Customs Benefits For Exporters

         

          Drawback of customs duties

         

          Drawback is a form of tax relief in which a lawfully

          collected customs duty is refunded or remitted wholly or in

          part because of the particular use made of the commodity on

          which the duty was collected. U.S. firms that import

          materials or components that they process or assemble for

          reexport may obtain drawback refunds of all duties paid on

          the imported merchandise, less 1 percent to cover customs

          costs. This practice encourages U.S. exporters by

          permitting them to compete in foreign markets without the

          handicap of including in their sales prices the duties paid

          on imported components.

         

          The Trade and Tariff Act of 1984 revised and expanded

          drawbacks.  Regulations implementing the act have been

          promulgated in 19 CFR Part 191. Under existing regulations

          several types of drawback have been authorized, but only

          three are of interest to most manufacturers:

         

          1.   If articles manufactured in the United States with the

               use of imported merchandise are exported, then the

               duties paid on the imported merchandise that was used

               may be refunded as drawback (less 1 percent).

         

          2.   If both imported merchandise and domestic merchandise

               of the same kind and quality are used to manufacture

               articles, some of which are exported, then duties that

               were paid on the imported merchandise are refundable

               as drawback, regardless of whether that merchandise

               was used in the exported articles.

         

          3.   If articles of foreign origin imported for consumption

               after December 28, 1980, are exported from the United

               States or are destroyed under the supervision of U.S.

               Customs within three years of the date of importation,

               in the same condition as when imported and without

               being "used" in the United States, then duties that

               were paid on the imported merchandise (less 1 percent)

               are refundable as drawback. Incidental operations on

               the merchandise (such as testing, cleaning, repacking,

               or inspection) are not considered to be "uses" of the

               article.

         

          To obtain drawback, the U.S. firm must file a proposal with

          a regional commissioner of customs (for the first type of

          drawback) or with the Entry Rulings Branch, U.S. Customs

          Headquarters, at the address in the following paragraph

          (for other types of drawback). These offices may also

          provide a model drawback proposal for the U.S. company.

         

          Drawback claimants must establish that the articles on

          which drawback is being claimed were exported within five

          years after the merchandise in question was imported. Once

          the request for drawback is approved, the proposal and

          approval together constitute the manufacturer's drawback

          rate. For more information contact Entry Rulings Branch,

          Room 2107, U.S.  Customs Headquarters, 1301 Constitution

          Avenue, N.W., Washington, DC 20229; telephone 202-566-5856.

         

          U.S. foreign-trade zones

         

          Exporters should also consider the customs privileges of

          U.S.  foreign-trade zones. These zones are domestic U.S.

          sites that are considered outside U.S. customs territory

          and are available for activities that might otherwise be

          carried on overseas for customs reasons. For export

          operations, the zones provide accelerated export status for

          purposes of excise tax rebates and customs drawback. For

          import and reexport activities, no customs duties, federal

          excise taxes, or state or local ad valorem taxes are

          charged on foreign goods moved into zones unless and until

          the goods, or products made from them, are moved into

          customs territory. This means that the use of zones can be

          profitable for operations involving foreign dutiable

          materials and components being assembled or produced here

          for reexport. Also, no quota restrictions ordinarily apply.

         

          There are now 180 approved foreign-trade zones in port

          communities throughout the United States. Associated with

          these projects are some 200 subzones. These facilities are

          available for operations involving storage, repacking,

          inspection, exhibition, assembly, manufacturing, and other

          processing.

         

          More than 2,100 business firms used foreign-trade zones in

          fiscal year 1990. The value of merchandise moved to and

          from the zones during that year exceeded $80 billion.

          Export shipments from zones and subzones amounted to some

          $12 billion.

         

          Information about the zones is available from the zone

          manager, from local Commerce district offices, or from the

          Executive Secretary, Foreign-Trade Zones Board,

          International Trade Administration, U.S.  Department of

          Commerce, Washington, DC 20230.

         

          Foreign free port and free trade zones

         

          To encourage and facilitate international trade, more than

          300 free ports, free trade zones, and similar

          customs-privileged facilities are now in operation in some

          75 foreign countries, usually in or near seaports or

          airports. Many U.S. manufacturers and their distributors

          use free ports or free trade zones for receiving shipments

          of goods that are reshipped in smaller lots to customers

          throughout the surrounding areas.  Information about free

          trade zones, free ports, and similar facilities abroad may

          be found in Tax-Free Trade Zones of the World, published by

          Matthew Bender & Co., International Division, 1275

          Broadway, Albany, NY 12204; telephone 800-424-4200.

         

          Bonded warehouses

         

          Bonded warehouses can also be found in many locations.

          Here, goods can be warehoused without duties being

          assessed. Once goods are released, they are subject to

          duties.

         

          FOREIGN SALES CORPORATIONS

         

          One of the most important steps a U.S. exporter can take to

          reduce federal income tax on export-related income is to

          set up a foreign sales corporation (FSC). This tax

          incentive for U.S. exporters replaced the domestic

          international sales corporation (DISC), except the interest

          charge DISC. While the interest charge DISC allows

          exporters to defer paying taxes on export sales, the tax

          incentive provided by the FSC legislation is in the form of

          a permanent exemption from federal income tax for a portion

          of the export income attributable to the offshore

          activities of FSCs (26 U.S.C., sections 921-927). The tax

          exemption can be as great as 15 percent on gross income

          from exporting, and the expenses can be kept low through

          the use of intermediaries who are familiar with and able to

          carry out the formal requirements. A firm that is exporting

          or thinking of exporting can optimize available tax

          benefits with proper planning, evaluation, and assistance

          from an accountant or lawyer.

         

          An FSC is a corporation set up in certain foreign countries

          or in U.S.  possessions (other than Puerto Rico) to obtain

          a corporate tax exemption on a portion of its earnings

          generated by the sale or lease of export property and the

          performance of some services. A corporation initially

          qualifies as an FSC by meeting certain basic formation

          tests. An FSC (unless it is a small FSC) must also meet

          several foreign management tests throughout the year. If it

          complies with those requirements, the FSC is entitled to an

          exemption on qualified export transactions in which it

          performs the required foreign economic processes.

         

          FSCs can be formed by manufacturers, nonmanufacturers, or

          groups of exporters, such as export trading companies. An

          FSC can function as a principal, buying and selling for its

          own account, or as a commission agent. It can be related to

          a manufacturing parent or it can be an independent merchant

          or broker.

         

          An FSC must be incorporated and have its main office (a

          shared office is acceptable) in the U.S. Virgin Islands,

          American Samoa, Guam, the Northern Mariana Islands, or a

          qualified foreign country. In general, a firm must file for

          incorporation by following the normal procedures of the

          host nation or U.S. possession. Taxes paid by an FSC to a

          foreign country do not qualify for the foreign U.S. tax

          credit. Some nations, however, offer tax incentives to

          attract FSCs; to qualify, a company must identify itself as

          an FSC to the host government. Consult the government tax

          authorities in the country or U.S. possession of interest

          for specific information.

         

          A country qualifies as an FSC host if it has an exchange of

          information agreement with the United States approved by

          the U.S. Department of the Treasury. As of February 20,

          1991, the qualified countries were Australia, Austria,

          Barbados, Belgium, Bermuda, Canada, Costa Rica, Cyprus,

          Denmark, Dominican Republic, Egypt, Finland, France,

          Germany, Grenada, Iceland, Ireland, Jamaica, Korea, Malta,

          Mexico, Morocco, Netherlands, New Zealand, Norway,

          Pakistan, Philippines, Sweden, and Trinidad and Tobago.

          Since the Internal Revenue Service (IRS) does not allow

          foreign tax credits for foreign taxes imposed on the FSC's

          qualified income, it is generally advantageous to locate an

          FSC only in a country where local income taxes and

          withholding taxes are minimized.  Most FSCs are

          incorporated in the U.S. Virgin Islands or Guam.

         

          The FSC must have at least one director who is not a U.S.

          resident, must keep one set of its books of account

          (including copies or summaries of invoices) at its main

          offshore office, cannot have more than 25 shareholders,

          cannot have any preferred stock, and must file an election

          to become an FSC with the IRS. Also, a group may not own

          both an FSC and an interest charge DISC.

         

          The portion of the FSC gross income from exporting that is

          exempt from U.S. corporate taxation is 32 percent for a

          corporate-held FSC if it buys from independent suppliers or

          contracts with related suppliers at an "arm's-length" price

          _ a price equivalent to that which would have been paid by

          an unrelated purchaser to an unrelated seller. An FSC

          supplied by a related entity can also use the special

          administrative pricing rules to compute its tax exemption.

          Although an FSC does not have to use the two special

          administrative pricing rules, these rules may provide

          additional tax savings for certain FSCs.

         

          Small FSCs and interest charge DISCs are designed to give

          export incentives to smaller businesses. The tax benefits

          of a small FSC or an interest charge DISC are limited by

          ceilings on the amount of gross income that is eligible for

          the benefits.

         

          The small FSC is generally the same as an FSC, except that

          a small FSC must file an election with the IRS designating

          itself as a small FSC -- which means it does not have to

          meet foreign management or foreign economic process

          requirements. A small FSC tax exemption is limited to the

          income generated by $5 million or less in gross export

          revenues.

         

          An exporter can still set up a DISC in the form of an

          interest charge DISC to defer the imposition of taxes for

          up to $10 million in export sales. A corporate shareholder

          of an interest charge DISC may defer the imposition of

          taxes on approximately 94 percent of its income up to the

          $10 million ceiling if the income is reinvested by the DISC

          in qualified export assets. An individual who is the sole

          shareholder of an interest charge DISC can defer 100

          percent of the DISC income up to the $10 million ceiling.

          An interest charge DISC must meet the following

          requirements: the taxpayer must make a new election; the

          tax year of the new DISC must match the tax year of its

          majority stockholder; and the DISC shareholders must pay

          interest annually at U.S. Treasury bill rates on their

          proportionate share of the accumulated taxes deferred.

         

          A shared FSC is an FSC that is shared by 25 or fewer

          unrelated exporter-shareholders to reduce the costs while

          obtaining the full tax benefit of an FSC. Each

          exporter-shareholder owns a separate class of stock and

          each runs its own business as usual. Typically, exporters

          pay a commission on export sales to the FSC, which

          distributes the commission back to the exporter.

         

          States, regional authorities, trade associations, or

          private businesses can sponsor a shared FSC for their

          state's companies, their association's members, or their

          business clients or customers, or for U.S. companies in

          general. A shared FSC is a means of sharing the cost of the

          FSC. However, the benefits and proprietary information are

          not shared. The sponsor and the other exporter-shareholders

          do not participate in the exporter's profits, do not

          participate in the exporter's tax benefits, and are not a

          risk for another exporter's debts.

         

          For more information about FSCs, U.S. companies may contact

          the assistant secretary for trade development (telephone

          202-377-1461); the Office of the Chief Counsel for

          International Commerce, U.S. Department of Commerce

          (202-377-0937); or a local office of the IRS.

          

          COMMERCE ASSISTANCE RELATED TO MULTILATERAL TRADE

          NEGOTIATIONS

         

          The Tokyo Round Trade Agreements, completed in 1979 under

          General Agreement on Tariff and Trade (GATT) auspices,

          produced significant tariff reductions and established

          several nontariff trade barrier (NTB) agreements or codes.

          The codes currently in effect address the following NTBs:

         

          *    Countervailing measures to offset trade-distortive

               subsidies.

         

          *    Antidumping duties used to counter injurious price

               discrimination.

         

          *    Discriminatory government procurement.

         

          *    Technical barriers to trade (e.g., product standards).

         

          *    Uniform and equitable customs valuation for duty

               purposes.

         

          *    Import licensing procedures.

         

          *    Trade in civil aircraft (both tariff and nontariff

               issues).

         

          An important benefit for U.S. exporters stemming from the

          Tokyo Round is the GATT Government Procurement Agreement

          opening many foreign government procurement orders to U.S.

          suppliers. Commerce's TOP has been designated the primary

          clearing point for tenders generated under this agreement.

          Information on the TOP can be obtained by contacting the

          local Commerce district office or Trade Opportunity

          Program, U.S.  Department of Commerce, Export Promotion

          Services, Washington, DC 20230; telephone 202-377-4203.

         

          Users can also access TOP leads by tapping in directly to

          the EBB, a data base service of the Department of Commerce.

          Subscriptions to this service can be obtained by mail from

          U.S. Department of Commerce, National Technical Information

          Service, 5285 Port Royal Road, Springfield, VA 22161.

         

          Other data base information on foreign tenders can be

          obtained from the Commerce Business Daily, available from

          the U.S. Government Printing Office, Washington, DC 20402;

          telephone 202-783-3238. Brief summaries of leads also

          appear in the Journal of Commerce.

         

          In 1991, negotiators were engaged in achieving a successful

          conclusion of the Uruguay Round of multilateral trade

          negotiations. U.S. objectives included (1) a substantial

          market access agreement covering tariffs and nontariff

          measures and (2) improvement in GATT to cover trade in such

          new areas as services, intellectual property rights, and

          trade-related investment measures. General information on

          the Uruguay Round can be obtained from the Office of

          Multilateral Affairs, H3513, U.S. Department of

          Commerce/ITA, Washington, DC 20230.

         

          BILATERAL TRADE AGREEMENTS

         

          The United States has concluded bilateral trade agreements

          with several Eastern European countries, the Soviet Union,

          and Mongolia. These congressionally approved agreements are

          required by the Trade Act of 1974 for these countries to

          receive most-favored nation (MFN) treatment.  In addition

          to an article providing for reciprocal MFN status, the

          agreements contain guarantees on intellectual property

          rights and business facilitation. Such guarantees as the

          right to establish commercial representation offices in a

          country by no more than a simple registration process, the

          right to serve as and hire agents, the right to deal

          directly with customers and end users of products and

          services, and the right to hire employees of a company's

          choice are all included in the agreements. The intellectual

          property rights provisions include protection for computer

          software and trade secrets. Trade agreements are in effect

          with Hungary, Czechoslovakia, and Romania (the MFN

          provisions of this agreement have been suspended). As of

          August 14, 1991, the trade agreements with the Soviet

          Union, Mongolia, and Bulgaria have been signed and

          submitted to the Congress for approval.

         

          INTELLECTUAL PROPERTY RIGHTS CONSIDERATIONS

         

          The United States provides a wide range of protection for

          intellectual property (i.e., patents, trademarks, service

          marks, copyrights, trade secrets, and semiconductor mask

          works). Many businesses -- particularly high-technology

          firms, the publishing industry, chemical and pharmaceutical

          firms, the recording industry, and computer software

          companies -- depend heavily on the protection afforded

          their creative products and processes.

         

          In the United States, there are five major forms of

          intellectual property protection. A U.S. patent confers on

          its owner the exclusive right for 17 years from the date

          the patent is granted to manufacture, use, and sell the

          patented product or process within the United States.  The

          United States and the Philippines are the only two

          countries that award patents on a first-to-invent basis;

          all other countries award patents to the first to file a

          patent application. As of November 16, 1989, a trademark or

          service mark registered with the U.S. Patent and Trademark

          Office remains in force for 10 years from the date of

          registration and may be renewed for successive periods of

          10 years, provided the mark continues to be used in

          interstate commerce and has not been previously cancelled or

          surrendered.

         

          A work created (fixed in tangible form for the first time)

          in the United States on or after January 1, 1978, is

          automatically protected by a U.S.  copyright from the

          moment of its creation. Such a copyright, as a general

          rule, has a term that endures for the author's life plus an

          additional 50 years after the author's death. In the case

          of works made for hire and for anonymous and pseudonymous

          works (unless the author's identity is revealed in records

          of the U.S. Copyright Office of the Library of Congress),

          the duration of the copyright is 75 years from publication

          or 100 years from creation, whichever is shorter. Other,

          more detailed provisions of the Copyright Act of 1976

          govern the term of works created before January 1, 1978.

         

          Trade secrets are protected by state unfair competition and

          contract law. Unlike a U.S. patent, a trade secret does not

          entitle its owner to a government-sanctioned monopoly of

          the discovered technology for a particular length of time.

          Nevertheless, trade secrets can be a valuable and

          marketable form of technology. Trade secrets are typically

          protected by confidentiality agreements between a firm and

          its employees and by trade secret licensing agreement

          provisions that prohibit disclosures of the trade secret by

          the licensee or its employees.

         

          Semiconductor mask work registrations protect the mask

          works embodied in semiconductor chip products. In many

          other countries, mask works are referred to as integrated

          circuit layout designs. The Semiconductor Chip Protection

          Act of 1984 provides the owner of a mask work with the

          exclusive right to reproduce, import, and distribute such

          mask works for a period of 10 years from the earlier of two

          dates: the date on which the mask work is registered with

          the U.S. Copyright Office or the date on which the mask

          work is first commercially exploited anywhere in the world.

         

          The rights granted under U.S. patent, trademark, or

          copyright law can be enforced only in the United States,

          its territories, and its possessions; they confer no

          protection in a foreign country. The protection available

          in each country depends on that country's national laws,

          administrative practices, and treaty obligations. The

          relevant international treaties set certain minimum

          standards for protection, but individual country laws and

          practices can and do differ significantly.

         

          To secure patent and trademark right outside the United

          States a company must apply for a patent or register a

          trademark on a country-by-country basis. However, U.S.

          individuals and corporations are entitled to a "right of

          priority" and to "national treatment" in the 100 countries

          that, along with the United States, are parties to the

          Paris Convention for the Protection of Industrial Property.

         

          The right of priority gives an inventor 12 months from the

          date of the first application filed in a Paris Convention

          country (6 months for a trademark) in which to file in

          other Paris Convention countries _ to relieve companies of

          the burden of filing applications in many countries

          simultaneously. A later treaty to which the United States

          adheres, the Patent Cooperation Treaty, allows companies to

          file an international application for protection in other

          member states. Individual national applications, however,

          must follow within 18 months.

          

          National treatment means that a member country will not

          discriminate against foreigners in granting patent or

          trademark protection. Rights conferred may be greater or

          less than provided under U.S. law, but they must be the

          same as the country provides its own nationals.

         

          The level and scope of copyright protection available

          within a country also depends on that country's domestic

          laws and treaty obligations. In most countries, the place

          of first publication is an important criterion for

          determining whether foreign works are eligible for

          copyright protection. Works first published in the United

          States on or after March 1, 1989 _ the date on which U.S.

          adherence to the Berne Convention for the Protection of

          Literary and Artistic Works became effective _ are, with

          few exceptions, automatically protected in the more than 80

          countries that comprise the Berne Union. Exporters of goods

          embodying works protected by copyright in the United States

          should find out how individual Berne Union countries deal

          with older U.S. works, including those first published (but

          not first or simultaneously published in a Berne Union

          country) before March 1, 1989.

         

          The United States maintains copyright relations with a

          number of countries under a second international agreement

          called the Universal Copyright Convention (UCC). UCC

          countries that do not also adhere to Berne often require

          compliance with certain formalities to maintain copyright

          protection. Those formalities can be either or both of the

          following: (1) registration and (2) the requirement that

          published copies of a work bear copyright notice, the name

          of the author, and the date of first publication. The

          United States has bilateral copyright agreements with a

          number of countries, and the laws of these countries may or

          may not be consistent with either of the copyright

          conventions.  Before first publication of a work anywhere,

          it is advisable to investigate the scope of and

          requirements for maintaining copyright protection for those

          countries in which copyright protection is desired.

         

          Intellectual property rights owners should be aware that

          after valuable intellectual property rights have been

          secured in foreign markets, enforcement must be

          accomplished through local law. As a general matter,

          intellectual property rights are private rights to be

          enforced by the rights owner. Ease of enforcement varies

          from country to country and depends on such factors as the

          attitude of local officials, substantive requirements of

          the law, and court procedures. U.S. law affords a civil

          remedy for infringement (with money damages to a successful

          plaintiff) and criminal penalties (including fines and jail

          terms) for more serious offenses. The availability of

          criminal penalties for infringement, either as the

          exclusive remedy or in addition to private suits, also

          varies among countries.

         

          A number of countries are parties to only some, or even

          none, of the treaties that have been discussed here.

          Therefore, would-be U.S.  exporters should carefully

          evaluate the intellectual property laws of their potential

          foreign markets, as well as applicable multilateral and

          bilateral treaties and agreements (including bilateral

          trade agreements), before making a decision to do business

          there. The intellectual property considerations that arise

          can be quite complex and, if possible, should be explored

          in detail with an attorney.

         

          In summary, U.S. exporters with intellectual property

          concerns should consider taking the following steps:

         

          1.   Obtaining protection under all applicable U.S. laws

               for their inventions, trademarks, service marks,

               copyrights, and semiconductor mask works.

         

          2.   Researching the intellectual property laws of

               countries where they may conduct business. The US&FCS

               has information about intellectual property laws and

               practices of particular countries, although it does

               not provide legal advice.

          

          3.   Securing the services of competent local counsel to

               file appropriate patent, trademark, or copyright

               applications within priority periods.

         

          4.   Adequately protecting their trade secrets through

               appropriate confidentiality provisions in employment,

               licensing, marketing, distribution, and joint venture

               agreements.

         

          ARBITRATION OF DISPUTES IN INTERNATIONAL TRANSACTIONS

         

          The parties to a commercial transaction may provide in

          their contract that any disputes over interpretation or

          performance of the agreement will be resolved through

          arbitration. In the domestic context, arbitration may be

          appealing for a variety of reasons. Frequently cited

          advantages over conventional courtroom litigation include

          potential savings in time and expense, confidentiality of

          the proceedings, and expertise of the arbitrators.

         

          For export transactions, in which the parties to the

          agreement are from different countries, additional

          important advantages are neutrality (international

          arbitration allows each party to avoid the domestic courts

          of the other should a dispute arise) and ease of

          enforcement (foreign arbitral awards can be easier to

          enforce than foreign court decisions).

         

          In an agreement to arbitrate (usually just inserted as a

          term in the contract governing the transaction as a whole),

          the parties also have broad power to agree on many

          significant aspects of the arbitration. The arbitration

          clause may do the following:

         

          *    Specify the location (a "neutral site") where the

               arbitration will be conducted, although care must be

               taken to select a country that has adopted the UN

               Convention on the Recognition and Enforcement of

               Foreign Awards (or another convention providing for

               the enforcement of arbitral awards).

         

          *    Establish the rules that will govern the arbitration,

               usually by incorporating a set of existing arbitration

               rules such as the UN Commission on International Trade

               Law (UNCITRAL) Model Rules.

         

          *    Appoint an arbitration institute to administer the

               arbitration. The International Chamber of Commerce

               based in Paris, the American Arbitration Association

               in New York, and the Arbitration Institute of the

               Stockholm Chamber of Commerce in Sweden are three such

               prominent institutions.

         

          *    Choose the law that will govern procedural issues or

               the merits of the dispute, for example, the law of the

               State of New York.

         

          *    Place certain limitations on the selection of

               arbitrators, for example, by agreeing to exclude

               nationals of the parties to the dispute or by

               requiring certain qualifications or expertise.

         

          *    Designate the language in which the arbitral

               proceedings will be conducted.

         

          For international arbitration to work effectively, the

          national courts in the countries of both parties to the

          dispute must recognize and support arbitration as a

          legitimate alternative means for resolving disputes. This

          support is particularly crucial at two stages in the

          arbitration process. First, should one party attempt to

          avoid arbitration after a dispute has arisen, the other

          party must be able to rely on the judicial system in either

          country to enforce the agreement to arbitrate by compelling

          arbitration. Second, the party that wins in the arbitration

          proceeding must be confident that the national courts will

          enforce the decision of the arbitrators. This will ensure

          that the arbitration process is not ultimately frustrated

          at the enforcement stage if the losing party refuses to pay

          or otherwise satisfy the arbitral award.

         

          The strong policy of U.S. federal law is to approve and

          support resolution of disputes by arbitration. Through the

          UN Convention on the Recognition and Enforcement of Foreign

          Arbitral Awards (popularly known as the New York

          Convention), which the United States ratified in 1970, more

          than 80 countries have undertaken international legal

          obligations to recognize and enforce arbitral awards. While

          several other arbitration treaties have been concluded, the

          New York Convention is by far the most important

          international agreement on commercial arbitration and may

          be credited for much of the explosive growth of arbitration

          of international disputes in recent decades.

         

          Providing for arbitration of disputes makes good sense in

          many international commercial transactions. Because of the

          complexity of the subject, however, legal advice should be

          obtained for specific export transactions.

          

          THE UNITED NATION SALES CONVENTION

         

          The UN Convention on Contracts for the International Sale

          of Goods (CISG) became the law of the United States on

          January 1, 1988. It establishes uniform legal rules to

          govern the formation of international sales contracts and

          the rights and obligations of the buyer and seller.  The

          CISG is expected to facilitate and stimulate international

          trade.

         

          The CISG applies automatically to all contracts for the

          sale of goods between traders from two different countries

          that have both ratified the CISG. This automatic

          application takes place unless the parties to the contract

          expressly exclude all or part of the CISG or expressly

          stipulate to law other than the CISG. Parties can also

          expressly choose to apply the CISG when it would not

          automatically apply.

         

          At present, the following nations apply the CISG:

          Argentina, Australia, Austria, Bulgaria, Byelorussian

          Socialist Republic, Chile, China, Czechoslovakia, Denmark,

          Egypt, Finland, France, Germany, Hungary, Iraq, Italy,

          Lesotho, Mexico, Norway, Spain, Sweden, Switzerland, Syria,

          Ukrainian Soviet Socialist Republic, USSR, United States,

          Yugoslavia, and Zambia. The CISG will enter into force in

          the Netherlands on January 1, 1992, and in Guinea on

          February 1, 1992.

         

          The United States made a reservation, the effect of which

          is that the CISG will apply only when the other party to

          the transaction also has its place of business in a country

          that applies the CISG.

         

          Convention provisions

         

          The provisions and scope of the CISG are similar to Article

          2 of the Uniform Commercial Code (effective in the United

          States except Louisiana). The CISG comprises four parts:

         

          *    Part I, Sphere of Application and General Provisions

               (Articles 1-13), provides that the CISG covers the

               international sale of most commercial goods.

         

          *    Part II, Formation of the Contract (Articles 14-24),

               provides rules on offer and acceptance.

         

          *    Part III, Sale of Goods (Articles 25-88), covers

               obligations and remedies of the seller and buyer and

               rules governing the passing of risk and damages.

         

          *    Part IV, Final Provisions (Articles 89-101), covers

               the right of a country to disclaim certain parts of

               the convention.

         

          Applying (or excluding) the CISG

         

          U.S. businesses can avoid the difficulties of reaching

          agreement with foreign parties on choice-of-law issues

          because the CISG text is available as a compromise. Using

          the CISG may decrease the time and legal costs otherwise

          involved in research of different unfamiliar foreign laws.

          Further, the CISG may reduce the problems of proof and

          foreign law in domestic and foreign courts.

         

          Application of the CISG may especially make sense for

          smaller firms and for American firms contracting with

          companies in countries where the legal systems are obscure,

          unfamiliar, or not suited for international sales

          transactions of goods. However, some larger, more

          experienced firms may want to continue their current

          practices, at least with regard to parties with whom they

          have been doing business regularly.

         

          When a firm chooses to exclude the CISG, it is not

          sufficient to simply say "the laws of New York apply,"

          because the CISG would be the law of the State of New York

          under certain circumstances. Rather, one would say "the

          provisions of the Uniform Commercial Code as adopted by the

          State of New York, and not the UN Convention on Contracts

          for the International Sale of Goods, apply."

         

          After it is determined whether or not the CISG governs a

          particular transaction, the related documentation should be

          reviewed to ensure consistency with the CISG or other

          governing law. For agreements about to expire, companies

          should make sure renewals take into account the

          applicability (or nonapplicability) of the CISG.

         

          The CISG can be found in the Federal Register (Vol. 52, p.

          6262, 1987) along with a notice by the U.S. Department of

          State, and in the pocket part to 15 U.S.C.A. app. at 29. To

          obtain an up-to-date listing of ratifying or acceding

          countries and their reservations call the UN at

          212-963-3918 or 212-963-7958. For further information

          contact the Office of the Assistant Legal Adviser for

          Private International Law, U.S. Department of State

          (202-653-9851), or the Office of the Chief Counsel for

          International Commerce, U.S. Department of Commerce

          (202-377-0937).

         

         

         

           EXPORT REGULATIONS, CUSTOMS BENEFITS AND TAX INCENTIVES

         

          

          This chapter covers a wide range of regulations,

          procedures, and practices that fall into three categories:

          (1) regulations that exporters must follow to comply with

          U.S. law; (2) procedures that exporters should follow to

          ensure a successful export transaction; and (3) programs

          and certain tax procedures that open new markets or provide

          financial benefits to exporters.

         

          EXPORT REGULATIONS

          

          Although export licensing is a basic part of exporting, it

          is one of the most widely misunderstood aspects of

          government regulations for exporting. The export licensing

          procedure may appear complex at first, but in most cases it

          is a rather straightforward process. Exporters should

          remember, however, that violations of the Export

          Administration Regulations (EAR) carry both civil and

          criminal penalties. Export controls are administered by the

          Bureau of Export Administration (BXA) in the U.S.

          Department of Commerce. Whenever there is any doubt about

          how to comply with export regulations, Department of

          Commerce officials or qualified professional consultants

          should be contacted for assistance.

         

          The EAR are available by subscription from the

          Superintendent of Documents, U.S. Government Printing

          Office, Washington, DC 20401; telephone 202-275-2091.

          Subscription forms may be obtained from local Commerce

          Department district offices or from the Office of Export

          Licensing, Exporter Counseling Division, Room 1099D, U.S.

          Department of Commerce, Washington, DC 20230; telephone

          202-377-4811.

         

          Types of license

         

          Export License

         

          For reasons of national security, foreign policy, or short

          supply, the United States controls the export and reexport

          of goods and technical data through the granting of two

          types of export license: general licenses and individually

          validated licenses (IVLs). There are also special licenses

          that are used if certain criteria are met, for example,

          distribution, project, and service supply. Except for U.S.

          territories and possessions and, in most cases, Canada, all

          items exported from the United States require an export

          license. Several agencies of the U.S.  government are

          involved in the export license procedure.

         

          General License

         

          A general license is a broad grant of authority by the

          government to all exporters for certain categories of

          products. Individual exporters do not need to apply for

          general licenses, since such authorization is already

          granted through the EAR; they only need to know the

          authorization is available.

         

          Individually Validated License_

         

          An IVL is a specific grant of authority from the government

          to a particular exporter to export a specific product to a

          specific destination if a general license is not available.

          The licenses are granted on a case-by-case basis for either

          a single transaction or for many transactions within a

          specified period of time. An exporter must apply to the

          Department of Commerce for an IVL. One exception is

          munitions, which require a Department of State application

          and license.  Other exceptions are listed in the EAR.

         

          Determining which license to use

         

          The first step in complying with the export licensing

          regulations is to determine whether a product requires a

          general license or an IVL. The determination is based on

          what is being exported and its destination.  The

          determination is a three-step procedure:

         

          1.   Determine the destination. Check the schedule of

               country groups in the EAR (15 CFR Part 770, Supp. 1)

               to see under which country group the export

               destination falls.

         

          2.   Determine the export control commodity number (ECCN).

               All dual-use items (items used for both military and

               civilian purposes) are in one of several categories of

               commodities controlled by the Department of Commerce.

               To determine what ECCN applies to a particular

               commodity, see the Commodity Control List in the EAR

               (15 CFR Part 799.1, Supp. 1).

         

          3.   Determine what destinations require an IVL. Refer to

               the specified ECCN in Part 799.1 of the EAR. Look

               under the paragraph "Validated License Required" to

               check which country groups require an IVL. If the

               country group in question is not listed there, no IVL

               is required. If it is listed there, an IVL is required

               unless the commodity meets one of the technical

               exceptions cited under the ECCN.

         

          To avoid confusion, the exporter is strongly advised to

          seek assistance in determining the proper license. The best

          source is the Department of Commerce's Exporter Counseling

          Division. Telephone or write to Exporter Counseling

          Division, Room 1099D, U.S. Department of Commerce,

          Washington, DC 20230; telephone 202-377-4811. Or the

          exporter may check with the local Commerce district office.

          An exporter can also request a preliminary, written

          commodity classification opinion from the Office of

          Technology and Policy Analysis, U.S. Department of

          Commerce. P.O. Box 273, Washington, DC 20044.

         

          Shipments under a general license

         

          If, after reviewing the EAR or after consulting with the

          Department of Commerce, it is determined that an IVL is not

          required, an exporter may ship its product under a general

          license.

         

          A general license does not require a specific application.

          Exporters who are exporting under a general license must

          determine whether a destination control statement is

          required. (See the "Antidiversion, Antiboycott, and

          Antitrust Requirements" section of this chapter.)

         

          Finally, if the shipment is destined for a free-world

          destination and is valued at more than $2,500 or requires a

          validated export license, the exporter must complete a

          shipper's export declaration (SED). SEDs are used by

          Customs to indicate the type of export license being used

          and to keep track of what is exported. They are also used

          by the Bureau of Census to compile statistics on U.S. trade

          patterns.

         

          Shipments under an individually validated license

         

          If an IVL is required, the U.S. exporter must prepare a

          Form BXA-622P, "Application for Export License," and submit

          it to BXA. The applicant must be certain to follow the

          instructions on the form carefully. In some instances,

          technical manuals and support documentation must also be

          included.

         

          If the application is approved, a Validated Export License

          is mailed to the applicant. The license contains an export

          authorization number that must be placed on the SED. Unlike

          some goods exported under a general license, all goods

          exported under an IVL must be accompanied by an SED.

         

          The final step in complying with the IVL procedure is

          recordkeeping. The exporter must keep records of all

          shipments against an IVL. All documents related to an

          export application should be retained for five years.

          Section 787.13 of the EAR covers recordkeeping

          requirements.

         

          Avoiding Delays in Receiving an Individually Validated

          License

         

          In filling out license applications, exporters commonly

          make four errors that account for most delays in processing

          applications:

         

          1.   Failing to sign the application.

         

          2.   Handwriting, rather than typing, the application.

         

          3.   Responding inadequately to section 9b of the

               application, "Description of Commodity or Technical

               Data," which calls for a description of the item or

               items to be exported. The applicant must be specific

               and is encouraged to attach additional material to

               explain the product fully.

         

          4.   Responding inadequately to section 12 of the

               application, where the specific end use of the

               products or technical data is to be described. Again,

               the applicant must be specific. Answering vaguely or

               entering "Unknown" is likely to delay the application

               process.

         

          In an emergency, the Department of Commerce may consider

          expediting the processing of an IVL application, but this

          procedure cannot be used as a substitute for the timely

          filing of an application. An exporting firm that feels it

          qualifies for emergency handling should contact the

          Exporter Counseling Division.

         

          Additional Documentation_

         

          Certain applications for an IVL must be accompanied by

          supporting documents supplied by the prospective purchaser

          or the government of the country of ultimate destination.

          By reviewing Part 775 of the EAR, the exporter can

          determine whether any supporting documents are required.

         

          The most common supporting documents are the international

          import certificate and the statement of ultimate consignee

          and purchaser. The international import certificate (Form

          ITA-645P/ATF-4522/DSP-53) is a statement issued by the

          government of the country of destination that certifies

          that the imported products will be disposed of responsibly

          in the designated country. It is the responsibility of the

          exporter to notify the consignee to obtain the certificate.

          The import certificate should be retained in the U.S.

          exporter's files, and a copy should be submitted with the

          IVL application.

         

         

          The statement of ultimate consignee and purchaser (BXA Form

          629P) is a written assurance that the foreign purchaser of

          the goods will not resell or dispose of goods in a manner

          contrary to the export license under which the goods were

          originally exported. The exporter must send the statement

          to the foreign consignee and purchaser for completion. The

          exporter then submits this form along with the export

          license application.

         

          In addition to obtaining the appropriate export license,

          U.S. exporters should be careful to meet all other

          international trade regulations established by specific

          legislation or other authority of the U.S.  government. The

          import regulations of foreign countries must also be taken

          into account. The exporter should keep in mind that even if

          help is received with the license and documentation from

          others, such as banks, freight forwarders or consultants,

          the exporter remains responsible for ensuring that all

          statements are true and accurate.

         

          ANTIDIVERSION, ANTIBOYCOTT, AND ANTITRUST REQUIREMENTS

         

          Antidiversion clause

         

          To help ensure that U.S. exports go only to legally

          authorized destinations, the U.S. government requires a

          destination control statement on shipping documents. Under

          this requirement, the commercial invoice and bill of lading

          (or air waybill) for nearly all commercial shipments

          leaving the United States must display a statement

          notifying the carrier and all foreign parties (the ultimate

          and intermediate consignees and purchaser) that the U.S.

          material has been licensed for export only to certain

          destinations and may not be diverted contrary to U.S. law.

          Exceptions to the use of the destination control statement

          are (1) shipments to Canada and intended for consumption in

          Canada and (2) shipments being made under certain general

          licenses. Advice on the appropriate statement to be used

          can be provided by the Department of Commerce, the Commerce

          district office, an attorney, or the freight forwarder.

         

          Antiboycott regulations

         

          The United States has an established policy of opposing

          restrictive trade practices or boycotts fostered or imposed

          by foreign countries against other countries friendly to

          the United States. This policy is implemented through the

          antiboycott provisions of the Export Administration Act

          enforced by the Department of Commerce and through the Tax

          Reform Act of 1977 enforced by the Department of the

          Treasury.

         

          In general, these laws prohibit U.S. persons from

          participating in foreign boycotts or taking actions that

          further or support such boycotts. The antiboycott

          regulations carry out this general purpose by

         

          *    prohibiting U.S. persons from refusing to do business

               with blacklisted firms and boycotted friendly

               countries pursuant to foreign boycott demands;

         

          *    prohibiting U.S. persons from discriminating against

               other U.S.  persons on the basis of race, religion,

               sex, or national origin in order to comply with a

               foreign boycott;

         

          *    prohibiting U.S. persons from furnishing information

               about their business relationships with blacklisted

               friendly foreign countries or blacklisted companies in

               response to boycott requirements;

         

          *    prohibiting U.S. persons from appearing to perform any

               of these prohibited acts;

         

          *    providing for public disclosure of requests to comply

               with foreign boycotts; and

         

          *    requiring U.S. persons who receive requests to comply   

               with foreign boycotts to disclose publicly whether

               they have complied with such requests.

         

          The antiboycott provisions of the Export Administration Act

          apply to all U.S. persons, including intermediaries in the

          export process, as well as foreign subsidiaries that are

          "controlled in fact" by U.S. companies and U.S. officials.

         

          The Department of Commerce's Office of Antiboycott

          Compliance (OAC) administers the program through ongoing

          investigations of corporate activities. OAC operates an

          automated boycott-reporting system providing statistical

          and enforcement data to Congress and to the public, issuing

          interpretations of the regulations for the affected public,

          and offering nonbinding informal guidance to the private

          sector on specific compliance concerns. U.S. firms with

          questions about complying with antiboycott regulations

          should call OAC at 202-377-2381 or write to Office of

          Antiboycott Compliance, Bureau of Export Administration,

          Room 6098, U.S. Department of Commerce, Washington, DC

          20230.

         

          Antitrust laws

         

          The U.S. antitrust laws reflect this nation's commitment to

          an economy based on competition. They are intended to

          foster the efficient allocation of resources by providing

          consumers with goods and services at the lowest price that

          efficient business operations can profitably offer. Various

          foreign countries -- including the EC, Canada, the United

          Kingdom, Federal Republic of Germany, Japan, and Australia

          -- also have their own antitrust laws that U.S. firms must

          comply with when exporting to such nations.

         

          The U.S. antitrust statutes do not provide a checklist of

          specific requirements. Instead they set forth broad

          principles that are applied to the specific facts and

          circumstances of a business transaction. Under the U.S.

          antitrust laws, some types of trade restraints, known as

          per se violations, are regarded as conclusively illegal.

          Per se violations include price-fixing agreements and

          conspiracies, divisions of markets by competitors, and

          certain group boycotts and tying arrangements.

         

          Most restraints of trade in the United States are judged

          under a second legal standard known as the rule of reason.

          The rule of reason requires a showing that (1) certain acts

          occurred and (2) such acts had an anticompetitive effect.

          Under the rule of reason, various factors are considered,

          including business justification, impact on prices and

          output in the market, barriers to entry, and market shares

          of the parties.

         

          In the case of exports by U.S. firms, there are special

          limitations on the application of the per se and rule of

          reason tests by U.S. courts.  Under Title IV of the Export

          Trading Company Act (also known as the Foreign Trade

          Antitrust Improvements Act), there must be a "direct,

          substantial and reasonably foreseeable" effect on the

          domestic or import commerce of the United States or on the

          export commerce of a U.S. person before an activity may be

          challenged under the Sherman Antitrust Act or the Federal

          Trade Commission Act (two of the primary federal antitrust

          statutes). This provision clarifies the particular

          circumstances under which the overseas activities of U.S.

          exporters may be challenged under these two antitrust

          statutes. Under Title III of the Export Trading Company Act

          (see chapter 4) the Department of Commerce, with the

          concurrence of the U.S. Department of Justice, can issue an

          export trade certificate of review that provides certain

          limited immunity from the federal and state antitrust laws.

         

          Although the great majority of international business

          transactions do not pose antitrust problems, antitrust

          issues may be raised in various types of transactions,

          among which are

         

          *    overseas distribution arrangements;

          

          *    overseas joint ventures for research, manufacturing,

               construction, and distribution;

         

          *    patent, trademark, copyright, and know-how licenses;

         

          *    mergers and acquisitions involving foreign firms; and

         

          *    raw material procurement agreements and concessions.

         

          The potential U.S. and foreign antitrust problems posed by

          such transactions are discussed in greater detail in

          chapter 16. Where potential U.S. or foreign antitrust

          issues are raised, it is advisable to obtain the advice and

          assistance of qualified antitrust counsel.

         

          For particular transactions that pose difficult antitrust

          issues, and for which an export trade certificate of review

          is not desired, the Antitrust Division of the Department of

          Justice can be asked to state its enforcement views in a

          business review letter. The business review procedure is

          initiated by writing a letter to the Antitrust Division

          describing the particular business transaction that is

          contemplated and requesting the department's views on the

          antitrust legality of the transaction.

         

          Certain aspects of the federal antitrust laws and the

          Antitrust Division's enforcement policies regarding

          international transactions are explored in the Department

          of Justice's Antitrust Enforcement Guidelines for

          International Operations (1988).

         

          FOREIGN CORRUPT PRACTICES ACT (FCPA)

         

          The FCPA makes it unlawful for any person or firm (as well

          as persons acting on behalf of the firm) to offer, pay, or

          promise to pay (or to authorize any such payment or

          promise) money or anything of value to any foreign official

          (or foreign political party or candidate for foreign

          political office) for the purpose of obtaining or retaining

          business. It is also unlawful to make a payment to any

          person while knowing that all or a portion of the payment

          will be offered, given, or promised directly or indirectly,

          to any foreign official (or foreign political party,

          candidate, or official) for the purposes of assisting the

          person or firm in obtaining or retaining business. Knowing

          includes the concepts of conscious disregard and willful

          blindness. The FCPA also contains provisions applicable to

          publicly held companies concerning financial recordkeeping

          and internal accounting controls.

         

          The Department of Justice enforces the criminal provisions

          of the FCPA and the civil provisions against "domestic

          concerns." The Securities and Exchange Commission (SEC) is

          responsible for civil enforcement against "issuers." The

          Department of Commerce supplies general information to U.S.

          exporters who have questions about the FCPA and about

          international developments concerning the FCPA.

         

          There is an exception to the antibribery provisions for

          "facilitating payments for routine governmental action."

          Actions "similar" to the examples listed in the statute are

          also covered by this exception. A person charged with

          violating the FCPA's antibribery provisions may assert as a

          defense that the payment was lawful under the written laws

          and regulations of the foreign country or that the payment

          was associated with demonstrating a product or performing a

          contractual obligation.

         

          Firms are subject to a fine of up to $2 million. Officers,

          directors, employees, agents, and stockholders are subject

          to a fine of up to $100,000 and imprisonment for up to five

          years. The U.S. attorney general can bring a civil action

          against a domestic concern (and the SEC against an issuer)

          for a fine of up to $10,000 as well as against any officer,

          director, employee, or agent of a firm or stockholder

          acting on behalf of the firm, who willfully violates the

          antibribery provisions.  Under federal criminal law other

          than the FCPA, individuals may be fined up to $250,000 or

          up to twice the amount of the gross gain or gross loss if

          the defendant derives pecuniary gain from the offense or

          causes a pecuniary loss to another person.

         

          The attorney general (and the SEC, where appropriate) may

          also bring a civil action to enjoin any act or practice

          whenever it appears that the person or firm (or a person

          acting on behalf of a firm) is in violation or about to be

          in violation of the antibribery provisions.

         

          A person or firm found in violation of the FCPA may be

          barred from doing business with the federal government.

          Indictment alone can lead to a suspension of the right to

          do business with the government.

         

          Conduct that constitutes a violation of the FCPA may give

          rise to a private cause of action under the

          Racketeer-Influenced and Corrupt Organizations Act.

         

          The Department of Justice is establishing an FCPA opinion

          procedure to replace the current FCPA review procedure. The

          details of the opinion procedure will be provided in 28 CFR

          Part 77 (1991). Under the opinion procedure, any party will

          be able to request a statement of the Department of

          Justice's present enforcement intentions under the

          antibribery provisions of the FCPA regarding any proposed

          business conduct. Conduct for which Justice has issued an

          opinion stating that the conduct conforms with current

          enforcement policy will be entitled in any subsequent

          enforcement action to a presumption of conformity with the

          FCPA.

         

          FOOD AND DRUG ADMINISTRATION (FDA) AND ENVIRONMENTAL

          PROTECTION AGENCY (EPA) RESTRICTIONS

         

          In addition to the various export regulations that have

          been discussed, rules and regulations enforced by FDA and

          EPA also affect a limited number of exporters.

         

          Food and Drug Administration

         

          FDA enforces U.S. laws intended to assure the consumer that

          foods are pure and wholesome, that drugs and devices are

          safe and effective, and that cosmetics are safe. FDA has

          promulgated a wide range of regulations to enforce these

          goals. Exporters of products covered by FDA's regulations

          are affected as follows:

         

          *    If the item is intended for export only, meets the

               specifications of the foreign purchaser, is not in

               conflict with the laws of the country to which it is

               to be shipped, and is properly labeled, it is exempt

               from the adulteration and misbranding provisions of

               the Federal Food, Drug, and Cosmetic Act (see 801(e)).

               This exemption does not apply to "new drugs" or "new

               animal drugs" that have not been approved as safe and

               effective or to certain devices.

         

          *    If the exporter thinks the export product may be

               covered by FDA, it is important to contact the nearest

               FDA field office or the Public Health Service, Food

               and Drug Administration, 5600 Fishers Lane, Rockville,

               MD 20857.

         

          Environmental Protection Agency

         

          EPA's involvement in exports is limited to hazardous waste,

          pesticides, and toxic chemicals. Although EPA has no

          authority to prohibit the export of these substances, it

          has an established notification system designed to inform

          receiving foreign governments that materials of possible

          human health or environmental concern will be entering

          their country.

         

          Under the Resource Conservation and Recovery Act,

          generators of waste who wish to export waste considered

          hazardous are required to notify EPA before shipping a

          given hazardous waste to a given foreign consignee.  EPA

          then notifies the government of the foreign consignee.

          Export cannot occur until written approval is received from

          the foreign government.

         

          As for pesticides and other toxic chemicals, neither the

          Federal Insecticide, Fungicide, and Rodenticide Act nor the

          Toxic Substances Control Act requires exporters of banned

          or severely restricted chemicals to obtain written consent

          before shipping. However, exporters of unregistered

          pesticides or other chemicals subject to regulatory control

          actions must comply with certain notification requirements.

         

          An exporter of hazardous waste, unregistered pesticides, or

          toxic chemicals should contact the Office of International

          Activities, U.S.  Environmental Protection Agency, 401 M

          Street, S.W., Washington, DC 20460; telephone 202-382-4880.

         

          IMPORT REGULATIONS OF FOREIGN GOVERNMENTS

         

          Import documentation requirements and other regulations

          imposed by foreign governments vary from country to

          country. It is vital that exporters be aware of the

          regulations that apply to their own operations and

          transactions. Many governments, for instance, require

          consular invoices, certificates of inspection, health

          certification, and various other documents.