Why Drawback? Why Now?
βDrawback is the refund, reduction or waiver in whole or in part of customs duties assessed or collected upon importation of an article or materials which are subsequently exportedβΒ
β U.S. Customs and Border ProtectionΒ Β
In the Beginningβ¦Β
It was the 1780sΒ and everything seemed possible: the Revolutionary War had been won,Β andΒ there was a central governmentΒ withΒ a new President.Β OpportunitiesΒ aboundedΒ in the newΒ country. But fishermen were struggling. Duties imposed on imported salt usedΒ forΒ curing their catch were killing their profits. Shipbuilders, dependent upon goods imported fromΒ aroundΒ the world to buildΒ merchant ships andΒ a new navy,Β struggledΒ under heavy duties.Β American importers and exporters needed help to ensure profits and a place in theΒ rapidly expandingΒ global trade.Β
SinceΒ the early years of the American Republic, Congress hasΒ responded to the needs of business andΒ devoted much time to assuring that U.S. companies are equipped to compete equitably in the global market. Indeed, George Washington signedΒ The Tariff Act of 1789Β into law as the first legislation passed by the first CongressΒ under Article 1 of the newly mintedΒ Constitution, and included in the Act was the first βdrawbackβ provision.Β
The duty drawback process may have changed following changes to the Act over the years and, as of February 2018, new drawback rules are in effect as part of theβ―Trade Facilitation and Trade Enforcement Act of 2015 (TFTEA), primarily increasing the time that a drawback claim can be filed to five (5) years and the requirement that companies must now file claims electronically.Β
What Goes Around Comes AroundΒ
The global impact of an escalating tariff war, and what its impact on industry and agriculture might be, may not have been fully understood in January 2018 when President Trump imposedΒ the first of a number of tariffs that have been introduced over the last two years: a 30-50% tariff on solar panels and washing machines. With the advent of Sections 201, 232, and 301 tariffs, the duty drawback process, still largely misunderstood and unclaimed,Β isΒ getting another lookΒ from businesses as a way to mitigate tariffs. And no wonder: exporters who reclaim 99% of their duties paid stand to reap a significant financial advantage over their competitors who either donβt claim or donβt qualify forΒ duty drawback.Β Β
One thing to keep in mind in exploring duty drawback rules is that no drawback claims are available for Section 232 tariffsΒ on steel and aluminum, butΒ Section 201Β andΒ Section 301Β tariffs meet the qualifications completely. The tariffsΒ imposed in the past two yearsΒ have had the direct result of manufacturers andΒ thoseΒ businesses key to their success paying substantially higher landed costs for both component materials and finished goods.Β Like the fishermen and shipbuilders of the eighteenth century, American exporters find themselves in need of action and must consider the advantages of duty drawback.Β
Drawback:Β UnderdogΒ of the Export IndustryΒ
Strictly speaking, duty drawback is the recovery ofΒ up to 99% of the duties paidΒ on goods imported into the United States, thereby lowering the material cost to exporters. Those goodsΒ receiving duty drawbackΒ are then required to beΒ either:Β
- imported and then re-exported,Β Β
- componentsΒ used in the manufacture of new goods which are then exported,Β Β
- goodsΒ rejected for not meeting specifications and re-exported,Β orΒ
- goods that areΒ destroyed under the supervision of CBP rather than exported.Β
There are several categories of duty drawback, the most commonΒ of themΒ beingΒ the Unused Merchandise drawback andΒ Manufacturing drawback such as the Direct Identification and Substitution drawbackΒ means.Β
Unused Merchandise Direct Identification Drawback
According toΒ 19 USC 1313(j), companies may file a claim for drawback on goods that have been imported that are subsequently exported in an unused condition orΒ destroyed within three (3) years of importΒ without being used in the U.S. Goods that are interchangeable with the imported goods may be substituted for the imported goods. Prior to exportation, Customs must be advised of your export shipment in order to allow them the opportunity to examine the export shipment, and your records must clearly establish the fact that the exported merchandise was the imported merchandise.Β Β
ManufacturingΒ Direct Identification DrawbackΒ
If a companyβs duty-paidΒ importedΒ goodsΒ areΒ used in the manufacture of aΒ subsequentlyΒ exported product, you may file aΒ manufacturingΒ drawback.Β Import records mustΒ be well-documentedΒ from imported goods through manufacture andΒ export.Β TheΒ originalΒ intent of this drawback was to encourage companies to produce goodsΒ domestically that areΒ intended for export with the goal of stimulating foreign trade andΒ boosting the U.S. economy and labor market.Β
ManufacturingΒ Substitution DrawbackΒ
IfΒ a company exports goods that are not theΒ originalΒ goods imported, nor any of the original goods used to produce the exported goodsΒ but are of the same kind and quality as the duty-paid goods, aΒ substitutionΒ drawbackΒ claimΒ may beΒ filed.Β Β The goods substituted must be classified under the same 8-digit HTSUS subheading as the designated import goods.Β Also,Β CBP must be informed ofΒ theΒ companyβs export shipmentΒ within aΒ proper timeframeΒ to examine that shipment.Β Β
If approved, companies filing claims underΒ Unused Merchandise orΒ Manufacturing drawback may file retroactively if the claims are filed within three (3) years of the export date. Three years of duty recovery is not insubstantial and should definitely be considered as part of a companyβs tariff mitigation planning.Β Β
Back Door to DrawbackΒ
A majority ofΒ importers, exporters,Β andΒ manufacturersΒ couldΒ most likely qualify for drawback,Β but may not understand the opportunities available to them,Β especiallyΒ if a third partyΒ is involved.Β It is widely reported thatΒ anΒ estimatedΒ $600 million per year is recovered by companies through drawback.Β That amount is made more significant when it isΒ alsoΒ notedΒ thatΒ as much asΒ 85% of duty drawback remainsΒ unclaimedΒ each year, providing an enormous advantageΒ for companies who file drawback claimsΒ over competitors that do not.Β Β [/vc_column_text][vc_column_text css_animation=”none”]
Β | Your Company | Your Competitor |
Cost of Imported Product | $1,000 | $1,000 |
Add 25% Duty | $1,250 | $1,250 |
Add 50% mark-up | $1,750 | $1,750 |
Participating in drawback? | YES | NO |
Duty Drawback refund (99%)* | ($247.50) | $0 |
Export Selling Price | $1,503 | $1,750 |
*Cost of Imported Product |
[/vc_column_text][vc_raw_html]JTNDc3R5bGUlM0UlMEElMjNjb21wYXJpc29uVGFibGUlN0JtYXgtd2lkdGglM0E3ODVweCUzQiU3RCUyM2NvbXBhcmlzb25UYWJsZSUyMHRyJTIwdGQlMjAlN0Jib3JkZXIlM0ElMjAxcHglMjBzb2xpZCUyMCUyM2NjYyUzQiU3RC5ncmV5JTdCYmFja2dyb3VuZC1jb2xvciUzQSUyM0Q4RDhEOCU3RCUwQSUzQyUyRnN0eWxlJTNF[/vc_raw_html][vc_column_text css_animation=”none”]Certainly, then, in todayβs global trade climate, companies involved in import-export should seek opportunitiesΒ forΒ duty drawback; however, even if they do not actively do business in both ventures themselves, but these transactions occur throughout their supply chains, thenΒ theyΒ may still be able to qualifyΒ to file duty drawback claims.Β 19 CFR 190 provides for the transfer of drawback rights when the importer and exporter of record are not the sameΒ entity.Β Either the importer or the exporter can submit the drawback claim to CBP, althoughΒ drawback regulations grant the exporter the first right to submit the drawback claim.Β Β
19 CFR 191.33Β states that the exporter may waive the right to claim drawback and assign the right to the importer (or to an intermediate party) provided that the exporter secures and retains a certification signed by the exporter that they waived the right to claim drawback.Β
Alternately,Β under 19 CFR 191.33(b)(2),Β if the importer wishes to retain drawback rights, thereby controlling the drawback claim process, the importer needs to obtainΒ a certification signed by the exporter that the importer waived the right to claim drawback.Β But determiningΒ the proper claimant forΒ drawback can be complicated.Β Here are two simplified examples:Β
Example 1: Acme Co. importsΒ wingnuts, sells them to their customer, Jones & Co, and then Jones & Co. exports those goods. Both Acme Co. and Jones & Co. can collectively qualify for duty drawback.Β Β
Example 2:Β BrownΒ Co. imports components that will be further manufactured into finishedΒ casegoods.Β The goods are sold toΒ Conrad & Co.Β and exported byΒ theirΒ domestic customers.Β In this case,Β the right to claim duty drawbackΒ actually belongs toΒ ConradΒ & Co.βs domestic customers. In order to claim the drawback for itself,Β ConradΒ & Co. would be required to obtain a signedΒ Waiver of Right to Claim DrawbackΒ from each of its domestic customers.Β
Because of the complicated nature of duty drawback rules, most companies opt for outside assistance in the way of customs brokers or drawback specialists.[/vc_column_text][vc_single_image image=”72736″ img_size=”full” alignment=”center” style=”vc_box_shadow” css_animation=”none”][vc_column_text css_animation=”none”]
Are there Drawbacks to Drawback?Β
Although the financial benefitsΒ of duty drawbackΒ to import-export businesses can be enormous, the process is not an easy one.Β The drawback regulations found inΒ Part 191 of the Customs RegulationsΒ are extensive and complex.Β Β Extensive documentationΒ including receiving, inventory, manufacturing records, substitution information, any Certificates of Delivery, etc., isΒ required throughout the supply chain proving that goods originally imported into the U.S. are the same (or of the same kind and quality) as the goods that are ultimately exported (or destroyed). Companies may need to keep those records for ten years or more following a claim. In addition, theΒ filingΒ processΒ and any resulting refundsΒ may take years to complete.Β Β
Developing a PlanΒ
Companies investigatingΒ duty drawbackΒ should begin by developingΒ a robust drawback compliance program thatΒ begins by:Β
- setting up aΒ protocol for documentationΒ retentionΒ
- conducting an analysis of each point in its supply chain to see where drawback would be most beneficialΒ
- determining which drawback types are applicableΒ
- gathering all necessary data to support a drawback claim, making sure to include all partners in the process including customs brokers and freight forwardersΒ
- evaluating whether a broker/specialist will be retained to see the drawback process through to completion with CBPΒ
In todayβsΒ ever-changing trade and regulatory environment,Β where there is almost constantΒ global pressure on companies as costs increase, now is the best time to investigate tariff mitigation, and duty savings through drawback is one of the best overall strategies available.Β The first U.S. Congress created the opportunity; it is yours to receive the benefit.
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