EU Advances WTO Complaints on Brazilian Taxes, Russian Import Duties

The European Commission reports that on Oct. 31 it requested the formation of a World Trade Organization dispute settlement panel to hear its complaint against certain Brazilian taxes and launched a WTO complaint against Russia’s import duties.

Brazil. A Commission press release asserts that Brazil applies high internal taxes in several sectors, such as automobiles, information technologies, and machines used by industry and professionals, and that imported goods may not benefit from selective exemptions or reductions as Brazilian products can. For instance, the Commission states, the tax on imported vehicles may exceed that collected on Brazilian-made cars by 30 percent of a car’s value. Combined with customs duties levied at the border and other charges, this may amount in some cases to a tax of 80 percent on the import value.

The EU also maintains that Brazilian manufacturers are required to use domestic components as a condition of benefitting from tax advantages, a practice that promotes import substitution by inducing foreign producers to relocate to Brazil and to limit foreign sourcing. Furthermore, the Commission states, the challenged tax measures shield uncompetitive Brazilian manufacturers from international competition and limit product choice for Brazilian consumers. For example, a smartphone costs 50 percent more in Brazil than in the EU or most other countries, even though manufacturers of IT goods in Brazil enjoy tax breaks ranging from 80 to 100 percent.

The press release notes that after EU and Brazilian authorities held consultations earlier this year to try to resolve the dispute, Brazil took steps to extend and prolong some of its discriminatory taxation regimes. For example, significant tax relief measures for Brazilian IT goods and machinery were extended until 2029 while imports continue to be fully taxed.

Russia. The EU has requested WTO consultations with Russia concerning its import duties on paper products, refrigerators and palm oil. A Commission press release states that while Russia committed to keep its import duties below specified limits when it joined the WTO, it “diverges” from these limits in one of two ways: applying a higher duty rate, or fixing a minimum amount that needs to be paid even if not justified by the agreed duty rate expressed in a percentage of the product value. The Commission claims that these higher duties “have a clear negative impact on European exports of paper products, refrigerators and palm oil that are worth approximately €600 million a year” but also raise a “systemic concern” because they violate “one of the key WTO principles.”

SEC Charges Texas-Based Layne Christensen Company With FCPA Violations

Washington D.C., Oct. 27, 2014

The Securities and Exchange Commission today charged a global water management, construction, and drilling company headquartered in Texas with violating the Foreign Corrupt Practices Act (FCPA) by making improper payments to foreign officials in several African countries in order to obtain beneficial treatment and reduce its tax liability.

After Layne Christensen Company self-reported its misconduct, an SEC investigation determined that the company received approximately $3.9 million in unlawful benefits during a five-year period as a result of bribes typically paid through its subsidiaries in Africa and Australia.  Some payments were funded through cash transfers from Layne’s U.S. bank accounts.

In addition to self-reporting the misconduct, Layne cooperated with the SEC’s investigation by providing real-time reports of its investigative findings, producing English language translations of documents, and making foreign witnesses available.  The company also undertook an extensive remediation effort.  Layne agreed to pay more than $5 million to settle the SEC’s charges.

“Layne’s lack of internal controls allowed improper payments to government officials in multiple countries to continue unabated for five years,” said Kara Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit.  “However, Layne self-reported its violations, cooperated fully with our investigation, and revamped its FCPA compliance program.  Those measures were credited in determining the appropriate remedy.”

According to the SEC’s order instituting settled administrative proceedings, Layne’s misconduct occurred from 2005 to 2010.  In addition to favorable tax treatment, the improper payments helped the company obtain customs clearance, work permits, and relief from inspections by immigration and labor officials in various African countries.

Among the findings in the SEC’s order:

  • Layne paid nearly $800,000 to foreign officials in Mali, Guinea, and the Democratic Republic of the Congo (DRC) to reduce its tax liability and avoid associated penalties for delinquent payment.  The bribes enabled Layne to realize more than $3.2 million in improper tax savings.
  • Layne made improper payments to customs officials in Burkina Faso and the DRC to avoid paying customs duties and obtain clearance to import and export its equipment.  The bribes were falsely recorded as legal fees and commissions in the company’s books and records.
  • Layne paid more than $23,000 in cash to police, border patrol, immigration officials, and labor inspectors in Burkina Faso, Guinea, Tanzania, and the DRC to obtain border entry for its equipment and employees.  The bribes also helped secure work permits for its expatriate employees and avoid penalties for non-compliance with local immigration and labor regulations.

The SEC’s order finds that Layne violated the anti-bribery, books and records, and internal controls provisions of the Securities Exchange Act of 1934.  Layne agreed to pay $3,893,472.42 in disgorgement plus $858,720 in prejudgment interest as well as a $375,000 penalty amount that reflects Layne’s self-reporting, remediation, and significant cooperation with the SEC’s investigation.  For a period of two years, the settlement requires the company to report to the SEC on the status of its remediation and implementation of measures to comply with the FCPA.  Layne consented to the order without admitting or denying the SEC’s findings.

The SEC appreciates the assistance of the Fraud Section of the Department of Justice and the Federal Bureau of Investigation.

Container ships ignite after collision in Malaysia

Flames raged aboard two container ships today after the ships collided at Port Klang near Kuala Lumpur.

Reports from the MalayMail Online and the New Straits Times reported the Al Riffa, a United Arab Shipping Company ship, and the San Felipe, a Hamburg Sud ship, collided near the wharf at 8 p.m. local time, igniting a fire that burned cargo on board both ships.

The San Felipe is a 9,000 TEU Hamburg Sud ship operating on a CMA CGM’s Asia to East Coast South America service. The 13,500 TEU Al Riffa is a USAC ship operating between Northern Europe, the Middle East and Asia.

The Star, a Malaysian newspaper, reported the fire on board the Al Riffa was larger, and the ship was towed out to sea in order to protect the port. Fire departments continued to fight flames for several hours. The fire on the San Felipe was quickly extinguished.

There were no injuries reported. Port Klang Authority chairman Tan Sri Kong Cho Ha said an investigation was launched shortly after the flames were put out, The Star reported.

FTZ eyes commodities spot trading

SHANGHAI’S pilot free trade zone has released draft rules for spot trading of commodities, a step closer to establishing international trading exchanges for various commodities in the FTZ.

The 48-item draft specifies requirements for market participants, trading methods, regulations on fund management and product delivery as well as risk control measures.

“The release of the draft is a step toward building international resource allocation platforms for energy products, raw industrial materials and agricultural products,” the China (Shanghai) Pilot Free Trade Zone Administration said in a statement on its website.

The zone will allow the transactions of bonded commodities as well as warehouse receipts and bills of lading of underlying bonded commodities. Commodities traded in the FTZ should be at pretax prices that exclude import tariffs and value-added taxes. Trading of commodities will adopt yuan-denominated quotation and settlement.

The rules also require commodity market operators to employ separate third-party institutions to take care of fund custody, fund settlement and commodity warehousing.

Both domestic and foreign enterprises engaged in commodity-related trading, production, and processing are qualified to become commodity dealers under the rule.

The regulator is soliciting public opinion on the draft until next Monday.

The zone has already set up an international gold board to boost China’s voice in the global bullion market.

The Shanghai government has said earlier it plans to set up eight international platforms to trade oil, gas, iron ore, cotton, liquid chemicals, silver, bulk commodities and nonferrous metals in the zone by 2015 as the city bids to build itself into a global trading hub.

Japan’s trade surplus with US grows

Japan’s trade surplus with the United States expanded for the first time in eight months in September on a year-over-year basis, as exports posted relatively strong growth despite a decline in auto shipments, according to preliminary trade figures released by the Japanese Finance Ministry today.

Japan’s exports to the U.S. rose for the first time in two months in September on a year-over-year basis, increasing 4.4 percent to 1.158 trillion yen ($10.8 billion). The growth in exports was led by motors, pumps and centrifuges, and construction and mining machinery, which surged 18.4 percent, 47.6 percent and 43.1 percent, respectively, in terms of value.

Automobile exports fell 5.2 percent in terms of value and 14.7 percent in terms of volume. Autos accounted for 27.7 percent of Japan’s U.S.-bound exports in September, in terms of value.

Japan’s imports from the U.S. grew for the fourth straight month in September on a year-over-year basis, increasing 6.9 percent to 617.5 billion yen. The growth in imports was led by grains, fishery products and meat, which ballooned 50.7 percent, 45.9 percent and 18.7 percent, respectively, in terms of value.

As a result, Japan’s trade surplus with the U.S. widened 1.7 percent in September from a year earlier to 540.7 billion yen.

Japan is now the world’s third-largest economy after the U.S. and China and is heavily dependent on exports for growth. The U.S. is Japan’s second-largest trading partner after China.

The U.S. overtook China to become Japan’s biggest export market for the first time in five years in 2013, although China remained by far the biggest source of Japanese imports.

Advance Notice Required for Imports of 52 Chemical Substances

The Environmental Protection Agency has issued a direct final rule that, effective Dec. 26, will impose import restrictions on 52 chemical substances that were the subject of premanufacture notices, nine of which are also subject to consent orders under section 5(e) of the Toxic Substances Control Act. If the EPA receives written adverse or critical comments on one or more of these significant new use rules, or notice of intent to submit such, by Nov. 26 it will withdraw the relevant sections of this rule before its effective date.

The chemical substances covered by this rule are used in fragrance components, electrical and electronic equipment, adhesives, cosmetics, paper and paperboard, industrial thermoplastics, flotation products, polyvinyl chloride and laminated textiles. Persons who intend to import, manufacture or process any of these substances for an activity that is designated as a significant new use by this rule must notify EPA at least 90 days before commencing that activity. This notification will provide EPA with the opportunity to evaluate the intended use and, if necessary, to prohibit or limit that activity before it occurs.

Importers of chemicals subject to this rule must certify their compliance with the rule’s requirements. Any persons who export or intend to export a chemical subject to this rule are subject to the export notification provisions of 15 USC 2611(b) and must comply with the export notification requirements in 40 CFR part 707, subpart D.

Chinese may go after California high-speed rail project

One of China’s top train manufacturers may show on Wednesday that it wants a piece of California’s planned $68 billion high-speed railway project.

Wednesday is the deadline for companies or groups to submit an expression of interest for a contract to supply up to 95 trains, and China CNR Corp, its unit Tangshan Railway and US-based SunGroup USA, will be among those submitting an expression of interest, Reuters reported on Tuesday.

By 2029, the rail system will run from San Francisco to Los Angeles, making the trip between the cities in under three hours, and will eventually extend to Sacramento and San Diego, totaling 800 miles with up to 24 stations.

The expressions of interest will be submitted to the California High- Speed Railway Authority in Sacramento. The agency is responsible for designing, building and operating what would be the nation’s first high-speed rail system.

“We are not sure if we will publicly identify who made an expression of interest in the trains,” Lisa Marie Alley, press secretary for the authority, told China Daily.

By the end of this year or early next year, Alley said the authority hopes to solicit Request for Proposals (RFPs) for the trains. That will contain specific technical requirements that the trains must meet and include a request for cost estimates.Orville Thomas, information officer at the California High-Speed Railway Authority, told China Daily on Tuesday that an expression of interest represents an attempt to gauge a company’s interest in providing not only the trains, but also the development of maintenance facilities as well. “It will offer the interested parties an opportunity to comment on the trains,” he said.

The authority’s specifications for the trains include requirements that they maintain speeds in excess of 200 miles per hour (mph) and a minimum of 450 seats. On its website, SunGroup touts its high-speed railway for the California project that can reach speeds of up to 300 mph. “It has very good climbing ability, low noise. It is suitable for city and suburb transportation,” SunGroup said.

Legislation that green-lighted the California project also included a buy America provision, Thomas said. “The authority is hoping to create a high-speed rail industry in California with this project. This requirement means the trains do not have to be made in California, but they do have to be made in the US.”

Alley said it will be during the RFP part of the process that the authority will want to hear from bidders on how they intend to comply with the buy America requirement. She added that the expression of interest is open to all interested parties including State-owned firms. “I don’t think we will be looking at that (SOE) in the RFP process,” said Thomas.

In Massachusetts, being state owned might be problematic for a CNR-led venture, which is the apparent top bidder on a $566.6 million contract to supply the Massachusetts Bay Transportation Authority with new cars, according to the Boston Globe.

Even though the contract requires that the railcars will be built in the state, the Globe reported that the potential deal has created concern about the company’s links to the Chinese government because of allegations of human rights abuses.

Governor Deval Patrick was quoted by the Globe as saying bidders on the contract have been “thoroughly vetted,” and that the process has been “transparent and rigorous and competitive.” The Massachusetts Department of Transportation board is scheduled to discuss the contract with CNR on Wednesday, according to the Globe.

California voters approved $10 billion in bonds for a high-speed railway in 2008, but they have expressed skepticism as cost estimates have increased. Governor Jerry Brown has vowed to see the train system built. In a 2013 trade mission to Shanghai, Brown courted Chinese investment for the planned high-speed rail line.

In little over a decade China has built the world’s largest high-speed rail network and the country is eager to export its technology and know-how overseas. Earlier this month during a visit by Chinese Premier Li Keqiang to Russia, it was announced that Chinese firms and their Russian partners will hold talks on the design, financing, and construction of a 770-kilometer high-speed line connecting Moscow and Kazan.

In Mexico, a Chinese-led consortium was the sole bidder to build a high-speed passenger rail line connecting Mexico City and the city of Queretaro. The eight-company group is led byChina Railway Construction Corp Ltd and China South Locomotive and Rolling Stock Co. The Mexican government wants to start construction on the estimated $4 billion project in December and the line is expected to be operational in 2017.

Citing the environmental and economic development benefits, US President Obama has been an enthusiastic backer of high speed rail in the US. The administration’s 2009 stimulus bill allotted billions for rail projects. But Republican governors in Florida, Ohio, and Wisconsin rejected the federal funds and outside of California, most high-speed projects have stalled. Most of the funds are being used for upgrades to existing service like Amtrak.

Dates and Deadlines: FTZ Reports, Economic Sanctions, Argentina, Trade Barriers, Incoterms

Following are highlights of regulatory effective dates and deadlines and federal agency meetings coming up in the next week.

Oct. 27 – deadline for comments to USDA on proposals to allow imports of fresh citrus from China and South Africa

Oct. 27 – deadline for comments to USDA on information collection concerning imports of gypsy moth host material from Canada

Oct. 27 – deadline for comments on annual FTZ reports

Oct. 27 – deadline for comments to ITC on potential IPR probe of personal transporters

Oct. 28 – ST&R webinar: Complying with U.S. Embargoes and Economic Sanctions Programs

Oct. 28 – meeting of State Department’s Advisory Committee on International Economic Policy to review U.S-Africa trade and investment relationship

Oct. 28 – deadline for comments to USDA on imports of fresh beef from northern Argentina

Oct. 28 – deadline for comments on potential IPR probe of footwear products

Oct. 29 – STTAS webinar: Oil and Gas Industry Import Scenarios in Argentina

Oct. 29 – deadline for comments on BIS import, end-user and delivery verification certificates

Oct. 29 – deadline for comments to USTR for annual report on foreign trade barriers

Oct. 30 – ST&R webinar: Using Incoterms 2010® Properly to Avoid Disputes

Oct. 30 – deadline for comments to BIS on proposal to eliminate special comprehensive license

Oct. 30 – FMC forum in Charleston, S.C. , on challenges facing South Atlantic ports

Oct. 30 – deadline for comments to ITC on remedy, the public interest and bonding in IPR probe of archery products

Oct. 31 – deadline for comments to USTR on India’s engagement on IPR concerns

Oct. 31 – deadline for comments to ITC on remedy, the public interest and bonding in IPR probe of breathing treatment systems

Trade Deficit Could be Lowered by Allowing Crude Oil Exports, GAO Finds

Amid an ongoing debate over whether Congress should remove the restrictions it placed on crude oil exports in response to the Arab oil embargo in the 1970s, the Government Accountability Office released this week a report finding that doing so could benefit consumers and lower the federal trade deficit. The report also recommends a comprehensive reevaluation of the appropriate size of the Strategic Petroleum Reserve, which was established to release oil to the market during supply disruptions and protect the U.S. economy from damage, in light of current and expected future market conditions.

The GAO states that the studies it reviewed and the stakeholders it interviewed generally suggest that removing crude oil export restrictions may have the following implications.

– increasing domestic crude oil prices by reducing domestic supply

– increasing world supplies of crude oil, which could reduce international prices and subsequently lower consumer fuel prices

– increasing domestic production (by 130,000 to 3.3 million barrels per day) because of increasing oil prices

– increasing the size of the U.S. economy, with implications for employment, investment, public revenue and trade (e.g., further declines in net crude oil imports would reduce the U.S. trade deficit)

– posing risks to the quality and quantity of surface groundwater sources, increasing greenhouse gas and other emissions, and increasing the risk of spills from crude oil transportation

However, the report cautions that estimates of the effects of removing export restrictions are uncertain due to several factors, including the extent of U.S. crude oil production increases, how readily U.S. refiners are able to absorb such increases and how the global crude oil market responds to increasing U.S. production.

Costco looks for China path that sidesteps Wal-Mart’s potholes

BY selling directly to Chinese consumers on Alibaba’s platform, a move unveiled last Tuesday, Costco Wholesale Corp aims to employ local knowledge and a low-cost structure to avoid missteps that caused even the world’s largest retailer, Wal-Mart Stores Inc, to stumble.

Many global retailers opening in China have struggled to find product mixes and store designs favored by local customers. Besides Wal-Mart, Best Buy, eBay and others have fallen short of expectations in one of the fastest-growing consumer markets.

Costco’s virtual storefront on Alibaba Group Holding’s Tmall is designed to help the warehouse store operator study consumer shopping habits with no bricks-and-mortar costs and fewer risks, signaling a new approach to expanding in China.

“This shows Costco has learned from the mistakes made by companies like Wal-Mart and also those who were forced to exit the market like Home Depot,” said Anjee Solanki, national director of retail services at Colliers International.

Wal-Mart’s China sales in the second quarter grew 1.1 percent, but same-store sales, a key figure, declined 1.6 percent. David Cheesewright, head of Wal-Mart’s international division, acknowledged at the company’s investor conference on Wednesday that China remains tough even after 17 years. “We are still very much focused on building our foundations,” he said.

Early steps at times have been shaky. Wal-Mart stuck with its big-box format even though Chinese consumers prefer neighborhood stores. And its stores in China, including Sam’s Club warehouses, offered few high margin private-label goods until as recently as last year.

Even Wal-Mart’s “Everyday Low Prices” slogan backfired. Chinese consumers equate inexpensive with unsafe and value quality as much as bargain prices, retail consultants said.

Supply-chain problems came to a head in January when Wal-Mart recalled its popular “Five Spice” donkey meat after tests showed traces of fox meat.

Despite the difficulties, Wal-Mart has become China’s third-largest retailer, behind Sun Art Retail Group Ltd and state-backed China Resources Enterprise Ltd, according to consultant Kantar Retail.

Wal-Mart has made adjustments, too. Last December it announced plans to boost private-label sales to a 20 percent share within a decade, and Wal-Mart has built its own distribution centers to manage product quality.

“We’ve done a lot of work on building trust,” Cheesewright said.

Costco’s decision to partner with Alibaba seeks to bring local credibility to the Washington-based retailer. Beijing-based iResearch in July forecast China’s online retail sales of 2.76 trillion yuan (US$451 billion) for the year, up 45.8 percent from 2013.

Virtual storefronts are a growing business on Tmall, one of the world’s fastest-growing business-to-consumer marketplaces, with a 50 percent share in China. Tmall lists more than 100,000 brands, about 2,000 of them foreign-made.

“Digital storefronts are a powerful tool to help shape what a retailer might want to do with a physical store,” said Marcie Merriman, executive director of retail strategy and customer engagement at EY.

Costco is opening in China with its well-regarded and high-margin private-label Kirkland brand, which sells everything from men’s shirts to laundry detergents, aimed at quality-conscious Chinese consumers.

Even so, price competition likely will be fierce with Yihaodian, a website in which Wal-Mart is majority owner. As part of an introductory “Shopping Spree” on Tmall, Costco offered four packs of Sensodyne toothpaste at 145 yuan, or US$23.68, compared with 109 yuan on Yihaodian.

The tie-up with Alibaba is not without risk. Rob Howard, chief executive officer of San Francisco-based local delivery firm Grand Junction, said the Alibaba partnership could put Costco in a system that often favors local players.