duty minimization solutions

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Duty Minimization Solutions


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Overview

The Rules

Foreign Trade Zone (FTZ)

Drawback

First Sale for Export

Free Trade Agreements

Tariff Engineering

Legislative Relief


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Mod Act and Responsibility

“Pursuant to the Customs Modernization Act, it is the responsibility of the importer of record to use “reasonable care” to enter, classify and value the goods and provide any other information necessary to enable the CBP to assess the correct duties, collect accurate statistics, and determine whether all other applicable legal requirements have been satisfied.

Under the authority of 19 U.S.C. § 1500(a), it is CBP’s responsibility to fix the final appraisement of merchandise in accordance with 19 U.S.C. § 1401a (as well as to fix the final classification and rate of duty applicable to the merchandise). This occurs after the importer of record, using reasonable care, has filed the declared value of the merchandise with the CBP.”

• Bona Fide Sales and Sales for Exportation to the United States, August 2005


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Foreign Trade Zones

Foreign-Trade Zones Act became law in 1934

Foreign Trade Zone (FTZ) program objectives are to:

– Promote investment in U.S.-based production and distribution facilities

– Grow and maintain U.S. employment

FTZ activity in 2013 grew 14% to $836 Billion and employed 390,000

– 68% related to U.S. production [Inputs: domestic (65%) foreign (35%)]

– 32% related to import/export distribution operations

Nearly 15% of all imports pass through FTZs, and ratio is growing

FTZs are located in all 50 states and Puerto Rico

Broad range of industries take advantage of the FTZ program

Use of the FTZ program saves participants billions of dollars per year!


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Foreign Trade Zones

The Swiss Army Knife of International Trade

Top 10 Reasons 1. Inverted Tariff Relief

2. Merchandise Processing Fee (MPF) Savings

3. Defer Payment of Duty/Taxes

4. Avoid Payment of Duty/Taxes on Exports

5. Defer, Reduce, or Avoid Duty on Imported Production Equipment

6. Simplify and Accelerate Drawback Claims

7. Delay or Avoid OGA Import Reporting/Release Requirements

8. Reduce Certain Property Taxes

9. Lower Inventory “Book” Value

10. Homeland Security Recognized Supply Chain “Best Practice”


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Merchandise Processing Fee (MPF) Savings

U.S. Customs and Border Protection (CBP) collects Merchandise Processing Fees (MPF) at the time import consumption entries are filed for imported merchandise, unless specifically excepted by law.

The MPF collection rate is .3464% of customs value, capped at $485 per consumption entry.

Consumption entries of NAFTA qualifying goods from Mexico and Canada are examples of imported merchandise that are not subject to MPF payments.


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MPF Savings Example: High-tech FTZ Distribution Center receives 4,000 import shipments per year with average shipment value of $140,000

$140,000 Average Shipment Value

X $4,000 Shipments Per Year

$560,000,000 Annual Import Value

X 0.3464% MPF Rate

$1,939,840 Normal Entry MPF Payable

– 25,220 FTZ Entry MPF Payable

$1,914,640 FTZ Annual MPF Savings


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Defer Payment of Duty/Taxes

U.S. FTZs are considered outside of the Customs Territory of the United States for import duty/tax/fee purposes. Technically, imported goods are “admitted” into FTZs without the payment of the above indirect taxes.

The indirect taxes are only due if the imported goods, or manufactured products that used the imported goods as production inputs, exit the FTZ destined for U.S. destinations and are entered for consumption.

As such, the payment of any indirect taxes are “deferred” until the actual time of the filing of an FTZ consumption entry.

The FTZ duty/tax deferral is calculated based on the time value of money for the average deferral time period.


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Deferral Savings Example: FTZ Distribution Center inventory turns 8 times a year. Total duty paid per year is $320,000. The company’s cost of capital is 10%.

$320,000 Annual Duty Payment

÷ 8 Inventory Turns Per Year

$40,000 Average Duty Deferred

X 10% Company Cost of Capital

$4,000 Duty Deferral Amount


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Drawback

The United States Customs and Border Protection (CBP) Agency collects approximately $32 billion annually of customs duty paid on imported goods entering the United States of America.

In addition to ordinary duties, CBP may also collect ad valorem Merchandise Processing Fees (MPF), Harbor Maintenance Fees (HMF) and Anti-dumping / Countervailing Duties (AD/CV) as well as certain Internal Revenue Taxes (IRT) that attach upon importation.


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Drawback

Certain of these customs duties, taxes and fees are subject to refund upon export or destruction through use of the CBP duty drawback program.

According to industry estimates and through discussions with industry personnel, roughly $2-3 billion of customs duties, taxes, and fees eligible for customs drawback goes unclaimed annually.


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Drawback

Other IRT excise taxes paid or payable on imports after entry are also eligible for export related refunds or credits that may go unclaimed.

Dollars are being left on the table due to a general lack of indirect tax planning by importers and exporters.


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Direct Manufacturing

Essentially, if a client imports raw materials or components and pays a duty on them, manufactures a product, or assembles these components and then exports the goods, we can make a claim for drawback on the duties paid when the raw materials or components were imported.


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Direct Manufacturing

We may claim any duties paid up to three years from the date of the file and expect a 99% refund plus interest.

The look back on drawback claims is 36 months – soon to be 60 months.


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Substitution Drawback

If both imported merchandise and any other merchandise of the same kind and quality are used to manufacture articles, some of which are exported or destroyed before use, then drawback not exceeding 99% of the duty which was paid on the imported merchandise may be payable on the exported or destroyed articles.


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Second Party Drawback

At its heart, duty drawback is a forensic exercise looking deep into the production activities of a company.

An often overlooked area of opportunity is the refunding of duties paid by the original importer and passed along to the eventual exporter.


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If you were to import raw materials and pay a duty on them, then sell them to an exporter, the exporter may file a claim for the original importer’s duty.

This claim will require the original importer’s documentation for submission. Because of the complexity of these claims, they are rarely pursued.


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This is an opportunity for you as a domestic sales entity as well.

If you know that you are selling the goods to someone who will eventually export them – try and broker a deal up front where you share in the exporter’s recovery via your import documentation.

Use your own drawback firm for the transaction.


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First Sale in the US

Because the value attributable to earlier sales may be lower than that assigned to later sales, use of the First Sale rule can lower the duties paid by importers.

Over the 12-month period investigated, from September 1, 2008, to August 31, 2009, a total of 23,520 unique importing entities reported using the First Sale rule. These account for 8.5% of all importing entities.

There are at least two ways to express the frequency of use. In terms of import value, of the $1.635 trillion in total U.S. imports over the period, $38.5 billion was imported using the First Sale rule, or about 2.4% of total U.S. imports. Another indication of frequency is that importing entities used the First Sale rule on average in 2.9 different months during the year, although no information is available on the average number of shipments imported using the rule.


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The First Thing We Need to Understand ...

Most imports are appraised based on their transaction (invoice) value: the price paid or payable for the goods in a sale for export, adjusted in accordance with required additions and deductions.

Many methods exist, however, to determine the customs value in addition to the transaction value of the imported goods.

– Identical goods,

– The transaction value of similar goods,

– The deductive or “sales minus” method,

– The computed residual method.


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Valuation and FSFE

The first sale rule was first confirmed through a series of court rulings. This was followed by the publication of a Treasury Decision on the requirements for establishing the application of the first sale rule.

That publication confirms that the transaction value is the primary method of appraising imported goods and is defined as “the price actually paid or payable for merchandise when sold for export to the United States,” plus specified additions.

This usually means the commercial invoice price paid by the importer on an FOB US basis.


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First Sale in Essence

Where a series of sales occurs during the process of exportation, US Customs and Border Protection (CBP) takes the position that the transaction value can be the price paid in the first sale, so long as:

– The first sale between the factory and the middleman is a bona fide sale

– The goods were demonstrably, clearly destined for the US at the time of the first sale

– The sale was made at arm’s length in the absence of any non-market influences that affect the legitimacy of the sales price


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Applying the FSFE Principal

No matter what anyone might tell you, CBP will NOT provide you with a ruling for FSFE.

You will need to create a picture of EACH VENDOR from purchase order through payment.

This is a forensics exercise – to the extreme.

You need to go through the exercise of sitting down with the folks at CBP in the port of import to let them see your backups and let them ask any questions.

Your Customs House Broker will be a key partner in this process.


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Free Trade Agreements

A brief review of our client’s import data usually reveals a number of instances where they are importing goods likely eligible for duty free entry under a free trade agreement.

The period you are able to review is limited to liquidation; however, these are usually forward looking opportunities.

A significant amount of information will be required to make the claim on past imports as well as future imports.

Customs will have a high standard for the claim.

Expect that the claim will be closely reviewed and the refund delayed.


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Tariff Engineering

Classification is equal parts science and art.

Merrit v. Walsh, 104 U.S. 694 – and SUGAR.

“So long as no deception is practiced, so long as the goods are truly invoiced and freely and honestly exposed to the officers of customs for their examination, no fraud is committed, no penalty is incurred.”

Does the product have a real commercial identity? (FEATHERS)

The trade is littered with creative changes that have been made to avoid duty payments.

The real solution stems from the idea of classifying goods far upstream, allowing the people in the trade function to make suggestions to avoid duty and really understanding the product.

All of the above points are never going to be achieved by having your broker classify the goods.


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Legislative Relief

The Miscellaneous Tariff Bill (MTB) is an annual piece of legislation passed by the Congress to temporarily suspend duty on specific products and make technical corrections to U.S. tariff laws.

Since 1982, Congress has passed these bills to boost the competitiveness of U.S. manufacturers by lowering the cost of imported inputs without harming domestic.

In the case of finished goods, MTBs similarly reduce costs for U.S. consumers where there is no domestic competition for production.

Tariff relief contained in MTBs is designed to be broadly available to any company that imports and pays duties pursuant to the specified tariff heading and to benefit downstream manufacturers, purchasers, and consumers.


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Legislative Relief

To be included in the MTB, a tariff modification (e.g., duty suspension or reduction) must be:

– non-controversial,

– cost under $500,000 per year,

– and be administrable.


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Legislative Relief

The Senate Finance Committee initiates the MTB process by issuing an invitation to Senators to introduce bills by a set deadline.

Bills should fall into one of the following categories:

– A new temporary duty suspension or duty reduction on one product,

– An extension of an existing temporary suspension or reduction on one product, OR

– A technical correction.

The provisions will then be created at the end of the process into a single Miscellaneous Tariff Bill.


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Legislative Relief

U.S. International Trade Commission

– Once bills are introduced, the ITC will seek information about the existence of domestic production.

– They will also determine whether a domestic producer objects to a bill.

– The ITC will seek information detailing the amount of tariff revenue that would no longer be collected upon entry into force of the bill in the present year and in future years.

– The ITC may also suggest technical changes to the product description in the bill.

– The information compiled by the ITC will be provided in the Congressional Bill Report, which will be posted on the ITC website.


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Legislative Relief

U.S. Department of Commerce:

– DOC will formulate an Administration position on each bill after determining whether domestic production exists and

whether any domestic producer opposes the bill

– DOC will also work with the Office of Management and Budget to coordinate interagency review and clearance of the Administration’s positions on the bills

– The DOC may suggest technical modifications to the bill as well


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Legislative Relief

U.S. Customs and Border Protection

– CBP will determine if a bill is administrable when goods are presented for importation.

– CBP might suggest technical changes to the product description.


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Legislative Relief

The State Department, USTR, and other agencies may also conduct a broad review of the bill.

Senate offices make themselves available to discuss the bills and then provide information to the agencies, when requested.

The Committee will request the Congressional Budget Office score of each bill to ensure that it complies with the MTB eligibility requirements.

After reviewing all of the information available the, Committee then determines if the bill meets all of the requirements.


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Contact Information

Pete Mento

Principal, Customs and Foreign Trade

[email protected]

781.359.3800

Dan Swartz

Director, Customs and Foreign Trade

[email protected]

415.593.0580

Stacy Hallon

Manager, Customs and Foreign Trade

[email protected]

972.934.0022

mailto:[email protected]



34 © 2015 Ryan, LLC. All rights reserved. All logos and trademarks are the property of their respective companies and are used with permission.

This document is presented by Ryan, LLC for general informational purposes only, and is not intended as specific or personalized recommendations or advice. The application and effect of certain laws can vary significantly based on specific facts, and professional advice of any nature should be sought

only from appropriate professional advisors. This document is not intended, and shall not be deemed, to constitute legal, accounting or other professional advice.

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