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Richard (Dick) Belanger, JD, Senior CounselSidley Austin LLP
Andrew Siciliano, CPA, JD, LCBU.S. National Practice Leader KPMG’s Trade & Customs Practice
Trade & Customs - Unlocking Above-the-Line Savings and Identifying Hidden Risks
International Tax InstituteTuesday, April 28, 2015
Trade & Customs PlanningAgenda
Hot Topics in Trade & Customs Valuation / Transfer Pricing First Sale for Export Foreign Trade Zones Duty Drawback Trade Embargoes CBP Audits
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Background – Trade & Customs Trade Facts Government Agencies Roles and Responsibilities
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2Trade & Customs Basics Valuation Tariff Classification Country of Origin Special Trade Programs Export Controls
1
Background –Trade & Customs
Background – Trade & CustomsHistory Lesson
What was the reason for the Boston Tea Party?
3
Background – Trade & CustomsTrade Facts
The Townshend Revenue Act (1767) – levied taxes on the captains of ships importing various merchandise, such as glass, lead, paints, paper and tea.
2014 Trade Highlights*
2014 exports of goods and services ($2.3 trillion), exports of goods ($1.6 trillion), and exports of services ($710.3 billion) were the highest on record.
2014 imports of goods and services ($2.9 trillion), imports of goods ($2.4 trillion), and imports of services ($478.5 billion) were the highest on record.
The 2014 services surplus ($231.8 billion) was the highest on record.
* census.gov
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Background – Trade & Customs Government Agencies
Including but not limited to… U.S. Customs and Border Protection (CBP) U.S. Food and Drug Administration (FDA) U.S. Fish and Wildlife Service Bureau of Alcohol, Tobacco, Firearms and
Explosives (ATF) U.S. Department of Agriculture (USDA) Environmental Protection Agency (EPA)
Including but not limited to… Bureau of Industry and Security U.S. Department of State Directorate of Defense Trade Controls
(DDTC) Office of Foreign Assets Control (OFAC) U.S. Department of Treasury U.S. Department of Commerce
Imports Exports
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Background – Trade & Customs Roles and Responsibilities
FactoryR&D Sourcing Logistics Importer Distribution Customer
Customs
SAVI
NG
SO
PPO
RTU
NIT
IES
RIS
K A
REA
S
Customs Valuation
First Sale for Export
Buying Commissions
Foreign Trade Zones
Bonded Warehouses
Free Trade Agreements
Special Trade Programs
Tariff Engineering
Cost Unbundling
Customs Valuation
Antidumping/ Countervailing
Duty
Product Regulatory Compliance
(CPSC, Lacey)
Filing Fees- Entry- ISF
Freight Costs
Selling Commissions
Tariff Classification
Temporary Importations
Special Provisions –Chapter 98
Related Party Sales
Customs Audits
C-TPAT
Processes & Procedures
Duty Drawback
SUPP
LY C
HAI
N
Export Controls- Classification
- Licensing- End-users
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Trade & Customs Basics
Trade & Customs BasicsDetermining Duty Owed
Trade & Customs BasicsValuation
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Sales price in the United States, minus statutory deductionsDeductive
Transaction value of identical or similar goodsTV of Identical or Similar Goods
Primary Method of Appraisement = Generally, the invoice price plus statutory additionsTransaction Value
Cost to manufacture, plus statutory additions Computed
Value when other values cannot be determinedFallback
Deductive and Computed value may be switched at the importers election Importer’s Election
Trade & Customs Basics Tariff Classification
Tariff classification determines the rate of duty applicable to an imported article
All goods can be classified using the Harmonized Tariff Schedule of the United States (HTSUS)
The first six digits are harmonized globally
Goods are classified pursuant to the General Rules of Interpretation and U.S. Rules of Interpretation
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Trade & Customs Basics Country of Origin
Many Reasons for Determining Country of Origin
• Customs Declaration
• Antidumping and Countervailing Duties
• Trade Preference Programs (e.g., FTAs)
• Marking
• Government Procurement
The country of origin may be different for many of
these categories.
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Trade & Customs Basics Special Trade Programs
Unilateral Preference ProgramsCBERA ATPA AGOAGSP ATPDEA FASCBI
Free Trade AgreementsNAFTA Israel PeruDR-CAFTA Chile Korea
Australia Jordan ColombiaSingapore Bahrain PanamaMorocco Oman
Free Trade Agreements
Unilateral Preference Programs
Special Classification Provisions
International Agreements for Certain Commodities
Types of Special Trade Programs
Special Classification ProvisionsChapter 98, HTSUS
International AgreementsPharmaceuticals Civil AircraftIntermediate Chemicals
Information Technology
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Trade & Customs Basics Export Issues
EmbargoesCubaCrimeaIranNorth KoreaSudanSyria
Export Controls U.S. Bureau of Industry and Security,
Commerce Commerce Control List
Sanctions & Embargoes U.S. Bureau of Industry and Security,
Commerce Office of Foreign Assets Control, Treasury
International Traffic in Arms Directorate of Defense Trade Controls, State U.S. Munitions List
U.S. Export Issues
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Hot Topics in Trade & Customs
Transaction Value
Transaction value is the primary method of appraisement
Transaction value may not be used in certain circumstances, one of which is when the relationship of the parties influenced the price
There are two primary tests to determine if the relationship of the parties influenced the price
Circumstances of Sale Test Values
Hot Topics in Trade & CustomsValuation
Just because a price is considered acceptable for
tax purposes does not mean it is acceptable for customs
purposes.
Customs Tax
Entry-by-Entry evaluationProduct-based comparison
Lower value = less duty
Annual evaluationFunctional comparison
Generally, higher value = less tax
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Transaction Value
Hot Topics in Trade & CustomsValuation
• “Transaction value” is the “price actually paid or payable for the merchandise when sold for exportation to the United States” plus certain statutory additions and deductions:
Additions:
− Packing costs− Selling commissions− *Assists− *Royalties (condition of sale)− Proceeds of subsequent resale
Deductions:
− International transportation and insurance − Costs incurred after importation− Customs duties and federal excise taxes
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Hot Topics in Trade & CustomsValuation
Intellectual Property and Royalties RisksGenerally included in customs value:• Any royalty or license fee that is a condition of the sale of the
imported merchandise per se condition of sale (indispensible IP right or “know how”) vs. by agreement
• The value of any engineering, development, artwork, design work, and plans and sketches (undertaken elsewhere than the United States): Supplied free of charge or at reduced cost by the buyer of the imported
merchandise Used in connection with the production or the sale for export to the United States of
the merchandise• Generra Presumption (CAFC 1990): CBP’s position that all payments made
by a buyer to a seller, or to a party related to the seller, are part of the price actually paid or payable for the imported merchandise CBP has broadly interpreted this presumption Rebuttable by evidence which clearly establishes the payments are completely
unrelated to the imported merchandise (Chrysler Corp. v. U.S. (CIT 1993)).
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Hot Topics in Trade & CustomsValuation
Exporterlicensor
Importerlicensee
goods payment Royalty*
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Exporter
Importerlicensee
good payment Royalty*
Relatedlicensor
Related parties
*License for exclusive distribution, trademark and trade name rights in the U.S.
*License for uses of trademark and trade nameon its products and U.S. retail stores
Finding: dutiable as “condition of sale” due towording of lic. agreement and parties’ relationship.(CBP Ruling 546033)
Finding: dutiable under the Generra presumption dueto wording of distribution and license agreement.(CBP Ruling 546966)
Intellectual Property and Royalties Risks
Hot Topics in Trade & CustomsTransfer Pricing
Differences Customs IRS
Different objectives Maximize COGS/import value Minimize COGS/import value
Different law 19 USC Section 1401a IRC Section 482
Different focus Per unit price of imported goods Aggregate income of importer
Different time periods Entry-by-entry declarations Annual period
Different comparable sets Product/Industry comparability Functional comparability
Different tests Circumstances of sale test/test values IRC §1.482-3 methods
Different measures if not arm’s length
Rejection of transaction value/ invoice price
Adjustment of transfer price/ invoice price
Customs vs. Tax Transfer Pricing Approach
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Hot Topics in Trade & CustomsTransfer Pricing
Retroactive Transfer Price AdjustmentsHistorically, CBP’s policy with respect to post-importation transfer price adjustmentshas been inconsistent under Transaction Value: Upward Adjustments
Importer must tender additional duties Part of the “price actually paid or payable”
Downward Adjustments Disallowed duty refunds Adjustment was viewed to be a “rebate” or decrease under 19 U.S.C.
§1401a(b)(4)(B): “Any rebate of, or other decrease in, the price actually paid or payable that is
made or otherwise effected between the buyer and seller after the date of importation of the merchandise into the United States shall be disregarded in determining [transaction value].”
Prices which require adjustment must be arrived by the application of a fixed objective formula:
Final sales price must be determined at a later time on the basis of some future event or occurrence over which neither the seller or the buyer have any control
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Hot Topics in Trade & CustomsTransfer Pricing
Retroactive Transfer Price Adjustments (continued) On May 16, 2012, CBP broadened its interpretation of an objective “formula,”
thereby allowing downward adjustments under Transaction Value (including downward adjustments) – HQ W548314 (5/16/12)
The “Five Factors” an Importer must meet to receive a duty refund:1. A written “Intercompany Transfer Pricing Determination Policy” is in place prior to
importation and the policy is prepared taking Internal Revenue Code section 482 into account
2. The U.S. taxpayer uses its transfer pricing policy in filing its income tax returnand any adjustments resulting from the transfer pricing policy are reported or used by the taxpayer in filing its income tax return
3. The company’s transfer pricing policy specifies how the transfer price and any adjustments are determined with respect to all products covered by the transfer pricing policy for which the value is to be adjusted
4. The company maintains and provides accounting details from its books and financial statements to support the claimed adjustments in the United States
5. No other conditions exist that may affect the acceptance of the transfer price by CBP (e.g., the adjusted price must be an arm’s length from a CBP perspective)
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Hot Topics in Trade & CustomsFirst Sale for Export – U.S. and EU currently
First Sale for Export Merchandise imported to the United States from a middleman, rather than from a
manufacturer, is often appraised for U.S. Customs purposes based on the price charged by the middleman to the U.S. importer. Since this price is generally higher than the manufacturer’s price to the middleman, duty liability is greater.
The below depicts the transactional structure needed to declare first sale for export
Ex-Factory Price - $78Duty - $15.60
FOB Price - $100Duty - $20
SECOND SALE(INVOICE 2)
Second Sale (Traditional Customs Value) Includes:
First Sale Value, plus - Middleman Mark-up Foreign Inland Freight Intellectual Property Rights Administration
FIRST SALE (INVOICE 1)
Factory Middleman Company
First Sale ValueIncludes:
Labor Factory Overhead Factory Margin Raw Materials
Assuming 20% Duty
Rate
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Hot Topics in Trade & CustomsForeign Trade Zones
Foreign Trade Zones Global cost savings area, specific to each country A Foreign Trade Zone (FTZ) is a geographical area, within the territory of the U.S. that is
considered to be outside of U.S. commerce and therefore not subject to CBP duties, taxes and fees, until the merchandise enters the commerce of the U.S.— Duty elimination— Duty drawback elimination— Duty deferral— Reduced brokerage fees— Reduced MPF— Inverted tariff benefit— Enhanced supply chain— Property tax exemption
Exported Merchandise
Imported Raw Materials, Machinery, and Parts
U.S. Consumption
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Hot Topics in Trade & CustomsForeign Trade Zones
Foreign Trade Zones (continued) Global equivalents
• Free Trade Zones• Bonded Logistics Parks• Processing Trade Regimes
EU• Public Customs Warehouses• Private Customs Warehouses
• Foreign Trade Zones• Free Trade Zones• Bonded Warehouses• IMMEX
ASPAC
Economic Benefits:• Import duty deferral• Import duty mitigation
(export)• Storage/processing/
assembly operations• Cash flow enhancement
Supply Chain Benefits:• Improved clearance
processes• Improved security
processes
Americas
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Hot Topics in Trade & CustomsDuty Drawback
Duty Drawback
Duty drawback (or refund of import duties) may be claimed on goods that were imported to the U.S. and subsequently exported, provided that the goods qualify as either of the following:— Direct or Substitution Manufacturing Drawback— Unused Merchandise Drawback— Rejected Merchandise Drawback
The exporter, processor, owner or producer may claim a drawback of customs duties
In most cases, the exporter may claim drawback for up 3 years from the date of export
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Hot Topics in Trade & CustomsTrade Embargoes – Cuba & Russia
Trade embargo of the Crimean Region
Sectoral Sanctions against identified individuals and entities within Russia’s economy
Additions to the Specially Designated Nationals (SDN) list of certain individuals and entities involved in the situation in Ukraine
CUBA
• Lightening Of Certain Restrictions
•Addition of license exceptions and general licenses for certain activities, including for certain exports and reexports supporting the Cuban People
Ukraine-Related Sanctions
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•Risk-based approach to selection of companies for audits•Priority Trade Issues
Antidumping and Countervailing Duties Intellectual Property Rights Textiles and Wearing Apparel Free Trade Agreements
•Composed of three phases Pre-Assessment Survey (PAS) Assessment Compliance Testing (ACT) Follow-up Audit
•Changes to the audits Most edits are in the PAS phase Increased emphasis on materiality Expanded guidance on tailoring the audit to
the importer Changes to sample size guidance Changes in report language
Focused Assessment Audits (FA)
Hot Topics in Trade & CustomsCBP Audits
Types of Audits
• Focused Assessment Audits• Referral Audits (formerly Quick
Response Audits)• User Fee Audits• Importer Self-Assessment
Evaluations
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