BIS clamps down on certain exports to Myanmar (Burma)

Yesterday we wrote about the easing of restrictions on exports of articles to Sudan. We also noted that is important to always review your export transactions in accordance with your export compliance system because things can change quickly. As if to illustrate our point, the Bureau of Industry and Security yesterday promulgated rules clamping down on certain exports to Myanmar, referred to by the U.S. as Burma. This is in direct response to the actions of the Burmese military, which “perpetrated a coup wresting control of the democratically-elected government of Burma.”

The restrictions imposed by BIS are targeted at certain entities: Burma’s Ministry of Defense, Ministry of Home Affairs, armed forces, and security services. Sensitive items that require a license for export or reexport to these entities–previously reviewed on a case-by-case basis–will now be subject to a presumption of denial. Further, certain license exceptions–LVS, GBS, TSR, and APP–will no longer be available. (These exceptions are not commonly used in our industry.) This means that exports to those entities of articles that require licenses will be very challenging for the foreseeable future.

Fortunately, it appears that exports of articles to support civil aviation that do not ordinarily require an export license remain unaffected by this rule. Additionally, the more common license exceptions in our industry–RPL (Servicing and Replacement of Parts) and AVS (Aircraft, Vessels, and Spacecraft) remain available. If you are using a license exception to export remember to always review it carefully because they often have limitations.

If you are exporting to Myanmar it is very important to carefully review the facts of your transaction to ensure compliance with the latest export regulations. If you are currently exporting to any of the above-mentioned entities or otherwise shipping Myanmar pursuant to a BIS license, you should also review the special conditions on the license to determine whether the license has been affected by these regulations. As always, if you have questions you should consult your export compliance attorney.

Sudan No Longer Subject to AT1

Frequent exporters of aircraft parts (like those of you who read this blog) are probably familiar with reason for control AT1 (Antiterrorism) found in the Export Administration Regulations. Most aircraft parts and many avionic and communication articles are controlled for export purposes as ECCN 9A991.d and 7A994, respectively. These two ECCNs are controlled only for reason AT1. And as anyone who has attended an ASA export workshop knows, when we consult the Commerce Country Chart (Supplement No. 1 to part 738 of the EAR), there was a lonely, lonely X in the AT1 column next to Sudan.

But no longer.

As of last month–January 14th to be specific–Sudan is no longer designated a State Sponsor of Terrorism. As a consequence, the Bureau of Industry and Security amended the EAR to remove the Antiterrorism control from Sudan and also remove Sudan from Country Group E:1, leaving Iran, North Korea, and Syria as those countries designated as terrorist supporting countries. The consequence of this change is that the 9A991.d- and 7A994-controlled articles that make up a significant percentage of civil aircraft parts and avionics will no longer require a license for export to Sudan. It also means that Sudan, as a new addition to Country Group B, will now be eligible for several license exceptions that can make exporting parts easier. (Note that it is always important to review the exact text of a license exception you wish to use, as there are several country-specific carveouts in many exceptions.)

This has been in the works for some time, as Sudan has been engaging bilaterally with the United States and has taken steps to ensure that it has not in the past six months and will not in the future provide support for acts of international terrorism. Four years ago BIS took steps to ease the export of aircraft related items to Sudan. Prior to 2017, applications for licenses to export to Sudan were reviewed under a general policy of denial, meaning an applicant would typically have to show a compelling reason for the license to issue. In January 2017, BIS revised its licensing policy to a general policy of approval for “parts, components, materials, equipment, and technology that are controlled on the CCL only for anti-terrorism reasons and that are intended to ensure the safety of civil aviation or the safe operation of fixed-wing, commercial passenger aircraft.” Articles controlled for reasons other than AT1 (such as avionic units like AHRS controlled for reason MT1) continued to be reviewed under a general policy of denial.

Taking a more permissive stance with respect to the export of aircraft parts to support civil aviation safety is a practice we have seen in other bilateral contexts. Previously, the United States used the export of civil aircraft parts to support civil aviation safety as a carrot during the negotiations leading up to the Iran JCPOA (the Iran nuclear deal from which the U.S. later withdrew). A safe civil aviation sector is an important economic driver and everyone benefits by improving and ensuring aviation safety.

Sudan is thus open for business–at least as far as most civil aircraft parts are concerned. It is important, however, to ensure your export compliance system verifies each transaction prior to export, because the status of countries and parties can change quickly. Just because a party was clear yesterday does not mean it will be clear tomorrow, and like Sudan, just because a destination is forbidden one day does not mean it will remain forbidden forever. If you have questions about whether an export license is required to ship an article to a destination like Sudan or anywhere else, or whether a license exception applies or how to use it, be sure to check with your export compliance counsel.

Shipping Lithium Batteries

Lithium batteries can be complicated to ship by air. Most people use the IATA Dangerous Goods Regulations but the lithium battery packing instructions are not like most of the other packing instructions.

To make it easier to ship lithium batteries by air, we’ve prepared a video that goes over the special packaging, marks, labels, and documentation commonly required when shipping lithium batteries by air.

You can watch the video on youtube or just watch here on our site:

This is not a stand-alone module; this video training is meant to be a supplement to the full hazmat certification training that we offer. If you haven’t taken that training, then we recommend attending one of our classes so you can understand the scope of your compliance obligations, and then using this video to review how to follow the IATA instructions for shipping lithium batteries (in particular).

EU To Accept UK Production Releases Under EU-UK Trade Agreement

We’ve examined the Trade Agreement between the UK and EU and it provides some useful guidance on aviation safety matters. The Agreement includes an Annex that details the scope of cooperation between the UK and EU in this subject area.

UK CAA Form 1 authorized release certificates signed on the left side by the approved production organization will be accepted in the EU

Trade and Cooperation Agreement between the EU and the UK, Annex AvSaf-1 Art. 21 (31 Dec 2020).

Under the Trade Agreement, the UK and EU each agree:

  • To accept certain approvals without validation (AvSaf 3-4; Annex AvSaf-1 Art. 13):
    • Non-significant supplemental type certificates, non-significant major changes and technical standard order authorizations issued by the EU
    • Minor change / minor repair approvals issued by the UK or EU;
  • To accept through a validation process (AvSaf 3-4; Annex AvSaf-1 Art. 10):
    • EU and UK type certificates;
    • EU significant supplemental type certificates and approvals for significant major changes;
    • UK supplemental type certificates, approvals for major changes, major repairs and technical standard order authorizations
  • To accept the production approval systems of the other (AvSaf 3-4; Annex AvSaf-1 Arts. 21-23);
    • This is limited to the categories of civil aeronautical products that were already subject to that system on 31 December 2020 – later-approved categories must be subject to negotiation;
    • Within these limits, UK CAA Form 1 authorized release certificates signed on the left side by the approved production organization will be accepted in the EU;
  • To limit fees and charges to those “commensurate with the services provided” (AvSaf 13);
  • To exchange accident/incident information (AvSaf 9);
  • When one of them takes immediate measure in response to a safety threat (such as through issue of an airworthiness directive) it will inform the other within 15 days (Article AvSaf 6).

One type of approval that is noticeably absent from this list is maintenance approvals. To address this, EASA issued third-country maintenance approvals to repair stations located in the UK that had previously applied. So maintenance releases from UK-based repair stations will need to be signed under EASA authority to be acceptable in the EU.

We should expect an EU-UK implementation agreement that further explains the mechanisms for acceptance and validation between the two jurisdictions.

There are some remaining issues, especially with respect to multi-country transactions. For example, nations outside of the EU, Canada, Japan and the US will need to decide whether to accept UK approvals. This could make things tricky when dealing with other jurisdictions: China comes to mind as a significant market for which a decision about acceptance of UK releases will need to be made.

New Military-Intelligence Rules Apply to Certain Transactions

New US rules published today create new restrictions on support of certain military-intelligence end uses and end users. This will authorize the addition of new entities to the export control lists, and will also impose a de facto requirement to ensure your transactions are not supporting restricted military-intelligence end uses. This new restriction comes on the heels of new restrictions related to military end uses and military end users.

15 C.F.R. is being amended to create new restrictions on the support of certain military-intelligence end uses and end users.

The specific restrictions apply to transactions – of any item subject to the Commerce Department export regulations – because there is an unacceptable risk of use in, or diversion to, a ‘military-intelligence end use’ or a ‘military-intelligence end user’ in the People’s Republic of China, Russia, or Venezuela; or a country listed in Country Group E:1 or E:2 (currently Cuba, Iran, North Korea, Sudan and Syria).

Two key definitions are also added to the regulations, to explain the scope of the new restrictions:

Military- intelligence end use’ means the design, ‘‘development,’’ ‘‘production,’’ use, operation, installation (including on-site installation), maintenance (checking), repair, overhaul, or refurbishing of, or incorporation into, items described on the U.S. Munitions List (USML) (22 CFR part 121, International Traffic in Arms Regulations), or classified under ECCNs ending in ‘‘A018’’ or under ‘‘600 series’’ ECCNs, which are intended to support the actions or functions of a ‘military- intelligence end user,’ as defined in this section.

15 C.F.R. § 744.22(f)(1) (March 16, 2021).

Military-intelligence end user’ means any intelligence or reconnaissance organization of the armed services (army, navy, marine, air force, or coast guard); or national guard. For license requirements applicable to other government intelligence or reconnaissance organizations in China, Russia, or Venezuela, see § 744.21 of the EAR. Military-intelligence end users subject to the license requirements set forth in this § 744.22 include, but are not limited to, the following:

(i) Cuba. Directorate of Military Intelligence (DIM) and Directorate of Military Counterintelligence (CIM).

(ii) China, People’s Republic of. Intelligence Bureau of the Joint Staff Department.

(iii) Iran. Islamic Revolutionary Guard Corps Intelligence Organization (IRGC– IO) and Artesh Directorate for Intelligence (J2).

(iv) Korea, North. Reconnaissance General Bureau (RGB).

(v) Russia. Main Intelligence Directorate (GRU).

(vi) Syria. Military Intelligence Service.

(vii) Venezuela. General Directorate of Military Counterintelligence (DGCIM).

15 C.F.R. § 744.22(f)(2) (March 16, 2021).

In summary, the recent expansion to the military end use/user rules is further expanded to include military intelligence services (in the seven affected countries) as well.

The most difficult compliance target may be China, because of the complicated manner in which the private sector and the state are intertwined (and also because of the large volumes of trade between these two nations). Compliance in China in particular will require special attention to detail, and to ensuring that regulatory obligations are understood and that compliance is well-documented.

The new rules apply to both direct exports and also to certain transactions that are not U.S. exports. There are some limited, specific cases where the U.S. export laws apply to transactions that are not U.S. exports. The best known case is re-exports, where U.S. origin products that are exported from one third-country location to another are nonetheless subject to U.S. export regulations.

Another special case involves weapons of mass destruction, the restrictions for which have been summarized in subsection 730.5(d). Current regulations provide:

(d) U.S. Person Activities. To counter the proliferation of weapons of mass destruction, the [Export Administration Regulations] restrict the involvement of “United States persons” anywhere in the world in exports of foreign-origin items, or in providing services or support, that may contribute to such proliferation.”

15 C.F.R. § 730.5(d) (2020).

In today’s Federal Register, the government expanded the scope of subsection 730.5(d) to read as follows (note that restrictions on missiles and nuclear, chemical, and biological weapons already existed in the regulations, but the text dealing with them is also expanded in the new rule change):

(d) ‘‘U.S. person’’ activities. The[Export Administration Regulations] restrict specific activities of ‘‘U.S. persons,’’ wherever located, related to the proliferation of nuclear explosive devices, ‘‘missiles,’’ chemical or biological weapons, whole plants for chemical weapons precursors, and certain military-intelligence end uses and end users, as described in § 744.6 of the [Export Administration Regulations].

15 C.F.R. § 730.5(d) (March 16, 2021).

This should be of note to ASA members because it expands the scope of this rule to include certain military-intelligence end uses and end users – which means that some transactions that are not strictly U.S. exports will nonetheless be restricted when the participants include U.S. persons.

The new regulation is an interim final regulation. It is exempt from the APA’s requirements for notice and comment so it will go into effect on March 16, 2021 without comment. In the interest of effective rule-making, the government is nonetheless collecting comments on this rule.

As always, if you think that your transactions may be affected by the new rule, please consider seeking our legal advice to support your compliance program.

Applications Are Opening for PPP2 Forgivable Loans

As we announced in our December 29th article, Congress has authorized a second draw Payroll Protection Program (PPP2).

The PPP2 loan program is very much like the first round, in that it is a loan that can be forgiven if the proceeds are spent on appropriate authorized expenditures (like payroll). But there are a few differences…

The most important of these differences is that the second draw PPP will be limited to businesses that can show an adverse effect from Covid-19. Nearly all of ASA’s members have been dramatically affected by Covid-19 so hopefully most of our members will be eligible for this program. The manner in which you must show adverse effect is by comparing your 2020 quarterly gross receipts with those of the corollary 2019 quarter. If you can demonstrate that your quarterly gross receipts dropped by 25 percent or more from the corollary 2109 gross receipts for the same quarter, then you meet this prong of the eligibility test. There are also special rules if you were not in business for all of 2019.

Another change is that the maximum business size drops from 500 employees (for PPP) down to 300 employees (for PPP2).

Please note that there are other detailed requirements not repeated in this blog article!

The SBA has published information on PPP2 loans. One particularly useful document explains how to calculate your maximum loan. The SBA information includes a model application form for PPP2 loans. Expect your bank’s application form to look similar but it may not be exactly the same. It appears that some banks have begun to accept applications for PPP2 loans, while others have not yet begun to accept them (but ought to be doing so, soon).

Payroll Support Program Deadline is Tonight

If you are an air carrier or a contractor to an air carrier then you probably already applied for the Payroll Support Program financing last year. Congress has authorized a second round of funding and the first deadline for application is midnight tonight (January 14, 2021). Applications received after 11:59 p.m. EDT tonight will be considered, but may not be processed as quickly.

Information about the second Payroll Support Program, or PSP2, can be found on the Treasury Department’s website at https://home.treasury.gov/policy-issues/cares/preserving-jobs-for-american-industry/psp2.

Additional information can be found in these two documents:

US Modifies Tariffs on EU-Sourced Aircraft Fuselage, Wing, and Stabilizer Assemblies

The United States published a modification of the tariffs on aircraft and aircraft parts imported from Europe. The modification goes into effect today. The modification continues tariffs for certain aircraft coming from the EU and expands the tariffs to also include certain major assemblies (certain fuselage, wing, and stabilizer assemblies).

Tariffs are descriptions of taxes imposed on the import of goods. The tariffs are published in the Harmonized Tariff Schedule of the United States (HTSUS). Each tax described in such a tariffs is known as a “duty.” Duties are typically paid by the importer.

As we’d previously reported, in 2019 the U.S. Trade Representative announced a preliminary proposal to implement new tariffs on a range of European products with a significant focus on the civil aviation sector, including both parts and completed aircraft. This resulted in the imposition of certain “section 301” punitive tariffs on aircraft products from the European Union. The additional punitive tariffs are published in chapter 99.

The modification clarifies that fuselages and fuselage sections, wings and wing assemblies, horizontal stabilizers and vertical stabilizers for certain large aircraft are subject to an additional 15% duty when they are products of France or Germany (particularly under HTSUS 8803.30.00). The additional tariff is referenced under 9903.89.61. This appears to be limited to assemblies for aircraft that are already subject to the 15% duty (large aircraft from certain EU countries under HTSUS 8802.40.00) which can be found under HTSUS 9903.89.05.

The good news for many ASA members is that this new expansion does not include airplane parts, components, or sub-assemblies (e.g., aft pressure bulkheads, floor panels, seats) that are imported unattached to the described articles. The 15% duty is limited to complete assemblies meeting the tariff descriptions.

The relevant descriptive language (establishing the scope of the tariff) is found in note 21(t) from HTSUS Chapter 99:

(t) For purposes of subheading 9903.89.61:

(1) “Fuselages and fuselage sections” means: (a) the complete, tube-like structure comprising the central body portion of an airplane, including accommodations for crew, passengers, and/or cargo, whether or not containing systems, insulation, or other articles; and (b) sections of articles described in (a) that have exterior side surfaces attached to exterior top/crown and bottom/keel surfaces, whether or not designed to be pressurized, and whether or not there are additional articles attached. The term “fuselages and fuselage sections” shall not cover airplane parts, components, or subassemblies (e.g., aft pressure bulkheads, floor panels, seats) when imported unattached to the articles described in (a) and (b) of this subdivision.

(2) “Wings and wing assemblies (other than wings having exterior surfaces of carbon composite material)” means: (a) left or right handed outboard wing structures with fixed structures, whether or not also including moveable structures, having exterior surfaces of other than carbon composite material; (b) center wing boxes having exterior surfaces of other than carbon composite material; and (c) wing assemblies that combine an outboard wing structure with a fixed structure (whether or not having moveable structure) and a center wing boxes, having exterior surfaces of other than carbon composite material. The term “wings and wing assemblies (other than wings having exterior surfaces of carbon composite material)” shall not cover airplane parts, components or subassemblies when imported unattached to the articles described in in (a), (b), or (c) of this subdivision.

(3) “Horizontal and vertical stabilizers” means a horizontal or vertical stabilizer, whether or not attached to elevators or fuselage/tail cone/empennages structures. The term “horizontal and vertical stabilizers” does not cover elevators or rudders when imported unattached to a fuselage, tail cone, or empennage structure.

Such subheading shall not cover other parts of airplanes or helicopter not covered by the definitions set forth in this subdivision.

HTSUS Chapter 99, Note 21(t) (2021)

Also certain tooling from Germany under HTSUS chapters 82 and 84 remains subject to a 25% tariff and this list has been repeated in the recent modification.

This is a complicated area of the law and it is important to carefully review the applicable base tariff code, the applicable additional tariffs under chapter 99, and any exceptions (typically described in the chapter notes). For example., there may be exceptions for certain goods entered into the United States under HTSUS Chapter 98, which includes U.S.-goods-returned and articles temporarily imported into the U.S. for maintenance with the expectation of returning them to their non-U.S. owners. This area of the law is also constantly changing so be sure to look up the applicable tariffs with every import!

PPP Loan Forgiveness: Authorized Expenses Paid With PPP Money Are Deductible

Many of our readers took advantage of the Paycheck Protection Program (PPP), which offered forgivable loans to businesses that were wiling to use the money for payroll purposes.

One open question was the tax treatment of the covered expenditures. An IRA Notice explained that the expenses would not be deductible, which reduced the total value of the PPP forgiven loan. That issue has been resolved in the recent Omnibus Bill. This issue presents itself like this:

  • First, under normal circumstances, loan forgiveness is taxable. You treat it like taxable income.
  • Second the CARES Act explicitly provided that loan forgiveness for CARES Act PPP loan forgiveness would not be taxable as income.
  • Third, the IRS released an interpretation – IRS Notice 2020-32 – explaining that although the PPP loan forgiveness would not be taxable as income, the payroll and other expenses paid with this money would also not be deductible. This was based on 26 U.S.C. § 265. You can see a complete analysis in our earlier article, here. For most taxpayers, this yielded the same result as if the PPP loan forgiveness had been taxable as income, and the payroll and other expenses had remained deductible.
  • Finally, this issue was resolved in the recent legislation, which confirmed that:
    • The CARES Act PPP loan forgiveness would not be taxable as income, as originally intended; and
    • The authorized expenses paid for with the forgiven PPP loan funds would remain deductible, without regard to 26 U.S.C. § 265.

In general, this means that the once the PPP loan has been forgiven, it will generate no additional tax liability, and it will not affect the deductibility of your payroll and other expenses. This makes PPP Loan forgiveness even more valuable to the taxpayers that receive it.

For those who apply for a second draw PPP (which will soon become available), comparable forgiveness and deductibility rules will apply. Se our article on the second draw PPP for more details.

This statutory authority can be found in Division N, Section 276 of the Omnibus bill (the particular subtitle is known as the ‘‘COVID-Related Tax Relief Act of 2020’’). You should review this authority with your tax accountant to understand how it affects your particular tax situation.

Second Draw PPP Loan

The President has signed the Covid-19 relief legislation, which means that there is an opportunity for businesses to seek a second loan under the Paycheck Protection Program (PPP).

Some things will remain the same with this second iteration of the PPP. The maximum amount of the loan will be equal to 2 and a half months of payroll (this can be based on 2019 payroll OR the one-year period prior to the loan). If you spend the loan on certain authorized expenses during the covered period then the loan can be forgiven (so you do not have to repay it).

But there will be some key differences in the second PPP. The most important of these is that the second draw PPP will be limited to businesses that can show an adverse effect from Covid-19. Nearly all of ASA’s members have been affected by Covid-19 so hopefully this works to the benefit of our members. The manner in which you must show effect is by comparing your 2020 quarterly gross receipts with those of the corollary 2019 quarter. If you can demonstrate that your quarterly gross receipts dropped by 25 percent or more from the corollary 2109 gross receipts for the same quarter, then you meet this prong of the eligibility test. There are also special rules if you were not in business for all of 2019.

We recommend that you simply arrange your gross receipts like this to assess eligibility:

  2019 2020 Subtract the 2020 quarterly gross receipts from the 2019 quarterly gross receipts and divide by the 2019 quarterly gross. If the number is greater than 25% (0.25) then you may be eligible for a second draw PPP Loan.
1st Qtr Q1 gross receipts Q1 gross receipts (2019Q1-2020Q1)/2019Q1
2nd Qtr Q2 gross receipts Q2 gross receipts (2019Q2-2020Q2)/2019Q2
3rd Qtr Q3 gross receipts Q2 gross receipts (2019Q3-2020Q3)/2019Q3
4th Qtr Q4 gross receipts Q4 gross receipts (2019Q4-2020Q4)/2019Q4

Other minor change include a tighter focus on smaller businesses: second draw PPP eligibility will be limited to businesses with fewer than 300 employees. The first round of PPP had a limits of 500 employees.

Payroll, rent and utilities remain allowable expenses for purposes of earning loan forgiveness, and the new law expands the scope of allowable expenditures to include (i) certain operations expenditures, like software that is necessary to facilitate business operation, (ii) uninsured property damage caused by vandalism or looting, (iii) payments to supplier providing essential goods, and (iv) certain worker protection expenses.

The new law also clarifies certain payroll costs. It establishes that group life, disability, vision, or dental insurance are included as part of payroll costs.

The maximum loan for the second draw PPP will be $2,000,000.

One limitation that may affect some ASA members – especially those whose business is focused in China – is a set of second draw PPP limits related to China:

  • If your business enjoys 20% or more ownership by a Chinese entity then your business is excluded from the second draw PPP;
  • If your business enjoys 20% or more ownership by an entity that has significant operations in China (including Hong Kong) then your business is excluded from the second draw PPP [“significant operations in China” is undefined and likely will be defined in the upcoming regulations]; or
  • If your business’ Board of Directors includes a resident of China then your business is excluded from the second draw PPP.

The deadline for second draw PPP application is March 31. The regulations for these new second draw PPP Loans ought to be out soon, and businesses should wait for the new regulations before applying (banks likely will not accept new applications until those regulations have been released).

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