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Greetings!
September's import/export highlights include: CBP's request for comments on a proposed change to its treatment of transfer price adjustments and the applicability of transaction value; DDTC issues a Libya policy update; enforcement updates regarding exports to Pakistan; and CBP's adoption of changes to country of origin rules for certain commodities. As always, thank you for reading! Jennifer Kessinger, Tammie Krauskopf
& Ruta Riley
globaltradeexpertise
info@globaltradeexpertise.com
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DDTC Issues Libya Policy Update
The U.S. Department of State Directorate of Defense Trade Controls (DDTC) posted on its website a notice that on September 16, 2011, the United Nations Security Council (UNSC) adopted resolution 2009, which modifies the arms embargo against Libya put in place by the adoption in February and March of resolutions 1970 and 1973.
Existing Exceptions to the Arms Embargo (UNSC Resolutions 1970 and 1973)
On February 26, 2011, UNSC adopted Resolution 1970, paragraph 9 of which provides that UN member states must immediately adopt the necessary measures to prevent the sale, supply, or transfer of arms and related materiel of all types to the Libyan Arab Jamahiriya, with certain exceptions.
On March 17, 2011, UNSC adopted Resolution 1973, paragraph 4 of which authorizes member states to take all necessary measures, notwithstanding the arms embargo established by paragraph 9 of Resolution 1970, to protect civilians and civilian populated areas under threat of attack in Libya.
On May 24, 2011, the Department of State amended the International Traffic in Arms Regulations (ITAR) implementing the Security Council's actions within the ITAR by adding Libya to §126.1(c), which identifies countries subject to UNSC arms embargoes, and revising the previous policy on Libya to announce a policy of denial for all requests for licenses or other approvals to export or otherwise transfer defense articles and services to Libya, except where not prohibited under UNSC embargo and determined to be in the interests of the national security and foreign policy of the United States.
Addition to the Existing Exceptions to the Arms Embargo (UNSC Resolution 2009)
Resolution 2009 adds to the existing exception of the arms embargo the supply, sale, or transfer to Libya of arms and related material, including technical assistance and training, intended solely for security or disarmament assistance to the Libyan authorities, and small arms, light weapons, and related materiel temporarily exported to Libya for the sole use of UN personnel, representatives of the media, and humanitarian and development workers and associated personnel. Items for export pursuant to the exceptions must first be notified to the Committee of the Security Council concerning Libya, which has the option of disapproving the export.
U.S. Policy Pertaining to Libyan Exports and Imports of Defense Articles and Services
The ITAR will be amended to reflect these exceptions. It continues to be the policy of the United States to deny licenses or other approvals for exports or imports of defense articles and defense services destined for or originating in Libya, except where it determines, upon case-by-case review, that the transaction (or activity) is not prohibited under applicable UNSC resolutions and that the transaction (or activity) is in furtherance of the national security and foreign policy of the United States.
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| Freight Forwarder Settles Charges of Aiding and Abetting Unlicensed Exports to a Listed Entity in Pakistan
$40,000 Penalty Assessed
On September 16, 2011, the U.S. Department of Commerce Bureau of Industry and Security (BIS) announced that the freight forwarder Ram International Inc. (Ram) of St. Louis, MO, has agreed to pay a $40,000 civil penalty to settle allegations that it committed two violations of the Export Administration Regulations (EAR).
Specifically, BIS alleges that on two occasions in 2006, Ram's Elk Grove Village location in Illinois helped to export salvage scrap electrolytic tin plate steel to Allied Trading Company (Allied) in Karachi, Pakistan, without the required BIS licenses. Allied is included on the Commerce Department's Entity List which names certain foreign persons that are subject to license requirements for the export, reexport and/or transfer in-country of specified items.
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Pakistani National Pleads Guilty to Conspiracy to Illegally Export Restricted Nuclear Materials to Pakistan
On September 9, 2011, the U.S. Department of Justice announced that Nadeem Akhtar of Silver Spring, Maryland, pleaded guilty to conspiracy to illegally export nuclear-related materials and to defraud the United States in a related scheme.
The plea agreement states that Akhtar, a 46-year old Pakistani national and lawful permanent resident of the U.S., owns Computer Communication USA (CC USA). From October 2005 through March 2010, Akhtar and his conspirators obtained radiation detection devices, resins for coolant water purification, calibration and switching equipment, attenuators and surface refinishing abrasives for export to restricted entities in Pakistan, using Akhtar's company CC USA. Due to the materials' use in both commercial and military applications, an export license is required when exporting these items to an end-user of concern or if the items are exported in support of a prohibited end-use, such as activities related to nuclear explosives or reactors, or the processing and manufacture of nuclear-related materials.
Akhtar also illegally exported to restricted entities in Pakistan mechanical and electrical valves, cranes and scissor lifts, valued at over $400,000. The restricted entities in Pakistan included Pakistan's Space and Upper Atmosphere Research Commission; and the Pakistan Atomic Energy Commission (PAEC) and its subordinate entities, specializing in nuclear-related research and development. These entities are of concern to the U.S. government as acting contrary to the national security or foreign policy interests of the United States. Accordingly, exports of commodities to these organizations were prohibited absent the issuance of an export license.
The plea agreement details that Akhtar attempted to evade export regulations and licensing requirements by undervaluing and falsely describing the items being exported; failing to reveal the true end-user by using third parties and/or real and fake business entities/locations in Pakistan, Dubai and the United States; using individuals in Illinois and California to procure items for him under false pretenses; shipping items to his residences in Maryland so it would appear as though his company was the actual purchaser/end-user of the items; and transshipping the items from the U.S. through the UAE.
Akhtar was the U.S. contact for the owner of a trading company located in Karachi, Pakistan, who had business relationships with governmental entities in Pakistan and who would obtain orders for nuclear-related and other commodities from Pakistani government entities identified above, and then would direct Akhtar as to what commodities to purchase in the United States for export to Pakistan, and the methods to use to conceal the true nature, value and end-user of the items. Akhtar would negotiate prices with manufacturers and suppliers of commodities sought in the U.S. and arrange for shipment of the commodities. Akhtar's coconspirators included individuals in Pakistan, Dubai, UAE and New York associated with the owner of the Pakistani trading company. The owner usually paid Akhtar a commission of 5-7.5% of the cost of each item Akhtar obtained for export from the U.S. Akhtar faces a maximum sentence of five years in prison and a $250,000 fine.
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CBP Seeks Comments on the Proposed Use of Pre-determined TP Price in Transaction Value Calculation
 On September 23, 2011, the U.S. Customs and Border Protection (CBP) posted on its website a request for comments on the broadening of CBP's interpretation of what constitutes a "formula" for purposes of using transaction value, thereby allowing post-importation adjustments.
In order to administer the upward and downward post-importation adjustments, CBP is considering modifying prior rulings in order to allow the transaction value basis of appraisement in these circumstances, provided that the importers use the reconciliation program for declaring the value of the affected importations.
Current Treatment of Adjustments to the Transfer Price
According to the CBP notice, many importations into the United States involve transactions between related parties. This presents numerous appraisement issues, such as ensuring that the relationship between the parties does not influence the price. Such transactions often involve arrangements in which the parties have in place formal inter-company policies that call for adjustments after importation to the price paid (i.e., the transfer price). These arrangements raise the issue of whether transaction value is the proper basis of appraisement and, if so, how to treat the adjustments.
In some cases, CBP has allowed the adjustments, but not under the transaction value methodology, which is the primary method of appraisement. Rather, the adjustments were allowed under the "fallback" method of appraisement because the price was not determined via an objective formula. In other cases, CBP has disallowed the adjustments because CBP considered a decrease in the transfer price to be a post-importation rebate or decrease under 19 U.S.C. §1401a(b)(4)(B). CBP has reviewed this matter and is considering proposing a broader interpretation of what is permitted under transaction value in the transfer pricing context.
Normally transaction value is fixed at the time of importation. However, transaction value may be arrived at by using a formula. Any rebates, or other decrease in the price actually paid or payable made or effected after the date of importation are to be disregarded for the purposes of determining transaction value.
CBP explains in the notice that related party transactions may involve adjustments to initial transfer prices after importation, in accordance with the company's formal transfer pricing policy/formula. In some cases, the transfer pricing policy may provide for year-end "compensating adjustments" to comply with the requirements of an Advance Pricing Agreement (APA) between the U.S. party and the Internal Revenue Service (IRS). Such adjustments could affect whether the price is considered fixed or determinable by objective formula at the time of importation.
The issue of the treatment of post-importation adjustments is addressed in CBP Headquarters Ruling Letter (HRL) 547654, dated November 9, 2001. In HRL 547654, the price for the goods was arrived at pursuant to a methodology that included an initial sum subject to adjustments. CBP determined that transaction value did not apply because the price was not considered to be fixed or determinable pursuant to an objective formula prior to importation because at least one of the elements for determining the price was within the control of the buyer and/or the seller. Nonetheless, following the hierarchy of the valuation statute, CBP found that the goods could be appraised using the "fallback" method of valuation based on the related party price and that the adjustments could be reported (and claimed) to CBP through reconciliation.
Upon review of the price adjustment treatment, CBP is proposing that even though the parties are related and certain costs may be within the control of the parties, if the transfer pricing policy is set before importation and is used by the parties, it may be considered an objective formula, allowing the use of transaction value, provided that certain additional criteria are met. In requesting reconsideration of HRL 547654, the importer described its transfer pricing policy and the distinction between its treatment of variable and fixed costs. According to the policy, none of the variable costs and profits are subject to any post-importation price adjustments. Therefore, the transfer price declared to CBP upon importation is fixed and any fluctuations are not re-invoiced or remitted back to the seller/exporter. The company also provided CBP with a copy of an inter-company memorandum, illustrating how the fixed costs are calculated and set in advance. According to the importer, the fixed costs paid are set; only allocation of those fixed costs to the individual import entries is not fixed until after the month has passed. Pursuant to its transfer pricing policy, the importer seeks to report, via reconciliation, the actual, final amount paid to the Seller for the imported goods.
Furthermore, with respect to the profit margin element of the importer's transfer pricing formula, the margin is calculated based on a study of comparable and available data, of sales in the uncontrolled market to allow a reasonable profit to be earned. The margin is confirmed as often as required by the U.S. transfer pricing regulations, by a joint external study of the importer's and exporter's finance departments, also submitted by the importer for CBP's consideration.
Factors to Consider
CBP is considering that since the following criteria were met, the company may use the transaction value method of appraisement:
(1) a written "Intercompany Transfer Pricing Determination Policy," which sets out how the transfer price is to be determined prior to the importation;
(2) the importer/buyer is the U.S. taxpayer, and it uses its transfer pricing methodology in filing its corporate income tax returns and in determining the transfer price for the products covered by the transfer pricing policy;
(3) the company's transfer pricing policy specifically covers the products for which the value is to be adjusted;
(4) the policy specifies what adjustments must be made to the transfer price, and how those adjustments are to be determined;
(5) the adjustments, although to a certain extent within the "control" of the parties, do not result in value manipulation;
(6) if adjustments are made, the company provides detailed explanations and calculations of the adjustments incurred in the United States and claimed after the importation;
(7) the relevant transfer pricing policy, pursuant to which adjustments are claimed is in effect prior to the importation; and,
(8) there is an absence of other circumstances which may indicate that the compensating adjustments do not result in an arm's length price between the parties.
None of these factors is determinative, and CBP's finding with respect to whether an objective formula exists will be made on a case-by-case basis.
Furthermore, CBP is considering that downward adjustments in the transfer price made pursuant to the transfer pricing study are not rebates of, or other decreases in, the price actually paid or payable that are made or otherwise effected between the buyer and seller after the date of importation of the merchandise into the United States (see 19 U.S.C. §1401a(b)(4)(B)). Instead, the post-importation adjustments represent an element of the determination of the price actually paid or payable in accordance with 19 CFR §152.103(a)(1). Therefore, the post-importation adjustments made pursuant to the transfer pricing policy in the proposed revocation simply reflect what should have been reported as the invoice price upon entry, had the exact price information of the imported merchandise been available at the time.
Of course as with any other transaction, in addition to the foregoing, companies must be prepared to show that transaction value is acceptable under one of the two tests: (1) circumstances of the sale, or (2) test values.
Using Reconciliation to Account for the Total Price Paid or Payable
In order for companies to claim post-importations adjustments, it is contemplated that importers must use the reconciliation program to properly apply transaction value and account for the total "price paid or payable for" imported merchandise where a formal transfer pricing study or policy, or an APA, provides for upward or downward post-importation adjustments that directly (or indirectly) relate to the value of the merchandise. CBP believes that reconciliation, which allows companies to provide CBP with information not available at the time of entry summary filing up to 21 months from the date of the first entry summary with extensions of time as available to importers, would make an ideal tool to declare all adjustments (upward and downward) within the timeframe allowed by an APA or transfer pricing study or policy.
Comments to CBP are due no later than thirty days from the date of publication.
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CBP Adopts Changes to Country of Origin Rules Applicable to Certain Commodities
On September 2, 2011, U.S. Customs and Border Protection (CBP) posted a final rule in the Federal Register amending the country of origin rules applicable to pipe fittings and flanges, greeting cards, glass optical fiber, rice preparations, and certain textile and apparel products, as codified in part 102 of the CBP regulations. The changes take effect October 3, 2011.
Proposed changes to the country of origin rules were first published in the Federal Register on July 25, 2008. The notice proposed to adopt part 102 rules for country of origin determination not only for the specific merchandise listed above, but also to all imported merchandise. However, CBP withdrew the proposal of uniform country of origin rules for all imported merchandise at this time to permit further consideration of relevant issues.
Thus, at this time, part 102 rules of country of origin determination are adopted only for the following merchandise:
· Pipe fitting and Flanges
The tariff shift rule in CBP regulations has been amended for commodities classified in headings 7301 through 7307, HTSUS, and now provides for a change within heading 7307 from fitting forgings or flange forgings to fittings or flanges made ready for commercial use by certain processing, including beveling, bore threading, center or step boring, face machining, heat treating, recoining or resizing, taper boring, machining ends or surfaces other than a gasket face, drilling bolt holes, and burring or shot blasting.
· Greeting Cards
The tariff shift rule for merchandise classified in headings 4901 through 4911, HTSUS, has been amended to include a specific rule for heading 4909, providing for a change to that heading from any other heading except from heading 4911 when the change is a result of adding text. According to CBP, the effect of this change will enable the country of origin of all printed greeting cards to be determined according to the country of initial printing of literary text, photographs, graphic designs, or illustrations. This change is also consistent with CBP practice in applying the substantial transformation standard to printed materials, as reflected in CBP's administrative rulings.
· Glass Optical Fiber
The tariff shift rule for subheading 9001.10, HTSUS, which encompasses optical fibers and optical fiber bundles and cables, has been amended to provide for a change to 9001.10 from any other subheading, except from subheading 8544.70, HTSUS, or glass preforms of heading 7002, HTSUS.
· Rice Preparations
Tariff shift rule for subheading 1904.90, HTSUS, which encompasses certain rice preparations, has been amended to provide for a change to subheading 1904.90 from any other heading, except from heading 1006, HTSUS, or wild rice of subheading 1008.90, HTSUS.
· Certain Textile and Apparel Products
With respect to the rules of origin for textile and apparel products, to properly align the country of origin rules with the language of the underlying statute (19.U.S.C. 3592(b)(1)(C)), Sec. 102.21(c)(3)(ii) has been amended to add the words "fabrics of chapter 59 and" so that the amended text now reads "Except for fabrics of chapter 59 and goods of heading * * *." The proposed rule explained that this change would have the effect of ensuring that fabrics of chapter 59, HTSUS, derive their country of origin from where the fabric is formed, consistent with the statute.
In addition, the tariff shift rule for goods classified in headings 6210 through 6212, HTSUS, has been amended by creating a separate rule for heading 6212, which encompasses "brassieres, girdles, corsets, braces, suspenders, garters and similar articles and parts thereof, whether or not knitted or crocheted." In the proposed rule, CBP noted that the existing tariff shift rule for headings 6210 through 6212 does not provide for the possibility of knit-to-shape goods, even though the body-supporting garments of heading 6212 may be knot to shape. As amended, the rule ensures that a knit-to-shape good of heading 6212 is found to derive its origin from where the good is knit to shape.
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Calendar of Events
Upcoming Trade Events & Seminars
 Our website has a comprehensive listing of import and export conferences held throughout the country, as well as Customs training, EAR training, ITAR training, and other training. Below is a small sampling of what's available in the coming months:
Basic ITAR Course- Federal Publications Seminars
October 24, 2011 - Arlington, VA
3rd International Forum on China Trade Compliance - American Conference Institute (ACI)
October 24 - 25, 2011 - San Francisco, CA
Advanced ITAR Workshop- Federal Publications Seminars
October 25, 2011 - Arlington, VA
ITAR Compliance: Disclosure and Audits - Federal Publications Seminars
October 26-27, 2011 - Arlington, VA
ITAR Boot Camp - American Conference Institute (ACI)
October 26 - 27, 2011 - Chicago, IL
EAR and OFAC Fundamentals: Export Control of Dual-Use Equipment, Technology and Services - Federal Publications Seminars
November 17 - 18, 2011 - Las Vegas, NV
2nd Advanced China Forum on Import Compliance- American Conference Institute (ACI)
November 29-30, 2011 - Shanghai, China
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Who's Hiring?
A Summary of Current Trade Job Opportunities
 As a service to the international trade community, Global Trade Expertise compiles links to trade job opportunities from many different sources. New trade job listings are posted frequently on our website.
To sort the job opportunities by region, fields, or levels, click on the appropriate category or tag in the right column on our Trade Jobs webpage. |
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Thanks again for your interest in our newsletter!
Sincerely,
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Jennifer Kessinger, Tammie Krauskopf & Ruta Riley
Attorneys & Consultants
jk@globaltradeexpertise.com
Tel. 925.876.1381 (Jennifer Kessinger)
tk@globaltradeexpertise.com
Tel. 708.707.4087 (Tammie Krauskopf)
rr@globaltradexpertise.com
Tel. (630) 862-8123
www.globaltradeexpertise.com
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