trade & customs - unlocking above -the-line savings and

Richard (Dick) Belanger, JD, Senior CounselSidley Austin LLP

Andrew Siciliano, CPA, JD, LCBU.S. National Practice Leader KPMG’s Trade & Customs Practice

Trade & Customs - Unlocking Above-the-Line Savings and Identifying Hidden Risks

International Tax InstituteTuesday, April 28, 2015

Trade & Customs PlanningAgenda

Hot Topics in Trade & Customs Valuation / Transfer Pricing First Sale for Export Foreign Trade Zones Duty Drawback Trade Embargoes CBP Audits

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Background – Trade & Customs Trade Facts Government Agencies Roles and Responsibilities

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2Trade & Customs Basics Valuation Tariff Classification Country of Origin Special Trade Programs Export Controls

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Background –Trade & Customs

Background – Trade & CustomsHistory Lesson

What was the reason for the Boston Tea Party?

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Background – Trade & CustomsTrade Facts

The Townshend Revenue Act (1767) – levied taxes on the captains of ships importing various merchandise, such as glass, lead, paints, paper and tea.

2014 Trade Highlights*

2014 exports of goods and services ($2.3 trillion), exports of goods ($1.6 trillion), and exports of services ($710.3 billion) were the highest on record.

2014 imports of goods and services ($2.9 trillion), imports of goods ($2.4 trillion), and imports of services ($478.5 billion) were the highest on record.

The 2014 services surplus ($231.8 billion) was the highest on record.

* census.gov

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Background – Trade & Customs Government Agencies

Including but not limited to… U.S. Customs and Border Protection (CBP) U.S. Food and Drug Administration (FDA) U.S. Fish and Wildlife Service Bureau of Alcohol, Tobacco, Firearms and

Explosives (ATF) U.S. Department of Agriculture (USDA) Environmental Protection Agency (EPA)

Including but not limited to… Bureau of Industry and Security U.S. Department of State Directorate of Defense Trade Controls

(DDTC) Office of Foreign Assets Control (OFAC) U.S. Department of Treasury U.S. Department of Commerce

Imports Exports

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Background – Trade & Customs Roles and Responsibilities

FactoryR&D Sourcing Logistics Importer Distribution Customer

Customs

SAVI

NG

SO

PPO

RTU

NIT

IES

RIS

K A

REA

S

Customs Valuation

First Sale for Export

Buying Commissions

Foreign Trade Zones

Bonded Warehouses

Free Trade Agreements

Special Trade Programs

Tariff Engineering

Cost Unbundling

Customs Valuation

Antidumping/ Countervailing

Duty

Product Regulatory Compliance

(CPSC, Lacey)

Filing Fees- Entry- ISF

Freight Costs

Selling Commissions

Tariff Classification

Temporary Importations

Special Provisions –Chapter 98

Related Party Sales

Customs Audits

C-TPAT

Processes & Procedures

Duty Drawback

SUPP

LY C

HAI

N

Export Controls- Classification

- Licensing- End-users

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Trade & Customs Basics

Trade & Customs BasicsDetermining Duty Owed

Trade & Customs BasicsValuation

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Sales price in the United States, minus statutory deductionsDeductive

Transaction value of identical or similar goodsTV of Identical or Similar Goods

Primary Method of Appraisement = Generally, the invoice price plus statutory additionsTransaction Value

Cost to manufacture, plus statutory additions Computed

Value when other values cannot be determinedFallback

Deductive and Computed value may be switched at the importers election Importer’s Election

Trade & Customs Basics Tariff Classification

Tariff classification determines the rate of duty applicable to an imported article

All goods can be classified using the Harmonized Tariff Schedule of the United States (HTSUS)

The first six digits are harmonized globally

Goods are classified pursuant to the General Rules of Interpretation and U.S. Rules of Interpretation

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Trade & Customs Basics Country of Origin

Many Reasons for Determining Country of Origin

• Customs Declaration

• Antidumping and Countervailing Duties

• Trade Preference Programs (e.g., FTAs)

• Marking

• Government Procurement

The country of origin may be different for many of

these categories.

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Trade & Customs Basics Special Trade Programs

Unilateral Preference ProgramsCBERA ATPA AGOAGSP ATPDEA FASCBI

Free Trade AgreementsNAFTA Israel PeruDR-CAFTA Chile Korea

Australia Jordan ColombiaSingapore Bahrain PanamaMorocco Oman

Free Trade Agreements

Unilateral Preference Programs

Special Classification Provisions

International Agreements for Certain Commodities

Types of Special Trade Programs

Special Classification ProvisionsChapter 98, HTSUS

International AgreementsPharmaceuticals Civil AircraftIntermediate Chemicals

Information Technology

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Trade & Customs Basics Export Issues

EmbargoesCubaCrimeaIranNorth KoreaSudanSyria

Export Controls U.S. Bureau of Industry and Security,

Commerce Commerce Control List

Sanctions & Embargoes U.S. Bureau of Industry and Security,

Commerce Office of Foreign Assets Control, Treasury

International Traffic in Arms Directorate of Defense Trade Controls, State U.S. Munitions List

U.S. Export Issues

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Hot Topics in Trade & Customs

Transaction Value

Transaction value is the primary method of appraisement

Transaction value may not be used in certain circumstances, one of which is when the relationship of the parties influenced the price

There are two primary tests to determine if the relationship of the parties influenced the price

Circumstances of Sale Test Values

Hot Topics in Trade & CustomsValuation

Just because a price is considered acceptable for

tax purposes does not mean it is acceptable for customs

purposes.

Customs Tax

Entry-by-Entry evaluationProduct-based comparison

Lower value = less duty

Annual evaluationFunctional comparison

Generally, higher value = less tax

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Transaction Value


• “Transaction value” is the “price actually paid or payable for the merchandise when sold for exportation to the United States” plus certain statutory additions and deductions:

Additions:

− Packing costs− Selling commissions− *Assists− *Royalties (condition of sale)− Proceeds of subsequent resale

Deductions:

− International transportation and insurance − Costs incurred after importation− Customs duties and federal excise taxes

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Intellectual Property and Royalties RisksGenerally included in customs value:• Any royalty or license fee that is a condition of the sale of the

imported merchandise per se condition of sale (indispensible IP right or “know how”) vs. by agreement

• The value of any engineering, development, artwork, design work, and plans and sketches (undertaken elsewhere than the United States): Supplied free of charge or at reduced cost by the buyer of the imported

merchandise Used in connection with the production or the sale for export to the United States of

the merchandise• Generra Presumption (CAFC 1990): CBP’s position that all payments made

by a buyer to a seller, or to a party related to the seller, are part of the price actually paid or payable for the imported merchandise CBP has broadly interpreted this presumption Rebuttable by evidence which clearly establishes the payments are completely

unrelated to the imported merchandise (Chrysler Corp. v. U.S. (CIT 1993)).

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Exporterlicensor

Importerlicensee

goods payment Royalty*

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Exporter

Importerlicensee

good payment Royalty*

Relatedlicensor

Related parties

*License for exclusive distribution, trademark and trade name rights in the U.S.

*License for uses of trademark and trade nameon its products and U.S. retail stores

Finding: dutiable as “condition of sale” due towording of lic. agreement and parties’ relationship.(CBP Ruling 546033)

Finding: dutiable under the Generra presumption dueto wording of distribution and license agreement.(CBP Ruling 546966)

Intellectual Property and Royalties Risks

Hot Topics in Trade & CustomsTransfer Pricing

Differences Customs IRS

Different objectives Maximize COGS/import value Minimize COGS/import value

Different law 19 USC Section 1401a IRC Section 482

Different focus Per unit price of imported goods Aggregate income of importer

Different time periods Entry-by-entry declarations Annual period

Different comparable sets Product/Industry comparability Functional comparability

Different tests Circumstances of sale test/test values IRC §1.482-3 methods

Different measures if not arm’s length

Rejection of transaction value/ invoice price

Adjustment of transfer price/ invoice price

Customs vs. Tax Transfer Pricing Approach

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Retroactive Transfer Price AdjustmentsHistorically, CBP’s policy with respect to post-importation transfer price adjustmentshas been inconsistent under Transaction Value: Upward Adjustments

Importer must tender additional duties Part of the “price actually paid or payable”

Downward Adjustments Disallowed duty refunds Adjustment was viewed to be a “rebate” or decrease under 19 U.S.C.

§1401a(b)(4)(B): “Any rebate of, or other decrease in, the price actually paid or payable that is

made or otherwise effected between the buyer and seller after the date of importation of the merchandise into the United States shall be disregarded in determining [transaction value].”

Prices which require adjustment must be arrived by the application of a fixed objective formula:

Final sales price must be determined at a later time on the basis of some future event or occurrence over which neither the seller or the buyer have any control

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Retroactive Transfer Price Adjustments (continued) On May 16, 2012, CBP broadened its interpretation of an objective “formula,”

thereby allowing downward adjustments under Transaction Value (including downward adjustments) – HQ W548314 (5/16/12)

The “Five Factors” an Importer must meet to receive a duty refund:1. A written “Intercompany Transfer Pricing Determination Policy” is in place prior to

importation and the policy is prepared taking Internal Revenue Code section 482 into account

2. The U.S. taxpayer uses its transfer pricing policy in filing its income tax returnand any adjustments resulting from the transfer pricing policy are reported or used by the taxpayer in filing its income tax return

3. The company’s transfer pricing policy specifies how the transfer price and any adjustments are determined with respect to all products covered by the transfer pricing policy for which the value is to be adjusted

4. The company maintains and provides accounting details from its books and financial statements to support the claimed adjustments in the United States

5. No other conditions exist that may affect the acceptance of the transfer price by CBP (e.g., the adjusted price must be an arm’s length from a CBP perspective)

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Hot Topics in Trade & CustomsFirst Sale for Export – U.S. and EU currently

First Sale for Export Merchandise imported to the United States from a middleman, rather than from a

manufacturer, is often appraised for U.S. Customs purposes based on the price charged by the middleman to the U.S. importer. Since this price is generally higher than the manufacturer’s price to the middleman, duty liability is greater.

The below depicts the transactional structure needed to declare first sale for export

Ex-Factory Price - $78Duty - $15.60

FOB Price - $100Duty - $20

SECOND SALE(INVOICE 2)

Second Sale (Traditional Customs Value) Includes:

First Sale Value, plus - Middleman Mark-up Foreign Inland Freight Intellectual Property Rights Administration

FIRST SALE (INVOICE 1)

Factory Middleman Company

First Sale ValueIncludes:

Labor Factory Overhead Factory Margin Raw Materials

Assuming 20% Duty

Rate

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Hot Topics in Trade & CustomsForeign Trade Zones

Foreign Trade Zones Global cost savings area, specific to each country A Foreign Trade Zone (FTZ) is a geographical area, within the territory of the U.S. that is

considered to be outside of U.S. commerce and therefore not subject to CBP duties, taxes and fees, until the merchandise enters the commerce of the U.S.— Duty elimination— Duty drawback elimination— Duty deferral— Reduced brokerage fees— Reduced MPF— Inverted tariff benefit— Enhanced supply chain— Property tax exemption

Exported Merchandise

Imported Raw Materials, Machinery, and Parts

U.S. Consumption

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Hot Topics in Trade & CustomsForeign Trade Zones

Foreign Trade Zones (continued) Global equivalents

• Free Trade Zones• Bonded Logistics Parks• Processing Trade Regimes

EU• Public Customs Warehouses• Private Customs Warehouses

• Foreign Trade Zones• Free Trade Zones• Bonded Warehouses• IMMEX

ASPAC

Economic Benefits:• Import duty deferral• Import duty mitigation

(export)• Storage/processing/

assembly operations• Cash flow enhancement

Supply Chain Benefits:• Improved clearance

processes• Improved security

processes

Americas

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Hot Topics in Trade & CustomsDuty Drawback

Duty Drawback

Duty drawback (or refund of import duties) may be claimed on goods that were imported to the U.S. and subsequently exported, provided that the goods qualify as either of the following:— Direct or Substitution Manufacturing Drawback— Unused Merchandise Drawback— Rejected Merchandise Drawback

The exporter, processor, owner or producer may claim a drawback of customs duties

In most cases, the exporter may claim drawback for up 3 years from the date of export

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Hot Topics in Trade & CustomsTrade Embargoes – Cuba & Russia

Trade embargo of the Crimean Region

Sectoral Sanctions against identified individuals and entities within Russia’s economy

Additions to the Specially Designated Nationals (SDN) list of certain individuals and entities involved in the situation in Ukraine

CUBA

• Lightening Of Certain Restrictions

•Addition of license exceptions and general licenses for certain activities, including for certain exports and reexports supporting the Cuban People

Ukraine-Related Sanctions

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•Risk-based approach to selection of companies for audits•Priority Trade Issues

Antidumping and Countervailing Duties Intellectual Property Rights Textiles and Wearing Apparel Free Trade Agreements

•Composed of three phases Pre-Assessment Survey (PAS) Assessment Compliance Testing (ACT) Follow-up Audit

•Changes to the audits Most edits are in the PAS phase Increased emphasis on materiality Expanded guidance on tailoring the audit to

the importer Changes to sample size guidance Changes in report language

Focused Assessment Audits (FA)

Hot Topics in Trade & CustomsCBP Audits

Types of Audits

• Focused Assessment Audits• Referral Audits (formerly Quick

Response Audits)• User Fee Audits• Importer Self-Assessment

Evaluations

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