The U.S. government in 2015 issued an estimated $804 million in duty drawbacks, less than 10 percent of the amount available to shippers, but upcoming regulatory changes should attract more shippers to the longtime duty refund program.
No one likes to leave money on the table, but in effect that’s what many American shippers do each year by failing to take advantage of duty drawback opportunities.
Drawback is a refund of customs duties paid on imported materials that are either exported or used in the manufacture of exported articles. With appropriate documentation, an exporter can receive up to 99 percent of duties paid. It’s also one of the oldest U.S. Customs regulations on the books, dating back to 1789.
In 2015, it’s estimated that $804 million in duty drawback refunds were made by the U.S. government. Yet, that’s under 10 percent of what’s estimated to be available to companies.
The reason for this lack of participation on duty drawback has long been the complexity involved with preparing and filing these types of claims with Customs. Since some of the more detailed refund filings can include the assembly of thousands of pages of documents, most companies use specialized customs brokers that are intimately familiar with the details of the program to manage this process.
But legislation contained in the recently enacted 2015 Trade Simplification and Trade Enforcement Act promises significant regulatory changes that will make filing for duty drawback easier and more accessible to more companies.
“We have long operated drawback like we’re in the 19th century,” said David Corn, vice president of one of the nation’s oldest drawback specialists, Comstock & Theakston Inc., and co-chairman of the Association of American Exporters and Importers’ Drawback and Duty Deferral Committee. “The new law brings us into the 21st century.”
Until recently, filing and processing of drawback refunds had changed little in the law’s 225-year history. Congress and Customs have taken only small steps in recent decades to reform and improve the efficiency of the drawback program, with the biggest change made during implementation of the 1993 Customs Modernization Act, which introduced penalties for falsified drawback claims.
In the early 2000s, the Trade Support Network (TSN), a Customs-sponsored group that provides industry input for the development of the agency’s new computer system, the Automated Commercial Environment (ACE), formed a subcommittee to offer guidance on how to include drawback in the new Customs system.
At the same time, the program has occasionally come under attack during U.S. free trade agreement negotiations with other countries, and from the U.S. Treasury and Homeland Security departments themselves. With the exception of the North America Free Trade Agreement and U.S.-Chile free trade agreement, industry associations have largely fended off attempts to erode drawback’s benefits. What has largely preserved duty drawback not just in the United States, but globally, is the fact that it’s the last export subsidy program permissible by the World Trade Organization.
Yet, despite its benefits to international trade, efforts to make the U.S. drawback filing process easier to use have moved at a glacial pace. Drawback simplification has been pegged to numerous failed pieces of Customs reform legislation over the past 12 years.
Thus, it was with great fanfare from many industry groups when President Obama signed the Trade Facilitation and Trade Enforcement Act into law on Feb. 24. While the comprehensive legislation covers myriad Customs operations and procedures, it specifically authorizes the reform of the drawback refund process by no later than February 2018.
Michael V. Cerny “Like any legislation, this bill involves compromises,” said Michael V. Cerny, chief executive officer and general counsel of Pawling, N.Y.-based Global Customs & Trade Specialists and chairman of the National Customs Brokers and Forwarders Association of America’s Drawback Committee, at the time of the legislation’s passage. “There are good points and bad points, but overall, the legislation offers significant benefits to drawback claimants and filers.
“For drawback brokers in particular, in an era where FTAs (free trade agreements) will likely reduce the amount of available drawback, this bill offers some real opportunity to offset some of those losses,” he added.
Complexity. Drawback may apply to a variety of import/export transactions, but traditionally the two most popular uses in the United States involve manufacturing substitution and substitution unused merchandise. Manufacturing substitution drawback includes both imported merchandise and any merchandise of the same kind and quality that are then exported or destroyed. Substitution unused merchandise drawback covers imported materials that are unused and exported or destroyed.
Nearly any dutiable commodity is eligible for a drawback refund. Industries that have used the program extensively over the years include chemicals, steel, tobacco, petrochemicals, pharmaceuticals, auto and electronics parts, textiles and apparel, wines, sugars, and citrus products.
Prior to the most recent changes to the law, however, it remained an intensive, long-term process of securing and organizing the necessary paperwork, processing it through a customs broker, and waiting for Customs to release the refund check.
There’s also been a perception that providing this level of detail about a company’s import and export activities to Customs would expose it to additional regulatory scrutiny, especially since the agency is being asked to return often hefty amounts of money in duty refunds.
C. R. “Bobby” Waid C. R. “Bobby” Waid, CEO of Katy, Texas-based Charter Brokerage and a longtime duty drawback specialist, said it’s just “a myth” that Customs would scrutinize drawback filers more closely than regular import entry activities. “You’re just asked to file additional information. That’s all,” he said.
Cerny added that third-party drawback specialists take great care in their work and won’t risk their reputation or worse, their customs broker license, by tendering false or error-ridden drawback refund filings to Customs.
The biggest problem with drawback as the program currently stands is that it has become increasingly out of sync with the goals of both Customs and industry to simplify the nation’s trade procedures and eliminate as much paperwork as possible through automation.
Big Changes. The most significant change in the new drawback regulations is the use of harmonized tariff schedule (HTS) classifications at the eight-digit level to facilitate filing. This aligns with Customs’ operation of the new ACE system.
For the popular manufacturing substitution drawback, the changes in the law mean no more tracking of receipt dates for imported materials, broader time limits on use, and reduced rulings. Also, the filer will need to show business records for transfer of merchandise from the importer.
Unlike the former regulation for this type of drawback, where bills of material were not required to be submitted with a claim, these documents will be required for substitution manufacturing drawback going forward. In addition, instead of calculating the bills of material at the unit level, the new rules state that the bills of material calculation will be made at the HTS level as the value of imported designation and substituted merchandise, which is in line with how ACE records overall are processed.
Similar to the former statute, filers under manufacturing substitution drawback have five years from the time of import of the material to the time of export to file a claim.
One of the more interesting provisions within the new manufacturing substitution drawback claims process is the protection of “sought chemical elements.” For example, a company imports 99 kilograms of pure titanium sponge, but also substitutes its refining process with a similar volume of pure titanium scrap. When it’s time to export, the article still contains 99 kilograms of pure titanium. The filer, in this case, can still obtain 99 percent of duties paid on the imported titanium material.
The changes for substitution unused merchandise drawback are similar to manufacturing substitution drawback claims. They include:
• Standard for substitution is eight-digit HTS, not commercial interchangeability;
• Five years from time of import to filing drawback claim;
• No more certificates of delivery;
• New rules for calculating drawback amount;
• Consideration of value of exported or destroyed items;
• And drawback for recovered materials.
A sticking point in the initial drafting of the new rules for brokers engaged in drawback was how to handle eight-digit HTS numbers that start with the word “other,” rather than the specific commodity identification. Under the new law, if this is the case, the filer may be able to move to the 10-digit HTS breakouts, but only if the product’s breakout also doesn’t start with the word “other.” If the 10-digit HTS begins with “other,” then the filer can only claim drawback using what is commonly known as direct identification drawback, under 1313(j)(1) of the statute, explained Cerny, Corn and Waid in a recent drawback presentation for the NCBFAA Educational Institute.
“Customs will have all the information in the computer system, instead of in paper,” Cerny said. “They will be able to analyze drawback claims at a surgical level. They can more easily ask questions when something doesn’t line up.”
Under the new regulations, recordkeeping remains important to drawback filers. The law states that records be held three years from date of payment.
“Today, many claims are paid accelerated and can take more than three years to liquidate. A desk review can actually be made after the recordkeeping timeframe has expired” the three drawback experts said during their presentation. “Under the new law, it is three years from the date of liquidation of the claim. This could be a longer period of time than is required now, but it will also ensure that records are kept through liquidation.”
Customs has already started the rulemaking process that will occur over the next two years as the agency puts the new drawback laws into practice. Cerny said the drawback industry will work closely with Customs during this period to help ensure the new laws are implemented smoothly.
More Opportunities. Although tariffs are increasingly being eliminated worldwide through myriad free trade agreements, many products are expected to maintain some percentage of import duties for years to come.
The customs broker industry believes the coming changes to drawback will make the program more user-friendly and less complex, as well as decrease the cost and administrative burden for both Customs and U.S. manufacturers and exporters.
It may also mean more companies than ever before will engage in drawback.
“We believe that one of the significant benefits of the new drawback legislation is that it will make drawback more accessible to small and midsized companies,” Cerny said.
“More people are becoming aware of it,” added Corn. “We get calls almost every day from companies interested in drawback. They’re realizing that it’s another potential way for them to add to their bottom line or save money for their customers.”
Waid agreed. “Definitely, we’re seeing more acceptance already. The new law opens opportunities for companies that didn’t take advantage of drawback before,” he said.
An American Shipper study published in partnership with BPE Global in June looked at the emerging trend of large importers self-filing in ACE and found that drawback was among the top three forms of duty avoidance programs used by these companies.
However, customs brokers with a focus on drawback don’t foresee an exodus among their customers to self-filing their own claims once ACE is fully operational.
“While the processes are being simplified, it’s still a complex program and must be managed correctly,” Cerny said. “Brokers will still be used to file drawback.”
Chris Gillis is Editor of American Shipper. He can be reached by email at cgillis@shippers.com.
