola’s 400 employees assemble watches in the company’s factory. The FTC, however, applied its “net impression” analysis and determined that Shinola’s slogans contradict reality. Shinola’s advertisements will now read “Built in Detroit using Swiss and Imported Parts.”

In light of the FTC’s stance on U.S. origin claims, companies should follow FTC decisions and exercise caution when saying “Made in the USA.” There is no bright line rule for whether a product is “all or virtually all” made in the USA. Companies should consider how their products fit within the FTC’s framework and only then decide whether their merchandise has, according to the FTC, been “Made in the USA.”

ARTICLE BY Brittany Robbins of Schiff Hardin LLP

© 2016 Schiff Hardin LLP

The Future of Business Relations in Cuba – Commentary from a Seasoned Customs Attorney

cuba_800_11429Since the December 2014 reopening of diplomatic relations, access to Cuba has been greatly widened, with new changes to regulations taking place as recently as late January.  These developments signal opportunities for legal service providers to assist clients who are seeking advice on business development opportunities in Cuba. However, effective advising requires a thorough understanding of the history of the U.S. embargo on Cuba and the changes in the laws themselves.

Peter Quinter, Chair of the Customs and International Trade Law Group at GrayRobinson P.A., offers a unique perspective regarding U.S. and Cuban relations as a former attorney in the Office of Chief Counsel for U.S. Customs in Miami. As a South Florida resident surrounded by the stories about the 1959 Cuban Revolution and Fidel Castro, Peter was fascinated with the unique relationship between the two countries. As an attorney with U.S. Customs, he was also responsible for enforcing the U.S. embargo of Cuba. I recently had the opportunity to discuss his perspective on the progress of reopening relations with Cuba following his participation in a panel discussion at the recent Marketing Partner Forum.1

Since the imposition of the U.S. embargo on Cuba 55 years ago, Cuba’s economy has remained relatively stagnant in growth. I was initially focused on the idea that only the U.S. refused to trade with Cuba, and that despite access to everywhere else in the world, their economy did not grow. Mr. Quinter corrected my assumption, stating “[t]here were multiple embargoes, but they disappeared long ago. Only the U.S. retains the embargo, and it was U.S. policy to punish any country doing business with Cuba.”  In fact, the UN General Assembly has nearly unanimously voted to condemn the embargo every year since 1992. The U.S. only garnered support from one other nation –Israel– in the most recent vote on the embargo in October 2015.

Despite the standing embargo, the U.S. is now poised to begin contributing to the significant growth of the Cuban economy. Although most U.S. companies are still prohibited from doing business in Cuba, the relaxed rules and opening of embassies in D.C. and Havana have allowed a few major companies to start doing business in Cuba including Verizon, Netflix, and AirBNB. Mr. Quinter believes many industries have the opportunity to rapidly develop in Cuba due to the expansion of diplomatic relations: “Logistics, warehousing, hospitality, aviation, travel agents, sports, education..to name a few.” These developments signal new opportunities for U.S. law firms to advise companies in their up-and-coming dealings in Cuba.

Like business dealings in any country, it is imperative to understand and work within the laws of Cuba’s socialist government. Mr. Quinter’s extensive experience in advising clients on OFAC regulations and policies (Office of Foreign Assets Control) for 26 years makes him uniquely positioned to comment on the current state of U.S. law firm involvement in this rapidly evolving area. During the presentation, he stated that few firms are approaching this opportunity in the appropriate manner. In our follow up discussion, he called attention to this error: “Suddenly, numerous law firms are ‘experts’ in this, and are attempting to be business brokers, instead of legal advisors.”

As a legal advisor, Mr. Quinter elaborated that law firms’ focus should remain on advising U.S. persons and companies about the relevant legal requirements that allow these entities to travel to, trade with, or invest in Cuba. A major part of this practice is determining whether a license is required to do any of these things, and if so, obtaining the license from the U.S. Treasury for the client. Once the appropriate license is obtained, then the firm will need to assist the client in working with the Cuban government.

Law firms can add value to their practice by beginning to form new partnerships now so they can be better equipped to help their clients establish businesses down the line. Mr. Quinter advises that traveling to Cuba, experiencing the culture, and introducing themselves to the community is an excellent way for law firms to equip themselves to guide clients who are looking to do business in Cuba. In May 2015, Mr. Quinter, as Chair of the Florida Bar’s International Law Section, led the largest lawyer delegation ever to visit Cuba. While the group was in Cuba, they met with lawyers, journalists, and dissidents to get a better lay of the land and to help move toward opening up business relationships. Mr. Quinter has since returned to Cuba in October 2015 on behalf of a client meeting with government officials.

The upcoming 2016 presidential elections could greatly impact the progress being made in Cuba. Several presidential hopefuls have made their sentiments toward the embargo known: Republican candidate Marco Rubio staunchly for the embargo, and Democratic candidate Hillary Clinton ardently against it. However, Mr. Quinter posited, “What has happened to date is legally reversible, but realistically not.” He believes the embargo will eventually meet its end: “As more investment in and trade with and authorized travel by Americans occur to Cuba, even the few people who support the U.S. embargo (Cubans call it a ‘blockade’) will realize the embargo is counterproductive, and a leftover from the Cold War of the 1950’s and 1960’s.”

At the moment, Mr. Quinter acknowledges that in the short term, OFAC regulations continue to make it difficult to do business in Cuba. However, he is hopeful for the future: “In 10 years, we will look back and wonder why the U.S. did not terminate the U.S. embargo of Cuba decades ago, and we will recognize the leadership of President Obama in having the courage and vision to starting the process.” In fact, President Obama has recently announced that he will be the first sitting U.S. president to visit Cuba in over the 85 years. This is a signal of the U.S.’s overall sentiment toward Cuba, but only time will tell how U.S.-Cuban relations are progressing.

Article By Nicole Cudiamat Minnis of The National Law Review / The National Law Forum LLC

Copyright ©2016 National Law Forum, LLC

 

1 Mr. Quinter was a part of a panel at the Legal Executives Institute 23rd Annual Marketing Partner Forum, held January 20-22nd in Orlando. He was joined by Eddy Arriola, Chairman of the Board & Chief Executive Officer, Apollo Bank for the presentation, “From Swords to Plowshares: Cuba, Legal Business Development and Industrial (R)evolution (Breakout)”.

What Cuba Wants From Investors

American investors have made their way into Cuba. What Cuba Wants From Investors Just this week, the U.S. Treasury Department has approved the first significant U.S. business investment in Cuba since 1959: the Oggun tractor factory. This plant represents a $5 million to $10 million investment by an American company in Cuba.

​Both countries seem serious about moving their recently-resurrected commercial relationship forward. The U.S. and Cuba have entered into an agreement to resume commercial flights between the two countries the same week Cuba’s Minister of Foreign Trade and Investments, along with other officials from the Ministry of Foreign Affairs, Cuba’s Central Bank, and the Cuban Chamber of Commerce, have come to meet with the U.S. Secretary of Commerce to discuss how the two countries could further bilateral commercial relations.

While the focus of politicians’ rhetoric and scholars’ analysis has been on either what Americans are allowed to do, or on what Americans should want to do in Cuba, attention should be paid to what Cuba wants from its investors.

Cuba Wants Investors

First, there can be no doubt that Cuba wants investors.

In September 2013, Cuba created a Special Development Zone at Mariel (Zona Especial de Desarrollo Mariel). This $900 million port was formed in November 2013, 30 miles west of Havana, with the express purpose of attracting foreign investment. Many Americans are already familiar with Mariel, but remember it for the 1980 mass boatlift that carried thousands of Cuban refugees to America’s shores.  Instead of being a point of departure, Mariel is now a destination for foreign capital.

A few months after the creation of the Special Development Zone, Cuba’s National Assembly unanimously passed the Foreign Investment Act (Law 118) on March 29, 2014.  Law 118 promises foreign investors tax breaks and legal protections for their investments.

These far-reaching overtures to potential foreign investors were not made, however, without certain conditions.

Cuba Wants Investments in Particular Sectors

The Foreign Investment Act delineates, among other things, which investment vehicles are permissible, how investment shares may be transferred, who may be hired to work on the investment projects, and how disputes may be resolved.

Cuba has also specified in what it wants foreigners to invest. Last year, Cuba published a Portfolio of Opportunities for Foreign Investment detailing 326 projects in twelve sectors ripe for foreign investment:

  1. Tourism – 94 Projects

  2. Oil – 86 Projects

  3. Agriculture and Food – 40 Projects

  4. Renewable Energy – 22 Projects

  5. Industrial – 21 Projects

  6. Mining – 15 Projects

  7. Transportation – 15 Projects

  8. Construction – 14 Projects

  9. Biotechnology and Medicine – 9 Projects

  10. Business – 4 Projects

  11. Health – 3 Projects

  12. Audiovisual – 3 Projects

The highest number of projects was, not surprisingly, in the tourism sector. Cuba’s official policy on tourism investment is to direct foreign capital towards building or reconstructing new hotels and corresponding infrastructures. The President of Cuba’s Chamber of Commerce has noted the need to increase hotel capacities and standards in Havana and other heritage cities. So far, 74 hotel marketing and administration contracts have been signed, and these include almost 20 contracts with foreign firms.

Interestingly, Cuba has expressed a desire to attract foreign chains to its coasts, and is reportedly working on establishing agreements with renowned international chains across 58 facilities. Cuba is also promoting real estate development, including golf courses, marinas, and theme parks. Cuba has predicted that it will be one of the Caribbean’s top golfing destinations, and has already created two joint ventures, with British and Chinese investors, responsible for hotel construction. These projects are said to be worth over $400 million.

Furthering its efforts to attract investment in its tourism sector, Cuba is hosting its 36th International Tourism Fair (FITCUBA 2016) this year, which will be dedicated to Cuba’s culture and will feature Canada as the guest of honor.  Canada represents one of the highest sources of visitors to Cuba each year.

Notably, the Beacon Council, Miami-Dade County’s official economic development partnership, has identified seven target industries Miami’s business leaders should focus on:

  • Aviation

  • Banking and Finance

  • Creative Design

  • Hospitality and Tourism

  • Information Technology

  • Life Sciences and Healthcare

  • Trade and Logistics

The overlap between Cuba’s and Miami’s lists of target industries, along with Miami’s geographical proximity to Cuba and supply of Spanish-speaking professionals make the city an obvious key player in the development of Cuba’s business sector.

There are certain sectors, however, in which Cuba will not allow private ownership.

Cuba Does Not Want Investments in Particular Sectors

Notably, last December, Cuba’s official newspaper, the Granma, published an article titled, “Open Also Your Mind to Foreign Investment,” encouraging the Cuban people to embrace foreign investment. Cuban officials have reiterated that these changes in economic policy will not threaten the country’s socialist regime. Cuba’s policies expressly prohibit investment in sectors that may threaten Cuba’s political landscape.

For example, the Foreign Investment Act makes it illegal for a foreigner to invest in education services for Cubans and in the armed forces. Cuba’s Constitution also states that Cuba’s press, radio, television, film industry, and other mass media can never be privately owned.

These carve-outs are consistent with the Cuban government’s assurances to its people: Cuba is importing only capitalists’ capital, not their ideologies.

While it has been said that profit is apolitical, investors should not ignore the political contours of Cuba’s budding foreign investment regulations, as these may impact their investment opportunities.

ARTICLE BY Jose M Ferrer & Yasmin Fernandez-Acuña of Bilzin Sumberg Baena Price & Axelrod LLP
© 2016 Bilzin Sumberg Baena Price & Axelrod LLP

Further Relaxation of Sanctions for Commercial Aircraft Operations in Cuba

cuba_800_11429On January 27, the US Department of Commerce’s Bureau of Industry and Security (BIS) and the Treasury Department’s Office of Foreign Assets Control (OFAC), took steps to further ease trade restrictions against Cuba, including transactions relating to the export and operation of civil aircraft in Cuba.[1] In order to sell or lease a commercial aircraft to an airline in Cuba, a US national must obtain licenses for each transaction from BIS and OFAC. The changes by BIS relax its licensing policies for certain transactions with Cuba and Cuban nationals, while OFAC lifted financing and payment restrictions for authorized exports, and broadened the scope of authorizations for travel to and from Cuba.

On February 16, the United States and Cuba announced the resumption of scheduled commercial air services between the two countries, and the US Department of Transportation (DOT) invited US air carriers to apply for permission to operate scheduled flights to and from Cuba.

As outlined below, these actions may lead to easier opportunities to provide aircraft leasing and related services to prospective customers in Cuba. They also will facilitate travel between the United States and Cuba by allowing US and Cuban airlines to fly scheduled flights between the two countries.

BIS Eases Licensing Policy for Exports of Items Necessary to Ensure Civil Aviation Safety

In light of moves earlier in 2015 to loosen restrictions on trade with Cuba, air travel to and from Cuba has significantly increased in that time. The policy change announced by BIS on January 27 emphasizes “the importance of civil aviation safety and . . . recognize[s] that access to aircraft used in international air transportation that meet US Federal Aviation Administration and European Aviation Safety Agency operating standards by Cuban state-owned enterprises contributes to that safety.”

In its notice, BIS indicated that it would move to generally approve license applications for the export of items for the safe operation of commercial aircraft in lieu of reviewing such applications on a case-by-case basis. This policy includes approving license applications for the export of commercial aircraft leased to Cuban state-owned enterprises.

Both commercial passenger and cargo aircraft are eligible for treatment under this revised policy of license approval. However, BIS will continue to generally deny license applications for exports or re-exports of goods (including aircraft) for use by the Cuban military, police, intelligence and security services. BIS also will generally deny such license applications for the export or re-export of goods for use by Cuban government or state-owned entities that primarily generate revenue for the state, including those engaged in tourism and extraction of minerals or raw materials.

BIS also will move from a general policy of denial to a policy of case-by-case review for applications to export certain items to “meet the needs of the Cuban people,” including those to Cuban state-owned entities that provide goods and services for the use and benefit of the Cuban people. This policy covers a number of categories, including goods for agricultural production, artistic endeavors, education, food processing, disaster preparedness, public health and sanitation, and public transportation.

OFAC Authorizes Certain Arrangements With Cuban Airlines to Facilitate Authorized Travel to Cuba

In conjunction with BIS, OFAC published its own regulatory amendments to ease restrictions on certain transactions with Cuba and Cuban nationals, including measures to facilitate air carrier services with Cuban airlines.[2] OFAC’s amendments authorize the entry by US persons into blocked space, code-sharing and leasing arrangements with Cuban nationals to facilitate the provision of authorized air carrier services. OFAC also is allowing travel-related and other transactions directly incident to the facilitation of the temporary sojourn of aircraft authorized for travel to Cuba. This allows US companies to engage with Cuba for services by personnel required for normal aircraft operation, such as aircraft crew, or to provide services to an aircraft on the ground in Cuba. These allowances are part of a larger expansion of authorized travel to Cuba—from organizing professional meetings, professional sports competitions and other events, to the creation and dissemination of artwork and informational materials.

Resumption of Scheduled Air Service Between the United States and Cuba

The memorandum of understanding signed by the United States and Cuba on February 16 allows for the re-establishment of scheduled commercial air service between both countries. For more than 50 years, there have been no scheduled flights between the United States and Cuba. As a result of the new agreement, a total of 110 daily scheduled round trip flights between the countries will be allowed to be conducted by each country’s carriers. Each country will be able to operate up to 20 daily roundtrip flights between the United States and Havana, and up to 10 daily roundtrip flights between the United States and each of nine other destinations in Cuba.

Immediately upon the announcement of the agreement, the DOT invited US carriers to apply for allocation of the new flight opportunities.[3] Applications from the US carriers are due to the DOT by March 2. The DOT is to answer those applications by March 14 and carrier replies are due March 21. The scheduled services are expected to begin in the fall 2016. All US carriers to which frequencies are eventually allocated will still be required to comply with all applicable regulations and requirements of the DOT and other US agencies and all US laws. US carriers’ ability to provide US–Cuba service through licensed charter flights continues unchanged.

Department of Transportation Matters Regarding Blocked Space, Code-Sharing and Wet-Leasing

The new amendments announced on January 27 allow blocked space, code-sharing or wet-leasing arrangements. As is the case with such arrangements with foreign carriers in general, any proposed blocked space, code-sharing or wet-leasing arrangement between a US air carrier and a Cuban carrier will require the DOT’s advance authorization. The DOT must determine whether the proposed operations are in the public interest, by assessing whether such operations meet an acceptable level of safety and security, and whether they will adversely impact competition in the US airline industry.

A US carrier seeking to conduct the activities allowed pursuant to the most recent OFAC amendments must first apply to the DOT for specific authorization for such planned operations.[4] The DOT will grant authorization only if the foreign carrier is from a country that complies with the safety standards of the US Federal Aviation Administration’s (FAA) International Aviation Safety Assessment (IASA) program and the proposed foreign carrier partner meets the requisite safety standards.[5] As part of the DOT’s analysis, the FAA will assess the safety oversight functions of the national aviation authority having jurisdiction over the proposed foreign partner’s operations.

Based on publicly available information, to date, the safety oversight function of Cuba’s national aviation authority has not been assessed by the FAA.[6] In assessing the safety oversight provided by any country’s civil aviation authority, the FAA will determine whether such oversight meets the minimum international safety standards established by the International Civil Aviation Organization (ICAO). Cuba is an ICAO member state and, according to the currently available ICAO information, in regard to the ICAO Universal Safety Oversight Audit Programme (USOAP), was audited by ICAO between February 19, 2008 and February 28, 2008, and meets the ICAO minimum safety standards. If the FAA determines that Cuba’s USOAP rating satisfies the requirements of the IASA program, it should approve the first prong of the safety assessment of the proposed code-sharing arrangement.

With respect to the proposed foreign carrier, the US carrier seeking authorization for such operations must have an existing FAA-accepted code-share safety program and must conduct safety audits on the proposed foreign partner in accordance with that program. The FAA will review the US carrier’s safety audit program, its initial safety audit report on the foreign carrier, and its statement that the foreign carrier is in compliance with international safety standards. Additionally, after authorization is granted, the US carrier must monitor its foreign partner’s safety programs for continued compliance during the existence of the approved arrangement. The DOT authorization process also includes review of the terms of the parties’ agreement for the proposed operations.

As for arrangements with foreign carriers that will provide service directly to the United States or to US territories, the Transportation Security Administration will provide the DOT with information regarding the security of the foreign carrier and its home country to aid the DOT in its assessment.

In assessing the impact of a proposed arrangement on competitiveness, the DOT will determine whether the agreements are adverse to the public interest because they would substantially reduce or eliminate competition.[7] In addition to serving the application for authorization on the requisite US government agencies, the US carrier seeking such authorization also must serve the application on each US-certificated carrier authorized to serve the general area in which the proposed transportation is to be performed. These other carriers may file any comments for consideration by the DOT.[8]

Of course, since most of the restrictions under the embargo remain in effect, operations under any such code-sharing, blocked space or wet-leasing arrangement, even if authorized by the DOT, may only be conducted within the scope of authorized US–Cuba transactions noted above.

Conclusion

The actions by BIS and OFAC and the announcements by the DOT will allow for a further expansion of trade activity and facilitate opportunities between the United States and Cuba. However, OFAC and BIS have made clear that they intend to continue enforcing existing sanctions on and trade embargoes with Cuba. Many restrictions will remain in place until US legislators vote to end or modify the embargo against Cuba. For example, the saleor lease by US persons of aircraft or related services to Cuba without a license continues to be restricted. Furthermore, as it stands now, any aircraft owned by the Cuban government arriving in the United States is subject to immediate seizure in settlement of the billions of dollars in judgments reached in US courts against Cuba in connection with Cuba’s nationalization of property owned by Americans and other civil judgments against the Cuban government. Thus, we remind those looking to take advantage of opportunities to sell or lease aircraft or related services to review all licensing applications and potential transactions with Cuba carefully to ensure that they are in compliance with federal laws and regulations.

[1] See Cuba Licensing Policy Revisions, 81 Fed. Reg. 4,580 (Dep’t Commerce, Jan. 27, 2016); Cuban Assets Control Regulations, 81 Fed. Reg. 4,583 (Dep’t Treasury, Jan. 27, 2016).

[2] OFAC now allows for financing and payment of authorized transactions through US banks or through sales on an open account. These changes were made to address the inability of customers in Cuba to obtain financing or for authorized transactions with the United States, due to more restrictive payment and financing arrangements.

[3] See, Order Instituting Proceeding and Inviting Applications, 2016 U.S. – Cuba Frequency Allocation Proceeding, issued by the US Department of Transportation, Docket DOT-OST-2016-0021, February 16, 2016.  

[4] The foreign carrier also must comply with all other relevant regulations, and hold all requisite DOT authorizations, prior to conducting any of the newly-allowed operations.

[5] See Department of Transportation Office of the Secretary and Federal Aviation Administration Code-Share Safety Program Guidelines, 12/21/2006, Revision 1.

[6] As Cuban carriers have not provided service to the US or participated in code-sharing arrangements with US carriers, and the Cuban national aviation authority has not significantly interacted with the FAA, for a four-year period, Cuba is not included on the publicly available IASA program summary listing, in accordance with standard FAA procedures. Before Cuba can be rated in the IASA program, a full reassessment of its aviation safety oversight must be conducted by the FAA.

[7] 49 U.S.C. 41309(b). Further, in accordance with 49 U.S.C. 41308(b), if it is determined that competition would not be reduced or eliminated, the DOT must approve the proposed agreement. If it is determined that competition would be adversely affected, but the DOT finds that (1) the arrangement is nevertheless necessary to meet a serious transportation need or to achieve important public benefits, including US foreign policy goals, and (2) those public benefits cannot be met or achieved by reasonably available and materially less anticompetitive alternatives, the DOT must approve the agreement.

[8] The DOT, the FAA, the Department of Defense, the Anti-trust division of the Department of Justice and any other US agency the DOT deems necessary must be served, in addition to the other carriers. 14 C.F.R. 212.10(d)(6). See also, Code-Share Safety Program Guidelines, infra at n. 5.

Article By Jane M. Cavanaugh, Stewart B. Herman & Timothy J. Lynes of Katten Muchin Rosenman LLP

©2016 Katten Muchin Rosenman LLP

EU Policy Update – February 2016 re: Dutch Presidency and Brexit, Digital Single Market Policy, Energy and Environment

Dutch Presidency and Brexit

In January, the Netherlands took over the Presidency of the Council of the European Union from Luxembourg.  In line with the political intentions of the Juncker Commission to be ‘big on the big issues but small on the small issues’, the Netherlands promises to focus on the essentials during its Presidency.  In particular, the Dutch Presidency would like to focus on migration and international security.  Another priority is to strengthen the free movement of services and the free movement of workers, where the Presidency would like to strengthen the protection of workers posted abroad.

Additionally, on February 2, the President of the European Council, Donald Tusk, presented his proposals for a ‘new settlement of the United Kingdom within the European Union’.  If accepted, they would allow David Cameron to campaign in the ‘Brexit’ referendum on the continuing membership of the UK in the bloc.  The Heads of State and Government will discuss and adopt the text in a meeting on February 18.  For Covington’s analysis of the proposals presented and the referendum, please see here.

Digital Single Market Policy

The formal adoption of the EU Network and Information Security (NIS) Directive is a step closer following a vote on January 14 by the European Parliament’s internal market and consumer protection (IMCO) committee.  The committee confirmed that the minimum harmonisation requirements under the Directive do not apply to digital service providers.  This means that Member States will not be able to impose any further security or notification requirements on digital service providers beyond those contained in the Directive, when transposing it into national law.  The NIS Directive will now be put forward for a plenary vote in the European Parliament.  Once it is published in the Official Journal of the European Union and enters into force later this year, Member States will have 21 months to transpose it into national law.  Member States will then have a further 6 months to apply criteria laid down in the Directive to identify specific operators of essential services covered by national rules.  These processes are likely to be complicated, and companies that may fall within scope should participate in consultations and monitor developments across the EU over the coming months.

On January 19, the European Parliament adopted a resolution on the Digital Single Market Strategy of the European Commission.  The parliamentarians called for ambitious and targeted actions to complete Europe’s digital single market.  Among other things, the MEPs support the end of geo-blocking practices across Europe, the setting of a single set of contract rules and consumer rights for online sales and for digital content, and the modernization of the copyright framework.

On February 2, the European Commission and U.S. Government reached a political agreement on the new framework for transatlantic data flows.  The new framework – the EU-U.S. Privacy Shield – succeeds the EU-U.S. Safe Harbor framework. The EU’s College of Commissioners has also mandated Vice-President Ansip, in charge of the Digital Single Market, and Commissioner Jourová, Commissioner for Justice, Consumers and Gender Equality, to prepare the necessary steps to put in place the new arrangement.  For Covington’s full analysis of the announcement of the EU-U.S. Privacy Shield, please see here.

Energy and Environment Policy

The European Commission published a proposal to update the approval requirements and market surveillance of new passenger cars and their respective systems and components.  The Commission’s proposal aims at strengthening the credibility and enforcement of the applicable safety and environmental requirements for cars, following the controversy regarding Volkswagen last year.

In a significant departure from past EU legislation, the proposal would empower the Commission to impose administrative fines on economic operators who are found not to have complied with the approval requirements, of up to €30,000 per non-compliant vehicle.

The Commission’s proposal focuses on three elements.  First, the European Commission proposes to reinforce the credibility of the type-approval assessment of new vehicles by ensuring that the technical services testing the new vehicles are fully independent from car manufacturers.  For this purpose, the proposal would enhance the financial independence of such technical services and require Member States to create a national fee structure to cover the costs of type-approval testing and market surveillance activities for vehicles.  Moreover, in order to prevent the use of ‘defeat devices’, as in the Volkswagen controversy, the proposal would grant approval authorities and technical services access to the software and algorithms of the vehicles tested.

Second, the proposal includes measures to strengthen the market surveillance of vehicles after they are type-approved and in circulation.  Member State authorities and the Commission would be able to conduct tests and inspections on cars available on the market and would be empowered to adopt restrictive measures in case of non-compliance of vehicles.  Among other proposed measures, the Commission would establish and chair a forum to coordinate the network of national authorities responsible for type-approval and market surveillance.  Member States would also be able to inspect and take measures against vehicles type-approved in a different EU Member State.

Third, the Commission proposes measures to ensure that non-compliant manufacturers are penalized in case of non-compliance.  Member States would be required to adopt penalties for non-compliant economic operators, including car manufacturers, importers and distributors, as well as technical services.  This may be complemented by administrative fines, imposed by the Commission, of up to €30,000 per non-compliant vehicle, as referred to above.

Finally, the European Commission hopes to ensure a more uniform application of the legislation in the EU by proposing a Regulation as opposed to the current Framework Directive 2007/46/EC.  If adopted, the Regulation would be directly applicable in national law with no requirement of transposition.

The Commission proposal is available here; it has been sent to the Council and European Parliament for consideration.

The European Commission is expected to propose a revision of the Fertilizers Regulation (EC) 2003/2003 in March 2016.  This revision comes in parallel to the Circular Economy Package announced in December 2015, which aims to create a single market for the reuse of materials and resources.

Under the current EU Regulation 2003/2003, manufacturers and importers of fertilizers may choose to comply with the laws of the Member States where they market their products, or to get their products approved and CE-labeled under the Regulation.  However, Regulation 2003/2003 only regulates a limited number of categories of fertilizer products.

According to Commission officials, the proposal aims to create a level playing field between existing, mostly inorganic categories of fertilizers, and innovative fertilizers, which often contain nutrients or organic matter recovered and recycled from biowaste or other secondary raw materials.  Therefore, the proposal will make the approval process more flexible for new categories of CE-labeled fertilizers.

The draft legislative text is structured in four parts: (i) a list of materials that could be used for the production of CE-marketed fertilizing products under the conditions included in the annexes of the proposal; (ii) a list of product function categories for fertilizers, rules for blends of different product categories, and respective safety and quality requirements for each category included in the annexes; (iii) an annex with the labelling requirements by product function; and (iv) a section with the different conformity assessment procedures.  Fertilizers that follow the harmonized EN standards will be presumed to conform with the requirements of the regulation.

Moreover, the proposal would continue to allow Member States to regulate national fertilizing products.  Products that are not in compliance with the EU Fertilizers Regulation and do not carry the CE label would be able to marketed in a particular Member State if they comply with its national legislation.

Importantly, the revised Fertilizers Regulation is also likely to include an EU-wide limit on the presence of cadmium in fertilizers.  In November 2015, the Scientific Committee on Health and Environmental Risks published an opinion concluding that new scientific information available justifies an update of the 2002 opinion on Member State Assessments of Risk to health and the Environment from Cadmium – see here.

The draft proposal is currently in inter-service consultation among the different Directorates General of the European Commission.  Fertilizer manufacturers wishing to voice their opinion regarding the future Regulation on fertilizers should reach out now to the different services of the Commission.

Internal Market and Financial Services Policies

On January 15, the European Commission launched a public consultation on non-binding guidance for reporting non-financial information by certain large companies, following Article 2 of Directive 2014/95/EU – see here.  Directive 2014/95/EU aims at improving the transparency of certain large companies related to Environmental matters, social and employee matters, human rights, and anticorruption and bribery matters.  The feedback gathered during the consultation will be used to prepare the guidelines and facilitate the disclosure of non-financial information by undertakings.  The public consultation will run until April 15, 2016.

On January 28, the European Commission presented its so-called Anti-tax Avoidance Package – see here.  The initiative includes: (i) a new communication on tax avoidance in the EU; (ii) a proposal for an Anti-Tax Avoidance Directive; (iii) a proposal for a Directive implementing the G20/OECD Country by Country Reporting (CbC Reporting); (iv) a Recommendation to the Member States on Tax Treaties, and (v) a Communication on an External Strategy regarding tax avoidance.

The Anti-Tax Avoidance Directive includes six measures, which aim at limiting the abuse of six well-established practices used to avoid taxes in various jurisdictions in Europe.  These include the mismatch in legal characterisation of financial instruments or legal entities between Member States, excessive inter-group interest charges, and a general anti-abuse rule against arrangements the essential purpose of which is to obtain a tax advantage.

The legislative proposal on CbC Reporting aims to strengthen the existing mandatory and automatic exchange of information between the Member States in the field of taxation.  The proposal also requires the parent entity of a multinational group to report to the competent authorities the aggregated information on the revenue, profit (or loss) before income tax, income tax paid, income tax accrued, stated capital, accumulated earnings, number of employees, and tangible assets other than cash equivalents, in respect of each jurisdiction in which the group operates.

Finally, because tax avoidance has a strong global dimension, the EU will also cooperate better with third countries on tax issues. The Commission therefore proposes to adopt a common EU system to screen, list and put pressure on third countries that refuse to adopt policies to limit tax avoidance. In addition, before the end of 2016, the Commission and Member States will consider whether to put in place sanctions to incentivize third countries to improve their tax systems.

Life Sciences and Healthcare Policies

At the beginning of February 2016, the Dutch presidency will resume trilogues on the legislative proposals regarding the medical devices Regulation (“MD proposal”) and the in vitro diagnostic medical devices Regulation  (“IVD proposal”).  The European Commission presented this pair of proposals in September 2012, and recently called upon the Council of Ministers and the European Parliament to reach an agreement in the first half of 2016.  The Dutch delegation therefore intends to ramp up the number of trilogues between the institutions to five political meetings and 10 to 15 technical meetings during its presidency.  Nonetheless, important differences remain between the negotiators on the reprocessing of single use devices, liability insurance for manufactures, and the classification of devices in the framework of the IVD proposal.  It is understood that the Dutch presidency hopes to achieve an agreement by the Employment, Social Policy, Health and Consumer Affairs Council of June 17, 2016.

Trade Policy and Sanctions

On January 1, the Deep and Comprehensive Free Trade Area (“DCFTA”) between the EU and Ukraine became operational.  According to the Commission, the implementation of the DCFTA will improve the Gross Domestic Product of Ukraine by circa 6% and increase economic welfare for Ukrainians by 12% over the medium term.

On January 13, the European Commission held an initial orientation debate on Market Economy Status for China in anti-dumping proceedings.  Under the current WTO rules, the EU can calculate potential anti-dumping duties on the basis of data from another market economy country rather than the domestic prices used in China, because there is a presumption that market economy conditions do not prevail in China.  However, this provision, included under Article 15(a)(ii) of China’s Protocol of Accession to the WTO, will expire on December 12, 2016.  The Commission is therefore considering its options for changing the methods used to calculate dumping margins in respect of China.  It is important for the Commission to start the process on time, because any change in the anti-dumping rules are likely to require legislation to be adopted by the Council and the European Parliament.  Given the delicate nature of such negotiations, the process is expected to take a year.

January 16, 2016, saw the Implementation Day of the Joint Comprehensive Plan of Action (“JCPOA”) – the historic deal reached among China, France, Germany, Russia, the UK, the U.S., the EU and Iran to ensure the exclusively peaceful nature of Iran’s nuclear program.  As part of that agreement, the Council of the EU lifted all nuclear-related economic and financial EU sanctions on Iran.  It did so by bringing into force the EU legislative package adopted on October 18, 2015, following the verification by the International Atomic Energy Agency (“IAEA”) that Iran had complied with the requirements laid down in the JCPOA.  As of January 16, many sectors and activities have been reactivated, including, among others: financial, banking and insurance measures; oil, gas and petrochemical; shipping and transport; gold and other metals; software; and the un-freezing of the assets of certain persons and entities.  Note that proliferation-related sanctions, including arms and missile technology sanctions, will remain in place until 2023 (subject to various conditions).  For the Council press release, see here.  For more details, see the Council Information Note here.

Article By Sebastian F.A. Vos of Covington & Burling LLP
© 2016 Covington & Burling LLP