The Trade Facilitation and Enforcement Act of 2016 (known by its acronym TFTEA) profoundly altered the tariff mitigation strategy commonly referred to as duty drawback refunds. The amendment of the Tariff Act represented the culmination of a nearly 12-year collaboration between the Trade Community and Customs and Border Protection in an effort to simplify the drawback program.
The Duty Drawback Law allows for the refund of Customs duties on imported merchandise that is exported from the United States either in the same form or following a manufacture process. And yes, Section 301 Tariffs assessed on imported titanium products from China are eligible for refund via this program.
Extensive changes to any legal, and by extension, regulatory structure result in a distinct set of “winners” and “losers” – in other words, certain industries or drawback claimants benefited more from the TFTEA changes than others. Without a doubt, the titanium industry falls into the TFTEA “winner” category. To understand why, an explanation of the new drawback regime is required.
Matching Methods: Direct Identification vs Substitution
The primary rule change that benefited most drawback claimants, and particularly the titanium industry, relates to the drawback concept of substitution. The substitution provision of the drawback regulations allows for the matching of exports to imports that are similar, but not identical. This method is available for products exported in the same condition or those that undergo a production process.
The alternative to the substitution method requires directly matching an export to its corresponding import via lot number or serial number tracing (known as the direct identification methodology). In the titanium industry specifically, the heat number serves as a unique identifier that would allow traceability of the titanium from import to eventual exportation for those that need to file under this method.
Whenever possible, drawback claimants should take advantage of the substitution method of matching as it allows for much more flexibility and less administrative effort in that a titanium claimant would not need to trace heat numbers through inventory.
Old Substitution Rules vs the New Standards
The new drawback law substantially liberalized the substitution rules to allow more flexibility when matching import and export activity for drawback purposes. Under the previous drawback rules, the imported and exported merchandise needed to share the same material code and/or product specifications. Under the new rules, the import and the export need only share the same tariff classification number at either the 8th or the 10th digit.
Using imported and exported beer as an example, under the previous regime one would need to match on the basis of brand for brand – imported Molson from Canada matched with exported Molson. Under the new standard, a beer distributor could export Sam Adams to Europe and match against imported Molson because both beers fall under the same eight-digit harmonized tariff classification.
Previous Titanium Drawback Substitution Rules: Historically, a titanium drawback claimant would need to meet and match imports/exports according to chemical specification, essentially on a grade-for-grade basis. In the case of titanium alloy Ti 6AL-4V, both the imported and exported material would need to meet this same specification.
In a substitution manufacturing drawback scenario, the raw material that entered a production process (Example – titanium billet used to produce bar stock) would need to meet the same chemical specification as the imported duty paid titanium. One could not export a bar produced from Ti 6AL-4V and use it to claim drawback against an imported ingot of commercially pure titanium because the two materials were not considered of the same kind and quality under the previous rules.
Titanium New Drawback Rules: HTS level substitution under the new drawback regulations is a game changer that will result in a potentially significant increase in refunds to the titanium industry. Let’s review some specific examples of classifications for titanium products in order to understand how the industry benefits from the liberalization of the substitution provisions:
- HTS 8108.20.00 listed below for unwrought titanium includes titanium sponge, powders and ingots. There is no distinction between physical form at the 8th digit, only at the 10th, which means that titanium powder is interchangeable, or substitutable, with ingot regardless of the chemical specification. Another example to make the point – an export of titanium alloy in ingot form can be matched against an import of commercially pure titanium sponge. The one caveat would be that the drawback claimant is only eligible for a drawback refund on the lesser of the two values (import vs. export) so, in the example cited, the 15% drawback refund of duty would be assessed upon the price of the lower grade/valued product.
- HTS 8108.90.30 includes articles made of titanium such as castings. All articles that fall under this HTS would be considered interchangeable regardless of chemical composition or grade.
- HTS 8108.90.60 provides a perfect example of the only other significant restriction on HTS level drawback substitution. The HTS 8108.90.60 begins with the description of “Other” which is a catch-all basket classification, in this case for “other” articles of titanium. For “Other” classifications at the 8th digit, the drawback claimant must drill down to the 10th digit. In this example, all articles falling under 8101.90.60 include blooms, sheet bars and slabs. A drawback claim for this classification can match import and export of these three forms, once again, without regard for the grade or chemical specification.
First Step in the Process, Conduct an Assessment: As the saying goes, a company must first determine if the “juice is worth the squeeze.” In other words, is there enough recovery potential on the table to justify establishing a drawback program? To answer this question, a company must analyze its import/export activity for the past five years in order to estimate the total potential refund, as the new regulations allow for a five-year lookback period!
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