Incorporating Today s News Into Tomorrow s International Contracts

Transcription

1 Incorporating Today s News Into Tomorrow s International Contracts Cross-border Trade and Tax Developments Predictions and Implications for International Commercial Contracts

2 Changes in the Geopolitical Landscape! A 2016 World Trade Organization (WTO) report notes that 2016 marked the slowest pace of trade and output growth since the 2008 financial crisis.! World trade is on track to expand by 2.4% in 2017, but there is deep uncertainty about economic and policy developments, according to the WTO.! WTO Director-General Roberto Azevêdo recently said clarity is still needed on US President Donald Trump s trade policies, while making a general appeal to resist protectionism. We should see trade as part of the solution to economic difficulties, not part of the problem, Azevêdo stated, adding that, [w]e need to keep strengthening the system, delivering new reforms, and resisting the erection of new barriers to trade.! President Trump has pledged to implement a trade policy agenda that protects domestic industry and strengthens trade enforcement programs. He has also announced his intent to re-examine existing free trade agreements and prioritize bilateral agreements over multilateral agreements. 2

3 Negotiating Free Trade Agreements! Separate from the WTO, countries may also seek to increase market access and reduce barriers to trade by negotiating bilateral or multilateral trade agreements.! Free trade agreements (FTAs) constitute agreements among two or more countries under which they agree to eliminate specific tariffs and nontariff barriers on substantially all trade.! Beginning in the 1980s, the US and others began to focus increasingly on FTA negotiations as a means of further reducing barriers to trade.! The US currently has FTAs with 20 countries.! Since the collapse of the multilateral WTO Doha Round, the US and many other countries are increasingly relying upon bilateral and regional trade deals. 3

4 Process for Approving Trade Agreements in the US Under US law, trade agreements are not treaties and therefore are not self-executing. Instead, trade agreements must be approved by both chambers of Congress and signed into law by the President through implementing legislation under a process known as Trade Promotion Authority (TPA). TPA s procedures would apply to the renegotiation of an existing agreement as well. TPA gives the President the ability to negotiate these agreements, but requires he consult with lawmakers as negotiations progress. Once a final agreement has been reached, Congress can only approve or disapprove of the agreement; it cannot amend or filibuster it. Although TPA requires Congress to vote on the bill within 90 days of its introduction, there is no deadline by which the President must send the bill to Congress for its consideration. Thus, the President can choose to delay introduction of the bill until he is certain that Congress will support it. The President need not seek congressional approval of any side agreements or letters negotiated outside of the main agreement, but he is likely to take into account views of senior Members of Congress. 4

5 Trade Promotion Authority (TPA) 5

6 Trans-Pacific Partnership (TPP)! On October 5, 2015, the 12 TPP countries announced that a final agreement had been reached and the deal was signed February 4, 2016.! Due in part to concerns raised by Members of Congress about the length of intellectual property protections for biologic drugs and the tobacco industry s carve-out from the deal s investor-state dispute resolution mechanism, President Obama failed to secure sufficient congressional support for the agreement before the end of his presidency.! President Trump has been vocal about his opposition to mega-regional trade deals like the TPP. Shortly after his inauguration, President Trump signed a memorandum directing the US Trade Representative to formally withdraw the US from the TPP.! Representatives from the 11 remaining TPP countries have been meeting in recent months to chart a path forward for the deal without the US. They most recently met in September in Japan and hope to finalize the agreement before the Asia-Pacific Economic Cooperation (APEC) leaders summit, scheduled for November in Vietnam. 6

7 North American Free Trade Agreement (NAFTA)! During the 2016 presidential campaign and since his inauguration, President Trump has been very critical of NAFTA, pledging to renegotiate the agreement and using the threat of withdrawal to push stakeholders to the table.! Mexico, Canada, and the US began renegotiation talks in August and hope to conclude before the end of 2017, an ambitious goal.! Trump Administration officials have made clear that the President is seeking a comprehensive revamp of the deal. Business stakeholders in all three countries have urged that, above all, any efforts to modernize NAFTA do no harm to existing trade in North America.! In addition to updating NAFTA to reflect the 21st century economy, negotiators are considering new chapters on e-commerce/digital trade, small- and medium-sized enterprises, and state-owned enterprises.! Energy is emerging as a major area for discussion. While Mexico and Canada are reportedly pushing to update NAFTA s stand-alone chapter on energy, the US has suggested that energy be addressed in various chapters throughout the agreement.! Contentious issues at this early stage of negotiations include (1) whether to amend NAFTA s regional rules of origin and a US proposal to include new country-specific rules of origin, and (2) proposals to amend NAFTA s Investor-State Dispute Settlement (ISDS) provisions. 7

8 Transatlantic Trade and Investment Partnership (TTIP)! US and EU leaders discussed the possibility of the TTIP in November The trade relationship between the US and the EU is the biggest in the world, with more than $2.2 billion of goods and services traded each day. If implemented, the agreement would cover approximately one third of global goods and services trade.! Following the US elections, EU Trade Commissioner Cecilia Malmström acknowledged that TTIP negotiations will be in the freezer for some time.! However, more recent statements by US and EU policymakers suggest some are optimistic about restarting TTIP negotiations.! Commissioner Malmström recently traveled to Washington, meeting with Commerce Secretary Wilbur Ross and others in the Trump Administration, after which she reportedly noted that while both parties still need a bit more time, she is hopeful TTIP will come out of the freezer.! Both Senate Finance Committee Chairman Orrin Hatch (R-UT) and House Speaker Paul Ryan have expressed an interest in resuming TTIP negotiations in the future.! Trump Administration officials also recently suggested an interest in advancing the deal.! If negotiations resume, the parties would likely focus on issues related to the financial services industry, regulatory coherence, and intellectual property (IP). 8

9 US Korea Free Trade Agreement (KORUS)! In early September, reports emerged that President Trump was considering withdrawing the United States from KORUS.! In late August, the US and South Korea held a special session of the KORUS Joint Committee, at the request of the US, to discuss potential changes to the agreement.! A US Trade Representative statement issued after the August meeting acknowledged the important economic relationship between the two countries, but cited a number of concerns with the agreement.! KORUS, which went into effect in 2012, reduces trade barriers between the two countries.! US companies exported $42.3!billion in goods to, and imported $69.9!billion in goods from, South Korea last year, resulting in a $27.7!billion trade deficit.! Withdrawing from the deal could lead to a large increase in tariffs against products the US imports from South Korea, such as electronics, cellphones, and automobiles, and on goods and services exported to South Korea.! US Chamber of Commerce officials have warned of possible job losses in the agriculture and manufacturing sectors if the Trump Administration were to withdraw from the pact.! Talks of withdrawal came just as the two countries look to create a united front against North Korea amidst heightened military tensions. While the immediate threat of withdrawal abated within a few days, Administration sources have cautioned it remains a possibility.! The US and South Korea are scheduled to participate in a second special session of the KORUS Joint Committee on October 4. 9

10 Key Political Developments January 3, 2017: 115th Congress convenes. January 20, 2017: President Donald Trump takes office. May 15, 2017: Robert Lighthizer confirmed to serve as US Trade Representative. August 2017: NAFTA renegotiation talks begin. May 2017: Congress begins FY 2018 budget debate. May 18, 2017: Trump Administration transmits letter notifying Congress of its intent to renegotiate NAFTA. December 8, 2017: Congress spending authority expires. July 2018: Mexican Presidential Elections scheduled. November 2018: US Midterm Elections scheduled. 10

11 The Trump Administration and 115th Congress! Throughout his campaign, President Trump repeatedly demonstrated an eagerness to challenge the status quo. Since his inauguration, President Trump has wasted no time setting the tone by following through on his promise to shake up Washington.! President Trump has already signed a number of executive orders aimed at rolling back many of the initiatives put forward by his predecessor, President Obama.! The Administration is still working to finalize a number of political appointments across almost every agency.! Congressional Republicans set an ambitious schedule for 2017, vowing to pass legislation related to health care reform, tax reform, and a possible infrastructure plan (in addition to the regularly scheduled appropriations bills) before the end of 2017.! However, there remains considerable uncertainty as to if and how Congress will be able to work alongside President Trump on trade matters. 11

12 President s 2017 National Trade Policy Agenda The report, which is required under US law, highlighted the following four top priorities:! Defending US national sovereignty over trade policy, which includes a discussion of concerns with the WTO dispute settlement body;! Strictly enforcing US trade laws, including antidumping/countervailing duty laws;! Using all possible leverage points to encourage other nations open their markets to US goods and services, which details concerns with existing rules under the WTO and some bilateral and plurilateral agreements; and! Negotiating new and better trade deals around the world, highlighting concerns with some existing deals, including NAFTA and KORUS. 12

13 Who s Who on Trade: Trump Administration Robert Lighthizer US Trade Representative Wilbur Ross Secretary of Commerce Peter Navarro Director, Office of Trade and Manufacturing Policy (Previously Director of the White House National Trade Council) Jason Greenblatt Special Representative for International Negotiations Gary Cohn Director, National Economic Council Sonny Perdue Secretary of Agriculture Rick Perry Secretary of Energy 13

14 Executive Actions on Trade January 23: President Trump withdraws the US from the Trans-Pacific Partnership (TPP). January 24: President Trump issues memorandum directing the Department of Commerce to prepare a plan on the use of domestic steel in pipeline construction projects. March 31: President Trump signs Executive Order (EO) requiring the US Trade Representative and the Secretary of Commerce prepare a report examining trade with countries with which the United States had a significant 2016 trade deficit in goods. March 31: President Trump signs EO directing the Secretary of Homeland Security to enhance the collection of antidumping and countervailing duty orders by improving bonding requirements and other policies addressing risk assessment procedures. April 18: President Trump signs EO on Buy American and Hire American policies, covering both US Federal government procurement and immigration issues. Late April: Trump Administration launches Section 232 investigations into all imports of steel and aluminum into the United States. April 29: President Trump signs two EOs related to trade. The first directs a review of existing trade agreements; the second establishes a new Office of Trade and Manufacturing Policy within the White House. May 18: US Trade Representative Robert Lighthizer provides Congress with letters notifying lawmakers of the President s intent to renegotiate the North American Free Trade Agreement (NAFTA). August 14: President Trump issues memorandum requiring US Trade Representative Robert Lighthizer to determine whether to investigate any of China's laws, policies, practices, or actions that may be unreasonable or discriminatory and that may be harming American intellectual property rights, innovation, or technology development. 14

15 Trade Enforcement! One area of bipartisan agreement in trade is the importance of increased trade enforcement.! The Trump Administration is dusting off trade enforcement tools that have been on the books for decades, with the strong support of some domestic stakeholders, including:! 232 of the Trade Expansion Act of 1962, governing imports that threaten national security. The Administration s decisions in two Section 232 investigations examining steel and aluminum imports remain pending despite an original effort to conclude quickly.! 301 et. seq. of the Trade Act of 1974, which authorizes actions for violations of existing trade agreements or that are otherwise unfair to US interests. Following a memorandum from the President, Ambassador Lighthizer launched a Section 301 investigation into China's laws, policies, practices, or actions that may be unreasonable or discriminatory and that may be harming American intellectual property rights, innovation, or technology development.! 201 of the Trade Act of 1974, governing US escape clause (or safeguard) laws. Safeguard actions are permitted under the WTO to respond to increased imports that risk seriously injuring or threatening serious injury to domestic industry. Safeguard actions have been used less frequently in recent decades, but two cases brought by domestic industry are currently pending before the ITC. 15

16 Business Tax Reform: Background! Last comprehensive reform of US Tax Code enacted in 1986.! Corporate tax rates now among the highest of major trading partners with second tax on dividends, payable by shareholders.! Worldwide system: application to income earned by US businesses from their international operations creates competitive disadvantages and discourages repatriation of foreign earnings to finance expansion in US.! An increasing number of businesses are now conducted through partnerships, LLCs, etc. with all business income taxed at individual rates.! Past reform efforts failed in part because of partisan disagreements and Republican election sweep in 2016 sparked optimism that business tax reform could be enacted in 2017.! House Republican leaders sought to use their 2016 tax reform Blueprint as basis for 2017 reform efforts. 16

17 Business Tax Reform: The House Republican Blueprint! Radically Restructure Corporate Income Tax! Reduce rate to 20 percent and convert from an income tax to a cash flow tax, with immediate expensing, but no deduction for net interest expense.! Border adjustable so that receipts from exports tax exempt and imports subject to a 20 percent tax.! Territorial system: future active business income from international operations conducted through foreign subsidiaries generally tax-exempt and minimum tax would imposed on prior unrepatriated foreign business income.! New Regime for Active Business Income Earned By Partnerships, etc.! Subject to tax at special rate of 25 percent, but with a portion of that income treated as compensation to operators of the business. 17

18 Business Tax Reform: 2017 Developments! Border adjustability and full interest disallowance very controversial and many businesses concluded Blueprint would impact virtually every business transaction, including financings, M&A and supply chain operations.! Border adjustability explicitly abandoned by the Big Six negotiators in a brief summary statement of agreed tax reform principles issued in July 2017, signaling demise of much of the Blueprint.! As Big Six discussions continued, congressional Republicans began to lay groundwork for use of the budget reconciliation process to facilitate a Republican only tax reform process. 18

19 Business Tax Reform: The September Big Six Framework I! Tax Rates! Corporate rate 20 percent.! Special 25 percent rate for business income of small and family-owned businesses, with special anti-abuse rules to be developed by Congress recasting of personal income into business income to prevent wealthy individuals from avoiding top personal tax rate.! Expensing Capital Investments! Investments in depreciable assets (other than structures) after September 27, 2017 for at least five years. Congress may work to provide further relief, especially for small business.! Interest Expense C corporations subject to unspecified partial limitations on deducting net interest expense. Congress will consider limits for non-corporate taxpayers. 19

20 Business Tax Reform: The September Big Six Framework II! Other Business Deductions and Credits! Domestic production credit (sec. 199) to be eliminated and other special exclusions and deductions to be repealed or restricted.! R&D and low income housing tax credits to be retained.! State & local tax deductions apparently to be eliminated for individuals and businesses.! Tax Rules Affecting Specific Industries! Congress to re-examine to reflect economic reality and reduce abuse opportunities.! US-Based Multinationals! Move to territorial system (100% exemption for qualified dividends foreign subsidiary dividends with prior years unrepatriated earnings subject to two-tier unspecified lower tax, payable in installments over a period of years). 20

21 Business Tax Reform: September Big Six Framework III! US-Based Multinationals Jobs (con t)! To prevent shifting profits to tax havens, Congress to adopt rules to protect US tax base by imposing taxes at a reduced rate and on a global basis for the foreign profits of US multinational corporations.! Congress will also incorporate rules to level the playing field between US headquartered parent companies and foreign headquartered parent companies. 21

22 Business Tax Reform: Impact of the September Big Six Framework! Absence of critical details confirms that a full impact assessment of the Statement cannot be made until congressional tax committees have acted.! Tax committees are free to add additional provisions (e.g., the partial integration of the corporate and individual taxes to reduce double taxation of corporate earnings ).! Statement can reasonably be read to confirm that most tax law changes will be made within the basic tax code architecture, but with exceptions for specific items like new partnership income regime and move to corporate territorial system.! Action on the 2018 budget resolution will have a major impact on the contents and duration of any tax reform legislation. 22

23 Business Tax Reform: Anticipated Next Steps! Hearings.! Projected release of proposed statutory text by House Ways & Means Committee later in October followed by pre-thanksgiving markup and approval.! Senate action to follow, but Finance Committee may take some preliminary action prior to Thanksgiving.! If budget reconciliation process is used approval of congressional budget resolution must precede action on the tax bill.! Prospects for differences between House and Senate bills suggest a conference committee may write the final legislation. 23

24 Business Tax Reform: Dealing with the Near-Term Uncertainties! Active monitoring to determine what areas of business structure and operations may be impacted.! Permanent structure changes vs. temporary rate cuts.! Adverse impacts of base broadening measures.! Effective dates.! Restructuring to adapt to new system for partnership active business income.! Impact on Current Transactions! Should any be deferred?! Use of special clauses in contracts with tax sensitive features. 24

25 Contract Implications Problem: Unknown, potentially significant changes to tax or trade landscape! Obvious Example: New US Import Tariff who pays? Pricing provision does it expressly identify the party responsible? List of exclusions from purchase price Shipping term / delivery location Inconsistencies between terms 25

26 Contract Implications Solution for a New Contract: No Silver Bullet Impose on other party Feasible? Realistic solution? (provides better leverage) Wait Business as usual Formula / split Re-opener Less direct provisions 26

27 Potential Solution: Formula / split Is there a published metric to reference? Need to define current levels or upper limits of a party s responsibility Need to define what is included when level/limit is measured Can cause of change be isolated? Complexity of formula Risk of missing the mark Risk of unintended consequences Audit provision Subsequent re-evaluation 27

28 Potential Solution: Re-opener Trigger event Change in law/treaty Event that causes the cost of production to be substantially varied from the cost at the date of the contract Subjective belief/concern Procedure / Procedure / verification / verification / expert expert determination / determination / arbitration arbitration Formula / range of outcomes / factors for consideration Re-negotiation (process); boundaries? Interim price and any true-up Default result if renegotiation fails Audit provision Subsequent reevaluation 28

29 Potential Solution: Soft re-opener Notwithstanding any provision of this Agreement to the contrary, if any change in law or other circumstances or events occur(s) which Seller in good faith determines to render the methods established in paragraph 3(A) for increasing or decreasing prices and/or calculating price increases and decreases (collectively, the Pricing Provisions ) not feasible or uneconomical for Seller or Seller determines in good faith that further adherence to the Pricing Provisions presents significant practical difficulties or is otherwise not feasible for Seller, then Seller may give written notice thereof to Buyer, and upon Buyer s receipt of such notice: (i) the Pricing Provisions shall no longer apply, (ii) the Price List in effect at the time of such written notice shall be the effective Price List under this Agreement and (iii) the parties shall thereafter be required to negotiate price increases or decreases to the prices set forth on such Price List and/or new price adjustment methodologies in good faith. 29

30 Potential Solution: Less direct provisions Price Formulas / Exclusions Adjustments for increased costs MFN Currency Shipping Termination / non-renewal Return of equipment / tooling Compliance costs / obligations Force majeure 30

31 What about existing contracts? Identify exposure points and potential fixes/compromises Analyze termination and force majeure rights; identify/document non-compliance Lay track via course of dealing 31

32 Questions? [ANY QUESTIONS / CONTACT INFO SLIDE TO END] Frank Samolis Partner, Squire Patton Boggs T frank.samolis@squirepb.com Special thanks to Don Moorehead Partner, Squire Patton Boggs don.moorehead@squirepb.com Jeff Wahl Partner, Squire Patton Boggs jeff.wahl@squirepb.com John Cobau Chief Counsel for International Commerce, U.S. Department of Commerce Lead attorney, International Trade Administration 32