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Changes Allow for Duty Free Return of Foreign Goods

Faded containers and professional man writing

For years, U.S. buyers have found it difficult to return imported articles when products come in damaged or erroneously shipped. In the case of a return, importers have been required to pay additional duties and Merchandise Processing Fees (MPF) upon re-importation.

With that being said, there is good news for importers. Recent changes to U.S. tariff number 9801.00.10 allow for duty free return of foreign goods, according to the Trade Facilitation and Trade Enforcement Act of 2015 [1].

Conditions to Qualify

It is important to meet the following conditions to avoid paying duties a second time.

  • Goods must be returned within 3 years of initial export.
  • Duty drawback was not claimed on the original export.
  • The goods were not entered under bond or produced in a Foreign Trade Zone (FTZ).
  • The article was not advanced in value or improved in condition while abroad [2].
  • The U.S. importer has proper documentation to support the claim.

Support Documentation

U.S. Customs is in the process of defining the required documents more clearly for 9801.00.10. In the meantime, it is vital for importers to have these documents on hand at time of entry to support their claim. These documents include

  • A Foreign Shipper’s Declaration and U.S. Importer’s Declaration
  • Some form of proof to demonstrate that the goods have been returned within 3 years, such as

- Export invoices
- Export bill of ladings
- Electronic Export Information filings (EEI)

On the bright side, these documents are already required records for exporters, making the process easier.

By meeting these conditions and having the supporting documents, the change to this tariff provision will save importers significant duties and MPF for their returning goods.

For assistance with developing processes and procedures for returning goods, contact Mohawk Global Trade Advisors.


Footnotes

[1] “Products of the United States when returned after having been exported, or any other products when returned within 3 years after having been exported, without having been advanced in value or improved in condition by any process of manufacture or other means while abroad.” Harmonized Tariff Schedule of the United States (2016).

[2] The article was not altered in any way that might have made it into a new product or might have improved it while overseas.


By Jim Trubits, Vice President.

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©2016 Mohawk Global Trade Advisors

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Duty Savings Achieved with TIB

TIB Container

By Jim Trubits

Astute importers and exporters can benefit from the numerous duty avoidance, deferral, and recovery programs offered by U.S. Customs & Border Protection (CBP).

Temporary Importation Bonds (TIB) are a great way to avoid paying thousands of dollars in duty. Here’s how it works: Under certain conditions, goods are imported into the U.S.—for a limited time—duty free. Instead of paying duties, the importer posts a bond for 110% or twice the amount of duties, taxes, etc. that would be due if the goods were entering without the TIB.

Most TIB goods must be re-exported or destroyed within one year. Two one year extensions may be granted. When using a TIB, it’s important to understand that the goods cannot be sold in the U.S. and must be re-exported within the allotted time frame. Many importers prefer using a TIB instead of setting up a duty drawback program, as they don’t have to wait months to recovery their duties.

When to use a TIB

TIBs are most useful for goods subject to high duties that will be imported for testing/repair before being re-exported. They are commonly used for medical devices that have yet to be approved by the FDA.

Keep in mind that CBP has strict requirements for goods that qualify for TIB. If your goods fail to meet these conditions, you could face a penalty of 110% or double the duties and user fees due, depending on which TIB provision was used.

Are you TIB ready?

Before ever making entry under a TIB, make sure

  • your goods qualify under one of the 14 TIB provisions
  • you’ve carefully reviewed the Customs requirements for TIBs
  • you’ve consulted with an expert or obtained a binding ruling, if necessary
  • your Customs documentation indicates that it’s a TIB shipment
  • you’ll be able to supply the necessary supporting documentation and records to account for the imported goods, including the required proof of export/destruction

Come learn more about TIB and other duty savings programs during one of our seminars on Duty Deferral & Recovery Strategies this November.

Cities/Dates

Chicago, IL – 11/4/14
[Register/more info]

Rochester, NY – 11/12/14
[Register/more info]

Syracuse, NY – 11/13/14
[Register/more info]

Albany, NY – 11/20/14
[Register/more info]

Jim Trubits is Vice President for Mohawk Global Trade Advisors. Click here to read more about Jim.

 

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Understanding Incoterms: When Lightning Strikes

when-lightning-strikes

By Jim Trubits

Many international buyers and sellers fail to recognize the positive financial outcomes that can be gained from a well thought out Incoterms strategy.

Your methodology need not be complicated. It can be as simple as having a solid understanding of the role that risk plays in each Incoterms rule. Before expanding of how this strategy works, let’s clarify what “risk” means in the context of Incoterms. Risk refers to who is responsible for paying for damage to the goods that occurs while the shipment is in transit. This responsibility shifts from the seller to the buyer at different points in the transit process, depending on the Incoterms rule that is used.

For example, FOB, CFR, and CIF all assign this responsibility (i.e., risk) to the seller from the time the containerized goods are at the seller’s premises, until the container is placed on board a vessel. Should lightning strike and damage the goods at any time between these two points, the seller is obligated to reimburse the buyer for the damaged goods. Once placed on board the vessel, that responsibility falls solely on the buyer, up to and including when delivery occurs at the final destination.

International sellers can use this understanding of risk to their advantage when discussing Incoterms during sales contract negotiations.

If a seller wanted to minimize their liability for paying for damages (i.e., minimize their risk), they may choose FCA, CPT, or CIP. These three Incoterms rules transfer risk from seller to buyer when the goods are tendered to the first carrier, usually a trucking carrier. This shortens the seller’s exposure to risk, as it normally occurs far earlier in the transit process than when the goods are place on board a vessel.

Jim Trubits is Vice President for Mohawk Global Trade Advisors. Click here to read more about Jim.

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Join Jim Trubits and Robert Stein for Country of Origin and Marking Webinar (1.5 CCS Credits)

NCBFAA Webinar: Country of Origin and Marking Requirements
August 5, 2014
12 to 1:30 pm EDT
1.5 CCS Credits
NCBFAA member: $50, Non-member: $75
Register here

You can’t mark goods without knowing the correct country of origin (where they were made). This webinar steps through the process of determining a product’s country of origin and uses visual examples to explain marking methods and requirements. Includes a review of “Best Practices” for meeting reasonable care requirements.

Join Jim Trubits and Robert Stein of Mohawk Global Trade Advisors for this informative webinar!

Webinar hosted by the National Customs Brokers & Forwarders Association of America (NCBFAA). Register here.

Speakers

Jim Trubits

Jim Trubits
Vice President
Bio

Robert Stein

Robert Stein
Vice President
Bio

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Jim Trubits to Speak at 2014 Upstate NY Trade Conference

Jim TrubitsJim Trubits, Vice President, will be speaking about export controls at the 2014 Upstate NY Trade Conference & Expo in Rochester, NY on June 19.

Trubits will present A Beginner’s Guide to Export Compliance, which will touch on basic compliance issues for all exporters, including how to determine which export regulations (ITAR or EAR) apply to products. Jim will also be a panelist at the ITAR/EAR Roundtable, where he will be answering questions on recent export control reforms and sharing his insights gained from working with exporters as a freight forwarder.

Jim Trubits is Certified Global Business Professional, licensed Customs broker, and certified Customs specialist. Read more about Jim.

2014 Upstate NY Trade Conference & Expo

 

 

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How Do You Prove Transaction Value?

Determining the price actually paid or payable for your Customs entry can be quite tricky. Transaction Value rules, pursuant to 19 USC 1401a(b), place responsibility on the importer to exercise reasonable care and accurately provide Customs and Border Protection (CBP) with the proper declared value.

It’s important to assure that all lawfully mandated payments (additions) and allowable deductions (subtractions) are accounted for in the total entered value on the Entry Summary.

If you are an importer that purchases goods under an INCOTERMS® rule starting with C or D (CIF, CFR, CPT, CIP, DAP, or DDP), you may deduct the freight transportation and other costs (insurance, etc.), provided they are included in the price payable and you have supporting documentation. To help guide importers, CBP has published the Informed Compliance Publication, Proper Deductions of Freight and Other Costs from Customs Value.

Keep in mind that Customs doesn’t consider amounts shown on the commercial invoice as proof of freight transportation paid by the shipper.

What is CBP’s position?
Customs requires transportation and insurance to be deducted as actual—not estimated—costs paid to the international carrier, freight forwarder, insurance company, or other appropriate provider of such services. Again, declaring these amounts without the proper backup may result in CBP disallowing the deductions during an audit or review of the Customs entry.

So what does CBP consider proof?
To prove actual price paid, CBP requires evidence, such as a rated bill of lading, from the service provider showing the actual freight/insurance charges. CBP may allow other types of substantiation as well.

Finally, it’s important for importers to be able to produce the required Customs entry documentation and the supplementary information showing the actual costs to support the entered value. This should be part of every importer’s recordkeeping program.

By Jim Trubits, Vice President, of Mohawk Global Trade Advisors. Jim is a licensed Customs broker. Read more about Jim here.

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5 Tips to Remember the Next Time You Classify Using CROSS

CROSS is a search engine of U.S. Customs rulings on tariff classification, country of origin, marking, and trade programs/agreements. See it in action here.

CROSS can be an invaluable compliance tool for U.S. importers—if they know how to use it correctly. In this article, we will focus on search tips for classification rulings.

You may be wondering what all the fuss is about. It’s just like a Google search, right? WRONG. If you’re not careful with how you complete a classification search in CROSS, key rulings could be left out of your search results, making it all the more likely that you will misclassify your product.

How do I effectively search CROSS?

1. Start by searching with as many keywords as possible.

2. Don’t include article words (such as like, with, the, etc.) or you won’t get any search results. For example, searching with the phrase, gun rifle cleaning kit with brushes, returns 0 search results because the word with is ignored by CROSS.
cross-ignoredwords2

Omitting the word with and searching with the phrase, gun rifle cleaning kit brushes, returns 1 result, N206317.
cross-ignoredwords3

3. Complete a second search using less keywords. This will usually return results not included in your first search. In our previous example, we searched using the phrase, gun rifle cleaning kit brushes, which returned only one result (Ruling N206317, classification 9603.90.8050). However, if we perform a secondary search with less keywords, using the phrase, gun cleaning kit, we find another ruling not listed in the previous search results, Ruling K88087.

cross-secondsearch

This second ruling confirms the classification of the gun/rifle cleaning kits as 9603.90.8050. So, based on our CROSS search, the cleaning kits would be best described on the commercial invoice as, gun/rifle cleaning kits including brushes and mops, with the HTS classification 9603.90.8050.

4. Use the most recent binding ruling to support your tariff classification decision. Make sure it describes your product closely. The same applies to any discrepancies between a relevant Informed Compliance Publication for your product and past rulings. The importer should defer to the rulings if they were written after the Informed Compliance Publication.

5. When in doubt, seek a binding ruling from U.S. Customs.

Managing your reasonable care

In Informed Compliance Publication: Reasonable Care,U.S. Customs & Border Protection recommends that importers have procedures in place to use CROSS for fulfilling two important components of reasonable care. They are:

  1. Using CROSS to assist in correct tariff classification of imported products.
  2. Using verbiage from CROSS rulings to more accurately describe goods on Customs documentation and to meet importer invoice requirements pursuant to 19 CFR 141.86 and 141.89.

CROSS

By Jim Trubits, Senior Advisor. Jim is a licensed Customs broker and certified Customs specialist.

 

 

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Don’t Overlook Reasonable Care

One common misconception among U.S. importers is that they don’t have to worry about what’s on their commercial invoice and other import documentation. These importers will often neglect to provide their Customs broker with a truly complete product description or accurate country of origin because they don’t think they have to sweat the details. What they may not realize is that these types of requirements fall under the umbrella of what U.S. Customs & Border Protection (CBP) refers to as “reasonable care.” Importers who do not attend to these crucial requirements risk delays in release of their goods, audits, and penalties.

Defining reasonable care

CBP expects all importers to exercise some form of caution (i.e. reasonable care) when dealing with [1]

  • import documentation
  • country of origin verification, marking, and labeling
  • tariff classification, valuation, and duty rates
  • quantity
  • free trade agreements
  • other government agencies
  • recordkeeping

Although this is by no means an exhaustive list, importers must be careful with all details relating to these areas, as well as have written procedures to document their approach. In other words, as an importer, you should be able to prove to Customs that you provided and obtained the right information to meet these regulatory standards.

Is there a right way to manage my reasonable care?

CBP allows you flexibility in how you manage your reasonable care responsibilities. You can manage them yourself, use an expert (a licensed Customs broker, attorney, or accountant), or a combination of the two.

If you decide to use an expert, it is important to choose wisely. CBP expects you to qualify your expert by asking if their firm is a licensed Customs broker or, in the case of an attorney or accountant, if they have specialized knowledge or expertise in CBP matters. When in doubt, avoid taking advice from unregulated or unlicensed “experts,” as it will not serve in your defense during a CBP audit.

Once you’ve qualified your expert, it is crucial to provide him or her with complete and accurate information about the import transaction. Falling short of this requirement will lead CBP to view your company as lacking reasonable care.

What steps can I take?

Prior to import

  • Familiarize yourself with U.S. import requirements by reading informed compliance publications like, What Every Member of the Trade Community Should Know About: Reasonable Care [2].
  • Determine if there are any other government requirements for your imported products, such as an FDA Prior Notice for food products or additional labeling requirements for wearing apparel.
  • Bookmark the link to the online Harmonized Tariff Schedule for quick classification reference [3].
  • Consult with a licensed or certified expert, such as a Customs broker, attorney, or accountant.
  • Search CROSS, CBP’s online ruling database, to see if Customs has previously ruled on a product similar to yours [4]. Use this ruling as a guide for classifying, valuing, and marking your goods.
  • If after consulting with an expert and reviewing CROSS you are still in doubt of your product’s correct classification, origin, value, etc., seek a binding ruling from CBP. The beauty of a binding ruling is that it provides CBP and the importer with a definitive answer on these aspects of the product.
  • Document your processes for classification, origin verification, valuation, marking, etc. and provide employees with step-by-step instructions to achieve compliance. Keep procedures simple and easy to follow and them with your vendor and Customs broker.
  • Create a tariff database and share it with your broker to cut down on entry errors. Periodically review the database and provide your broker with any updates.
  • Issue purchase order instructions to your vendor that match your invoice requirements.

After import

  • Attend trade seminars and read newsletters to stay informed of changing requirements.
  • Review your commercial invoice or proforma invoice to make sure all requirements are met [5].
  • Verify that entries prepared by your broker are correct. If you find an error during a post entry review, correct it and work with your vendor and broker to prevent it from happening again.
  • Establish a recordkeeping program. Verify which documents should be kept, how long they should be retained, and how they should be stored.

Keeping up with your reasonable care responsibilities is not easy but with continued effort you will be able to show CBP that you’ve done your homework.

MGTA’s import audit service can help you to uncover gaps in your import procedures. Click here to learn more about our import audit services. Our import compliance programs can assist you in developing, improving, and enhancing your reasonable care policies and procedures. Click here to learn more about our import compliance programs.

Footnotes

[1] per U.S. Code Title 19, Section 1484(a)(1).
[2] See the list of Informed Compliance Publications, including Reasonable Care (A Checklist for Compliance), on U.S. Customs & Border Protection’s website, www.cbp.gov.
[3] View the Harmonized Tariff Schedule at www.usitc.gov/tata/hts/.
[4] See rulings.cbp.gov.
[5] For a complete list of requirements see 19 CFR 141.86-141.89 and 142.6.

By Jim Trubits, Vice President. Click here to read more about Jim.

©2012 Mohawk Global Trade Advisors

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7 Ways to Harness the Power of Foreign Trade Zones

More and more U.S. companies are using Foreign Trade Zones (FTZ) to better manage their global supply chain costs. Here are seven advantages that showcase FTZ as a competitive alternative to a domestic distribution center.

1. Duty Deferral. Duties are only paid when imported merchandise enters U.S. Customs territory. Goods may be held in an FTZ indefinitely and without duty payment, allowing for improved cash flow.

2. Duty Avoidance. There are no duties on FTZ merchandise that is destroyed, exported, or transferred to another zone. This eliminates the need to manage costly and time consuming duty drawback programs.

3. Duty Inversion. The user may elect to pay the duty rate applicable to the component materials or the finished goods produced from raw materials, depending on which is lower.

4. Inventory Tax Incentives. Companies that hold goods in an FTZ are exempt from inventory taxes. Also, certain tangible personal property is generally exempt from state and local ad valorem taxes.

5. No Duty on Value Added. There are no duties on labor, overhead, or profit to operations performed within an FTZ.

6. Save with One Weekly Entry. Customs allows for weekly entry processing, which benefits importers because they pay a single Merchandise Processing Fee per week, versus paying on a per shipment basis.

7. Enhanced Security. By using an FTZ, the internal controls requirements of the  Sarbanes-Oxley Act (Section 404) are met. Participants in the Customs-Trade Partnership Against Terrorism (C-TPAT) program are eligible for additional Customs benefits.

By taking advantage of Foreign Trade Zones (FTZ), U.S. companies can save on duty, improve their market competitiveness, and reap the rewards of a more secure supply chain.

By Jim Trubits, Vice President. Click here to learn more about Jim.

MGTA can make FTZ a worry-free process for your company by helping you with Foreign Trade Zone application prep, employee training, activation, and compliance reviews. Click here to learn more about our FTZ services.

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How to Survive an Export End-Use Check

Finding out that the government wants to do an end-use check on your export is a lot like finding out that you’re being audited by the IRS. Anxiety begins to take over. You may ask yourself, what did I do wrong?

The reality of the situation is that you may have been selected at random, so don’t panic. Through the U.S. Bureau of Industry and Security—the agency that performs these checks—the government is attempting to verify that your exported goods are not being used by the wrong people or for the wrong reasons. Ultimately, end use checks are a proactive way to protect national security. They help the government inhibit the proliferation of weapons of mass destruction, limit support of terrorism, and identify unauthorized end users.

Behind the scenes

Although the government performs two types of end-use checks, one pre-license and one post-shipment, the majority of checks are post-shipment.

Fifty percent of post-shipment end-use checks are conducted by Export Control Officers in U.S. embassies and consulates in Moscow, Beijing, Hong Kong, New Delhi, Singapore, and Abu Dhabi [1]. The other fifty percent are conducted by U.S. investigative officials.

During each check, the exporter will be asked for all documentation related to a particular shipment. The Export Control Officer will then take steps to verify that the item is being used as intended by the end-user, at the stated location, as noted in the shipment’s documents. This may involve physically visiting the foreign consignee’s operations to verify location and correct use. If the officer discovers that the item is not in the location stated on the documents or is being used improperly, the check’s results will be considered “unfavorable” and the exporter’s future shipping activities will be monitored more closely by government officials or, in some instances, completely prohibited.

Avoiding unfavorable results

Loss of export privileges is a death sentence for U.S. companies that sell their products overseas. So how do you avoid “unfavorable” end-use check results? The answer lies in how well you complete your screening, know your customer, keep your records, and review your documentation.

Complete your screening
This one is simple. Don’t attempt to ship your exports without knowing your screening requirements and completing them in full. If you export EAR99 goods, you are not exempt from these requirements.

Know your customer
Let’s assume you’ve completed all of your screening requirements. Your foreign consignee didn’t appear on any of the prohibited end-user lists. However, this doesn’t mean that you truly know your customer and your customer’s operations. The best way to do this is to actually visit your customer. So, plan a visit to the customer’s facility. See with your own eyes what kind of operation your foreign customer is running.

Keep your records
Federal regulations require exporters to keep all transaction records for five years [2]. Some of the documents that may be requested during a government end-use check include:

  • commercial invoice
  • purchase order
  • international bill of lading
  • copy of the EEI (Electronic Export Information) filing
  • screening documentation, if available
  • Shipper’s Letter of Instruction (SLI) and other supporting documentation
  • technical specifications

Review your documentation
It is important to review any export documentation prepared by you and on your behalf. Your freight forwarder can help you with this process but make sure that you take time to carefully inspect the documents yourself. As you review each one, look for incomplete and inaccurate information. If the same information appears on multiple documents (such as a serial number), make sure the data matches on each one. If your goods require a destination control statement, make sure it appears on all the required documents [3].

Does the commercial invoice…

  • identify all parties to the transaction (ship to, sold to, price payable to, etc.)?
  • include a commodity description sufficient enough to correspond to the Schedule B number used?

If a forwarder filed your EEI, did you…

  • receive a copy? If not, did you request a copy from the forwarder? Does your compliance program include a procedure for obtaining a copy of every EEI from your forwarder?
  • provide the forwarder with a Shipper’s Letter of Instruction (SLI) to help prevent AES filing errors?
  • independently review the EEI for accuracy?

The Bureau of Industry and Security expects every exporter to know their compliance responsibilities and abide by them. It is up to you, the exporter, to determine how that will happen. Protect your company from an unfavorable end-use check by completing your screening, knowing your customer, keeping your records, and reviewing your documentation.

Need guidance for an imminent end-use check?

MGTA can help. Click here to learn more about our export audit services.

Footnotes

[1] Statistic taken from an online transcript of a presentation given by Jose Rodriguez on July 20, 2011 in Washington D.C. during the 2011 Update Conference on Export Controls and Policy.

[2] See 15 CFR 762.2.

[3] See 15 CFR 732.5, 758.1, 758.6, and 762.

By Jim Trubits, Vice President. Click here to read more about Jim.

©2011 Mohawk Global Trade Advisors

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My Goods Are EAR99. Why Do I Have to Screen?

One afternoon I get a phone call from a frantic export client who is desperate to meet with me. He’s just been informed by the Bureau of Industry and Security (BIS) that he’s being penalized $250,000 for failing to do proper export screening.

He tells me that the Bureau has made a huge mistake. His goods are harmless commodities with no specific ECCN, so they are classified as EAR99.

Since his goods don’t need a license, he was under the impression that he didn’t have do any screening.

Not exactly, I tell him.

***

Additional Screening

It is in an exporter’s best interest to document the process for each of the following screens as well as keep the records for each completed screen for five years.

Denied Party Screening. This screen involves checking a number of lists to ensure that an export or reexport is not being shipped to a prohibited end-user. Exporters can invest in software to perform this screen or use the Lists of Parties of Concern on the Bureau of Industry and Security’s website.

The first part of the screen involves checking the Denied Persons List and Debarred List. It is illegal for an exporter to conduct a sale with any individual or entity on these two lists, regardless of whether the end-user is located in the U.S or overseas.

Next, exporters should check all parties against the Unverified List, Entity List, Specially Designated Nationals List, and Nonproliferation Sanctions List. Export transactions involving certain parties on these lists may be completely prohibited or only allowed with a license.

Red Flags Check. This is a check for any abnormal circumstances in an export transaction that cause a reasonable suspicion of a potential violation of the Export Administration Regulations (EAR). The Bureau of Industry and Security refers to such circumstances as “red flags.” Examples of red flags include the customer insisting on paying with cash for an expensive item when normally the terms of sale would call for financing OR the products don’t fit the buyer’s line of business (e.g. an order of sophisticated computers for a small bakery).

Sanctioned or Embargoed Countries Check. Exporters must verify that the destination is not a sanctioned country. The U.S. restricts shipping to Sudan, Syria, Cuba, North Korea, and Iran. Exporters should carefully review embargo provisions for license requirements.

End-Use Check. For goods subject to 15 CFR 744, exporters must check for prohibited end-uses, such as chemical, biological, and nuclear applications; as well as those used to transport them (e.g. a vessel, aircraft, or rocket system).

If any of the above screens results in a prohibition, the exporter must request a license from the Bureau of Industry and Security or ensure the export is eligible for a license exception.

The Real Cost of Noncompliance

It’s important that U.S. exporters understand and comply with all screening requirements to avoid losing export privileges and hundreds of thousands of dollars in penalties [2]. In 2010, the Bureau of Industry and Security completed 708 end-use checks, resulting in over $12.2 million in criminal fines and $25.4 million in civil penalties [3].

MGTA’s export audit service can help you to uncover gaps in your procedures that could lead to the scenario described at the beginning of this piece. Click here to learn more about our export audit service. Our export compliance programs can assist you in developing, improving, and enhancing these procedures too. Click here to learn more about our export compliance programs.

By Jim Trubits, Vice President. Click here to read more about Jim.

Footnotes

[1] See 15 CFR 736.2.

[2] See 15 CFR 766.

[3] Amounts for fines taken from page 9 of the Bureau of Industry and Security’s “Annual Report to Congress for Fiscal Year 2010.”

©2011 Mohawk Global Trade Advisors

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Import Compliance and Customs Assists: What’s the Real Cost?

Many of our clients produce molds as part of their manufacturing process.

Did you know?

US Customs requires that importers not only pay duty on the physical product, but also pay duty on “assists” that aided in the production of that product.

According to US Customs, these listed assists should be reported as part of the import value of your products.

  1. Tools, dies, molds, and similar items used in producing the imported merchandise.
  2. Materials, components, parts, and similar items incorporated into the product.
  3. Merchandise consumed in producing the imported merchandise.
  4. Engineering, development, artwork, design work, plans and sketches that are undertaken outside the United States.

Remember: The lump sum value of any assist is considered part of the transaction value of the merchandise. First, the value of the assist is determined; then the value should be declared on the first shipment or alternatively prorated to the unit cost of the imported merchandise.

Stay compliant and avoid unnecessary fines!

Contributed by Jim Trubits, Senior Advisor. Jim Trubits is a licensed Customs broker and certified Customs specialist.

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Potential Pitfalls for Exporters Using Ex Works

Many exporters like to sell under the Incoterms rule Ex Works (EXW) because it seems to require the least obligation or responsibility for the seller. Taken at face value, Ex Works may appear to be the best, no-hassle choice for exporters that don’t want the added burden of arranging transportation and ensuring export compliance. However, appearances can be deceiving. Exporters should use caution when selling under Ex Works, due to these potential pitfalls.

Loading
Ex Works assigns the buyer with the risk for loss and damage to the goods during loading. Though the seller normally loads the merchandise as common procedure, under Ex Works, it is the buyer who’s at risk if the goods are damaged during loading. At first, this scenario may seem preferable from the seller’s standpoint. In reality, it leaves the sales relationship very vulnerable. If goods are damaged during loading, it could cause serious conflict between seller and buyer, possibly jeopardizing the sales relationship.

Export Controls
Under Ex Works, the buyer is responsible for arranging export formalities and clearance. Again, one would assume this to be preferable for the seller/exporter, who perhaps sees these obligations as too much of a hassle. However, most exporters don’t realize the potential compliance issues that this arrangement creates.

Let’s start with the most obvious issue: if the buyer is overseas, one can assume that this person is not familiar with the U.S. Export Administration Regulations (EAR). Therefore, it’s going to be very difficult for that foreign buyer to understand how to comply with U.S. export laws and regulations. This increases the possibility for incorrect or insufficient export filing. Why should the exporter be concerned about this? As the U.S. Principal Party of Interest (USPPI), the exporter is still responsible for the shipment’s compliance, regardless of whether a foreign agent/buyer arranges the export formalities (see 15 CFR 758.3). Failing to obtain the proper export license, for example, could mean stiff penalties or loss of export privileges for the exporter.

Another disadvantage to Ex Works is that it increases the chances of the exporter being audited or penalized for violations. Under Ex Works, the foreign buyer arranges transportation of the goods. In the U.S., when a foreign entity controls the transportation of exported goods, the government considers the shipment a routed export transaction.

Due to the potential security risks involved, all routed export transactions are carefully scrutinized by the Bureau of Industry and Security and U.S. Customs and Border Protection. While exporters are required by law to maintain full compliance with U.S. laws and regulations for all shipments, routed export transactions must be all the more compliant because they are so closely examined by the government. Thus, in the case of routed transactions, Ex Works actually adds to the exporter’s/U.S. seller’s compliance burdens.

Payment
If selling using a letter of credit, documentary sight, or time draft, exporters need to maintain control of the international bill of lading in order to get paid by the bank. Unfortunately, under Ex Works, the exporter has no say in how these documents are prepared. If a bill of lading has a mistake, the exporter has no recourse for obtaining corrections, as the forwarder who prepared the document is employed by the buyer. The buyer’s forwarder is under no obligation to make corrections on the seller’s behalf. Without a correct bill of lading to present to the bank, the exporter will be charged discrepancy fees, or worse, not be paid at all.

Better alternative to Ex Works: CPT

For the compliance-savvy exporter, Carriage Paid To (CPT) is a better alternative to Ex Works. The advantages are many.

1) The seller/exporter controls the transportation all the way to the named destination point, with risk for loss passing to the buyer when the goods are handed over to the first carrier in the U.S. In many cases this happens at the seller’s warehouse, as the goods are loaded on the truck.

2) The goods are loaded by the seller, at the seller’s risk, removing this burden from the buyer.

3) The seller or exporter controls the export formalities and export compliance—such as filing the Electronic Export Information (EEI)—thereby minimizing the potential for penalties and sanctions.

4) The shipment is no longer considered a routed export transaction, eliminating the additional compliance burdens that such a designation would require.

5) If selling under a letter of credit, sight, or time draft, the exporter will control international transport, and thus, the documentation needed to receive payment from the bank.

6) An added benefit of controlling the international freight under CPT is that the exporter can choose the freight forwarder. Working with a preferred freight forwarder gives the exporter the advantage of additional expertise regarding export compliance, best routing, and required export documentation. This is extremely helpful for smaller and less experienced exporters but can also be beneficial for larger exporters.

Exporters should consider the benefits of selling using CPT, which actually reduces risk and allows for peace of mind on export compliance.

Want to know about strategies for using Incoterms for your export sales? Click here to learn more about MGTA’s on-site Incoterms training.

By Jim Trubits, Vice President. Click here to read more about Jim.

©2011 Mohawk Global Trade Advisors

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