Shortly after the U.S. enacted its first federal tax (a customs duty), the Continental Congress created a drawback of that same tax in 1789 to promote trade and allow American companies to compete internationally. Today, the federal government collects more than $28 billion annually in customs tariffs, of which somewhere between $2 billion to $3 billion is available to be refunded under drawback.
Surprisingly, the U.S. Bureau of Customs and Border Protection (CBP) estimates that in any given year more than 70% of these monies go unclaimed and are eventually lost by companies.
What is drawback?
In its simplest form, drawback is a refund of duty paid on imported merchandise that is linked to an exportation (or destruction) of an article. For valid drawback claims, CBP refunds 99% of the value of duties paid at the time of import, retaining 1% to cover its costs of administering the program. Today, there are three categories of drawback: 1) manufacturing drawback, 2) unused merchandise drawback, and 3) rejected merchandise drawback.
How long does it take to receive a refund?
Drawback regulations provide for generous time periods to collect information, import/export documentation, and prepare and file refund claims. For example, recovery of import duties and fees for unused merchandise that is subsequently sent abroad is available when such goods are exported or destroyed within 3 years following import. Considering the multi-year window for claiming drawback after the export of the merchandise, a company new to the drawback program can potentially receive a significant duty recovery on its initial filing(s). Thereafter, duty refund claims can be filed in periodic installments based on import and export activity.
What are the steps required to receive drawback?
In addition to gathering import and export transaction documentation, authorization to operate under drawback is required, and detailed records of the company’s inventory flows must be maintained. For certain types of drawback, the claimant must select a drawback accounting method (e.g., FIFO, LIFO, Low-to-High) which does not necessarily have to match that used by the company for financial or tax purposes. Additionally, a notice of intent to export or destroy merchandise may be required prior to export or destruction, but in many cases, a waiver may be requested.
While there are many benefits to duty drawback beyond cash recovery, the initial and ongoing diligence required to maintain a compliant and effective drawback program can be challenging for some companies.
Considering the various types of drawback available and the advanced approval/ruling requirement, initial studies, such as a duty-refund opportunity identification exercise and operational feasibility analysis, are recommended. These efforts will help determine the amount of duties that may be available for recovery, the type of drawback that may apply to your company, and the process you need to follow to prepare for filing claims. The output of these efforts will provide you with 1) the proper insight for selecting the type of drawback that is right for your company and 2) help you to develop and implement the procedures necessary to operate a robust and compliant drawback program.
This guest post was written by Mark Ludwig of Variant Advisors,* a corporate management consulting firm offering value-added services including export control compliance program development, reviews or assessments, and staff & management training.
For more information contact Mark at firstname.lastname@example.org or 305-213-8775.
*Outside of the Big Four, and through its relationship with Variant Advisors, CBIZ is unique among other major national professional services firm by offering these value-added solutions.