Many companies pay duties and taxes up-front when importing their products into a country—even though this is not legally required and ties up significant amounts of capital. Other importers simply never assess whether they are paying the correct amount to customs agencies and end up overpaying. Programs exist to help importers with reclaiming their duty payments.
One of the ways companies in the United States can do this is by using a Customs program called Duty Drawback. It is a refund from US Customs and Border Protection (CBP) for 99% of the duties paid on imported items which are subsequently exported or used in the manufacture of exported goods. This refund is available to you even if someone else did the importing. It is estimated that over $600 million is recovered annually through the Duty Drawback program and companies are paying 20% of those refunds to service providers to help them get that refund from the government. CBP estimates that up to 85% of potential refunds go unclaimed each year.
By ensuring that you do not have to include import duties into your costs, you can compete more effectively with foreign corporations for business abroad. However, Duty Drawback is recognized as the most complex commercial program that CBP administers because it involves every aspect of a business, including both imports and exports. Historically, the program relied on a subjective analysis of “commercial interchangeability” making it difficult for many companies to take advantage of substituted merchandise.
Companies must prove that imported goods were exported or destroyed and maintain supporting records to prove eligibility and compliance. Most companies prefer to hire the services of a professional customs broker to assist in the implementation of a process that reconciles the import and export records and ensures the accuracy of the claims. Historically, a small number of specialized service providers have dominated the drawback landscape, due largely to the expertise required to prepare and file the claims.
Drivers for a renewed interest in Duty Drawback
Two issues have brought the Duty Drawback program to the forefront of trade in 2020:
First, the program has been undergoing a modernization effort by US policymakers and CBP. The Trade Facilitation and Trade Enforcement Act of 2015 (TFTEA) brings significant changes to Duty Drawback policy and implementation.
- Streamlined product substitution rules; goods interchangeable at the 8-digit harmonized tariff schedule (HTS) level (with some exceptions)
- Simplified filing time frame (5 years from import)
Modernization of the program also includes implementation of claim filing within a fully electronic environment—the US Automated Commercial Environment (ACE). This is the system through which the trade community reports imports and exports and the government determines admissibility. Using ACE may allow companies to file more quickly and gives CBP the ability to process claims quicker, but also gives them the resources to audit claims more broadly and deeply. Electronic filing may have a leveling effect on the playing field in terms of increasing access to drawbacks. However, at the same time, electronic filing makes it more difficult for companies to back up claims and recover duties.
Secondly, the global trade environment in the United States has contributed to a higher level of interest in Duty Drawback for 2020. A direct effect of Section 301 additional tariffs on many goods imported from China is that distributors and manufacturers are paying significantly higher landed costs for imported finished goods and component materials. In general, tariffs on imports in most developed economies are very low or zero, and many companies that have not historically had a business case for Duty Drawback now do because of these additional duties.
Because of modernization and the opportunities to reclaim duties paid, there may be an increase in broker services provided as well as the number of vendors offering services. The implementation of Duty Drawback into ACE means that companies are asking their brokers for electronic filing of these claims. Plus, the streamlining of commercial interchangeability rules means that brokers can more easily provide standardized solutions to process certain types of Duty Drawback claims.
Implementing a Duty Drawback process
A company interested in the Duty Drawback program should first analyze their imports and exports to identify the potential duty refunds available. They may be able to take advantage of unused merchandise, rejected merchandise or manufacturing drawback. The difficulty of preparing Duty Drawback claims comes in the details. Regardless of the type of claim, companies will have to go through the effort of identifying how to match exports against imports using one of the approved methods: direct identification (ID) or substitution. The TFTEA substitution rules can be difficult to administer because they require additional checks that include the HTS goods description as well as restrictions under certain trade agreements. Claimants will also need to document how the goods are matched together and create audit trails to support CBP audits, which are almost guaranteed to happen within the new electronic filing workflow.
Companies will also need to identify how to manage the process internally. Some may try to take on the filing work themselves and some will outsource entirely to service providers, but the majority will lie somewhere in the middle. Identifying the right mix requires an analysis of your company’s combination of internal expertise related to the Duty Drawback program, type and amount of available claim opportunities, supplier relationships, supply chain maturity and systems in place to support the process.
Automating Duty Drawback provides opportunities
One of E2open’s Global Trade Management intelligent applications, E2open Customs Warehouse Management makes it feasible for companies to use available duty savings programs—such as Duty Drawback—without the need to pay third parties to administer them. The application automates administrative tasks and creates an audit trail to meet their stringent compliance and reporting requirements. Using deep automation capabilities, the application can scale your existing drawback program exponentially or begin a program where one was not feasible before. Businesses can identify transactions that are eligible for a duty refund and then use intelligent tools to submit and pro-actively build and manage each claim.
There are also other programs that the application can administer. These are, for example, EU Customs Warehousing and US foreign-trade zones programs. They can all be managed from a unified digital platform in an intuitive and efficient way, enabling companies to benefit from all duty savings that these programs provide.
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