Loading in 2 Seconds...
Loading in 2 Seconds...
U.S. Customs Trade Compliance: What Japanese Exporters Need to Know Tokyo, Japan February 26, 2007 Robert J. Pisani Pisani & Roll 1717 K St. NW Suite 600 Washington, DC 20036 Tel 202.466.0960 Fax 877.674.5789 firstname.lastname@example.org www.worldtradelawyers.com Michael E. Roll Pisani & Roll 1875 Century Park East Suite 600 Los Angeles, CA 90067 Tel. 310.826.4410 Fax 877.674.5789 email@example.com www.worldtradelawyers.com
Seminar Agenda • Overview of Requirements for U.S. Importers and Impact on Exporters to the USA • U.S. Tariff Classification for Japanese Exporters • U.S. Customs Valuation for Japanese Exporters • Special Duty Program Requirements & Country of Origin Marking • Basics on Customs Enforcement Actions (e.g., Detentions, Seizures & Penalties) – What Exporters Need to Know
Part 1 - Overview of Requirements for U.S. Importers and Impact on Exporters to the USA
Some Trade Facts: Japan/USA • Japan is the 3rd largest trading partner of the USA (for both imports and exports – source: US Census Bureau) • Japanese exports to the USA in 2005 exceeded 135 billion USD in value (Source – US Census Bureau) • 68% of the annual 5.7 million sea containers arriving in the USA come from 20 Megaports* • Tokyo, Kobe, Nagoya & Yokohama represent 4 of the 20 megaports* • Nearly 8% of all sea containers arriving in the USA come from these ports* *Source: U.S. Customs Website
U.S. Bureau of Customs and Border Protection (CBP) • Formerly known as the “U.S. Customs Service,” CBP is part of the new Department of Homeland Security (DHS). • As the primary border agency, CBP enforces its own requirements and those of many other U.S. government agencies with interest in cross-border trade, including, among others: • Food and Drug Administration • Department of Agriculture • Consumer Product and Safety Commission • Department of Transportation • Federal Communications Commission • Environmental Protection Agency • Federal Trade Commission • Drug Enforcement Administration • Census Bureau
U.S. Customs (CBP) has Changedits “Mission” or Priorities: • Border Control and Trade Facilitation - Programs to combat international terrorism - Improve flow of trade without impairing homeland security 2. Investigations & interdiction 3. Commercial Compliance - Rapidly modernizing CBP information systems
Benefits of Customs Compliance • Efficient, predictable supply chain. • Shorter cycle time. • Lower cost. • Less overpayment of duties. • More opportunities to reduce duties. • Fewer fines, penalties. • Better vendor/customer relationships. • More control over business operations.
Risks of Non-compliance (What can happen if U.S. Customs discovers non-compliant importations) • Additional duty; loss of duty preference • Fines or penalties Delays at the border • Seizures • Damage to reputation • Damage to vendor/customer relationships • Criminal liability • Increased government scrutiny • Aggravating factor for future violations NOTE: These risks also apply to non-revenue violations, including violations involving unconditionally duty-free goods.
Customs Compliance Concepts — Customs Modernization Act (enacted December 8, 1993) • Shared Responsibility: U.S. Importers and Customs have a mutual responsibility to ensure compliance • Informed Compliance: Customs' responsibility is to clearly and completely inform importers of their legal obligations with regard to importing • Reasonable Care: Requires U.S. importers to use reasonable care when they provide Customs with entry information, including the tariff classification, value, and rate of duty applicable to their merchandise • Enforced Compliance: Customs will transition from informed compliance to enforcement measures
“Reasonable Care” • Section 484 of the Tariff Act, as amended, requires a U.S. importer of record, “using reasonable care” to make entry by filing such information as is necessary to enable the Customs Service to determine whether the merchandise may be released from customs custody,” and using reasonable care - - “complete the entry by filing with the Customs Service the declared value, classification and rate of duty” and “such other documentation...or information as is necessary to enable the Customs Service to….properly assess duties…collect accurate statistics…determine whether any other applicable requirement of law…is met.” • The facts and circumstances surrounding every import transaction differ from the experience of the importer to the nature of the imported articles.
Key Compliance Areas Requiring Reasonable Care • Tariff Classification - - “What is it?” • Valuation - - “How much is it worth?” • Country of Origin - - “Where was it made?” • Special Requirements - - “Are unique reporting or documentary requirements applicable?” • Preferential Trade Programs - - “Does the imported product qualify for duty-free or reduced duty benefits?” • Unfavorable Trade Issues - - “Is the imported product subject to punitive duties or action?” • Recordkeeping - - “Does the importer retain required documentation to substantiate claims made at the time of entry?”
Entry Process • Pre-shipment negotiations between U.S. importer and overseas supplier initiate shipment (e.g., purchase order, terms of sale, payment terms) • Seller/exporter prepares commercial invoice • Goods arrive in the United States • U.S. Importer or authorized agent (Customs Broker) prepares and files entry documents (i.e., CF-3461, invoice, and packing list) • Customs decides whether to examine / release goods (Customs may ask questions!) • Broker files entry summary (CF-7501) and submits duty payment • Customs reviews entry summary transaction • Entry summary is liquidated (finalized), usually 314 days after date of entry
Commercial Invoice Usually, the exporter prepares the commercial invoice (must be in English) KEY COMPONENTS OF THE INVOICE: • It is IMPERATIVE that the exporter provide an accurate description of the article • Buyer/Seller Information & Date • Quantity • Value • Country of Origin • HTSUS • Japanese exporter should coordinate with US subsidiary/importer (See 19 CFR141.86 through 141.89 for complete requirements)
Invoice Description – What’s required by US Customs 19 USC §1481(a)(3) provides the legal requirement concerning how the merchandise must be described on the commercial invoice: (3) A detailed description of the merchandise, including the commercial name by which each item is known, the grade or quality, and the marks, numbers, or symbols under which sold by the seller or manufacturer in the country of exportation, together with the marks and numbers of the packages in which the merchandise is packed… • One of the most common forms of U.S. Customs non-compliance that may subject the importer to fines and penalties involve incomplete, insufficient or inaccurate invoice descriptions
Bad Descriptions “ … Part 123456” “ … Parts and accessories” “ … Replacement parts” “ …O-ring” “ … Power supply” Good Descriptions “… Replacement parts for car radio consisting of knob, tuner, and face plate…” “… Polyethylene o-ring” “… Power supply for laptop computer” Examples of Invoice Descriptions
Elements of Entry / Entry Summary • U.S. Importer / Consignee Identification • Description / Classification of Goods • Declared Value – Including Non-dutiable charges and additions to Value • Country of Origin / Export • Manufacturer / Seller • Related Party • Other Information Required to Administer U.S. Laws • Surety Coverage
U.S. Customs Options at Time of Entry • Release Cargo Immediately • Perform Document Review • Decide to Release • Decide to Examine • Perform Intensive Examination or Inspection • Release if Compliant • Delay, Detain, or Seize if Non-Compliant • Review for “Other Government Agency” (OGA) Requirements
Communications from Customs • Request for Information (CF*-28) • Notice of Action (CF-29) • Notice to Mark and/or Redeliver (CF-4647) • Notice of Liquidation (CF-4333A) • Detention and/or Seizure Notices • Notice of Liquidated Damages (CF-5955A) *CF = Customs Form
Binding Rulings and Internal Advice • Binding Rulings – For prospective transactions, a written request for a binding ruling can be submitted to U.S. Customs and a written decision is issued to the U.S. importer by Customs • A ruling must be followed and identified to Customs when the subject merchandise is imported • Internal Advice – For current transactions, a U.S. importer may request an internal advice decision from Customs • A published ruling is binding on Customs and the U.S. importer until it is revoked • Proposed revocations must be published in the Customs Bulletin with notice and comment provided in accordance with the Customs Modification Act and 19 U.S.C. § 1625(c)
Tariff Classification • US importer is required to use “reasonable care” in identifying the correct tariff classification • Burden is on importer, not U.S. Customs, to properly classify merchandise • Like Japan, United States uses Harmonized System • Similarities in nomenclature for first 6 digits • Differences in interpretation • Differences beyond 8 digits
Tariff Classification • Impacts many aspects of the importation • Duty rate • Note that in the United States (unlike, for example, Mexico) antidumping duties are not determined by HTS • HTS may be a “trigger” for other government agency requirements • Country of origin determinations
Tariff Classification • Japanese exporter should: • Coordinate HTSUS determination with U.S. importer • Do NOT assume Japanese HTS also applies in United States • Develop common “dictionary” or “database” of the tariff classification of all parts shipped to United States • Print HTSUS (at least to 6 digit level) on Japanese export invoices • Avoid overuse of “basket” or “parts and accessories” tariff provisions • Excessive use of these provisions considered a “risk area” by U.S. Customs
Tariff Classification • Japanese exporter should (continued): • Try to implement “NO HTS = NO SHIPMENT” or “NO HTS = PART NUMBER NOT CREATED” with “escape valve” • While this appears to be inefficient, it is useful for “internal control” purposes. • Develop process for new parts and goods for U.S. market to be reviewed by appropriate personnel in United States before parts or goods ship to United States
Common Valuation Issues • Items provided free of charge or at a reduced cost to a foreign supplier (“assists”) • Payment of royalties and license fees to a foreign supplier • Procurement or transfer of engineering • Post-importation price adjustments • Related-party transactions & unsupported transfer pricing • Issues related to “no charge” shipments and nominal value shipments
Customs Valuation –5 Hierarchical Valuation Methods • Transaction Value; • Transaction Value of Identical or Similar Merchandise (based on the transaction value of previously imported merchandise); • Deductive Value (selling price in the US less certain post-importation costs); • Computed Value (foreign supplier cost information for materials, processing, profit, general expenses, etc.); and • Fallback Method (methodology based on a modified version of one of the first four methods).
Transaction Value • Preferred basis of appraisement (vast majority of U.S. import transactions enter under transaction value) • Price actually paid or payable for the merchandise when sold for exportation to the United States, plus certain statutory additions to the price • “Price Actually Paid or Payable” • total payment (whether direct or indirect) for the imported merchandise from the buyer to the seller • general presumption that all payments from the buyer to the seller are dutiable • often the invoice price, but certain upward and downward adjustments may be made
Transaction Value (continued) • Must have sale (no consignment shipments) • Related-party sales must be at arm’s length, • all costs plus a profit, or • comparable to sales to unrelated parties in the U.S. • Exclusions from transaction value, if separately identified on the commercial invoice, include: • inland freight • international freight/insurance • technical assistance provided in the United States • duties and taxes
Exclusions From Transaction Value The following items will not be added to the price paid if they are separately invoiced or identified elsewhere: 1. Inland Freight —will not be included if the sale is ex-factory or if freight charge is shown separately by means of a through bill of lading 2. International Freight/Insurance — the costs/expenses incurred for transportation, insurance, and related services incident to the international shipment 3. Technical Assistance —charges for the construction, erection, maintenance, assembly or for technical assistance provided after importation of the product, if separately identified
Statutory Additions to TransactionValue: The Checklist • The following are added to value and declared to Customs when not included in invoice price for imported article: 1. Commissions — selling commissions paid by buyer 2. Royalty or license fees paid by buyer as a condition for the product to be exported to the U.S. • Assists • Packing costs paid by buyer 5. Proceeds of any subsequent resale of the goods transmitted to the seller
Selling vs. Buying Commissions • Selling commissions must be added to the price paid, but bona fide buying commissions are exempt • Review of all transactions involving a middleman • Determine whether the middleman operates as an agent (for buyer or seller) or operates as an independent entity • Is the agent a buying agent? • Who is in control? • Who takes title? • Who bears risk of loss? • What does the agent do? • Relationships? • Written agreement?
“Assists” Defined Assists: • Materials, components, parts and other items used in production • Tools, dies, molds and similar items used to produce product • Merchandise consumed in production of the imported merchandise • Engineering, research, development, artwork, design work, plans and sketched produced other than in U.S.
What Is the Value of an Assist? 1. Value of Assist generally is either: • the cost of acquiring the assist, if acquired by the importer from an unrelated seller, plus freight costs, or • the cost of the assist, if produced by the importer or a person related to the importer, plus freight costs 2. Used capital equipment is generally valued at its depreciated value at the time of transfer 3. Assist value must also include the cost of transporting the assist to the place of production 4. If the assist value is incorporated in the unit cost of the imported merchandise, no separate declaration is needed
“Assist” Examples - Items used in the production of imported merchandise • U.S. importer, or its related Japanese parent company, supplies, at a reduced cost, to its overseas related supplier a chemical catalyst used to make the finished good • U.S. importer, or its related Japanese parent company, provides, free of charge, integrated circuits to a related party supplier in Singapore. The integrated circuits are to be used in the production of a completed transmitter • U.S. importer, or its related Japanese parent company, supplies, free of charge, transistors to Japanese parent company to be used in the production of integrated circuits that are incorporated into flat panel displays
Avoiding Potential “Assist” Problems • “Assist” problems can often be avoided by ensuring payment by the overseas supplier for any materials, components, supplies, research, etc. that the U.S. importer provides • Review of transfer pricing practices • Incorporation of appropriate terms and conditions in new supply contracts • Planning for future shipments and proper valuation will avoid future problems, delays, and potential civil penalties
Other Areas of Concern and Potential Valuation Problems • Post-importation price adjustments • Retroactive transfer price adjustments • Currency Exchange Agreements • Capital equipment imports which incorporate multiple shipments and progress payment terms and conditions
Post-Importation / Retroactive Price Adjustments to Price Paid • Post-importation price adjustments may occur for the following reasons: • Change in transfer price • Shortage/Overage • Incorrect product or SKU number • Contract adjustments upon exceeding (or reducing) forecasted purchases • Other invoicing price or clerical errors
Currency Exchange Agreements • Currency risk sharing agreements affect “price paid or payable” • Payments usually have to be reported to Customs • If sale to U.S. in not in U.S. dollars, then for U.S. Customs purposes, the date of exportation of the goods is the date used for applying the rate of exchange - even if a different rate was used in payment for the goods • Customs uses the rate of exchange determined and certified by the Federal Reserve Bank of New York
Related Party Sales • U.S. Customs reviews related party transaction to ensure that there is an arm’s length sale • Related party sales may still be appraised using transaction value • Customs Regulations provide that parties are “related” when they share: • Common officers or directors • Power to vote 5% or more of the outstanding stock or shares • Family members
Related Party Sales (continued) • U.S. Customs may scrutinize sale to ensure that the relationship did not impact the price • “Circumstances of Sale” Approach • Is price determined in a manner consistent with normal industry pricing practice or the way seller deals with unrelated buyers? • Is the transfer price adequate to recover all costs, plus a profit equivalent to the overseas seller’s overall profit?
Transfer Pricing Issues How to demonstrate that “relationship did not influence the price:” • Can U.S. importer demonstrate that overseas selling entity covers all costs plus a reasonable profit? • Transfer prices that are based on manufacturing costs only invite Customs scrutiny • “All” usually means all! • If overseas selling entity is selling at a loss, can U.S. importer justify why there is a loss? • Is the Importer using the “test values” approach • Was comparison value from an actual importation and accepted by Customs?
Transfer Pricing • Double checking you meet the “circumstances of the sale” test • How to demonstrate that “relationship did not influence the price” • Can you demonstrate that foreign selling entity covers all costs plus a reasonable profit? • Watch for transfer prices that are based on manufacturing costs only • “All” usually means all! • If foreign selling entity is selling at a loss, can you justify why there is a loss? • Are you using the “test values” approach • Was comparison value from an actual importation and accepted by CBP?
Transfer Pricing • IRS Accepted Transfer Price? Advance Pricing Agreement? • This is just one factor CBP will consider in determining whether the relationship between the importer and the foreign seller influenced the price • Not automatically accepted
No Charge Shipments • Returns/RMAs: • Have return/RMA department advise shipper of value to use • Importer often will have to use “fall back” method of appraisement • Use original sales price, if available • Equipment transfers • If not sold, “fall back” method likely is basis of appraisement • Book value • Objective source for fair market value
No Charge Shipments • Freehouse deliveries (“FHD”) • Importer often will have to use “fall back” method of appraisement • Use original sales price, if available
“NISSHO IWAI” or “FIRST SALE” 2 1 3 • Sale from Singapore Manufacturer to Tokyo buyer • Tokyo Buyer sells to Los Angeles Purchaser • Goods drop-shipped from Singapore Manufacturer to Buyer in Los Angeles • What value should be declared to U.S. Customs??
“First Sale” (Nissho Iwai “Multi-tiered” Transactions) In Nissho Iwai America Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992) and Synergy Sport International, Ltd. v. United States, 17 CIT 18 (1993), the courts rejected U.S. Customs’ position that transaction value must be based upon the sale which most directly causes the exportation of the merchandise to the U.S., stating that “once it is determined that both the manufacturer's price and the middleman's price are statutorily viable transaction values, the rule is straightforward: the manufacturer's price, rather than the price from the middleman to the purchaser, is to be used as the basis for determining transaction value.”
“First Sale” Issues The tests that must be met (as set forth in the court cases) to establish a first sale transaction value are that the sale: • (1) was negotiated at arm’s length free from non-market influences; and • (2) involves “goods clearly destined for export to the United States” U.S. Customs has developed several criteria to determine if there has been a bona-fide sale – and it is extremely difficult to support transaction value if the manufacturer and seller are related parties
First Sale Issues (continued) • Due Diligence Tools • Customs Informed Compliance Publication “Bona Fide Sales and Sales for Exportation to the United States” • Customs Valuation Encyclopedia • Customs Rulings • Due Diligence Issues • How do you show “clearly destined for the United States”? • How do you establish existence of sale?