Canada-U.S. Blog

Trade Lawyers Cyndee Todgham Cherniak and Susan K. Ross

Poof Goes the Rule of Law!

Posted in Anti-Trust/Competition Law, Corporate Counsel, Cross-border deals, Cross-border trade, Customs Law, Export Controls & Economic Sanctions, Exports, Legal Developments, Trade Remedies

Originally published by the Journal of Commerce in June 2018.

There was a strong temptation to title this column – What the Football!  President Trump has spent a good deal of his time recently excoriating professional football players about their actions when it comes to the nation anthem. He seems to have not spent even a fraction of that time addressing the implications of the recent settlement with ZTE China.

For those who have not followed the case, ZTE China faced both criminal charges and civil fines for its actions in circumventing U.S. export laws related to the sale of products to Iran, and to a lesser extent, Sudan,  North Korea, Syrian and Cuba (more background can be found below).  The original settlement with the Dept. of Justice resulted in ZTE China (two related entities) pleading guilty and being subject to the largest criminal fine/civil penalty then imposed, along with three years of corporate probation. Additionally, the company agreed to put in place a monitor who was to report to the court about the success of ZTE China’s newly upgraded compliance program.

ZTE China also agreed to pay fines to the Bureau of Industry and Security (BIS) and the Office of Foreign Assets Control (OFAC) pursuant to settlement agreements with those agencies. BIS suspended an additional $300,000,000 fine which would be imposed if ZTE China violated its settlement with the agency. The total overall forfeiture and fine amount that ZTE China was to pay the U.S. Government was $1.19 billion with $300,000,000 suspended.

Five (5) weeks later, BIS issued a denial order in which the following statements were made by the then Acting Assistant Secretary of Commerce for Export Enforcement: “[ZTE agreed to the record-high combined civil and criminal penalties after]  engaging in a multi-year conspiracy to violate the U.S. trade embargo against Iran to obtain contracts to supply, build, operate, and maintain telecommunications networks in Iran using U.S.-origin equipment, and also illegally shipping telecommunications equipment to North Korea .. .”  In the face of “ZTE ‘s Pattern of Deception, False Statements, and Repeated Violations of U.S. Law,” BIS found ZTE had violated the terms of the settlement, and imposed the denial order.  Given U.S. sanctions laws apply directly (barring the acquisition of U.S. parts from U.S. sellers) and indirectly (barring the acquisition of U.S. parts from third parties, even those outside the U.S.), ZTE China was effectively put out of business

Secretary Ross issued a statement at the time saying “ZTE made false statements to the U.S. Government when they were originally caught and put on the Entity List, made false statements during the reprieve it was given, and made false statements again during its probation … ZTE misled …  Commerce … This egregious behavior cannot be ignored.”

Then, last month, it was announced that at the request of Chinese President Xi, President Trump instructed Commerce Secretary Ross to find a different solution, one that would allow ZTE China to stay in business. The outcome we learned last Thursday June 7th was a new deal was struck wherein ZTE China will now pay an even larger fine and accept other conditions.

Based on the press release issued by Secretary Ross on the 7th, ZTE will now pay an additional $1 billion on top of the $892 million previously paid. Plus, an additional $400 million must be posted into a “suspended penalty” escrow account before “BIS will remove ZTE from the Denied Persons List” Secretary Ross went on to say: “ZTE will also be required by the new agreement to retain a team of special compliance coordinators selected by and answerable to BIS for a period of 10 years. Their function will be to monitor on a real-time basis ZTE’s compliance with U.S. export control laws. … ZTE is also required under the new agreement to replace the entire board of directors and senior leadership for both entities [i.e., Zhongxing Telecommunications Equipment Corporation and ZTE Kangxun Telecommunications Ltd].  Finally, the new agreement once again imposes a denial order that is suspended, this time for 10 years, which BIS can activate in the event of additional violations during the ten-year probationary period. These collectively are the most severe penalty BIS has ever imposed on a company …  The purpose of this settlement is to modify ZTE’s behavior while setting a new precedent for monitoring to assure compliance with U.S. law. Embedding compliance officers into the company vastly improves the speed with which the Department of Commerce can detect and deal with any violations.”

One is left to ask, what did the U.S. really get?  If money alone was the cure for bad actors, fines of large sizes would have been imposed years ago. If replacing executives and boards would do the trick when dealing with a Chinese company, that, too, would have been done a long time ago. Ironically, last Thursday, the CEO of Qualcomm was quoted as hoping the deal with NXP in China would now finally be approved by the Chinese authorities!  Was that the quid pro quo? If so, one has to ask – who got the better deal?

When you consider the behavior that originally led BIS, OFAC and Justice to proceed involved a long history by ZTE of bad and intentional actions, were these terms enough?   Does anyone think the new team can’t figure out a more sophisticated means to get U.S. telecom equipment sold to Iran or North Korea?

ZTE knew the items it was acquiring in the U.S. could not be shipped or sold to Iran, North Korea or any other embargoed country. So elaborate plans were hatched that involved subterfuge, evasion, outright lies and destruction of evidence, including to the American subsidiary’s lawyers and consultants who were trying to help the company address the allegations against it! Just how convinced are you the U.S. got a “good deal”?

Knowing it was under investigation, ZTE took steps to mislead the U.S. government, which included having the involved individuals sign non-disclosure agreements. ZTE management gave false statements to the company’s counsel knowing they would be shared with the U.S. government, including that sales to Iran had ended and thereby stating the company was now in compliance with U.S. law.  Further, existing data was hidden from the forensic accounting firm hired by defense counsel to conduct an internal investigation.  The withheld data was omitted from reports prepared and given to the U.S. government, thereby ZTE provided false statements.  To further avoid detection, ZTE formed a “contract data induction team” of about 13 people with the goal to “sanitize the databases” of all relevant information. To further cover their tracks, emails by team members were subject to a 24 hour auto-delete function.

When you listen to the relevant U.S. government representatives, you are left wondering – What the Firetruck? The violations by ZTE were export related and so the activities of BIS, OFAC and Justice were law enforcement in nature.  Do you really deal with violators who rub their noses at U.S. law by upping the fine and changing management and board members?  In a curious coincidence of timing, on June 7th, the current Assistant Secretary of Commerce for Export Administration spoke at the annual meeting of an international trade association. His point was that BIS does not set policy, but rather enforces the law. He went on to also say: “We don’t negotiate national security.”  So, when the regulatory consequence / rule of law states if you violate the law, get fined, agree to a settlement and then lie about your level of compliance, that means you are placed on the denied parties list, how does changing that long-standing law enforcement / rule of law outcome not amount to setting a new policy? Whether it also means the U.S. negotiated national security remains to be seen.  As this column is published, President Trump is in Singapore to meet with Supreme Leader Kim of North Korea. Maybe that was the quid pro quo with the Chinese government?

Anyone who deals regularly with China will not be in the least surprised to hear in the future that American telecommunications equipment ended up in Iran or in the hands of other questionable end users, and that result can be traced back to a ZTE affiliate, perhaps this time through more sophisticated schemes than the ones reported in the settlement documents publicly filed. In the end, most international traders who attended the referenced annual conference were left wondering – did the U.S. get enough in return to make the deal with ZTE worthwhile?

What Are Canada’s Economic Sanctions Against Venezuela?

Posted in Canada's Federal Government, Corporate Counsel, Cross-border trade, Export Controls & Economic Sanctions, Politics

Canada imposes two types of unilateral economic sanctions against Venezuela.  Canada imposes unilateral economic sanctions under the Special Economic Measures Act (and Special Economic Measures (Venezuela) Regulations).  Canada also imposes unilateral economic sanctions and trade restrictions pursuant to the Justice for Victims of Corrupt Foreign Officials (Sergei Magnitsky Law) Act and Justice for Victims of Corrupt Foreign Officials Regulations. Both sets of economic sanctions are intended to put financial pressure on President Maduro and his inner circle.

On September 5, 2017, Canada imposed the SEMA sanctions in order to implement the decision of the association formed between Canada and the United States.  On November 3, 2017, Canada imposed its first round of Magnitsky sanctions shortly after the passage of the Justice for Victims of Corrupt Foreign Officials (Sergei Magnitsky Law) Act. Global Affairs’ statement concerning the Magnitsky sanctions against Venezuela reiterated Canada’s concern about the political and economic crisis in Venezuela.  On May 30, 2018, Canada announced in a news release “Canada imposes further sanctions on the Maduro Regime in Venezuela” that it was adding 14 more names to the SEMA Designated Persons List in response to May 20, 2018 Venezuela Election.  This May 30, 2018 announcment occurred one day after the release of the report by the Panel of Independent International Experts on possible crimes against humanity in Venezuela and one day before Minister Freedland was to attend a meeting on the Assembly of American States’ General Assembly. The May 30, 2018 additions to the SEMA Designated Persons List includes Maduro’s wife and family members of the late President Hugo Chavez.

Who in Canada Needs to Be Aware of Canada’s Sanctions Against Venezuela?

Any Canadian or business in Canada that does business with Venezuela or Venezuelans should carefully review the two sets of economic sanctions.  In addition to financial institutions (e.g., banks, financial advisors, insurance companies), real estate companies and condominium sales entities, businesses in the oil and gas section, engineering companies, service providers, exporters of goods, etc. there are many others who need to be aware of the sanctions.

When I was younger, many children at Canadian camps were from Venezuela.  Venezuelan officials may also send their children to Canadian private schools and universities.  It is important to obtain information about relatives of Venezuelan citizens who are in Canada benefiting from our health care and education systems.

SEMA Asset Freeze and Prohibitions

Canada’s SEMA sanctions against Venezuela are a combination of an asset freeze and prohibitions.  The SEMA sanctions against Venezuela include:

  1. Persons in Canada and any Canadian outside Canada shall not deal in any property, wherever situated, that is owned, held or controlled by person on the SEMA Designated Persons List or by a person acting on behalf of a person on the SEMA Designated Persons List.
  2. Persons in Canada and any Canadian outside Canada shall not enter into or facilitate any transaction related to a dealing in any property, wherever situated, that is owned, held or controlled by person on the SEMA Designated Persons List or by a person acting on behalf of a person on the SEMA Designated Persons List.
  3. Persons in Canada and any Canadian outside Canada shall not provide any financial or related services in respect of a dealing in any property, wherever situated, that is owned, held or controlled by person on the SEMA Designated Persons List or by a person acting on behalf of a person on the SEMA Designated Persons List.
  4. Persons in Canada and any Canadian outside Canada shall not make available any goods, wherever situated, to a person on the SEMA Designated Persons List or by a person acting on behalf of a person on the SEMA Designated Persons List.
  5. Persons in Canada and any Canadian outside Canada shall not provide any financial or related services to or for the benefit of a person on the SEMA Designated Persons List.
  6. Persons in Canada and any Canadian outside Canada shall not knowingly do anything that causes, facilitates or assists in, or is intended to cause, facilitate or assist in, any probitied act in 1-5 above.

There are a number of exceptions to the above listed prohibitions.

Magnitsky Asset Freezes and Prohibitions

Canada’s Magnitsky sanctions against Venezuela are a combination of an asset freeze and prohibitions.  The Magnitsky sanctions against Venezuela duplicate some the SEMA sanctions and, in some cases, differ from the SEMA sanctions.  The Magnitsky sanctions are more expansive in their scope to cover property, services and financial services:

The prohibitions under Canada’s Magnitsky Law include:

  1. Persons in Canada and any Canadian outside Canada shall not deal in any property, wherever situated, that is owned, held or controlled by person on the Magnitsky Designated Persons List or by a person acting on behalf of a person on the Magntisky Designated Persons List.
  2. Persons in Canada and any Canadian outside Canada shall not enter into or facilitate any financial transaction related to a dealing in any property, wherever situated, that is owned, held or controlled by person on the Magnitsky Designated Persons List or by a person acting on behalf of a person on the Magnitsky Designated Persons List.
  3. Persons in Canada and any Canadian outside Canada shall not provide any financial services or any other services to a person on the Magnitsky Designated Persons List or on behalf of a person on the Magnitsky Designated Persons List or on the direction or order of a person on the Magnitsky Designated Persons List.
  4. Persons in Canada and any Canadian outside Canada shall not acquire financial services or any service for the benefit of  or on the direction of a person on the Magnitsky Designated Persons List.
  5. Persons in Canada and any Canadian outside Canada shall not make available any property, wherever situated, to a person on the Magnitsky Designated Persons List or by a person acting on behalf of a person on the Magnitsky Designated Persons List.
  6. Persons in Canada and any Canadian outside Canada shall not knowingly do anything that causes, facilitates or assists in, or is intended to cause, facilitate or assist in, any probitied act in 1-5 above.

There are a number of exceptions to the above listed prohibitions.

Designated Persons Lists

Canada has creates two lists of designated persons.  There are 54 individuals (all associated with the Maduro Regime, including Nicolas Maduro Moros) named in the Special Economic Measures (Venezuela) Regulations a (“SEMA Designated Persons List”) and 19 individuals named in the Justice for Victims of Corrupt Foreign Officials Regulations (“Magnitsky Designated Persons List”).

The following individuals are named in both the SEMA Designated Persons List and the Magnitsky Designated Persons List as at June 1, 2018:

  • Nicolás MADURO MOROS
  • Tareck Zaidan EL AISSAMI MADDAH
  • Gustavo Enrique GONZÁLEZ LÓPEZ

The following individuals are named only and the Magnitsky Sanctions List as at June 1, 2018:

  • Adán Coromoto CHÁVEZ FRÍAS
  • Luis Ramón REYES REYES
  • Rocco ALBISINNI SERRANO
  • Alejandro Antonio FLEMING CABRERA
  • Rafael Darío RAMÍREZ CARREÑO
  • Carlos Alberto OSORIO ZAMBRANO
  • Luis Alfredo MOTTA DOMÍNGUEZ
  • José Vicente RANGEL ÁVALOS
  • Eulogio Antonio DEL PINO DÍAZ
  • Nelson José MERENTES DÍAZ
  • José David CABELLO RONDÓN
  • Rodolfo Clemente MARCO TORRES
  • José Gregorio VIELMA MORA
  • Francisco José RANGEL GÓMEZ
  • Ricardo Antonio MOLINA PEÑALOZA
  • Argenis de Jesús CHÁVEZ FRÍ

The following individuals are named only to SEMA Sanctions List as at June 1, 2018:

  • Elías José JAUA MILANO
  • Tarek Willians SAAB HALABI
  • Néstor Luis REVEROL TORRES
  • Roy Antonio María CHADERTON MATOS
  • María Iris VARELA RANGEL
  • Pedro Miguel CARREÑO ESCOBAR
  • Diosdado CABELLO RONDÓN
  • Susana Virginia BARREIROS RODRÍGUEZ
  • Freddy Alirio BERNAL ROSALES
  • Delcy Eloína RODRÍGUEZ GÓMEZ
  • Tania D’AMELIO CARDIET
  • Aristóbulo ISTÚRIZ ALMEIDA
  • Jorge Jesús RODRÍGUEZ GÓMEZ
  • Francisco José AMELIACH ORTA
  • Carlos Alfredo PÉREZ AMPUEDA
  • Sergio José RIVERO MARCANO
  • Jesús Rafael SUÁREZ CHOURIO
  • Carmen Teresa MELÉNDEZ RIVAS
  • Bladimir Humberto LUGO ARMAS
  • Gustavo Enrique GONZÁLEZ LÓPEZ
  • Elvis Eduardo HIDROBO AMOROSO
  • Remigio CEBALLOS ICHASO
  • Antonio José BENAVIDES TORRES
  • Hermann Eduardo ESCARRÁ MALAVÉ
  • Sandra OBLITAS RUZZA
  • Socorro Elizabeth HERNÁNDEZ HERNÁNDEZ
  • Maikel José MORENO PÉREZ
  • Gladys María GUTIÉRREZ ALVARADO
  • Juan José MENDOZA JOVER
  • Luis Fernando DAMIANI BUSTILLOS
  • Lourdes Benicia SUÁREZ ANDERSON
  • Carmen Auxiliadora ZULETA DE MERCHÁN
  • Arcadio de Jesús DELGADO ROSALES
  • Calixto Antonio ORTEGA RÍOS
  • Andrés Eloy MÉNDEZ GONZÁLEZ
  • Manuel Enrique GALINDO BALLESTEROS
  • Vladimir PADRINO LÓPEZ
  • Iania Valentina DÍAZ GONZÁLEZ
  • Fidel Ernesto VÁSQUEZ IRIARTE
  • Carolys Helena PÉREZ GONZÁLEZ
  • Cilia Adela FLORES DE MADURO (Maduro’s wife)
  • Erika del Valle FARÍAS PEÑA
  • Ramón Darío VIVAS VELASCO
  • Christian TYRONE ZERPA
  • Fanny Beatriz MÁRQUEZ CORDERO
  • Malaquías Gil RODRÍGUEZ
  • Indira Maira ALFONZO IZAGUIRRE
  • Jhannett María MADRIZ SOTILLO
  • Carlos Enrique QUINTERO CUEVAS
  • Xavier Antonio MORENO REYES
  • Carlos Alberto ROTONDARO COVA

It is important to realize that the above names are only a starting point.  The prohibitions and asset freezes extend to other persons where the activity benefits a designated person or is on the direction of order of a designated person.  This means that family members could be covered (such as children).  It also means that companies associated with the designated persons are covered (e.g., the designated person or a company owned by a designated person is a shareholder of the company).  Further, representatives and agents may be covered (e.g., a Venezuelan lawyer or holding company hired by a designated person who is soliciting goods, property or services, including financial services) may be covered.

It is also important to know that Canada’s SEMA Designated Persons List and Magnitsky Designated Persons List may change at any time.  Both lists should be reviewed carefully.

For more information about complaince with CAnada’s economic sanctions against Venezuela, please contact Cyndee Todgham Cherniak at 416-307-4168 or cyndee@lexsage.com.

 

232 Auto Investigation Timeline Published

Posted in Anti-Trust/Competition Law, Corporate Counsel, Cross-border deals, Cross-border trade, Customs Law, Imports Restrictions, Legal Developments, NAFTA, Trade Agreeements, Trade Remedies

The Federal Register notice advising the timeline which applies to the Administration’s 232 investigation regarding automobiles and parts was published on May 30, 2018.  The relevant time frame requires that written comments are due by June 22, 2018 and rebuttal comments by July 6, 2018.  A public hearing will be held on July 19 and 20, 2018.  All comments should be filed through www.regulations.gov referring to Docket Number DOC-2018-0002.

In particular, Commerce wants information about:

  • The quantity and nature of imports of automobiles, including cars, SUVs, vans and light trucks, and automotive parts and other circumstances related to the importation of automobiles and automotive parts;
  • Domestic production needed for projected national defense requirements;
  • Domestic production and productive capacity needed for automobiles and automotive parts to meet projected national defense requirements;
  • The existing and anticipated availability of human resources, products, raw materials, production equipment, and facilities to produce automobiles and automotive parts;
  • The growth requirements of the automobiles and automotive parts industry to meet national defense requirements and/or requirements to assure such growth, particularly with respect to investment and research and development;
  • The impact of foreign competition on the economic welfare of the U.S. automobiles and automotive parts industry;
  • The displacement of any domestic automobiles and automotive parts causing substantial unemployment, decrease in the revenues of government, loss of investment or specialized skills and productive capacity, or other serious effects;
  • Relevant factors that are causing or will cause a weakening of our national economy;
  • The extent to which innovation in new automotive technologies is necessary to meet projected national defense requirements;
  • Whether and, if so, how the analysis of the above factors changes when U.S. production by majority U.S.-owned firms is considered separately from U.S. production by majority foreign-owned firms; and
  • Any other relevant factors.

As usual, the process describes how the comments are to be filed, permits the submission of business confidential information, outlines the process to request to speak and submit testimony at the hearing and emphasizes all testimony, oral or written, must address the factors listed in 15 C.F.R. § 705.4 (a list which nearly mirrors the factors Commerce cites in its notice):

(a) To determine the effect on the national security of the imports of the article under investigation, the Department shall consider the quantity of the article in question or other circumstances related to its import. With regard for the requirements of national security, the Department shall also consider the following:

(1) Domestic production needed for projected national defense requirements;

(2) The capacity of domestic industries to meet projected national defense requirements;

(3) The existing and anticipated availabilities of human resources, products, raw materials, production equipment and facilities, and other supplies and services essential to the national defense;

(4) The growth requirements of domestic industries to meet national defense requirements and the supplies and services including the investment, exploration and development necessary to assure such growth; and

(5) Any other relevant factors.

(b) In recognition of the close relation between the strength of our national economy and the capacity of the United States to meet national security requirements, the Department shall also, with regard for the quantity, availability, character and uses of the imported article under investigation, consider the following:

(1) The impact of foreign competition on the economic welfare of any domestic industry essential to our national security;

(2) The displacement of any domestic products causing substantial unemployment, decrease in the revenues of government, loss of investment or specialized skills and productive capacity, or other serious effects; and

(3) Any other relevant factors that are causing or will cause a weakening of our national economy.

The complete Federal Register notice can be found here: https://www.gpo.gov/fdsys/pkg/FR-2018-05-30/pdf/2018-11708.pdf.

Which Way Is Up?

Posted in Aerospace & Defence, Agriculture, Antidumping, Border Security, Corporate Counsel, Cross-border deals, Cross-border trade, Customs Law, Imports Restrictions, Legal Developments, NAFTA, Trade Agreeements, Trade Remedies, World Trade Organization

This client alert was originally published on May 30, 2018, and now there is an update. Today, May 31st, President Trump announced a resolution with Argentina, Brazil and Australia regarding the 232 tariffs on steel (25%) and/or aluminum (10%), but as there is no similar agreement with Canada, Mexico or the EU, the tariffs on products from those countries was reinstated. See https://www.whitehouse.gov/briefings-statements/president-donald-j-trump-approves-section-232-tariff-modifications-2/ for the basic announcement.

The announcement about Argentina and Australia and their aluminum exports to the U.S. can be found here – https://www.whitehouse.gov/presidential-actions/presidential-proclamation-adjusting-imports-aluminum-united-states-4/ and makes clear a quota has been imposed. A similar announcement was published regarding steel products imported into the U.S. from Argentina and Brazil, see https://www.whitehouse.gov/presidential-actions/presidential-proclamation-adjusting-imports-steel-united-states-4/.

Living true to the times, it is nearly impossible to find predictability in current events.   That fact makes it quite challenging for businesses, and we have recent events adding to the confusion.

One notable example is that on June 1, the suspension of the 232 tariffs on steel (25%) and aluminum (10%) expire on the relevant goods from Australia, Argentina, Brazil, Canada, Mexico and the EU member countries: Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and United Kingdom.  Last reports indicate that negotiations with Australia continue, while the NAFTA renegotiations with Canada and Mexico seem mired in the automobile domestic content requirement.

India has joined China in challenging reliance on 232 by the U.S. before the World Trade Organization, but both cases are in the very early stages, so any resolution is far off.  After imposition of the steel tariffs, South Korea quickly negotiated a permanent exemption by agreeing to the imposition of a quota. In exchange, as part of the renegotiation of the Korea-U.S.  Free Trade Agreement, U.S. automakers obtained greater access to markets in South Korea.

We are in the midst of the changes brought by the U.S. withdrawal from the Iran nuclear deal.  In addition, despite statements by various administration officials in recent days to the contrary, on May 29th the White House announced that 25% tariffs will be imposed on Chinese made goods very soon. While a specific list of goods was not published, the list published in April itemized $50 billion worth of goods that could be impacted.  The White House stated: “[t]he United States will implement specific investment restrictions and enhanced export controls for Chinese persons and entities related to the acquisition of industrially significant technology.”  The Administration committed to announce those changes by June 30, 2018. In addition, the release goes on to state, the U.S. continues to pursue action at the World Trade Organization regarding China’s practices regarding licensing of intellectual property. Finally, comes the 25% tariff. The stated focus of the products listed will be “industrially significant technology, including those related to the “Made in China 2025” program.”  The final list of products is due to be announced by June 15, 2018. The White House announcement goes on to state a series of additional demands which very much mirror the recent ill-fated meetings in Beijing.

May 23, 2018, of course, saw the announcement by the Trump Administration of a 232 investigation into the auto industry.  Much of this action is seen, at least in part, as a ploy to gain a negotiating edge with Canada and Mexico in those NAFTA renegotiations, but whether that works remains to be seen.  What this new 232 action portends about continued exemption of the EU member countries from the 232 steel and aluminum case also remains to be seen.  As we go to press, the Federal Register notice which outlines the relevant timeline for this new 232 investigation, has yet to be published.

Similar to the steel and aluminum cases, the context for this 232 investigation into the auto industry is also framed as an increase in the trade deficit (imports have grown from 32% of cars sold to 48% in the past 20 years) but also “whether the decline of domestic automobile and automotive parts production threatens to weaken the internal economy of the United States, including by potentially reducing research, development, and jobs for skilled workers in connected vehicle systems, autonomous vehicles, fuel cells, electronic motors and storage, advanced manufacturing  processes, and other cutting-edge technologies.” While framing national security as equating to economic security as permitted by law, the justification for this investigation raises even more questions about whether such action is a proper application of 232, especially since the stated justification seems to focus on the inability of the U.S. to keep up with the competition. Traditional 232 actions have focused on defense articles, strategic resources and energy goods. While being creative is to be encouraged, the legal question is whether this is a step too far? As such, assuming the auto industry investigation (on automobiles, SUVs, vans, light trucks and part) concludes with tariffs be imposed, this context seems to present an even more compelling reason for litigation to challenge the Administration’s action in the U.S. courts.

Reliance on 232 was recently challenged regarding the steel and aluminum tariffs at the Court of International Trade by a German-owned steel exporter who sought an injunction stopping the imposition of these tariffs.  Once the injunction was denied, the case was dropped, so the substantive arguments are yet to be fully vetted. See Severstal v U.S.,  Case No. 18-00057, Slip Op. 18-37 (April 5, 2018).

Further confounding matters is the situation with ZTE. First, the U.S. government conducted an investigation and found that ZTE repeatedly violated U.S. export sanctions on Iran and North Korea, lied about its actions even to its own counsel and internal investigators, and generally flunked the “attitude test.” The company pled to a criminal violation. The immediate fine was $892 million, with $300 million in future penalties, dependent on its compliance with the terms of the deal. A short time later, the full amount had to be paid and a 7 year denial order was issued because the company failed to meet the terms of the settlement.  The intelligence community had such serious doubts about ZTE that it recommended against Americans purchasing their smartphones due to concerns about national security.

Then, in the midst of the 301 investigation into China, and the on-going North Korea situation, Mr. Trump instructed the Commerce Dept. to come up with a different solution.  While it remains to be seen what will be the ultimate outcome, Mr. Trump seems to favor a larger fine so as to allow the company to continue in business. The amount of the fine being mentioned publicly is $1.3 billion, but we do not yet know if that amount is firm or whether ZTE will get credit for the amount already paid?

Then you have the on again off again meeting with North Korea.  News reports indicate the meeting was cancelled due to what Mr. Trump called North Korea’s “tremendous anger and open hostility” to the U.S. which was blamed on China. Given the desire to have China’s support to sway the North Koreans and also to accomplish a major trade deal with China, one has to conclude raising the fine on ZTE to $1.3 billion is related, especially since word has now come out that the Qualcomm – NXP deal will again be approved by the Chinese government. Supposedly there are additional conditions to be imposed on ZTE,  including tighter security rules, a Chinese commitment to buy more American components, and a new management team and board.  Given that Chinese firms answer in the end to the government, it would not be surprising to find the intelligence community’s position does not change.

Right now the question is will he or won’t he? Will Mr. Trump meet with Mr. Kim? If so, when? If the outcome leads to substantive results, that would be wonderful. The worry has to remain what happens if the outcome is less than satisfactory? What is Plan B?

Given the current climate, for companies right now, the favored approach seems to be to stay the course and remain engaged in the political process whenever and wherever possible, but hunkering down continues to be an ever increasing challenge!

Canada Announced New Marking Rules for Steel and Aluminum

Posted in Antidumping, Border Security, Canada's Federal Government, Customs Law, origin, Trade Remedies, U.S. Federal Government

On May 30, 2018, Canada’s Minister of Finance announced new marking rules for steel and aluminum products.  In a News Release entitled “Canada Bolsters Prevention of Transshipment and Diversion of Steel and Aluminum Products Through Country of Origin Marking Regime“, the Department of Finance announced that Canada was aligning its marking rules with the United States’ marking rules (the U.S. regime requires all foreign-origin steel and aluminum products to be marked with a country of origin). as a result of the new marking rules, foreign steel and aluminum that is not properly marked with country of origin will not be released into Canada by the Canada Border Services Agency.  It will either be sent back to the country of shipment or it will be destroyed.

Changes will be made very soon to two regulations:

(1) Determination of Country of Origin for the Purposes of Marking Goods (NAFTA Countries) Regulations; and

(2) Determination of Country of Origin for the Purposes of Marking Goods (Non-NAFTA Countries) Regulations.

Foreign manufacturers of steel and aluminum products will be expected to mark the goods with a country of origin marking.

The following changes were proposed in the Canada Gazette on April 28, 2018:

Table 1: Proposed amendments to the Determination of Country of Origin for the Purposes of Marking Goods (NAFTA Countries) Regulations and the Determination of Country of Origin for the Purpose of Marking Goods (Non-NAFTA Countries) Regulations

Existing Text Proposed Amendments
None (add in new section in Schedule 1) Add in new text after Schedule 1 (Subsection 2(1)):

1 Goods of Steel or Aluminum

Goods of steel or aluminum classified in headings 72.06 through 72.15, subheadings 7216.10 through 7216.50 or 7216.99, headings 72.17 through 72.29, subheading 7301.10, 7302.10, 7302.40 or 7302.90, headings 73.04 through 73.06, heading 76.01, headings 76.04 through 76.09 or castings or forgings of subheading 7616.99, except wire (other than barbed wire)

2(12) Iron or steel pipes and tubes Delete “or steel”
Renumber sections to reflect new section 1
Schedule II (Subsection 2(2))

4. Used goods, with the exception of iron or steel pipes and tubes

4. Used goods, with the exception of iron pipes and tubes, or goods of steel or aluminum listed in Schedule 1, section 1
5. Goods that are for the exclusive use of the importer or the importer’s employees and not for resale to the general public, with the exception of iron or steel pipes and tubes 5. Goods that are for the exclusive use of the importer or the importer’s employees and not for resale to the general public, with the exception of iron pipes and tubes, or goods of steel or aluminum listed in Schedule 1, section 1
8. Goods that are imported for subsequent exportation from Canada, with the exception of iron or steel pipes and tubes 8. Goods that are imported for subsequent exportation from Canada, with the exception of iron pipes and tubes, or goods of steel or aluminum listed in Schedule 1, section 1

Table 2: Additional amendments to the Determination of Country of Origin for the Purposes of Marking Goods (NAFTA Countries) Regulations (Schedule III — Tariff Shift Rules)

Existing Text Proposed Amendments
Schedule III

  • 72.01 – 72.29
  • A change to headings 72.01 through 72.29 from any other heading, including another heading within that group.
Replace rules 72.01 through 72.29 with the following:

  • 72.01 – 72.06
  • A change to headings 72.01 through 72.06 from any other heading, including another heading within that group.
  • 72.07
  • A change to heading 72.07 from any other heading, except from heading 72.06.
  • 72.08
  • A change to heading 72.08 from any other heading.
  • 72.09
  • A change to heading 72.09 from any other heading, except from heading 72.08 or 72.11.
  • 72.10
  • A change to heading 72.10 from any other heading, except from headings 72.08 through 72.12.
  • 72.11
  • A change to heading 72.11 from any other heading, except from headings 72.08 through 72.09.
  • 72.12
  • A change to heading 72.12 from any other heading, except from headings 72.08 through 72.11.
  • 72.13
  • A change to heading 72.13 from any other heading.
  • 72.14
  • A change to heading 72.14 from any other heading, except from heading 72.13.
  • 72.15
  • A change to heading 72.15 from any other heading, except from headings 72.13 through 72.14.
  • 72.16
  • A change to heading 72.16 from any other heading, except from headings 72.08 through 72.15.
  • 72.17
  • A change to heading 72.17 from any other heading, except from headings 72.13 through 72.15.
  • 72.18
  • A change to heading 72.18 from any other heading.
  • 72.19 – 72.20
  • A change to headings 72.19 through 72.20 from any other heading outside that group.
  • 72.21 – 72.22
  • A change to headings 72.21 through 72.22 from any other heading outside that group.
  • 72.23
  • A change to heading 72.23 from any other heading, except from headings 72.21 through 72.22.
  • 72.24
  • A change to heading 72.24 from any other heading.
  • 72.25 – 72.26
  • A change to headings 72.25 through 72.26 from any other heading outside that group.
  • 72.27 – 72.28
  • A change to headings 72.27 through 72.28 from any other heading outside that group.
  • 72.29
  • A change to heading 72.29 from any other heading, except from headings 72.27 through 72.28.
  • 76.01 – 76.06
  • A change to headings 76.01 through 76.06 from any other heading, including another heading within that group.
  • 7607.11 – 7607.20
  • A change to subheadings 7607.11 through 7607.20 from any other subheading, including another subheading within that group.
  • 76.08 – 76.15
  • A change to headings 76.08 through 76.15 from any other heading, including another heading within that group.
  • 76.01 – 76.04
  • A change to headings 76.01 through 76.04 from any other heading, including another heading within that group.
  • 76.05
  • A change to heading 76.05 from any other heading, except from heading 76.04.
  • 76.06 – 76.15
  • A change to headings 76.06 through 76.15 from any other heading, including another heading within that group.

It should be expected that the regulatory changes will be published soon.

The Department of Finance also announced that it was hiring more CBSA Officers to enforce border laws.  The new funding is to allow the CBSA to identify and stop companies that try to avoid AD/CVD duties and give the CBSA greater flexibility in responding to situations where home market pricing is problematic.

If you have any questions, please contact Cyndee Todgham Cherniak at 416-307-4168 or at cyndee@lexsage.com.

The United States Imposed 25% Steel Tariffs and 10% Aluminum Tariffs on Canada and Canada Responds

Posted in Antidumping, Border Security, Canada's Federal Government, Exports, NAFTA, NAFTA Renegotiations, Trade Remedies, U.S. Federal Government

On May 31, 2108, President Trump issued two Presidential Proclamations, which impose steel and aluminum tariffs on Canada. All exports of covered steel will be subject to a 25% import tariff (Canadian steel into the United States) and all exports of covered aluminum products will be subject to a 10% tariff (Canadian aluminum into the United States). This is a sad day for Canada-US trade relations. The two Presidential Proclamations are:

  1. Presidential Proclamation Adjusting Imports of Steel into the United States; and
  2. Presidential Proclamation Adjusting Imports of Aluminum into the United States.

These measures are Presidential Proclamations and are decisions made by President Trump personally.  These are not anti-dumping and countervailing measures that result from complaints by domestic industry participants. These are not safeguard measures. These are unilateral measures taken pursuant to section 232 of the Trade Expansion Act of 1962, as amended (19 U.S.C. 1862).  President Trump has taken the position that Canada poses a national security threat to the United States.  If Canada agrees to all of President Trump’s NAFTA renegotiation demands, then and only then will Canada be viewed as not a threat to the national security of the United States.

Covered Steel Under Trump Steel Tariffs

The Trump Steel Tariffs cover a wide range of steel products, classified under the Harmonized Tariff Schedule (HTS) 6 digit levels 7206.10 through 7216.50, 7216.99 through 7301.10, 7302.10, 7302.40 through 7302.90, and 7304.10 through 7306.90.  See Presidential Proclamation on Adjusting Steel Imports Into the United States (March 8, 2018).

Covered Aluminum Under Trump Aluminum Tariffs

The Trump Aluminum Tariffs cover products falling under HTS headings for (a) unwrought aluminum (HTS 7601); (b) aluminum bars, rods, and profiles (HTS 7604); (c) aluminum wire (HTS 7605); (d) aluminum plate, sheet, strip, and foil (flat rolled products) (HTS 7606 and 7607); (e) aluminum tubes and pipes and tube and pipe fitting (HTS 7608 and 7609); and (f) aluminum castings and forgings (HTS 7616.99.51.60 and 7616.99.51.70). The Trump Aluminum Tariffs do not cover bauxite or alumina feedstock, aluminum waste and scrap, and/or aluminum powders or flakes. See Presidential Proclamation on Adjusting Aluminum Tariffs Into the United States (March 22, 2018).

Canada Will Retaliate

Canada has indicated it will retaliate against the Trump Steel Tariffs and the Trump Aluminum Tariffs by imposing countermeasures on certain U.S.-origin goods. These countermeasures will only apply to goods originating from the U.S., which shall be considered as those goods eligible to be marked as a good of the U.S. in accordance with the Determination of Country of Origin for the Purposes of Marking Goods (NAFTA Countries) Regulations.

Canada’s Department of Finance has posted a list of proposed retaliatory tariffs ranging from 10% (see Table 2) – 25% (See table 1) (steel products) .  Canada is imposing tariffs on U.S. goods totaling $16.6B (which is the calculated value of Canadian steel and aluminum exports to the U.S. affected by the Trump Steel Tariffs and Trump Aluminum Tariffs). Canada will impose tariffs on U.S. steel (see table 1) at a rate of 25%,  and aluminum and various items at a rate of 10% (see table 2). The other retaliatory tariff items include plywood, veneer, boats, playing cards, beer kegs, whisky/bourbon, coffee, orange juice, strawberry jam, tomato ketchup, mustard, mayonnaise,  maple syrup, licorice candy, soup, gherkins and cucumbers, toilet paper, dishwasher detergent, candles, hair lacquers, combined refrigerators/freezers, laundry-type washing machines, dishwashers, water heaters, mattresses, sleeping bags, lawn mowers, ballpoint and felt-tip pens, etc.

The duties will not be imposed until after a consultation period has ended on June 15th.  It is expected/planned that the Canadian retaliatory tariffs will start on July 1, 2018.  The countermeasures will remain in place until the United States ends the Trump Steel Tariffs and Trump Aluminum Tariffs.

Canadian Importers Should Start Planning Alternative Sources of Supply

Canadian importers will be affected by the new tariffs.  Canadian importers and manufacturers should undertake the following steps:

  1. review imports/inputs and identify whether any goods will be affected by the new tariffs;
  2. review H.S. codes of imported items and certificates of origin for NAFTA goods;
  3. review current purchase orders – do you need to cancel shipments that will arrive after July 1, 2018 or attempt to speed up delivery before the tariffs are imposed;
  4. review contracts for supplies on inputs – do you need to cancel shipments that will arrive after July 1, 2018 or attempt to speed up delivery before the tariffs are imposed;
  5. review supply alternatives – can these goods be purchased from another source country (e.g., EU member as the Canada-EU CETA may apply);
  6. review pricing of goods sold in Canada and determine whether price increases are necessary;
  7. update posted pricing to reflect and price increases or changes to sourcing of goods;
  8. review whether any changes to sourcing affects NAFTA treatment of downstream goods and NAFTA certificates of origin; and
  9. be ready for change.

U.S. Exporters Should Submit Consultation Letters

U.S exporters do not have to stay silent.  U.S. exporters who are affected by Canada’s countermeasures have 14 days to reach out to their buyer/Canadian importers and ask them to help convince the Government of Canada to remove their items from the countermeasures list. If you do nothing, there will be Canadian countermeasures unless the Trump Steel Tariffs and Trump Aluminum Tariffs are reversed.

If you would like more information, please contact Cyndee Todgham Cherniak at 416-307-4168 or at Cyndee@lexsage.com.

America First – America Alone?

Posted in Corporate Counsel, Customs Law, Export Controls & Economic Sanctions, Legal Developments, Politics, Trade Remedies

Originally published by the Journal of Commerce in May 2018

The White House website defines the foreign policy of the Trump Administration as follows: “President Trump is bolstering American influence by leading a coalition of strong and independent nations to promote security, prosperity, and peace both within America’s borders and beyond. The promise of a better future will come in part from reasserting American sovereignty and the right of all nations to determine their own futures.”

Since the start of the current administration, the U.S. has withdrawn from the Paris Accord, the Trans-Pacific Partnership, and now the Iran JCPOA deal, to list the most significant international actions taken to date. The Paris Agreement provides internationally agreed upon standards to manage climate change. The current Environmental Protection Agency Administrator, Scott Pruitt, does not believe that human actions contribute significantly to climate change. See https://www.washingtonpost.com/news/energy-environment/wp/2017/03/09/on-climate-change-scott-pruitt-contradicts-the-epas-own-website/?noredirect=on&utm_term=.74315ce11367, where Mr. Pruitt is quoted as saying: “… so no, I would not agree that [human activity is] a primary contributor to the global warming that we see…” Nonetheless, other countries are proceeding with the Paris Accord.

Then, there was TPP. Whereas the expectation may have been that the deal would be dead when the U.S., withdrew,  that hardly turned out to be the case.  The agreement itself has been adopted and renamed. Alternately known as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP),  and also as TPP11, the agreement was signed, but not-yet ratified by  Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.  Equally interesting is the 20 or so provisions which were originally inserted at U.S. insistence and have now been “suspended”!  Also worthy of note is the expressed interest of the U.K. to join the talks after Brexit.

Subsequently, we have seen events related to NAFTA, KORUS, aluminum/steel tariffs under 232, and the threat of significant tariffs on Chinese goods in the context of 301. Most recently, of course, is the withdrawal of the U.S. from the Joint Comprehensive Plan of Action or JCPOA, the nuclear non-proliferation agreement between Iran, China, France, Russia, the United Kingdom, the U.S. and Germany. The justifications for withdrawal have been well-covered in the general press. Less attention has been paid to the process that will apply.  See the updated OFAC Frequently Asked Questions at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/jcpoa_winddown_faqs.pdf. Certain actions will be subject to a 90 day wind-down period which expires on August 6. 2018, and the remaining activities must be wound-down no later than November 4, 2018.

The 90 day wind-down period applies to sanctions on:

  1. The purchase or acquisition of U.S. dollar banknotes by the Government of Iran;
  2. Iran’s trade in gold or precious metals;

iii.        The direct or indirect sale, supply, or transfer to or from Iran of graphite, raw, or semi-finished metals such as aluminum and steel, coal, and software for integrating industrial processes;

  1. Significant transactions related to the purchase or sale of Iranian rials, or the maintenance of significant funds or accounts outside the territory of Iran denominated in the Iranian rial;
  2. The purchase, subscription to, or facilitation of the issuance of Iranian sovereign debt; and
  3. Iran’s automotive sector.

Plus any and all activities related to General License I, the license associated with contingent contracts related to passenger aircraft and related parts and services.

On or around August 6, 2018, the U.S. will also revoke any authorizations related to:

  1. The importation into the United States of Iranian-origin carpets and foodstuffs and certain related financial transactions pursuant to general licenses under the Iranian Transactions and Sanctions Regulations, 31 C.F.R. part 560 (ITSR);
  2. Activities undertaken pursuant to specific licenses issued in connection with the Statement of Licensing Policy for Activities Related to the Export or Re-export to Iran of Commercial Passenger Aircraft and Related Parts and Services (JCPOA SLP); and

iii.        Activities undertaken pursuant to General License I relating to contingent contracts for activities eligible for authorization under the JCPOA SLP.

The 180 day wind-down period applies to sanctions on:

  1. Iran’s port operators, and shipping and shipbuilding sectors, including on the Islamic Republic of Iran Shipping Lines (IRISL), South Shipping Line Iran, or their affiliates;
  2. Petroleum-related transactions with, among others, the National Iranian Oil Company (NIOC), Naftiran Intertrade Company (NICO), and National Iranian Tanker Company (NITC), including the purchase of petroleum, petroleum products, or petrochemical products from Iran;

iii.        Transactions by foreign financial institutions with the Central Bank of Iran and designated Iranian financial institutions under Section 1245 of the National Defense Authorization Act for Fiscal Year 2012 (NDAA);

  1. The provision of specialized financial messaging services to the Central Bank of Iran and Iranian financial institutions described in Section 104(c)(2)(E)(ii) of the Comprehensive Iran Sanctions and Divestment Act of 2010 (CISADA);
  2. The provision of underwriting services, insurance, or reinsurance; and
  3. Iran’s energy sector.

Also subject to the 180 day timeframe are all activities involved transactions by foreign entities which are owned or controlled by U.S. persons, see General License H.

Pending license applications will be returned without action. No sanctions will be reimposed retroactively, but OFAC makes clear that engaging in new projects between March 8, 2018 and the relevant wind down deadline will be treated negatively.

France, Germany and other long-considered close U.S. allies pushed to keep the U.S. in the JCPOA. They were already disappointed with the outcome, but the situation is no doubt going to get more challenging. The focus of the U.S. sanctions which are being reimposed are the Government of Iran and its financial institutions. The stated goal of course is to get Iran to agree to what the U.S. considers a better deal.  Is such a deal even possible? Why would Iran sit down with this administration when it can wait for the next one and seek reinstatement of the existing deal or something similar? Who will pay the price in the meantime?

The way the U.S. sanctions are written and applied, many European and Asian companies, especially financial institutions, will be barred from making deals with Iranian businesses and/or processing their funds. When that happens, it is entirely possible a larger gap in cooperation will occur between the U.S. and Europe. Does the word “isolation” come to mind?

There is a saying that to avoid making the same mistakes, one must learn from history. The last time the U.S. seriously attempted isolationism was between the end of World War 1 and the bombing of Pearl Harbor which drew the U.S. into World War II.  In those days, the U.S. was a dominant world power, with no real rivals. That is hardly the case today.  Certainly there is the EU. China is also on the rise.  The world is too connected for any one country to totally withdraw from the rest of the world. One has to hope that Mr. Trump’s approach works, especially with the upcoming North Korea meetings, but the lingering question remains what is Plan B?

In the end, what seems to be going on is akin to a neighborhood dispute. No one questions the right of a new administration to take a fresh look at existing policies, but most of us learned early in our youth that you end up with a greater degree of cooperation if you don’t constantly bloody your neighbor’s nose!

The Bumpy Ride Continues!

Posted in Antidumping, Border Security, Corporate Counsel, Cross-border deals, Cross-border litigation, Cross-border trade, Customs Law, Legal Developments, Politics, Trade Agreeements, Trade Remedies, World Trade Organization

Originally published by the Journal of Commerce in May 2018  as part of its 100 Top Importers and Exporters Edition

Old movie buffs immediately recognize the inspiration for the title. There was a movie released in 1950 starring Bette Davis called All About Eve. Its most famous lines have bearing on current events impacting global trade. To paraphrase them – “Fasten your seatbelts. It’s going to be a bumpy [ride].”  Since the start of the current Administration, the U.S. has withdrawn from the Paris Accord and the Trans-Pacific Partnership, KORUS and NAFTA have been or are being renegotiated, 232 steel and aluminum tariffs were imposed, 301 triggered duties on Chinese goods from China, and renunciation of the Iran JCPOA deal occurred, to list the most significant international actions to date.

The bottom line for this Administration is America first, but in a way that seems to turn us inward, with a longing for the good old days, when American was self-sufficient, thereby wholesale ignoring the world is now totally interconnected.

Ironically, just as the U.S. has essentially ticked off all our friendly trading partners, China has stepped up: “We are seeing profound changes in economic globalization  …   We should uphold multilateralism, pursue shared growth through consultations and forge close partnerships.” President Xi delivered these remarks at November 2017 APEC CEO Summit.

It seems as though we are seeing life imitate art. In 1995, Michael Douglas starred in a movie called An American President. The closing scene finds Douglas’ character – the President – stating:

“We have serious problems to solve, and we need serious people to solve them. And whatever your particular problem is, I promise you, Bob Rumson [his opponent from across the aisle] is not the least bit interested in solving it. He is interested in two things and two things only: making you afraid of it and telling you who’s to blame for it. That, ladies and gentlemen, is how you win elections. You gather a group of middle-aged, middle-class, middle-income voters who remember with longing an easier time, and you talk to them about family and American values and character…”

This point was underscored yet again by Commerce Secretary Wilbur Ross’ [no relation] speech to the National Press Club on May 14, 2018. Mr. Ross states: “Does anyone doubt that China’s trade surpluses with us have boosted their economic growth? Second question: If their surpluses with us have been good for China, how can our trade deficits with them not be bad for us? I believe that deficits do matter? But not all trade deficits are the same.” He then mentions the U.S. is not oil self-sufficient and so any country providing the U.S. with “our needs” is part of a “blameless deficit”. All other forms of trade deficit are actionable.  So, obviously the boon to American consumers of cheaper products is irrelevant!

Mr. Ross goes on to say: “Both China and Europe eloquently espouse free-trade rhetoric, but – in actual practice – are far more protectionist than the United States. Our trade policy’s main objective is to make their real-world behavior match their free-trade speeches. A second objective is to have our trading partners abide by the rules … Instead, of the 424 trade actions the U.S. has in effect against violations of the rules, half are antidumping or countervailing cases against China. They have subsidized their industrial expansion far in excess of demand. And have disrupted global markets … China has forced technology transfers from companies wanting to sell to its vast market, and it has stolen intellectual property … A third objection of our trade policy is reforming prior errors made by our government.”  Mr. Ross then goes on to list U.S. efforts to open markets, such as the establishment of GATT and then the WTO, and complains others have taken advantage of the U.S.’s open system to its detriment.  He goes on to complain that Mexico is part of NAFTA, but Mexico also has a free trade agreement with Europe. So, Mexican made vehicles going to Europe are free of duty, but those made in the U.S. are subject to Europe’s 10% duty rate.   Next, he complains that the U.S. only has one vote at the WTO and again is being taken advantage of! Stop whining! If the U.S. has stuck with the TPP and completed efforts at the free trade agreement with Europe, things would be much different!

Secretary Ross then states the U.S. has the largest trade deficit in the world and it is “unreasonable” for it to “bear the burden of bolstering the economic fortunes of the entire planet.”   One has to agree with him here, the U.S. should not shoulder the entire burden, but it is?  If we consider the value of services exported by U.S. companies– what does the trade deficit look like then? By at least one estimate, the value of services exported in 2017 was $780.88 billion!  Since the value of goods exported is in the trillions, the trade deficit will not be wiped out, but at least draw an accurate and complete picture!

While every Administration has the right to review existing policies and procedures, this is the first one in recent memory that has come in with a chip on its shoulder and basically told business, we will totally disregard what our actions do to you and your workers! Against that backdrop,  here is a list of actions businesses might consider:

1)         If you are a member of a trade association, get active with it, bring issues of concern to the right committees and get those associations to take action, including filing comments with the Administration, but more importantly, keep in regular contact with your Member of Congress and Senators.  If you are not already a member of at least one trade association, get cracking!

2)         Members of Congress and Senators prefer to hear from constituent outside the beltway, so  when you can, join association members and visit D.C., or visit with your Member and Senator in their district offices. Congress does not vote on all trade policy, but it still has influence through the purse string. Does anyone think the push to renegotiate NAFTA by the end of May isn’t drive by the political calendar – elections are in November!

4)         Take another look at your roster of advisors.  Do you have the right mix to keep you informed and help support any advice and counsel you may need?

5)         Dust off and update your strategic plan. As various trade remedies are announced, when was the last time you looked to see if you could identify a vendor in a different country with whom you could do business?

6)         Finally, keep innovating – whether with new products, new designs, new methods of production or in any other manner – stay competitive.

The one word answer to what things will look like for the next year is – unpredictable! It has been that way since January 20, 2017. No reason to think things will change anytime soon!

Trump’s withdrawal from the Iran JCPOA Deal: What does this mean for Canadian companies and trusts?

Posted in Aerospace & Defence, Corporate Counsel, Cross-border trade, Export Controls & Economic Sanctions, Exports, U.S. Federal Government

On May 8, 2018, U.S. President Donald Trump announced that the U.S. will withdraw from the Joint Comprehensive Plan of Action (“JCPOA”) with Iran. Canada was not a party to the JCPOA.  So, the U.S. being in or out of the JCPOA does not affect Canada directly.

That being said, President Trump’s decision has consequences that would affect some Canadian-based businesses.  President Trump has directed the U.S. Administration to immediately start the process to re-impose economic sanctions against Iran.  Whether this means the Trump Administration will re-impose the pre-JCPOA sanctions or develop a revised list that comprises old and new sanctions against key sectors of the Iranian economy (e.g., energy/oil, airlines, financial sectors) is anyone’s guess.  What we do know is that new U.S. economic sanctions against Iran are imminent and will be meant to punish Iran.

What does this mean for Canadian Companies?

The short answer is that some Canadian businesses will not be able to engage in certain business activities with Iran or Iranian persons.  What is currently legal may become illegal or restricted under U.S. law.

Canadian companies (including subsidiaries of U.S. companies, affiliates of U.S. companies, and trusts) should undertake a risk assessment as soon as possible to determine whether any aspect of their business will be affected by the new U.S. economic sanctions against Iran.  The time to ask the questions is now.

First Question: Is there exposure?

Canadian companies, Canadian subsidiaries of U.S. companies, Canadian branches of U.S. companies and Canadian companies that purchase business inputs from the United States need to ask questions to define their exposure, such as:

  • Does the company/branch have any dealings with Iran or Iranian persons?
  • Are any existing contracts with Iran or Iranian persons?

If the answer is “yes” to either of these question, it will be necessary to ask more questions.

U.S. sanctions can and do reach subsidiaries and branches of U.S. companies. U.S. subsidiaries and branches will need to consider whether certain future transactions (or completion of existing transactions) will be prohibited by the re-imposition of sanctions by the United States.  We will talk about the exposure of wholly owned Canadian companies below.

Second Area of Inquiry: Employees/Officers/Directors

For Canadian companies and multi-nationals, an important question is whether decision makers are Americans.  U.S. law applies to Americans in the United States and outside the United States. If there are American individuals in the company, it may be that the decision tree within the organization may need to be adjusted to remove Americans from decisions on business with Iran and/or you may need to take further steps to ensure they are not in violation of U.S. sanctions.

Third Area of Inquiry – the Goods

If there is business with Iran, what is the status of that business? Will there be deliverables after the re-imposition of US sanctions.  Will the Canadian company need to apply for a U.S. export permit or OFAC approval before completing a contract?

We do not yet know the details about what is to be covered by the new economic sanctions.  In the meantime, each Canadian company with business in Iran needs to identify the contracts with Iran and what goods will be delivered and to whom.  Canadian companies need to be ready to stop certain export transactions. Even though the transaction may not be prohibited under Canadian economic sanctions, the U.S. sanctions may apply.

Canadian Export Permits

Canada controls the export from Canada of goods and technology that originates in the United States.  As a general rule (and pursuant to item 5400 of the Export Control List), exporters from Canada must obtain an export permit from Global Affairs Canada for U.S. origin goods and technology.  ECL Item 5400 covers:

“All goods and technology of United States origin, unless they are included elsewhere in this List, whether in bond or cleared by the Canada Border Services Agency, other than goods or technology that have been further processed or manufactured outside the United States so as to result in a substantial change in value, form or use of the goods or technology or in the production of new goods or technology.”

Canadian companies who export goods and/or technology to Iran must obtain a Canadian Individual Export Permit for each shipment.  Global Affairs Canada will require a  copy of a U.S. export permit.  If sanctions cover the goods in question, it is unlikely the U.S. Administration will grant the export permit required by Global Affairs Canada.

There is an important clarification to the above rule.  Goods and technology that “have been further processed or manufactured outside the United States so as to result in a substantial change in value, form or use of the goods or in the production of new goods” are excluded from the controls is item 5400.  There is no written guidance on what “significant change” means.  While, as a rule of thumb, a “significant change” normally is normally around 50% of the regional value content in Canada, there are no rules for the calculation of regional value content in the context of Item 5400.  Other factors and considerations come into play.

When conducting the analysis, it is important to prepare a bill of materials for the finished product to be exported from Canada and identify which inputs are of U.S. origin. You will need to include the B3 customs documentation relating to the imports of the U.S. origin goods or the invoice received from a distributor or seller in Canada.  This is a starting point and the result can be influenced by the role of particular inputs in the finished product. For example, if the essential character of a finished product is derived from U.S origin goods, it can be that the finished good is controlled.

Canadian companies and trusts that sell Canadian manufactured goods to Iran will need to undertake a compliance review with respect to goods made from U.S. inputs and revisit their analysis.

Getting Paid

If the U.S. imposes economic sanctions on Iranian financial institutions, Canadian companies may find it more difficult to get paid.  Most business is conducted in United States dollars.  Many USD payments go through U.S.-based financial institutions.  If U.S. financial institutions cannot deal with certain Iranian banks, Canadian companies may run into difficulties getting paid too.

Canadian companies doing business with Iran should review the financial arrangements in contracts and restructure payment arrangements as needed.

Review Existing Lines of Credit and Loan Documentation

Canadian companies that do business with Iran should review all existing credit facility and loan agreements.  Many contracts contain representation and warranty provisions and covenants to comply with all laws, including U.S. economic sanctions laws.  Some agreements specify compliance with U.S. economic sanctions laws.  It is possible that a Canadian business will have to report certain business to their financial institutions under the credit facility and loan contracts and that activities relating to Iran would put those agreements in jeopardy.

If you require any assistance in conducting a risk assessment, please contact Cyndee Todgham Cherniak at 416-307-4168 or at Cyndee@LexSage.com or Heather Innes at 416-315-1234 or at Heather@LexSage.com.

 

 

Are Actors/Actresses/Performers/Directors Required to Register for GST/HST?

Posted in Canada's Federal Government, Cross-border trade, GST/HST

Canada is known as Hollywood North because many movies and television shows and commercials are filmed in Canada. However, unlike the United States, Canada has a federal sales tax called the goods and services tax (“GST”) and in some provinces harmonized sales tax (“HST”) is imposed.  GST/HST is exigible in respect of supplies of services (including the services of acting or directing or performing in a movie, video, television program/series, commercial, music video, acting in a theatre production or musical, etc.). GST is imposed in all provinces and territories at a rate of 5%.  HST is imposed in Ontario, Quebec (called QST), Nova Scotia, New Brunswick, Newfoundland/Labrador and Prince Edward Island at varying rates between 13%-15%.

An issue arises for non-resident actors, actresses, performers, directors, producers, etc. – Do they need to charge GST/HST on their services.  Non-resident actors, actresses, performers, directors, producers and others who work on sets in Canada earn fees for their services either directly as employment income or as an independent contractor or through a company.  Many actors, actresses, directors, etc. have companies that enter into a services contract with a services/production company that is producing a work in Canada.

When the actors, actresses, performers, directors, producers and others earn employment income (that is, they are an employee of the person who pays them for their services), GST/HST is not payable or collectible. The reason for this is that the definition of “commercial activity” excludes an office or employment.

The term “commercial activity” does include business activity and adventures or concerns in the nature of trade.  When the actors, actresses, directors, producers and others enter into a services contract (either as an independent contractor who contracts directly or through a services/production company), GST/HST may be collectible/remittable on top of the consideration payable for the acting/directing services.  In other words, an actor who provides services as an independent contractor or through a production company may be required to charge, collect and remit GST/HST.  The acting or directing services are considered to be taxable (from a GST/HST perspective, not necessarily income tax) supplies made in Canada.  Another issue is Canadian income tax – but we will not be addressing income tax and withholding tax in this post. It is important to know that the test for income tax is different than for GST/HST – they are different types of taxes.

Whether or not a specific contract is subject to GST/HST on the facts.  The most important question is whether the actor, actress, director, producer, etc. is “carrying on business in Canada” or carrying on business with Canadians.  If the actor, actress, director, producer, etc. is “carrying on business in Canada, the actor, actress, director, producer, etc. is required to register for GST/HST purposes and to charge, collect and remit to the Government of Canada GST/HST on the service fees charged in the contract (with respect to the fees earned in relation to activities in Canada).  If the actor, actress, director, producer, etc. earns a portion of the fees based on the success of the movie or work, a portion of that amount may also be subject to GST/HST.

Whether a person is “carrying on business” in Canada is a factual question that must be reviewed on a case-by-case basis.  At one end of the spectrum, an actor/actress/performer/director/producer comes to Canada one time for a few days to film a few scenes on location.  This person is not likely to be considered to be carrying on business in Canada.  At the other end of the spectrum, a person moves to Canada for a year or longer to film a television series or movie that is set in Canada or to perform in a long running theatre engagement in Canada.  This person is likely to be considered to be carrying on business in Canada.  The range of scenarios in the middle is endless – this is where further consideration of the facts is always necessary..

The starting point of the analysis as to whether a person is “carrying on business” in Canada is set out in Policy  P-051R (2005) “Carrying on business in Canada”, which is the Canada Revenue Agency’s (“CRA”) written administrative positions on the general subject of carrying on business in Canada.  There isn’t a specific policy for actors, actresses, directors, producers, etc.  Policy Statement P-051R has a number of examples.  Examples 18-21 deal with the provision of services in Canada by a company.  In most cases where an employee performs services in Canada, the CRA takes the position that the company is carrying on business in Canada.  Given the complexity of the factual analysis for actors, actresses, performers, directors and producers and the amount of money involved, it is important to ask the questions as the contract is being negotiated. Policy P-051R sets out a number of factors that the CRA will consider. However, no one factor is considered to be determinative.

The CRA issued a headquarters letter in 1999 (HQR0001927) in which it took the position that the following scenarios would be considered by the CRA to involve a performer carrying on business in Canada:

  • a non-resident performer who provides acting services in Canada during the making of thirteen episodes of a series for television; or
  • a non resident performer who provides acting services in Canada during the shooting of three specific films in one calendar year.

The CRA took the position that a non-resident performer who provides acting services in Canada during the shooting of a film may not be considered to be carrying on business in Canada.  That being said, more recently, the CRA has taken the position that a non-resident performer who provides acting services in Canada in connection with a single film was carrying on business in Canada based upon other relevant facts, including the fact that the film was produced by a Canadian incorporated entity (not a non-resident production company), the amount of remuneration earned for the acting services, the living arrangements of the performer while in Canada, and the length of time in Canada the performer would spend filming.

Most Canadian productions involve a Canadian company as the buyer of the acting, directing or producing services.  If that entity is registered for GST/HST purposes, it may recover GST/HST paid to actors, actresses, directors, producers, etc.  As a result, the entire production may be structured so that any GST/HST payable is a flow-through.  In other words, the actor’s company collects the GST/HST and remits it and the production company that pays the GST/HST gets in back.  Sometimes, it is better for companies of actors, actresses, directors and producers to register and collect the GST/HST rather than being audited by the CRA.

We have provided legal services to many actors, actresses and directors directly or through their Canadian agents or U.S. accountants.  We have to review the questions each time the actor, actress, director, producer, etc. comes to Canada for another movie, television series, guest appearance, theatre or musical performance, etc.  It is necessary to have GST/HST addressed within the services contract.

If you have any questions about GST/HST, please contact Cyndee Todgham Cherniak at 416-307-4168 or at Cyndee@LexSage.com.