CFIUS Reform/Issues

Dear Friends,

I wanted to let you know that, earlier this week, one of my partners, Rod Hunter, testified before a subcommittee of the US House of Representatives Committee on Financial Services, which is looking at ways to improve the effectiveness of the Committee on Foreign Investment in the United States (CFIUS) (an inter-agency committee authorized to review transactions that could result in control of a U.S. business by a foreign person, in order to determine the effect of such transactions on the national security of the United States).  This is a hot topic right now for a variety of reasons (e.g., CFIUS is expanding its view of what constitutes “national security”; Congress is looking to possibly expand the types of transactions subject to CFIUS review to include, not just mergers or combinations, but certain joint ventures with foreign partners as well, etc.).

Rod previously served as senior director for international economics at the National Security Council (NSC), the White House office that coordinates international trade policy and supervises national security reviews conducted by the CFIUS.  At Baker, he represents clients on matters before CFIUS, as well as trade policy.

His recommendations for the committee concentrated on improving CFIUS’s legal authority and the challenges with turning CFIUS into a technology control regime.  Rod’s full testimony is attached as is the Committee’s Memorandum.

If you (or your colleagues) have any questions about CFIUS, or how its evolution may impact your business (e.g., future acquisitions, combinations or deals), please let me know.

Best regards,
Ted

 

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Border Searches of Personal Electronic Devices

Dear Friends,

We wanted to highlight for you an interesting development regarding searches and seizures of personal electronic devices by U.S. Customs and Border Protection (CBP) at the border.   

CBP recently announced that, in fiscal year 2017 (which ended September 30, 2017), it searched the personal electronic devices of 30,200 travelers (inbound and outbound), which is up over 60% from the prior year.  Devices include any communication, electronic, and digital devices, including computers, tablets, removable media, disks, drives, tapes, mobile phones, cameras, music and other media players.  These searches and seizures are stated to be conducted to identify and respond to terrorism threats, smuggling attempts, illegal immigration, etc. and have been the subject of multiple lawsuits.  CBP also updated its directive “Border Search of Electronic Devices” (CBP Directive No. 3340-049A).   

What You Should Know

CBP has broad authority to search individuals, and their belongings, entering or exiting the country.  There is no reasonable suspicion, probable cause, or warrant requirement.  Encrypted and passcode protected content may also be searched.  Travelers that refuse to assist CBP in accessing protected content may have their devices detained. 

In addition to reviewing content stored on the device (a ‘basic search’), CBP may also conduct an ‘advanced search’ if there is reasonable suspicion of activity in violation of laws enforced or administered by CBP (e.g., customs, export control, immigration laws, etc.).  An advanced search is any search in which an Officer connects external equipment, through a wired or wireless connection, to an electronic device not merely to gain access to the device, but to review, copy, and/or analyze its contents.

Not all device content is treated equally.  For example, CBP treats content stored on the device differently than content stored remotely (CBP may only access content stored on the device).  In addition, CBP must initiate specific procedures when a traveler contends that certain content is privileged or sensitive. 

Considering the prominent role of electronic devices in today’s society, CBP’s updated Directive, and the Trump Administration’s focus on border security, device searches at the border will likely continue to increase.

Recommendations 

If your company has executives or employees who travel frequently, we recommend preparing those individuals to respond appropriately if/when CBP Officers ask to search their devices (e.g., do employees have to provide their passcodes, if requested by CBP?).  For example, updating your company’s travel policies to address this issue and then publishing the updates internally could be a good start to preparing employees for this eventuality.  In addition, we recommend that all companies review their company’s data storage policies to ensure the company’s most sensitive data is stored remotely, rather than locally on devices (or that employees have only limited amounts of sensitive data stored locally).  While these are not traditional “customs compliance issues,” they are nevertheless important issues the in-house trade compliance team should be raising internally.

We are working with clients on these issues and would be happy to discuss how best to implement the recommendations discussed above with you further.  If you would like to do so, please let us know.

We hope this is helpful.

Best regards,
Ted

 

Intercompany Customs Valuation Issue – India

Dear Friends,

Happy New Year!  It is hard to believe it is 2018 already . . . .

We wanted to bring to your attention a recent report out of India involving a customs valuation investigation that could have meaningful consequences for other multinationals who do business there. 

The article published in The Indian Express earlier this week details a customs investigation by the Directorate of Revenue Intelligence (“DRI”) (as you may know, DRI is a group within the Central Board of Excise and Customs responsible for investigating and pursuing violations of India’s Customs Act) into the intercompany pricing of a multinational enterprise.  DRI alleged that the Indian subsidiary of this multinational undervalued goods purchased/imported from related parties over a 6-year period and, as a result, failed to pay approximately $96 million (Rs. 612.72 crore) in customs duties.

There are several interesting/important take-away’s from this article. 

The first is the substantive customs valuation issue involved, as it may be a common one among multinationals.  From the article, it appears that the intercompany distribution agreement required the Indian distributor to spend a certain amount in the Indian market advertising and promoting the product (which is not unusual).  DRI took the position that that the amounts the distributor spent on advertising and promotion in the local market were for the benefit of the seller and, therefore, were part of the “price actually paid or payable” (i.e., part of the customs value) for the imported goods.  What is interesting is DRI’s characterization of normal distributor expenses as being for the benefit of the seller, rather than being for the benefit of the distributor (i.e., the amount the distributor spends advertising promoting the product helps justify the margin the distributor earns on resale of that product).  This characterization has a major impact on how the expenses are treated for customs purposes.

The second take-away is to remember that DRI is quite aggressive, particularly when it comes to multinationals, and even more particularly when it comes to intercompany customs valuation issues.  We are currently assisting several clients with customs-related disputes with DRI and can attest to this personally.

While the article does not say whether DRI’s conclusions are being further challenged in court (one would expect/hope so), all multinationals that do business in India should take this as a warning and review their intercompany agreements/practices to identify any additional customs risk.  If you would like any assistance doing so, please let us know.

We hope this is helpful.

Best regards,
Ted

 

GSP Expiration Part II

Dear Friends,

Unfortunately, it appears increasingly likely that Congress will not renew the Generalized System of Preferences (“GSP”) program before it expires on December 31, 2017.  While the program may get renewed in 2018, and that renewal may be retroactive, there will be a period when GSP is not in effect.  U.S. Customs and Border Protection (“CBP”) has published a notice (copy available here) that advises importers of GSP-eligible merchandise to continue entering the merchandise using the “A” Special Program Indicator and to deposit the Normal Trade Relations duties (i.e., the regular, non-preferential duties) during any lapse in the program (e.g., as of January 1, 2018).  This will make it easier for CBP to process refunds IF Congress renews the GSP program retroactively. 

Any of you who regularly import using GSP should make sure that your brokers are familiar with CBP’s notice (in addition to making sure your finance colleagues are aware of the potential increase in costs).

If you have any questions about these issues, please let us know.

Best regards,
Ted

 

CBP Forced Labor Update & Recommendations

Dear Friends,

We are writing to provide you with an update on the developments with regard to U.S. Customs and Border Protection’s (CBP) enforcement of the U.S. import ban on goods made with forced labor (19 U.S.C. § 1307).  The last few months have seen both significant changes in the law and in CBP’s enforcement activity.  While the reputational risks of a forced labor entanglement remain as high as ever, these changes mean that (1) the likelihood of encountering enforcement activity has increased, and (2) the elements of a “compliant” forced labor program are evolving.  We have summarized the background, recent developments and our recommendations below.

Background – Import Ban & Loophole

As you may recall, in early 2016, Congress removed a loophole in the near-80 year old statute banning the importation of goods made with forced labor.  The effort to remove this loophole was led for many years by Senator Bernie Sanders, and was later championed by Senator Sherrod Brown.  The loophole had permitted goods made with forced labor to be imported whenever U.S. demand outstripped domestic supply (the “consumptive demand exception”).  The consumptive demand exception resulted in there being little application/enforcement of the import ban for most of its history.

CBP’s Old Enforcement Mechanism

Within weeks of the consumptive demand exception being removed, CBP initiated four new enforcement actions under a mechanism the agency adopted in the 1960’s.  This older enforcement mechanism allows CBP to issue “withhold release orders” (or WROs) for shipments of articles manufactured by a specific named foreign entity, which CBP has reason to believe may have been produced with forced labor.  An importer may challenge the imposition of a WRO, but only on a shipment-by-shipment basis.

The WRO mechanism has shown itself to be a blunt instrument.  Companies named in a WRO are likely to suffer significant economic harm, with little-to-no opportunity to review or respond to the allegations before the WRO is put in place.  The relative ease with which CBP can impose a WRO (upon information which “reasonably, but not conclusively” indicates the presence of forced labor) corresponds directly with the profound difficulty in having a WRO removed.  As we have explained previously, once a WRO is in place, it is difficult to have it removed (the standard for imposing a WRO is relatively low, but for removal is quite high).

CBP’s Emerging Approach to Enforcement

While the WRO mechanism remains a viable tool for CBP’s enforcement of the forced labor ban, CBP has also begun taking steps to hold U.S. importers more directly accountable for forced labor compliance.  Most notably, CBP recently updated its informed compliance publication governing “reasonable care” to specify that importers are expected to have documented controls in place to mitigate the risk of importing goods made with forced labor.  Specifically, CBP expects importers to be able to answer questions such as (but not limited to):

Have you taken reliable measures to ensure imported goods are not produced wholly or in part with convict labor, forced labor, and/or indentured labor (including forced or indentured child labor)?

Have you established reliable procedures to ensure you are not importing goods in violation of 19 U.S.C. § 1307 and 19 C.F.R. §§ 12.42-12.44?

Have you obtained a “ruling” from CBP regarding the admissibility of your goods under 19 U.S.C. § 1307 (see 19 C.F.R. Part 177), and if so, have you established reliable procedures to ensure that you followed the ruling and brought it to CBP’s attention?

CBP has broad authority to determine “admissibility” (whether an article presented for importation complies with “the requirements of the laws of the United States”) and to detain articles until compliance is confirmed.  As a result, importers who cannot answer these questions run the risk of having their goods detained or seized.  CBP is laying the groundwork for it to be able to (1) deny entry of merchandise that an importer cannot prove was not made with forced labor, and (2) assess penalties for forced labor violations against companies without adequate controls.

CBP has recently begun issuing requests for information (via CBP Form-28s, or informal requests from ISA account managers) asking importers to produce documentation regarding their forced labor policies and controls.

North Korea Forced Labor Presumption

In August 2017, as part of an wide-ranging sanctions bill, the forced labor ban was again modified.  The statute now specifies that merchandise made by North Korean laborers, regardless of location, is presumed to be made with forced labor, and, therefore, subject to the import ban.  No official guidance has been provided to use in determining whether North Korean laborers may be present in a given supply chain.  The risk of North Korean labor appears to be especially high in northeastern China, but North Korean laborers are known to be working in more than a dozen industries across more than 40 countries, according to the U.S. government.  Recent statements by U.S. government officials have made it clear that importers are expected to have updated their forced labor (and/or CSR) policies to take this change in the law into account.

Recommendations

In view of these developments, we have the following recommendations.

  1. Update your CSR/forced labor compliance program to reflect the recent changes in the law, including the presumption with respect to North Korean labor.  An effective forced labor compliance program will be tailored to a company’s forced labor risk profile (e.g., industry, area of the world, type of production, direct/indirect sourcing, etc.).  It will include updated policies around vendor/factory set-up and audit, and may include revisions to master sourcing agreements, POs and/or vendor contracts.  Depending on the risk profile, it may also include changes to sourcing activity.
  2. Prepare a memorandum explaining your forced labor compliance program to CBP.  All importers (and those in certain higher risk industries, such as apparel and footwear, in particular) should anticipate getting a question about their forced labor compliance program and prepare accordingly.  While many companies have robust CSR programs (that are hopefully now updated to account for the recent changes in the law – see #1 above), we believe it will be important to “translate” that program into “Customs speak”.  Stated differently, if CBP is going to ask about your forced labor controls (an area in which it has little expertise), it is in your interest to have an answer that addresses its concerns, in a language it understands.  Just like one should not provide CBP solely with transfer pricing documentation in response to an inquiry about the acceptability of intercompany customs values, one should not provide CBP solely with CSR documentation in response to an inquiry about the admissibility of goods due to forced labor concerns.  Producing documentation that recognizes CBP’s concern and summarizes your program from a customs perspective will go a long way to minimizing the interaction; whereas providing just the underlying CSR documentation and hoping CBP finds what it needs will likely prolong it.
  3. Ensure that any query you receive from CBP relating to forced labor (whether by CBP Form-28 or other means) is reviewed by counsel before it is responded to.  In our experience, companies can sometimes be eager to provide information to CBP which they believe it will cast them in a favorable light.  There will likely come a time and place for sharing such information with CBP, but doing so comes with risks, particularly if your forced labor/ CSR program has not yet been updated to reflect all relevant recent changes in the law.  If you receive any specific queries, please let us know.  We are advising several clients on these and related matters, and would be glad to assist.

We are working with several clients to implement these recommendations.  We have developed questionnaires to pull together the relevant aspects of a company’s existing CSR program, are updating those programs to account for the change in the law and are preparing reports summarizing the programs from a customs perspective (so the client’s have a response ready to provide CBP when needed).  We are also assisting several clients respond to general, as well as specific, inquiries from CBP in this area.

*     *     *

We hope this is helpful.  If you have any questions about this evolving area of customs law, or how best to respond, please let us know.

Best regards,

Ted

Interesting Design Services/Assist Ruling

Dear Friends,

U.S. Customs and Border Protection (“CBP”) recently issued a ruling on a common customs valuation issue for the consumer goods/retail industry that we wanted to make sure you saw.  The ruling, Headquarters Ruling H287490, involved foreign product design services and whether such costs are to be included in the dutiable value of the goods those design services were indirectly used to produce.

In the ruling, the prospective importer, a U.S. apparel company, entered into agreements with unrelated designers in the Netherlands for services related to the creation of a new line of sleepwear.  Pursuant to these agreements, the designers would create an initial design package (concepts, patterns, color palettes, sketches, trims) and provide input on concept and marketing samples.  The importer will use the initial design package to create a technical package (“tech pack”) of garment patterns, bills of materials, size specifications and concept samples that it will then provide free of charge to an unrelated manufacturer in China for use in the production of market samples.  Using input from the designers, the importer will modify the market samples and send the modifications to the Chinese manufacturer for final production of the sleepwear garments.

In analyzing whether the foreign design fees are assists that should be added to the price actually paid or payable , CBP examined whether the design work is “necessary for production of the imported merchandise.”  CBP explained that design work necessary to production “does not merely convey a general concept as to what [ ] should be created, but instead imparts detailed instructions as to how [it] is to be created ….”  Citing its own precedent, CBP contrasted design work lacking in detail necessary for production (e.g., preliminary sketches) with more detailed plans, such as bills of materials and samples that a producer relies on for guidance when manufacturing.

Since the tech packs provided by the importer to the Chinese manufacturer include detailed plans, CBP concluded it is an assist within the meaning of 19 U.S.C. § 1401a(1)(A).  CBP then examined whether the foreign design work is a “dutiable step” in the production of that assist.  In its analysis, CBP focused on two factors: (1) whether the design activity was undertaken with the knowledge or intent that it would be used to produce the assist, and (2) whether the design activity plays a significant or crucial role in the production of the assist.  Applying these factors, CBP noted that the design activities performed in the Netherlands contribute significantly to the creation of the tech pack provided to Chinese manufacturer by the importer.  The designers generate the overall garment design and specify details such as their color, shape, pattern and material—features that are directly incorporated into the detailed production instructions provided to the manufacturer in the tech pack.  Moreover, CBP concluded that the designers are fully aware of the fact that their contributions will influence the instructions provided to the manufacturers since they will expect to review, and provide input on, both the concept samples and market samples.  For these reasons, CBP ruled that the designers’ fees must be included in the value of the assist.

This is an important reminder for all companies that provide U.S.-developed tech packs to foreign manufacturers for use in the production of articles imported into the United States.  If you do so, you should be asking whether the tech packs are based (in whole or in part) on design services provided by anyone outside of the United States – whether a design services company or a buying agent (since it Is common for buying agents to provide some level of design input/services).  If so, the extent of those services should be reviewed in light of the guidance provided in Headquarters Ruling H287490.

We hope this is helpful.  If you have any questions about this ruling, or its impact on your business, please let us know.

Best regards,
Ted

GSP Expiration

Dear Friends,

As those of you who import articles under the Generalized System of Preferences (“GSP”) program know, it is scheduled to expire in a little over two months — on December 31, 2017.  While it is possible that it will be renewed prior to December 31, 2017, Congress is cutting it close (e.g., the House of Representatives will be in session for only ~27 days between now and the end of the year).  So far, there has not been much movement on renewal. 

As a result, companies which rely on the program for duty savings should (i) continue pushing for renewal (e.g., through their trade associations, their Congressional representatives, etc.) and (ii) prepare for at least a temporary gap in coverage.  If the program is not renewed prior to December 31st, then importers will need to start depositing duties and merchandise processing fees.  This possibility should be raised internally, so that your finance colleagues can plan for the potential increase in cost.  Of course, if the program is eventually renewed, and renewed retroactively (as has happened in the past), then importers will be able to apply for a refund.  Nevertheless, given the (hopefully short-term) increase in cost, it is best to make sure your finance colleagues are prepared for this eventuality. 

If you have any questions about the GSP program, its expiration and/or potential renewal, please let us know.

Best regards,
Ted