Trending Now

Building a Resilient Supply Chain with Advanced Predictive…

New Articles

SBA Extends Safe Harbor Deadline to May 14, 2020 and Confirms that Foreign Affiliate Employees Must be Counted for Size Purposes

safe harbor
Archives, Banking on Global Trade, Global Trade Daily, News, Stories

SBA Extends Safe Harbor Deadline to May 14, 2020 and Confirms that Foreign Affiliate Employees Must be Counted for Size Purposes

Leave a comment

Late on May 5, 2020 the Small Business Administration (SBA) issued another round of Frequently Asked Questions (FAQs) that extended the Safe Harbor Deadline to return Paycheck Protection Program (PPP) loan funds from May 7, 2020 to May 14, 2020. Significantly, the SBA also confirmed that its rules regarding foreign affiliates are applied to PPP applicants in the same manner as its other programs. Loan applicants should closely review the most updated version of the SBA’s FAQs and talk to their counsel about the best way to proceed.

Safe Harbor Extended from May 7, 2020 to May 14, 2020

As discussed in a previously, on April 23, 2020 (20 days after applications could first be submitted for PPP loans), the SBA issued FAQ 31 that significantly increased the requirements surrounding an applicant’s certification that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” In the strongly worded FAQ 31, the SBA stated that “[b]orrowers must make this certification in good
faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.” Unfortunately, as of the date of this alert, neither the Department of Treasury (Treasury) nor the SBA have issued any further guidance beyond the above sentence to confirm how applicants actually make this determination. On April 28, 2020, the SBA also confirmed that FAQ 31 equally applies to both public and private companies.

In addition to issuing FAQ 31, the SBA also issued an initial Safe Harbor Deadline of May 7, 2020 to return PPP loans. This May 7, 2020 Safe Harbor Deadline has now been extended to May 14, 2020. Under FAQ 43 that was issued on May 5, the SBA and Treasury are allowing borrowers to return PPP loan funds by May 14, 2020. For those borrowers that return funds by May 14, the SBA and Treasury have confirmed that they will deem the certification regarding “need” to have been made in good faith. The SBA also has confirmed that it intends to issue additional guidance on how it will review the “need” certification before May 14, 2020.

While the SBA’s recent guidance does not specifically reference any eligibility certifications outside of the “necessity” for the loan, a borrower knowing that it has a separate eligibility issue should seek counsel about addressing that issue before the extended deadline of May 14, 2020.

Frustration and confusion abound since the issuance of FAQ 31 and FAQ 37. There are several questions that Treasury has not adequately answered. Until further guidance is issued, applicants are faced with a difficult choice of keeping funds with the risk that the government may later hold the unclear guidance against them, or refuse the funds and accept the impacts that go along with that, including a possible reduction of employees.

Applicants across the country have been raising these complaints, and Treasury has at least initially responded by extending the deadline to May 14, 2020. We hope that Treasury will also soon issue additional FAQs or rules to confirm the parameters for which businesses can in good faith certify the need for a PPP loan.

Borrowers Must Count Employees of Foreign Affiliates When Determining Eligibility for a PPP Loan

The SBA also issued FAQ 44 on May 5, which confirms that borrowers must count both foreign and domestic affiliates when determining eligibility for PPP loans. FAQ 44 has significant impacts on businesses which applied for PPP loans without counting the employees of foreign affiliates.

As a reminder, SBA’s regulations confirm that “[c]oncerns and entities are affiliates of each other when one controls or has the power to control the other, or a third party or parties controls or has the power to control both.” 13 C.F.R. § 121.301(f) (February 5, 2020). The PPP Loan Affiliation Rules describe how the SBA determines affiliation for PPP loans.

SBA’s rules for determining size have long required participants in SBA’s programs to count both foreign and domestic affiliates. See 13 CFR §§ 121.103(a)(6), 104(a), 106(b)(1), and 301(f)(6) (confirming that both foreign and domestic affiliates should be considered for size purposes).

However, when the SBA issued the PPP Loan Affiliation Rules, it did not include the pre-March 11, 2020 version of 13 C.F.R. § 121.301(f)(6)1, which confirms that foreign affiliates should be counted. The PPP Loan Affiliation Rules do not reference Section (f)(6). The Interim Final Rule first issued on April 2, 2020 and SBA’s FAQ 3 also states that borrowers are eligible for a PPP loan “if the business has 500 or fewer employees whose principal place of residence is in the United States,” or meets other criteria.

The use of the term “principal place of residence in the United States” in the Interim Final Rule and SBA’s FAQs created confusion about whether employees of foreign affiliates actually needed to be counted for PPP loan eligibility. For those who have long worked with SBA’s rules, it seemed that not counting foreign affiliates would be a significant change from SBA’s past implementation of its regulations, but the clear language in the above sources made it reasonable to openly consider that question to determine if the SBA was handling the PPP loan program differently.

On May 5, the SBA confirmed that PPP loans are consistent with its other programs and borrowers must count foreign affiliates when considering size:

For purposes of the PPP’s 500 or fewer employee size standard, an applicant must count all of its employees and the employees of its U.S. and foreign affiliates, absent a waiver of or an exception to the
affiliation rules. 13 C.F.R. 121.301(f)(6). Business concerns seeking to qualify as a “small business concern” under section 3 of the Small Business Act (15 U.S.C. 632) on the basis of the employee-based size standard must do the same.

See FAQ 44.

Businesses which have already applied and know that foreign affiliates would cause them to exceed the relevant size standard should discuss this with their counsel to closely evaluate next steps on how to proceed. It would be wise to consider and address this before the May 14, 2020 Safe Harbor Deadline.

For specific guidance on this issue, please contact Josh Mullen, John  Scannapieco, or Jeff Wagner. For more information and general guidance on how to address other legal issues related to COVID-19, please visit the Coronavirus (COVID-19): What You Need to Know information page on our website.

countervailing duty
Archives, Global Trade Daily, In The News

Commerce Modifies Countervailing Duty Regulations to Address Currency Undervaluation

Leave a comment

The Commerce Department issued its final rule amending the countervailing duty regulations to address potential currency undervaluation. This revision to Commerce’s regulations will take effect in 60 days and will apply to all new investigations and administrative reviews that begin on or after April 6, 2020. The new rules would effectively clear the way for the U.S. to start applying punitive tariffs on goods from countries accused of having undervalued currencies.

Under the revised regulations, Commerce in the conduct of its countervailing duty proceedings will now have the authority to take into consideration the real effective exchange rates to determine the extent to which a currency is undervalued. They will also be able to seek the Treasury Department’s formal, non-binding evaluation on whether the foreign government’s actions were responsible for the undervaluation. If Commerce determines that there is undervaluation of the currency and that the undervaluation resulted from government action, Commerce will then potentially consider currency exchanges by the exporters and/or traders to be a subsidy given that the exporter or trader would effectively receive more domestic currency in return for their exchanges of U.S. dollars than they otherwise would have been able to receive under the old rules.

In the conduct of its countervailing duty investigations and reviews, Commerce will now look at each individual exporter’s currency exchanges, and specifically, the amount of additional domestic currency received in exchanges due to undervaluation. It will then potentially add the currency subsidy amount to the exporter’s overall countervailing duty rate. The move would give new muscle to U.S. complaints about currency manipulation that have in the past targeted economies like China and Japan and thus turn the more than $6 trillion-a-day global currency market into a new battlefield in the Trump administration’s trade wars. The new rule was opposed by the Treasury Department when it was first proposed in May 2019 as it would allow U.S. companies to file trade complaints with the Commerce Department over specific imported products by treating undervalued currencies as a form of an unfair subsidy.

The new regulations have far-reaching effects as it would allow the U.S. to impose countervailing duties on goods from countries accused of manipulating their currencies, even in cases where they were not officially found to be a currency manipulator by the U.S. Department of Treasury. Previous administrations have examined this issue but have delayed or resisted efforts to take such actions as it could potentially lead to currency wars amongst trading partners.

Commerce’s announcement is the result of campaign promises from the 2016 election. “This Currency Rule is an important step in ensuring that unfair trade practices are properly remedied,” said Secretary of Commerce Wilbur Ross in a statement. “While successive administrations have balked at countervailing foreign currency subsidies, the Trump Administration is taking action to level the playing field for American businesses and workers.”

In a question and answer section attached to Monday’s announcement, the Commerce Department said it would preserve the final power to make any determination about whether a currency’s value presented an unfair subsidy for that country’s exporters. The statutes governing Treasury’s mandate to monitor currencies and Commerce’s power to impose anti-subsidy duties had different criteria, Commerce said.

“Hence, the two processes may result in different outcomes as to a particular country, theoretically including the possibility of applying countervailing duties to a country that does not meet the criteria for designation under the laws Treasury administers,” the statement said.

Commerce also said the new rule would allow it to specifically impose currency-related tariffs against China even if the Treasury did not label it a currency manipulator. The Treasury last month lifted a designation of China as a manipulator just days before Trump signed a “Phase One” trade deal with China that included language on currencies, though the new rule appears to give the U.S. powers to act that go beyond what was included in last month’s deal.

The Commerce Department put some purported caveats on its powers, saying it would “not normally include monetary and related credit policy of an independent central bank or monetary authority” in determining whether foreign governments had acted inappropriately to weaken currencies. “Commerce will seek and generally defer to Treasury’s expertise in currency matters,” it said.  This statement, however, leaves a lot of room open for potential unilateral action by Commerce, as Commerce has reserved for itself the authority to find that undervaluation exists, even if Treasury in its bi-annual report makes a determination that a particular currency is artificially weak but not undervalued. This type of broad authority is similar to Commerce’s authority to conduct Particular Market Situation (“PMS”) investigations resulting in contested decisions and appeals to the Court of International Trade.