International Communique Fall 2004

October 2004
Frost Brown Todd LLC

Japan - Increasing Export Opportunities
By Joseph J. Dehner
China is hot, as the proliferation of conferences and news reports reflect.  But Japan remains the world’s second largest national economy – more than 3 times the size of China.  With 13% of the world’s GDP and US$50 billion of imports from the U.S., Japan merits attention from U.S. exporters of goods and services.  And there are reasons that opportunities for U.S. exporters are greater than ever.

Japan is a sophisticated market with wealthy consumers.  The average Japanese household has over US$100,000 of savings and per capita monthly disposable income of US$3,800.  Historically a closed market with complicated supply chain and retail systems that have disadvantaged imports, Japan’s economy is changing.  A prime example of this is retail trade.  Costco is in Japan, and Walmart is about to enter.  The historical tradition of small retail stores is breaking down, just as has occurred in Europe and the U.S.  Coupled with Japanese insistence on quality, this trend augurs well for U.S. high-quality finished goods.  Japan has an aging population, 17% of whom are over 65 years (compared to 12% in the US), with this cohort estimated to grow to 30% of the country by 2030 (compared to 20% in the U.S.).  Japan’s economy has improved from a flat 2002.  The first quarter of 2004 saw growth of over 6%, and Japanese economists project annual growth of more than 3% for this year.  For these and other reasons, the U.S. Commerce Department is bullish on Japan.  Its top 10 prospects for U.S. exports to Japan are in the following order:  medical equipment, biotechnology, electronic components, computer software, pharmaceuticals, travel and tourism, aircraft, new energy power generation, dietary supplements/health food and lifestyle goods.

The desire for high-end services is increasing too.  From finance to software to architecture to e-commerce, western firms offering state-of-the-art solutions compete successfully for Japanese business.

To penetrate the Japanese market requires good planning, commitment and local presence. Direct presence is best but can be prohibitively expensive to launch.  For all but very large firms, this usually means engaging a strong Japanese agent or distributor.  The key here is careful selection.  One place to start is the U.S. Government’s Commercial Service Japan, accessible through your local U.S. Export Assistance Center.  With 6 offices in the country, CS Japan can give you a list of potential business partners for a modest cost, and offers a Gold Key Service to meet candidates while you are in Japan.  Due diligence is crucial, not only to satisfy credit and credibility checks, but also to make sure that the chosen firm will diligently promote your products in Japan.  For a list of companies that perform Japanese due diligence, see www.buyusa.gov/japan/en/page9.html.

Once an agent or distributor is chosen, constant involvement and periodic in-person visits are vital.  Otherwise, there is a serious risk of a distributor’s creating a conservative, low-volume, high-markup strategy that “cherry-picks” and thus undermines the ultimate market for your products.  The company representative who works with a Japanese agent or distributor should have reasonable cultural savvy and awareness of the differences in business customs between Japan and the U.S.  Accompanying a Japanese agent or distributor on calls to important customers is crucial in developing the market.  Adequate product service and customer support before and after sales are essential.

An arrangement with an agent or distributor should be properly documented.  Letter style agreements are adequate if they cover all essential points.  While Japan has no mandatory post-termination payments to agents or distributors, there are culturally understood norms regarding how a relationship is ended.  If handled so that both sides save face and believe that they have been treated with dignity and respect, a termination can avoid legal cost and loss of market during a transition. 

The size of market opportunities in Japan is far greater than other markets outside North America.  Japan should be a top-priority export market for U.S. business. 
*  *  *
Joe Dehner wrote this article in Tokyo in September 2004, while attending the Midwest U.S./Japan Association’s Annual Conference and participating in Ohio’s 2004 Trade Mission to Japan.


 Dutch Face Daunting Challenges at Helm of Expanded EU
By Yvonne A. Herkemij
The Netherlands has assumed the rotating Presidency of the Brussels-based European Union for a six-month term ending on December 31. The Presidency, which had been held by Ireland since the beginning of the year, will be headed by Netherlands Foreign Minister Bernard Bot.

As head of the EU, the Dutch will chair meetings of the Council of the European Union in Brussels and Luxembourg and organize formal and informal Council meetings within the Netherlands. They will also play an essential role in guiding the legislative and political decision-making process, and chairing the official working groups that prepare the ministerial meetings of the Council. 

Other important functions include representing the Council in dealings with other EU institutions, such as the European Parliament and the European Commission, and representing the EU in international organizations and conferences.  Between now and the end of the year, the Dutch Presidency will be responsible for organizing EU summits with China, Ukraine, and India, and heading EU delegations to a summit with South Korea and the Asia-Europe meeting in Hanoi.

Among other things, the new Dutch leadership would like the 25-member EU to assume more economic power, a strategy that was adopted at the EU summit in Lisbon in March 2000, but never actively pursued.  The so-called "Lisbon Agenda" seeks to make the EU the world's leading economy by 2010.

Other priorities of the Dutch Presidency include:

Actually, assuming the EU Presidency is old hat for the Netherlands.  Since 1958, the country has held the Presidency 10 times, and presided over two milestone events – the initialing of the Treaty of Maastricht  in 1991 and the Treaty of Amsterdam in 1997.   The Maastricht treaty, formally the Treaty on European Union, was signed in 1992 by members of the European Community and led directly to the creation of the European Union.  The Treaty of Amsterdam, signed in 1998, sought to modify the terms of the Maastricht Treaty to facilitate enlargement of the EU from its original six members to 25 countries.

As custodians of the EU's decision-making process, the Dutch Presidency, like those that preceded it, must carry the political process forward in the interest of all member states. In so doing, it must guard against favoring its own priorities.

EU business is on-going, and it often takes much longer than six months to make a decision or pass a piece of legislation. Guiding decisions through the political process is indispensable even if it isn't the most exciting part of the Presidency. A process that began two years ago, may take another year to reach a conclusion. Consequently, it's impossible for any Presidency to take credit for a single decision, directive or regulation. 

In addition to facing a litany of political and socio-economic issues, the Dutch Presidency will preside over the adoption of a new EU constitution.  Under the proposed constitution, the rotating Presidency would be replaced by an elected president, a worrisome prospect for the Dutch. The Dutch fear that abolishing the six-month rotation would cause the EU to suffer since some countries would be better organized than others.  Moreover, good ideas introduced by one Presidency could be abandoned by the succeeding Presidency in favor of its own initiatives.  Conversely, retaining the rotation gives the presiding country the sense that it is in the driver's seat for a while.  During the current term, for example, the entire Dutch central government – not just the Prime Minister and Minister of Foreign Affairs – will immerse itself in various aspects of the Presidency.

Regardless of the outcome of the constitutional debate, the Dutch recognize that for all that has been accomplished to date, the EU is still neither an alliance of sovereign countries working together voluntarily, nor a state, either unitary or federal.  If anything,  the EU's "hybrid" image has been reinforced with the recent addition of 10 Eastern and Central European countries that jealously guard their sovereignty.  Since many only recently regained their independence, they're understandably leery of domination by bigger neighbors.

Yvonne A. Herkemij is area director in Chicago for the Netherlands Foreign Investment Agency (NFIA).  Yvonne assists North American companies in expanding, restructuring or consolidating their European operations, helping them utilize the superior international business climate in the Netherlands as their “Gateway to Europe.”


Reduction of Cross-Border Transportation Delays - Advance Electronic Cargo Information for Truck Carriers

By H. Powell Starks

In the wake of the September 11th terrorist attacks, the movement of products from Canada and Mexico into the U.S. has become increasingly cumbersome and often subject to long delays.  According to the U.S. Department of Transportation statistics, goods transported by truck account for approximately 80% of the goods transported between Mexico and the U.S. and approximately 75% of the goods transported between Canada and the U.S.  A recent study by the Montreal-based Institute for Research on Public Policy concluded that border delays between the U.S. and Canada increase transportation costs by as much as 10–15%.  That study singled out customs clearance procedures as the major contributor to border congestion.  In order to reduce that burden on cross-border shipments, the U.S. Bureau of Customs and Border Protection (CBP) has implemented two initiatives to enhance security and to expedite customs clearance at the border.

The FAST Program
CBP has instituted the Free and Secure Trade (FAST) program as a bilateral initiative with each of the Canada Border Services Agency and Mexican customs authorities to harmonize their respective commercial processes for the clearance of commercial shipments at the border.  The intent of the FAST program is to reduce the information requirements for customs compliance, to eliminate the need for importers to transmit data for each transaction, to reduce the rate of border examinations and to verify trade compliance away from the border.  The program is limited to those carrier and importers enrolled in the Customs Trade Partnership Against Terrorism (C-TPAT).  Dedicated lanes for the clearance of FAST trans-border shipments are being established on both borders.  Already, there are dedicated FAST lanes in operation at eleven ports of entry on the Northern border and at seven ports of entry on the Southern border. 

On the Northern border, the FAST program is offered to C-TPAT-approved importers whose goods are transported by C-TPAT-approved carriers and drivers possess a valid FAST-Commercial Driver Card.  On the Southern border, the requirements to qualify for the FAST program are slightly broader.  In order to qualify for the FAST program, the shipment must be carried by a C-TPAT-approved carrier, whose driver posses a valid FAST-Commercial Driver Card, carrying qualifying goods from a C-TPAT-approved manufacturer for a FAST registered importer.

Electronic Presentation of Cargo Information
The Trade Act of 2002 provides for the mandatory collection of electronic cargo information  before cargo is brought into or departs the U.S. by any mode of transportation.  Commencing on November 15, 2004, CBP will be implementing at 99 designated ports of entry a requirement that truck carriers must provide to CBP advance electronic transmission of required cargo manifest information for inbound cargo.  Until the Automated Commercial Environment Truck Manifest becomes fully operational, CBP has approved two interim EDI systems to transmit the required truck cargo information to CBP:  the Pre-Arrival Processing System (PAPS) and QP/WP, which is an Automated Broker Interface in-bond processing system that is used to process in-bond shipments.  CBP must receive those electronic transmissions through the approved EDI system not less than one-hour prior to the carrier’s arrival at the first port of arrival in the U.S. or not later than 30-minutes prior to such arrival with respect to shipments qualified for clearance under the FAST Program.

With only limited exceptions, such as domestic cargo arriving at one port from another in the U.S. after transiting Canada or Mexico, all commercial cargo is subject to advance cargo information requirements.  However, as a temporary accommodation, CBP has also created two additional exceptions from compliance for inbound truck cargo that is currently approved for processing under the Customs Automated Forms Entry System or the Border Release Advanced Screening and Selectivity programs.       

The program is being implemented in three stages:  First Stage - forty ports of entry on November 15, 2004; Second Stage – forty-three ports of entry on December 15, 2004, and Third Stage – sixteen ports of entry on January 14, 2005.  A listing of those ports of entry and their applicable implementation date are set forth in the Federal Register (69 Fed. Reg. 51,008 (August 17, 2004)).


Social Security Administration's Employer Correction Request or "No Match" Letter
By Hector A. Chichoni
Each year, employers must provide every employee with Form W-2 Wage and Tax Statement and transmit a copy to the Internal Revenue Service (“IRS”). The Social Security Administration (“SSA”) is often unable to post the earnings to a worker's SSA account because the Social Security Number (“SSN”) is invalid or because the name is inconsistent with the one associated with the SSN in SSA’s records.  This is particularly prevalent in the case of foreign workers.

To date millions of records cannot be matched and billions of dollars cannot be credited to particular SSN holders.  SSA holds these reported earnings in "suspense accounts."  These accounts now exceed $300 billion and are awaiting identifying information to credit the taxpayer. SSA tries to avoid payments into these suspense accounts due to the comprehensive administrative costs involved with correcting suspense account earnings.

To reduce the number and amount of suspense account postings, the SSA began issuing Employer Correction Request or “No Match” Letters to employers in 1993.  The letter basically notifies the employer of its inability to correctly post earnings due to discrepancies between the employee's name and the SSN as reported on Form W-2.  SSA has no ability to penalize employers either for supplying incorrect SSN information or for failing to respond to the mismatch letter and, as such, the letter, specially the latest sample, politely “requests” an employer response within 60 days.  However, SSA can provide “No Match” information to the IRS.

In response to one of these letters, an employer may be tempted to hastily ask workers for new documents, suspend, or even terminate, a worker who cannot produce a new Social Security card. Before acting too hastily, the employer should follow certain steps to ensure it has discharged its responsibilities properly.

Fines and Penalties
While SSA has no enforcement authority, IRS can fine employers $50 for each W-2 Form filed with an incorrect SSN.  The maximum an employer can be fined is $250,000 per year, $100,000 for smaller employers with gross receipts of less than $5 million.  If it is determined that failures occurred due to intentional disregard of the information reporting requirements, the penalty is $100 per return or 10 percent of the amount to be reported correctly, with no annual limit.

An employer can escape liability under the Internal Revenue Code, however, if the failure to comply was due to reasonable cause.  In the context of SSN no-match or mismatches, the “events beyond an employer’s control” would require the employer to show the failure resulted from the employee's failure to provide the correct SSN upon which the employer relied on in good faith.  Furthermore, the employer must establish it acted in a responsible manner, both before and after the failure occurred.
 
Discharging Responsibilities Properly
The following process must be followed to properly document efforts to comply for purposes of avoiding liability:

Check Your Records - Upon receipt of the “No Match” letter from SSA, check your records for a discrepancy in recording the information, comparing the employee’s W-4 to the SSN reported to SSA.

Provide Initial Written Notice to the Affected Employees – If the records still do not match, you should provide notice to the affected employees and former employees (to the their last known address) that their names and numbers do not match SSA records and ask them to correct the discrepancy with SSA and advise you on the results.

Report SSN Corrections Back to SSA - All information reported back by employees should be used to correct your records and to report back to SSA.  If discrepancies persist or employees do not report changes back to the employer, then you must follow the next step.

Year-End Follow Up – You should notify those employees you have not heard from at the end of the current tax year. Again, you should send a “form” notice.

Written Follow up in the Next Year - The employer should send another notice at the end of the next tax year. The language in this notice is the same as in the previous step, but should indicate that you have previously sent notice to the employee or former employee.

The decision to terminate an employee for failure to respond to the request should likely be governed by the employer's systematic policy. Counsel should be contacted in developing this policy prior to taking any adverse action against an employee.  If you receive other credible information that the employee may be unauthorized, you would have an obligation to inquire further and possibly reverify the employee's employment eligibility.  With respect to the employees who do not answer at all, U.S. Citizenship and Immigration Service’s (“USCIS,” f/k/a INS) General Counsel has indicated that it would be much more likely to consider that the employer violated the I-9 provisions if it continues the employment without taking appropriate steps to reverify work authorization.  If the employee is indeed unauthorized, again suggesting re-verification might be appropriate.  The safest course of action is to begin compliance procedures to avoid IRS penalties.


Visa Delays Inexcusable and Harmful to the U.S.
By Joseph J. Dehner
American business is suffering from undue delay and overkill in denying business visas to foreigners.  According to the National Foreign Trade Council (NFTC), between July 2002 and March 2004 U.S. companies lost $30.7 billion as a direct result of visa delays and arbitrary denials.  Even Mariemont High School in greater Cincinnati (where my daughters attend) suffered, when students from our sister city Liuzhou, China learned they will have to wait months before getting an interview for our consulate to decide whether they can visit Cincinnati.

An NFTC survey of 734 companies revealed that 75% see recent problems in processing of business visas.  3 of 5 reported an adverse material impact from business visa delays, including lost sales, increased costs and relocation of people and functions offshore (to avoid the need for U.S. travel).  More than half reported that the visa process is worse now than a year ago.

These business concerns were echoed by 20 of our leading scientific and academic organizations.  They reported that US academic institutions could lose not only huge sums in tuition and other revenue from foreign students but also brainpower that helps keep America at the forefront of science and technology.  This only drives up tuition cost to American students and causes job losses at universities.  European institutions are gleeful for the prospects of getting more foreign students to see their futures lying in European instruction, rather than American.  This is particularly unfortunate when one considers that some of the world’s leaders were educated here, and are more understanding of our way of life as a result.

The Council of Graduate Schools reports that international applications to graduate schools dropped 32% for 2003.  Half these students were from China, 27% from Muslim nations and 8% from India.  China and India send the most students to the US.  According to the Institute for International Education, foreign students spend $11 billion a year on tuition and living expenses, making higher education America’s fifth largest service export.  And, as we all know, they bring great talent and energy to our high-tech sector and our communities.

Yes, homeland security is important.  But delaying and denying visas out of bureaucratic caution or technology defects only undermine the very values that we hold dear.  We must keep a flow of business and people.  The US cannot become isolated.  We need top talent, access to markets and a global mind-set.  So, what to do?  Here are specific steps that can be implemented by executive and legislative action:

America is strong because of our openness and diversity.  We can have security without sacrificing what makes our country great.  The Statue of Liberty should not have a “keep out” sign draped around its neck.

*    *    *    *

US-VISIT Expanded
Effective, September 30th, all foreign nationals traveling to the U.S. under the Visa Waiver Program (VWP) will be subject to enrollment in US-VISIT. For French and other VWP travelers arriving at a U.S. port of entry, enrollment in US-VISIT entails a digital photograph, as well as  fingerscans. The expansion of US-VISIT enrollment to VWP travelers will  more than double the number of individuals required to enroll in the program, as most non-immigrant visa holders (such as J-1 Trainees) are  already required to register in US-VISIT. Due to this increase, travelers to the U.S. should anticipate delays at American ports of entry.

*    *    *    *

Machine-Readable Passport Requirement
As a reminder, please note that on October 26, 2004, VWP travelers will be required to present machine-readable passports (MRPs) to enter the United  States. If a VWP traveler does not have an MRP on this date, he  or she will be required to secure a B-1 or B-2 visa. J-1 Trainees have a machine-readable visa already in their passport when they arrive.


Remaining a Public Company in the Sarbanes-Oxley Era
By James F. Koch, CPA
An article that recently appeared in the Wall Street Journal proclaimed, “The cost of corporate audits in the U.S. is surging, and investors could ultimately pick up the tab.”  In the wake of the Sarbanes-Oxley Act of 2002, the U.S. world of auditing is indeed experiencing fundamental changes, affection both domestic and foreign public companies.

Not only has the U.S. audit process been significantly affected, causing additional work for the auditor, but companies being audited face substantial increases in the cost of implementing the new rules.  The implications for public companies, and for those considering going public, are considerable.

These changes result as well from new rules issued by the Securities and Exchange Commission (SEC) and by creation of the Public Company Accounting Oversight Board (PCAOB).  The September 2003 Journal of Accountancy reported that, “Among the nation’s fastest growing public companies 81% of CEOs said they anticipated the cost of complying with Sarbanes-Oxley will continue to rise in the future; only 17% predicted no change.” 

The Right Questions
There’s little doubt that the costs of external audits and internal compliance for public companies doing business in the U.S. are escalating at an alarming rate.  Then there are the increased potential liabilities and exposures of directors and officers.  As a result, many smaller public firms, particularly those with a limited trading market for their shares, are asking:  “Is it in the best interest of our shareholders to continue as a public company?”  If the answer is no, what is the process of going private, including assuring that cashed-out shareholders are treated fairly, and that those who choose to remain owners of the private entity have the opportunity to do so, subject to market conditions? 

There are critical questions to be asked – and answered – when a company is considering making a move from public to private.  Among them are the following:

It is essential to obtain competent expert advisors in areas including legal, tax, valuation and accounting.  The presence of independent board members with experience in the process is also a big plus.  There are diverse approaches to going private, and each business faces a unique set of circumstances in assessing and selecting among them. 

A reverse stock split followed immediately by a forward stock split seems to be the preferred method.  The reverse stock split allows for some control over the number of shareholders remaining after the split, and requires a cash price be paid to those shareholders with fewer than the minimum shares required to remain as a shareholder in the new company. 

If a special committee is formed, the board members selected to serve  should be independent.  As well, they  should be free to engage their own legal counsel and obtain a “fairness opinion” from a financial advisor to determine a fair price for stockholders receiving cash. 

Multiple Challenges
Once the board approves the transaction, the company must file the appropriate documents with the SEC, which will provide management with its comments.  This process may take several months.  During this period the company is required to continue annual, quarterly and other required SEC filings.  Depending on the timing of the transaction relative to the company’s year end, the demands can be particularly onerous.  This is especially so in light of  requirements of Sarbanes–Oxley and related SEC rules, particularly if the registrant is not a small-business reporting entity.

Businesses making the public-private transition face a number of other challenges.  Among the most significant are the tax implications for the remaining shareholders if a separate entity is formed to effect the transaction.  Another is utilizing net operating loss carry-forwards for tax purposes, should they exist.  The company must also have sufficient funds available to complete the transaction for payments to cashed-out stockholders, professional fees, special committee fees, cost of fairness opinions and administrative expenses such as printing and mailing. 

Depending on the entity selected for the private company (for example a pass-through limited liability company), the company may need to plan for dividends to be paid to shareholders to cover potential income taxes.  Finally, an exit strategy must be developed for potential transfer of shares or units, rights of first refusal and other shareholder rights in the event of a sale or other exit transaction. 

Clearly, going private in the U.S. presents a minefield of potential missteps, but the freedom on the other side can indeed be rewarding.
*  *  *
Jim Koch is a CPA and Director/Partner with Carpenter, Mountjoy & Bressler PSC, the largest Kentucky-based accounting and alliance firm of Ernst & Young LLC. 


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