duty drawback changes - aiag

Duty Drawback Changes

Michael V. Cerny

Cerny Associates, PC

[email protected]

Cerny

Associates, P.C.

History

US. Customs Law - Duty Refunds

Tariff Act of 1789

Fixed Policy to Assist U.S. Business

Drawback’s Importance

• It enables manufacturers and exporters to better compete

• Allows US companies to factor in cost savings of drawback

• It is the last remaining export promotion program that is sanctioned by the World Trade Organization/GATT.

Definitions

Drawback is a refund of Customs duties paid on imported merchandise which is used to manufacture articles that are subsequently exported from the United States…or

Definitions

…a refund of duties paid on imported merchandise which is exported unused.

Definitions

Destruction - Drawback is allowed on imported merchandise, finished articles, or rejected merchandise which is destroyed under Customs supervision. Such destruction can be used to satisfy the requirement of exportation.

Duties and Fees Eligible

• Ad Valorem

• Specific

• Marking

• Voluntary Tenders

• Harbor Maintenance Fee

• Merchandise Processing Fees (unused merchandise claims only under current law)

Duties & Fees Not Eligible

• Anti-dumping Duties

• Countervailing Duties

Types of Duty Drawback

• Manufacturing 1313(a) and (b)

• Unused Merchandise 1313 (j)(1) and (2)

• Rejected Merchandise 1313 (c)

Manufacturing Direct Identification Drawback

•Import & Pay Duty

•Manufacture

•Export

Manufacturing Substitution Drawback


•Manufacture

•Export Imported product is of the

Same Kind and Quality as the

product used in production



•Manufacture

•Export Import

Used



•Manufacture

•Export

Unused Merchandise Drawback

Direct Identification

• Import & pay duty

• Specific or alternate identification method

• Perform allowable operations only

• Export or destroy

Unused Merchandise Drawback

Substitution

• Import & pay duty

• Substitute commercially interchangeable merchandise

• Perform allowable operations only

• Export or destroy

Commercial Interchangeability

Criteria Considered

• Government & Industry Standards

• Harmonized Tariff Classification

• Part Numbers

• Values

Who can file for drawback?

By law it is the exporter who is entitled to file for drawback, however the exporter can endorse those rights back to the manufacturer or importer.

Under current law, importers transfer rights to claim drawback today to exporters via Certificates of Delivery (CD)

Manufacturers transfer rights to claim drawback via Certificates of Manufacture and Delivery (CM&D)

Importer Manufacturer Exporter

Endorse

rights

back

CD

CM

&DImporter Exporter

CD

Endorse

rights

back

Hallmarks of the Drawback Changes

– Products are considered the same if they have the same 8-digit HTSUS

– Streamline processes- electronic filing

– Unified and simpler time frame for claiming drawback

– Use of business records to support drawback requirements

– Reduced cost for the trade and administrative burden for CBP- use of average line item

Effective Date of the Changes

• Subsection (q) of the new law states that the amendments made by Section 906 take effect

• On the date of enactment (February 24, 2016), and

• “apply to drawback filed on or after the date that is 2 years after such date of enactment”- February 24, 2018

• However, there is a transition rule which says that for one year after the date that filings can be made under the new law, drawback claims can be filed under the new law (1313 as amended) or the old law (1313 prior to the amendments)

• Application of the new law is not subject to the operation of ACE


Current

• Same kind and quality

• Receipt and use requirements

• Rulings

• CDs and CM&Ds required

Future

• 8-digit HTS number (aligns to new ACE system, no need to trace “other”)

• No tracking of receipt date and broader time limit requirement on use

• Reduced rulings

• Need to show business records for transfer of merchandise (directly or indirectly from importer)

Current

• Bills of Material (BOM) not required by statute to be submitted with claim

• BOM calculation at unit level

Future

• BOM required to be submitted with substitution manufacturing claims

• BOM calculation at HTS level as value of imported designated and substituted merchandise (aligns with ACE records that are required)


Manufacturing Drawback Calculations

1313(a) & 1313(b) calculations are now found in 1313(l)

– For manufacturing direct identification, will be equal to 99% of duties, taxes, and fees paid on the imported merchandise

– CBP can issue regulations paying drawback based upon the average per unit on the entry summary line item

– Can now collect taxes and fees


“Lesser of” Calculation

• “The regulations required by subparagraph (A) for determining the calculation of amounts refunded as drawback under this section shall provide for a refund of equal to 99 percent of the duties, taxes, and fees paid on the imported merchandise incorporated into an article that is exported or destroyed….except that where there is substitution of the imported merchandise, then-

– i. in the case of an article that is exported, the amount of the refund shall be equal to 99 percent of the lesser of-

• (I) the amount of duties, taxes, and fees paid with respect to the imported merchandise; or

• (II) the amount of duties, taxes, and fees that would apply to the substituted merchandise if the substituted merchandise were imported;”

– AND

• If destruction only, reduced by the value of the materials recovered during destruction

Import Manufacture Export

Current 1313(a)

Current 1313(b)

Import

Received @ Plant

Used in Manufacturing

Article Manufactured

Export

5 years

3 years

5 y

ears

3 y

ears

Manufacturing Drawback Timeframes

Current

Claim

3 years

Claim3 y

ears

Import

Manufacture

Export

File Claim

5 years

Future 1313(a) and (b)

Manufacturing Drawback Timeframes

New

Substitution Unused Merchandise Drawback

1313(j)(2)

• Standard for substitution is 8-digit HTS, not commercial interchangeability

• Limitations if your 8-digit HTS starts with “other”

• 5 years import to claim

• No more Certificates of Delivery

• New rules for calculating drawback amount

• Consider value of exported/destroyed items

• Drawback for recovered materials

1313(j)(2) Drawback

What does 8-digit substitution mean?

• It means just that, same 8-digit HTS in and out

• Schedule B can be used at export, and it could be broader- “without regard to whether the Schedule B number corresponds to more than one 8-digit HTS subheading”

• Your Entry Summary could have an incorrect HTS, but still qualify for drawback (PEAs, Protests, Disclosures, Rulings, Court Cases)

• Previous Commercial Interchangeability Determinations and CI rulings are irrelevant

• No need for CIDs- obtain a classification ruling

1313(j)(2) Drawback

8-digit substitution and “other” categories

• What is this about? Basket Provisions

• You may not be able to use substitution if your 8-digit HTS starts with the word “other”

• However, you can use substitution if your 8-digit HTS has 10 digit breakouts and you product’s breakout doesn’t start with the word “other.”

• If your 10 digit HTS begins with “other,” then you can only claim drawback under 1313(j) using j1- direct identification drawback

1313(j)(2) Drawback

8-digit substitution and “other” categories

• Example, 8509 “Electromechanical Domestic Appliances”

(j)(1)

1313(j)(2) Drawback

New Statutory Time Requirements

• Current Law:

• New Law:

Date of Import Date of Export

3 Years

Date of Claim

3 Years

Date of Import Date of Export

5 Years

Date of Claim

1313(j)(2) Drawback

Certificates of Delivery Eliminated

“Transfers of merchandise may be evidenced by business records kept in the normal course of business and no additional certificates of transfer shall be required.”

1313(j)(2) Drawback

What does this mean?

• You do not need CDs under the new law

• Transfers need only be evidenced by business records kept in the normal course of business, such as invoice and shipping records (what, by whom, to whom, when)

• Must be received “directly” or “indirectly” (intermediate transfers) from the importer

• With joint and several liability, some importers may feel more comfortable with agreements and some type of transfer records (a private CD?)

1313(j)(2) Drawback

Calculating Drawback – 1313(l)

• Every drawback provision now points to (l) for the drawback calculation.

• 1313(l)(2)(A):

– “Not later than the date that is 2 years after the date of the enactment of the Trade Facilitation and Trade Enforcement Act of 2015 (or, if later, the effective date provided for in section 606(q)(2)(B) of that Act), the Secretary shall prescribe regulations for determining the calculation of amounts refunded as drawback under this section.”

Calculating Drawback – 1313(l)

The regulations required by subparagraph (A) for determining the calculation of amounts refunded as drawback under this section shall provide for a refund of equal to 99 percent of the duties, taxes, and fees paid on the imported merchandise, which were imposed under Federal law upon entry or importation of the imported merchandise, and may require the claim to be based upon the average per unit duties, taxes, and fees as reported on the entry summary line item, or if not reported on the entry summary line item, as otherwise allocated by U.S. Customs and Border Protection

This means:

• Customs must write regulations to explain calculation of drawback

• They must provide for an amount equal to 99% of the duties, taxes, and fees paid

• Customs can choose to issue regulations providing for calculation of duties, taxes and fees based upon the average line item amount

1313(j)(2) Drawback

• You are limited to no more than drawback of 99% of the duties, taxes, and fees that would apply to the exported or destroyed merchandise.

However, for substitution, the calculation is limited by

the value of the exported/destroyed item

1313(j)(2) Drawback

What does this do?

• You can’t import an expensive race car and then export an economy car and get the full duty, taxes and fees on the race car. You are limited by the value of the economy car.

• Another example: Montblanc for BIC pen

1313(j) Drawback

1313(x) Recovered Materials – now applies to (j)

For purposes of subsections (a), (b), (c), and (j), the term ‘destruction’ includes a process by which materials are recovered from imported merchandise or from an article manufactured from imported merchandise. In determining the amount of duties to be refunded as drawback to a claimant under this subsection, the value of recovered materials (including the value of any tax benefit or royalty payment) that accrues to the drawback claimant shall be deducted from the value of the imported merchandise that is destroyed, or from the value of the merchandise used, or designated as used, in the manufacture of the article.

Direct Identification Drawback 1313(j)(1)

What has changed?

• Same 5-year time frame

• Likely same drawback calculation under (l) (same condition?)

• CDs are eliminated

• Substitution still not available for unused merchandise claims based upon exports to Mexico, Canada, or Chile

• Will be claimed by only (1) those with 8-digit HTS numbers that fail the “other” rule, (2) those who otherwise can’t use substitution (3) those with same condition under NAFTA and US-Chile, and (4) those folks who want to punish themselves.

Rejected Merchandise Drawback

1313(c)

• Amendments to synchronize with new concepts

– Eliminating certificates of delivery

– Changing timeframe from 3 years to 5 years

– Changing “the Customs Service” to “U.S. Customs and Border Protection”

– Refund amount will be determined by calculation language in 1313(l)

– Evidence of Transfers by ordinary business records

Proof of Exportation

1313(i)

– Proof of exportation shall establish fully the date and fact of exportation and the identity of the exporter

– Records to meet the above can be:

1.Records kept in normal course of business; or

2.Electronic export system of the U.S. as determined by U.S. Customs and Border Protection

Liability for Drawback Claims

1313(k)

– Any person making a claim for drawback shall be liable for the full amount claimed

– Liability for Importers will be lesser of

• (1) amount claimed with respect to the imported merchandise; or

• (2) amount that the importer authorized other person to claim with respect to the imported merchandise

– Joint and Several Liability

– Make sure a surety is involved

Recordkeeping Time Frame

What has changed?

• The current law is three years from date of payment.

• Today, many claims are paid accelerated and can take more than 3 years to liquidate. A desk review can actually be made AFTER the recordkeeping time frame has expired.

• Under new law, it is 3 years from the date of liquidation of the claim.

• While perhaps much longer than the current timeframe, it will also ensure that records are kept through liquidation.

What About Regulations?

The new Subsection (l)(2) of Section 313 requires CBP to prescribe regulations:

• Within 2 years after the date of enactment - February 24, 2018, and

• That determine the calculation of amounts to be refunded as drawback under the new law.

The new law is a statutory change, and CBP must prescribe regulations to implement the new law

• Expect an NPRM

• The need for CBP and the Trade to work together in drafting

• Congressional oversight will be part of the process

What Should You Do Now?

• Determine the impact of the drawback changes on your existing drawback program

• Should we hold off filing until the new law goes into effect?

• Reexamine potential drawback under the new law

• Plan to capture the appropriate data elements and information to take advantage of new drawback

How does this affect my current

drawback program?

• Review what you currently import and export based upon the new substitution rules- 8-digit HTS (ITRAC, ACE report, USPPI EEI records)

• How does this compare to your current substitution program? Does your export pool expand? Does your import pool expand? For manufacturing, can you now claim substitution for more inputs used in production?

• Consider the new value rules, value of the exported item, value of the substituted component- how will this impact the overall calculation?

• If you use direct ID for CA and MX exports, should you now ignore them and just file substitution?

Should I stop filing under the old law?

• Remember the new law is five years import to claim- so for many in 2018, you can still reach back to 2013 imports

• How much more does the new law offer you?

• Are exports worth more after February 24, 2018?

• What does the CFO say? Do the benefits of waiting outweigh the regular cash flow expected from drawback?

If you don’t file drawback now, reexamine

• Do the analysis based upon 8-digit HTS (ITRAC and ACE reports)

• Does 8-digit substitution now justify filing even avoiding CA and MX exports?

• Will it be easier to get information from importers using business records?

• Third party drawback- Let’s make a deal?

What else can I do to anticipate

new drawback?

• Capture the value of exported items and components used in manufacturing

• Bills of Materials now at the 8-digit HTS level- do I need to classify?

• Are you the USPPI and do you file the EEI?

• Is it advantageous to change how I do my import entries-

– Consolidate line items or arrange by SKUs.

– Consider a single EIN/IOR number

Questions?

Michael V. Cerny

[email protected]

845-855-8900

www.cernyassociates.com

duty drawback changes - aiag

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