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Exporting to the United States - The legal side of exporting to the U.S.

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4. The legal side of exporting to the U.S.

Exporting to the United States means that you will have to become familiar with a new set of business laws. While there is no substitute for good legal counsel, you will make better decisions if you have a basic knowledge of NAFTA rules, U.S. tax laws and Canadian customs and export regulations. We will examine these and similar issues in the following sections.

Note that the trade teams in Canadian consulates in the U.S. can often refer you to local professionals, such as trade lawyers and accountants, whose assistance you may need. For consulate contact information, refer to Trade Commissioner Service.

4.1. The North American Free Trade Agreement (NAFTA)

For a clear understanding of how NAFTA regulations may affect your specific export activities, you will need to consult specialists in cross-border trade, such as lawyers, brokers and shippers.

NAFTA, as mentioned in section 1, is an agreement among Canada, the United States and Mexico to remove impediments to trade and investment among the three countries.

While the intent of NAFTA is straightforward, the agreement itself and its side agreements are complex. The Department of Foreign Affairs, Trade and Development’s NAFTA website at http://international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/nafta-alena/fta-ale/index.aspx?lang=eng will provide you with the text of the agreement, along with many other resources such as technical papers and information about frequently asked questions.

NAFTA is most likely to have an immediate effect on your export initiative in two areas:

4.2. Dealing with U.S. taxes

The United States applies taxes to both businesses and individuals. It has two different levels of tax jurisdiction: the first is at the federal level under the U.S. Internal Revenue Service (IRS), and the second is at the state level. Taxes can be based on income, or on the sale or use of a good or service (for example, state sales taxes).

The U.S. tax system, like most tax systems, is complicated, so you will need legal and accounting professionals to help you avoid unexpected tax liabilities. Failure to pay or collect the correct taxes may result in penalties above the actual tax amount owed.

Adding another layer of complexity is the Canada–United States Tax Treaty, which is intended to avoid double taxation and which will affect the way that both Canadian and U.S. federal tax systems evaluate your export trade. The treaty does not apply to state income taxes, though, so you should obtain legal advice to make sure you comply with state tax laws.

U.S. clients often ask the Canadian exporter to file a "Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding," or form W-8BEN. This form generally applies when products or services are made, processed or otherwise undertaken in the U.S. by the Canadian firm, and for which the Canadian firm will receive payment from the American client. As a general rule, though, if you are a firm that simply exports goods to the U.S., you will not be required to file this form.

However, you can be asked to complete a SS-4 form to get an EIN “Employer Identification Number". With the form in your hands, you can complete this process over the phone by calling directly at 215-516-6999. EIN can be written on the appropriate line of the form W8BEN and where you can indicate that you are exempted under the Canada–United States Tax Treaty. For more information, visit the IRS website listed below or call the IRS at 1-267-941-1000 (from Canada) or 1-800-829-4933 (U.S. toll free number).

You can find out more about U.S. tax regulations and policies here:

4.3. U.S. sanctions laws and regulations

If a Canadian business intends to export goods or services to the U.S., and if these goods or services originate in a third country, the Canadian company should make sure that the third country is not affected by U.S. sanctions.

Exporters to the U.S. need to be aware of U.S. sanctions laws and regulations administered by the Office of Foreign Assets Control (OFAC), at
www.treasury.gov/about/organizational-structure/offices/Pages/Office-of-Foreign-Assets-Control.aspx. OFAC acts under Presidential wartime and national emergency powers, as well as authority granted by specific legislation, to impose controls on transactions and freeze foreign assets under U.S. jurisdiction. Sanctions that target foreign countries may prohibit the import into the U.S. of goods or services originating in the targeted countries.

The OFAC website identifies several countries currently subject to trade sanctions; these are listed at www.treasury.gov/resource-center/sanctions/Programs/Pages/Programs.aspx. Generally speaking, if a Canadian business intends to export goods or services to the U.S., and if these goods or services originate in a third country, the Canadian company should make sure that the third country is not affected by U.S. sanctions.

The same website also lists sanctions that the U.S. applies on a non-country basis; these include anti-terrorism, diamond trading, counter-narcotic and non-proliferation sanctions.

Among the most significant examples of U.S. sanctions law affecting Canada is the Cuban Liberty and Democratic Solidarity (Libertad) Act of 1996, also known as the Helms-Burton Act. This legislation prohibits the importation into the U.S. of goods or services originating in Cuba. It also targets other economic activities, such as investment and travel. Consequently, Canadian individuals or businesses carrying out economic activities with Cuba and wishing to engage in economic activities or travel in the U.S. should investigate the scope of the Act’s application and seek legal advice. The Canadian Embassy in Washington can provide a list of local attorneys who can advise Canadians on these issues.

The Canadian government is opposed to the extraterritorial application of laws by another country when these conflict with Canada's own policies and laws. Canada's Foreign Extraterritorial Measures Act and the Foreign Extraterritorial Measures (United States) Order prohibit Canadians from complying with extraterritorial measures that operate to prevent trade or commerce between Canada and Cuba.

4.4. Bribery and corruption legislation

The United States, like most countries, has well-developed laws and regulations to prevent the bribery or corruption of its officials. The penalties for doing so can be severe.

Many nations also have laws intended to keep their own citizens from bribing or corrupting officials of foreign countries, and Canada is no exception. Our Corruption of Foreign Public Officials Act, which you will find at
www.canada.justice.gc.ca/eng/dept-min/pub/cfpoa-lcape, makes bribing a foreign public official a criminal offence, and the Criminal Code makes it an offence to knowingly launder the property and proceeds of bribery, or possess such property and proceeds with knowledge of their origin.

Canadians can also be prosecuted if they conspire to commit these offences, aid or abet them, or counsel other people to commit them. Prosecution for such offences takes place in Canadian courts. For a plain-language guide to the legislation, you can download the pamphlet Keeping Corruption Out from Export Development Canada. It is at www.edc.ca/EN/about-us/corporate-social-responsibility/Documents/keeping-corruption-out.pdf.

The OECD also has deep concerns about bribery, and publishes a 100-page booklet called Bribery in Public Procurement; to read an online copy, refer to
www.oecd.org/dataoecd/47/11/44956834.pdf.

4.5. Export contracts for goods

Export contracts are more likely to cause disputes than straightforward domestic contracts, since the contracting parties come from places that often have different business laws, regulations and attitudes. This can be true even when the countries have as much in common as Canada and the United States. You should therefore make your export contracts as clear, precise and comprehensive as is reasonably possible.

To provide a common terminology for international shipping, and minimize misunderstandings over contract terms, the International Chamber of Commerce has developed a set of terms known as "Incoterms." These are the basic terms used in international sales contracts, and you can learn more about them from the Incoterms Website at www.iccwbo.org/incoterms or in the Glossary of International Trade Terms in Appendix A.

The basic provision of a contract for the sale of goods is that the seller will transfer ownership of the goods to the buyer in return for payment. The rest of the export contract specifies the terms and conditions for doing this, and at the minimum should describe:

To provide a common terminology for international shipping and minimize misunderstandings over contract terms, the International Chamber of Commerce has developed a set of terms known as "Incoterms."

If the contract involves the licensing of proprietary information or technology, it is important that the wording be very precise about the licencee's rights.Vagueness can create serious problems and could lead to the loss of your intellectual property. If the licencee uses your technology to create other technologies, for example, this can severely undermine the value of your asset.

Also — and this would seem obvious, but it is sometimes overlooked — be sure that all parties to the contract have signed it. For instance, if you are working through a representative, be sure that the actual buyer signs the contract. The representative’s signature is not necessarily enough, because without the buyer’s signature there is no written evidence that the buyer owes you money. Last, but certainly not least, have the contract examined by a lawyer familiar with the U.S. export market.

The Step-by-Step Guide to Exporting at
www.tradecommissioner.gc.ca/exporters-exportateurs/steps-etapes.aspx?lang=eng, has an overview of international contracts in the chapter titled "The Legal Side of International Trade."

4.6. Export contracts for services

Just like the export sale of goods, the export sale of services requires a contract. These two types of exports share many characteristics, and basic to both is the need for clarity. A clearly written, precise contract will greatly reduce the chances of disagreement between you and your customer.

It is also crucial to be absolutely clear about whose laws will govern the interpretation and enforcement of the contract: will they be Canada’s laws or the laws of the United States? A contract that is vague about this can cause no end of difficulty, litigation and loss of revenue.

4.6.1. Special aspects of contracts for services

As well as the general provisions described in the previous section on goods contracts, your contract for exporting services should specify:

4.6.2. Performance requirements and service contracts

Depending on the nature of your services, your U.S. buyers may insist that you provide financial security, such as a surety performance bond, to compensate them if you fail to deliver the services as contracted. When negotiating this, be certain that the contract stipulates your precise performance obligations, as well as the conditions under which your buyer can make a valid call for non-performance on the guarantee or bond.

It is, unfortunately, possible for a buyer to make an invalid call for alleged non-performance (referred to as a "wrongful call"). If this happens, you have to pay out the value of the bond even if you do not think there was a reason for the call, and try to get the money back by demonstrating that the call was wrongful. However, since a wrongful call can take a large financial toll on a company, you might want to take out wrongful call insurance that will protect you from financial loss until the problem can be resolved. This type of insurance and other security instruments are available from Export Development Canada; refer to www.edc.ca/bonding for further information.

Before signing any U.S. export contract, of course, always obtain professional legal advice regarding the business laws that govern service contracts in the state where you are doing business.

4.7. Obtaining contract insurance and bonding

As a condition for closing a deal, your U.S. buyer may require you to provide financial security that will protect him against any failure, on your part, to meet your obligations under the contract. This security can take several forms, such as an on-demand bank letter of guarantee, a standby letter of credit or a surety performance bond.

Depending on your financial circumstances, you might have difficulty arranging such security on your own. Export Development Canada (EDC) may help you obtain the required security instruments without restricting your working capital. You can find out more about these financial instruments on EDC’s Bonding Products web page at
www.edc.ca/bonding.

If you provide one of these instruments, make sure that your contract clearly stipulates your performance obligations, as well as the conditions under which your buyer can make a valid call for non-performance in order to have the security paid out.

4.8. Patents, trademarks and copyrights

For many businesses, their intellectual property and/or proprietary technology can be their most valuable assets.

Goods, of course, are not the only marketable things a company may possess. For many businesses, their intellectual property and/or proprietary technology can be their most valuable assets.

Because these assets are intangible, they can be difficult to protect and easy to misappropriate. Several legal methods have been developed to protect them. The major ones are:

4.9. Protecting intellectual property from theft

The United States Patent and Trademark Office defines intellectual property as "creative works or ideas embodied in a form that can be shared or can enable others to recreate, emulate, or manufacture them." As mentioned earlier, the intangible nature and the relative portability of this kind of property make it easy to steal and difficult to protect. These attractive characteristics, when added to the high value of some kinds of intellectual property and proprietary technology, can lead to theft by other businesses, which is known as industrial espionage. Such theft costs legitimate companies vast amounts annually in lost sales and business opportunities.

The first step, as outlined in the previous section, is to establish legal protection through patents, trademarks or copyrights. You can (and should) also secure your intellectual property from industrial or economic espionage in other ways, such as:

4.10. Litigation in the U.S.

Business litigation is common in the United States. Making sure that your contracts are clear, precise and specific will go a long way toward avoiding disputes. However, sometimes a good contract is not enough, and having one does not guarantee that you will never find yourself in court, either as a plaintiff or a defendant.

Problems that involve litigation often involve matters such as:

Business litigation is common in the United States. Making sure that your contracts are clear, precise and specific will go a long way toward avoiding disputes.

Trying to resolve a dispute through litigation in a U.S. or Canadian court can be very expensive and may not be in your best interest, no matter how justified your position. Often it is much better to have the matter put to arbitration, often called "Alternative Dispute Resolution" or ADR.

An alternative to arbitration or litigation is mediation. With mediation, a neutral third party hears your position and that of your opponent, and then tries to find a solution acceptable to both of you. A mediator's solution is not binding, however, unless you and your opponent both agree to it.

Mediation and arbitration services are available in the U.S. through the American Arbitration Association www.adr.org, a public service, not-for-profit organization that deals with a broad range of disputes. The corresponding Canadian organization is the ADR Institute of Canada www.adrcanada.ca.

4.11. Product liability litigation

Product liability lawsuits are much more common in the U. S. than in Canada, and the result has been a huge increase in the cost of product liability insurance (PLI) in the U.S.

In both the U.S. and Canada, individuals and groups can sue businesses on the grounds a business's product or service was faulty and that this fault caused harm to the plaintiff(s). Product liability lawsuits are much more common in the United States than in Canada, and the result has been a huge increase in the cost and difficulty of obtaining product liability insurance (PLI) in the U.S.

Carrying PLI for your U.S. operations is not legally mandatory. However, potential intermediaries or buyers may refuse to purchase your exports unless you obtain such coverage, because this will help protect them from litigation if your product or service is alleged to be faulty.

In consequence, before you settle on a final export price for your product, be sure to find out whether you do need PLI and, if so, how much it will cost. Insurance- Canada.ca's product liability web page has more information on PLI; you will find it at www.insurance-canada.ca/profproducts/corporate-insurance/corporate-insurance.php.

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