In an earlier alert, we discussed the various export incentives put into place with the passage of the Trade Facilitation and Trade Enforcement Act (“TFTEA”). One long-standing benefit available to exporters is duty drawback, which enhances a company’s ability to compete in the global market. Drawback lowers the cost of U.S. exports by allowing for refunds of duties, taxes and fees paid on imported merchandise which is subsequently exported in its same form, as part of a U.S. manufactured product or similar domestic merchandise which is substituted for the imported merchandise. More details will become evident as the regulations are developed within two (2) years following enactment. Here we discuss the key provisions in the TFTEA which impact drawback.
Duty drawback is under-utilized, partly because eligible U.S. companies do not know about it. A second and more important factor for many is the extensive administrative and compliance burdens. The cost-benefit ratio just does not make sense to many. The TFTEA attempts to simplify the process to make drawback more available to companies of all sizes for exports to non-NAFTA countries.
Common types of duty drawback are manufacturing and unused:
Manufacturing Drawback – This claim allows for a refund of duties (no taxes and fees) paid on imported merchandise based upon the production and export of articles using imported, duty-paid merchandise or similar domestic merchandise, which is substituted for the imported merchandise. This type of drawback can apply to a variety of manufacturing operations
Unused (Non-Manufacturing) Drawback – This claim allows for a refund of duties, taxes and fees paid on imported merchandise exported in essentially the same condition. Imports can be matched to exports by direct identification or by substitution (i.e. the export is “commercially interchangeable” with the import). This type of drawback applies to all types of imports.
The key changes include:
Substitution – The TFTEA improves the substitution provision by making it easier to track and match substituted merchandise. There is a switch from the current requirement to substitute “commercially interchangeable” merchandise to substitution based on the 8-digit HTSUS code, unless the 8-digit code starts with “other,” in which case a 10-digit classification for substitution will be required. Much of the past litigation between CBP and the trade was over the question of whether the exported good was, in fact, commercially interchangeable with the original imported good. This change eliminates the need for any subjective analysis on CBP’s part.
Substitution Claims – Claims will be calculated on a lesser-than basis. For manufacturing claims, the refund claim amount will be the lesser of the duties paid on the imported merchandise or on the substituted merchandise had it been imported. For unused claims, the refund again keys on the lesser of concept, and here, it is between the duties paid on the imported merchandise and the duty that would apply to the exported article had it been imported.
Simplified Timeframes – The new law allows drawback on imported merchandise exported within five (5) years from importation, rather than the current three (3) year limitation.
Recordkeeping Timeframe – Currently, records must be kept three (3) years from the date of payment of the claim. The new rule is three (3) years from liquidation of the claim.
Certificates of Delivery – This requirement has been removed.
Proof of Export – Drawback claimants can now use their Automated Export System (“AES”) record to substantiate the export of their goods.
Liability – Under the new law, when multiple parties are involved in the import and export of the drawback merchandise, liability is shared if the drawback is denied due to lack of compliance.
If you want to explore duty drawback opportunities for your company, we suggest you start now. Remember, although the new regulations will not be in place for several years, duty drawback allows for five (5) years of import history. It is always better to be prepared, so this is the time to evaluate the potential for your company and start getting your records in order.