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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.

Proposed Change in Rules Would Broaden U.S. Export Jurisdiction Over Aircraft Parts in Other Countries

It is a little-known fact that when an article is exported from one non-U.S. country to another (known as a ‘re-export’), if that article has some U.S. content, it may be subject to U.S. export laws even though the components have already left the U.S.! The US government is proposing new policies that would expand the scope of the parts that are regulated in this way, which could have a negative effect on US exports of aircraft parts.

In order to be fair, the U.S. has a de minimis exception that provides that if the amount of US content is below a certain threshold, then the U.S. will not assert jurisdiction over the ‘re-export.’

The latest government proposal, made by the Bureau of Industry and Security, would remove the de minimis exception for “re-export” Category 7 articles that are controlled for missile technology (MT) reasons on the Commerce Country List.

Most avionics are generally included in Category 7. Specifically, Category 7 articles that are controlled for MT reasons include certain accelerometers, gyros, inertial systems, gyro-astro compasses, GPS receiving equipment, UAV auto-pilots, three axis magnetic heading sensors, and other instrumentation and navigation equipment. Component parts for each of these categories would also be affected. Therefore this proposed change would have a direct affect on the aviation industry.

In general, a U.S. article that is controlled for export purposes is also controlled for ‘re-export’ purposes. Thus, if a U.S. company needs an export license to export the product to a non-U.S. distributor, the non-U.S. distributor will need a license to re-export the article to third location. This means that an aircraft part sent overseas by a U.S. manufacturer may need to be licensed a second time if it is sent to a distributor or repair station that will ultimately provide the product to someone else.

But what about non-U.S. made aircraft parts containing U.S.-sourced parts? For example, imagine that a French manufacturer of Inertial Navigation Units (INUs) relies on gyros from the United States. If the gyros were required to be licensed when they were first exported, then it is possible that the French manufacturer of the INUs that contain the U.S. gyros installed within might need to secure a U.S. export license to ‘re-export’ the INUs with the gyros. This requirement represents an extension of U.S. jurisdiction over already exported products. This extension of jurisdiction creates concerns in the international community, which sometimes objects to the US assertion of jurisdiction over a transaction that does not touch US territory. The U.S. created the de minimis rule to address these concerns.

The De Minimis Rule

The de minimis rule allows certain articles with U.S.-origin components to be re-exported without requiring a U.S. license. Under the de minimis rule as it stands today, the Commerce Department defines when the U.S.-origin content of a commodity is sufficiently small that the commodity will not be deemed to be subject to the export control restrictions set forth in the Export Administration Regulations. This rule applies to the re-export of foreign-made articles – so it would apply to aircraft parts fabricated outside the US that incorporated some US-origin content.

The normal de minimis standard is that products incorporating 25% or less U.S. content are considered to NOT be subject to U.S. export control laws. Those that incorporated more than 25% U.S. content are considered to be controlled, and may require a U.S. export license when re-exported from one foreign (non-U.S.) country to another foreign (non-U.S.) country. This threshold drops to 10% if the article will be re-exported to a group E:1 country (Cuba, Iran, North Korea, Sudan or Syria).

Applying this threshold to our hypothetical INUs, the gyros and any other U.S. content would have to represent more than 25% of the value of the INUs in order for the U.S. to assert export jurisdiction over the French-manufactured INUs. So if U.S.-content accounted for only 15% of the value of the INSs, most exports would be outside the jurisdiction of the U.S. Commerce Department. But if the same INSs were being exported from France to Cuba, Syria, or another group E:1 country, then the 10% threshold would apply and the unit would need a U.S. export license to get exported. Additionally, French export laws would also apply.

When U.S. content is incorporated into a commodity, even if that content is not itself subject to U.S export controls, the content must satisfy the requirements of the de minimis rule, or the incorporation of the content may subject that commodity to U.S. export controls. So if the U.S. content of an INU was not export-controlled (e.g. non-controlled hardware and components), but the INU is export controlled (and the U.S. content exceeds the 25% or 10% threshold – depending on destination) – then the INU might still be subject to US export controls.

The de minimis rule allows a non-U.S. manufacturer to carefully control its designs to make sure that they will not be subject to U.S. export controls.  MARPA Members who supply non-U.S. manufacturers may be receiving business – in part – because their content fits within the de minimis rule.

The proposed change to the rule is a drastic and jarring departure. The U.S. Commerce Department is proposing to eliminate the de minimis rule as it applies to almost all Category 7 articles. This would mean that most non-U.S. manufactured avionics would be subject to U.S. export jurisdiction if they incorporated any U.S. content. This would inhibit the re-export of such avionics, and it would also serve as a disincentive to using U.S. component suppliers.

The Aviation Parts Exception(?)

Initially, it appears that this proposal to eliminate the de minimis rule contains an exception for the aviation community. But the apparent exception is illusory. The exception would apply only where “the commodities are incorporated as standard equipment in FAA (or national equivalent) certified civilian transport aircraft.” This exception is practically useless:

• It would only apply to parts that are installed in transport category aircraft. Articles that are shipped in a container (not installed in an aircraft) would not benefit.
• It would not apply to articles for Part 23 or Part 27 aircraft, even if they were installed in the aircraft.
• It would apply only to “standard equipment.” This term was just redefined by the State Department in August (See the October issue of Avionics News at Page 60). The term is now equivalent to what the civil aviation community thinks of as “standard parts.” ALmost nothing that fits within Category Seven will meet the new definition of “standard equipment!”

File Your Comments With the Government

This proposal could represent a serious problem for the industry. By seeking to impose re-export limitations on non-U.S. avionics that have some small amount of U.S. content, and to shift exempt avionics into a licensable classification, this proposal could create compliance problems for U.S. and non-U.S. exporters alike. It may also cause non-U.S. manufacturers to eschew U.S. component suppliers. Most importantly, it appears that there is no good policy reason for the change.

The proposed change is found in the November 20, 2008 issue of the US Federal Register, at page 70,322. It can be found online at http://edocket.access.gpo.gov/2008/E8-27588.htm. Comments must be received no later than January 20, 2009.

It is important that PMA manufacturers everywhere carefully read this proposal, and file comments (1) opposing the elimination of the de minimis thresholds and (2) seeking an expansion of the aviation exception to include all civil aircraft parts in Catgeory Seven.

File Your Export Documents Online!

Are you exporting aircraft parts? Don’t forget that all of your Shipper’s Export Declarations must be filed online (via the aesdirect website).  The implementation date for the new rule that requires online filing of Shipper’s Export Declarations is September 30, 2008, so time is running our if you are still using paper forms!

The final rule that requires online filing can be found online at:

http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=2008_register&docid=fr02jn08-13.pdf

There are severe penalties for failing to use the online system. In addition to the civil penalties that can run up to $10,000 per failure (in addition to any other export violation penalties that might also be discovered), a failure to file an online Shipper’s Export Declaration can also lead to a criminal penalty that includes imprisonment for up to five years per violation. In a criminal action, the government can also require the exporter to forfeit to the United States the proceeds of the export transaction, so that there is no situation in which it can be ‘profitable’ to circumvent the law.

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