August, 2015

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Importer initiatives: What the importer can do about …

Mark K. Neville, Jr.

Long term readers will recognize one of the continuing themes of this space as the prescription that importers and exporters should invest the time in identifying and then pursuing opportunities to actively manage their international business. Companies who do that are usually better off than those others who passively allow events to shape their destiny. The point of this discussion is to point to some of the issues that importers face and then, for each such decision point, to list one or two things that the importer “can do about it.”
  1. The rules governing importing are so complex, where do I start? Aside from the rules which directly govern the import process itself, those contained in the trade and customs laws set forth at Title 19 of the US Code and the regulations contained in Title 19 of the Code of Federal Regulations, the importation may be regulated by one of the other federal agencies, such as the Food and Drug Administration (FDA). This is generally a highly transparent system, but there are so many rules that the entire process is usually daunting for the novice importer.

    What you can do—First, you can make a realistic assessment of what you do know. If you are not entirely sure about the extent of your knowledge then you should seek assistance so that you can avoid the “he doesn’t know what he doesn’t know” effect. Once the gaps are identified, you can hire an experienced employee to work with you or engage an outside service provider for the professional services you will require to fill the gaps.

  2. Tariff classification of the imported goods is a requirement. How do I classify my product?

    What you can do—Tariff classification seems straightforward once you have done the first one or two—or 20 or 30—classifications. First, you can assemble all of the resource tools you will need. These include the Harmonized Tariff Schedule of the United States (HTSUS), as well as the Explanatory Notes (ENs), which are published by the World Customs Organization and are not a direct source of authority but which Customs and Border Protection (CBP) and the trade community treat as near-determinative. You will need to become familiar with the HTSUS and the ENs. You will want to consult the on-line database of administrative rulings published by CBP on its CROSS system and available on its website. You will want to see if products that are identical or similar to yours have been previously classified by CBP in any of those rulings. For certain product lines, CBP has published guidance in the form of Informed Compliance Publications (ICPs), so you should determine if your imported product is the subject of any of the ICPs. Finally you will want to take advice from your in-house experts or an outside provider—but be careful about relying on a customs broker for this information (more below in context of compliance).

  3. Customs rules demand that a customs value must be declared upon entry. What value do I put down?

    What you can do—Here again, you must know how to apply the customs valuation rules. You will want to become great friends with the code section that governs valuation, 19 USC § 1401a, and also to have at your disposal a copy of the Valuation Encyclopedia which CBP has published (the last edition covering 1980-2010). Most importations are made on a transaction value basis, which refers back to the price actually paid or payable when sold for export to the US. This usually means the invoice price paid by the importer for the goods, on an FOB basis. The US and Canada are two of the few countries which do not assess duty on a CIF basis, so the international freight and insurance charges do not attract duty. Finally, you will want to refer to CROSS for valuation rulings on the many questions that can arise. A word of caution—customs valuation is a much more complicated issue than classification, with “many more moving parts.” For example, if the importer/buyer is related to the foreign seller, then CBP will have a similar interest in ensuring that the related party pricing is at arm’s length as will the Internal Revenue Service on a Section 482 inquiry. The customs criterion is whether the relationship of the parties has influenced the price of the goods.

  4. Origin of the goods is the third point which will determine the amount of duty owed at entry--how do I make sure the origin is correct? Aside from the rate of duty, correct labeling of the origin is also a key point of admissibility.

    What you can do—You should become familiar with these rules and how they are applied by CBP. The country of origin of an imported article is the country where the article last underwent “substantial transformation.” And imported goods or their containers generally must be marked in a “conspicuous place” and “legibly, indelibly and permanently” to show the country of origin so that the ultimate purchaser in the US can be apprised of that fact. There are hundreds of rulings which address these criteria, so there is no excuse for the importer to be surprised if there is a problem. The importer may want to insist to its foreign supplier that the goods are marked in a way that meets these obligations.

  5. I am unable to resolve one of these questions—can I get a reading from CBP?

    What you can do—Yes, you need not stay in the dark. You can submit a request for a binding ruling for a prospective transaction to CBP, either to Headquarters or to CBP’s Customs Information Exchange (CIE) in New York, where the National Import Specialists can review and issue rulings on classification and origin. For valuation issues, submissions must be made to Headquarters. You can also engage in non-binding informational discussions with customs officials at the port or at the various Centers of Excellence (CEEs) which are assuming responsibility in CBP’s outward-facing role. Of course the importer can also consult with one of the experienced professional advisors that he has on stand by for such occasions.

  6. Compliance is a major responsibility—what do I do about it? The thrust of the US customs law in the “Mod Act” of 1993 was to impose the responsibility to meet a “reasonable care” standard on importers and, fort its part, to offer administrative guidance by way of supporting this “informed compliance” effort. The reasonable care standard is codified at 19 USC § 1484.

    What you can do—The point here is that ignorance is not bliss. First, you should not adopt an ostrich-like avoidance of the issue. You must acknowledge that the US boasts the most vigorous customs enforcement apparatus on the planet. Thus, it is not ok to simply say, “I’ve never had a problem. If a problem arises, I’ll do with it then.” If the importer admits to the fact that CBP is active, the importer should next fearlessly review its compliance posture on such crucial issues as classification, valuation and origin, as well as recordkeeping and eligibility for special trade programs. The statute of limitations is five years, so today’s problem is potentially the past five years’ problem. Of course, sometimes “the wolf is at the door” meaning that CBP has either begun an audit or has started an investigation—and by that time the importer is only in damage control mode. It is far better, and far smarter, too, to anticipate those events and to commission a customs compliance review of your own. Such a review should mimic the audit approach of CBP—and the Focused Assessment (FA) playbook is available online (there’s that transparency again). The results will typically present three categories of findings for the importer— Issues where the importer is in compliance and should continue on the same path, Issues where the importer is in compliance but is not making use of planning opportunities,

    Issues where the importer is not in compliance and corrective action is indicated. Of course, an importer who has followed the recommendations 1-5 should find most or all of the findings in the first grouping—no money is “left on the table” and there are no compliance issues. Duties are neither overpaid nor underpaid—a true “Goldilocks” solution.

    Another compliance-related option is to volunteer for participation in the Importer Self Assessment (ISA) program. This is essentially a yearly self-audit option which will take the importer out of the audit pool for the FA. The ISA will likely be phased out and rolled into the new Trusted Trader program which is in a pilot phase. A final word of advice here, in the nature of what the importer should not do. The importer should not rely on the customs broker alone. The answer to a CBP question such as, “how do you assign a tariff classification?” should not—cannot—be “My broker does that for me.” Since the Mod Act CBP demands more, CBP demands the individual responsibility of the importer himself.

  7. I think I violated the customs laws—now what do I do? The starting point in assessing possible action is a knowledge of the consequences, i.e., civil penalties, criminal sanctions, seizures and forfeitures and liquidated damages. Those normally lead an importer to pause before acting on the problem—or ignoring it.

    What you can do—As stated, the first thing is to learn what are the possible consequences. Then, depending on whether or not CBP has already started an investigation of the matter, the importer may want to consider whether to file a Prior Disclosure with CBP. This is one of the prime initiatives that the importer may exercise—a perfected prior disclosure will drastically reduce the impact of a civil penalty. This brings us back to point no. 6—if the importer waits for CBP to act, then the importer may lose the opportunity to file a prior disclosure and will instead face the full effect of law. For example, under Section 1592 (19 USC § 1592) for a duty-loss violation where the importer was negligent (it did not meet its “reasonable care” obligation), the penalty is an additional ½ to two times the loss of revenue, and these penalties are non-tax deductible. Of course, if the statute of limitations is about to run, the importer could decide to “chance it” and not take any action.

  8. I own a valuable trademark—how do I protect it against imports that violate my rights? Aside from taking registration at the US Patent and Trademark Office (PTO), the importer can also take action with CBP.

    What you can do—The owner of a valuable trademark (or trade name or copyright) can not only register with the PTO he can also record these IP rights with CBP. By recording with CBP, the trademark owner gets the full measure of protection at the border. Counterfeit goods, for example, are to be seized and, for the first such seizure, a penalty may be issued in the amount of what the proper retail value of the goods would have been had they been legitimate. For later seizures, the civil penalty would be twice the amount of that proper retail value. 19 USC § 1526. Ouch!

  9. Information about imports and exports is in the public record—how do I find out about my competitors’ business? How do I suppress my information? As observed a few times in this discussion, the general philosophy in the US is to favor transparency. Still, exceptions can be made.

    What you can do—You start with the knowledge that the Census Bureau is in the business of collecting information, not just about the decennial census of the population, but all of the data that is gathered by the federal government. Trade data is included in that effort. If you wanted to find out what a competitor is doing—who their supplier may be, how much import volume they are managing, and so forth, the information may be included in inward or outward cargo manifests. There are public companies that pay Census for access to that information, and you can obtain the information for a fee from those information providers--unless the company has taken the initiative to obtain confidential treatment from CBP for this information. The grant lasts for two years and is renewable.

  10. Cargo security inspections are a drag. Is there any way for an importer to speed up the clearance process? Ever since the Global War on Terror began in earnest in September 2001, the US and most other nations as well have taken active steps to protect their borders. The resulting inspections of cargo can delay the entry into the customs territory.

    What the importer can do—In the United States, the Customs-Trade Partnership Against Terrorism (C-TPAT) allows for importers and other companies in the supply chain to voluntarily participate in a program which leads to fewer and faster inspections. The program was just recently expanded to cover exports as well. The C-TPAT is the US expression of the WCO’s Authorized Economic Operator (AEO) system which is a major element in the WCO’s voluntary public/private partnership SAFE Framework of Standards to Secure and Facilitate Global Trade which was first promulgated in 2005. Many other countries have similar AEO programs, e.g., the Canadian Partners in Protection (PIP), and, as visible evidence of the inter-connectedness of the programs, there is a growing body of Mutual Recognition Arrangements (MRAs) whereby countries extend benefits to other countries’ AEO participants. At this writing, the US has entered into ten MRAs.


    I hope that with these few illustrations we have made the point—importers have many opportunities to seize the initiative and drive their business. Importers can save money, can be more compliant and lower risks, can eliminate surprise and can have a clearer understanding of their business. For example, an importer who meets CBP internal control and recordkeeping needs is almost guaranteed to have greater internal visibility. In a phrase, such active importers are simply better managed. Importers who do not adopt this attitude are simply stupid and slow.


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