Types of Duty Drawback

NAFTA Drawback: Unfortunately, the NAFTA was not friendly to drawback, as it placed a variety of restrictions on claimants filing drawback on US export activity to Canada and Mexico. Many claimants became discouraged by the additional regulatory burden of the process and simply abandoned filing drawback on exports to these destinations. Given that Canada represents one of the primary destinations for US exports, many claimants forfeited significant drawback recovery. The primary restriction on unused drawback (drawback on merchandise exported in essentially the same condition as imported) related to the substitution method of matching exports to imports. Under the substitution provision, a drawback claimant does not need to trace an export back through inventory and match it to its actual entry of importation (this is called the direct identification method). Instead, an export can be matched to any import of like merchandise within three years of the export data.

While the NAFTA eliminated unused substitution, it does allow for unused drawback under the direct identification approach; However, what if a claimant cannot trace an export back through inventory using a lot number or serial number? Most types of merchandise lose its identity once it entered inventory. The alternative to actual direct tracing is to use one of the accounting methods allowable under the provisions of direct identification. While not as flexible as substitution, these methods allow a claimant to bypass the more onerous task of specifically tracing merchandise. The simplest of the accounting methods is “low to high.” Low to high requires a claimant to designate imports (choosing an import for a drawback claim) according to the one with the lowest amount of duty on a per unit basis. If duty rates and values are relatively constant over time, most claimants will give up a slight amount of recovery in exchange for a significant reduction in the amount of administrative effort. Claimants with significant export volume to Canada should evaluate the viability of filing under this method as means of increasing drawback recovery.

Petrochemical Drawback: (19 USC 1313P): A commodity specific drawback provision for petroleum derivatives was added to the law in 1990. The statute was subsequently amended again in 1999 to further liberalize substitution rules for claiming drawback on products deemed “qualified articles” under 19 USC 1313(p).

Notably, subsection (p) allows for drawback on the export of domestically produced petrochemicals in exchange (substituted) for imported chemicals, so long as they both fall within the same 8-digit HTSUS classification. For example, a company imports a duty-paid PVC compound classified under 3904.22.0000 in the tariff schedule. It also procures domestically produced PVC compounds from a US supplier. The domestic PVC compounds, if theoretically imported, would fall under the same 8-digit classification. The company then exports the domestically produced compounds to an oversees customer and uses these exports to secure a refund on the duty assessed on the imported chemicals. The statute specifically lists these qualifying articles/HTS classifications that allow for substitution at the classification level instead of the part level, as is the case for drawback provisions.

The domestic PVC compounds, if theoretically imported, would fall under the same 8-digit classification. The company then exports the domestically produced compounds to an oversees customer and uses these exports to secure a refund on the duty assessed on the imported chemicals. The statute specifically lists these qualifying articles/HTS classifications that allow for substitution at the classification level instead of the part level, as is the case for drawback provisions.

TFTEA Drawback – The New Regime: The drawback statute has been the subject of numerous amendments since 1789, the most recent of which occurred as part of the Trade Facilitation and Enforcement Act of 2015 (know by its acronym of TFTEA). The TFTEA amendments took effect Feb. 24, 2018 and allowed a one-year transition period where claimants could file either under the old or the new rules. This transition period ended on February 24, 2019.

Currently, claimants can only file under the new TFTEA drawback rules. The TFTEA changed the drawback program in certain key areas:

  • Liberalized the drawback substitution standards
  • Changed record keeping time parameters
  • Extended and standardized timelines for filing drawback claims so that a company can claim drawback on import/export activity up to 5 years old
  • Made the electronic filing of drawback claims a requirement

Third Party Drawback: The drawback regulations (found in 19 CFR 190) allow for the transfer of drawback rights when the importer and exporter of record are not the same company. Example: Company A imports orange juice from Brazil and pays the duty to Customs before selling the juice. While either entity can submit the drawback claim to Customs, (referred to as the drawback claimant) the drawback regulations grant the exporter the first right to submit the drawback claim to Customs and Border Protection (CBP).

Specifically, the importer can transfer the duty paid imports to the exporter with any record that provides the necessary data elements for the exporter to prepare and submit a claim for drawback. Required fields and data elements include the Customs Entry Number, the date of importation, duty paid, and HTS number, among others.

Conversely, if the importer wants to retain the drawback rights, and thus control the preparation and submission of the drawback claim, the importer needs to secure a waiver of drawback rights from the exporter. Additionally, the importer should also establish a procedure that provides them with a copy of the export bill of lading and commercial invoice for each export transaction included in the drawback entry.

Bottom-line: Both the importer and the exporter must cooperate in order to compliantly submit a drawback claim.

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