New Trade Policy Leaders in Washington

Excerpt from North American Free Trade & Investment Report
published by WorldTrade Executive, Inc.

By Steven J. Mulder (Greenberg Traurig)

Steven J. Mulder (mulders@gtlaw.com) is Assistant Director of Global Trade & Governmental Affairs with Greenberg Traurig in Washington.

In December, then President-elect Obama announced his pick for the next United States Trade Representative (“USTR”), former Dallas Mayor Ron Kirk. The new President made brief, but important, comments on trade policy when he introduced Kirk striking a balanced tone between the importance of trade to the U.S. economy and the need for a new approach on trade -- just as he promised on the campaign trial. It will largely fall to Kirk and the new senior leadership at the Office of U.S. Trade Representative to develop and implement the President’s goals.

However, it is likely to be several months before the President himself can focus on trade. President Obama and the Congress are intensely focused on enacting a massive economic “stimulus” package that should be completed in the next few weeks. Following that, it is expected the President will turn to major reform of America’s financial markets with many of his other stated priorities -- health care reform, environmental protection, energy policy -- jockeying for position to be “next in line.” Thus, it is not expected that the new administration will seriously tackle trade issues until the second half of 2009.

That said, a lot of work is going to take place with USTR-designate Kirk and the new senior leadership at the USTR in the months ahead to try to fashion a new policies that advance the President’s vision on trade. The broad parameter’s of his vision were laid out during the President’s announcement last month. The President called for enhanced trade as part of the effort to turn around the economy: “We must engage in strong, robust trade and open doors for American products.” At the same time, the President made clear that greater consideration for labor and environmental protection, as well as shielding American workers from the effects of trade, will be a major part of his trade agenda: “…there is nothing inconsistent about standing up for free trade and standing up for American workers.” President Obama indicated that once Kirk becomes USTR, he will ensure that, “any agreement I sign as President protects the rights of all workers, promotes the interests of all Americans, strengthens business and preserves the planet we all share.”

It will be interesting to see how Kirk balances this support for NAFTA with the adamant opposition to free trade agreements by organized labor, which played a strong role in electing President Obama and are expecting a major “roll back” of the Bush Administration trade policies. Following the President’s announcement, labor and their congressional allies reacted with responses that ranged from “wait and see” to outright skepticism. For example, a leading critic of current trade policy, Congressman Mike Michaud (D-Maine), issued a statement saying: “I am deeply concerned about the choice of Ron Kirk because his past trade policy positions do not reflect the views of most Americans.”

A representative of the AFL-CIO indicated that the union would “reserve judgment” on Kirk. Many other labor supporters of the President issued cautious statements and almost all vowed to “closely scrutinize” the President’s choice. That process will start with the upcoming confirmation hearing, though Kirk should easily win Senate confirmation.

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China Tax and Financial Planning Briefing New Edition

--Concord, MA. December 10, 2008. WorldTrade Executive, Inc. announces the publication of its new corporate report, China Tax and Financial Planning Briefing, Second Edition.

Tax and financial regulation can have an enormous impact on the profitability of a transaction. The newly-released China Briefing is designed to update corporate CFO’s and counsel on recent changes and practices concerning China’s tax and financial regulation. It contains case studies and analysis from leading practitioners.

Important topics include:

• Audits in China: How do they Differ?
• China’s New Thin Capitalization Rules
• Update on Current Tax Issues Facing the Foreign Banking Sector
• Managing Your Channel Under the PRC Antimonopoly Law
• The Five Biggest Mistakes People Make in Non-Disclosure Agreements with Chinese Firms
• M&A Transactions in China: Managing Legal Risks and Pitfalls
• China Strengthens Its Transfer Pricing Policies
• Building a Tax-Effective Supply Chain in China
• New Tax Law Provides Relief to Investors in Chinese Companies Owned through US Holding Corporations
• Selling Chinese Goods to the US via Canada
• China Strengthens Its Transfer Pricing Policies

Other important topics cover transfer pricing, finding tax efficient ways to operate a supply chain, complying with the PRC’s new M&A rules, staying on top of the new Anti-Monopoly Regulations, issues relating to China’s Company Law, and China’s VAT.
WorldTrade Executive specializes in providing reports and periodicals concerning tax and legal issues in international markets. Its products include a family of periodicals covering tax strategies used by leading corporations to manage international tax issues, with regional editions focusing on tax planning for companies in China, Asia, Europe, South America and Mexico. It also has special reports on tax issues in markets such as Japan, Viet Nam, Mexico, Brazil, and Russia, and reports on transfer pricing.

For more information or to sign up for a free international tax briefing go to http://www.wtexec.com/tax.html or contact Jay Stanley at 978-287-0301 or at 2250 Main St., Concord, MA. 01742.

What to Expect from US Trade Agenda

excerpt from International Finance & Treasury
published by WorldTrade Executive, Inc.

By Steven J. Mulder (Greenberg Traurig)

Among the many outcomes from November’s historic elections was the election of several new Members of Congress who ran on a so-called “fair trade” platform that critics argue amounts to little more than protectionist stances on economic and trade policies. Those candidates that successfully ran on the fair trade platform argued that the trade policies of the Bush Administration have failed to provide meaningful benefits for average working Americans. Whatever version one may believe, it is clear that the pro-free trade voices in Congress have been diminished as a result of the elections.

Given that, we are likely to see a period of inactivity on the trade front in the 111th Congress, at least for the pending free trade agreements concluded by the Bush Administration with Colombia, Panama and Korea. The real question is how will the incoming Obama Administration address trade issues and can it work with Congressional critics of trade to create a “new path” for U.S. trade policy going forward?

There are any number of creative ideas floating around Washington on how the new President and 111th Congress may fashion a new consensus on trade policy. Some of the leading ones are creation of new fast track trade negotiating authority that allows much greater congressional input; doing away altogether with comprehensive, country-specific free trade agreements and instead limit them to defined “sectorals” -- for example, a “services” agreement with Japan that would include financial, legal and insurance services trade, but avoid the highly controversial matter of opening Japan’s agricultural economy to U.S. producers. Others argue that free trade agreements should include the highest standards for labor and environmental protections. (It should be noted that the pending free trade agreements contain such protections, yet they still face bleak prospects in Congress).

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Stock Options for Works Council Members in Germany: The Role of Oral Communications

Excerpt from EuroWatch
published by WorldTrade Executive

By Dr. Walter Ahrens (Morgan Lewis & Bockius LLP)

A recent judgment of the federal labor court underlines how important it is that the right legal entity within a group of companies grants stock options and that no misleading representations are made to the employees in this context. As the following case demonstrates, failure to sufficiently take these requirements into account can lead to unexpected financial consequences that can be substantial.

The plaintiff started employment in 1999 with a German company that was owned by a U.S. corporation. In 2000 and 2001 he received a total of 5,000 stock options from the U.S. parent corporation. In 2001 he became a member of the company’s works council. He was subsequently elected chairman of the works council and released from his obligation to work. German statutory law provides that in operations that regularly employ at least 200 employees, a certain number of works council members have to be released to enable them to fully engage in works council activities. These works council members are nevertheless entitled to the same pay and benefits as comparable employees and even take part in pay increases. This is intended to ensure that they suffer neither financially nor with respect to their professional development from their works council membership.

It probably does not come as a surprise that the plaintiff in this case did not receive any stock options from 2002 to 2005, while an employee whom the parties had agreed was comparable to the plaintiff did receive such options. The employee claimed the options from the German subsidiary in court, but lost in the first two instances.

The federal labor court set the appeal court judgment aside and remanded the case to the appeal court for further investigation. It held that the pay and benefits that works council members are entitled to may also include stock options. The court also made clear that payments and benefits that are provided by a third party and not by the employer, for example by another group company, are not to be taken into account in this context.

In this case, the U.S. parent corporation had gotten nearly everything right. The stock options had been granted by the parent corporation, and the employment contract between the German subsidiary and the employee did not include any stock options. Such clear distinction is also helpful from a conflict-of-laws point of view.

The reason, however, why the federal labor court nevertheless set aside the appeal court judgment was that the appeal court had not sufficiently taken into account the plaintiff’s submission that in his job interview, the German subsidiary had presented the stock options as an additional pay component. According to the court, this could mean that the U.S. parent entity’s stock options were benefits in addition to the regular remuneration agreed upon between the parties that could establish the employer’s secondary liability in accordance with the terms and conditions of the stock option agreements. What exactly had been said in the job interview and how it has to be construed will now have to be determined by the appeal court.

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Canada’s Prime Minister Announces Plan to Relax Foreign Investment Restrictions

Excerpt from North American Free Trade & Investment Report
published by WorldTrade Executive, Inc.

by Kim D. G. Alexander-Cook (Stikeman Elliott LLP)

Prime Minister and Conservative Party Leader Stephen Harper announced on September 12 that his party would seek to lift some of Canada’s restrictions on foreign investment if it is returned as the government in the October 14 federal election.

Currently, Canada’s Investment Canada Act requires review and approval of direct acquisitions of Canadian businesses by non-Canadians where Canadian assets exceed a $295 million (adjusted annually) threshold, with lower thresholds applying to direct and indirect acquisitions of Canadian businesses in four “sensitive sectors” — uranium mining, financial services, transportation services and “cultural” businesses. In addition, Canada has sector-specific legislation and/or foreign ownership restrictions in broadcasting, telecommunications, cultural industries, transportation services and uranium production. As well, the financial services sector is subject to ownership restrictions of general application (but not foreign ownership restrictions).

The Prime Minister announced that a Conservative government would open up the airline and uranium-mining sectors to allow increased foreign investment, "subject to negotiation with our trading partners and to considerations of national security." In particular, airline ownership limits would be raised to 49 per cent from the current 25 per cent, as long as Canadian companies were offered reciprocal rights in other countries.

Only foreign investments of more than $1 billion would be reviewed under the Investment Canada Act, up from the current level of $295 million that applies to direct acquisitions, with the change phased in over a four-year period.

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MANAGING CHANNELS UNDER THE NEW PRC ANTIMONOPOLY LAW

Excerpt from Practical China Tax and Finance Strategies
published by WorldTrade Executive, Inc.

By Lefan Gong, S.J.D. (Zhong Lun Law Firm)

With the new Antimonopoly Law (AML) effective on August 1, 2008, manufacturers, distributors and others are now subject to new rules that may significantly change their existing ways of doing businesses. Some of the automakers in China reportedly have already started making changes to agreements with their dealers to be in full compliance with the new law. Antimonopoly lawsuits were filed just within a few days after the AML took effect, marking a start of a likely new wave of litigation in China against large corporations, trade associations and even government agencies.

In particular, the AML will likely have a profound impact on channel management. For instance, Article 14 the AML prohibits “monopoly agreements” that fix resale prices or specify minimum resale prices. Now a host of questions emerge:

• Can a company use methods other than “agreements” to impose minimum resale prices on its distributors?
• Can a company suggest and advertise minimum retail prices for its products?
• Can it terminate those distributors that fail to obey such “suggested retail prices”?
• Can a franchisor continue to impose price and territorial restrictions on its franchisees?

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Audits in China -How Do They Differ?

Excerpt from Practical China Tax and Finance Strategies
published by WorldTrade Executive

by Tony Upson (Director of Assurance and Advisory at PKF Beijing)


If you are contemplating investing in or trading with a Chinese company or are already doing so, you will want to satisfy yourself about the company’s financial position and results and will no doubt consider the company’s financial statements. Do you know the differences between Chinese audits and financial statements, particularly for private companies, and Western standards?

Here are some items to consider:

Firstly, financial statements for unlisted Chinese companies are not generally on the public record. This is similar to the USA but dissimilar to Europe, where the financial statements of all limited companies are on the public record (in theory, at least). Financial statements of private companies in China have to be prepared for the tax authorities and various other government bodies.

Listed companies have to use modern Chinese accounting standards (Accounting Standards for Business Enterprises or ASBEs), which are similar to International Financial Reporting Standards (IFRS), but private companies often still use the previous system. This form of financial statements is of limited use to a potential investor or other trading partner. Unlike financial statements prepared under IFRS, they are not designed to provide information of use to investors. Areas where differences often exist between financial statements prepared under the old Chinese system and under IFRS include:

• accounting for land use rights as intangible assets rather than operating leases
• doubtful debt provisions based on ageing formulae, rather than realistic appraisal of recoverable amounts
• use of ‘standard’ asset lives and residual values, rather than realistic estimation
• deferral of expenditure such as start-up costs and R & D
• lumping together taxes on income with indirect, sales and other taxes
• deferred tax
• inclusion of the results of subsidiaries in the parent company’s individual accounts

In addition to these differences between the old Chinese rules and IFRS, unaudited financial statements of private companies often do not even comply with the old Chinese rules. Adjustments are only made when financial statements are audited and submitted to the tax bureau. So in Unaudited accounts it is common to find that:

• revenue recognition is on a cash basis rather than an accruals basis
• recognition of costs depends on whether an invoice has been received, not on whether the goods or services have been received.

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