Month: August 2020

The IRS has issued Excise Taxes; Transportation of Persons by Air; Transportation of Property by Air; Aircraft Management Services, proposed regulations relating to federal excise taxes for aircraft owners that utilize aircraft management companies. These proposed regulations, if finalized, would expand on the Tax Cuts & Jobs Act (TCJA) provision that codified that certain amounts paid by an aircraft owner to an aircraft management company are not subject to the excise taxes imposed by Section 4261 or 4271.

In summary, these proposed regulations:

• Address exemptions for certain aircraft management services fees;

• Amend, revise, redesignate and remove outdated/obsolete provisions of existing regulations;

• Update existing regulations to incorporate statutory changes, case law and other guidance;

• Withdraw and then re-propose a provision from a prior notice of proposed rulemaking that was never finalized;

• Impact individuals who provide air transportation of persons and property, and those who pay for those services.

Some key takeaways from these regulations include clarifying that:

• The “Possession, Command, and Control Test” is not relevant to the application of the exemption codified by the TCJA in Section 4261(e)(5).

• Payments by certain closely related parties shall not be considered as though made by the aircraft owner for purposes of applicability of the exemption in Section 4261(e)(5).

• Choice-of-flight rules (i.e. – FAR Part 91 or Part 135) do not affect the application of the exemption in Section 4261(e)(5).

• Whether an aircraft owner permits its aircraft to be used for for-hire flights (i.e. – third-party charter) does not affect the application of Section 4261(e)(5) to amounts paid by the aircraft owner for aircraft management services.

• The method or manner by which an aircraft owner is billed for aircraft management services (e.g. – monthly fees, hourly fees for each hour of flight time, billed at cost plus a mark-up, etc.) does not affect whether the exemption provided for in Section 4261(e)(5) applies to amounts paid for those services.

The IRS is accepting written and electronic comments on the proposed rules until September 29, 2020.

The above takeaways address some of the most frequently asked questions by the business aviation community. The proposed regulations elaborate further on the above and address additional items. Please do not hesitate to contact a member of GKG Law’s Business Aviation team with questions about these proposed rules as they relate to your business needs and decisions. We would be happy to advise or to assist in drafting and submitting comments.

On July 14, 2020, President Trump issued Executive Order (E.O.) 13936, setting forth a tranche of regulatory changes enacting the new U.S. policy to treat Hong Kong as part of the People’s Republic of China (PRC). Historically, the U.S. has granted Hong Kong preferential treatment with regard to export restrictions in recognition of Hong Kong’s strong export controls regime and autonomy from the PRC. These new changes will adversely affect any forwarder or NVOCC that is organized or incorporated under the laws of Hong Kong; to the extent that you are working with a Hong Kong based NVOCC, these changes will have a significant effect on that relationship. These changes will also directly affect international trade and transportation industries that do business in or with Hong Kong in the following ways:

 

1. EAR License Exceptions. Shipments to or through Hong Kong can no longer rely on EAR License Exceptions that previously provided Hong Kong with preferential treatment as compared to the PRC. This includes Hong Kong and Country Group B-related exceptions under EAR License Exceptions LVS (15 CFR § 740.3); GBS (§ 740.4); TSR (§ 740.6); APP (§ 740.7); TMP (§ 740.9); RPL (§ 740.10); GOV (§ 740.11); GFT (§ 740.12); TSU (§ 740.13); BAG (§ 740.14). AVS (§ 740.15); APR (§ 740.16); ENC (§ 740.17); and STA (§ 740.20). The U.S. Department of Commerce’s Bureau of Industry and Security (BIS) updated the EAR to codify this suspension on July 31, 2020, in 85 FR 45998.

Any EAR items affected by this rule that were on dock for loading, on lighter, laden aboard an exporting or transferring carrier, or en route aboard a carrier to a port of export or re-export on June 30, 2020, which were actually destined for export to Hong Kong, may proceed to Hong Kong under the previous License Exception eligibility.

Deemed export and re-export transactions involving Hong Kong nationals that were authorized under a License Exception affected by this rule and that commenced prior to June 30, 2020, will continue to be authorized until August 28, 2020. According to BIS, companies relying on this authorization should retain documentation demonstrating that the Hong Kong nationals were hired and provided access to technology eligible for Hong Kong nationals prior to June 30, 2020.

 

2. EAR Shipments of “600 Series” and 9×515 Items. Hong Kong has been added to the list of proscribed countries for “600 series” and 9×515 ECCN items on the Commerce Control List (CCL). A license is typically required to ship these items to any location in the world, and BIS reviews these license applications with a presumption of denial if the parties involve entities in Hong Kong or the PRC. Put simply, Hong Kong is now subject to the PRC arms embargo, which prohibits PRC and Hong Kong involvement in shipments of “600 series” and 9×515 ECCN items.

Ongoing “600 series” and 9×515 shipments affected by this rule on June 30, 2020, may also qualify for the BIS savings clause provided that the cargo was on dock for loading, on lighter, laden aboard an exporting or transferring carrier, or en route aboard a carrier to a port of export or re-export on June 30, 2020, and actually destined for export to Hong Kong.

 

3. ITAR Shipments. Now that Hong Kong is subject to the PRC arms embargo, it will be treated as a proscribed territory under 22 CFR §126.1 of the International Traffic in Arms Regulations (ITAR). Accordingly:

• ITAR shipments to, from, or within Hong Kong are no longer eligible for most ITAR license exemptions. 

• DDTC will review all Hong Kong-related licenses with a presumption of denial. 

• Under ITAR §126.1(b), ITAR shipments can no longer move on aircraft, vessels, or other conveyances owned by, operated by, leased to, or leased from Hong Kong companies. 

• Under ITAR §129.7(b), forwarders and other transportation providers must obtain prior approval from DDTC before engaging in any ITAR-related “brokering activity” that involves Hong Kong. ITAR defines brokering activity to include any transportation or freight forwarding activities to facilitate the export or import of a defense article, regardless of origin. See ITAR §129.2(b). Importantly, this prohibition applies regardless of whether the forwarder is exempted from broker registration and licensing. See ITAR §129.7(a).

  Current, valid, non-exhausted licenses and authorizations from the U.S. Department of State’s Directorate of Defense Trade Controls (DDTC) for Hong Kong-related ITAR shipments are still effective.DDTC stated that it does not intend to rescind or revoke previously approved licenses and authorizations.On the other hand, DDTC’s guidance did not clarify how they intend to treat existing Hong Kong-related ITAR shipments that rely on ITAR exemptions. Accordingly, forwarders and NVOCCs should identify any ongoing shipments that rely on ITAR license exemptions.

4. Country of Origin Markings. Under E.O. 13936, Hong Kong shall no longer be treated as separate customs territory from China with respect to 19 U.S.C. §1304, which sets forth the requirements for Country of Origin markings on imported articles and containers. This means that imported items and containers should be marked with “Made in China” rather than “Made in Hong Kong.”

Based on these changes, it would be prudent for forwarders and NVOCCs to review all Hong Kong-related shipments to determine whether the customers are using license exceptions that have now been suspended. In addition, Hong Kong-related shipments should be screened for “600 series” or 9×515 ECCNs, or ITAR-controlled cargo.

Transportation and Forwarding Services from Hong Kong Companies
The imposition of the PRC arms embargo on Hong Kong will affect a range of shipping arrangements beyond the new licensing requirements for EAR and ITAR controlled items to, from, or through Hong Kong.

First, ITAR effectively precludes the use of Hong Kong-based carriers or other transportation service providers for new U.S.-origin munitions shipments. While DDTC apparently will not revoke or rescind existing export or import licenses for ITAR-controlled goods that involve Hong Kong, it will review future applications with a presumption of denial. In addition, these changes to ITAR will now specifically prohibit the handling of ITAR materials by Hong Kong-based NVOCCs, as well as the use of aircraft or vessels operated by, owned by, leased to, or leased from Hong Kong companies. Moreover, this prohibition is not limited to U.S. origin items but rather applies to any defense related article that would be included on the U.S. Munitions List (USML) absent prior approval from the DDTC. Further, DDTC’s policy is to deny all requests for approval.

Second, the EAR will affect the use of Hong Kong carriers and transportation providers for “600 series” and 9×515 shipments. These ECCNs generally require a license for export to any location in the world. When reviewing licenses for shipments of these ECCNs, BIS would likely reject licenses that identify Hong Kong-based intermediaries. BIS has stated that it would rely on the ITAR restrictions in § 126.1 when reviewing shipments for these types of items. In addition, the use of Hong Kong-related forwarders or NVOCCs that are not identified on licenses would likely raise questions at BIS, as it may appear to be an attempt to circumvent the PRC arms embargo restrictions.

Altogether, Hong Kong is now subject to the broad PRC arms embargo by the U.S. government. The use of Hong Kong organized companies to handle shipments of munitions and military-related items is likely to be problematic absent clear approval from DDTC or BIS.