Articles Posted in International Business

TabletBusinesses in New Jersey and New York that import goods from overseas need to be aware of their obligations and potential liabilities under U.S. customs laws. Any individual or business that imports goods into the U.S. is responsible for paying tariffs, if any, on the goods. Various types of goods may also be subject to import restrictions or even bans. The federal government recently announced a settlement in a civil forfeiture action against a major retail company for allegedly importing cultural artifacts in violation of federal laws. United States v. Approx. 450 Ancient Cuneiform Tablets, et al., No. 1:17-cv-03980, complaint (E.D.N.Y., Jul. 5, 2017). While this is a rather extreme example, it demonstrates the complex web of laws affecting imports.

Tariffs on goods imported into the U.S., also known as customs duties, are established by the Harmonized Tariff Schedule for the U.S. (HTSUS). 19 U.S.C. § 1202. This voluminous document covers a wide range of items. To offer one example, Chapter 9 of the 2017 edition of the HTSUS covers “coffee, tea, maté and spices.” Most types of un-roasted coffee beans are not subject to tariffs, while “coffee substitutes containing coffee” are subject to a tariff of 1.5 cents per kilogram. Some tariff amounts are expressed as a percentage of the value of the goods. Imported thyme, for example, is subject to a 4.8 percent tariff.

U.S. Customs and Border Protection (CBP) identifies various “prohibited and restricted” items, which may be restricted for violations of domestic laws, violations of treaty obligations, or public health or safety regulations. The alcoholic drink absinthe, for example, is restricted because of federal regulations. Drums made from animal hides in Haiti, according to the CDC, are restricted because of a possible link to anthrax cases. In the Cuneiform case mentioned above, federal laws and international treaties addressing cultural artifacts play a major role.

Captain Albert E. Theberge, NOAA Corps (ret.) [Public domain], via Wikimedia CommonsMaritime commerce constitutes a major part of the economies of New York City and Northern New Jersey. Any type of business transaction involves a complex web of legal obligations and risks, and transactions involving interstate and international shipping can be the most complex of all. Legal claims arising from maritime disputes can be particularly difficult. The debtor/defendant might be based in a different jurisdiction—possibly a different country—from the creditor/plaintiff, and any assets might be located in yet another jurisdiction. The Supplemental Rules for Admiralty or Maritime Claims and Asset Forfeiture Action (the “Supplemental Rules”), part of the Federal Rules of Civil Procedure, provide methods for asserting claims over otherwise highly mobile assets in maritime disputes. This should be a last resort, of course, since carefully drafted contracts with dispute-resolution provisions often yield more satisfactory results in a shorter span of time.

Rule B of the Supplemental Rules enables plaintiffs to attach a defendant’s assets in an ex parte proceeding, provided they cannot locate the defendant in the same jurisdiction as the asset. The plaintiff files a quasi in rem lawsuit in the jurisdiction where the asset is located. Lawsuits typically proceed in personam, against a particular person, business, or organization; or in rem, against a particular item of property. A quasi in rem lawsuit combines elements of both types of suit, with a plaintiff asserting a claim over a piece of property in connection with a claim against its owner.

In maritime transactions, parties often do business using multiple corporate shells to protect assets and other interests. As a result, the record owner of an asset that could be subject to attachment under Rule B might not be the same as the business entity against which the plaintiff has a claim. Rule B allows a plaintiff to attach an asset owned by a different business entity if they can establish that the entity functions as an “alter ego” of the defendant. A New York court recently addressed this issue in a Rule B claim in D’Amico Dry Ltd. v. Primera Maritime (Hellas) Ltd., et al., No. 1:09-cv-07840, order (S.D.N.Y., Jul. 30, 2015).

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United Nations [Public domain], via Wikimedia CommonsDoing business across international borders involves a careful review of numerous potential legal hurdles. In a few cases, doing business with a particular country may be restricted, or even outright prohibited, under U.S. foreign policy. New York and New Jersey businesses considering international opportunities should carefully assess whether any federal regulations will affect their plans. Even small businesses can find themselves in violation of international trade restrictions if they are not careful. The U.S. Department of the Treasury, through its Office of Foreign Assets Control (OFAC), enforces various restrictions associated with U.S. sanctions. Last summer, it found a U.S. company with overseas subsidiaries in violation of trade sanctions against Iran. It later issued a document clarifying the rule, known as “General License H,” permitting U.S. companies to do business with that country.

The relationship between the U.S. and Iran has been strained since 1979, shortly after a revolution overthrew Iran’s U.S.-backed leader. A group of Iranians seized control of the U.S. Embassy in the capital, Tehran, and held a group of Americans hostage inside for 444 days. President Jimmy Carter issued the first set of sanctions against Iran, Executive Order 12170, on November 14, 1979, freezing billions of dollars of Iranian assets. The U.S., the United Nations, and other countries have imposed additional sanctions against Iran since then. These include a wide variety of restrictions on trade. The greater New York City area is home to a large number of Iranian immigrants and people of Iranian descent, so these regulations could have a particularly significant impact on this region.

The current sanctions regime is largely based on the Iran and Libya Sanctions Act of 1996. OFAC regulations prohibit the importation of various goods and services from Iran, investment in Iranian businesses, and other transactions. 31 C.F.R. § 560.101 et seq. While U.S. businesses remain subject to a total ban on transactions with Iran, see 31 C.F.R. §§ 560.204, 560.206, General License H allows foreign companies owned or controlled by a U.S. business to engage in limited transactions with the country. Exactly how they can do that remains unclear, but the license states that they may establish “operating policies and procedures” for transacting business with Iran, and they may set up “globally integrated…business support system[s]” for the purpose of such activities.

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By Smiley.toerist (Own work) [CC BY-SA 4.0 (], via Wikimedia CommonsThe taxation of American businesses operating overseas is a controversial topic. The officers of a corporation, or the managers of a limited liability company (LLC), have a fiduciary duty to the owners of the business to maximize profits. With small businesses, the managers and owners are often the same people, but the duty remains. Minimizing a company’s tax burden is one way to do this. Some companies have developed a variety of schemes for keeping money offshore to avoid U.S. taxes. To the extent that these schemes do not violate U.S. tax laws, it is often because of loopholes in existing laws. A recent ruling from the European Commission (EC), the executive body of the European Union (EU), could have a significant impact on how American companies do business—and pay taxes—overseas.

According to some estimates, large U.S. corporations are holding over $2.1 trillion in profits in other countries, allegedly to avoid paying roughly $620 billion in income tax in the U.S. Unlike most countries, the U.S. requires both its citizens and its businesses to pay federal income tax on income derived outside U.S. territory. Why does the U.S. do this? One possible answer, albeit a rather cynical one, is that the U.S. projects its power and influence around the world, and both citizens living overseas and businesses operating abroad expect the protection of the U.S. government—and occasionally its armed forces—should they need it.

The EC is responsible for monitoring the compliance of EU member nations with EU laws and treaties. In the summer of 2014, the EC announced investigations into three companies either based in or closely tied to the United States, and their business practices in three European countries:  Apple in Ireland, Starbucks in the Netherlands, and Fiat Chrysler Automobiles in Luxembourg. In October 2014, it also announced an investigation of Luxembourg’s tax treatment of Amazon. The investigations are targeted more towards the countries than the companies, but the EC’s rulings will substantially affect the companies. The EC announced rulings in the investigations of Starbucks and Fiat in October 2015.

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4517840289_e6558e6f0a_z.jpgA little-known federal agency within the Department of Commerce, the Bureau of Economic Analysis (BEA), revived a reporting requirement last year for U.S. companies receiving foreign investments. It also expanded the reporting requirements for U.S. companies that directly invest in foreign businesses. Prior to the recent amendments to these rules, the reporting requirements only applied to companies directly contacted by the BEA. Now they apply to any U.S. company that meets the benchmarks for reporting.

The International Investment and Trade in Services Survey Act authorizes the Executive Branch “to collect information on international investment and United States foreign trade.” 22 U.S.C. § 3101(b). The BEA is charged with carrying out this purpose. It revived Form BE-13, the “Survey of New Foreign Direct Investment in the United States,” in a final rule published in August 2014, after having discontinued the survey in 2009. 79 Fed. Reg. 47573, 15 C.F.R. § 801.7. Another final rule, published in November 2014, changed the requirements for Form BE-10/11, the “Benchmark Survey of U.S. Direct Investment Abroad.” 79 Fed. Reg. 69041, 15 C.F.R. § 801.8.

Information provided in the surveys may only be used “for analytical or statistical purposes” by the federal government, to enforce reporting requirements, and for “augmenting and improving the quality of data collected by the Bureau of the Census.” 22 U.S.C. §§ 3104(c), (d). Failure to file reports as required can result in civil penalties of $2,500 to $25,000, as well as criminal penalties of up to one year’s imprisonment and a fine of up to $10,000. 22 U.S.C. § 3105.
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US-DeptOfCommerce-Seal.svg.pngThe U.S. Department of Commerce (DOC) recently released a digital tool to help businesses engaged in the export of goods abroad. Federal export laws require a substantial amount of due diligence regarding the intended recipients and end users of export shipments. The DOC may hold an export business liable for violations of these requirements. The White House has enacted a policy of reforming controls on exports. Part of this initiative involves streamlining the screening process with the Consolidated Screening List (CSL), a collection of “watch lists” from various federal agencies. In November 2014, the DOC announced the release of an application program interface (API) that allows export businesses to search the CSL much more efficiently.

Under the Export Administration Act (EAA) of 1979, 50 U.S.C. App. § 2401 et seq., the U.S. President has the authority to regulate U.S. exports for national security and other reasons. Congress has placed restrictions on exports directly through laws like the Arms Export Control Act (AECA) of 1976, 22 U.S.C. § 2751 et seq. Exports may also be restricted by sanctions against specific countries and laws or regulations related to terrorism and other international criminal matters.

In 2013, the DOC’s Bureau of Industry and Security (BIS) charged the University of Massachusetts at Lowell with violations of the Export Administration Regulations (EAR) for shipping atmospheric testing equipment to an entity in Pakistan on the BIS Entity List, 15 C.F.R. Supp. 4. This list identifies entities that the federal government believes may have indirect connections to weapons of mass destruction (WMD) programs. The BIS claimed that the university violated the EAR by shipping the equipment without a required license. 15 C.F.R. §§ 734.3(c), 744.11, 764.2(a); 63 Fed. Reg. 64322 (Nov. 19, 1998). In this case, the equipment itself was not a controlled item, but the recipient was subject to government restrictions. The university agreed to a $100,000 civil penalty, suspended for two years. See also United States v. Roth, 642 F.Supp.2d 796 (E.D. Tenn. 2009), 628 F.3d 827 (6th Cir. 2011).
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Manhattan.jpgOne of the most important benefits of forming a corporation or other business entity is the protection of owners and managers from personal liability for acts performed on behalf of the business. Holding a shareholder or officer liable is known as “piercing the corporate veil.” This may occur for acts found to be illegal or grossly negligent. A series of decisions from the Court of International Trade (CIT) and the Federal Circuit Court of Appeals addressed the liability of a corporate president, who was also the sole shareholder, for failure to pay customs duties on imported goods. The Federal Circuit ultimately applied a broad interpretation of the statute in question and held that the corporation and the shareholder may be held jointly and severally liable.

The corporation, Trek Leather, Inc., imported a number of men’s suits during a period of about eight months in 2004. According to U.S. Customs and Border Protection (CBP), Trek Leather’s sole shareholder and president used other corporate entities to purchase materials for foreign manufacturers. The manufacturers used the materials, known as “assists” in federal customs law, to produce the suits that he imported. CBP alleged that he failed to include the cost of these assists in the total price that he reported to customs officials. A lower price meant a lower customs duty.

CBP brought an action against Trek Leather and the shareholder in the CIT for misrepresenting the value of imported goods under 19 U.S.C. § 1592(a). The shareholder argued that he could not be held personally liable because he was not the “importer of record.” The CIT found that the statute applied to him as well as the corporation. It granted CBP’s motion for summary judgment and ruled that Trek Leather and the shareholder were jointly and severally liable for unpaid customs duties and related civil penalties. United States v. Trek Leather, 781 F.Supp.2d 1306 (USCIT 2011).
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BurgerKingFood.jpg“Corporate inversion,” the process by which a corporation merges with a foreign corporation and relocates its headquarters to the foreign company’s home country, has received a considerable amount of attention in recent months. It is often expressly intended to reduce a corporation’s tax burden by moving the company to a country with lower corporate taxes, while still maintaining physical operations in the U.S. The White House and others have criticized the practice, and corporations are lobbying against laws that would restrict it. The Internal Revenue Code (IRC) already contains “anti-inversion” provisions, and a recent notice from the Department of the Treasury (DOT) states that new Internal Revenue Service (IRS) regulations will enhance the scrutiny of foreign mergers.

Section 7874 of the IRC, 26 U.S.C. § 7874, seeks to regulate corporate inversions. It applies to any U.S. corporation that transfers its headquarters and other assets overseas through a merger with a foreign corporation after March 4, 2003. The merged foreign corporation is subject to the same tax treatment as a domestic corporation if 80 percent of its stock is held by the U.S. company’s former shareholders, and it does not have “substantial business activities” in its home country. Id. at §§ 7874(a)(2), (b). If the merged foreign corporation has 60 percent of its shareholders in common with its domestic predecessor, the IRS designates it as a “surrogate foreign corporation” and applies U.S. tax rates to the amount of its inversion gain. Id. at §§ 7874(a)(1)-(2).

Several U.S. corporations have announced inversion plans in 2014. While some of them decided not to follow through after public opinion turned against them, other deals are still in the works. The U.S. pharmaceutical company Pfizer abandoned a bid to acquire the British company AstraZeneca, and the pharmacy chain Walgreens decided not to reorganize in Switzerland after merging with that country’s Alliance Boots. The fast-food chain Burger King, however, is reportedly still in the process of acquiring Tim Hortons and reorganizing in Canada.
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Aspire_frontview_3.jpgBusinesses in New Jersey and New York have more opportunities now to do business internationally than, probably, at any other point in history. As massive amounts of commerce pass through the ports of New York and northern New Jersey, technology allows people to do business together almost anywhere in the world. New York has become one of the country’s centers of technological innovation, so businesses looking to get involved in global commerce are well-positioned in New York or New Jersey. New Jersey’s Department of State (DOS) has established programs to assist both domestic businesses that want to do business internationally and foreign companies that want to bring their goods or services here. Other nations have also reached out with possible opportunities for New Jersey businesses to go global.

The DOS’s Business Action Center (BAC) offers programs to support and assist New Jersey businesses. Its Office of International Business Development & Protocol (IBDP), launched in the summer of 2012, assists New Jersey companies with import and export regulations and helps them find international markets and business partners. Its outreach efforts focus on countries described as “New Jersey’s top investor nations,” including Canada, France, Germany, Japan, and the United Kingdom, as well as “countries where New Jersey enjoys rich relationships,” including India and Taiwan. The BAC expanded its call center in August 2012 to include Spanish-speaking representatives, reportedly in order to improve outreach to New Jersey’s Latino-owned businesses and to foster relations with businesses in Spanish-speaking countries like Mexico.
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