If you’re a U.S. importer, you might be overpaying import duties. Unless, that is, you have a large internal trade compliance team to manage the many regulatory and administrative details that impact those costs.
How much of your hard-earned profit are you turning over to the government in import duties? It’s not unusual for companies to discover a 6- or 7-figure savings opportunity from either avoiding or recovering duty payments.
There are basically 3 compliant ways to realize these savings:
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- Reduce the duty percentage applied to your imports
- Reduce the value of the import shipment to which duty is applied
- Get refunds on duties already paid
Let’s look at the strategies you can employ in each of these areas to reduce your import duty payments.
REDUCE THE DUTY PERCENTAGE
Explore Section 301 Exclusion Opportunities
The Section 301 tariffs were imposed on certain China-sourced goods based on trade practices that, in the U.S. government’s view, put an “unreasonable” burden on U.S. commerce. These tariffs can be as high as 25% and are applied over and above regular duties. One simple strategy is to check your imported products against a published list of products that are excluded from the 301 tariffs. But the government websites that cover these exclusions can be confusing. It’s best to reach out to your broker or preferred expert to see if your products qualify. If they do, these products will be excluded from 301 duties going forward and claims can be made to recover duties previously paid.
Don’t assume your customs broker will proactively alert you to 301 exclusion opportunities. You must be your own advocate.
Leverage Free Trade Agreements, Trade Preference Programs & Chapter 98 Provisions to Reduce or Avoid Import Duties
The USMCA (US Mexico Canada Agreement), KORUS (Korea Free Trade Agreement), the Generalized System of Preferences (GSP), and the Caribbean Basin Initiative (CBI) are just a few examples of programs that reduce or eliminate import duties from those countries or regions. Likewise, special HTS Chapter 98 provisions allow importers to mitigate duties on some goods – for example, U.S. goods returned for repair.
As with the Section 301 exclusions, consult with your freight forwarder or customs broker to explore these programs. The benefits can be substantial, but large penalties can be assessed against non-compliant claims.
Change Your Product’s Country of Origin
Can you source products or raw materials from a different country to lower import duties or to eliminate Section 301 tariffs? Many companies are doing exactly this. In fact, it’s one of the main drivers of a China Plus One strategy. Let’s say your product is made in China today and is subject to 7% duty plus a 25% 301 duty. Sourcing that product in Vietnam, for example, might reduce your duty obligation to 7%.
Of course, making and sourcing products in a new, more “tariff-friendly” country can present significant logistics challenges. Read our eBook on The Logistics of China Plus One to understand the challenges and how to overcome them.
Fulfill Lower-Cost eCommerce Orders from Outside the U.S.
U.S. law allows a duty exemption for any goods imported by one person on one day if the goods are valued at less than $800. This exemption applies to Section 301 tariffs, too. The increase in the deminimis to $800 led many companies to bypass their U.S. distribution centers and send imports directly to eCommerce fulfillment centers in Mexico and Canada. These facilities fulfill eCommerce orders and ship them directly to U.S. consumers as single transactions, thus avoiding U.S. duty payments.
It should be noted that some members of the U.S. Congress are looking to reduce the demonisms value, or eliminate it from certain countries like China, to undermine this duty-avoidance strategy. But for right now it seems a viable strategy that many importers have already implemented.
Use Tariff Engineering to Get Your Product Reclassified
Could making a slight change to your product qualify it for a lower duty rate? With the help of an expert, like your customs broker, it might be possible. Examples of tariff engineering:
- Converse added a felt lining on the sole of the brand’s sneakers to lower its duty rate from 48% to 3%.
- Columbia designs some women’s shirts with little pockets placed below the waist that reduce the duty rate from 26.9% to 16%.
Be cautious when employing tariff engineering since CBP will examine changes carefully. Lean on trade compliance experts to ensure you remain compliant.
REDUCE THE DUTIABLE VALUE OF THE IMPORT SHIPMENT
Remove Middle-Man Markups to Reduce the Dutiable Value of Imports
If a middleman is involved in the purchase of your imported goods, you can establish the dutiable value as the price that the middleman paid for the goods – exclusive of that party’s mark-up and other charges. The catch is that this initial transaction must meet standards set in the U.S. Customs regulations and be properly documented. If the standards are met, that commercial invoice value can be used for duty calculation. This “First Sale” strategy can have a huge financial benefit for importers using a middleman for foreign purchases. First Sale programs can be complicated to validate and document. Reach out to a qualified expert to get started if you think you might qualify.
Deduct Invoice Charges Unrelated to Product Value
If international freight, insurance, foreign inland freight, or foreign port charges are included in the commercial invoice value you receive from suppliers, you might be paying too much in import duties. Just like with an income tax return, importers are allowed certain deductions that can adjust the transaction value of imported goods. For instance, if you purchase under CIF terms (cost, insurance and freight), you can deduct properly documented insurance and freight charges on the invoice in order to calculate duty payments.
Confirm with your customs broker that you are taking all available deductions on your imported goods.
GET REFUNDS ON DUTY PAYMENTS ALREADY MADE
Take Advantage of Duty Drawback
Is your company importing product to the U.S. that it later exports? Many companies sell their imported products to buyers in Canada or Mexico, for example. Duties on imported goods that are later exported to foreign buyers can be recovered through a Duty Drawback program. Importers can go back 5 years to recover previously paid duties, including Section 301 duties on goods from China. Some provisions of Duty Drawback are relatively new, so it’s a smart bet to look into the program if you are exporting imported goods.
Duty Drawback programs can be complex, so be sure to reach out to a qualified expert to explore this option.
Review Customs Broker Invoices and Customs Entries for Imported Goods
Importers don’t always check the work of their customs brokers. But these professionals are not infallible. Employ an expert to perform periodic audits of entry transactions. Were products properly classified? Did the broker apply the correct HS code and properly declare the value of the goods? Were all available deductions made against the dutiable value of the import shipment? Were available Section 301 exclusions taken?
Mistakes can be caused by incorrect data entry, poorly trained personnel, or even technology. One recent audit turned up a hornet’s nest of errors related to the broker’s use of technology to automate the loading of entry data. No QA process was in place, so incorrect product codes were uploaded and assigned to customs entries, resulting in hundreds of thousands of dollars in overpayments.
What’s the expression? Trust, but verify? Take steps to ensure proper duty payments to meet your informed compliance obligation to CBP.
YOU CAN ALSO DEFER DUTIES
There are other strategies that won’t reduce import duties, but they can allow you to hold on to your cash longer. Foreign Trade Zones (FTZs) are government-approved areas that are considered outside U.S. territory, so goods remain there duty-free until they are “exported” out. FTZs are often used by importers whose products have a very high duty rate, so the cash flow benefits of duty deferral outweigh the costs to operate in the zone. Bonded warehouses are another duty deferral option that can be used. Dimerco operates bonded warehouses throughout Asia, often inside an FTZ. Check out our article on the advantages of bonded warehouses and FTZs in China and Southeast Asia.
Trade compliance is a complex process involving thousands of rules, regulations, and exceptions that change regularly. It’s understandable that busy importers might struggle to carefully oversee this aspect of their business. But that lack of oversight could be costing you money. Lots of it. For advice on how to make sure you’re compliantly paying the least amount of import duties possible, contact Dimerco experts to start a conversation.
