Cerny
Associates, P.C.
Duty Drawback Changes
Michael V. Cerny
Cerny Associates, PC
[email protected]
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 Direct Identification
Drawback
•Import & Pay Duty
•Manufacture
•Export
Manufacturing Direct Identification
Drawback
•Import & Pay Duty
•Manufacture
•Export
Manufacturing Substitution
Drawback
•Import & Pay Duty
•Manufacture
•Export
Imported product is of the
Same Kind and Quality as the
product used in production
Manufacturing Substitution
Drawback
•Import & Pay Duty
•Manufacture
Import
•Export
Used
Manufacturing Substitution
Drawback
•Import & Pay Duty
•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)
Endorse
rights
back
Importer
CM
&D
Exporter
CD
Importer
Manufacturer
CD
Exporter
Endorse
rights
back
Hallmarks of the Drawback Changes
– Products are considered the same if they have the same 8digit 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
Manufacturing Substitution Drawback
Current
Future
•
Same kind and quality
•
•
Receipt and use requirements
•
•
•
Rulings
CDs and CM&Ds required
•
•
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)
Manufacturing Substitution Drawback
Current
Future
• Bills of Material (BOM) not
required by statute to be
submitted with claim
• BOM required to be submitted
with substitution
manufacturing claims
• BOM calculation at unit level
• 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
Manufacturing Substitution Drawback
“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
Manufacturing Drawback Timeframes
Current
Current 1313(b)
Current 1313(a)
5 years
Import
3 years
Export
Claim
3 years
Manufacture
Used in
Manufacturing
Article Manufactured
Export
3 years
Import
5 years
Received @ Plant
Claim
3 years
Manufacturing Drawback Timeframes
New
Import
Manufacture
Future 1313(a) and (b)
5
years
Export
File Claim
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:
Date of Import
Date of Export
Date of Claim
3 Years
3 Years
• New Law:
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