President Issues Directives for U.S. Export Control Reforms

On January 22, 2008, the President announced a national security directive that requires action by the U.S. State Department and the Department of Commerce, Bureau of Industry and Security. With the continued threats to security, proliferation of weapons of mass destruction and increased reliance on outsourcing in our global economy, the United States must be vigilant to ensure that distribution of controlled technology to foreign entities is only allowed when properly authorized.

The President’s directive to the Department of Commerce addresses three major initiatives:

1. Foreign End-Users

This initiative focuses on foreign end-users of U.S. technology products to deny potentially sensitive technology to America’s adversaries while facilitating the development of technology with our allies. The use of the Validated End User (VEU) program facilitates legitimate exports to civilian end-users. After submitting the required information and receiving authorization from BIS, export, reexport and transfer of eligible items to approved end-users in eligible destination will be allowed. Exports to foreign parties with a record of activities in opposition to U.S. foreign policy and national security interests will be subjected to additional scrutiny.

2. U.S. Competitiveness

This requirement includes developing a regular process for review of the list of controlled dual-use items, the Commerce Control List (CCL), improved controls on intra-company transfers, revised controls on encryption products, and a review of reexport controls.

3. Transparency

Another aspect of the directive identifies the need for the Commerce Department to provide sufficient information related to dual-use export controls to U.S. exporters to help them comply with the regulations. To fulfill this obligation, Commerce will publish advisory opinions on the BIS website and a list of foreign parties that warrant higher scrutiny.

The directives issued to the U.S. Department of State also focused on three major areas, licensing, dispute resolution and enhanced enforcement:

1. More Effective U.S. Export Licensing

This directive is designed to limit the period of time the government is permitted to make license determinations for goods on the U.S. Munitions List (USML) to 60 days. Additional resources will be made available to carry out this mandate. In addition, the electronic licensing system will be upgraded to permit the submission of all types of defense trade licenses and to enable all agencies to access the same electronic information.

2.More Efficient Dispute Resolution Mechanism

A formal interagency dispute mechanism will be created to allow for timely resolution of licensing jurisdiction issues involving the Departments of State and Commerce under the Commodity Jurisdiction (CJ) process. The National Security Council will also undertake a review to make sure the CJ process is efficient and timely.

3. Enhanced Enforcement

A multi-agency working group will be established to improve procedures for conducting export enforcement investigations.

In concluding his communication of these directives, the President stated that the Administration continues to support reauthorization of the Export Administration Act with updated penalties and enhanced law enforcement.

CBP Proposes Elimination of First Sale Rule

In the January 24, 2008 edition of the Federal Register, CBP announced its proposal to change the interpretation of “sold for exportation to the United States”. CBP proposes that in a transactions involving a series of sales, the price actually paid or payable for the imported goods when sold for exportation to the United States is the price paid in the last sale occurring prior to the introduction of the goods into the United States, instead of the first (or earlier) sale.

The WTO Valuation Agreement, formally GATT, provides that the customs value of imported merchandise "shall be the transaction value, that is the price actually paid or payable for the goods when sold for export to the country of importation, adjusted in accordance with the provisions of Article 8.” The WTO Valuation Agreement, which all members of the WTO are required to implement, does not define the phrase "sold for export to the country of importation.” Neither 19 U.S.C. 1401a, nor the implementing regulations set forth in part 152 of title 19 of the Code of Federal Regulations (19 CFR part 152), defines the phrase "sold for exportation to the United States.''

When the import transaction involves only one sale, it is usually easy to identify the sale for exportation to the United States to determine the price actually paid or payable. In this situation, there is only one buyer, usually located in the United States, and one seller, usually located in another country. The problem arises when the import transaction involves a series of sales between parties in different countries. CBP's current interpretation bases transaction value on the price paid by the buyer in the first or earlier sale (e.g., the sale between the manufacturer and the intermediary) provided the importer can establish provide evidence that the sales was made at arm's length and that, at the time of such sale, the merchandise was clearly destined for exportation to the United States. See T.D. 96-87.

In April 2007, the Technical Committee on Customs Valuation (Committee) adopted Commentary 22.1, which provides clarification on the meaning of the phrase “sold for exportation to the country of importation” in a series of sales. The Committee found that member countries might find it difficult to verify the information related to the first sale. The Technical Committee concluded that in a series of sales situation, the price actually paid or payable for the imported goods when sold for export to the country of importation is the price paid in the last sale occurring prior to the introduction of the goods into the country of importation.

As a result of the Committee’s decision, CBP examined the decision and the current application of the first sale rule in the U.S. and concluded that the current interpretation as set forth in T.D. 96-87 is not correct. Seeking to comply with the Committee’s findings and Commentary 22.1, CBP proposes the use of the price paid or payable for the imported goods when sold for exportation in the last sale occurring prior to the introduction of the goods into the United States instead of the first (or earlier) sale.

CBP provides detailed information concerning the reasons for the change the Federal Register publication. CPB indicates that adopting the new standards will:

· Assure components of value such as commissions, packing and assists that may not be included when using the first sale are properly included in the value.
· Reduce the amount of time and resources spent by the importer or CBP to verify the requirements of T.D. 96-87 have been met.
· Provide a straightforward rule for determining value in a series of sale.
· Reduce post entry audit verification issues including production of records.
· Reduce importer’s burden for compliance in properly declaring the value 19 U.S.C. 1484.

Specifically, CBP is proposing that in a series of sales situation, the price actually paid or payable for the imported goods when sold for exportation to the United States is the price paid in the last sale occurring prior to the introduction of the goods into the United States, instead of the first (or earlier) sale. As a result, transaction value in situations involving a series of sales will be determined based on the price paid by the buyer in the United States. In order demonstrate how the proposed new interpretation would apply to U.S. valuation law, the Committee’s example was provided at the end of the Federal Register document.

If this proposed interpretation is adopted, it will result in the revocation of T.D. 96-87, the modification or revocation of administrative rulings that have analyzed the series of sales issue using the first-sale criteria, and the revocation of any treatment previously accorded by CBP to substantially identical transactions. In addition, the application of the court decisions in McAfee, Nissho Iwai and Synergy would be limited to the specific entries at issue in those cases. Of course, the most important result is the potential for increased duty payments for importers currently using the provisions allowed by the first sale rule. Consider the following scenario:

Scenario
Company A in the United States purchases widgets from Company B in Canada for $500,000. Company B purchases the Widgets for Company A from Company C in Germany for $300,000. Company C ships the widgets to Company A in the United States. Widgets are dutiable at 5%.

Option 1 – First Sale Rule
Using the first sale rule, Company A could use the value of the “first sale” between Company B and company C. The amount of duty paid would be $15,000 ($300,000 x 5%).

Option 2 – Last Sale Rule
Using the proposed last sale rule, Company A must use the value of the sale between Company A and Company B. The amount of duty paid would be $25,000 ($500,000 x 5%).

Results
As you can see, application of the last sale rule results in an increase in duty for the importer of $10,000.

This proposal has extremely important ramifications for the trade community. Importers and other members of the trade are urged to provide comments to CBP. Instructions for submitting comments are found in the Federal Register Notice and must be received on or before April 23, 2008.

CBP’s New System for Administrative Messages

In Message 08-0003 on January 16, 2008, Customs and Border Protection introduced the new Administrative Messaging Service (CSMS). The CSMS is the new system for distributing Administrative Messages that replaces the current distribution of messages through the Automated Broker Interface (ABI). CBP uses Administrative Messages to communicate general information including:

· Currency exchange rates.
· Changes to the HTS.
· Antidumping and countervailing duty cases.
· New or changed entry procedures.
· Port power outages and closings.
· Other government agency notices.

CBP has moved all significant Administrative Messages previously issued by ABI into the new database. For consistency, two additional zeros have been added following the hyphen for all of the converted messages. The new format for Administrative Message numbers is YY-NNNNNN. YY represents the last two digits of the calendar year and NNNNNN is a sequentially assignment number.

Effective February 11, 2008, CBP will only issue Administrative Messages using the CSMS. The trade community has two new options to obtain Administrative Messages from CBP. CSMS messages can be retrieved via a database linked to www.CBP.gov based on combination of keywords and filtering. Individuals can also elect to receive administrative messages via email by registering for a free subscription.

The Proposed Federal Freight Fee: A New Tax on Imports and Exports?

It appears that the Harbor Maintenance Fee isn’t enough. Last week, the National Surface Transportation Policy and Revenue Study Commission released a report to Congress that recommends a Federal freight fee to help finance freight-related improvements. In conjunction with that report, Rep. Ken Calvert, R-Corona plans to introduce federal legislation that would impose a maximum $500 tax on all cargo shipments moving through U.S. ports of entry.

The proposed tax is 0.075 percent levied on the value of each shipment imported or exported through the nation’s 300 ports of entry, which includes ocean ports, airports and border crossings. The proposal puts a $500 maximum tax per shipment, which means the maximum of $500 would be applied to any single shipment over $6,600; however, the details of what constitutes a single shipment have not been determined. The tax could raise $3 billion to $5 billion per year to finance freight-related improvements for seaports, airports and border crossings within 300 miles of the port of entry. Calvert’s plan calls for the taxes to be used within 300 miles of the port they are collected and used only for goods-movement related projects. The plan sunsets in 10 years.

There is a minor detail that the Congressman may have overlooked related to the constitutionality of imposing a tax on exports. Many of you may remember the controversial issue over the application of the Harbor Maintenance Tax (HMT) to exports. Article I, Section 9, Clause 5 of the United States Constitution states that “no Tax or Duty shall be laid on Articles exported from any State.” On March 31, 1998, after a lengthy court battle, the, the Supreme Court ruled the application of the Harbor Maintenance Tax to exports was an unconstitutional tax on exports in violation of the Export Clause. Given the history of the HMT, it doesn’t look like Rep. Calvert’s plan to impose the Federal freight tax on exports would pass muster. Once again, the importers would foot the bill for these improvements.

Currently, Calvert does not have the support of key transportation sectors such as retailers and the railroads. With the increased costs of transportation and the unfairness of burdening the importing community with another tax, it will be interesting to see how much support importers and exporters provide.

Voice your opinions for or against this plan by contacting Rep. Calvert and your state representatives!