Volume 22, No. 24 -- June 17, 2002

BIS SEEKS COMMENT ON RAISING SOFTWARE EXCEPTION LEVEL

The Bureau of Industry and Security (BIS) is considering a significant increase in the eligibility level for License Exception TSR to allow exporters to transfer technology and software for the development, production and use of computers at the same level as License Exception CTP for computers.  Responding to a request from its industry advisors, BIS in the June 10 Federal Register asked exporters to comment on the problems they encounter because the eligibility level for TSR, which is 33,000 million theoretical operations per second (MTOPS), is so much lower than for CTP, which is 190,000 million MTOPS.

BIS' Regulations and Procedures Technical Advisory Committee (RAPTAC) urged it to raise the TSR level because the disparity in MTOPS levels has created problems for firms who have foreign workers in the U.S. who can't have access to the technology and software that corresponds to the computers they are designing and developing or for products produced overseas.  At issue is technology under Export Control Classification Numbers (ECCNs) 4E001 and 4D001.

BIS wants industry to submit comments explaining the difficulties they are facing with foreign workers or foreign production, the competitive impact of the current control levels, the foreign availability of the technology and software and the regulations imposed by other countries.  It also asked for information of the percentage of current workers who are restricted by the TSR limits and what that percentage is expected to be in 2-3 years and 5-7 years.
 

EU NARROWING PROPOSAL ON DRUG EXPORTS UNDER COMPULSORY LICENSE

The European Union (EU) is stepping back from a bold proposal it made in March to revise the World Trade Organization's (WTO) Trade-Related Intellectual Property Rights (TRIPs) agreement to allow the export of drugs subject to compulsory licensing to countries that need the patented drugs to fight major epidemics such as HIV/AIDS.  Faced with a sharp split among its own members and the complexity of implementing its proposal, the EU is drafting a new offer that it will present to the WTO's TRIPS Council June 25-26 (see WTTL, March 11, page 4).

A June 11 draft of the EU's communication, obtained by WTTL, would significantly narrow the exception it proposed for developing and least developed countries that invoke the compulsory licensing provisions of TRIPs.

At the WTO's Doha Ministerial Meeting in November, members adopted a policy statement liberalizing the application of TRIPs rules on compulsory licensing for countries dealing with a major health crisis and needing access to drugs that might not be available because of patents and prices.  Ministers directed the TRIPs Council to work out the details of implementing that policy.

A key problem with the new policy involved developing countries that might invoke the compulsory license rules but don't have a pharmaceutical industry with the capacity to manufacture the drug.  Under current TRIPs rules, compulsory licenses only allow domestic production and consumption and block the export of drugs to other countries.  The EU's proposal would allowed one country to produce the drug for export to another country that issued the compulsory license.

The EU proposal drew complaints that it might undermine TRIPs protection for patented drugs and that it promoted the worldwide distribution of generic drugs.  These objections forced the EU's European Commission (EC) to issue a statement disavowing such interpretations and backing the need for research-based pharmaceutical companies to make profits to support their research.  "Medicines do not invent themselves," the EC declared.  It also said conditions needed to be established to make sure the licensed drugs were used by the people that need them and are not diverted for profit to others.

In the latest draft of the communication the EU will present to the TRIPs Council, the EC's 113 Committee, which is drafting the document, includes language that would require compulsory licensing countries to take "all reasonable and necessary regulatory and/or administrative measures to ensure that condition (ii) (i.e., no further reexportation) is effectively respected."  It also adds a provision calling on all WTO members to prevent diversion of these drugs.

The draft also contains language supported by the pharmaceutical industry, providing the patent holder the opportunity to supply the needed drugs "at strongly reduced prices."   If these firms can provide the drugs "in terms of price, safety and sustainability, this should be a reason not to resort to a compulsory license," the EU draft states.

One issue still being debated in the 113 Committee is whether the exception for manufacturing and exporting a drug under patent should be limited only to developing and least developed countries.  Some European generic drug manufacturers reportedly want the opportunity to supply drugs under compulsory licenses.  But patent-based firms in Europe want this exception limited.  They want to prevent generic firms in countries such as Canada, Brazil and Argentina from using the exception to circumvent patent rights.

A paragraph in an earlier draft, which would have limited the export rule to producers in "developing and least developed countries," was taken out.  Sources, however, say they expect the paragraph to be put back in before the EU makes its presentation to the TRIPs Council.
 

END-USER CHECKS PLAYING LARGER ROLE IN STATE, BIS ENFORCEMENT

Exporters of dual-use and Munitions List (ML) goods can expect increased scrutiny of their foreign customers by BIS and State's Office of Defense Trade Controls (ODTC), as the two agencies increase their focus on end-use checks as an enforcement tool.  A recent ODTC report on its end-use checks in fiscal 2001, which ended Sept. 30, 2001, said the agency made "unfavorable determinations" in over 17% of the cases it investigated.  Meanwhile, BIS June 14 for the first time released names of end-users that should raise "red flags" for exporters.

Under its Blue Lantern inspection program for following up on commercial exports of ML items, State last year conducted 410 end-use checks.  That was a slight increase over the average of 400 that it has performed annually since the program was established in 1990.  Of those checks, 71 were found unfavorable, which meant there was possible diversion of licensed goods to countries or end users of concern.  In some cases, the information led to licenses being denied or exports being block.  At least one criminal investigation was initiated.

The largest diversion involves aircraft spare parts going to countries such as China, Iran and Iraq.  Other targets were electronic products, communications equipment and firearms.  "A notable trend revealed by the Blue Lantern checks over the past three years is the incidence of West European-based intermediaries involved in suspicious transactions," State's report noted.  "In FY 2001, 23% of unfavorable checks, mostly for the export of aircraft spare parts, involved possible transshipments through allied countries," it added.  East Asia and the Pacific accounted for 28% of the unfavorable checks and the Western Hemisphere produced 26%.

After years of requests from exporters for information on end-users of concern, BIS has made a modest move to satisfy those demands.  In the June 14 Federal Register it published the names 11 entities, nine Chinese, one Malaysian and one United Arab Emirate, that it was not able to verify during pre-license checks (PLC) or post-shipment verifications (PSV).  While names on the "Unverified List" are not formally denied parties such as those on the Entities List, BIS considers them "red flags" and expects exporters to make inquiries about them.

"If an exporter can satisfy himself that the transaction does not involve a proliferation activity and does not violate any other provision of the EAR [Export Administration Regulation], the exporter may proceed with the transaction notwithstanding the inclusion of the person on the Unverified List," BIS stated.  "If an exporter continues to have reasons for concern after the inquiry, the exporter should refrain from such transaction or submit all relevant information to BIS in the form of an application for a license or a request for an advisory opinion," it added.
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BIS conducted more than 1,000 PSVs and PLCs in 2001.  Entities were placed on the Unverified List because the agency was unable to inspect them for reasons outside of its controls.  In some cases, this was due to lack of cooperation by the host government, the end-user or the ultimate consignee.  "The notice we are publishing today is designed to share with exporters information in our possession about such end-users, thereby helping exporters meet their obligations under our regulations," said BIS Under Secretary Kenneth Juster.  The agency said it will add more names to the list periodically or remove names if they can be verified.
 

FSC FIX COULD GET SWEPT UP WITH TAX INVERSION LEGISLATION

Growing public and congressional objections to U.S. companies moving offshore to avoid U.S. taxes could become the spark to move legislation to revise the Foreign Sales Corporation (FSC)/Extraterritorial Income (ETI) tax laws that the WTO has ruled to be illegal export subsidies.  Industry sources say they expect House Ways and Means Committee Chairman Bill Thomas (R-Calif.) and select revenue subcommittee chairman Jim McCrery (R-La.) to introduce a bill in the next few weeks to address both these issues.

Linking the two issues probably would make passage of the legislation more difficult, but introduction of a bill is mostly intended to demonstrate to the European Union (EU) that the U.S. is making a good faith effort to comply with the WTO ruling.  The two lawmakers were expected to propose the measure shortly after a WTO arbitration panel was supposed to rule in mid-June on how much compensation the U.S. owes the EU for trade loses due to FSC/ETI.  But they could postpone action, because the WTO panel has told the U.S. that its decision will be delayed until late in July.

With at least six different bills already introduced to deal with the issue of tax inversion, which has prompted the movement of U.S. companies to low-tax countries, a partisan fight has already erupted.  Congressional Republicans and the White House want to reduce the incentives for moving offshore, but some Democrats want to tax foreign parent corporations the same as domestic corporations.  White House officials have urged Congress to limit the extent of changes in the tax code, while leaving the door open to additional changes in the future.

The core of the expected Thomas-McCrery legislation would be the elimination of the FSC/ETI rules, the creation of new tax rules that would reduce the taxes on the foreign sourced income of multinational corporations, and the revision of tax rules addressing inversions.  While stopping far short of a shift to a territorial tax system, the proposed change in the tax rules for foreign income would supposedly reduce the incentive for U.S. multinationals to move offshore to get these savings.  It also would offset increased taxes caused by killing FSC/ETI.  The likely losers in this approach are small and medium size exporters who use FSC/ETI rules but who don't have foreign-source income to shelter.

At a June 13 hearing of his subcommittee on FSC/ETI rules, McCrery said: "We might be able to put together a nice little package on tax inversions and ETI that would make a lot of sense in terms of restructuring the American tax provisions."  He noted that the Bush administration has made useful suggestions for addressing the tax inversion issue.  "The administration has been very helpful," he said.

During a June 6 Ways and Means hearing on tax inversions, Treasury Assistant Secretary Pamela Olson revealed several administration proposals that would limit the sheltering of domestic and foreign income through offshore parents.   The proposal included tightening interest-deduction rules under Section 163(j) of the tax code, revising rules for income shifting and transfer pricing for intangibles under Section 482 and examining current tax treaties.

 * * * BRIEFS * * *

FAST TRACK: House-Senate Conference is off to rough start even before it begins.  Naming of conferees in House has been delayed over effort by Ways and Means Committee Chairman Bill Thomas (R-Calif.) and House GOP leaders to get rule attached that would give conference authority to raise issues not in original House fast-track bill (H.R. 3009).  This is infuriating House Democrats, and increasing likelihood of contentious and long conference.  Republican leaders are keeping exact wording of rule close to their vests, but sources say they believe measure would address DeMint textile rule changes, changes to Trade Adjustment Assistance bill and healthcare tax credit proposals.  House Rules Committee will meet June 17 to mark up rule, with House vote expected Tuesday.

CANADA: WTO dispute-settlement panel June 12 rejected Canadian complaint that Section 129(c)(1) of Uruguay Round Agreements Act (URAA) violated WTO rules.  Section provides for revising ITC rulings in cases overturned by WTO dispute-settlement process.  URAA makes changes prospective from date USTR orders change.  Canada argued change, with refund of duties, should be retroactive to date of WTO ruling.

SENATE: Ranking Finance Committee Member Charles Grassley (R-Iowa) has named Everett Eissenstat to be chief international trade counsel.  Eissenstat joined staff in March 2001 after serving as legislative director for Rep. Jim Kolbe (R-Ariz.).  Richard Chriss, who has been with Grassley four years, will continue to serve as international trade counsel.

STEEL: Announcement of next tranche of exclusions from steel Section 201 tariffs is expected week of June 17.  U.S. steel firms were upset with first batch of exclusions issued June 7 because Commerce and USTR, in some cases, disregarded objections of domestic companies that said they could produce excluded products.  They also complain about lack of detailed explanation or justification for granting exclusions when domestic supplies exist.  Industry will try to bring congressional pressure to bear on White House to prevent exclusion process from becoming way to deflect claims for compensation from EU and Japan.  Meanwhile, USTR's office applauded Japan's decision to defer imposition of retaliatory sanctions.

SHRIMP: Five Northwest fishing and marketing cooperatives June 11 filed antidumping and countervailing duty complaints at ITC and ITA against coldwater shrimp from Canada.

PET FILM: On 5-0 vote June 10, ITC decided U.S. industry is being injured by imports of subsidized polyethylene terephthalate film, sheet and strip from India and dumped PET film from India and Taiwan.

FTAs: President Bush June 13 told Australian Prime Minister Howard that U.S.-Australia FTA talks can't start until after Trade Promotion Authority is enacted.  "I would be more than willing to ask my man Zoellick to talk to the Australians, but only until and after we get TPA," Bush said during photo-op with Howard.  Meanwhile, in Cairo June 10, Zoellick held talks with Egyptian trade officials on details of what would have go into U.S.-Egypt FTA.  Without committing U.S. to FTA with Egypt, Zoellick said working-level exploration of possible trade pact would continue and be reviewed in October.  "I think for me the key point is we are now moving on a more rapid and active schedule," Zoellick told reporters.

Copyright 2002 by Gilston Communications Group. Reproduction or retransmission in any form is prohibited. Washington Tariff & Trade Letter is published weekly 50 times a year.