Substantial Transformation

A quick explanation of substantial transformation:

As mentioned in the earlier post - Country of Origin - substantial transformation is the degree to which processing of an article leads to a new article, with a different name, character, and use. In addition, Customs uses a second method known as the “tariff shift” i.e. change in tariff classification, which is also used to determine substantial transformation. As of now, there are no uniform rules that settle country of origin questions.

As a result, substantial transformation can be highly subjective and tend to be based on political considerations. There has been much litigation in this area and have case-specific interpretations. Further, determinations as to what is considered a substantial transformation change periodically. Thus, it would be wise to discuss the nature of the product with Customs prior to importation because you are not excused from exercising reasonable care when determining the proper country of origin for your goods.

Country of Origin

What is the "Country of Origin?"

Generally, the country of origin refers to the country where the product was grown, produced, or manufactured. This is easily applied when the product is produced in one country using domestic materials. For example, a bicycle that is manufactured in India using components all made in India has the country of origin "Made in India."

However, today it is unrealistic to think that all materials, components, and labor all stem from the same country. Using the bicycle example, the wheels may be from USA, the bicycle frame from India, but the labor was done in China. In this example, it is not always clear as to where the country of origin is. In these situations the law created the concept of substantial transformation - it is a degree of processing requiring to change the country of origin (more on substantial transformation to be discussed next post).

An incorrect determination as to an imported product may lead to incorrect marking, incorrect duty, and incorrect documentation upon attempted entry. The consequences for these errors can be delays, additional costs, or seizures.

Happy Importing and Happy Holidays :)
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Countervailing duties - Protection against foreign government subsidies

What are countervailing duties?

Countervailing duties, similar to anti-dumping is a trade remedy to neutralize foreign economic threat. Specifically, countervailing duties are duties imposed by the U.S. government against tax reduction, grants, bounties, or any other subsidy provided by a foreign government on exported goods.

For example, in our country the government provides corn growers a tax credit whereby they pay them to use their corn for ethanol instead of food.

Who determines if a countervailing duty is applicable?

Same as in the anti-dumping matters, "Commerce determines whether the alleged . . . subsidizing is happening, and if so, the margin of dumping or amount of subsidy. The International Trade Commission determines whether the U.S. industry is materially injured or threatened with material injury by reason of the imports under investigation."

If the investigation of both agencies finds that goods are provided subsidies, countervailing duties will be implemented in addition to any duties they must pay under normal circumstances - enforcement of the anti-dumping duties via Customs and Border Protection. Countervailing duty is approximately equal to the amount of any subsidy that exists to which is creating harm in the U.S. market.

Happy Importing :)

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Anti-Dumping Duties - Protection from Lowball Pricing

What are anti-dumping duties? Duties imposed against goods from foreign countries that are sold significantly lower in their country of origin or comparable third country markets - destroying the U.S. market for that product in the process.

For example: Company X, an exporter from China is selling massive quantities of iPod's to U.S. resellers for the wholesale price of $50 a piece when the average price for an iPod sold at wholesale price in China is $200 a piece.

So what? a great deal is just that, a great deal, who determines whether it reaches the level of anti-dumping.

There are two players involved. The International Trade Commission (USITC) and the U.S. Department of Commerce, but each address a different issue.

"Commerce determines whether the alleged dumping . . . is happening, and if so, the margin of dumping. The USITC determines whether the U.S. industry is materially injured or threatened with material injury by reason of the imports under investigation."

If the investigation of both agencies finds anti-dumping, Company X from China will face anti-dumping duties in addition to any duties they must pay under normal circumstances - enforcement of the anti-dumping duties via Customs and Border Protection.

How do these agencies find out about the potential anti-dumping? Generally, the agencies are prompted to investigate after receiving word from a business harmed by the influx of cheap goods (e.g., your competitors!)

Happy Importing :)

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"Drawback" - What is it?

What is "Drawback"? A program that provides a refund for a majority of goods that are exported or destroyed after importation into the United States.

If the goods are exported or destroyed drawback permits Customs to refund 99% of the duties when the goods were imported into the U.S. The only difficult part about drawback is that you must maintain precise compliance with the drawback rules and regulations - the government is not going to just return money willy nilly. The importer must fill out the drawback application before exportation.

There are (4) types of drawback:

1. Merchandise not conforming to sample or specifications - Imported goods that were not solicited not conform to the samples or specifications at the time it was imported. Must be done within 3 years from the time the merchandise was released from Customs.

2. Unused merchandise drawback - Imported goods that have not been "used" (speak to an expert about whether your particular product qualifies as used). Must be done within 3 years from the time the merchandise was released from Customs.

3. Manufacturing drawback - Imported goods used to manufacture new goods. Manufacturer's Drawback requires that a "ruling" be approved by Customs so that Customs is aware of how the product is being manufactured.

4. Substitution for drawback purposes - Like manufacturing drawback, but you may substitute components of exported products with "commercially interchangeable" (again speak to an expert as to whether you qualify) components. For example: You import Company A screws into the U.S. but instead use Company B screws to manufacture your product. Company A screws and Company B screws are found to be commercially interchangeable, in other words industry equivalents. Must be done before the close of the 3-year period beginning on the date of importation of the imported merchandise

Happy Importing :)

Programs to Reduce your Duties

The United States offers a number of special duty reduction programs for products that originate from certain countries. Each of the programs requires that the good originate from beneficiary country. If the good was imported into the beneficiary country then the material must be "transformed" by a process or manufactured into a product of that country. Transformation is where things get a bit gray, contact an expert to determine if and how a good can be transformed.

Value Requirements:
The amount of value to be added consists of:
1. the materials produced in the beneficiary country
2. the direct costs of processing operations performed in the beneficiary country

Documents Required:
Most duty reduction programs require a certificate of origin and basis for qualifying under the program. It must be filed with each entry of goods into the U.S.

Some examples of Duty Free Reduction Programs:

The U.S.-Australia Free Trade Agreement
The U.S.—Israel Free Trade Area Agreement
he North American Free Trade Agreement

Happy Importing :)

New Rule and Duty Rate Governing Textile-Bottomed Footwear! DECEMBER 3, 2011

THE FOLLOWING WILL BE IN EFFECT DECEMBER 3, 2011.

Ever since an intelligent business man designed footwear with a textile outer sole (i.e. textile bottom) that footwear was subject to duty rates approximately 25% - 35% lower than equivalent footwear with a rubber or plastic outer sole - what a way to utilize Tariff Engineering!

President Obama signed Presidential Proclamation 8742 that was published in the Federal Register on November 3, 2011. What the Proclamation did was add a U.S. Note 5 to the footwear Chapter in the tariff schedule ("Chapter 64").

The new note, Note 5 states “For the purposes of determining the constituent material of the outer sole pursuant to note 4(b) of this chapter, no account shall be taken of textile materials that do not possess the characteristics usually required for normal use of an outer sole, including durability and strength.” Consequently, based on this note duty rates for certain footwear with the textile bottom may be affected.

What does "normal" mean?
How does an importer determine "durability and strength"?

As always it is in the importers best interest to consult an expert and/or have your goods tested during the production phase to evaluate the best model for the lowest duty rates.

Happy Importing :)

The Foreign Trade Zone

What is a Foreign Trade Zone?

A United States Foreign Trade Zone (FTZ) is a geographic location within the United States but is considered to be outside of Customs territory. Similar to a Bonded Warehouse, (inside Customs territory) many prerequisites for entry such as quotas are not to be adhered to. Additionally, goods may be transferred to a foreign trade zone with less formality than the bonded warehouse.

What are its advantages?

1. Both Domestic as well as foreign goods may be stored in a foreign trade zone for an UNLIMITED amount of time (for a bonded warehouse only 5 years).

2. Good may be stored, manipulated, processed, and manufactured.

3. Domestic merchandise can be taken from the FTZ duty free. Customs duties are only due on foreign goods when removed from the FTZ and entered into the domestic market (unlike if exported - no duty requirements).

4. Ability to get "PRIVILEGED" status for goods - Dutiabilility based on the condition of the goods and the duty rate when the goods entered the FTZ even though they may have been changed by the time they are withdrawn from the FTZ. Meaning that you can alter the goods in the FTZ whereby they would have been subject to a higher duty rate. However, because they were placed in an FTZ, you the importer only pays the duty rate for the goods when entered in the FTZ.

5. Ability to get "NON-PRIVILEGED" status for goods - Dutiable based upon when the goods were withdrawn from the FTZ. An importer can manufacture goods within the FTZ whereby foreign materials are used to lower the duty rate.

The Bonded Warehouse

What is a bonded warehouse?

Customs bonded warehouses are licensed warehouses that satisfy strict security regulations. It is within bonded warehouses that goods may enter the United States but are not considered "cleared" through customs. Merchandise in a bonded warehouse is considered still to be in Customs custody and duties do not have to be paid.

What are its advantages?

1. Customs duties do not have to be withdrawn until goods are released from the warehouse.

2. Duty rates that are applied are based on the time the goods are released not the time that they enter into the bonded warehouse.

3. No duty is paid if the goods are exported (so no need for drawback claim - to be discussed in another blog entry).

4. Merchandise can remain in a bonded warehouse for up to 5 years from the date of importation.

5. Manipulation of goods within warehouse is LIMITED to: cleaning, sorting, packing, repacking which are not considered manufacturing.

Happy Importing :)

My Goods Can Be Described In So Many Ways!

For Tariff Classification purposes, there are circumstances in which more than one word can describe an item. What do you do?! Well the law provides under the "General Rules of Interpretation" 2(b) that consideration is to be given to every heading that identifies an item by name, language or description. Okay, that is great but my goods can be described in more than one way.

General Rules of Interpretation 3 comes along and simplifies the identification of the goods.

Relative Specificity More SPECIFIC language is preferred over general language, thus the heading which more precisely describes the good will be used and the others will be ignored.

Composite Goods and Goods Sold in Retail Sets when a good is a mixture or a composite of different material, components, or sets Customs again uses the concept of Essential Character. In these cases, the question becomes which part of the retail set is causing you to purchase the item? To qualify as a retail set 1) there must be two or more articles with different classifications 2)a single commercial purpose and 3) packaged as ready for sale.

More Than One Essential Character What happens if the good has more than one essential character? Customs Answer: Look to the feature of the good that appears in the Tariff Schedule the last numerically.

Good Cannot be found in the Tariff Self Explanatory. Answer, General Rule of Interpretation 4 says pretend like the goods have changed to one in the tariff to which it is most akin.

Packing and Packaging Whether certain types of packaging are treated as part of the merchandise or must be classified separately. Fitted cases for example, camera cases, musical cases, gun cases, specifically designed for the particular product and have long term use are to be classified with the merchandise for which they are imported. However, if you import these separately then they would need there own tariff number.

How Many Pieces Make a Whole?

Many goods are unassembled or incomplete when they arrive at the port. The U.S. Harmonized Tariff Schedule for classification predominantly addresses complete and assembled products. However, the law provides via the "General Rules of Interpretation" for unassembled or incomplete goods by allowing certain goods to be classified as though they are complete and assembled.

The rule qualifies these goods by its ESSENTIAL CHARACTER. Essential character is not defined in the law but all depends on the specifications of the product. Can a person objectively recognize the product for what it is when incomplete? While Customs may have their own opinion it is within the importers best interest to convince them of the goods essential character for beneficial duty treatment.

How Much Duty Do I Have To Pay?

CLASSIFICATION is the process by which goods are categorized for determining payment of duty as well as for statistical purposes. The United States is apart of the Harmonized System of Classification which functions under an International and a Domestic (Country Specific) level. On the international level all those who are parties to the Harmonized system will classify the product the same. However, at the domestic level each country has its own detailed descriptions and rates of duty one has to pay.

There are many laws and rules regarding interpreting the Harmonized Tariff Schedule of the United States (HTSUS). For every product there is a place for classifying it and if your good comes from outer space there are ways to squeeze your item some place in the tariff. I would hate to describe to you the tedious nature of columns, headings, and subheadings involved in tariff (if you do e-mail me). Thus, it is important to have a customs broker handling these transactions and counsel assisting on difficult matters if they should arise. Incorrectly classifying a product can result in improper duty liability, failure to meet the free trade opportunities if applicable, or major penalties. Be Cautious and choose your customs agents wisely.



Happy Importing :)

What is the "Value" of my goods?

The duty, taxes, and Customs' fees due on an imported article are its percentage of its DUTIABLE VALUE. The dutiable value is determined by the process of appraisement. Generally, appraisement is calculated by determining the transaction value of the goods, i.e. the price actually paid or payable for the goods when sold for export into the United States. Usually, the the price paid or payable is based on the F.O.B price at the port of export and shipping it onto the carrier.

Improper valuation of goods affects the duty liability. If the value of the goods is in excess of its proper value, the importer will pay a greater amount than necessary. Conversely, under declaring the value of goods may result in costly penalties. Our firm assists importers in appraising the value of goods as well as preparing and submitting binding rulings to Customs for calculating the correct value of goods.

The following costs are included in the price actually paid or payable:

1. Selling Commissions - Any commission paid to the seller's agent (anyone who is related to , controlled, by, works for, or on behalf of the manufacturer or seller).

2. Assists - Anything that the buyer provides to the manufacturer and/or seller directly or indirectly either free of charge or for less than the arms length price for which he would have charged the buyer.

3. Royalties or License fees - Fees that the buyer must pay directly or indirectly as a condition of sale for export to the United States.

4. Packing Costs - Any costs incurred by the buyer for labor and materials to make them ready for exportation.

5. Proceeds of subsequent sale - Generally, if subsequent to the importation an importer pays or is required to pay more for the imported goods than was declared at the time of entry, those additional payments are part of the price paid for the goods.

Happy Importing :)

Documents you should know!

Providing documentation to U.S. Customs and Border Protection ("CBP") dictates the basis for all CBP decisions. Without complete and accurate information results in delay and added expenses. What are the documents usually involved in international trade?

The Invoice:
1. Provides the documents evidencing the commercial transaction.
2. Government agencies such as CBP, Food and Drug Administration, Consumer Product Safety Commission use the invoice to determine importing compliance.
3. Special information may be required accompanying the invoice. For example, Footwear requires the following:

Footwear, classifiable in headings 6401 through 6405 of the HTSUS-
(1) Manufacturer’s style number.
(2) Importer’s style and/or stock number.
(3) Percent by area of external surface area of upper (excluding
reinforcements and accessories) which is:
Leather a._________%
Composition Leather b.__________%
Rubber and/or plastics. c. __________%
Textile materials d.__________%
Other (give separate percent for each type of material) e.__________%
f. ___________%

Certificates of Origin:
The certificates of origin are declarations as to where the imported goods are originating from.
1. Important for establishing preferential treatment for rates of duty if they come from a certain country e.g., Israel, Canada, and Mexico.
2. For certain programs if the certificate of origin is missing the goods may be seized.

Documents of Transportation and Title:
Bills of Lading (Water and Ground Shipping) and Air Waybills (Air Shipping) are the documents under which goods are transported.
1. They are contracts! Thus, they list the terms and liabilities for goods that are damaged during shipment.
2. They evidence the right to delivery or possession of goods.
3. They evidence the right to make a CBP entry into the U.S.

Export Licenses
Export Licenses provide that government authorizations to export certain types of products to a specific country. Highly technological goods such as electronics or military products generally require a validated license.

Modes of Transportation

Air, Sea, Truck, and Rail are the four modes of transporting your merchandise from location to location.

These transportation services are either provided directly by the carrier (e.g. the shipping line) or by what is known as a non-carrier operating third party. A non-carrier generally contracts space on the ship, plane, etc and then resells the space with other services. For air shipments these entities are called CONSOLIDATORS and for Ships they are called NON-VESSEL OPERATING COMMON CARRIERS (NVOCC).

When should an importer use a Consolidator or an NVOCC?
These services provide a practical and economical way for importers who ship less than a full shipping unit (i.e. igloo for air, container for sea, trailer for truck) to gain a cheaper rate.

Air Freight - Air freight carriers are not regulated thus the rates that they charge differ from person to person and/or from date to date. Airlines have a tariff (list or schedule) and are far less flexible then consolidators.

Vessel, Truck, and Rail Freight - All these services are regulated and all freight rates must be published in their tariff. Any negotiations for a cheaper rate must be filed with the agency in charge. If the importer is charged less than what was published the importer will still be liable to pay the freight damages (but may still be able to maintain a civil action against the carrier for breach of contract).

Check all available modes of transportation for the best rates and make sure that all legally related publishing requirements are met....Happy Importing!

Credit: Free photos from acobox.com

Tariff Engineering

There are those importers who find themselves under the belief that duty rates are beyond their control. However, one of the ways an importer can use his or her whit and intelligence is known as "Tariff Engineering."

The importing laws in the United States are for the most part narrowly tailored to a specific item. For example, you import an adult bicycle and there is a tariff duty rate for that bicycle. However, this strict construction of items based on a tariff may benefit the importer. That same adult bicycle may have different duty rates based on its wheels diameter!

The laws in the U.S. provide a framework for how to import your goods. During the manufacturing process the importer is recommended to speak with the manufacturer, customs broker, and/or attorney to determine the most cost effective way of manufacturing the product to save on import duties - i.e. Tariff Engineering. The earlier this is done in the production process the more one can predict how Customs will react to the product during importation.

Planning is the key word folks - you do not want to the surprise of owing thousands in duty after the goods left the dock.

Maintain your Customs Records

Anything that is imported must be properly recorded - maintaining accuracy and validity of all the entry records you create. The government can always pop in unannounced and ask questions on your importations. The questions that arise are usually based on "Red Flags" they find via a database filled with information about factories, goods, people from across the globe.

How long are you required to maintain records? 5 years after importation (drawback claims, 3 years after payment of drawback claim).

What is Customs looking for? Could be anything but the most common areas Customs looks at are classification, valuation of merchandise, compliance with the law, and the importer's right to import or export merchandise. THE FAILURE TO KEEP RECORDS RESULTS IN PENALTIES UPWARDS OF $100,000.00.

Who can maintain the records? The law does not force the importer itself to maintain the records. The importer may hire an agent to do so however, importer maintains full liability for any errors resulting from the maintenance of the records.

In addition, a system of certification for recordkeepers has been established by the government. It is a voluntary program available to those importers and their agents who take steps to assure that records are properly kept. You may read more about it in detail here http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&sid=1ceedfd75e9813b3f6d88b3fc7e9e8a0&rgn=div8&view=text&node=19:2.0.1.1.16.0.2.13&idno=19

Pay Your Duties!

One of the main functions of U.S. Customs and Border Protection is to collect duties. What are "duties"? Duties are a form of tax that an importer has an obligation to pay. Inherent in the payment of duties is liability to which the government defines to be a personal debt due from the importer to the U.S. that can only be discharged by paying the FULL amount. There is no haggling with Customs!

Please be careful because the failure to pay your duties on time may result in an audit, penalties, and other legal consequences leading you to be on Customs bad side.

When is duty due?
A deposit of estimated duties are due during the time of your merchandise entering the U.S. Any additional duty found is due 30 days after liquidation (Liquidation means the final computation or ascertainment of the duties).

Customs duties are often paid by the importers customs broker who is clearing the shipments to be paid over to Customs. However, Customs Brokers are not agents of Customs and therefore payment of duties to your Customs Broker does not relieve you from liability if Customs is not paid.

Two ways to pay Customs: 1) Checks Payable to Customs which are delivered with a Customs entry; 2) Automated Clearing House which permits Customs to withdraw duties from your bank account - allows a 10 day window to pay AFTER entry.

Feel Free to e-mail me with any questions :)

Accuracy is the Key to Importation

Documentation is the first stage of the government's determination as to whether they will allow your product to cross the border. Further, these documents allow the government to assess duties and taxes on your container shipments. IMPORTERS ARE HELD RESPONSIBLE FOR THE ACCURACY OF DOCUMENTATION PRESENTED TO THE GOVERNMENT, even if the documentation was prepared by someone else (i.e. customs broker or exporter). I cannot stress this enough. If the documentation is misleading, inaccurate, incomplete, or false the transaction is compromised and you will be held responsible. Problems with the documentation can result in higher duties, penalties, exclusion of the goods, and seizure.

Declare Your Goods!

Almost everything that your business imports into the U.S. must be declared to Customs. However, not all merchandise that enters the U.S. is subject to duty (tax or fee on imports) and/or importation restrictions.

You must be careful because the failure to declare goods can result in civil penalties, customs seizures, forfeiture of your merchandise, and in some cases CRIMINAL LIABILITY!

A failure to declare goods is not always intentional, it can happen by mistake through normal business practice. Customs does not understand the meaning of a "mistake," you will be liable; however, a mistake usually provides a business with the likelihood of a mitigation in penalties.

Having trouble with how to declare your goods, it is recommended to contact a customs broker or attorney. You do not want to make a bad impression on those who allow your goods to enter the U.S.!

Credit: Free images from acobox.com

Importer Responsibility

For my first post I thought it would be appropriate to begin with "Importer Responsibility." The laws of the United States relating to the importation of goods primarily place the responsibility on YOU! the importer, kinda sucks right. Whether the source of a problem is due to a foreign exporter's conduct, the United States has jurisdiction over you as the importer. As a result, importers must be cautious and not place all of their trust in the foreign exporter to know what to do.

Building on the idea of responsibility, Customs and Border Protection (CBP) (the government enforcement agency protecting our borders) coined the term "shared responsibility" meaning that CBP communicates its requirements to the importer, and the importer must use "Reasonable Care" to assure that CBP is provided with accurate information regarding their imports. The reasonable care standard is subjective to what CBP believes it to mean, basically you must be PERFECT in every way. Thus, it is important to consider any and all help in complying with the Customs Regulations. This can be accomplished through the aid of a customs broker, import/export consultant, accountant, or an attorney.

A checklist of an importer's responsibilities can be summarized by:
1. Declaring your merchandise that is entering the U.S.
2. Complete and accurate documentation (NO careless mistakes as we prone to in grade school).
3. Compliance with all legal requirements.
4. Pay your duties on time!
5. Maintain accurate records.

Follow the checklist (if you can) and it should be smooth sailing for your merchandise from overseas and into a department store near you.