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Treasury Makes It Easier to Comply, When Exporting

PMA manufacturers who are exporting their parts from the U.S. need to ensure that they remain in compliance with the U.S. export regulations.  In addition to the BIS and DDTC regulations that apply to aircraft parts, exporters also need to remain in compliance with Treasury Department regulations.

Some of those Treasury Department regulations include lists of people and entities that you ought not to do business with.  Every agency has multiple lists that you need to examine, but Treasury is doing something to consolidate its lists and make it easier to review them. This consolidation should make it easier to search to ensure compliance, whether you are searching on line or using a computer program to automatically research your business partners.

The Treasury Department office with jurisdiction over export programs is the Office of Foreign Asset Control (OFAC).  OFAC has a list of Specially Designated Nationals (SDNs) as well as other (non-SDN) sanctions lists. OFAC is now offering all of its non-SDN sanctions lists in a consolidated set of data files called the Consolidated Sanctions List. This consolidated list will include the following:

  • Non-SDN Palestinian Legislative Council List
  • Part 561 List
  • Non-SDN Iran Sanctions Act List
  • Foreign Sanctions Evaders List
  • Sectoral Sanctions Identifications List

OFAC announced that it plans to discontinue some of these lists as separate lists, so they will only be available as part of the consolidated list.

Persons seeking to check whether there are OFAC sanctions that might apply to their transaction should be sure to check their export business partners (by personal name and company name) against the Specially Designated Nationals List and the Consolidated Sanctions List.

One can also use the Sanctions List Search which consolidates both lists into a single searchable database. This tool is useful because it can automatically search for names that are close (bot not exact matches) and can be set to find matches with different levels of confidence (which will then be reviewed by a human to assess whether they actually match).

Exporters should also check the details of their transaction (including destination country) against the Sanctions Programs and Country Information page, which list sanctions programs based on country and on certain other criteria.

MARPA Wins Department of Commerce Grant to Expand Export of PMA!

MARPA is proud to announce that it is the recipient of a $300,000 matching grant from the Department of Commerce International Trade Administration Market Development Cooperator Program!  MARPA was one of eight recipients of funding under the Market Development Cooperator Program (MDCP), which is intended to help organizations boost exports and create U.S. jobs.  With the receipt of this assistance, MARPA plans to implement a number of initiatives to help grow the international PMA market and most importantly help our members grow their businesses by exporting more PMA parts!

The first of these initiatives will be to establish a European MARPA Conference, similar to the MARPA Annual Conference held in Las Vegas. Our current target is for the inaugural MARPA Europe conference to occur in May 2015, in Istanbul, Turkey.  The primary goal of MARPA Europe will be to bring together PMA manufacturers (our members) and customers from both Europe and the Middle East.  Air carriers reliably account for 25% of our Las Vegas attendees, and we expect to meet or exceed that rate at MARPA Europe.

Another initiative will be to lead educational missions to regions that present an opportunity for expanded PMA penetration. These include Japan, China, Southeast Asia, and the Middle East.  MARPA will lead technical and regulatory seminars explaining the benefits of PMA and the way PMAs fit within the regulatory framework of the various countries we visit.  MARPA also plans to attend regional MRO shows and other trade shows to educate the global aviation industry about the benefits of PMA.

Finally, MARPA will work with our partners and air carrier contacts to continue to bring more air carriers to both the MARPA Annual Conference in Las Vegas as well as MARPA Europe.  The significant and growing attendance by air carriers at MARPA’s conferences make them the premiere events for PMA manufacturers to meet and network with air carriers in an intimate setting.

Of course nothing in life is free!  One very important element of MARPA’s participation is the MDCP program will be measuring the effects our efforts have on growing the export PMA market.  In a previous post we explained that MARPA would begin collecting export data from our members to get a better idea of the global PMA market share and identify to what market PMAs were being sold and where opportunities lay.  As a part of our commitment to the Commerce Department, MARPA will track and measure the increases in exports reported by our members.  This will be an important part of the next three years, as MARPA works closely with the Commerce Department to grow exports of PMA.  MARPA will also need the help of its members to collect and report accurate data to measure the effects of our initiatives.  We will be working with our members to help them increase their exposure to foreign markets and increase their exports in order to optimize the return on the Commerce Department’s investment as well as to develop accurate PMA export data.

Fred Elliot from the Department of Commerce and Ryan Aggergaard from MARPA will be on hand at the MARPA 2014 Annual Conference in Las Vegas to discuss some of MARPA’s planned initiatives and the requirements related to the award of the MDCP grant, as well as to answer member questions on how they can benefit from MARPA’s new programs.  We look forward to seeing you there!

PMA Export Data Needed

As the sole trade association representing the PMA industry, MARPA receives many inquiries from both industry and regulators regarding the economic effect of the PMA industry.  Among the most frequent question is to the extent PMA parts are exported to other countries.  Because the aerospace industry is such a large exporter, information regarding economic effect is useful in helping to shape policy and build support for the industry.

Unfortunately, MARPA does not have a significant pool of data from which to report or draw conclusions when approached with questions about economic effects and export statistics.  Although we have data from a handful of members and plenty of anecdotal evidence to support the PMA industry’s positive economic effect, we lack significant hard data from which to draw any statistical conclusions.  We would like to change this.

MARPA is therefore beginning an initiative to collect export data from our members to begin developing statistical data specific to the PMA industry.  Rather than relying on information from aerospace trade publications or industry forecasting groups, which tend to focus on the aerospace industry as a whole without distinguishing PMA, MARPA seeks to develop a PMA-specific industry analysis.

But to develop and perform such economic export analyses, we need the help of our members.  We will therefore be requesting that our members provide to us economic export data about their businesses.  Such data would include, for example, to which countries you export, revenue derived from export, and percentage of total revenue derived from exports.

Of course, there is nothing more important to MARPA than a robust and competitive PMA industry.  With that in mind, all information submitted to MARPA will be kept strictly confidential, and used only for overall statistical analysis.  No company names, data, or strategies will ever be disclosed, either to other members, regulators, or the public in general.  We understand and appreciate how important confidentiality is, and how much value is placed in keeping data about your business private.

The more data we obtain the better we will be able to promote the benefits of PMA, open new markets and expand existing markets, continue to build the trust of industry, and gain the support of regulators.  We cannot do any of this without the support of our members.

We will be discussing this initiative further at the MARPA Annual Conference in Las Vegas, just a little more than a month away.  But in the meantime, if you have data readily available, or have any questions about this initiative, you can email them to Ryan Aggergaard at MARPA at ryan@washingtonaviation.com.  We look forward to hearing from you, and continuing to build the future of PMA.

How Might REACH (European Environmental Regulations) Affect Your Business?

The U.S. Commerce Department will hold a webinar on November 29 to discuss the effect of European Evironmental Regulations on  U.S. Aerospace companies.

The European Union has a regulation called the REACH regulation.  REACH stands for Registration, Evaluation, Authorisation & restriction of CHemicals.

REACH imposes certain obligations on companies that manufacture certain chemicals in Europe, and on companies that import certain chemicals into Europe.  Under REACH, the continued marketing of substances of Very High Concern (SVHCs) requires an authorization. Businesses active in the aerospace marketplace use a number of substances that are being considered for SVHC classification, and unauthorized import into Europe of such substances could violate REACH.

For more information, see the notice on the Commerce Department website.

U.S. Government Almost Ready to Publish Export Reform

MARPA has reported on, and vocally supported, the Administration’s plans to revise the U.S. export rules in a way that makes it less complex to export aircraft parts.

The Hill Reports that the Administration is getting ready to publish the first of these export revisions.

Those of you who’ve seen me speak on export law in the past year know that I have been predicting that the Administration will take far less than the normal 18 months to publish the final rule in the export reform provisions.  While most people deride election cycle politics for its emphasis on form over substance, and a tendency for both parties to block partisan gains that might help the other earn votes, this is one situation where election year politics work in our favor.  The Administration would like to be able to take credit for making it easier for businesses to export products, in order to show that they are not anti-business.  The export reforms will do just that.

If the final rule looks like the proposal, then it will ease unnecessary burdens on the export of many dual-use aircraft parts.  With many dual-use aircraft parts (replacement parts that can be installed on both civilian and military aircraft), their precise placement into BIS or DDTC jurisdiction can be ambiguous, and can be based on facts that are not readily available to many exporters.  For example, the mechanism for obtaining a license to export a replacement part that is listed on both a military engine design and a civilian engine design (approved by the FAA) is very ambiguous, because it can be unclear whether the FAA exception applies [originally published in the 1979 Export Administion Act section 17(c), the exception has been turned into a rubik’s cube with contradictory guidance].

The proposed rule would move all of the dual use aircraft parts into BIS jurisdiction, leaving only parts with a clear defense mission in the jurisdiction of DDTC.

This is important to exporters because (1) many BIS exports do not need a license while nearly all DDTC exports require a license, and (2) even if a license is necessary, it is far quicker and easier to obtain a license from BIS than it is from DDTC.  It is also useful because there has been a lot of confusion about which agency’s rules must be followed for certain aircraft parts, and the reform would make the pathway to compliance much more clear.

30 Year Old Tax-Break for Exporters is Worth Another Look

At the MARPA Conference, Kevin Cox of LarsenAllen mentioned IC-DISCs as a way to minimize federal taxes on profits from exports.  After his presentation, I asked if his organization could provide us with more information, because this seemed like a useful structure for MARPA members performing significant exports.  In response, his colleague Steve Roark wrote us the following article describing the IC-DISC and the way that a US exporter can use an IC-DISC to reduce its tax obligation.  Contact information for LarsenAllen is at the bottom of the article.

Manufacturers and distributors work hard to provide products and services competitive in the global economy. Now more than ever, generating foreign sales is a necessary component to growth. Competition for export sales is burdened by many factors including foreign competition, tariffs, fees, foreign taxes and so forth. Wouldn’t it be great if companies could get a break from this burden? The rallying cry by many companies is that Congress needs to act now to allow U.S. manufacturers to be more competitive in the global market. Well, Congress did act – they just acted about 30 years ago. Years ago, congress recognized the growing disparity in global competition and provided a way to help compete on a level footing in the face of these burdensome requirements. The vehicle to do this is through the tax strategy called an IC-DISC.

Organizations that have export sales can significantly reduce their Federal tax by creating an Interest Charge-Domestic International Sales Corporation (IC-DISC). It’s a long name, but the concept is quite simple. By creating a separate entity, a domestic organization with international sales can defer and/or reduce their overall tax burden related to the income on these international sales.

The IC-DISC reduces U.S. taxation on exports of property originating in the United States for direct use outside the U.S. There are two types of sales that qualify. The first is for products shipped directly outside of the U.S. The second is for products sold in the U.S. that ultimately are added to a product that is shipped internationally. Many contract manufacturers and distributors are part of a supply chain that serves large OEM’s whose products end up outside the U.S. Parts shipped domestically to these OEM’s may also qualify for this tax advantaged status, even though on the surface they aren’t what you think of as foreign sales.

An IC-DISC can be used in a number of ways. Some of the advantages and benefits provided by an IC-DISC include:

• Permanent tax savings on export sales. Although an IC-DISC is a tax exempt entity, any cash distributed out of an IC-DISC is taxed to the shareholders at the capital gains rate of 15 percent. This results in up to a 20% savings on Federal taxes on the income associated with foreign sales.
• Tax deferral on export sales. An IC-DISC also allows a company to defer up to $10 million dollars of taxable income to the future. This can be a significant benefit if cash flow is tight, or if you are a proponent of deferring the payment of tax to Uncle Sam.
• Means to facilitate succession planning. An IC-DISC offers a number of capabilities for executing a succession plan. An important feature of the IC-DISC is that shareholders can be corporations, retirement accounts, individuals or a combination thereof. This can result in an effective means to distribute cash to beneficiaries in a tax-advantaged manner.

It doesn’t take much for a company to benefit from an IC-DISC. Companies with as little as $500,000 of export sales have shown savings from establishing an IC-DISC. In addition, the set-up and recurring maintenance of this strategy is relatively minimal compared to the savings.

IC-DISC’s have been around for close to 30 years, yet they are not widely used in small to mid-sized organizations – why is that?

One reason is the misconception that they are too complicated or administratively burdensome. An IC-DISC strategy does require a company to establish a separate entity to report these international sales. The IC-DISC is a “paper” entity created to make the company more competitive. It does not require corporate substance or form, office space, employees, or tangible assets. It simply serves as a conduit for export tax savings. Customers do not need to know about the IC-DISC, and contracts remain as they are today. In addition, the transactions required to be reported in the IC-DISC can be summarized and reported once a year.

Another reason is that in the past this structure didn’t provide much benefit. There were other provisions in the tax code that provided deductions for international sales. These provisions expired a number of years ago resulting in the IC-DISC strategy once again becoming more advantageous.

If you think this strategy may be an option for your company, it is important to act quickly. An IC-DISC is only allowed to provide benefit beginning on the date the IC-DISC is formed (benefits are not available retroactively). The sooner a taxpayer creates an IC-DISC entity the greater their benefits will be.

To maximize savings and ensure proper IC-DISC formation and administration, businesses that wish to create an IC-DISC should seek assistance from a qualified tax advisor. While the concept and administration are relatively simple, it is important that the initial set-up is done properly to maximize and protect this tax advantage status.

About the Author: Steve Roark is a Manager in the Manufacturing and Distribution group of LarsonAllen. Steve can be reached at 888.529.2648 or sroark@larsonallen.com. To learn more about LarsonAllen, visit www.larsonallen.com.

State Department Seeks to Tilt the Playing Field for Exports of ITAR-Controlled Parts.

The State Department filed a proposal entitled Amendment to the International Traffic in Arms Regulations: Replacement Parts/Components and Incorporated Articles Notice of Proposed Rulemaking, 76 Fed. Reg. 76 Fed. Reg. 13928 (March 15, 2011).  The proposal was offered for public comment and MARPA filed comments in response to the Sate Department proposal.

The State Department has proposed to exempt from the State Department’s ITAR export licensing requirements certain parts and components that are sent as replacements for an end unit that was previously legally exported.  The proposed update of ITAR part 123 would specifically permit companies to export parts without a license as long as “[t]he exporter was the applicant of a previously approved authorization to export the U.S.-origin end-item.”

The proposed exemption would permit original equipment manufacturers (OEMs), but not aftermarket component manufacturers, to sell and export replacement parts without obtaining a license. The failure to account for all market participants would reduce the competitiveness of the industry as a whole.  As a consequence, the proposed rule negatively impacts distributors by creating unequal burdens on U.S. exporters.

MARPA filed comments asking the State Department to level the playing field, and treat all similarly-situated exporters to the same licensing standards.

White House Says Exports Are A Priority – But Does Little to Make any Difference

On March 11, the White House issued an Executive Order to promote exports. This Executive Order establishes a high-level Export Promotion Committee whose job is to set the strategic plan for the National Export Initiative (NEI).

Remember that Over a year ago, during the State of the Union Address, President Obama pledged to double exports.  Most of the White House data on doubling exports has used the 2009 export statistics as the baseline (this was the baseline used in the September 16, 2010 NEI Report).  That year’s exports numbers were 17% below both 2008 and 2010, so it is a conveniently low figure from which to start.

Let’s look at those numbers.  The Administration is taking credit for a significant increase in exports in 2010.  2010 numbers are up 17% over 2009 numbers.  But all the country really did is return to (just below) 2008 numbers.  Census Bureau export data shows that the U.S. exported $1.839 trillion in goods and services in 2008.  After dipping to $1.571 trillion in 2009, the country returned to $1.832 trillion in 2010.

I’m not saying that the government has been inactive – organizations like the USTR and the ITA have been very proactive in promoting U.S. exports.  ITA has been ramping up interest in the private sector in the MDCP program; despite the fact that Congress chose not to fund the lion’s share of the program (refusing to permit ITA to spend the $15 million for the export-partnership program despite the fact that the funds were authorized in the Small Business Jobs Act).  But the Administration seems to be doing very little to provide any real leadership or support from the top.

The recently-created Export Promotion Committee has until September 2011 to establish the strategic plan that will drive the NEI.  This means that three years will have passed since the 2009 figures that form the Administration’s baseline, and nearly two years will have passed since the President pledged to increase exports. At that stage, we will be just beginning to investigate actual changes to our laws and policies that might help increase exports.

Does anyone else find it amazing that the President announced an intent to increase exports without having any sort of plan for how to accomplish this goal; and then is taking two years just to come up with a plan for how to address the issue?

By the time the President is debating against his opponent in the 2012 Presidential election, he will likely have a good strategic plan in his hands for how to increase exports, but any actual increases in exports between now and then will certainly be a product of market forces and commercial initiative, rather than any Administration plan.

Insure Your Export Receivables With the Ex-Im Bank

I met today with Kate Bishop of the U.S. Export-Import Bank (“Ex-Im Bank”).  The Ex-Im Bank serves as an export credit agency for the United States, and they help to fill the gap when credit might be otherwise unavailable for export transactions.

One of their special areas of concentration is supporting small business exports. The Ex-Im Bank provides loan guarantees, direct loans, and export credit insurance.

What does this mean for PMA companies?  For many PMA companies that do not have a significant experience in past exports, one of the daunting issues is how to provide credit to customers while maintaining a reasonable assurance of payment.  The Ex-Im Bank’s export credit insurance may be the best answer for those sorts of transactions.  Export credit insurance allows a PMA manufacturer to safely offer credit terms to export customers.

Kate Bishop explained that $100,000 of export credit insurance on credit offered at 60 day terms costs a company less than $600.  If the PMA company is not paid by the buyer, then the export credit insurance pays 95% of the value of the insured transaction (so a default on$100,000 would yield an insurance payment of$95,000).  After the PMA copmany is paid, then the Ex-Im Bank would seek to collect the debt, and if the Ex-Im Bank is eventually able to collect the debt, then the payment back to the insured PMA company would increase!

This is a great way for PMA companies seeking to enter foreign markets to protect their export receivables.

Interested in starting the process?  You can apply for export insurance on-line, but the best way to get more information before you start is to speak to a trade finance advisor by calling (800) 565-3946 or by sending an email to the Ex-Im Bank.

Gorham Conference, Coming Up in March

Several MARPA members have had trouble finding information about this year’s Gorham Conference. Gorham has a new website.  You can find information about their Conference at http://www.gorham-tech.com.

Gorham holds the second most important conference for PMA companies (behind MARPA’s Conference, of course!).  Their Conference is scheduled to be held March 25 – 27 at the Hilton San Diego Resort & Spa in San Diego, California.

I spoke with Michael Concannon of Gorham Technical Associates, and he told me that he is pleased with the response he’s gotten so far.  We are about eight weeks out from his conference, and his hotel room block is already 40% full – at this stage, that demonstrates that he will likely fill the block well before the conference begins.  For MARPA members who want to stay at the Conference hotel, this means that you need to make sure you make your reservations before they fill up!

I will be speaking about the effect that U.S. export laws have on PMA parts being sold to non-U.S. customers (or to non-U.S. line stations for U.S. customers).

In other conference news, we have several sponsors already committed for the 2009 MARPA Conference, which will be held Sept 30- Oct 2 in Las Vegas, Nevada.  You can find out more on our website at http://wwwpmamarpa.com.

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