Duty Refund Newsletter - May 2010
Reinventing Drawback
We mentioned in our last Newsletter (March 2010) that there were two pieces of legislation under consideration that will drastically alter drawback as we know it today. Although these bills have yet to be passed and are not identical in content, there is industry and Customs consensus on what the eventual changes should be.
The current drawback program is too costly and time-consuming for Customs, and too labor-intensive and onerous for industry to efficiently and economically utilize. The desire is to get back to the basic purpose of drawback - to allow American business and labor to compete more effectively in the global marketplace by reducing or removing the impact of U.S. Customs import duties on the cost of exported products.
From the perspective of Customs, the proposed changes will make the drawback program easier to administer, will take advantage of the current CBP automation efforts, and will improve their ability to protect the revenue. From the perspective of industry, the requirement for layers of approvals and rulings are removed, electronic data in the Automated Export System (AES) will replace the need for extensive export documentation in hardcopy format, and more companies would be able to utilize this important export-incentive program.
One of the more sweeping changes being proposed is to use the Harmonized Tariff Schedule (HTS) classification as the basis for claiming drawback. If the imported and exported items have the same 8-digit HTS number, then you can claim drawback. If the imported and exported items have different 8-digit HTS numbers and you have a bill of material that shows how the imported merchandise is incorporated into the exported product, then you can claim drawback.
This single change accomplishes many things. First of all, it removes the current requirement to identify and trace imported merchandise and exported products by composition, industry standards, part number, SKU number, UPC code, or color/size/style detail. It also makes all drawback function under the concepts of substitution. For example, if you import a red striped shirt size small and export a green plaid shirt size extra large, and both the imported and exported shirts carry the same 8-digit HTS classification, you have a drawback situation. Substitution of this type is not permitted under the current provisions.
If you have a manufacturing situation that takes one widget of a given HTS classification and two gizmos of a different HTS classification to make each doodad of a third classification, you have a drawback situation as long as you can produce the bill of material showing this relationship between the three items.
Since the determination of drawback eligibility will be based solely on HTS classification, this removes the need for rulings and approvals to establish the parameters of a drawback program. The standard becomes objective - how is the stuff classified - and eliminates the need for Customs to make judgment calls on a claimant's eligibility.
The amount of drawback that can be recovered will be based on the "lesser of" concept currently in use on NAFTA claims. The drawback will either be the average duties, taxes and fees paid per unit on the designated import entry line of the imported merchandise, or the average duties, taxes, and fees paid per unit on the designated import entry line item using the declared export value - whichever is less. This would remove the temptation to import a high-end BMW, export a stripped-down Kia, and claim the full duty from the BMW against the exported Kia (assuming they fell under the same 8-digit HTS classification).
As with most things in life, you have the good news and you have the bad news. One change being proposed is considered both good and bad, depending on your perspective. The time frame for filing a drawback claim will be limited to 5 years from the date of importation to the date of filing of a drawback claim. This effectively reduces the universe of transactions eligible to be claimed from current time limits.
For manufacturing drawback we now have a much more expansive timeframe - 5 years from date of import to date of export, and 3 years from date of export to filing a claim. However, this change does reduce the record keeping burdens on both Customs and industry, and it is generally felt that the less restrictive 8-digit HTS substitution will more than offset the possible reduction in eligible transactions due to the shorter date parameters.
We caution again that these changes are proposed - nothing has been set in stone, and everything is subject to change. But we are encouraged that there is a very real effort under way to significantly alter and improve the drawback process, and we look forward to swift passage. We will keep you informed of progress and will invite your participation and support in this effort.
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