In this continued era of protectionist and mercantilist trade policies arising from the United States, there are strategies that can be carefully evaluated and pursued to maximize Customs duty savings when importing. This article briefly summarizes a few strategies. Importantly, all duty saving strategies are heavily scrutinized by the government and should be carefully evaluated before implementation.
- First Sale: In the United States the import
value to be declared to Customs, and consequently the value the
importer pays duties on, is typically based on the commercial
invoice price (i.e., transaction value) of the goods sold
from the last foreign seller to the U.S. buyer. In transactions
involving multiple sales prior to being sold to the U.S. buyer, the
first sale method, if followed correctly, would permit the U.S.
buyer to pay duty on the much lower factory price (the first sale
to a foreign seller such as in the case of a factory selling to a
distributor in the foreign country for further resale to the U.S.
buyer). The first sale method may only be utilized if certain
transaction elements are present. The main requirements for
application of the first sale method are that the transactions must
be bona fide sales for export to the United States, and clearly
destined for shipment to the United States. If the parties are
related, then the price must be at arm's length.
Importantly, before proceeding with the first sale method, it is important that feasibility and pre and post implementation reviews are conducted. For more information on first sale, visit Torres Trade Advisory's article Here.
- Review of Supply Chains, Country of Origin, and
Substantial Transformation: Not all countries will
be treated equally under the trade policies of the Trump
administration, so an analysis should be conducted to determine if
sourcing from countries not facing tariff threats is feasible.
Importantly, U.S. Customs laws require products that incorporate
multiple inputs, parts, and components from various countries to
undergo a substantial transformation to be deemed as originating
from the country where the manufacture of all the inputs into a
final product takes place. To be deemed substantially transformed,
a good must undergo a fundamental change in form, appearance,
nature, or character. This fundamental change typically occurs
because of processing or manufacturing in the country claiming
origin.
- Tariff Engineering: U.S. customs duties are
applied based on the state of goods at the time of import.
Importers can review the makeup and composition of the imported
products to identify potential modifications that could lead to
duty savings. For example, if a finished product has a U.S.
Harmonized Tariff Schedule (HTS) code with a higher duty rate than
its individual components, the importer can import the parts
individually to benefit from lower duties. Thus, importing
unfinished or modified forms of the products could lead to legal
ways of lowering import duty.
Tariff engineering has its limitations and can be subject to government scrutiny. For an interesting case involving tariff engineering gone wrong, visit our article Here. Companies can request prospective classification rulings to minimize these risks.
- Customs costs: Importers can review the
valuation of their products under U.S. customs rules. In some
cases, there are costs included in the price paid or payable (the
invoice price) that do not have to be included under the Customs
laws. Identifying which costs can be subtracted can lead to
substantial savings.
- Duty Drawback: The duty drawback program is
rigorous, but if appropriately implemented, it permits U.S.
importers to claim a refund of paid duties. Importers can claim
duty drawback in various situations including where finished
products are imported into the United States for resale and
substituted products are exported to foreign countries.
Importers can also claim duty drawback when importing multiple raw materials and components into the United States for the manufacture of a final product that will ultimately be exported abroad.
Duty drawback has a five-year statute of limitations.
- Use of Foreign Trade Zones (FTZs) or Bonded
Warehouses. FTZs are areas considered outside the U.S.
customs territory. Goods can enter into an FTZ and not be subject
to tariffs until they leave the FTZ. Goods imported into an FTZ can
be assembled, exhibited, cleaned, manipulated, manufactured, mixed,
processed, relabeled, repacked, repaired, salvaged, sampled,
stored, tested, displayed and destroyed. If the merchandise
ultimately leaves the United States, then no duty accrues.
Manufacturing that changes the tariff classification must be
approved by the FTZ board.
A bonded warehouse is considered within U.S. customs territory, but merchandise can be stored without duty payment for up to five years. Entry of merchandise into a bonded warehouse has more limitations than an FTZ. For example, merchandise can only be stored in a warehouse for five years whereas an FTZ can be stored indefinitely. Bonded warehouses also do not allow manufacturing; manufacturing is only permitted for export. However, storing goods in a bonded warehouse is more convenient and less expensive than in an FTZ.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
