Duty Drawback is a refund from the U.S. Customs Service for 99% of the duties paid on imported items which are subsequently exported or used in the manufacture of exported goods. This refund is available to you even if someone else did the importing. It’s estimated that over $600 million dollars is recovered annually through the U.S. Duty Drawback program, and companies are paying 20% of those refunds to service providers that help get the refund from the government. U.S. Customs estimates that up to 85% of potential duty drawback is not being claimed each year.
By ensuring that you do not have to include import duties into your costs, you can compete more effectively with foreign corporations for business abroad. However, drawback is recognized as the most complex commercial program Customs and Border Protection (CBP) administers because it involves every aspect of Customs business, including both imports and exports. Historically, drawback relied on subjective analysis of “commercial interchangeability” making it difficult for many companies to take advantage of substituted merchandise.
Companies must prove that imported goods were exported or destroyed, and maintain supporting records to prove eligibility and compliance. Most companies prefer to hire the services of a professional Customs broker to assist in the implementation of a process that reconciles the import and export records and ensures the accuracy of the claims. Historically, a small number of specialized service providers have dominated the drawback landscape, due largely to the expertise required to prepare and file the claims.
Trends Driving Interest in Duty Drawback
Several events have brought drawback to the forefront of trade in 2019.
For years, Drawback has been undergoing a modernization effort by U.S. policymakers and Customs. The Trade Facilitation and Trade Enforcement Act of 2015 (TFTEA) brings significant changes to Duty Drawback policy and implementation.
- Streamlined product substitution rules; goods interchangeable at the 8-digit HTS level (with some exceptions)
- Simplified filing time frame (5 years from import)
Modernization of Duty Drawback also includes implementation of claim filing within a fully electronic environment (ACE). This may allow companies to file more quickly and gives Customs the ability to process claims quicker, but also gives Customs the resources to audit claims more broadly and deeply. Electronic filing may have a leveling effect on the playing field in terms of increasing access to drawback, but at the same time make it more difficult for companies to back up claims and recover duties.
Additionally, the global trade environment in the U.S. has contributed to a higher level of interest in drawback for 2019. A direct effect of the 301 tariffs (10% on many goods from China) is that distributors and manufacturers are paying significantly higher landed costs for imported finished goods and component materials. In general, tariffs on imports in most developed economies are very low or zero, and many companies that have not historically had a business case for drawback now do because of these additional duties.
Because of drawback modernization and increased demand for drawback, there may be an increase in services provided as well as the number of vendors offering services. The implementation of drawback into ACE means that companies are asking their brokers to support drawback filing, and the “streamlining” of commercial interchangeability rules means that vendors can more easily provide standardized solutions to process certain types of drawback claims.
Implementing a Drawback Process
A company interested in drawback should first analyze their imports and exports to identify the potential duty refunds available. They may be able to take advantage of unused merchandise, rejected merchandise, or manufacturing drawback. The difficulty of preparing drawback claims comes in the details. Regardless of the type of drawback, companies will have to go through the effort of identifying how to match exports against imports using one of the approved methods: Direct ID or Substitution. The TFTEA substitution rules can be difficult to administer, as they require additional checks that include the Harmonized Tariff Schedule goods description, as well as restrictions under certain trade agreements. Claimants will also need to document how the goods are matched together and create audit trails to support Customs audits, which are almost guaranteed to happen within the new electronic filing workflow.
Companies will also need to identify how to manage the drawback process internally. Some may try to take on the work internally, some will outsource entirely to service providers, but the majority will lie somewhere in the middle. Identifying the right mix is an analysis of your companies’ combination of internal drawback expertise, type and amount of available claim opportunities, supplier relationships, supply chain maturity, and systems in place to support the process.
Matt Robeson is Software Product Manager at Amber Road.