Duty Drawback

Simplification Adapting Your

Procedures

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Speakers • Michael V. Cerny is Vice President of Sandler & Travis Trade Advisory Services,

a global trade compliance management provider and licensed Customs broker specializing in duty drawback and other trade services. Mr. Cerny is also an a member of Sandler, Travis & Rosenberg, a law firm focused exclusively on customs and trade law. Together, STTAS and ST&R form the largest customs and international trade services provider in the world.

• Mr. Cerny is the Chair of the Drawback Committee for the National Customs Brokers & Forwarders Association of America. He was selected by U.S. Customs & Border Protection to serve as a Trade Ambassador as part of the Trade Support Network (TSN), and the Trade Leadership Council, and is Chair of the TSN Drawback Committee, Co-Chair of the TSN Legal Policy Committee, and a member of the TSN Entry Committee. Mr. Cerny is Co-Chair of the Drawback and Duty Deferral Committee of the American Association of Exporters & Importers, as well as a member of that organization’s Board of Governors and Nominating Committee. Mr. Cerny is admitted to the United States Court of International Trade and is a member of the Customs & International Trade Bar Association, the American Bar Association Section of International Law & Practice, the New York State Bar Association, and the Association of the Bar of the City of New York. Mr. Cerny also serves on the Simplification, Drawback Regulations, and ACE Drawback working groups, as well as on the COAC Rulings Subcommitee.

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Speakers

• David Corn is a Vice President with Comstock & Theakston Inc.,

starting his drawback career in 2011. David was appointed to the co-

chair position of AAEI's Drawback and Duty Deferral Committee in 2015

and is active on the NCBFAA Drawback Committee. He also serves on

a working group for the Trade Support Network that is coordinating

efforts with CBP to write the new drawback CATAIR to fulfill the user

requirements for ACE. Mr. Corn has discussed drawback legislation with

congressional representatives from NJ, NY, CT, the House Ways and

Means Committee and the Senate Finance Committee.

• Mr. Corn has a Bachelor of Science degree from The Ohio State

University in Consumer Affairs, is a Licensed Customs Broker (LCB)

and a Certified Customs Specialist (CCS).

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The Purpose of Drawback • Drawback is the last remaining export promotion program that is sanctioned by the

World Trade Organization/GATT

• As stated by Congress, “[t]he rationale for drawback has always been to encourage

American commerce or manufacturing, or both. It permits the American

manufacturer to compete in foreign markets without the handicap of including in his

costs, and consequently in his sales price, the duty paid on imported merchandise.”

See the Legislative History Report of the Customs Mod Act from the House Ways

and Means Committee, House Report 103-361, 103d Cong., 1st Sess. (1993)

• Customs states that “[t]he purpose of drawback is to enable a manufacturer to

compete in foreign markets. To do so, however, the manufacturer must know, prior

to making contractual commitments, that he will be entitled to drawback on his

exports. The drawback procedure has been designed to give the manufacturer this

assurance and protection.”

http://www.customs.gov/xp/cgov/import/cargo_control/ftz/about_ftz.xml.

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Why Change Drawback?

• One word – simplification

• Streamline a process

• Move to 8-digits

• Make it user friendly and less complex

• Decrease the cost and administrative burden for both

CBP and manufacturers/exporters

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Taking Effect

• When does the new law take effect?

• Subsection (q) of the new law states that the amendments

made by Section 906 take effect

• On the date of enactment, and

• “apply to drawback filed on or after the date that is 2 years

after such date of enactment.”

• However, there is a transition rule which says that for one

year after the date that filings can be made under the new

law, drawback claims can be filed under the new law (1313

as amended) or the old law (1313 prior to the amendments)

• Application of the new law is not subject to the operation of ACE

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What About Regulations?

• The new Subsection (l)(2) of Section 313 requires CBP to

prescribe regulations:

• Within 2 years after the date of enactment - February 24,

2018, and

• That determine the calculation of amounts to be refunded as

drawback under the new law.

• The new law is a statutory change, and CBP must prescribe

regulations to implement the new law

• Expect an NPRM, hopefully later this summer

• The need for CBP and the Trade to work together in drafting

• Congressional oversight will be part of the process

• Not impacted by Trump moratorium on new regulations

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Yet Another Government Report…

• Subsection (p): Government Accountability Office Report to be

completed one year after issuance of the regulations

• Assessment of modernization of drawback and refunds under the

new law

• Description of permissible claims before and after the effective

date and identification of the affected industries

• Description of drawback claims not permissible before the

effective date that are now permissible and the affected

industries

• Study to be submitted to Ways & Means and Finance Committees

• Why a GAO study?

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Substitution Unused Merchandise

Drawback 1313(j)(2)

• Standard for substitution is 8-digit HTS, not commercial

interchangeability

• Limitations if your 8-digit HTS starts with “other”

• 5 years import to claim

• No more Certificates of Delivery

• New rules for calculating drawback amount

• Consider value of exported/destroyed items

• Drawback for recovered materials

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1313(j)(2) Drawback What does 8-digit substitution mean?

• It means just that, same 8-digit HTS in and out

• Schedule B can be used at export, and it could be broader- “without

regard to whether the Schedule B number corresponds to more

than one 8-digit HTS subheading”

• Your Entry Summary could have an incorrect HTS, but still qualify

for drawback (PEAs, Protests, Disclosures, Rulings, Court Cases)

• Previous CIDs and CI rulings are irrelevant

• No need for CIDs - obtain a classification ruling

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1313(j)(2) Drawback 8-digit substitution and “other” categories

• What is this about? Basket Provisions

• You may not be able to use j2 if your 8-digit HTS starts with the

word “other”

• However, you can use j2 if your 8-digit HTS has 10 digit breakouts

and you product’s breakout doesn’t start with the word “other.”

• If your 10 digit HTS begins with “other,” then you can only claim

drawback under 1313(j) using j1.

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• Example, 8509 “Electromechanical Domestic Appliances”

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(j)(1)

1313(j)(2) Drawback 8-digit substitution and “other” categories

1313(j)(2) Drawback New Statutory Time Requirements

• Current Law:

• New Law:

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Date of Import Date of Export

3 Years

Date of Claim

3 Years

Date of Import Date of Export

5 Years

Date of Claim

1313(j)(2) Drawback Certificates of Delivery Eliminated

• “Transfers of merchandise may be evidenced by business records

kept in the normal course of business and no additional certificates

of transfer shall be required.”

• Expect to see regulations as to what business records may be used

to support evidence of transfer

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1313(j)(2) Drawback What does this mean?

• You do not need CDs under the new law

• Transfers need only be evidenced by business records kept in the

normal course of business, such as invoice and shipping records

(what, by whom, to whom, when)

• Must be received “directly” or “indirectly” (intermediate transfers)

from the importer

• With joint and several liability, some importers may feel more

comfortable with agreements and some type of transfer records (a

private CD?)

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1313(j)(2) Drawback Calculating Drawback – 1313(l)

• Every drawback provision now points to (l) for the drawback

calculation.

• 1313(l)(2)(A):

“Not later than the date that is 2 years after the date of the

enactment of the Trade Facilitation and Trade Enforcement

Act of 2015 (or, if later, the effective date provided for in

section 606(q)(2)(B) of that Act), the Secretary shall prescribe

regulations for determining the calculation of amounts

refunded as drawback under this section.”

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1313(j)(2) Drawback Calculating Drawback – 1313(l)

• The regulations required by subparagraph (A) for determining the

calculation of amounts refunded as drawback under this section

shall provide for a refund of equal to 99 percent of the duties, taxes,

and fees paid on the imported merchandise, which were imposed

under Federal law upon entry or importation of the imported

merchandise, and may require the claim to be based upon the

average per unit duties, taxes, and fees as reported on the entry

summary line item, or if not reported on the entry summary line

item, as otherwise allocated by U.S. Customs and Border

Protection

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1313(j)(2) Drawback This means:

• Customs must write regulations to explain calculation of drawback

• They must provide for an amount equal to 99% of the duties, taxes,

and fees paid

• Customs can choose to issue regulations providing for calculation

of duties, taxes and fees based upon the average line item amount

– Possibly no change in the calculation method

– Alternatively, CBP could require all calculations to use the average

– Third possibility is a hybrid approach requiring average for substitution

and invoice level calculation for direct ID

• If claimed at invoice level, possibly not available for substitution

• Could result in tough decisions for drawback claimants

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1313(j)(2) Drawback: Lesser Of Rule

• You are limited to no more than drawback of 99% of the duties,

taxes, and fees that would apply to the exported or destroyed

merchandise.

• However, for substitution, the calculation is limited by the value of

the exported/destroyed item

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1313(j)(2) Drawback: Lesser Of Rule What does this do?

• You can’t import an expensive race car and then export an

economy car and get the full duty, taxes and fees on the race car.

You are limited by the value of the economy car.

• Another example: Montblanc for BIC pen

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1313(j)(2) Drawback: Lesser Of Rule Questions for regulations

• How do you determine value of the exported item?

– Export Invoice

– EEI

– Other method

• How do you determine value of the destroyed item?

– Original Invoice Value

– Current Inventory Value

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1313(j) Drawback 1313(x) Recovered Materials – now applies to (j)

• For purposes of subsections (a), (b), (c), and (j), the term

‘destruction’ includes a process by which materials are recovered

from imported merchandise or from an article manufactured from

imported merchandise. In determining the amount of duties to be

refunded as drawback to a claimant under this subsection, the

value of recovered materials (including the value of any tax benefit

or royalty payment) that accrues to the drawback claimant shall be

deducted from the value of the imported merchandise that is

destroyed, or from the value of the merchandise used, or

designated as used, in the manufacture of the article.

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Direct Identification, 1313(j)(1)

Drawback What has changed?

• Use the new 5-year time frame

• Same drawback calculation under (l) (same condition?)

• CDs are eliminated

• Will be claimed by only:

(1) those with 8-digit HTS numbers that fail the “other” rule

(2) those who otherwise can’t use substitution

(3) those with same condition under NAFTA and US-Chile, and

(4) those folks who want to punish themselves

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Manufacturing Drawback

Calculations • 1313(a) & 1313(b) calculations are now found in 1313(l)

• For manufacturing direct identification, will be equal to 99% of

duties, taxes, and fees paid on the imported merchandise

• Need specific definitions in new regulations for average per unit

on the entry summary line item

• Can collect taxes and fees

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Manufacturing Substitution Drawback Lesser-of Calculation

• “The regulations required by subparagraph (A) for determining the calculation of amounts refunded as drawback under this section shall provide for a refund of equal to 99 percent of the duties, taxes, and fees paid on the imported merchandise incorporated into an article that is exported or destroyed….except that where there is substitution of the imported merchandise, then-

• i. in the case of an article that is exported, the amount of the refund shall be equal to 99 percent of the lesser of-

• (I) the amount of duties, taxes, and fees paid with respect to the imported merchandise; or

• (II) the amount of duties, taxes, and fees that would apply to the substituted merchandise if the substituted merchandise were imported;”

• AND • If destruction only, reduced by the value of the materials recovered during destruction

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Manufacturing Substitution Drawback Major Changes

• 8-digit for 8-digit for substituted merchandise, looking at the components used in the manufacturing process

• Same kind and quality rulings are no longer required

• No tracking of receipt date and broader time limit requirement on use

• BOM will be required to be submitted with substitution manufacturing claims

• BOM will require HTS and value of both the imported designated and substituted merchandise

• Includes a special rule for “sought chemical elements”

• CDs and CMDs no longer required (transfer of merchandise)

• Claim HMF and MPF refunds

Manufacturing Substitution

Drawback Sought Chemical Elements

• Statute has special provision to protect sought chemical elements

within 8-digit substitution (tied to calculation subsection (l))

• Sought elements in today’s world with apportioned quantity

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Import and designate titanium sponge (99kg pure)

• Or substitute scrap (99kg pure titanium)

Use any combination of sponge and scrap

Export article containing 99kg pure

titanium

Apportion duty paid

on 100kg of sponge

with 99% duty to

pure titanium

content

Manufacturing Substitution Drawback Sought Chemical Elements

• Lesser-of provision was added late

• Intent was to leave the apportionment to be based on the value of

the metal is the substituted material, not based on duty alone

• Regulations should clarify based on value, but appears as if lesser-

of will apply

• Will be impact to some claimants here

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Import

Manufacture

Export

File Claim

5 years

Future 1313(a) and (b)

Import Manufacture Export

Current 1313(a)

Current 1313(b)

Import

Received @ Plant

Used in Manufacturing

Article Manufactured

Export

5 years

3

years

5 y

ears

3 y

ears

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Manufacturing Drawback Timeframes

1313(c) Merchandise Not Conforming

to Sample or Specification

• Amendments to synchronize with new concepts

• Eliminating certificates of delivery

• Changing timeframe from 3 years to 5 years

• Changing “the Customs Service” to “U.S. Customs and Border

Protection”

• Refund amount will be determined by calculation language in

1313(l)

• Evidence of Transfers by ordinary business records

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1313(p) Substitution of Petroleum

Products • Amendments to synchronize with new concepts

• Changing “Harmonized Tariff Schedule of the United States” to

“HTS”

• Eliminating certificates of delivery

• Evidence of Transfers by ordinary business records

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Proof of Exportation

• Amendments to 1313(i)

• Proof of exportation shall establish fully the date and fact of

exportation and the identity of the exporter

• Records to meet the above can be:

• (1) Records kept in normal course of business or

• (2) Electronic export system of the U.S. as determined by U.S.

Customs and Border Protection

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Liability for Drawback Claims

• Amendments to 1313(k)

• Any person making a claim for drawback shall be liable for the

full amount claimed

• Liability for Importers will be lesser of

• (1) amount claimed with respect to the imported

merchandise; or

• (2) amount that the importer authorized other person to

claim with respect to the imported merchandise

• Joint and Several Liability (hierarchy?)

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Recordkeeping Time Frame What has changed?

• The current law is three years from date of payment

• Today, many claims are paid accelerated and can take more than 3

years to liquidate. A desk review can actually be made AFTER the

recordkeeping time frame has expired

• Under new law, it is 3 years from the date of liquidation of the claim

• This could be a period of time that is required now, but it will also

ensure that records are kept through liquidation

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Adapting Your Procedures: Data

• Start collecting data based on known statutory

changes

–Still waiting on regulations to provide specifics, but will need to

add line item number when new law begins

–Some overlap with development of ACE and new fields

needed (i.e., fees, line item number, etc.)

• Utilize ACE and ITRAC for full view of imports and

exports

–Data for the last several years; may assist in filling data gaps

within your system

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Adapting Your Procedures:

Applications and Claims

• Filing applications

– May need to file additional applications for opportunities that

didn’t exist before, specifically with unused substitution

– Waiting on direction from CBP policy for different types of (j)

drawback approval

• Claim preparation

– Claim frequency may increase due to change in drawback type

and due to transition to ACE

– Additional programming necessary to allow for new fields and

new CATAIR

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Adapting Your Procedures:

Classification • Examine, correct, and document HTS numbers for

imports, domestic items, exports

• Identify items classified as “other”, as you may be

required to claim on a different unused type

• Record value of substituted merchandise (for unused and

manufacturing)

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Adapting Your Procedures:

Additional Opportunities

• Drawback trading

– Concept for petroleum drawback today

– Other commodities can trade in 2018 with TFTEA

– Match on 8 or 10-digit HTS, subject to “other” restrictions

– Expands on opportunities for companies that only import OR

export

– Works outside of your current drawback program

– Prospective only

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Questions and Contact Information

Michael V. Cerny

STTAS/Sandler, Travis &

Rosenberg

24 Smith Street

Building 2, Suite 101

Pawling, NY 12564

mvcerny@strtrade.com

(212) 549-0160

David Corn

Comstock & Theakston, Inc.

466 Kinderkamack Road

Oradell, NJ 07649

dcorn@dutydrawback.com

(201) 967-1220 x103