More than ever, effectively managing global trade requirements and costs is crucial to obtaining and maintaining a competitive advantage.
Why should you consider duty refunds?
Moving goods across borders is complex and can be costly. Each time a good is imported, it is potentially subject to customs duty, depending on the type of good and its country of origin. Duties are ultimately a bottom-line cost, but they can be reduced, deferred or eliminated through various mechanisms. More than ever, effectively managing global trade requirements and costs is crucial to obtaining and maintaining a competitive advantage. This article will focus on duty refund opportunities.
Free trade agreements
Effectively identifying and using free trade agreements (FTAs) can significantly reduce — or even eliminate — duty costs.
- Are you utilizing FTAs?
With over 400 trade agreements in force, optimizing utilization has become a primary focus of many importers. Trade agreements may be bilateral or multilateral, and each has distinct rules.
The FTA climate is changing, as seen with the US withdrawal from the Trans-Pacific Partnership and the potential renegotiation of the North American Free Trade Agreement (NAFTA). Such moves may signal a shift away from large multilateral agreements to more bilateral agreements. Companies should be mindful of how potential changes might affect their overall duty impact.
Effectively identifying and using FTAs can significantly reduce — or even eliminate — duty costs. The benefits of FTAs are optimized when claims for preferential treatment are made at the time of entry. But importers should remember that many agreements permit refunds for a certain time after entry.
- The US rules for post-importation claims under certain agreements
Historically, US importers have used various post-importation mechanisms to claim duty preferences under FTAs. These include post entry amendments (PEAs), post summary corrections (PSCs), protests and post-importation claims under 19 USC §1520(d). However, on 11 August 2014, U.S. Customs and Border Protection (CBP) released a guidance memorandum1 on “post-importation preference claims.”
The CBP determined that if a preference program does not have a statutory post-importation mechanism (referenced in 19 USC §1520(d)), such as the US-Australia FTA or US-Israel FTA, importers cannot claim post-importation duty preferences through protests. In essence, with certain trade agreements, post-importation claims cannot be made after liquidation, limiting the time frame. (Liquidation is the final computation of duties or drawback accruing on an entry.)
According to the guidance, if FTAs2 contain a statutory post-importation provision, such as NAFTA and the US-Korea FTA, a 1520(d) post-importation claim remains the “only” appropriate mechanism for seeking preference after importation. If a good would have qualified as an originating good under NAFTA or the US-Korea FTA when it was imported, the importer can file a 1520(d) claim within one year of the importation date.
For FTAs3 that do not have a statutory post-importation provision, the CBP continued to allow unliquidated entries to be amended with a PEA or PSC prior to liquidation.
1 ”Post-importation Claims for Preferential Tariff Treatment,” U.S. Customs and Border Protection, https://www.cbp.gov/sites/default/files/documents/CSMS%20message_Post%20entry%20preference%20claims.pdf, accessed on 8 March 2017.
2 These FTAs contain a statutory post-importation provision: CAFTA-DR, Chile FTA, Colombia TPA, Korea FTA, NAFTA, Oman FTA, Panama TPA and Peru TPA.
3 These FTAs do not contain a statutory post-importation provision: Australia FTA, Bahrain FTA, Israel FTA, Jordan FTA, Morocco FTA and Singapore FTA, as well as other preference programs, including AGOA, CBERA, CBTPA, Civil Aircraft Agreement, GSP, Insular Possessions, Uruguay Round Concessions on Intermediate Chemicals for Dyes, and Pharmaceutical Products Agreement.
- Do recent changes to the rules help your company?
On 28 February 2017, the CBP amended the 2014 determination by issuing new guidance. The agency will permit the use of the protest mechanism to submit initial post-importation preference claims if the preference programs do not specifically provide for claims under the statutory post-importation mechanism of 19 USC §1520(d). Thus, companies have more time to pursue duty refunds under FTAs.
- Trends in FTA management
Companies are increasingly moving to a shared services approach for FTA management, especially because rules of origin and refund mechanisms tend to be similar across agreements. Developing centralized knowledge in areas such as origin management makes processes more efficient and allows executives to focus on more strategic decisions — critical in today’s rapidly changing environment.
The use of data can also help identify missed FTA opportunities. In the right circumstances, claims can be made after entry if the correct documentation (such as a certificate of origin) is available. Companies can also use their trade data to identify opportunities for future FTA preference.
- Can you participate in a duty drawback program?
Duty drawback is a refund mechanism used globally, typically to promote job creation, manufacturing and export. The specific opportunities and requirements vary by jurisdiction.
Generally, duty drawback programs permit refunds of customs duties, fees and taxes paid in connection with the importation of articles when those articles, or like-kind articles, are exported or destroyed (subject to certain conditions). Exports may include manufactured products in which imported articles, or like-kind articles, were used as a raw material or component.
In the United States, the use of drawback dates to the Tariff Act of 1789, but the program has recently undergone significant reform. In February 2016, Congress passed HR 644, The Trade Facilitation and Trade Enforcement Act of 2015. It includes a broad slate of customs and trade reforms for which the CBP and Congress will jointly establish priorities and performance standards. The main implications of the act are detailed below.
- Substitution based on the Harmonized Tariff Schedule of the United States (HTSUS) or the Department of Commerce Schedule B Statistical Classification (Schedule B). Under US law before the act, substitution manufacturing drawback claims were permitted on amounts paid upon importation of merchandise when substituted merchandise “of the same kind or quality” was used in a manufacturing process. Substitution unused-merchandise claims were permitted when the imported merchandise and the merchandise exported or destroyed were “commercially interchangeable.” The act simplifies these fact-intensive analyses by allowing substitution between articles with the same eight-digit HTSUS classification.
- Expanded and simplified time frame. Under current drawback provisions, an imported or substituted product must be used in a manufacturing process and must be exported or destroyed within three years of the importation date. The manufacturing or unused-merchandise drawback claim must be filed within three years of that exportation or destruction. The act simplifies this time frame by providing a single date from which time is measured — the importation date. And it expands the window for all drawback claims to five years from the importation date.
- Inclusion of taxes and fees in manufacturing drawback claims. Under current rules, many claims, including for manufacturing drawback, are limited to 99% of only the duties paid on the imported merchandise. Additional taxes and fees recoverable under substitution drawback were not available for manufacturing claims. The act provides uniformity in authorizing drawback for 99% of duties, fees and taxes paid for all types of drawback.
- Anti-abuse limitation on refunds. The act includes a new provision that limits drawback to the lesser of the actual duties, fees and taxes paid on import, or the duties, fees and taxes that would have been paid if the exported article were imported. As a result, importers that import a high-value item and export a low-value item with the same HTSUS classification generally will have drawback claims limited based on the lower value.
- Relaxation of transfer documentation requirements. Current rules require a certificate of delivery to be provided when an importer transfers merchandise to a manufacturer or claimant who ultimately relied on the merchandise in submitting a drawback claim. Claimants are required to submit these certificates as part of their claims. The act removes this certificate requirement, stating that records kept in the normal course of business will be sufficient evidence of a transfer.
Duty drawback reform example: automobile industry
Who will benefit?
Companies that may benefit from the new duty drawback rules include:
- Manufacturers of similar products under different brands
- Importers and exporters of products subject to excise tax
- Commodities traders with international operations
- When will the new provisions take effect?
The provisions were enacted on 24 February 2016, with a notable caveat: no claims can be filed under the new provisions until two years after enactment. The delay is intended to allow time to develop the ability to file drawback claims within the Automated Commercial Environment. Once this delay period passes — on 24 February 2018 — claimants can take advantage of the expanded time frame described above and file drawback claims on imports that occurred after 24 February 2013.
- Who will benefit?
Companies that will benefit from the new rules include:
- Manufacturers of similar products under different brands in the US and foreign locations
- Importers and exporters of products subject to excise tax
- Commodities traders with international operations
- What has changed?
Are you properly classifying your products?
The Harmonized Commodity Description and Coding System (HS) is an internationally recognized and standardized system for classifying traded goods that is administered through the World Customs Organization (WCO). The underlying idea is for all member countries to use the same system to classify goods, including the same descriptive categories, terms and six-digit codes. The HS terms down to the six-digit level are the same for all member countries. At the 8- or 10-digit level, classification is not standardized across countries’ tariff schedules.
Correct classification is necessary to properly assess duties. In most countries, incorrect classification can result not only in penalties for the importer but also in overpayment or underpayment of duties. With average rates of 2% to 3%, duties are not an insignificant cost and can directly affect the company’s bottom line. Compliance objectives aside, correcting classification errors can be worthwhile, particularly in jurisdictions where an importer can obtain a refund for overpaid duties.
In the United States, PSCs are available to correct classification codes and obtain refunds of overpayments, as long as the entry has not been liquidated. Once liquidation occurs, the computations are considered “final,” and the entry is closed from a duty payment perspective. Classification, rate and calculated duty may also be protested. A customs protest must be filed within 180 days of liquidation. Not all countries provide the same mechanisms or even allow duty refunds. To the extent classification errors are detected, companies should consider available corrective mechanisms. In cases where HTS codes with lower duty rates are deemed correct, the importer may be able to improve its bottom line!
Are your products subject to transfer pricing adjustments?
Refund opportunities may be available for companies importing from related parties where transfer pricing adjustments occur. These adjustments may change product pricing. A downward adjustment may result in a duty refund, while an upward adjustment will require additional payment of duties.
The United States offers mechanisms for companies to obtain refunds in related-party transactions that are subject to downward transfer pricing adjustments, assuming certain criteria are met. In 2012, the CBP adopted a policy that will accept transfer pricing adjustments under specific conditions. The policy broadens the CBP’s interpretation of what constitutes a formula for the purposes of using “transaction value.” The policy specifically allows post-importation customs value adjustments made under a transfer pricing policy, provided that:
1. The transfer pricing policy meets specific criteria stated in the CBP announcement.
2. The importer can demonstrate that the transfer pricing policy results in arm’s-length pricing under customs-specific tests.
This policy has enabled importers significantly greater flexibility when making periodic adjustments to transfer prices after importation, including clearly allowing refunds of customs duties when prices are adjusted downward.
The policy outlines actions that importers of related-party products should take to benefit from the new policy.
- Apply for the CBP Reconciliation Program
CBP specified that the proposal was intended to apply to importers using the Reconciliation Program. Reconciliation allows an importer to declare a provisional value at import, then adjust to the final value up to 21 months later. Importers must be approved to use the reconciliation program. The ruling also states that if importers claim adjustments outside of reconciliation, “they are expected to demonstrate at the time of entry that the price is arm’s length and to provide supporting documentation.”
- Supplement transfer pricing policies
Importers must satisfy five criteria for transfer pricing adjustments to be considered formula-based pricing eligible for transaction value. Several of these criteria must be present in current transfer pricing policy (e.g., “how the transfer price and any adjustments are determined with respect to all products covered by the transfer pricing policy for which the value is to be adjusted”). Transfer pricing policies should be adjusted to clearly meet the customs criteria.
- Prepare customs-specific supporting documentation
The 2012 policy dealt with reporting adjustments made under transfer prices that are otherwise acceptable for customs purposes. It did not mean that the CBP would accept transfer pricing studies as support for customs value. Because the proposed policy will make adjustments easier, including those that result in customs refunds, it is more important than ever for taxpayers to supplement transfer pricing studies with customs-specific supporting documentation.
Spotlight on Mexico — customs duty refunds and duty drawback
What are they?
Customs duties are indirect taxes paid on the importation or exportation of goods based on their customs or commercial value.
Amounts paid in excess can be requested as refunds or offset against future payable duties.
Furthermore, the duty drawback program allows Mexican companies to recover the general import duty paid on importation of:
- Inputs, raw materials, components, fuel and other materials incorporated into an exported product
- Goods returned in the same condition as imported
- Repaired goods
Who is affected?
Only Mexican entities are affected because they are generally the only ones allowed to import or export goods.
What are the impacts?
Improper management of customs duties or failure to request refunds could result in higher costs in the operation because duties are non-cash-flow taxes and are not creditable.
What are the procedures?
Importers or exporters should file the refund request with the tax authorities, along with the customs declaration – and any amendments – and the corresponding certificate of origin (if applicable). The request can be filed through the tax authorities’ website or physically with the corresponding administration.
To offset amounts paid in excess, importers should attach this information to the customs declaration as applicable:
- Taxes and fees offset notice
- The original customs declaration that generated the favorable balance
- The writ, withdrawal or amendment customs declaration
- The certificate of origin or invoice declaration
- Corresponding permits from the Ministry of Economy
- The customs authorities’ resolution on the tariff classification
To apply for the duty drawback program, companies should analyze the origin of the imported goods, the use of preferential duty rates, the destination country of exported goods and, in some cases, the amount of duties paid in the destination country for the importation of the Mexican goods.
To qualify for the program, goods must be exported within a year after they were originally imported, and the official request must be filed with the Ministry of Economy within 90 working days from the date of exportation.
The Ministry of Economy will issue a final resolution within 10 working days. If accepted, the request will be sent to the Ministry of Finance and Public Credit so that it may refund the corresponding amount.