Tariffs: Force Majeure and Surcharges — FAQs
As we navigate a turbulent tariff landscape for manufacturers, we want to help you with some of the most frequently asked questions we are encountering right now as they relate to force majeure and price increases:
1. What are the key doctrines to excuse performance under a contract?
There are three primary defenses to performance under a contract. Importantly, these defenses do not provide a direct mechanism for obtaining price increases. Rather, these defenses (if successful) excuse the invoking party from the obligation to perform under a contract. Nevertheless, these defenses can be used as leverage during negotiations.
Force Majeure
Force majeure is a defense to performance that is created by contract. As a result, each scenario must be analyzed on a case-by-case basis depending on the language of the applicable force majeure provision. Nevertheless, the basic structure generally remains the same: (a) a listed event occurs; (b) the event was not within the reasonable control of the party invoking force majeure; and (c) the event prevented performance.
Commercial impracticability (Goods)
For goods, commercial impracticability is codified under UCC § 2-615 (which governs the sale of goods and has been adopted in some form by almost every state). UCC § 2-615 excuses performance when: (a) delay in delivery or non-delivery was the result of the occurrence of a contingency, of which non-occurrence was a basic assumption of the contract; and (b) the party invoking commercial impracticability provided seasonable notice. Common law (applied to non-goods, e.g., services) has a similar concept known as the doctrine of impossibility or impracticability that has a higher bar to clear. Under the UCC and common law, the burden is quite high. Unprofitability or even serious economic loss is typically insufficient to prove impracticability, absent other factors.
Frustration of Purpose
Under common law, performance under a contract may be excused when there is a material change in circumstances that is so fundamental and essential to the contract that the parties would never have entered into the transaction if they had known such change would occur. To establish frustration of purpose, a party must prove: (a) the event or combination of events was unforeseeable at the time the contract was entered into; (b) the circumstances have created a fundamental and essential change, and (c) the parties would not have entered into the agreement under the current terms had they known the circumstance(s) would occur.
2. Can we rely on force majeure (including if the provision includes change in laws), commercial impracticability, or frustration of purpose to get out of performing under a contract?
In court, most likely not. These doctrines are meant to apply to circumstances that prevent performance. Also, courts typically view cost increases as foreseeable risks. Official comment of Section 2-615 on commercial impracticability under UCC Article 2, which governs the sale of goods in most states, says:
“Increased cost alone does not excuse performance unless the rise in cost is due to some unforeseen contingency which alters the essential nature of the performance. Neither is a rise or a collapse in the market in itself a justification, for that is exactly the type of business risk which business contracts made at fixed prices are intended to cover. But a severe shortage of raw materials or of supplies due to a contingency such as war, embargo, local crop failure, unforeseen shutdown of major sources of supply or the like, which either causes a marked increase in cost or altogether prevents the seller from securing supplies necessary to his performance, is within the contemplation of this section. (See Ford & Sons, Ltd., v. Henry Leetham & Sons, Ltd., 21 Com.Cas. 55 (1915, K.B.D.).)” (emphasis added).
That said, during COVID and Trump Tariffs 1.0, we did see companies use force majeure/commercial impracticability doctrines as a way to bring the other party to the negotiating table, to share costs.
3. May we increase price as a result of force majeure?
No, force majeure typically does not allow for price increases. Force majeure only applies in circumstances where performance is prevented by specified events. Force majeure is an excuse for performance, not a justification to pass along the burden of cost increases. Nevertheless, the assertion of force majeure can be used as leverage in negotiations.
4. Is a tariff a tax?
Yes, a tariff is a tax.
5. Is a surcharge a price increase?
Yes, a surcharge is a price increase. If you have a fixed-price contract, applying a surcharge is a breach of the agreement.
That said, during COVID and Trump Tariffs 1.0, we saw many companies do it anyway. Customers typically paid the surcharges under protest. We expected a big wave of litigation by those customers afterward, but we never saw it, suggesting either the disputes were resolved commercially or the customers just ate the surcharges and moved on.
6. Can I pass along the cost of the tariffs to the customer?
To determine if you can pass on the cost, the analysis needs to be conducted on a contract-by-contract basis.
7. If you increase the price without a contractual justification, what are customers’ options?
The customer has five primary options:
1. Accept the price increase:
An unequivocal acceptance of the price increase is rare but the best outcome from the seller’s perspective.
2. Accept the price increase under protest (reservation of rights):
The customer will agree to make payments under protest and with a reservation of rights. This allows the customer to seek to recover the excess amount paid at a later date. Ideally, the parties continue to conduct business and the customer never seeks recovery prior to the expiration of the statute of limitations (typically six years, depending on the governing law).
3. Reject the price increase:
The customer will reject the price increase. Note that customers may initially reject the price increase but agree to pay after further discussion. In the event a customer stands firm on rejecting the price increase, the supplier can then decide whether it wants to take more aggressive action (e.g., threaten to stop shipping) after carefully weighing the potential damages against the benefits.
4. Seek a declaratory judgment and/or injunction:
The customer can seek a declaratory judgment and/or injunction requiring the seller to ship/perform at the current price.
5. Terminate the contract:
The customer may terminate part or all of the contract, depending on contractual terms
For additional information, here is a comprehensive white paper we have written on the tariffs.
Federal Circuit Broadens ITC Economic Prong
In the recent decision of Lashify, Inc. v. International Trade Commission, the United States Court of Appeals for the Federal Circuit rejected the long-standing approach concerning the interpretation of the domestic-industry requirement under Section 337 of the Tariff Act of 1930. The complainant, an American company importing eyelash extensions from international manufacturers, which alleged that certain other importers were infringing on its patents.
The central legal issue in this case revolved around the interpretation of the “economic prong” of the domestic-industry requirement under 19 U.S.C. § 1337(a)(3)(B). Specifically, the panel examined whether significant employment of labor or capital related to sales, marketing, warehousing, quality control, and distribution could satisfy the economic prong, even in the absence of domestic manufacturing.
The Federal Circuit vacated the Commission’s split decision regarding the economic prong, finding that the Commission’s interpretation was contrary to the statutory text. Notably, the Court cited the Loper Bright Supreme Court decision that allows the Court to “exercise [] ‘independent judgment’ about the correctness of [the Commission’s] interpretation.”
The Court ultimately held that significant employment of labor or capital should be considered sufficient to satisfy the economic prong, regardless of whether the labor or capital is used for sales, marketing, warehousing, quality control, or distribution. The Court emphasized that the statutory language does not impose a domestic-manufacturing requirement or limit the economic prong to technical development. Rather the panel held that so long as the human activity is related to “aspects of providing [patented] goods or services,” the cost of that investment in human capital should be accounted for. This decision has significant implications for future cases involving the domestic-industry requirement under Section 337. The Federal Circuit’s interpretation broadens the scope of what can be considered significant employment of labor or capital, potentially allowing more companies to satisfy the economic prong without engaging in domestic manufacturing. This could lead to increased access to Section 337 relief for companies that focus on sales, marketing, and distribution activities within the United States.
Foley Automotive Update 06 March 2025
Foley is here to help you through all aspects of rethinking your long-term business strategies, investments, partnerships, and technology. Contact the authors, your Foley relationship partner, or our Automotive Team to discuss and learn more.
Special Update — Trump Administration and Tariff Policies
Foley & Lardner provided an update on the potential ramifications of steel and aluminum tariffs on multinational companies.
Foley & Lardner partner Gregory Husisian described sentiment among Chief Financial Officers on the Trump administration’s approach to trade policy in The Wall Street Journal article, “The Latest Dilemma Facing Finance Chiefs: What to Tell Investors About Tariffs.”
Key tariff announcements include:
USMCA-compliant automakers have a one-month exemption from the 25% tariffs on U.S. imports from Canada and Mexico that were announced on March 4. The Trump administration announced the decision on March 5, following discussions with Ford, GM, and Stellantis.
In a March 5 MEMA update regarding the temporary pause of auto tariffs on Canada and Mexico, President and CEO Bill Long stated “Conversations held today indicate positive results that USMCA-compliant parts are included, but we are awaiting official confirmation from the Administration.” In breaking news on March 6, Commerce Secretary Howard Lutnick stated to CNBC: “It’s likely that it will cover all USMCA compliant goods and services, so that which is part of President Trump’s deal with Canada and Mexico are likely to get an exemption from these tariffs. The reprieve is for one month.”
On March 4, U.S. duties on Chinese imports were doubled to 20%. China intends to implement new tariffs on U.S. imports on March 10, and the nation added over two dozen U.S. companies to export control and corporate blacklists.
The Canadian government does not plan to repeal the 25% retaliatory tariffs on approximately C$30 billion worth of goods from U.S. exporters, announced on March 4. Canada could also implement a second round of 25% tariffs in three weeks on C$125 billion of products that include cars, trucks, steel, and aluminum. Mexico plans to announce tariffs on U.S. imports on March 9.
25% levies on U.S. imports of steel and aluminum could be implemented March 12.
Announcements could follow on April 2 regarding 25% sector-specific tariffs that would include automobile and semiconductor imports, along with broader “reciprocal tariffs” on countries that tax U.S. imports. Details have not been provided regarding the recent threat for 25% duties on European imports.
A February 25 executive order directed the government to consider possible tariffs on copper.
Automotive Key Developments
U.S. new light-vehicle sales are estimated to have reached a SAAR between 16.1 and 16.3 million units in February 2025, according to preliminary analysis from J.D. Power and Haver Analytics.
Annual U.S. auto sales could decline by 500,000 units, and up to 2 million units, if the Trump administration were to implement 25% tariffs on automotive imports from Mexico and Canada, according to automotive analysts featured in the Detroit Free Press and Bloomberg. In addition, a recession could begin “within a year” if certain tariffs “persist for any length of time.”
The Alliance for Automotive Innovation and Anderson Economic Group estimate tariffs on Mexican and Canadian imports could raise the cost of a new vehicle by up to 25%, or by a range of $4,000 to $12,000, depending on the model.
Crain’s Detroit reports product launch delays are impacting suppliers as automakers postpone investment decisions until there is more stability in areas that include “federal tariffs, regulatory policy and electric vehicle incentives.”
A number of large auto suppliers are taking steps to reduce expenses in order to support profitability amid market uncertainty, according to a report in Automotive News.
The Wall Street Journal provided overviews of the potential impact of tariffs on automakers and vehicle components, stating that “no sector is as exposed to possible Trump tariffs as the auto industry.”
The benchmark price for domestic steel has increased 25% this year to $900 a ton, ahead of a possible 25% import tariff on the metal.
The Wall Street Journal reports the potential for tariffs on aluminum have already raised costs for buyers, as there are few U.S. suppliers capable of meeting supply needs after years of declining domestic production.
The National Highway Traffic Safety Administration laid off 4% of its staff as part of a government-wide reduction of federal employees. NHTSA had expanded its workforce by roughly 30% under the Biden administration, and it was estimated to have a staff of approximately 800 prior to the job cuts.
At the annual MEMA Original Equipment Suppliers event on February 27, the North American purchasing chief of Stellantis indicated the automaker will consider supplier requests for pricing relief. This represents a reversal of a “no more claims” policy announced in 2024.
OEMs/Suppliers
Stellantis reported a full-year 2024 net profit of $5.8 billion on net revenue of $156.9 billion, representing year-over-year declines of roughly 70% and 17%, respectively.
GM will temporarily halt production for a number of weeks at its Corvette plant in Bowling Green, Kentucky, for undisclosed reasons.
Mercedes plans to reduce capacity in Germany as part of an initiative to reduce expenses by 10% through 2027 amid heightened competition, uneven demand, and high material costs. The automaker may also reduce its sales and finance workforce in China, according to unidentified sources in Reuters.
China’s top-selling automaker, BYD, could decide on a third plant location in Europe within the next two years. The automaker has plants underway in Szeged, Hungary, and Izmir, Türkiye.
Detroit Manufacturing Systems, LLC will acquire Android Industries, LLC and Avancez, LLC. The combined entity, Voltava LLC, will be headquartered in Auburn Hills, Michigan, and it is expected to reach over $1.5 billion in annual revenue.
Market Trends and Regulatory
J.D. Power estimates the average monthly payment for a new vehicle reached $738 in February, up 2.4% year-over-year. The analysis noted “vehicle affordability remains a challenge for the industry and is the primary reason why the sales pace, while strengthening, has not returned to pre-pandemic levels.”
The new vehicle average transaction price reached $48,118 in January 2025, according to analysis from Edmunds.
The International Longshoremen’s Association (ILA) ratified a six-year labor contract with the United States Maritime Alliance (USMX), ending months of uncertainty over the potential for a follow-up strike at U.S. East and Gulf Coast ports.
National “right to repair” legislation was introduced in Congress last month by a bipartisan group of lawmakers. The Right to Equitable and Professional Auto Industry Repair Act (H.R. 906) follows multiple recent attempts by Congress to pass similar legislation.
The 2026 Detroit Auto Show will take place January 14–25, 2026, at Huntington Place.
In response to concerns over the compliance costs associated with 2025 carbon dioxide emissions standards in the European Union, the European Commission announced automakers will now have a three-year window to meet emissions targets in the bloc.
Autonomous Technologies and Vehicle Software
Automotive News provided an update on the outlook for artificial intelligence (AI) adoption in certain automotive applications.
A number of automakers are pursuing software and AI-based technology to differentiate their vehicles’ self-driving features, according to a report in The Wall Street Journal.
Stellantis debuted a Level 3 automated driving system, STLA AutoDrive 1.0, that is expected to facilitate hands-free and eyes-off functionality at speeds of up to 37 mph. The automaker did not provide a launch date for the technology. The Society of Automotive Engineers (SAE) defines Level 3 as autonomous technology that can drive the vehicle under limited conditions without human supervision.
Mercedes is currently the only automaker with a Level 3 system approved for use in the U.S., and the automaker’s Drive Pilot is only available in Nevada and California. Honda plans to launch Level 3 automated driving system in 2026, in the 0 Series in North America.
Uber began offering its customers driverless Waymo rides in Austin, Texas.
Electric Vehicles and Low Emissions Technology
China’s Xiaomi has a goal to deliver over 300,000 EVs in 2025, and this would more than double its deliveries last year. The consumer electronics giant sells nearly all its EVs within China.
China announced new export restrictions on tungsten and other specialty metals used in applications that include EV batteries.
TechCrunch analysis indicates there are currently 34 battery factories either planned, under construction, or operational in the U.S., up from two in 2019.
Stellantis’ Brampton Assembly plant in Ontario has been temporarily shut down as the automaker reevaluates plans for the next-generation electric Jeep Compass SUV that was scheduled to begin production in early 2026. This follows a decision by Ford to delay the launch of its next-generation gas and hybrid F-150 pickup trucks.
Canada’s zero-emission vehicle sales declined by nearly 30% in January 2025 from December 2024. This follows a halt in the federal rebate program, when funding was exhausted ahead of the original termination date of March 31, 2025.
The Trump administration directed federal buildings across the U.S. to shut off EV chargers, according to communications from the General Services Administration described by unidentified sources in Bloomberg.
Upstream’s 2025 Automotive and Smart Mobility Global Cybersecurity Report found that attacks involving EV chargers increased to 6% in 2024, from 4% in 2023. According to the report, 59% of the EV charging attacks in 2024 had the potential to impact millions of devices, including chargers, mobile apps, and vehicles.
Among the top 10 battery electric vehicle (BEV) models with the fewest reported problems in the J.D. Power 2025 U.S. Electric Vehicle Experience (EVX) Ownership Study, seven were in the mass market segment. BMW iX was rated highest overall and highest in the premium BEV segment, and the Hyundai IONIQ 6 ranked highest in the mass market BEV segment.
Consumer Reports’ Best Cars of the Year for 2025 includes six models with hybrid options and one fully electric model.
BEV sales in Europe increased 34% year-over-year in January 2025, while overall new-vehicle registrations fell by 2.5%, according to data from the European Automobile Manufacturers’ Association (ACEA). BEVs achieved a 15% market share in Europe, compared to 10.9% in January 2024.
Analysis by Julie Dautermann, Competitive Intelligence Analyst
Important Update on U.S. Tariffs Impacting Ontario Businesses
The United States has announced the imposition of new tariffs on Canadian goods, effective immediately as of March 4, 2025. These tariffs include a 25% surcharge on a wide range of products imported from Canada. The products include but are not limited to: steel and aluminum products; automotive parts and vehicles; agricultural products such as dairy, beef, and pork; consumer goods like appliances, electronics, and apparel; raw materials and chemicals.
In response to the announcement, Ontario Premier Doug Ford stated on March 4, 2025, that Ontario would implement a reciprocal 25% surcharge on all energy exported by Ontario to the United States. He stated further that it was expected by the Ontario government that the tariffs would have a significant impact on multiple industries including, in particular, manufacturing.
The Purpose and Potential Impact of the Tariffs
The U.S. government has stated that tariffs are intended to protect American industries and jobs over the long term. However, the immediate impact on businesses and customers will be significant. For Canadians, the tariffs are likely to increase the cost of exporting goods to the U.S., potentially leading to reduced demand for Canadian products, and increasing the overall price of goods for citizens. This could result in financial strain on businesses and may necessitate adjustments to the workforce.
Legal Considerations for Workforce Reduction
The imposition of tariffs will pose challenges for many businesses and the workforce. But as we saw with COVID-19, the fact that there are significant and sometimes societal level impacts on the economy, or a particular industry, will not automatically remove or lessen an employer’s obligations to their employees in Ontario. In this regard, some of the major legal considerations to keep in mind as you contemplate how to weather this storm and manage your workforce are as follows:
Compliance with Employment Standards: Ensure that any workforce reductions comply with Ontario’s Employment Standards Act, 2000 (ESA), including proper notice periods and severance pay requirements. There are options short of termination for temporary reductions in work, including layoffs, which may be available.
Human Rights Legislation: Be mindful of the Ontario Human Rights Code, ensuring that layoffs or terminations are not targeted towards any particular group of employees.
Collective Agreements: If your workforce is unionized, review your collective bargaining agreements to understand the rules and procedures for layoffs or terminations. Many collective agreements contain provisions which deal with temporary interruptions of work, voluntary leaves/layoffs, and notice and severance obligations.
Constructive Dismissal: Although there may be an avenue to lay off employees under the ESA, the common law in Ontario does not automatically allow an employer to layoff an employee. It is important to consider, and avoid, how your actions could be construed as a constructive dismissal which could lead to legal claims from employees.
Record Keeping: It is important that you maintain thorough documentation of the reasons for workforce reductions and the steps taken to comply with your legal obligations. This can be crucial in defending against potential legal claims.
It is recommended that you review your employment agreements, collective agreements, and policies, and formulate a plan now that will allow you to respond quickly to changing economic conditions over the coming weeks. As always, and prior to implementing major changes in your workplace, it is important that you obtain advice and comply with your legal obligations.
Cross-Border Catch-Up: Employer Considerations for International Secondments [Podcast]
In this episode of our Cross-Border Catch-Up podcast series, Shirin Aboujawde (New York) and Maya Barba (San Francisco) discuss an important global mobility topic: international secondments. Maya and Shirin focus on key issues for employers to consider, including immigration compliance, employment law considerations in both the home and host countries, as well as obligations related to income tax, social security, and corporate taxation.
President’s Remarks Keep the Pressure on Congress to Deliver on Taxes
President Trump used his 4 March 2025 address to the joint session of Congress to remind the American public and Congressional leaders that he is serious about adding his imprimatur to the tax code—and in the process adding to the pressure that Republican leadership and tax committee chairs already face as they attempt to extend the 2017 tax cuts using budget reconciliation.
The President highlighted several tax policies he has championed during his campaign and in the weeks following his inauguration. On the business side, he touted a reduced tax rate on US manufacturers and 100% full expensing retroactive to 20 January 2025, (Inauguration Day). In addition to making the 2017 Tax Cuts and Jobs Act tax cuts permanent, he listed no taxes on tips, overtime, social security, and deductibility of car loan interest if the vehicle is produced in the United States, for individuals. Notably, he did not mention his proposal to lift the cap on state and local taxes (SALT), an issue that continues to divide the Republican caucus.
Each of these proposals has a cost, increasing the amount of revenue offsets that the tax writers must find to pay for them, or increasing the deficit if they do not, assuming a current law baseline. Indeed, some of the President’s other proposals would be offsets, which he also did not mention during his remarks. These include scaling back on the ability of sports team owners to amortize the cost of player contracts and taxing carried interest as ordinary income.
Congressional Republicans are in the midst of the arcane budgetary practice called budget reconciliation to enact tax reform without having to negotiate with or rely on Democrats. Because it is, in fact, a budgetary maneuver, the cost of tax reforms will be restricted by budget reconciliation instructions included in a budget resolution. The House resolution limits a decrease in revenue to US$4.5 trillion—barely enough to extend the 2017 tax cuts let alone accommodate the President’s own priorities, which House members view as something that they must address, especially after the President highlighted them in his joint session remarks. They do have some flexibility since Mr. Trump has not been particularly specific about most details, but when they have no room to spare to begin with that may be a distinction without a difference. These challenges are exacerbated by extremely tight margins in the House, intraparty tensions about cuts in benefits, adding to the deficit, and other assumptions that are part of the budget reconciliation process.
Although he did not specifically mention taxes of foreign jurisdictions during his remarks about imposing reciprocal tariffs—as some of his executive orders do—the President may have indirectly implicated certain foreign taxes and information-reporting regimes when he referred to “non-monetary” tariffs. He gave Speaker Johnson permission to use tariff revenues to reduce the deficit or for “anything you want to;” perhaps to help pay for tax cuts in budget reconciliation.
The President’s remarks reinforced his commitment to his campaign and post-inaugural tax proposals. It will be up to his House and Senate counterparts to sharpen their pencils and their elbows to successfully figure out how to accommodate President Trump’s priorities as part of the budget reconciliation process.
A Summary of China’s Retaliation Actions Since The Trump Administration
This summary helps to navigate the various retaliation actions China has taken in the past 50 days after President Trump took office on January 20, 2025, to counter the US trade restrictions, including (i) imposing additional tariff on certain US origin products, (ii) adding 12 US companies to the Unreliable Entity List, (iii) control of export of certain precious minerals, (iv) adding 15 US companies to the export control related Controlled Party List and (v) launching anti-circumvention investigation against US fiber optic products.
1. Tarriffs
The following additional tariffs has been imposed on US origin products:
Effective Date
Tariffs on Goods Originated from the US
February 10, 2025
15% on coal and liquefied natural gas10% tariff on crude oil, agricultural machinery, large-displacement cars, and pickup trucks No reduction or exemption.
March 10, 2025
15% on chicken, wheat, corn and cotton10% on sorghum, soybeans, pork, beef, aquatic products, fruits, vegetables and dairy products No reduction or exemption. *Goods that were departed before March 10, 2025, and imported between March 10, 2025 and April 12, 2025 are not subject to the additional tariffs.
2. Unreliable Entity List
The Unreliable Entity List (UEL) is a blacklist administrated by the China Ministry of Commerce (MOFCOM) pursuant to the Regulation on Unreliable Entity List. Companies placed on the UEL may be subject to the following measures:
Restricted or prohibited from import or export from China
Restricted or prohibited from investing in China
Restricted or prohibited from entering into China
Its personnel may be denied of work permits or residency permits
Be imposed with a fine
Since January 20, 2025, China has added 12 companies to the UEL with the list and the applicable restriction as follows.
Effective Date
Unreliable Entity List
Restrictive Measures
February 4, 2025
PVH group* lllumina, Inc. Reasons of Addition – Discriminatory actions against Chinese companies. Termination of normal business with Chinese companies. *As previously reported, MOFCOM launched an investigation against PVH likely in connection with UFLPA. See our previous post. PVH Facing the Risk of Being Placed on China’s Unreliable Entities List | The Trade Practitioner
PVH – Specific restrictive measures to be announced. Illumina – Prohibited its exporting of gene sequencers to China.
March 4, 2025
TCOM, Limited PartnershipStick Rudder Enterprises LLCTeledyne Brown Engineering, Inc.Huntington Ingalls Industries Inc.S3 AeroDefenseCubic CorporationTextOreACT1 FederalExoveraPlanate Management Group. Reasons of addition were not announced.
Prohibited from import and export with China Prohibited from making new investment in China
3. Export Control of Certain Minerals
On March 4, 2025, MOFCOM released an announcement (10th Announcement) to control certain products relating to tungsten, tellurium, bismuth, molybdenum and indium. The 10th Announcement also updates and supplements the Dual-Use Items Control List that was published December 2024.
To facilitate businesses in making classification and assessment of products, the 10th Announcement includes the HS code of each item under control.
For more information about China’s dual-use control and control list, please refer to our previous article: China Releases Consolidated Dual – Use Items Control List | Publications | Insights & Events | Squire Patton Boggs.
4. Controlled Party List (管控名单)
The Controlled Party List (CPL) was first created under the Export Control Law and supplemented under the new Regulations on the Export Control of Dual Use Items that took effect on December 1, 2024. Companies on ECPL are not allowed to purchase any controlled items without a special approval from MOFCOM.
For more information about Controlled Party List, please refer to our previous article: China Released the First Comprehensive Dual-use Items Export Control Regulations | Publications | Insights & Events | Squire Patton Boggs
On March 4, 2025, MOFCOM, for the first time, used the tool of ECPL and added 15 companies to ECPL.
Effective Date
Controlled Party List
Restrictive Measures
March 4, 2025
LeidosGibbs&Cox, Inc.IP Video Market Info, Inc.Sourcemap, Inc.Skydio, Inc.Rapid Flight LLCRed Six SolutionsShield AI, Inc.HavocAINeros TechnologiesGroup WAerkomm Inc.General Atomics Aeronautical Systems, Inc.General Dynamics Land SystemsAero Vironment Reasons of Addition – Protect national security and interest, perform non-proliferation and other international obligations.
Export of dual-use items to the listed companies are prohibited All ongoing export must be stopped immediately If export is necessary under special circumstances, the exporter shall make an application to MOFCOM
5. Anti-circumvention Investigation
On March 4, 2024, MOFCOM announced an anti-circumvention investigation into certain cut-off shifted single-mode optical fiber, marking the first time that China has initiated such an investigation.
The investigation was initiated after receiving an application from Changfei Fiber Optic Cable Co. alleging suspected circumventing of China’s anti-dumping measures. China currently imposes a 33.3%-78.2% anti-dumping duty on US-originated fiber optic products.
The investigation may affect Corning Incorporated, OFS Fitel LLC, and Draka Communications Americas, Inc., and other related US exporters.
Comments Solicited on Michigan Research Credit Draft Notice
The Michigan Department of Treasury released a draft of a notice regarding the new research and development credit. The notice provides preliminary guidance to taxpayers on eligibility for the credit, how to calculate the unadjusted credit and make a tentative claim, how Treasury will notify taxpayers if total claims exceed the $100 million cap and must be prorated downward, and how taxpayers will claim the adjusted credit. The Department will accept comments on the draft through March 7, 2025. Please click here for Miller Canfield’s prior discussion of the credit.
Pass-Through Entities: The draft explains that the credit is available for a pass-through entity if the entity is subject to Michigan income tax withholding. This means that an employer located in Michigan or an out-of-state employer having employees in Michigan should evaluate its entitlement to the credit.
Related Federal Tax Disputes: Expenses that qualify for the credit are defined by federal tax law. The definition has been disputed and litigated in federal tax courts for almost the last four decades. It is unclear how such federal changes would impact the Michigan credit.
Departing Members of a Unitary Business Group: The draft does not explain the effect on the credit if a member departs a unitary business group that claimed the research credit. For federal purposes, the research credit history of the departing member is its attribute that would follow it. The departure would affect calculation of the base amount.
Refundability: The draft reminds taxpayers that the credit is refundable but not assignable.
Comment Period: Comments on the draft are due by March 7.
How Alcohol Exporters Can Use FDII and IC-DISC to Maximize Tax Savings
For US alcohol exporters – whether crafting bourbon, brewing craft beer, or bottling fine wines – selling to international markets is a significant opportunity for growth. Two US federal income tax regimes, the foreign-derived intangible income (FDII) deduction and the interest charge-domestic international sales corporation (IC-DISC), offer valuable ways to reduce tax liability and boost profits. Each has unique benefits and trade-offs, making them suited to different business needs. This blog post compares FDII and IC-DISC, helping alcohol exporters decide which tool – or combination – best fits their global ambitions.
Note that all discussions of tax rates are limited to US federal income tax. Additional state and local taxes and excise taxes may also apply.
FDII for Export Income
Introduced under the 2017 Tax Cuts and Jobs Act (TCJA), FDII incentivizes US C corporations to earn income from foreign sales while keeping operations stateside by providing a reduced effective tax rate on eligible export income derived from US-based corporations. It targets “intangible” income – profits exceeding a routine return on tangible assets – and applies a deduction directly on the exporter’s tax return.
How FDII Works
Eligible income comes from selling alcohol (e.g., whiskey or wine) to foreign buyers for use outside the United States.
The FDII deduction is 37.5% of qualifying income (dropping to 21.875% after 2025), reducing the effective corporate tax rate from 21% to 13.125% on that portion of income.
No separate entity is required. Claims are made on the existing C corporation’s Form 1120.
Example: A winery exporting $2 million in Pinot noir with $400,000 in net profit might qualify $300,000 as FDII. A 37.5% deduction ($112,500) lowers the tax from $63,000 to $39,375, saving $23,625.
IC-DISC: A Classic Deferral and Rate Reduction Tool
The IC-DISC, a legacy export incentive from the 1970s, operates as a separate “paper corporation” that earns commissions on export sales. It is available to any US business structure (e.g., C corporations, S corporations, and LLCs) and shifts income to shareholders at a lower tax rate or defers it entirely.
How IC-DISC Works
The exporter forms an IC-DISC and pays the entity a commission (up to 4% of export gross receipts or 50% of net export income).
The commission is deductible for the operating company, reducing its taxable income.
The IC-DISC pays no federal tax; instead, its income is distributed to shareholders as qualified dividends (taxed at 20% capital gains rate) or retained for deferral.
Example: A distillery owned by a closely held pass-through entity with $2 million in export sales and $400,000 in net profit pays a $200,000 commission to its IC-DISC. The operating company saves $74,000 in income tax (37%), while shareholders pay $47,600 in capital gains tax (20% plus 3.8% net investment income tax) on the dividend, netting a $27,600 savings.
Comparing Tax Benefits: FDII vs. IC-DISC
Combining FDII and IC-DISC?
For alcohol manufacturers and distributors, using both FDII and IC-DISC is possible. FDII reduces the corporate tax rate on export income, while an IC-DISC could shift additional income to shareholders at the capital gains rate or defer it.
Conclusion
FDII and IC-DISC are potent tools for alcohol exporters, each with distinct strengths. FDII delivers a lower tax rate with minimal effort, ideal for C corporations riding the wave of global demand for American products. IC-DISC offers flexibility, deferral, and broader eligibility, suiting a wider range of businesses with an eye on cash flow. As the craft beer, spirits, and wine industries expand abroad, choosing the right regime – or blending them – can uncork significant savings. Consult a tax professional to tailor the choice to your operation.
Final Regulations Issued for Certain Partnership Related Party Basis Adjustment Transactions
Introduction
On January 10, 2025, the Treasury Department and the U.S. Internal Revenue Service (the “IRS”) released final regulations (the “regulations”) classifying certain partnership related party basis adjustment transactions and substantially similar transactions as transactions of interest, a type of reportable transaction, which requires disclosure for the taxpayer and its material advisors. The regulations finalize proposed regulations issued in June 2024.
These regulations were issued to require disclosure of transactions that the IRS viewed as objectionable from a policy matter. These transactions often involve distributions of appreciated property from a partnership among related partners under circumstances where the partnership would get a stepped-up basis in its remaining property without any tax cost to the distributee partner or the distributee partner has a step up in basis without cost to the remaining related party partners. However, the regulations also apply to transactions that do not present the same tax policy issues. Although the regulations generally will not apply to funds (which generally do not make section 754 elections and generally avoid having a substantial basis reduction), they could apply to continuation funds, restructuring of funds and fund investments (including as a result of distributions in-kind) and liquidations of splitters owned by blockers and transfers among related parties of interests in funds. The regulations can in certain cases apply retroactively for six years (generally covering transactions occurring on or after January 1, 2019 for partnerships and partners with the calendar year as its tax year).
The regulations apply only to transactions where the total stepped-up basis increases from all transactions engaged in by the same partner or partnership during the taxable year (generally without netting for any basis adjustment that results in a basis decrease in the same transaction or another transaction), reduced by the gain recognized, if any, on which income tax is imposed, equal or exceed $10 million for transactions occurring after the “six-year lookback period” (as discussed below), and $25 million for transactions that occurred during the “six-year lookback period”.
Penalties may be up to $50,000/transaction/participant. Because the penalties are severe and the regulations apply retroactively for six years (and memories may be fuzzy), we expect that many taxpayers and material advisors will “protectively” report many past transactions that in fact are not covered by the regulations.
The regulations largely adopt the proposed regulations but include an increased threshold for basis increases, the limited six-year retroactive lookback window, additional time for reporting, certain exclusions for publicly traded partnerships, and a narrowed scope of reporting for transfers between related transferors and transferees. As described above, the threshold amount is $25 million for transactions occurring within the six-year lookback period (discussed below) and $10 million for transactions occurring after the six-year lookback period.
This blog explains the transactions that the regulations target, the common and innocuous transactions they also seem to cover, and the consequences if a taxpayer enters (or has entered into) one of the transactions.
Background
Under section 734(b)(1),[1] if (i) a partnership has a section 754 election in place, (ii) the partnership distributes property to a partner, and (iii) the adjusted basis of the distributed property immediately before the distribution exceeds the partner’s adjusted basis in its partnership interest, the partnership must increase its basis in its remaining assets. In this situation, because the redeemed partnership has “lost basis” in the distributed asset (and the redeemed partner has not increased its basis), the partnership is permitted to increase its basis in its remaining assets to avoid “double gain”.
Under section 732(b), if a partner receives appreciated assets in complete liquidation of the partner’s interest in a partnership, the partner’s basis in the assets is generally equal to the adjusted basis of the partner’s interest in the partnership, reduced by any money distributed in that same transaction.[2] Thus, if the partnership’s basis in the asset is less than the partner’s outside basis, the partner will receive the asset with a basis that is “stepped up” to the partnership’s outside basis. This basis step-up also avoids double gain.
Under section 732(d), if a partnership does not have a section 754 election in place, a partner acquires an interest in the partnership, and the partner receives a distribution of property within two years after the partner acquired the partnership interest, the partner can elect to adjust the basis in the distributed property to what it would have been had the section 754 election been in place.
Under section 743, if a partnership has a section 754 election in place, and a partnership interest is transferred, the partnership adjusts the basis of its assets so that it is equal to the transferee’s basis in its partnership interest.
Each of these adjustments are designed to avoid possible “double gain.” However, where the partners are related and a distributee partner will not be subject to tax with respect to the distributed property, or a transferor of a partnership interest will not be subject to tax on the transfer, these sections can be used to create tax basis for the remaining partners (or the transferee).
For example, assume that elderly parents own 50% of a real estate partnership and their children own the other 50%. The partners have a zero basis in their partnership interest, and the partnership has a zero basis in its property, but the property has high fair market value. The partnership has a section 754 election in place. The partnership borrows funds, uses those funds to purchase an asset and distributes the asset to the parents in redemption of the parents’ interest in the partnership. The parents will have a zero basis in the asset and, were the parents to sell the asset, they would have gain.[3] However, the parents will hold the asset and receive a stepped-up basis on their death. Under section 734(b)(1), the partnership will get a stepped-up basis in its real estate equal to the fair market value of the distributed asset over the parents’ outside basis (zero), which the partnership could depreciate or use to offset gain on the sale of the property.
While this transaction complies with the relevant tax rules, the IRS views the result as objectionable as a tax policy matter because the children will get a stepped-up basis but the parents will not pay tax (by reason of the stepped-up basis at death).
Transactions of Interest
The following transactions are discussed in the regulations as transactions of interest:
Situation 1 (Section 734(b)): A partnership distributes property to a person who is a related partner in a current or liquidating distribution, the partnership increases the basis of one or more of its remaining properties under section 734(b) and (c) and the $10 million or $25 million threshold is met. A related party in this situation means two or more direct partners of a partnership that are related (within the meaning of section 267(b) (without regard to section 267(c)(3)) or section 707(b)(1), generally a 50% test) immediately before or immediately after the relevant transaction.
Situation 2 (Section 732(b)): A partnership distributes property to a person who is a related partner in liquidation of the person’s partnership interest (or in complete liquidation of the partnership), the basis of one or more distributed properties in increased under section 732(b) and (c) and the $10 million or $25 million threshold is met. A related party in this situation means two or more direct partners of a partnership that are related (within the meaning of section 267(b) (without regard to section 267(c)(3)) or section 707(b)(1)) immediately before or immediately after the relevant transaction.
Situation 3 (Section 732(d)): A partnership distributes property to a person who is a related partner, the basis of one or more distributed properties is increased under section 732(d), the related partner acquired all or a portion of its interest in the partnership in a transaction that would be a transaction described in Situation 4 if the partnership had a section 754 election in effect for the year of the transfer and the $10 million or $25 million threshold is met. A related partner in this situation means two or more direct partners of a partnership that are related (within the meaning of section 267(b) (without regard to section 267(c)(3)) or section 707(b)(1)) immediately before or immediately after the relevant transaction.
Situation 4 (Section 743): A partner transfers an interest in a partnership to a related partner in a nonrecognition transaction, the basis of one or more partnership properties is increased under section 743(b)(1) or (c) of the Code and a predetermined threshold is met. A transferor and transferee of a partnership interest are related for purposes of this situation if they are related (within the meaning of section 267(b) (without regard to section 267(c)(3)) or section 707(b)(1)) to each other immediately before or immediately after the relevant transaction.
Substantially Similar Transactions
The Final Regulations also cover “substantially similar transactions.” These transactions include any transaction that is the same or substantially similar to one of the types of transactions described above. Transactions are generally “substantially similar” if they are expected to obtain the same or similar types of tax consequences or are factually similar. The regulations specifically provide that a transaction is substantially similar if the partners are not related, but one or more partners are “tax-indifferent parties” that facilitate an increase in the basis of partnership property by receiving a distribution of property from the partnership or having a share of a corresponding decrease to the basis of partnership property, and the $10 million or $25 million threshold is satisfied. The transfer of a partnership interest in a partnership with a section 754 election by a tax-indifferent party is not specifically listed as substantially similar. A tax-indifferent party is, in general, a person that is either not liable for federal income tax by reason of the person’s tax-exempt status or foreign status, or to which any gain that would have resulted from a transaction (that is described in Situation 1 or Situation 2 except that the partners are not related and one or more of the partners is a tax-indifferent party) if the property subject to the basis decrease in such transaction were sold immediately after such transaction would not result in federal income tax liability, and whose status as a tax-indifferent party is known or should be known to any other person that participates in the transaction or to a partner in a partnership that participates in such a transaction. As a result, a transaction would be substantially similar if it is described in Situations 1 and 2 above, except it involves a tax-indifferent party (instead of related partners) and that status was known or should have been known.
Common Transactions
While these regulations are focused on the transactions described above, given their broad scope, the regulations may apply to many basic transactions and impose significant compliance burdens. Certain common transactions that may be covered by the regulations include the following:
Liquidations of “splitter” partnerships: Assume a fund sets up a “splitter” partnership for non-U.S. investors. The partners of the partnership are a U.S. corporation and a non-U.S. corporation owned by the non-U.S. feeder. At the end of the fund, the partnership liquidates and distributes assets to the U.S. corporation. The U.S. corporation’s basis in the partnership exceeds the partnership’s basis in its assets by more than $10 million. In this case, the U.S. corporation will receive a stepped-up basis by more than the $10 million threshold, and the two corporate partners are related to each other because they are owned by the same investors. The distribution is a transaction of interest under the regulations.
Certain continuation fund transactions: An existing fund (“Fund 1”) is at the end of its life and one of its remaining assets is an interest in a partnership (the “Investment”). Fund 1’s basis in its interest in Investment exceeds its share of Investment’s basis in its assets. Investment has section 754 elections in place. Fund 1 contributes Investment to a new fund (“Fund 2”) in exchange for interests in Fund 2 and Fund 1 distributes Fund 2 interests to Fund 1’s partners in liquidation of Fund 1. Assume that more than 50% of the partners in Fund 1 “rollover” to Fund 2. This is a “Situation 2 (Section 732(b)) transaction”: Fund 1’s investors will receive a stepped-up basis, and they are “related” to Fund 2’s investors. If the basis step up exceeds to $10/$25 million threshold, the distribution will be a transaction of interest.
Liquidation of a partnership AIV in connection with a blocker sale: A fund forms a partnership AIV to purchase a partnership portfolio company. The AIV is owned more than 50% by a blocker corporation and the balance is owned by the fund. The AIV and the portfolio company make section 754 elections. Subsequently, a buyer agrees to purchase the blocker and the AIV’s interest in the portfolio company but does not wish to acquire the AIV. Therefore, the AIV distributes the portfolio company to the fund and the blocker in liquidation, and the buyer purchases the blocker and the remaining interests in the portfolio company. The AIV’s basis in the portfolio company with respect to the blocker is more than $10 million greater than the blocker’s basis in the AIV. Because the blocker owns more than 50% of the AIV, they are related parties. Therefore, the distribution is a transaction of interest.
Distribution by a partnership owned by consolidated group members: Assume two members of a consolidated group set up a partnership. The partnership distributes assets to one of the members. The recipient partner’s basis in the partnership exceeds the partnership’s basis in its assets by more than $10 million. In this case, the recipient partner will receive a stepped-up basis by more than the $10 million threshold, and the two corporate partners are related to each other because they are members of a consolidated group. The distribution is a transaction of interest under the regulations.
Distribution by an Up-REIT partnership to its REIT: Assume a REIT distributes an asset to its REIT member. Assume that the asset is a capital gain asset, and the REIT’s basis in the partnership exceeds the partnership’s basis in its assets by more than $10 million. Although not entirely clear, the REIT may be a tax-indifferent party (because a tax-indifferent party is a person that is not liable for federal income tax and a REIT that designates a distribution as a capital gain dividend is not subject to tax on the capital gains). If so, the distribution would be a transaction of interest under the regulations.
Lookback Rule
The regulations require a taxpayer to report a transaction that was entered into prior to the publication of guidance identifying a transaction as transaction of interest. Many transactions that could be covered by the new rules would cause completed, non-abusive transactions that were done in accordance with law existing at such time to be treated as transactions of interest. Under the regulations, a participant of a transaction of interest must provide the information described in the regulations if the transaction of interest occurred within a six-year lookback period. This lookback period means the seventy-two months immediately preceding the first month of the taxpayer’s most recent taxable year that began before the date of publication of the regulations in the Federal Register. Taxpayers have 180 days from the publication of the regulations to file disclosure statements for transactions of interest in open tax years for which a tax return has already been filed and that fall within the six-year lookback period. Material advisors have an additional 90 days beyond the regular reporting deadline (which is generally the last day of the month that follows the end of the calendar quarter in which the advisor became a material advisor with respect to the transaction) to file the disclosure statements for transactions made prior to the publication of the regulations.
[1] All references to section numbers are to the U.S. Internal Revenue Code of 1986, as amended.
[2] “Marketable securities” are generally treated as cash for these purposes unless the partnership is an “investment partnership” and the partner is an “eligible partner”. See sections 731(a), 731(b), and 731(c)(3)(A)(iii).
[3] Under section 752(a), the parents’ basis in the partnership would increase by their share of the borrowing and then decrease when they are relieved of it, so the liability would have no effect on them.
Rita N. Halabi & Maggie Livingstone also contributed to this article.
President Trump’s 4 March Tariffs Against Canada, Mexico, and China
Today, President Trump announced the implementation of new tariffs targeting imports from Canada, Mexico, and China, making good on his promise last month in the event measures were not taken by these countries to stem the tide of fentanyl and illegal migration into the United States.
Details of the Tariffs
The newly enacted tariffs are as follows:
CanadaA tariff of 25% will be imposed on all imports from Canada. This includes a broad range of goods, notably steel, aluminum, and various manufactured products, significantly impacting industries that rely on Canadian materials and components.
Mexico Similar to Canada, imports from Mexico will face a 25% tariff. This measure affects key sectors, including automotive parts, electronics, and agricultural products, posing challenges for businesses that have integrated supply chains spanning both countries.
ChinaAll imports from China will now be subject to a 20% tariff which will be in addition to the Section 301 and Section 232 tariffs. This figure reflects an increase of an additional 10% on top of the 10% duty that was already imposed on Chinese goods last month. This elevated rate applies to various goods, including electronics, machinery, and consumer products, signaling the administration’s intensified focus on addressing unfair trade practices and protecting American manufacturing.
Key Implications for Businesses
Supply Chain Disruptions: The tariffs may cause disruptions to existing supply chains. Companies should assess their current sourcing strategies to identify alternative suppliers and mitigate risks associated with higher costs and import delays.
Compliance and Regulatory Challenges: Importers must navigate new compliance requirements associated with the tariffs. Businesses should ensure they have the correct documentation for customs and be prepared for increased scrutiny regarding product classifications and valuations.
Potential for Retaliation: These tariff measures will likely lead to retaliatory actions from Canada, Mexico, and China, potentially impacting US exports to these markets. Companies should anticipate possible trade barriers that could disrupt their international operations.
Recommendations
Assess Impact on Cost Structures and Explore Supply Chain Alternatives: Consider diversifying your supplier base to include domestic sources or suppliers from other countries, reducing reliance on imports from Canada, Mexico, and China and minimizing exposure to tariffs.
Monitor Trade Developments: Stay informed about future regulatory changes and potential retaliatory measures from Canada, Mexico, and China that could further impact your business landscape and operations.
Conclusion
The implementation of tariffs against Canada, Mexico, and China represents the core tenants imbedded in the America First US Trade Policy with broad implications for businesses engaged in imports. Companies must quickly adapt to these changes to mitigate risks and seize potential opportunities.
Attention North Carolina Retailers: Time to Renew Your ABC Permits!
If your business sells alcohol in North Carolina, now is the time to renew or register your Alcoholic Beverage Control (ABC) retail permit.
Failure to complete this process on time could result in penalties, increased costs, or even permit revocation. Here’s what you need to know to stay compliant and keep your retail business running smoothly.
Important Renewal Deadlines
April 30, 2025: This is the final day for retail permittees to renew their ABC permits without facing any penalties. Be sure to complete the process before this date to avoid unnecessary fees.
Late Fees: Beginning this year, SL-2024-41 mandates that permittees who fail to renew by April 30 will incur a 25% late fee. This additional cost could affect your business’s bottom line, so be sure to complete the renewal process promptly.
June 1, 2025: If your renewal is not completed by this date, your permit will be permanently revoked. If this happens, you’ll need to reapply for a new permit, which could cause significant disruptions to your business and an inability to sell alcoholic beverages until the permits are reissued.
How to Renew
The renewal process is simple and can be done online through the ABC Permittee Portal. Pull up the retail PIN assigned to your account by the ABC Commission and visit the portal here: https://epay.abc.nc.gov/ to submit your renewal and make the necessary payments.