issues affecting small businesses entering foreign markets · 2015-06-10 · commission agreement...

Issues Affecting Small Businesses Entering Foreign Markets

Presented by:Frank P. Nagorney, Esq.

John O. Storey, Esq.Robert M. Humphrey, Esq.

Cowden & Humphrey Co. LPAOctober 30, 2014

Copyright 2014, Cowden & Humphrey Co. LPA 1

AGENDA

I. Protecting Intellectual PropertyII. IC-DISCIII. Tax Treaty IssuesIV. Contract Arrangements: License,

Joint Venture or Go it AloneV. US Export Assistance ProgramsVI. Foreign Corrupt Practices Act


I. Protecting Intellectual Property Rights

IP Rights in United StatesA. Patents B. TrademarksC. CopyrightsD. Trade Secrets/Know-how


A. PATENTS

FIRST TO FILE RULE effective March 16, 2014: a patent application must be filed before any publication, public use, or sale. • Utility and Plant patents – 20 years• Design Patent – 14 years• Patent becomes a public document • Patent holder must enforce patent rights


B. TRADEMARKS

Trademark can be renewed forever, but it will lapse if it is not used and/or defended.Trademark Symbols:™ Unregistered Trademark® Registered Trademark


C. COPYRIGHTS

Definition: Right granted to protect original literary, artistic and other creative works, including right to copy, distribute and adapt the work.

© Symbol denotes automatic copyright.Term extends through author’s life plus 70 years.


D. Trade Secrets and Know-how

Definition: Information that is kept secret to provide an advantage over competitors; knowledge of “how to” that is not generally available to the public.

• The “Coca Cola” Formula• No expiration date, but must keep the secret

from being divulged to the public.


IP RIGHTS OUTSIDE OF UNITED STATESGrant of US Patent, Trademark, Copyright in US does not give any protection beyond the borders.• World Intellectual Property Organization provides

single source for application process for member countries

• WIPO also offers dispute resolution adjudication (“forum of equal inconvenience”)

• Multi and Bi-Lateral TreatiesCopyright 2014, Cowden & Humphrey Co. LPA 8

A. PATENTS

• Patent Cooperation Treaty – 148 member countries

• Allows a single international application having the same effect as a national application filed in each PCT member country

• Inventor still has to register the patent in each country where protection is desired.

Copyright 2014, Cowden & Humphrey Co. LPA

9

B. TRADEMARKS

• European Union Community Trademark (CMT)

• Madrid Agreement and Madrid Protocol• Single application is offered, but individual

country registration may be required as well


C. COPYRIGHTS

• WIPO administers:– Berne Convention– WIPO Copyright Treaty– Geneva Convention

• World Trade Organization administers:– Agreement on Trade-Related Aspects of

Intellectual Property Rights


II. IC-DISC

• INTEREST CHARGE- DOMESTIC INTERNATIONAL SALES CORPORATION

• Allows corporation to take advantage of preferential tax rates on qualified dividends; with net benefit tax rate benefit of up to 15.8% (difference between top bracket ordinary income rate of 39.6% and preferred dividend rate of 20% (+ 3.8% tax on net investment income)

IC-DISC History

• IC-DISC was enacted in 1971 to stimulate United States export market

• Foreign Sales Corporation history (1984);• GATT/World Trade Organization (WTO) claimed

unfair trade practice; • IC-DISC continues to be beneficial legislation that

was largely ignored or unknown to most American business owners and even service providers.

Formation

• IC-DISC is typically setup as a wholly-owned C-corporation subsidiary of a United States corporation (C or S status is permitted for the parent corporation) with this new subsidiary serving as the parent corporation’s foreign sales representative.

• The IC-DISC also can be set up as an affiliated corporation owned by shareholders

• C-Corporation and Shareholders must file IRS Form 4876-A within 90 days of formation electing IC-DISC status.

Additional Eligibility Requirements– Single class of stock with minimum par value

of $2,500– 95% Qualifying Assets Test– 95% Qualifying Gross Receipts Test– Separate bank account and records– Retaining the help of an accounting firm or

expert regarding these tests is highly recommended

BENEFITS• Tax savings occur through a series of

straightforward intercompany transactions– For each export sale, the parent corporation

pays a sales commission to the IC-DISC– The commission is deducted by the parent

corporation in computing its taxable income– Since the IC-DISC is a tax-exempt entity, it

recognizes no income on the receipt of these sales commissions (NO TAX)

» (Continued)

(continued)

– The IC-DISC distributes the sales commissions back to the parent corporation or to its individual shareholders as a pass through dividend which is taxed as a qualified dividend (maximum of 23.8% rather than 39.6%)


Commission Agreement

• Good practices– Put into place a commission / service

agreement between the parent corporation and the IC-DISC to memorialize such actions

– Actually write the checks to pay the commissions and dividends

III. Tax Treaties• Tax Treaties can reduce taxes on specific

income sources and defer US tax on worldwide income– Dividends– Royalties– Interest– Also consider transfer pricing rules– Foreign tax credits


IV. License, Joint Venture or Go it Alone

• Licensing (exclusivity; territory; milestones)• Joint Venture (% ownership; profit sharing)• Wholly-Owned Foreign Subsidiary

(management)


• Contract terms include– Confidentiality and Trade Secrets– Ownership of IP– Non-competition; Non-solicitation– Terms of Commerce: INCO terms (“who pays

the freight”)– Payment Terms: Letter of Credit; net XX days– Dispute Resolution: Location; arbitration;

courts


V. US Export Assistance Programs

• US Export Import Bank– Working capital up to 90%– Performance bonds– Export credit insurance– Capital equipment financing

• SBA Export Assistance Center– SBA Export Express and Working Capital– SBA International Trade Loan Program


VI. Foreign Corrupt Practices Act• FCPA prohibits corrupt practices by both

US and foreign companies and individuals. • Applies to public and private companies• Any payment or promise of payment to any

foreign official in order to influence the official to act or not to act

• Payment is anything of value


• “Foreign official” includes any officer or employee of any department, agency or instrumentality of a foreign government, political party, candidates for office, consultants or agents who are connected with a foreign government.


• Includes payments to family members or others which may benefit the foreign official.


• The FCPA includes a “narrow” exemption for “grease” payments, which are payments made in furtherance of routine government action where the government official has no discretion.

• Includes processing visas, providing police protection or mail services and supplying utilities like phone or power services.


• DOJ has a procedure for submission of information regarding whether proposed conduct violates the FCPA.


• Bribes Have Been Mischaracterized As:– Commissions or Royalties– Consulting Fees– Sales and Marketing Expenses– Scientific Incentives or Studies– Travel and Entertainment Expenses– Rebates or Discounts


– After Sales Service Fees – Miscellaneous Expenses– Petty Cash Withdrawals– Free Goods– Intercompany Accounts– Supplier / Vendor Payments– Write-offs– “Customs Intervention” Payments


Accounting Provisions of FCPA

• FCPA prohibits mischaracterization of payments on audited financial statements

• Internal controls must be reviewed by accountants as part of audit procedures


Questions?

``4600 Euclid Avenue, Suite 400

Cleveland, Ohio 44103www.cowdenlaw.com

[email protected] [email protected]@cowden.law.com

(216)241-2880

Copyright 2014, Cowden & Humphrey Co. LPA` 32

Resources• WIPO PCT Contracting States List

– www.wipo.int/pct• Madrid Union Contracting States List

– www.wipo.int/madrid• USPO Overseas toolkits

– http://www.uspto.gov/ip/iprtoolkits– USPTO Mission to the EU toolkit


PCT Contracting States

Madrid Union List of States

USPTO Toolkit list

EU toolkit

Resources (continued)• US Copyright Office International Relations

– www.copyright.gov/circs/circ38a.pdf• IC-DISC election form 4876-A• IC-DISC Sample Commission Agreement• SEC Resource Guide to the FCPA

– www.sec.gov/spotlight.fcpa


Copyright Office

IRS form 4876-A

IC-Disc Sample mmission Agreeme

SEC FCPA Resource Guide

issues affecting small businesses entering foreign markets · 2015-06-10 · commission agreement...

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