TAIWAN CUSTOMS SLOW TO CHANGE THERMISTOR

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 003982 SIPDIS STATE PASS AIT/W AND USTR STATE FOR EAP/TC, USTR FOR WINTER AND WINELAND USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT TREASURY FOR OASIA/LMOGHTADER E.O. 12958: DECL: 06/03/2020 TAGS: ETRD TW SUBJECT: TAIWAN CUSTOMS SLOW TO CHANGE THERMISTOR CLASSIFICATION REF: A. 04 TAIPEI 3728 ¶B. 04 SECSTATE 243653 Classified By: AIT Acting Director David Keegan, REASON 1.5 (b),(d) ¶1. (SBU) Summary: The Tyco thermistor case remains unresolved. In making a revised proposal to Customs September 20, Tyco reps discovered that Customs has already forwarded the bulk of pending cases to the court system, making a negotiated settlement more difficult. The Ministries of Finance and Economic Affairs were unaware of Customs' actions and MOEA has promised to further discuss the case with Customs and seek an early resolution of the dispute. Customs handling of the Tyco case is another example of Taiwan regulatory agencies taking regulatory actions that are out of step with international norms. End Summary. Tyco Thermistors -------------- ¶2. (SBU) Representatives of Tyco Corporation visited Taiwan September 19-20 to seek a settlement with Taiwan Customs over the ongoing dispute about the appropriate classification of thermistors imported into Taiwan by Tyco. Chief Financial Officer Jeff Harrison and legal advisor Bob Cassidy came from the U.S., while Borchee Liaw, Tyco Electronics Controller for Asia Pacific Global Communications and Computer and Consumer Electronics and Doris Tseng, Taiwan Controller for Tyco, joined them from Tyco offices in Taipei. AIT/Econ met with the four Tyco reps on September 19 subsequent to their meeting with Huang Chih-peng, Director General of the Board of Foreign Trade (BOFT) and prior to their meeting with Customs on September 20. AIT/Econ also participated in a dinner hosted by Bob Cassidy on September 20. Cassidy used the dinner to allow Tyco to brief Ministry of Economic Affairs Vice Minister Steve Chen (Ruey-long) and BOFT's Huang on the outcome of a September 21 meeting with Customs and to seek their advice on how to proceed in this case. Background -------------- ¶3. (SBU) Tyco has a long-standing dispute with Customs on the proper classification of its thermistors involving more than a thousand individual cases under various stages of consideration ranging from administrative review by Customs to final rulings by Taiwan courts. Tyco has been insisting that the product should be classified under Harmonized System Code 8533 and thus eligible for duty-free importation under the terms of the WTO Information Technology Agreement. Taiwan Customs, on the other hand, has been insisting that the product falls under HS 8536 and thus is subject to an import duty. Tyco has worked with USG agencies to seek a definitive ruling on the appropriate classification for this product in the World Customs Organization. In April 2004, we understand that the relevant WCO Committee determined that Tyco's product should be classified under HS 8533 (the duty-free category) and in the fall of 2004, the WCO reaffirmed this decision. According to Tyco representatives, in April 2005 Taiwan Ministry of Finance officials indicated that Taiwan would formally reclassify the products into the duty-free category. As of September 23, 2005, this reclassification has yet to take place. ¶4. (SBU) In April 2005, Tyco's Harrison and Cassidy visited Taipei to discuss settlement of the outstanding cases. They held discussions on principles of a settlement with Ministry of Finance and Customs officials as well as BOFT's Huang. Following the discussions, Tyco provided a written settlement proposal to Customs in April, which Customs reviewed and eventually rejected in August. The accumulated duty and associated penalty charges could potentially run in the US$ millions. On September 20, 2005 Harrison told AIT, and VM Chen, that Tyco would like to reach a negotiated settlement in early December before it issues its financial report for the fiscal year. Harrison said that Tyco wishes to eliminate the uncertainty created by the ongoing dispute and would like to avoid the need to insert a footnote explaining the dispute in its financial statements. Customs Remains Unresponsive -------------- ¶5. (SBU) Cassidy described to VM Chen, BOFT's Huang and AIT/T the results of Tyco's meeting with Customs officials on September 20. He said that Tyco made a revised settlement proposal to Customs based on its understanding of the distribution of cases between the courts and Customs. Tyco also believed that Taiwan's informal acknowledgment that it would be reclassifying Tyco's product into the duty-free category would help promote settlement of the case. Cassidy said that he and Harrison made a revised proposal to Customs noting that Tyco was prepared to pay duties and penalties for cases that had been decided by the courts and that were now pending before the court while also seeking dismissal of cases now under Customs review. Customs responded that it has accelerated its administrative review of the cases and forwarded the vast majority of the cases to the court system, leaving only a small proportion of the cases under its purview. Cassidy noted that this move seriously limits the latitude for Tyco to negotiate a settlement. MOF Surprised By Customs' Action -------------- ¶6. (SBU) The Ministry of Finance sent a representative, Lilian Hsieh, to the Tyco/Customs meeting on September 20, according to Cassidy. Hsieh and the Customs officials, Cassidy said, engaged in a discussion in Chinese about the accelerated process. Tyco's Liaw and Tseng later told Cassidy that Hsieh had been unaware of the accelerated review of Tyco cases by Customs. Further, Cassidy said that he understood from Liaw and Tseng that it is not clear when Taiwan will formally reclassify the products into the duty-free category. Hsieh had earlier told Cassidy that MOF was prepared to issue the reclassification and that she had expected it to occur on September 16, 19 or 20. However, in Hsieh's side conversation at Customs on September 20, it turned out that Customs has yet to provide the required paperwork to MOF to implement the reclassification. MOEA Promises Swift Action -------------- ¶7. (C) VM Chen expressed some surprise at Cassidy's report of the meeting with Customs. He promised to call the Director General of Customs, Yu Shaw-wu, to ask about the situation. Chen went on to say that it would look bad for the Taiwan government to not get this case settled soon. He indicated that he would like to see the case resolved well before Harrison's goal of early December. Chen also noted that he viewed Customs "as quite conservative" in its outlook. He said that he had worked extensively with Customs in 2004 on this issue in an effort to convince it that Customs would not bear responsibility for reclassifying the thermistors into another category. (Comment: Chen's remarks suggest that Customs may be concerned that reclassifying the thermistors into a duty-free category would reduce Taiwan's duty revenue and that Customs would be blamed for contributing to this loss of revenue. End Comment.) Comment -------------- ¶8. (C) Both Chen and Huang appeared to be as surprised as AIT/T at Cassidy's description of the events. It is difficult to view Customs' moves as anything but deliberate attempts to distance itself from responsibility for the Tyco cases by forwarding them to the court system for final adjudication. Tyco has made at least one written proposal to Taiwan, purportedly in the range of millions of US$, and MOF and Customs avoided responding to it from April of this year until August. Cassidy contacted AIT in June and July requesting assistance in getting a response to its April settlement proposal. In each case, BOFT assured us that MOF and Customs were reviewing the proposal and BOFT voiced optimism that Tyco's proposal would be accepted. Tyco has now made the effort to increase its offer through a revised proposal, but Customs has apparently used its long deliberation time to move cases from its jurisdiction to the courts and thus reduce the scope for a negotiated settlement. ¶9. (C) In addition to the financial uncertainty that this case poses for Tyco, this issue is one more example of the limited, Taiwan-centric view of events that some Taiwan regulatory agencies seem to take. Customs took a classification stand long ago that turned out to be markedly different from the international norm and has staunchly resisted any efforts to reclassify the product or resolve the issue. Other Taiwan agencies have imposed regulatory actions that are out of step with international norms. In 2004, the Bureau of Standards, Meteorology and Inspections imposed new Taiwan-unique requirements for the importation of home appliances; the Department of Transportation imposed unique requirements on imported motorcycles (heat shields, among others); the Department of Health imposed a medical device registration requirement in December 2004 when it was unprepared to process the paperwork that would be generated; in fall 2004, Taiwan's Environmental Protection Administration imposed new packaging requirements for imported goods without notifying the WTO or consulting the foreign business community; and the list can go on. US importers are stuck trying to comply with regulatory orders that are poorly thought out and agencies are often reluctant to admit any kind of error on their part. The companies then seek AIT assistance and support from other Taiwan agencies to modify the rules to conform to international standards. ¶10. (C) We take some comfort in VM Chen's commitment to continue to engage with Customs on behalf of Tyco. Chen has proved in the past to be an effective problem solver. We have no doubt that he will exert himself in the Tyco case. Nevertheless, we would prefer to see a Taiwan bureaucracy more willing to conduct business based on rule-based trade regulations rather than personal connections and pressure tactics. We have set up a lunch with BOFT's Huang for October 4 and will follow up on the Tyco case then and also with VM Chen. Absent contrary instructions from Washington Agencies, we will also raise the issue with Customs DG Yu once we know that Chen has spoken with him. End Comment. KEEGAN