INTERNATIONAL TRADE AND CUSTOMS LAW NEWSLETTER PREPARED FOR THE CLIENTS AND FRIENDS OF THE FIRM, FOR VIEWING ON THE WORLD WIDE WEB.

Volume XI, Number 8
October/November, 1997

MARKING DUTY PAYMENT
NOT REQUIRED FOR
"PRIOR DISCLOSURE":
FEDERAL CIRCUIT:

Special 10% ad valorem marking duties assessed pursuant to 19 U.S.C. Section 1304 are not "withheld duties", and need not be tendered to Customs as a condition of receiving "prior disclosure" treatment, the U.S. Court of Appeals for the Federal Circuit (CAFC) recently held. In Pentax Corp. v. Robison, the CAFC reversed a 1996 U.S. Court of International Trade (CIT) ruling that an importer who had confessed to marking imported goods with the wrong country of origin must tender $5 million in marking duties to Customs, or face full liability for 19 U.S.C. Section 1592 civil penalties.

The CAFC ruled that the concept of "withheld duties" under 19 U.S.C. Section 1592 is subject to a strict "but-for causation" test: the violation must have deprived Customs of duties it would otherwise have been entitled to collect. Marking duties don't fit that definition, the CAFC ruled; the failure to mark goods does not deprive Customs of marking duties, but triggers liability for such duties. Thus, an importer confessing marking law violations need not tender marking duties up front to obtain "prior disclosure" protections.

Copies of the Pentax decision are available from our offices [GTR #97-801].

CUSTOMS APPLIES
NISSHO-IWAI
VALUE RULE IN
RELATED PARTY CASE

The "first sale" Customs valuation rule of Nissho-Iwai American Corp. v. United States, 982 F.2nd 505 (Fed Cir. 1992) applies, under certain circumstances, to transactions between related units of a single multinational enterprise, according to a significant new U.S. Customs Service ruling. The Nissho-Iwai decision holds that when merchandise is the subject of two or more "sales for exportation to the United States", its dutiable transaction value should be based upon the first such sale which, considered independently, would be an acceptable basis of "transaction value".

In Customs Headquarters Ruling 546357 of August 27, 1997, Customs for the first time accepted the use of the Nissho-Iwai rule in a "three tiered" transaction involving units of a single multinational enterprise. The ruling involved a U.S. importing subsidiary of a Japanese electronics manufacturer, which placed orders with its Japanese parent company for goods to be imported into the U.S. The parent had the option to fill the order internally, but instead ordered the merchandise from its Chinese manufacturing affiliate. Customs ruled that the sale price from the Chinese affiliate to the Japanese parent -- which was based on manufacturing costs plus a negotiated mark-up -- could be used as the basis of determining the "transaction value" of the imported goods.

In a related development, the Internal Revenue Service ruled that the U.S. importer's taxable basis in the imported merchandise would not be limited to the dutiable value of the merchandise [as Section 1059A of the Internal Revenue Code would suggest], but may instead be adjusted upward to reflect additional mark-ups charged by the Japanese parent which were not included in dutiable value.

The ruling will be of significant interest to multinational enterprises. Copies of the Customs and IRS rulings, together with an analysis prepared for recent AAEI Transfer Pricing conference, are available from our offices [GTR #97-802].

SALE TO "SHELL"
IMPORTER NOT
BONA FIDE: CIT

The Nissho-Iwai rule is not limitless, however, the U.S. Court of International Trade recently noted, holding that a purported sale from a Canadian textile factory to its insubstantial U.S. importing subsidiary was not a bona fide sale, and could not used as the basis for calculating dutiable "transaction value". In VWP of America, Inc. v. United States, Slip Op. 97-139 (September 25, 1997), a Canadian firm which had previously sold wool fabrics directly to U.S. purchasers set up a U.S. subsidiary which had a single employee and no significant assets. The Canadian plant sold fabrics to the U.S. subsidiary on an "FOB Canadian plant" basis; the subsidiary resold the fabrics to U.S. customers on the same terms.

The importer asserted that the dutiable "transaction value" was the price it paid its Canadian parent. After an audit, Customs concluded that these were not bona fide sales, and that the fabrics should be appraised according to the prices charged to the U.S. customers. The CIT agreed, noting that the U.S. subsidiary held title and risk of loss to the goods only momentarily; it maintained no U.S. inventories, bore no responsibility for returns of defective merchandise, and lacked freedom to select the U.S. customers and negotiate prices with them. Rather, the U.S. firm was, in effect, a mere conduit or selling agent for the Canadian plant.

As a result of the VWP of America decision, Customs can be expected to take a more critical view of U.S. "sales subsidiaries" of foreign factories. Copies of the VWP of America decision are available from our offices [GTR #97-803].

CIT: CUSTOMS MAY
NOT APPLY INVALID
REGULATION

Once the courts have invalidated a Customs regulation, the agency may not lawfully apply it to future transactions, the U.S. Court of International Trade recently held. In Gulfstream Aerospace Corp. v. United States, Slip Op. 97-137 (September 19, 1997), Customs denied an importer's claim for duty-free entry of civil aircraft parts, based upon the importer's failure to submit required certifications at the time of entry. Customs asserted that, under its regulations, the importer's post-entry attempts to provide the required certification were impermissible. However, the regulation requiring certification at the time of entry had been invalidated by the Federal Circuit's 1996 Aviall of Texas since it had not been promulgated with adequate notice under the Administrative Procedure Act.

In Gulfstream, the CIT ruled that Customs was estopped from attempting to enforce the regulation which had been invalidated in Aviall. While acknowledging that the government was free to try and distinguish the case at bar from the situation presented in Aviall, Judge R. Kenton Musgrave held that the government had failed to make such an attempt, and its efforts to apply the invalidated rule were "somewhere between wishful thinking and contempt." Finding that the Customs Regulations provided a basis for the importer to submit the certifications after entry, the Court ruled that Customs must accept the certifications and accord duty-free treatment to the importer's aircraft parts.

Copies of the Gulfstream Aerospace decision are available from our offices [GTR #97-804].

INTEREST PAYABLE
ON CERTAIN DRAWBACK
REFUNDS: CIT

Drawback claimants are entitled to receive interest on refunds of "returned drawbacks", according to a recent U.S. Court of International Trade decision. In Novacor Chemicals, Inc. v. United States Slip Op. 97-138 (September 25, 1997), an exporter received an accelerated drawback payment, but its claim was subsequently liquidated "no drawback". The claimant paid Customs' bill for restoration of the accelerated drawback, which was styled as a bill for "supplemental duties", and successfully protested it. Customs refunded the accelerated drawback, but paid the claimant no interest.

The CIT, in a decision which is certain to be controversial, held that a refund of "returned drawback" based upon a reliquidation of the claim, was conceptually identical to a payment of "increased or additional duties" upon liquidation or reliquidation of an import entry. Thus, the CIT ruled, the drawback claimant was entitled to interest on its refund, even under the Tariff Act's "interest" provisions as they existed before the enactment of the Customs Informed Compliance and Modernization Act in 1993.

While the government is certain to appeal from this decision, drawback claimants will in the meantime continue filing protests in order to preserve their right to potential interest on repayments.

Copies of the Novacor decision are available from our offices [GTR #97-805].

DUMPING: INTERIM
MEASURES MUST
EXPIRE, SAYS CIT

Provisional antidumping duties and deposit requirements, imposed upon publication of a preliminary Less Than Fair Value (LTFV) determination, expire after four months unless exporters request an extension, the U.S. Court of International Trade (CIT) recently held. In De Cecco di Filippo Fara San Martino, SPA et al v. United States, Slip Op. 97-143 (October 2, 1997), Commerce made a preliminary affirmative LTFV finding against Certain Pasta from Italy, and imposed provisional antidumping measures. Subsequently, the Italian exporters asked that the LTFV investigation be extended, but did not request an extension of the provisional antidumping measures. The Commerce Department determined that implicit in the exporters' request to extend the investigation was a consent to the extension of provisional dumping measures.

The CIT disagreed. Holding that the language of 19 U.S.C. Section 1673(b)(d) must be interpreted as written, the Court concluded that provisional antidumping measures "may not remain in effect for more than 4 months" unless "exporters representing a significant proportion of the subject merchandise" request an extension. Since the exporters had not requested an extension, the CIT held, Commerce lacked authority to extend the provisional measures.

The Court rejected the government's policy-based argument that allowing provisional antidumping measures to expire during the course of an investigation would create a "gap" during which allegedly dumped imports could be entered into the United States without depositing estimated antidumping duties. Although the government argued that Congress intended that provisional measures be in place in all cases "from the day the preliminary [LTFV] determination is published until the final determination is published", the Court found no statutory support for this assertion.

As a result of the DeCecco ruling, Commerce is likely to refuse any request to extend investigation periods unless the request is accompanied by a request for extension of provisional antidumping measures. Copies of the decision are available from our office [GTR #97-806].

NEW "INTEREST"
DECISION COULD
HURT IMPORTERS

Customs Service bills for "interest" on underpaid duties must be protested separately from the duty assessments on which interest is charged, according to a controversial new decision by the U.S. Court of Appeals for the Federal Circuit (CAFC). In Castelazo & Associates v. United States, No. 96-1109 (October 7, 1997), an importer entered merchandise subject to an antidumping order, furnishing Customs with a bond, rather than a cash deposit of estimated antidumping duties. Years later, Customs liquidated the entries, assessing antidumping duties, plus interest for the period between the filing of entries and liquidation. The importer filed a timely protest against liquidation of the entries, but did not specifically challenge the interest assessment. The protest was approved in part and the entries reliquidated, with interest in a higher amount. The importer protested the reliquidation, challenging the assessment of both duties and interest.

Reversing a Court of International Trade decision, the Federal Circuit ruled that the importer's failure to specifically challenge the interest assessment following the initial liquidation of an entry made the interest assessment final and unappealable. The Court reasoned that interest payments are "charges and exactions", which do not merge in liquidation. Thus, a protest against the liquidation of an entry (including classification, appraisement and similar decisions which "merge" in liquidation) is not necessarily a challenge to the assessment of interest.

Although the Castelazo decision involved antidumping duties assessed on entries made prior to the 1993 enactment of Customs "Mod Act", the decision is likely to affect many post-Mod Act entries which were liquidated with increased duties plus interest. As the Castelazo court noted, the legal provisions regarding liquidation and protest were not substantively changed by the Mod Act, which allows Customs to assess interest on pre-liquidation duty "underpayments". Importers who challenged duty increases, but did not specifically protest Customs' bills for interest, may be precluded from recovering the interest.

Furthermore, the Federal Circuit's recent Travenol decision, read in conjunction with the Castelazo case, suggests that Customs may even be able to send importers interest bills for pre-"Mod Act" entries which were finally liquidated after the December 8, 1993 effective date of the "Mod Act".

Copies of the Castelazo decision and our firm's memorandum analyzing it are available from our offices [GTR #97-807].

COMMERCE ANNOUNCES
"TRANSITION"
REVIEWS OF AD, CVD
ORDERS

The Commerce Department, International Trade Administration (ITA) has published its tentative schedule for the commencement of "transition" reviews of outstanding antidumping and countervailing duty orders. The reviews will take place over a 3-year period, commencing in January, 1998.

The Uruguay Round Trade Agreements require that antidumping and countervailing duty orders expire after 5 years, unless an administrative review indicates a need for the orders to be continued. The Uruguay Round Agreements Act (URAA) amended the U.S. trade laws to provide for such reviews, and to also provide for review of all previously-issued orders (some in effect for more than 30 years) during a three-year "transition" period. Commerce's schedule indicates when it plans to initiate transition reviews of the currently outstanding orders.

Neither the Commerce Department nor the U.S. International Trade Commission (ITC) has published regulations for the conduct of "transition" or "sunset" reviews, so the exact procedures to be utilized in these reviews are not yet clearly defined. Nonetheless, domestic industries who petitioned for these orders can now begin planning their strategy concerning possible continuation of these orders, while foreign manufacturers and exporters, and U.S. importers, can begin planning for their participation in these reviews, with an eye toward terminating the orders.

ITA's tentative schedule of "transition" reviews is available from our offices, together with a list of antidumping and countervailing duty orders currently in effect [GTR #97-808].

EXTILE TRADE: CITA
TO CONTINUE VISAS,
LICENSES FOR
"INTEGRATED" GOODS

Although approximately 16% of U.S. textile and apparel imports will be removed from quota controls and "integrated" into World Trade Organization trade rules on January 1, 1998, importers will be required to continue presenting Customs with export licenses and textile visas for these goods, according to a recent announcement for the Committee for the Implementation of Textile Agreements (CITA). Notwithstanding the elimination of quotas for many imported textiles (save those from China), CITA has determined that it is necessary, in the agency's judgment, to continue requiring the presentation of export licenses and visas for these goods. [CITA has also announced that, to adjust for "Stage 2" textile integrations, it will reduce "group" quota limits for certain countries].

CITA's announcement, which is likely aimed at detecting and deterring the unlawful transshipment of Chinese-origin goods, will require importers to continue obtaining export documents as if quotas were in effect. The decision has been assailed as an attempt to continue blocking textile imports after quotas are removed. Copies of the announcement are available from our offices [GTR #97- 809].

NAFTA PARITY;
WAYS AND MEANS
VOTES OUT BILL

The House Ways and Means Trade Subcommittee on October 9 approved H.R. 2644, the Caribbean Trade Partnership Act (CTPA). The CTPA, if approved by the full Congress, would grant NAFTA-like trade preferences to a wide range of textiles, apparel, footwear and other goods produced in Caribbean Basin Economic Recovery Act (CBERA) beneficiary countries. The bill would extend such preferences during a 14-month "transition" period, during which time the U.S. and the Caribbean "partners" would negotiate permanent NAFTA accession or NAFTA-like agreements.

The Senate Finance Committee passed a more limited "NAFTA Parity" bill on October 2. House-Senate conferees are likely to iron out differences of the bills in an upcoming conference.

Copies of the CTPA are available from our offices [GTR 97-810].

LABELING; FTC
MAY WITHDRAW PROPOSED
"MADE IN USA" GUIDES

Following a torrent of negative comments from domestic manufacturing interests and labor unions, the Federal Trade Commission (FTC) will reportedly withdraw its proposed "Made in USA" labeling guides. The guides, issued for public comment earlier this year, would have replaced the current requirement that goods be made "all or virtually all" from domestic materials and labor in order to be marked with an unconditional "Made in USA" label, with a series of "safe harbor" rules which would have allowed goods with as little as 75% U.S. content to bear such a label. FTC spokesmen have indicated that the agency is likely to retain its "all or virtually all" rule, and to indicate the agency's interpretation that goods containing 89% of more domestic content qualify for a "Made in USA" label. [The derivation of this "89% rule is presently unclear].

For further information concerning matters discussed in the Global Trade Report, please call Martin Neville, John Peterson, Maggie Polito or Arthur Purcell at (212) 635-2730 or George Thompson at (202) 861-2959.