Customs Develops New Measures to Ease Burdens on Importers
By David J. Levine and Matthew R. Fowler
Over the past two years, the U.S. Customs Service (Customs) has proposed and developed a number of initiatives intended to ease the process of importing goods into the United States. In consideration of comments from several trade groups, Customs published its third draft of "Entry Revision Project" (ERP) at the end of 2000.
In the ERP, Customs has stated its objective as streamlining and improving the customs entry process to reflect the modern business reality while still meeting the U.S. government’s requirements. Adoption of the proposals in the ERP remains subject to discussions between Customs and the trade community and the "fine tuning" of several ideas. In addition to revising entry procedures, Customs has proposed and developed other changes including how the government agency measures compliance by importers using laws and rules relating to importing operations.
Customs has proposed to revamp several aspects of the process for entering imported goods into the United States. Customs’ ERP proposals comprise of three basic areas for change. These include cargo release based on four different models depending on importers’ circumstances; periodic, as opposed to entry-by-entry, duty collection; and extended periods for correcting entry information. These changes would coincide with the modernization effort to completely automate the entry process pursuant to an automated commercial environment (ACE).
The goal of ACE, the first phase for which Congress has approved funding, is to create a paperless entry process. Customs is already testing a new post entry amendment policy, with the goal of streamlining the existing, cumbersome supplemental information letter policy. The new policy would allow for periodic (e.g., quarterly) reporting of entry amendments (e.g., for classifications and valuations) resulting in less than $20 per entry and uniform processing by Customs of amounts greater than $20 per entry. Similarly, Customs is implementing a new reconciliation policy that will allow importers to report post-entry change information en masse, with one bill or refund covering many, possibly thousands, of entries.
In conjunction with the ERP, Customs is developing a "risk management" approach to Customs compliance issues. One aspect of this approach is the designation of certain importers as "low risk," based on good past compliance records and internal controls established during a Customs compliance assessment. To date, 380 U.S. importers have undergone Customs compliance assessments to determine their particular level of compliance with customs laws and procedures. To date, about 150 of these firms have been designated as "low-risk" importers. Among the benefits of such designation, low-risk importers will undergo fewer cargo examinations and information requests from port officials. The amount of that reduction will vary, depending on the type of product imported. But Customs officials have cited as an example one retailer that had 250 cargo examinations last year and should see fewer than 50 this year after being rated as a low-risk importer. In addition to the benefits mentioned above, information requests sent by Customs to low-risk importers will first go to an account manager at Customs, who will ensure that the information requested is necessary and has not already been supplied.
Relevance to All Importers
The ERP proposals remain subject to debate and discussion between Customs and the trading community. The intentions of all parties in the importing community is for the ultimate changes (and those already being implemented) to streamline the Customs entry operations for most commercial importing companies—thereby reducing the overall cost of compliance with Customs regulations. Achieving these objectives will require an increased emphasis on maintaining good compliance records and internal controls by importers. Companies should ensure that their Customs compliance policies are up to the standards required for a "low-risk" importer determination. They should also monitor the development of continuing regulatory and procedural improvements by Customs in order to be able to take full advantage of their benefits as soon as these changes become operational.
Extraterritorial Income Exclusion
By Michael R. Fayhee, Rachel L. Waimon and Lowell D. Yoder
The ETI exclusion replaces the existing foreign sales corporation (FSC) regime. The new rules also simplify the requirements and expand eligibility for benefits. Companies with existing FSCs will need to transition to the new ETI regime, and exporters that do not currently have FSCs should adopt procedures to qualify for ETI benefits. Those who now benefit under the ETI regime include individuals, S corporations and partnerships; U.S. companies with net operating losses or that are in an alternative minimum tax position; and income from certain products produced outside the United States. The ETI legislation is effective as of October 1, 2000, but the FSC rules continue to apply through the end of 2001.
The ETI tax benefits are generally available to any U.S. taxpayer that exports property that is manufactured or produced in the United States. Businesses qualifying for benefits include U.S. manufacturers and producers and U.S. wholesalers and distributors of goods manufactured or produced in the United States. Transactions that qualify for ETI benefits include sales to foreign purchasers, sales to U.S. purchasers where the goods are destined for use in a foreign country and certain leasing transactions.
Under the new rules, the goods may also be manufactured outside the United States. This rule applies as long as not more than 50 percent of the value of the goods is attributable to articles manufactured and produced or grown outside the United States, plus the direct costs of labor performed outside the United States. While only U.S. taxpayers qualify for benefits, the ETI regime allows a foreign corporation to elect to be treated as a domestic corporation and become eligible for benefits, although under certain circumstances there may be disadvantages of such an election that outweigh the benefits.
The calculation of federal income tax savings under the ETI regime is essentially the same as under the FSC regime. The ETI rules exclude 15 to 30 percent of qualifying export income from U.S. taxation. For corporations with a 35 percent tax rate, the effective tax rate on export income would be reduced to between 24.5 and 29.75 percent (a reduction in rate of between 5.25 and 10.5 percent). For individuals and S corporations, assuming a 40 percent tax rate, the reduction in the tax rate on export income would range from 28 to 35 percent.
Under the FSC regime, individuals and S corporations (and partnerships or LLCs with individual owners) actually suffered a tax detriment because the FSC was subject to corporate level tax on a portion of its income, and FSC dividends were fully taxable to such shareholders. The ETI regime instead excludes a portion of export income from taxation, thereby providing a net benefit for such exporters. Companies with net operating losses often did not the use the FSC regime because it created taxable income at the FSC level. This disadvantage does not apply to the ETI exclusion, which reduces the amount of net operating losses absorbed by export income. Also, the ETI benefit is not subject to alternative minimum tax. The foreign tax credit results under the FSC rules essentially carryover to the ETI regime.
The new regime provides favorable rules for cooperative exporters. At the cooperative level, qualifying export income derived from goods marketed through cooperatives is excluded in the same manner as for other taxpayers. Moreover, the amount of any patronage dividends or per-unit retain allocations paid to a member of an agricultural or horticultural cooperative is excluded (to the extent allocable to qualifying export income of a cooperative). To claim the export tax benefit, a U.S. taxpayer simply excludes a portion of their qualifying income from U.S. taxation on their tax return. It is expected that the IRS will provide a special form for computing the exclusion.
To qualify for the ETI exclusion, certain requirements must be satisfied. The ETI regime requirements are similar to those regarding FSCs, although several have been eliminated. Unlike the FSC regime, U.S. taxpayers do not need to organize a foreign corporation. As a result, it will no longer be necessary to follow the complex formalities of establishing and maintaining a separate foreign entity, such as holding director and shareholder meetings outside the United States, maintaining foreign bank accounts and keeping books and records in a foreign jurisdiction.
The ETI regime retains certain foreign activity and costs tests of the FSC regime. Taxpayers must satisfy the foreign economic processes test by soliciting, negotiating or making the contract with respect to export sales transactions outside of the United States. They must also incur certain costs outside the United States, such as advertising and transportation.
Businesses with existing FSCs will need to rethink how such foreign requirements can be met without the participation of the FSC and modify their existing procedures accordingly. Businesses without FSCs will need to put systems into place to meet the requirements. Taxpayers with annual qualifying export income of $5 million or less will qualify for the ETI exclusion without satisfying such requirements.
The ETI regime applies to any export transaction occurring after September 30, 2000 that satisfies the above requirements. The FSC regime continues to apply to transactions through the end of 2001 and applies after 2001 if a transaction occurs pursuant to a binding contract between a FSC and an unrelated person that was in effect on September 30, 2000.
A taxpayer with an existing FSC can choose which regime to apply to their export income during the transition period. Also, both the ETI and FSC regimes may be used during the transition period, but only for different transactions. After September 30, 2000, however, no corporation may elect to become a FSC. The ETI legislation was enacted in response to a successful challenge of the FSC regime brought by the European Union (EU) in the World Trade Organization (WTO). The EU has since asked the WTO for a ruling that the FSC replacement regime also constitutes an illegal export subsidy. While the U.S. government believes that the ETI exclusion is consistent with its international trade obligations, whether the new regime satisfies the WTO will remain uncertain until mid-2001 when a final WTO decision is expected.
The UK Consumer Protection (Distance Selling) Regulations
By Rafi Azim-Khan
Failure to comply with new supplier obligations to provide consumers with certain information before entering into business-to-consumer (B2C) contracts could result in both unenforceable contracts and the risk of committing a criminal offense. These new obligations stem from the European Union (EU) distance selling directive and affect any distance sales to consumers, including mail order, Internet and interactive TV, throughout the EU. However, there may be differences in the implementation of the directive in each EU member state. These regulations are UK-specific and highlight the issues to be aware of when entering into B2C contracts at a distance in the UK.
The following are a few questions companies should consider when marketing its wares to UK consumers:
- Do you supply goods or services to consumers over the Internet or by mail order, telephone, interactive television or fax? If so, you must be aware that consumers now have new rights.
- Which contracts are caught? The regulations apply to all contracts save for certain exemptions, e.g., for property, financial services or auctions. Some of the new regulations will not apply to contracts relating to deliveries of food or beverages, transport, accommodation, catering or leisure services provided on specific dates.
- What does it mean for business? There is an obligation on the supplier to provide the consumer with certain information in writing before entering
into a contract. This includes clearly identifying the company, the commercial details of the contract and the return policy. When cold-calling consumers at home, the supplier must explain the purpose of the call at the beginning of
- What if you don’t comply? Failure to provide the information before contracting will extend the period in which the consumer has the right to cancel the contract without penalty.
- How long is the cooling off period? After entering into a contract at a distance, the consumer is entitled to a cooling-off period during which the consumer can cancel the contract without reason or penalty. In the case of goods, the cooling-off period is seven working days starting with the day on which they are delivered. For services, it is seven working days starting with the day on which the consumer agreed to go ahead with the contract.
- Will goods be returned? The consumer must take reasonable care of goods but is not obliged to return them to the supplier. Terms should be carefully drafted in light of the regulations and restrictions on charges.
- What must be refunded? Upon cancellation by the consumer, the supplier must refund any money paid by the consumer (less certain return costs only) as soon as possible after the contract has been cancelled and at the latest within 30 days of receiving written notice of the consumer’s decision to cancel.
- Criminal Offenses? It is an offense under the regulations to supply unsolicited goods and services to consumers. Anyone found guilty of this offense may be fined up to £2,500. Anyone found guilty of supplying unsolicited goods and threatening legal action for payment, placing a consumer on a list of debtors or threatening or invoking a collection procedure is liable to a fine of £5,000 per offense.
Take appropriate specialist advice to review your trading practices, websites/catalogues and contract terms, and take the necessary remedial action.
Unconstitutional Aspects of the Norm Against Tax Planning
By Salvador Fernando Salvia
Martins e Salvia Advogados
São Paulo, Brazil
"Tax avoidance" is an expression that has gained certain notoriety in the recent past, graduating from the language of jurists to the media because a norm was issued by the Brazilian Congress to prevent taxpayers from reducing their tax burden by making use of loopholes in the law. The new norm is embodied in Complementary law 104/01, which added a paragraph to Article 116 of the Brazilian National Tax Code (NTC). From now on, pursuant to the procedures to be laid down by an ordinary act, tax inspectors may disregard acts or transactions the purpose of which is to disguise the existence of a taxable event or the nature of the acts, which would create the tax liability. Many of the provisions of that law may be unconstitutional.
In the past, the government unsuccessfully tried to create a provision with a lesser impact (Article 51 of Law 7450/85) but was stopped by negative reactions of legal scholars and by the judiciary itself, whenever the courts were required to rule on the matter.
Both the previous and the newer norm, with its wider coverage, violate the individual rights and guarantees that constitute the controlling and fundamental constitutional provision that assumes the principle of strict compliance with law and complete supremacy of formal provisions. Tax law, in addition to the supremacy of formal law assured by Article 5, Item II of the Constitution, are also required to detail the type of tax in very definite and specific terms. Norms cannot embody the flexibility required to permit assessment not provided for in law or delegate legislative competence to tax agents.
Brazilian tax authorities may act within the boundaries of law, but not outside of it. Tax laws do not permit unwritten laws as a basis for tax claims. Article 150, Item I of the Constitution clearly indicates, "(Article 150) Without prejudice to other guarantees assured to the taxpayers, the Union, States, Federal District and Municipalities shall not: I. Demand or increase a tax without an appropriate law."
In other words, either there is a legal gap and the taxpayer can take advantage of it, or there is no gap because there is a law on the matter. The Fazenda is not authorized to unilaterally fill in any legal gap on a case-by-case basis to suit its needs without a written or a previous law.
This new law will not prevent tax planning (tax avoidance) nor will it prevent tax evasion, which is a different subject. There is a significant difference between tax evasion and tax avoidance. Tax avoidance is a legitimate activity that seeks and identifies means to legally reduce the tax burden. Tax planning arises in part from the fact that the same text might permit different and innumerable interpretations, each of which might be legitimate. Given this, the judiciary will have a strong basis for rejecting the application of the new norm and for granting injunctions against these attempts which might violate the Constitution.
Salvador Fernando Salvia can be contact at 55-11-3066-4848 or via e-mail at graziela martinsesalvia.com.br.
The Proposed European Community Patent
By Larry Cohen
Since the inception of the European Patent in mid-1978, the European patent system has only partially succeeded in its objective of a unified European patent to match the advantages of a U.S. patent, perhaps, without some of the disadvantages.
The European patent system suffers from high cost, fragmentation and slow procedures. The average time to grant a European patent is about four years, and the cost (excluding professional fees) is five times higher than the cost of a U.S. patent. Enforcement is fragmented, and litigation is required in each member state where enforcement is required. Finally, damages in many member states of the European Union (EU), especially Germany, are miserly.
Help is at hand in the shape of a proposal by the European Council of Ministers for a Community Patent, which is proposed to be operative in 2001 (2002 is more probable). It will address many of the defects of the current system. The proposal is that the EU as a block joins the European Patent system (which will be modified to better deal with software patents and the doctrine of equivalents). As a result, on grant, the designated state will be the whole of the EU.
Accordingly, only one set of renewal fees will be payable post grant as opposed to up to 15 at present. The cost of translations will be tackled by requiring translation of the claims only into the three official languages, which are English, German and French. However, in order to enforce a community patent in a member state that does not use the language of the patent as one of its official languages, a translation will be required. This limits the requirement to translate to a limited class of patents that will likely be litigated.
The necessary legislation will be introduced by a regulation that makes it applicable across the EU without requiring further domestic legislation. So, the effective introduction should be quick once the wording of the regulation has been agreed. Also, there should be several community patents soon after the regulation has come into effect. If all member states of the EU are designated, it can be converted at any time up to grant to a community patent. After conversion, it cannot be converted back to national patents, and the community patent will be unitary. Its validity is determined for the whole patent and invalidity will be across the whole of the EU.
A community patent will still be subject to the post-grant opposition procedure, which is slow and can take up to eight years to resolve. However, the draft regulation permits an infringement suit to be conducted even if the patent is under opposition.
A new European intellectual property court will be set up. It is likely to have three judges and sit in parallel in several locations. It will try all issues of infringement and validity but not contractual issues nor the right to a patent, which will continue to be dealt with by national courts. Infringement and validity will be tried together, unlike the present German system. The procedure is likely to be similar to civil law countries: no cross-examination of witnesses or discovery, but there will be short oral argument at trial. Evidence will be by witness statements and expert opinions, and costs should be low compared to U.S. standards. There will be no discovery.
Proof of infringement of a process patent is assisted by reversing the burden of proof; a process patent will be deemed to be infringed unless the defendant can prove otherwise. This is difficult to reconcile with the requirement in the regulation to respect confidential information. Damages will be awarded on a pan-European basis, but punitive damages will not be available.
The community patent should be welcomed. It is a major step toward a reasonably priced and effective patent system in Europe to supplement the current unsatisfactory situation. The proposals are not perfect, but there is still time to lobby. This initiative is well overdue.