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