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Proposed Rule

Performance of Customs Business by Parent and Subsidiary Corporations

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Information about this document as published in the Federal Register.

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AGENCY:

Customs Service, Department of the Treasury.

ACTION:

Notice of proposed rulemaking.

SUMMARY:

This document sets forth proposed amendments to Part 111 of the Customs Regulations to specify that corporate compliance activity engaged in for the purpose of exercising “reasonable care” under 19 U.S.C. 1484 is not customs business and, therefore, such activity is not subject to the customs broker licensing requirements of 19 U.S.C. 1641. The proposed amendments make clear that this corporate compliance activity concept does not extend to document preparation and filing, which is customs business subject to licensing requirements. It is anticipated that the proposed amendments will improve the operational efficiency of the affected corporate entities and, thereby, enhance their ability to ensure compliance with applicable customs laws and regulations.

DATES:

Comments must be submitted on or before December 16, 2002.

ADDRESSES:

Written comments are to be addressed to the U.S. Customs Service, Office of Regulations and Rulings, Attention: Regulations Branch, 1300 Pennsylvania Avenue NW., Washington, DC 20229. Submitted comments may be inspected at U.S. Customs Service, 799 9th Street NW., Washington, DC.

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FOR FURTHER INFORMATION CONTACT:

Gina Grier, Office of Regulations and Rulings (202-572-8730).

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SUPPLEMENTARY INFORMATION:

Background

Statutory and Regulatory Framework

Section 641 of the Tariff Act of 1930, as amended (19 U.S.C. 1641), provides that a person must hold a valid customs broker's license and permit in order to transact customs business on behalf of others, sets forth standards for the issuance of broker's licenses and permits, provides for disciplinary action against brokers in the form of suspension or revocation of such licenses and permits or assessment of monetary penalties, and provides for the assessment of monetary penalties against other persons for conducting customs business without the required broker's license. Section 641 also authorizes the Secretary of the Treasury to prescribe rules and regulations relating to the customs business of brokers as may be necessary to protect importers and the revenue of the United States and to carry out the provisions of section 641.

The regulations issued under the authority of section 641 are set forth in part 111 of the Customs Regulations (19 CFR part 111). Part 111 includes detailed rules regarding the licensing of, and granting of permits to, persons desiring to transact customs business as customs brokers, including the qualifications required of applicants and the procedures for applying for licenses and permits. Part 111 also prescribes recordkeeping and other duties and responsibilities of brokers, sets forth in detail the grounds and procedures for the revocation or suspension of broker licenses and permits and for the assessment of monetary penalties, and sets forth fee payment requirements applicable to brokers under section 641 and 19 U.S.C. 58c(a)(7).

Section 111.1 of the Customs Regulations (19 CFR 111.1) defines “customs business” as follows for purposes of part 111:

“Customs business” means those activities involving transactions with Customs concerning the entry and admissibility of merchandise, its classification and valuation, the payment of duties, taxes, or other charges assessed or collected by Customs on merchandise by reason of its importation, and the refund, rebate, or drawback of those duties, taxes, or other charges. “Customs business” also includes the preparation, and activities relating to the preparation, of documents in any format and the electronic transmission of documents and parts of documents intended to be filed with Customs in furtherance of any other customs business activity, whether or not signed or filed by the preparer. However, “customs business” does not include the mere electronic transmission of data received for transmission to Customs.

Section 111.1 also defines “person” for purposes of part 111 as including “individuals, partnerships, associations, and corporations.”

Section 111.2 of the Customs Regulations (19 CFR 111.2) sets forth the basic rules regarding when a person must obtain a customs broker license and permit. Paragraph (a)(2) of § 111.2 specifies several exceptions to the license requirement including, in subparagraph (i), an exception for an importer or exporter (and his authorized regular employees or officers acting only for him) transacting customs business solely on his own account and in no sense on behalf of another. Section 111.4 of the Customs Regulations (19 CFR 111.4) provides that any person who intentionally transacts customs business, other than as provided in § 111.2(a)(2), without holding a valid broker's license, will be liable for a monetary penalty for each such transaction as well as for each violation of any other provision of section 641.

Reasons for Proposed Change

The amendments made in 1993 by the Customs Modernization Act provisions of the North American Free Trade Agreement Implementation Act (Public Law 103-182, 107 Stat. 2057) included the requirement to exercise “reasonable care” in connection with the entry requirements set forth in 19 U.S.C. 1484. To foster compliance with the customs laws and regulations under this added statutory responsibility, many importer groups consisting of a parent corporation and one or more subsidiary corporations have chosen to centralize their in-house customs experts into one corporate entity and to make the services of those experts available to the group as a whole. However, when requested to issue an administrative ruling on the issue, Customs has consistently taken the position that many of the activities performed under this type of arrangement would involve Start Printed Page 63577the transaction of “customs business,” which would require a broker license under § 111.2(a)(1). See HQ 115248 dated August 26, 2001, and HQ 115278 dated November 13, 2001. In this regard, Customs has considered the fact that (1) the parent corporation and each subsidiary corporation is a separate legal “person” both under longstanding legal precedent and under the definition of “person” in § 111.1, and (2) therefore, the parent or subsidiary corporation in which the customs expertise resides would be transacting customs business not solely on its own account as provided under § 111.2(a)(2)(i) but rather on behalf of another “person.”

Members of the trade community have indicated to Customs that the present situation is unsatisfactory because it does not afford importers sufficient opportunity to address multiple related aspects of an individual customs transaction or groups of transactions and thus is an impediment to their ensuring that reasonable care is exercised by all corporate affiliates for purposes of 19 U.S.C. 1484.

An example will illustrate the basis for the trade community concerns: Under the current regulations as interpreted by Customs, if an unlicensed corporation in a parent and subsidiary relationship wished to engage a licensed individual broker as an employee of the corporation to give customs business advice to its related company regarding specific transactions, there would be certain legal limitations. The rendering of advice under the described circumstances would be permissible only if the licensed broker employee were to become a bona fide employee of each of the two involved companies, or if the employing corporation were to obtain a corporate broker license, or if the licensed broker employee were to set up business to operate as a broker during non-work hours.

Accordingly, Customs is proposing for public comment amendments to the Customs Regulations that would expand the permissible use of in-house experts by corporations and their affiliates to include activity that is intended to meet the corporation's “reasonable care” obligations under 19 U.S.C. 1484 and that, as such, does not fall within the definition of “customs business” in 19 U.S.C. 1641. The proposed amendments are discussed below.

Discussion of Proposed Amendments

Customs believes that the definition concepts in § 111.1 should be amended to recognize corporate compliance activity as falling under the term reasonable care and, as such, as not falling within the term “customs business.” This would allow parent, subsidiary, and sister subsidiary corporations to structure their corporate compliance activities to ensure an effective and efficient exercise of “reasonable care” under 19 U.S.C. 1484. Accordingly, this document proposes to add a definition of the term “corporate compliance activity” to § 111.1 and to amend the existing definition of “customs business” by adding conforming exception language at the end of the last sentence. Under these proposed amendments, the limitations on the activities described in the previously discussed example would no longer apply because those activities would not be considered “customs business.” Rather, they would be allowed as a corporate compliance activity under the “reasonable care” standard in 19 U.S.C. 1484.

The new definition limits the corporate compliance activity that the in-house experts may perform to those activities that do not involve the preparation of documents or their electronic equivalents to be filed with Customs and the filing of documents or their electronic equivalents with Customs, because Customs believes that these specialized activities clearly fall within the term “customs business.”

Finally, this document proposes to amend § 111.2 by adding a new paragraph (a)(2)(vii) which states that a company performing a corporate compliance activity is not required to be licensed as a broker.

Comments

Before adopting the proposed amendments as a final rule, consideration will be given to any written comments timely submitted to Customs, including comments on the clarity of this proposed rule and how it may be made easier to understand. Comments submitted will be available for public inspection in accordance with the Freedom of Information Act (5 U.S.C. 552), § 1.4 of the Treasury Department Regulations (31 CFR 1.4), and § 103.11(b) of the Customs Regulations (19 CFR 103.11(b)), on regular business days between the hours of 9 a.m. and 4:30 p.m. at the Office of Regulations and Rulings, U.S. Customs Service, 799 9th Street, NW., Washington, DC. Arrangements to inspect submitted comments should be made in advance by calling Mr. Joseph Clark at (202) 572-8768.

Executive Order 12866

This document does not meet the criteria for a “significant regulatory action” as specified in E.O. 12866.

Regulatory Flexibility Act

Pursuant to the provisions of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.), it is certified that, if adopted, the proposed amendments will not have a significant economic impact on a substantial number of small entities. Customs believes that the proposed amendments will have only a minimal impact on overall customs broker operations because they do not authorize the preparation of documents and the filing of documents with Customs, which constitute the bulk of customs business services provided by brokers, and the proposed amendments will provide positive economic and related benefits to other members of the import community. Accordingly, the proposed amendments are not subject to the regulatory analysis or other requirements of 5 U.S.C. 603 and 604.

Drafting Information

The principal author of this document was Francis W. Foote, Office of Regulations and Rulings, U.S. Customs Service. However, personnel from other offices participated in its development.

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List of Subjects in 19 CFR Part 111

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Proposed Amendments to the Regulations

For the reasons stated above, it is proposed to revise Part 111 of the Customs Regulations (19 CFR Part 111) as set forth below.

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PART 111—CUSTOMS BROKERS

1. The authority citation for Part 111 continues to read in part as follows:

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Authority: 19 U.S.C. 66, 1202 (General Note 23, Harmonized Tariff Schedule of the United States), 1624, 1641;

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2. In § 111.1, the definition of “customs business” is amended by adding at the end of the last sentence before the period the words “and does not include a corporate compliance activity”, and a new definition of “corporate compliance activity” is added in appropriate alphabetical order to read as follows:

Definitions.
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Corporate compliance activity. “Corporate compliance activity” means activity performed by a parent company or subsidiary company or sister subsidiary company to ensure that Start Printed Page 63578documents for a parent company or subsidiary company or sister subsidiary company are prepared and filed with Customs using “reasonable care”, but such activity does not extend to the actual preparation or filing of the documents or their electronic equivalents. For purposes of this definition, a parent company is a corporation that owns more than 50 percent of the voting shares of another corporation, a subsidiary company is a corporation in which a parent company owns more than 50 percent of the voting shares, and a sister subsidiary company is one of two or more corporations in which the same parent company owns more than 50 percent of the voting shares.

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3. In § 111.2, a new paragraph (a)(2)(vii) is added to read as follows:

License and district permit required.

(a) * * *

(2) * * *

(vii) Corporate compliance activity. A company performing a corporate compliance activity is not required to be licensed as a broker.

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Douglas M. Browning,

Acting Commissioner of Customs.

Approved: October 8, 2002.

Timothy E. Skud,

Deputy Assistant Secretary of the Treasury.

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[FR Doc. 02-26039 Filed 10-11-02; 8:45 am]

BILLING CODE 4820-02-P