The recently passed H.R. 644 - Trade Reconciliation and Trade Enforcement Act of 2016, contained a landmark provision designed to liberalize the duty drawback refund program for drawback claimants as well as reduce the administrative burden to Customs and Border Protection (CBP) officials responsible for overseeing the program. Each year hundreds of millions in potential drawback refunds that could fuel additional economic expansion remains unclaimed due to an overly complex and burdensome refund process, The Administration’s Press Secretary issued a statement on February 11th indicating that the President intends to sign the bipartisan measure.
Originally enacted by the first United States Congress in 1789, the current drawback in its amended form provides for a refund of regular duties, taxes and fees on imported merchandise subsequently exported from the United States either in the same form or following a manufacture process. The law’s purpose is to enhance a company’s ability to compete globally by essentially lowering the cost of US exports through this tax refund measure. Increased export activity directly results in economic expansion and domestic job creation. According to Department of Commerce economic statistics, nearly 40% of the total job growth between 1993 and 2012 was directly attributable to expansion of US export volume.
The convoluted regulatory structure of the existing drawback program and onerous administrative procedures effectively discourage participation by increasing the program’s regulatory compliance costs, thus making a portion of potential recoveries non viable. Companies simply take a pass on the program due to the burden and potential liability for non-compliance. This drawback simplification legislation addresses many of these issues by streamlining the claim filing process while allowing for increased levels of refunds through the expansion of the “substitution” provision of the law.
The substitution rule allows a drawback claimant to match like imported and exported merchandise within broad time parameters instead of tracing directly from import to export using lot or serial number (referred to as direct identification drawback). Under the current regulatory structure, merchandise was considered substitutable if it complied with certain criteria that considered part number, specifications, governmental and industry specifications, et al. when determining if imported and exported merchandise where sufficiently similar to be matched on a drawback claim.
For example, a company imports various sunglasses from China each identified by an individual part number. A portion of the glasses are exported to Caribbean retail stores from its US based distribution facility. Substitution allows for a pair of exported sunglasses with a part number of PN-123 to be matched against any import within the past three years of part number PN-123. This rule is particularly useful for merchandise that losses its identity once it enters inventory thus making direct tracing impossible.
The new drawback law expands the substitution concept by redefining the current mostly part number based criteria to one that is more flexible, and instead relies upon on the eight digit harmonized tariff schedule number (HTS Number). To continue with the sunglass example, the Tariff Schedule lists three different classifications for sunglasses based upon the material content of the glasses (for example metal vs. plastic frames). Under the new law a claimant could export glasses with PN-456 and match it against glasses with PN-123 assuming the two fall under the same classification (HTSUS 9004.10.00 for “Sunglasses” as an example).
While all claimants will benefit from the new rules, certain industries could see more opportunity than others based on how general the HTS numbers are in a given section of the tariff schedule. For example, apple, quince, and pear purees all fall under the same eight-digit HTS number. Theoretically a company could export apple puree and “designate” (select for drawback purposes) imported pear puree.
Unfortunately, for claimants with significant exports to Canada and Mexico, there is no such relief in sight as the NAFTA passed in 1993 (the Chilean Free Trade Agreement contained a similar provision) eliminated the ability to file under substitution for pass through drawback (also referred to as “same-condition” drawback); consequently, the existing more restrictive rules still apply. Nonetheless, this measure still represents a game-changing opportunity for exports to non-NAFTA countries.
In addition to the liberalization of the substitution rules, the legislation includes the following key provisions and significant changes to the existing drawback program:
- Proof Export: Long a source of controversy between the Trade community and CPB, claimants can now use the AES (Automated Export System) reporting record to substantiate export activity.
- Simplified Time Frames: The current regulations contain numerous time requirements related to the timing between the import and export (three years) and the eventual submission of a claim to Customs (three years from the date of export). The new law simplifies the time frames by establishing one uniform period for all types of drawback - five years from the date of import to the submission of the drawback claim to CBP that encompasses said import.
- Multiple Party Drawback, Joint and Severable Liability: Under the existing drawback law, the drawback claimant is primarily responsible for the accuracy of the drawback claim in instances where a “third party” importer sold imported duty paid merchandise to the claimant and passed on the drawback rights. Now in instances where multiple parties are involved in the import and export of the merchandise, liability is shared between the two parties if drawback is denied due to a lack of compliance.
- Record Keeping Time Frames: Drawback record keeping is currently tied to the payment of the drawback claim. Specifically, all supporting records must be maintained for the three years from the date of payment. The new requirement is 3 years from the date of liquidation of the claim (the final disposition of the claim following a Customs review).
- Implementation of the Law: Drawback filers can submit claims under the existing law for the next three years during the transitionary period. Claimants wishing to take advantage of the new law can do so starting two years from the enactment of the law (expected later this month). Even though there is a two year waiting period, keep in mind the retroactivity feature allows for 5 years of import history which means companies should immediately start the process of evaluating and organizing its import and export activity to maximize recovery under the new law.