Global Logistics: 2014 Customs/Regulations Update—Shippers called into action

Amid heightened concern about the integrity of cargo moving through the world’s supply chains, Customs is increasingly relying on importers to promote the security of the U.S. by making certain that their goods are moving through a transparent pipeline. And while

Customs offers incentives to importers who adopt appropriate programs to ensure compliance, the price shippers pay for not doing so is about to become more punitive.

“Importers have an affirmative duty to exercise ‘reasonable care’ in making entry declarations,” says Terrence Stewart, head of the Washington, D.C., law firm Stewart and Stewart. “This requires strong and reasonable efforts to declare correct classifications, dutiable values, origins, and the like.”

Stewart adds that importers are increasingly obliged to engage in comprehensive self-assessments and implement Customs compliance programs in order to avoid severe penalties. This means that shippers must understand proposed legislation, rules, and regulations regarding changes in Customs duty protections—and to challenge any and all of these that undermine duty protections.

“At the same time,” says Stewart, “shippers may file petitions to request corrected classifications, valuations, and duty rates for imported merchandise that is unfairly competing with domestic merchandise due to improper Customs duty assessments.”

Identifying instances in which importers or foreign producers may be circumventing antidumping or countervailing duty orders through their classification or valuation of imported merchandise is also a priority, says Stewart. Finally, shippers should understand the implications and requirements of free trade agreements.

Suzanne Richer, president of Customs & Trade Solutions, Inc., says that the majority of penalties or “holds” issued against importers are not due to non-compliance with new regulations, but rather with non-compliance against long standing regulatory requirements.

“For 2014, importers should more closely monitor trade regulations specific to their commodity types and ensure that they’re meeting existing regulations,” says Richer. “The company strategy can’t be based on the idea that ‘we never had that happen before.’ Rather, a closer audit of an importer’s practices to assess gaps and determine what steps should be taken to close those gaps would be highly recommended.”

Customs checklist
Given the complexity of importing in 2014, trade analysts and legal firms are suggesting that shippers compile a checklist for compliance as soon as the New Year begins. Here’s a rundown of basic essential steps to be taken:

• Understand country of origin rules for marking and special preference programs. Most imports must bear a marking indicating the country of origin. Again, the controlling rules are complicated, particularly when the imported goods are produced or assembled from materials originating from multiple countries. Mismarked goods are subject to exclusion and assessment of special penalties.

• Determine classification and valuation of imported goods. The classification and value of goods determines the amount of duties assessed, and the controlling regulations are often vague. Careful analysis can minimize duties and avoid possible customs penalties for mis-declarations upon entry.

• Parse free trade agreements, trade preferences, and other duty-free programs. There are numerous programs in which imports may enter the U.S. duty-free either in whole or in part. These include, among others, the North American Free Trade Agreement (NAFTA) as well as various regional and bilateral free trade agreements. There are also trade preference programs that aim to encourage development through commerce. They include the Generalized System of Preferences, along with the Andean Trade Preferences and Drug Eradication Act. Shippers should also become familiar with the Caribbean Basin Initiative and the Africa Growth and Opportunity Act.

Additionally, certain provisions in Chapter 98 of the Harmonized Tariff Schedule provide duty-free treatment to imports of various categories of U.S. goods, such as American Goods Returned; American Goods Repaired or Altered Abroad; and American Components Assembled Abroad.

• Become reacquainted with duty drawback. Importers can obtain refunds of duties—“duty drawback”—that they pay on imports that they subsequently re-export or use to produce other exported goods. Careful planning to assure conformance with the rules can result in duty savings.

• Find Foreign Trade Zones and bonded warehouses. Importers may import goods into Foreign Trade Zones (FTZs) or bonded warehouses and not pay duties at the time of importation. They may also further process the imports while they remain in those locations. The goods become subject to duties only at the time of withdrawal if they ultimately enter the U.S., and they completely escape duty assessment if they are, instead, exported. Even when they enter the U.S. they sometimes can be subject to lower duty rates in certain appropriate situations. These programs create options that can minimize or even eliminate duties.

• Learn about Customs ruling requests. Importers can gain certainty as to prospective import transactions by seeking formal Customs rulings on a broad array of legal issues, such as the classification, value, and origin of goods.

• Study Customs compliance and self-assessment programs. This requires affirmative efforts to declare correct classifications, dutiable values, and origins. Importers are increasingly obliged to engage in comprehensive self-assessments and implement customs compliance programs in order to avoid customs penalties. Customs expects importers to engage consultants with appropriate expertise.

• Obtain information on prior disclosures and corrections. When an importer discovers that it has made a mistake on its Customs documentation or declarations, a Post-Entry Amendment/Post-Summary Correction or prior disclosure to Customs may be appropriate to correct the error. A valid prior disclosure can protect an importer from large penalties, especially if the importer has made multiple errors.

Shippers need to invest in systems
While legal experts emphasize the importance of checklists, other trade analysts suggest that shippers must also formulate a strategic plan for 2014. Beth Peterson, president of BPE, Inc., a consultancy specializing in import/export operations and the development of global supply chain security programs, says that the majority of shippers admit that they still use manual or spreadsheet-based processes for import operations and compliance.

“In our annual benchmark report, we found that shippers may be aware of the necessary legal protections out there, but are still unwilling to invest in systems that make compliance easier,” says Peterson. “And we know that without automation true integration with legacy systems isn’t even possible.”

According to the BPE report, 60 percent of shippers have no plans to integrate their global trade management (GTM) and transportation management systems (TMS) functions, or only have it, at best, in their five year plan. Furthermore, blending of operations and compliance is not a priority for the majority of shippers surveyed.

“Yet, less than one-third of global shippers are satisfied with their current setup,” says Peterson. “And the barrier to investment in import IT is largely one of cost, or lack of ROI, or an inability to communicate the importance of automating the compliance and transportation processes.”

The BPE survey indicates that systems-based shippers are clearly more efficient than their manual counterparts in certain areas, such as their ability to process shipments. Furthermore, systems-based shippers process more than three times the number of entries than manual shippers, yet require only twice the full-time equivalent employees that manual shippers do.

“That efficiency enables systems-based shippers to maintain more complex import supply chains,” says Peterson. “On average, they import from 62 percent more countries of origin and answer to nearly 40 percent more regulatory agencies.”

Peterson also observes that companies are taking a long and hard look at the classification of their products. In the past, companies put the U.S. Harmonized Tariff System classification on every shipment and hoped that the customs broker at destination would use the correct, local HTS.

“We saw brokers just dropping the last four digits of the HTS and ending up with incorrect classification,” says Peterson. “This also resulted in charges on duty-free items because of the misclassification.”

When shippers undertake a classification project they should be looking for four things, says Peterson: Accuracy, consistency, completeness, and a system of record. Any classification effort that does not do all four of these things is “doomed to failure.”

“Shippers simply need a system of record,” Peterson adds. “If they do all of the work we’ve described and don’t have a way to track and share their classifications, it’s a wasted effort.”

Finally, Peterson says that shippers should remember to save their “classification logic” and keep each version when they change it. Judging by the increased scrutiny looming in the Customs arena in 2014, change will remain a constant.