Duty Drawback – benefits and challenges

Most US importers are familiar with duty. They pay duty (and applicable MPF/HMF) on many of their imported goods – particularly those that are not granted 0 duty by virtue of a free trade deal.

Unfortunately, too many companies consider this cost a “necessary cost of business” and simply plan for it in their budgets. These duties can represent anywhere from 1 or 2, up to double digit percentages of product value. This can have a serious impact on your bottom line! These costs could be reduced or eliminated, through a duty drawback program, if a significant amount of the imported product was subsequently exported or destroyed.

Why is it that so many companies fail to take advantage of this program? The reason is largely due to a perceived difficulty in the process, and an inability to comply with the requirements. The truth is, those companies are right! They are unable to comply, that is without an automation solution. Allow me to explain, using the drawback process.

In order to claim duty drawback, you will have to put together several document files, as well as demonstrate your systems to customs in a satisfactory way. Not to mention the fear most companies have of opening their books to customs (voluntary audit, anyone?), this process itself is very time consuming. Several key elements of data are needed as follows:

-          Import history – all of the import transactions that cost you duty, for products you subsequently exported or destroyed. This data set must include the specific import entry data fields required: fields you may not have available in your company ERP system. This means you will have to go to the hard copies or an external database

-          Export history –all of the export transactions representing the items (either in their original state or as part of your finished good that used them). Again this must contain the stringently required data fields, which you may need to consult hard copies to get

-          Disposal records for destroyed product

-          A systemic demonstration of your company processes. This is to give Customs satisfaction that the export/disposal data lines represent the original imported goods. Remember – you likely export product codes that do not match what you imported. Furthermore – you must show that the export/disposal occurred within the legislated time frame allowed, after importation

-          After all that, you must take the data and input it into the mandated Customs forms and templates. You can’t just submit your own document types

-          All of the above needs to be 100% accurate. Incorrect filings resulting in improper refund checks expose you to penalties

Considering all this, is it any wonder many companies choose to pass on the drawback opportunity? What then to do about it? Well, there’s two solutions – implement an automated drawback system that ties to your ERP and customs systems, and enables fast calculation and filing of all of the above. OR, consider an FTZ, or Foreign Trade Zone.

What is an FTZ? FTZ’s allow you to avoid duty at the time of import .This means you won’t need to file for duty drawback when you export/destroy, since you never paid it. It gets better: you also don’t pay duty on the domestically consumed imports until they leave your facility. This means you can defer payment of duty for months at a time, improving your cash flow.

The US FTZ program also allows for “tariff inversion”. What is this? Allow an example:

If you import widget A, and it has duty of 10%, you are currently paying 10%. Now let’s imagine you manufacture gear B using that widget. Gear B has a duty rate of 5%. Under an FTZ you will pay 0 duty when you import the widget. Next you consume the widget in the gear. When you sell the gear domestically you will pay only 5% duty on the value of the widget, resulting in a savings of half the duty vs. the non-FTZ model, on top of payment deferral.

There are also other ancillary benefits such as weekly import filing, allowing you to pay one MPF fee for multiple entries.

Let’s take this back to where we started. If you are an importer and manufacturer, you are likely paying significant duty. You could recover some of that duty through drawback, but the manual process is difficult and perhaps out of the question. A foreign trade automation tool such as SAP GTS can help you recover these duties easily and more accurately. Alternatively, why not consider an FTZ? With an FTZ you could save even more money and with much less administrative burden.

Kevin Riddell