On October 1, 2008, the U.S. Department of Commerce, Bureau of Industry and Security ("BIS") published a new interim rule, effective immediately, modifying the provisions by which companies calculate the de minimis value of U.S. components, materials, or technologies incorporated in foreign-manufactured products. 73 Federal Register 56964. While the new rules do not substantively modify current export policy, they do effect some changes that could benefit foreign companies in determining whether their foreign-manufactured products are beyond the scope of the Export Administration Regulations ("EAR") (15 CFR Parts 730-772).
The EAR has a long jurisdictional reach. Practically all products or technologies that were developed or manufactured in the U.S., move in commerce through the U.S., or incorporate U.S. components, materials, or technologies are subject to U.S. export laws. The EAR recognizes, however, that certain products containing de minimis levels of U.S. content are not subject to the EAR. See EAR 734.4.
- As a general rule, all foreign-developed technology or software, and foreign-manufactured products containing 10% or less in value of U.S.-origin controlled content is not subject to the EAR.
- Even more broadly, so long as a foreign-manufactured product, software or technology is not exported to certain sanctioned countries (currently Cuba, Iran, North Korea, Sudan, and Syria), the product, software or technology is not subject to the EAR if it contains 25% or less in value of U.S.-origin controlled content.
Foreign-manufactured products or foreign-developed technologies that do not meet these de minimis thresholds are subject to the EAR and may require an export license when exported or re-exported to certain countries, to certain end-users, or for certain end-uses.
Historically, companies have struggled with calculating the value of U.S.-origin controlled content for purposes of determining whether a product is subject to the EAR. Companies have also been required to calculate U.S. content separately for commodities, software and technology. Following are five features of the new rule:
1. Clarifies Recordkeeping Requirement for De Minimis Calculations. Companies are required to maintain internal documentation as to how the company calculates the de minimis percentage of U.S.-origin controlled content in foreign technology and software, specifying whether the relative values are derived from actual market prices, comparable transactions, or internal values (such as, for example, production costs, overhead, profit).
2. Allows "Bundled" Software to be Included in the Valuation of the Associated Commodity. Previously, U.S.-origin software that was "bundled" with a foreign commodity – software reexported together with the commodity and configured for the commodity, but not necessarily physically integrated into the product – was required to be separately calculated. The new rules allow "bundled" software to be included as part of the commodity for valuation purposes, reflecting the fact that many modern hardware items include critical operational software that may not necessarily be fully integrated with the commodity. Under the new rules, a single calculation based on the value of the U.S.-origin controlled "bundled" software and the foreign-made product will be used to determine whether the U.S.-origin controlled content exceeds the de minimis thresholds under the EAR.
3. Clarifies Definition of "U.S.-Origin Controlled Content." The new rules also clarify that the de minimis rules apply only to U.S.-origin controlled content. This means that even though a product, software, or technology may incorporate U.S. content, if export of that content would not be otherwise restricted to a specific country, then it is not considered "controlled content" for purposes of this calculation. BIS has emphasized that "in identifying U.S.-origin controlled content, do not take account of commodities, software, or technology that could be exported or reexported to the country of destination without a license (designated as ‘NLR’ [No License Required]) or under License Exception GBS." EAR Part 734, Supplement 2. Non-controlled U.S. content is included in the overall "value" of the product or technology, but not as part of the U.S.-origin controlled content that must meet the de minimis threshold.
4. Clarifies Definition of "Incorporated." The new rules also clarify when U.S.-origin controlled content is considered incorporated in a foreign product. U.S.-origin controlled content is considered "incorporated" when it is: (i) essential to the functioning of the foreign equipment; (ii) customarily included in sales of the foreign equipment; and (iii) reexported with the foreign produced item. Technology and source code used to design or produce the foreign-made commodities or software are not considered "incorporated" into the foreign-made products or software, and should not be included in determining the relative de minimis value.
5. Removes the Requirement to Submit a One-Time Report for Foreign-Made Software Incorporating U.S.-Origin Software. The new rules remove the requirement to submit a one-time report to BIS for foreign-made software that incorporates U.S.-origin software. Note, however, that the rule does not remove the requirement to submit a one-time report for foreign technology incorporating U.S.-origin technology. The content of the one-time report for foreign technology remains the same as under the old rules. The report does not require information regarding the end-use or end-users of the reexported foreign technology.
BIS hopes that the new rules will help facilitate compliance with the EAR by making it easier for foreign manufacturers to calculate de minimis levels of U.S.-origin controlled content. Time will tell whether these new rules actually streamline the process. Based on our reading of these rules, we do not think that these changes will significantly reduce the burden on industry. Companies are encouraged to continue to alert BIS of ways in which the de minimis rules can be improved. BIS is receiving comments on this new rule until December 1, 2008.