CBP loses court case on enhanced bonding requirements for shrimp importers.

The U.S. Court of International Trade has ruled this month that Customs and Border Protection (CBP) unfairly targeted U.S. shrimp importers with its enhanced bonding requirement (EBR). The ruling stems from a lawsuit filed by the National Fisheries Institute (NFI) on behalf of 27 shrimp importers. Previously, the Court had determined that CBP had “arbitrarily and capriciously” singled out U.S. shrimp importers and they had been irreparably harmed as a result of application of the EBR.

CBP had originally adopted the EBR in 2004 to prevent tariff evasion. However, the measure was applied at that time only to shrimp, which had no history of tariff evasion. Shrimp importers had their bonds increased from $50,000 to millions of dollars in some cases. Now, following the Courts ruling this month, CBP has 60 days to cancel all of the bonds or appeal the Courts decision. Once the bonds are canceled, shrimp importers will be able to ask the surety companies to release their collateral securing the bonds. As such, an onerous bonding requirement that singled out one class of importers has now been removed.

New Schedule UTP Finalizes Guidance on Uncertain Tax Positions and FASB Interpretation No. 48

On September 24, 2010, the Internal Revenue Service released the final version of Schedule UTP regarding “uncertain tax positions.”  The new Schedule finalized the requirement that specified categories of corporate taxpayers include information as to UTPs as part of their tax return.

In announcing the new UTP rules, IRS Commissioner Douglas Shulman hailed “a principled and balanced approach” that will improve tax administration and “will provide significant benefits to taxpayers, including getting them earlier certainty while preserving important taxpayer protections and respecting the important relationships the taxpayer has with its tax advisors and independent auditors.”

Generally speaking, a UTP is any federal income tax position for which a tax reserve has been established in an audited financial statement.  UTPs usually are identified while preparing financial statements under applicable accounting standards, such as Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (FIN 48).

Companies affected by the new rules are those corporations filing Form 1120, 1120-F, 1120-L or 1120-PC, which issued audited financial statements and recorded a reserve for one or more U.S. tax positions.

Under the new rules and as described in guidance documents that were released simultaneously:

  • Reporting of UTPs will be phased in over five years depending on a companys size:
    Corporate Assets First Year to File Schedule UTP
    $100 million or greater2010 Tax Year
    $50 million or greater2012 Tax Year
    $10 million or greater2014 Tax Year
  • The maximum potential exposure related to a UTP does not have to be disclosed.  Instead, the taxpayer must rank its UTPs based on its size of financial accounting reserves.  The taxpayer must also indicate which UTPs are “major”; i.e., when reserves are greater than 10% of the aggregate reported reserves.
  • Taxpayers do not have to disclose the rationale and nature of uncertainty in the concise description of the position.  This reconciles UTP disclosures with existing rules (e.g., Form 8275 for disclosure under section 6662).  It also protects attorney-client privilege for any legal advice that taxpayers received in planning for a transaction.
  • Taxpayers also do not have to report “Administrative Practice” positions; i.e., those items omitted from tax reserves because “the corporation determined it was the Service’s administrative practice not to raise the issue during an examination.
  • Disclosures on Schedule UTP should be made in a manner consistent with the decisions involved in establishing tax reserves for financial accounting, including pertinent certainty and materiality standards.  Under applicable accounting standards, however, taxpayers must disclose positions for which it did not establish a reserve because of an intention to litigate, if challenged.

In addition to the above-described Schedule UTP guidance, the IRS also issued Announcement 2010-76, which expands the Services “policy of restraint.”  The IRS stated that it will not assert any waiver of attorney-client privilege (or the tax advice privilege of section 7525 or the work-product doctrine) in most cases in which a corporation turns over documents to an independent auditor as part of a formal audit program.

Contemporaneously, in a Directive to the Field, the agency instructed tax examiners to apply regular examination tools “without bias in favor of the government or the taxpayer” and to “apply the law as it currently exists, not how we would like it to be.”  According to the Directive, “This is the key to meeting our mission of fair and balanced tax administration[.]”

With the announcement of Schedule UTP, corporations will now require greater attention to “ and legal advice on “ the proper disclosures on tax positions to be made, how to quantify positions for the required rank ordering, and what information should be provided (with an eye toward maintaining privilege). 

FDA Announces Public Meeting on Approval Pathways for Biosimilars

The U.S. Food and Drug Administration (FDA) has announced that it will hold a two-day public hearing on November 2-3, 2010 for the purpose of gathering “input on specific issues and challenges associated with the implementation of the Biologics Price Competition and Innovation Act of 2009 (BPCI Act).”

The Patient Protection and Affordable Care Act (Pub. L. 111-148), signed into law by President Obama in March of this year, contains the BPCI Act. The BPCI Act amends the Public Health Service Act (PHS Act) to create an abbreviated approval pathway for biological products. In order to take advantage of this abbreviated pathway, these biological products must be shown to be biosimilar to, or interchangeable with, an FDA-licensed reference biological product.

Biosimilarity may be demonstrated through the use of scientific support (clinical trials, animal studies, etc.) with the appropriate number of trials and appropriate types of studies. The appropriate number and type required will be determined by the FDA. For a product to be considered biosimilar, data collected from the requisite study/studies must show that the biological product is “highly similar to the reference product, notwithstanding minor differences in clinically inactive components.” While it is unclear what level of clinical similarity is required to reach the finding of “highly similar”, The Agency intends to address this issue during the November hearing.

For more information on biologics or the BPCI Act, contact us at contact@fidjlaw.com.

CVS To Pay Largest Civil Penalty Ever Under The Controlled Substances Act for Unlawful Sales of Pseudoephedrine

On October 14, 2010, the Department of Justice announced it had reached a settlement with CVS Pharmacy, Inc. (“CVS”) for unlawful sales of pseudoephedrine, a key product in the manufacture and production of methamphetamine. As part of the settlement agreement, CVS, the largest operator of retail pharmacies in the United States, has agreed to pay $75 million in civil penalties, the largest civil penalty ever paid under the Controlled Substances Act.

The violations stem from CVSs failure to comply with the Combat Methamphetamine Epidemic Act of 2005 (“CMEA”), which, among other things, limited the amount of pseudoephedrine that a customer can purchase in one day. The CMEA was passed to combat “smurfing”, a practice where methamphetamine manufacturers make multiple purchases of small amounts of pseudoephedrine with the intent to aggregate the purchases for use in the illegal production of meth.

Department of Justice investigations revealed that, while CVS had implemented an electronic records system to record individual pseudoephedrine sale, this system did not prevent multiple purchases by the same customer in the same day. The US Attorney alleged that between 2007 and 2008 CVS committed thousands of violations of the CMEA in 25 states by failing to prevent customers from purchasing pseudoephedrine in amounts in excess of the law.

The total settlement will cost CVS $77.6 million, $75 million in civil penalties and CVS has agreed to forfeit $2.6 million in profits earned as a result of the unlawful conduct. CVS has agreed to pay the $75 million in civil penalties by October 15, 2010 and forfeit the $2.6 million in profits earned within 30 days. The settlement also requires CVS to implement a new compliance and ethics program over the next three years. Additionally, CVS has entered into a separate 5 year compliance program with the Drug Enforcement Agency.

For more information on pharmaceutical regulations, and acceptable pharmaceutical marketing practices please contact us at contact@fidjlaw.com.

More News on the Coming Wave of FDA Enforcement Actions

Yesterday we reported the comments of Eric Blumberg, FDA Deputy Chief Counsel for Litigation, who said that the FDA will increase misdemeanor criminal prosecutions for pharmaceutical executives whose companies are promoting off-label uses of their products. At this same conference, sponsored by the Food and Drug Law Institute, additional guidance was provided for the pharma industry with respect to coming trends in FDA enforcement and how companies can achieve compliance now.

In addition to prosecuting off-label marketing of pharmaceutical products, Blumberg also warned that criminal investigations will increase and be focused on the distribution of unapproved new drugs as well as the failure to report unexpected adverse events caused by these products.

Eugene Thirolf, Director of the Office of Consumer Litigation at the Department of Justice (the FDAs government prosecutor), echoed Blumbergs comments stating that he foresees more criminal prosecutions arising from safety issues related to pharmaceutical products; e.g., distribution of defective products, adverse event reporting failures and fraudulent use or reporting of testing data.

This increased emphasis on criminal investigations and prosecutions by the FDA and the Justice Department are not just confined to consumer issues, however. Blumberg, Thirolf and several other speakers also discussed holding pharma companies accountable for regulatory issues arising from manufacturing. Company executives were admonished to adhere to current Good Manufacturing Practice (cGMP) regulations and standards, and cautioned not to ignore (or cover-up) safety issues discovered in the manufacturing and testing of pharmaceutical products. Thirolf stated that criminal prosecutions could arise from false documentation of manufacturing processes and procedures.

Much of the impetus for these new investigations and prosecutions will come from the FDAs Office of Criminal Investigations, which the agency has pledged to revamp and refocus.

The message from the FDA is clear “ not only for pharmaceutical companies, but for dietary supplement companies, medical device manufacturers, food producers, cosmetic companies and other FDA regulated industries as well:

Now is the time to proactively implement FDA compliance programs, to perform audits of your existing compliance programs, and to review your manufacturing processes, distribution networks, advertising, websites, and promotional activities to ensure compliance with FDA laws and regulations. Failure to do so now will result in even greater problems “ including criminal investigations and prosecutions “ later.

FDA Message to Pharma: Misdemeanor Criminal Charges can Result from Promoting Off-Label Drug Uses

The FDA should target for misdemeanor criminal prosecution the executives of pharmaceutical companies which promote unauthorized uses of their medicines.

This is the latest message from Eric Blumberg, Deputy Chief for Litigation for the U.S. Food and Drug Administration. Speaking at the “Enforcement and Litigation Conference” for the Food and Drug Law Institute on October 13, 2010, Blumberg said, “Unless the government shows more resolve to criminally charge individuals at all levels in the company, we cannot expect to make progress in deterring off-label promotion.”

Blumberg cited a recent case involving Pfizer in which the company agreed to pay a $2.3 billion fine for the off-label marketing of several products. Some industry analysts point to the Pfizer case as evidence that big pharma increasingly sees FDA fines and settlement agreements referencing “corporate integrity” as nothing more than a cost of doing business, and not changing industry practices. “Its clear were not getting the job done with large, monetary settlements,” Blumberg added.

This is not the first time Blumberg “ and the FDA “ has talked about getting tough with criminal prosecutions for drug law violations.

Not long after his appointment as the FDAs top litigator in 2005, Blumberg stated that senior executives should be held accountable for company actions under Federal Food, Drug and Cosmetic Act (FD&C Act). He warned that ignorance is not bliss, and also is not a defense in court. “The FD&C Act is a strict liability statute,” Blumberg said to a conference of pharmaceutical companies. “That means you may be found criminally responsible for a violation of the FD&C Act, even though you did not participate in the violation, you were not aware of the violation, or you did not act with criminal intent, or even negligence.”

Blumbergs words echo the so-called Park Doctrine, named after the Supreme Court decision in United States v. Park, 421 U.S. 658 (1975). This doctrine allows the government to seek criminal convictions against company officials for alleged violations of the FD&C Act.

In that case, the conviction of John Park, President of a national retail food chain, was upheld by the Supreme Court. The Court ruled that senior executives of companies manufacturing or selling FDA-regulated products have an affirmative duty to ensure the safety of those products. The Court further held that the U.S. Government can criminally prosecute corporate officers who are in a “responsible relationship” to an illegal activity by a company even if the person did not take part in, or even know of, the companys activities. The FD&C Act, according to the Court, imposes a positive duty on senior company officers to seek out and remedy violations when they occur as well as implement processes to prevent violations in the first place.

The Doctrine was used extensively by the FDA in the 1970s in strict liability cases usually involving “dirty warehouses” “ unsanitary facilities maintained by a company. But by the early 1980s, use of the Park Doctrine in criminal prosecutions had fallen off, due in part perhaps, to the meager penalties for misdemeanor convictions, which often were as low as $50.

Then in 2008, the U.S. Sentencing Commission adopted new guidelines that increased the likelihood that misdemeanor convictions under the Doctrine will result in prison time. These changes, along with higher penalties and the passage of new laws increasing the FDAs enforcement authorities and postures seem to have resurrected use of the Park Doctrine.

While Blumberg stated yesterday that his comments did not reflect FDA policy, they do reflect the thinking of the agencys senior management. In a March 2010 letter from FDA Administrator Margaret Hamburg to the Senate Finance Committee, Hamburg also stated that the FDA plans to increase misdemeanor prosecutions of pharma industry executives as it refocuses its Office of Criminal Investigations on stricter enforcement measures.

Blumberg added yesterday that pharmaceutical company officials shouldnt wait until they are criminally charged to begin bringing their marketing campaigns into compliance with FDA regulations. “If youre a corporate executive or are advising a corporate executive, now is the time to comply,” he said. “That conduct may already be under the criminal microscope.”

And quite a microscope it is. Under current law, misdemeanor cases carry sentences for company execs of up to a year in prison and/or a maximum fine of $100,000 per count. If the crime results in death, however, the maximum fine for an individual is $250,000. The FDA also can bar individuals from working in the industry.

Brazilian Regulations List Delaware as a Tax Haven

Article 23 of Brazilian Law No. 11.727 became effective on January 1, 2009 defining a “privileged fiscal regime” for transfer pricing purposes. The law defined privileged fiscal regime (“regime fiscal privelegiado”) as any jurisdiction that met one of the following requirements:

A) It does not tax income or where the maximum applicable rate is below 20 percent;

B) It grants fiscal advantages to a non-resident individual or legal entity

  1. without requiring that substantial economic activity be made in the country or dependency; or
  2. conditioned to the non=exercise of substantial economic activity in the country or dependency

C) It does not tax the earnings obtained outside its territory or imposes a maximum applicable rate below 20 percent to such earnings;

D) It does not permit access to information regarding the capital stock structure, ownership of assets or rights or to the economic transaction entered into between the parties.

Pursuant to this law, the taxing authority in Brazil issued Normative Instruction 1037/2010, which includes specific jurisdictions on a list of “privileged fiscal regimes.” Delaware appears on this list.

In the case of the United States of America, the regime applied to the entities incorporated in the form of Limited Liability Company (LLC) whose equity participation is formed by non resident, which are not subject to federal income tax, such as Delaware, Nevada, Florida and other US states which adopt a similar regime . . . .

When a jurisdiction is included in the list of privileged fiscal regimes, entities of this jurisdiction are required to obey all Brazilian transfer pricing rules. Thus, all earnings and profits relating to import and export operations with Brazil must be adjusted and taxed as if the transaction was subject to Brazilian taxes.

Commentators are questioning the Brazilian regulation, wondering “how a state can have a privileged tax regime when the state is not the taxing jurisdiction in question.” The regulation shows the Brazilian Taxing Authoritys lack of understanding of the United States Federal Income Tax. Although LLCs in Delaware and other states are pass-through entities, the United States Internal Revenue Service is given the responsibility to ensure that LLC owners pay their respective tax liability for income generated by the LLC. Normative Instruction 1037/2010 implies that the Brazilian Taxing Authority believes that Delaware has that responsibility instead.

Because the United States usually only taxes the worldwide income of its residents, this rule is likely to impact all LLCs formed in the United States with nonresident owners. Responding to these and other potential consequences, Delaware Chief Deputy Secretary of State, Richard Geisenburger announced Delawares plans to speak to Brazilian tax authorities in an effort to persuade them not to place Delawares LLCs on its list of “tax havens.” Notably, the Brazilian government does have discretion to require the Secretary of the Brazilian Federal Revenue office to review and edit the list included In Normative Instruction 1037/2010.

It is possible that the rule may exempt LLCs whose nonresident owners pay U.S. tax on U.S. source income. However, the actual impact of this regulation is still unknown.

If you have any questions regarding the Normative Instruction 1037/2010 or any other tax provision, please contact Fuerst Ittleman, PL at contact@fidjlaw.com.

Codification of the Economic Substance Doctrine is Not a Change in Substantive Law

The economic substance doctrine was codified on March 30, 2010 in IRC § 7701(o) providing that transactions shall be treated as having economic substance only if the transaction changes the taxpayers economic position in a meaningful way and the taxpayer has a substantial purpose for entering into the transaction.

IRC § 7701(o)(5)(C) further states that the doctrine only applies to a transaction entered into in connection with a trade or business or activity engaged in for income. IRC § 7701(o)(5)(D) provides that the term “transaction” includes a series of transactions.

As it relates to transactions with a potential for profit, IRC § 7701(o)(2)(A) provides that the economic substance doctrine is applied only if the present value of the reasonably expected pre-tax profits is substantial in relation to the present value of the claimed net tax benefit.

On October 5, 2010, IRS Associate Chief Counsel, William D. Alexander, speaking at a panel discussion sponsored by the Boston Bar Association, said that the newly codified economic substance doctrine does not constitute a change in substantive law. Mr. Alexander instead said that the codification affects issues of proof and stressed that when planning a transaction one cannot plan the transaction around issues of proof. Mr. Alexander explained that when planning a transaction, the transaction should be based on the assumption that all facts will become known and entered into the record and thereafter appropriately appreciated by the finder of fact and determiner of law. Thus, practitioners who have been structuring transactions based on the reality of the transactions will not be affected by the codification of the economic substance doctrine.

Taxpayers have requested published guidance on the doctrine since its codification on March 30, 2010. In response, the IRS issued a notice, Notice 2010-62, describing how the IRS plans to administer the doctrine moving forward. The notice also explains guidance on penalties and foreign taxes. The IRS, however, does not intend to issue guidance on specific transactions that would or would not pass muster under the doctrine or so-called Angel List transactions.

During his discussion, Mr. Alexander noted that the doctrine is rooted in common law and because common law is evolving, the IRS may “take a run on an existing authority which it might think . . . was wrongly decided.”

Our professionals at Fuerst Ittleman PL are knowledgeable in the newly codified economic substance doctrine. If you believe you have been affected by the new law please contact our professionals at contact@fidjlaw.com.

“Oh yeah?!” PCAOB Bars Foreign Auditors which do not Allow Board Inspections

The Public Company Accounting Oversight Board (PCAOB) has announced rule changes that could bar audit firms based outside the United States from auditing U.S. companies.

Under the new rules promulgated on October 7, 2010, foreign audit firms applying to the PCAOB for registration will be required to state their understanding of whether a PCAOB inspection of the firm would currently be allowed by local law or local authorities. If the applicant indicates that PCAOB inspections would not be allowed, the a Notice of Hearing will be issued by the PCAOB to determine whether approval of the application would run counter to the Sarbanes-Oxley Act of 2002.

Under the Sarbanes-Oxley Act of 2002, audit firms are required to register with the PCAOB and submit to regular inspections by the Board if the firm audits financial statements filed by issuers with the Securities and Exchange Commission. In recent years, however, the PCAOB has been frustrated by foreign audit firms blocking Board inspections because of asserted legal restrictions or objections of local authorities.

PCAOB Acting Chairman Daniel Goelzer stated:

Since 2004, the Board has approved registration applications of non-U.S. firms with the expectation that any potential obstacles to inspections would be resolved through cooperative efforts with foreign regulators. Although we are still pursuing those efforts, the continuing obstacles to inspections in some jurisdictions have forced us to re-evaluate that approach to registration.

Earlier this year, the PCAOB published a list of PCAOB-registered auditors which the Board currently cannot inspect because of asserted non-U.S. legal obstacles. The list includes numerous subsidiaries and affiliates of firms such as Deloitte Touche, Ernst & Young, PricewaterhouseCoopers, KPMG and Grant Thornton. (https://pcaobus.org/International/Inspections/Documents/issuer_audit_clients_of_certain_non-US_firms_by_jurisdiction.pdf) The listed firms audit over 400 non-U.S. companies whose securities trade in U.S. markets.

Regulators in countries throughout Europe and Asia deny the PCAOB access to inspect non-US applicants, arguing that these firms should be inspected by local authorities. They further believe that any information shared by these firms with the PCAOB should be transmitted under the auspices of an equivalence arrangement rather than the non U.S. firm directly being inspected by the Board.

However, in its statement on the new rules and citing the Sarbanes-Oxley Act, the Board countered:

These inspections are fundamental to the Board’s ability to carry out its oversight responsibilities “in order to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports.” Obstacles to those inspections frustrate the oversight system put in place by the Act and, in turn, threaten the public interest by impeding the Board’s ability to detect conduct that violates U.S. law and professional standards.

These new rules will have a substantial effect on how U.S .companies and their foreign subsidiaries are audited. U.S. companies will be deterred from engaging unregistered auditors in jurisdictions where PCAOB inspections would be denied. For their part, unregistered global audit firms will have a much harder time pursing cross-border business with U.S. companies. While PCAOB staffers deny that the rules are an attempt to strong-arm foreign audit firms into inspections, they are optimistic that the pace of negotiations on PCAOBs foreign inspections will greatly increase as a result of the tactic.

Separate but Equal – AICPA Panel Recommends a Separate Board to Establish Private Company Accounting Standards

In its October 8, 2010 meeting, the AICPAs Blue Ribbon Panel on Private Company Standard Setting reported that it plans to recommend that the Financial Accounting Foundation (FAF) adopt a new standard-setting model that follows Generally Accepted Accounting Practices (GAAP) with exceptions for private companies. The Panel also recommended that these accounting standards should be set by a separate board under the watchful eye of the FAF and not FASB, the FAFs parent organization.

The impetus for the separate board arose from a desire to install a system of checks and balances to ensure that issues unique to private companies are being addressed while maintaining a reference to FASBs standards. The underlying battle over differentiated accounting standards, i.e., whether there should be alternative, simplified accounting standards that meet the needs of users of private company financial statements, has been brewing for years.

The Blue Ribbon Panel was established through the cooperation of the AICPA, the FAF and the National Association of State Boards of Accountancy (NASBA). It is comprised of 18 members representing the spectrum of financial reporting companies: auditors, regulators, investors and company owners. Most Panel members seemed to embrace the private board plan. AICPA President Barry Melancon stated:

Im pleased the majority of the panel members supported the bold step of a new, separate private accounting standards board under the FAFs oversight. An important benefit of having a new board is to help ensure the needs of the private company sector are appropriately addressed in the standard-setting process.

Yet a minority of Panel members opposes this idea. NASBA Chairman Billy Atkinson stated that a single board is necessary to ensure that all strata of businesses are represented “at the same table” when standards are being discussed and established. Atkinson commented, “The FAF and its processes for the oversight of standard setting are sound. The real challenges ahead are the important public policy issues associated with the debate.” Other Panel members feared that a separate set of standalone GAAP standards for private companies would take too long to put in place.

It is widely recognized that many private companies in the United States do not following GAAP in their financial reporting. Yet while the shortcomings of this lack of adherence to GAAP may be obvious, a recent WebCPA poll (https://www.webcpa.com/polls/?poll_id=22&page=1) found that a majority of readers did not favor a separate set of accounting standards for private companies.

Despite these differing opinions, virtually the entire Panel agreed that FASB needs more private company representation and that a recent expansion of the board from five to seven members did not go far enough to ensure that private companies are adequately represented.

The next step is for the Panels staff to develop a list of specific recommendations in anticipation of the Panels next meeting on December 10, 2010. It is believed that the Panels final recommendations will be made in a report to the FAF in January 2011. The recommendations will be made public at that time, after which the FAF is expected to solicit comments fro constituents and the public.