E-Commerce and International Trade Regulations November 6, 2014 Presented by Morgan, Lewis & Bockius LLP Margaret M. Gatti Kelly S. Herman Louis K. Rothberg www.morganlewis.com
E-Commerce and Trade Regulations Estimated worldwide business-to-consumer (B2C) e- commerce sales will increase by 20.1% this year to reach $1.5 trillion. In 2014 consumers in Asia-Pacific ifi will spend more on ecommerce purchases than those in North America. Argentina, Mexico, Brazil, Russia, Italy, and Canada, will also drive ecommerce sales growth worldwide. E-commerce is the fastest growing retail market in Europe. If you have a website that allows web-based sales, how do you insure that your E-Commerce sales comply with U.S. Export Regulations & Importing Country Regulations? Morgan, Lewis & Bockius LLP 2
Parties Involved Designation of the parties to the transaction is dependent on the type of business model followed (i.e. B2C or B2B) and how the sales are made to the customer: Direct Sales Sales through a local website Sales through a global website Morgan, Lewis & Bockius LLP 3
Direct Sales B2C The easiest and simplest way for a retailer to start an e-commerce business A customer places an order directly through the website and pays in foreign currency. The goods are transported internationally through post or express courier. Who will be the importer of record? The importer of record is responsible for clearing the goods through customs (i.e., payment of shipment, duties and taxes). Morgan, Lewis & Bockius LLP 4
Local Website Sales B2B For consumers this is the most hassle-free method of ordering. The online store is supported by a local server in the host country. Goods are imported and stored by a legal resident entity and dispatched locally. All issues regarding customs clearance have been resolved prior to placement of the order. Consumers can receive their goods more quickly. Morgan, Lewis & Bockius LLP 5
Global Website Sales (B2B) Orders are placed in the same manner as in the direct sale but the goods are shipped in bulk to a bonded warehouse or zone in importing country. Duties and taxes do not become due nor must customs paperwork be completed until the goods are ready to be dispatched. Must find a local team to dispatch the goods which comes at a cost. Same issues as with direct sales re. importer of record Morgan, Lewis & Bockius LLP 6
Outsourcing to Third Party Providers E-fulfillment can be outsourced to 3 rd party service providers. 3 rd party may assume all responsibilities related to the export and import requirements to deliver and clear the product. 3 rd party may assume partial responsibility and deal with select aspects of export and import requirements to deliver and clear the product. Lessens the risk of uncertainty but comes at a price. Morgan, Lewis & Bockius LLP 7
Important Consideration #1 What prohibitions apply to the products being sold internationally? Embargoed Country? Prohibited Party? US Importing Country Cuba, Iran, North Korea, Sudan & Syria (Dual Use products) 5 Bad Guy Lists (Debarred Party, Denied Party, SDN, Sanctions Evader, Proliferator) US? US seller & other US supply chain participants? Prohibited Product? Unlikely but possible. Possible. Need to verify. Need to verify. Morgan, Lewis & Bockius LLP 8
Important Consideration #2 What restrictions ti apply to the products being sold internationally? US Importing Country Product License required? Determine if an Export License is required. ITAR: Will need an Export License EAR: May Need an Export License if not EAR99 Determine if an Import License is Required Morgan, Lewis & Bockius LLP 9
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Important Consideration #2 (cont d) What restrictions ti apply to the products being sold internationally? US Importing Country Restricted Party 2 Semi-Bad Guy Lists US seller & other US supply chain (Entity List, Unverified participants? End User List) Restricted End Use? Unlikely but possible. N/A Need to verify. Red Flag? Unlikely but possible. Need to verify. N/A Morgan, Lewis & Bockius LLP 12
Summary of U.S. Export controls DDTC & ITAR Defense Items Prohibitions Country? End User? OFAC & OFACR BIS & EAR Dual Use Items Prohibitions Country? End User? Restrictions License Required Morgan, Lewis & Bockius LLP 13 Restrictions Product? End User? End Use? Red Flag? License Required?
Important Consideration #3 Does importing country have any: Limits on quantity of specific product imports in the form of quotas? Absolute Tariff Rate Limits it on who can import? Are Import Rights required Morgan, Lewis & Bockius LLP 14
Important Consideration #4 Does importing country have any: Packing requirements? Heat or chemical treatment of Solid Wood Packing Materials Packaging requirements? Mandatory packaging and labeling li requirements Morgan, Lewis & Bockius LLP 15
Packaging Requirements Review any mandatory requirements to label the product or its packaging with specific information. Canada has a Consumer Packaging g and Labeling Act The regulations specify the manner and location in which the following statements must appear: product identity product net quantity dealer's name and principal i place of business Similar requirements apply in the EU for specified goods such a textiles, footwear, cosmetics etc. Morgan, Lewis & Bockius LLP 16
Important Consideration #5 Does importing country have any: Origin requirements? What is the country of origin What are the importing country s origin rules What are the importing country s origin marking requirements What are the importing country s origin documentation requirements Morgan, Lewis & Bockius LLP 17
Country of Origin 1. Where the goods have been wholly obtained, or 2. When more than one country is concerned, the country where: the final process of manufacture took place sufficient working or processing was carried out, or the last substantial working or processing was performed All resulting in the manufacture of a new product Morgan, Lewis & Bockius LLP 18
Non-Preferential Rules of Origin All imported and exported goods must report their country of origin. Country of origin determinations are used in non-preferential commercial policy instruments: Most favored nation treatment Anti Dumping and Countervailing duties Safeguard measures Origin Marking Discriminatory quantitative restrictions (tariff quotas) Government Procurement Trade statistics Morgan, Lewis & Bockius LLP 19
Preferential Rules of Origin There are several different rules of origin, depending upon the FTA and/or the product Substantial Transformation Wholly obtained or produced Tariff Shift Rule Specific Textile and Apparel Rules of Origin Process Based Rules or Origin (e.g., chemical ca reaction, or controlled mixing/blending rules) Regional Value Content ( RVC ) Morgan, Lewis & Bockius LLP 20
Origin Marking Requirements How must goods be marked? Sticker? Permanent? Purpose of origin marking: Inform the ultimate purchaser as to where a product was made Dilemma of made in the U.S. U.S. sales versus international sales Morgan, Lewis & Bockius LLP
Country of Origin Documentation Every shipment must include a commercial invoice listing the country of origin for each good in the shipment. Many countries also require presentation ti of a certificate of origin Official document signed by the exporter certifying the country of origin for each product contained in the shipment. A certificate of origin/certification of origin may also be required to establish eligibility for preferential treatment under a Free Trade Agreement. Morgan, Lewis & Bockius LLP 22
Important Consideration #6 Does importing country have any: Product requirements? Toys Electrical products Food and food supplements Drugs and medical equipment Consumer products Morgan, Lewis & Bockius LLP 23
Important Consideration #7 Does importing country have any: Certification requirements? CCC FCC CE GOST-R CSE NOM C-Tick UL Morgan, Lewis & Bockius LLP 24
Important Consideration #8 Does importing country have any: Foreign exchange license requirements or foreign currency restrictions? Sellers beware of regulatory restrictions on transactions with foreign currency in Argentina, Brazil and Russia. Morgan, Lewis & Bockius LLP 25
Important Consideration #9 Does importing country have any: Payment method limitations or payment method preferences? Choice of multiple payment options is key to reduce shopping cart abandonment. Offering payment options that are confusing, that aren t trusted or in accordance with banking needs can impede success. Consider an international merchant account Morgan, Lewis & Bockius LLP 26
Important Consideration #10 What is classification of product? Classification = determination of standardized product identification number or Harmonized Tariff Number (HTS) for imports (and exports) Eliminates need to translate product names Used to determine applicable import duty Harmonized internationally first 6 digits Morgan, Lewis & Bockius LLP 27
HTS #s Format of HTS # Each HTS# comprised of 10 digits 6 digits = harmonized internationally 4 digits = country-specific Chapter number in first 2 digits it Heading = first 4 digits Sub-heading = first 6 digits 7 th digit determines the applicable rate of duty 9 th digit is for statistical reporting Morgan, Lewis & Bockius LLP 28
Harmonized Tariff Schedule Agricultural goods to manufactured goods Format: 22 Sections with 99 chapters 97 Chapters used for Merchandise 2 Chapters reserved for special use Chapter 98 = Special Classifications Chapter 99 = Temporary Legislation Chapters group articles by industry, list non-manufactured goods first and progress to more highly manufactured goods. Chapters are broken down into: Headings of 4 digits Sub-headings of 6 digits Morgan, Lewis & Bockius LLP 29
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HTS # Classification Classification Principles: HTS covers all goods Specifically provided or Otherwise NES or NESOI Goods are classified by HTS based on: Common, scientific or technical name Material or composition Use, application or function Articles classified in condition imported Classify what is imported Morgan, Lewis & Bockius LLP 31
Important Consideration #11 What are you going to include in Checkout price? How will the goods purchased online get delivered to the customer? Who is responsible for delivery? What are the costs of delivery? What are the terms of delivery? Morgan, Lewis & Bockius LLP 32
Check-Out Costs For Internet Export Sales What is included d in Internet t Check-out Cost U.S. Export Packaging (ExW INCOTERMS) U.S. Export Clearance (FAS, FOB, FCA INCOTERMS) U.S. Pre-Carriage Freight and Insurance Costs (FAS, FOB, FCA INCOTERMS) Morgan, Lewis & Bockius LLP
Check-Out Costs For Internet Export Sales (cont d) What is included d in Internet t Check-out Cost International Carriage and International Insurance (CFR, CIF, CPT, CIP INCOTERMS) Foreign Country On-Carriage Freight and Insurance Costs (DAT, DAP, DDP INCOTERMS) Non-U.S. Import Clearance (DDP INCOTERMS) Morgan, Lewis & Bockius LLP
INCOTERMS Seller / Exporter Tasks Costs in Pricing EXW Export Packaging $ FAS / FOB / FCA Export Packaging Pre-Carriage $$ CFR / CIF CPT / CIP Export Packaging Pre-Carriage Main Carriage (Insurance = I) $$$ Morgan, Lewis & Bockius LLP 35
INCOTERMS DAT / DAP DDP Seller / Exporter Tasks Export Packaging Pre-Carriage Main Carriage On Carriage Export Packaging Pre-Carriage Main Carriage On Carriage Foreign Import Duties (but NOT VAT / GST ) Costs in Pricing $$$$ $$$$$ Morgan, Lewis & Bockius LLP 36
Valuation Summary Valuation Issues for Retailers Who Export Determine Base Price If appropriate, add amounts below to base price Packing costs Assists Selling commissions International freight & insurance Importing country duties based on HTS # and any ADD / CVD Morgan, Lewis & Bockius LLP 37
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Don t Forget About Taxes The concept behind GST was invented by a French tax official in the 1950s. In some countries it is known as VAT, or Value-Added Tax. Today, more than 160 nations, including the European Union and Asian countries such as Sri Lanka, Singapore and China practice this form of taxation. Roughly 90 percent of the world's population live in countries with VAT or GST. Consider whether registration for VAT is necessary. Morgan, Lewis & Bockius LLP 39
Important Consideration #12 Who will assume export clearance responsibilities and be the USPPI? The USPPI (U.S. Principal Party in Interest) is the person or legal entity in the United States that receives the primary benefit, monetary or otherwise, from the export transaction. Generally, the USPPI is the U.S. seller, manufacturer, or order party, or the foreign entity while in the United States when purchasing or obtaining the goods for export. Morgan, Lewis & Bockius LLP 40
Export Clearance What is export clearance? Determining the proper classification, obtaining any necessary licenses and filing the required export documents etc. AES filing is a required export document for exports for which any HTS value > $2500. AES can be filed by USPPI, a FRE for AES purposes, p freight forwarder on behalf of a USPPI, or a freight forwarder on behalf of a FPPI In all cases, the USPPI = exporter Morgan, Lewis & Bockius LLP 41
Important Consideration #13 Who will assume import clearance responsibilities and be the importer of record (IOR)in importing country? The IOR is the person or legal entity in the importing country who is responsible for complying with all import laws and regulations, submitting import clearance documents as well as paying all duties, fees and taxes applicable to the import. Consider if the purchaser can act as IOR (i.e. China) Morgan, Lewis & Bockius LLP 42
De minimis Import Value Ath threshold h amount tis often designated dunder which h customs formalities are not necessary and no payment of duties are required. Typically limited to personal use goods or documents of limited value. Beware of legislation to lower the amount due to increase in e-commerce sales and duty avoidance. Legislation may also limit the number of items which can be shipped under the personal use exception. If ineligible, consider if the good qualifies under an FTA. Morgan, Lewis & Bockius LLP 43
Important Consideration #14 Deal with Charge Backs and Returns Communicate the return policy clearly and upfront before the purchase. Consider requiring a Return Authorization. Export formalities may apply including obtaining a license. Duties may be due upon re-import. Morgan, Lewis & Bockius LLP 44
Important Consideration #14 (cont d) Deal with Charge Backs and Returns (cont d) MID# will be required upon re-import. It may be cheaper to replace than return. Dispute charge backs with credit-card companies where warranted. Minimize fraud by doing your homework upfront. Morgan, Lewis & Bockius LLP 45
Important Consideration # 15 Retain Records for 5 Years Customer Order Information Any License Application Any Licenses Obtained Invoice and Payment Information Transportation Documents AES Records Correspondence / E-Mails Morgan, Lewis & Bockius LLP 46
International Trade & Economic Sanctions Group Margaret M. Gatti Philadelphia, PA tel. 215.963.5569 Washington, DC tel. 202.739.5409 mgatti@morganlewis.com Marynell DeVaughn Washington, DC tel. 202.739.5281 mdevaughn@morganlewis.com Louis K. Rothberg Washington, DC tel. 202.739.5281 lrothberg@morganlewis.com Kelly S. Herman Washington, DC tel. 202.739.5540 kherman@morganlewis.com Katelyn M. Moscony Washington, DC tel. 202.739.5674 kmoscony@morganlewis.com Morgan, Lewis & Bockius LLP 47
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