What is Duty Drawback? Simplified Explanation

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A Duty drawback is where the customs officer refunds the paid duty and tax, provided that the articles or commodity imported fulfills certain criteria.

That non-negotiable condition is that the cargo imported has to be exported back out of the state.

Duty drawback is a way that the government incentivizes manufacturers to set up an organization in its state, the obvious benefit of having more manufacturers situated at your own state are that you can reduce the unemployment rate, as well as increase government revenue in a form of business income tax.

The duty and tax refunded are only up to 99% of the formerly paid amount.

Who can claim a duty drawback?

The exporter of the goods is entitled to claim for a duty drawback. From the perspective of the Customs officers, they only are in touch with the exporter as the final cargo owners as they are performing a customs declaration, which business transactions that was performed prior to that is not entirely transparent to the customs officer. Therefore, it is only possible for the customs officer to allow duty drawback claims to the final exporter of the goods.

That being said, it is actually the importer that pays for the duty and tax on imported goods. In a complex manufacturing supply chain, the importer and exporter may not be the same entity. In this circumstance, the exporter needs to obtain a “Waiver of Rights to Claim Drawback” from the original importer in order to be eligible.

A duty drawback claim occurs retroactively, which means once the cargo has been exported, you can only proceed with the duty drawback claim. Currently, a shipper can claim duty drawbacks for cargos that remained in the USA within a 5-year time frame, beginning from the date of importation.

Several types of cargo eligible for Duty Drawbacks

Returned Goods

The term that we categorize under “returned goods” are:

  1. Direct Identification Manufacturing Drawback
  2. Unused Direct Identification Manufacturing Drawback
  3. Substitution Manufacturing Drawback
  4. Substitution Unused Manufacturing Drawback

Goods that are imported, unused, then subsequently exported back to its country of origin is eligible for a duty drawback claim.

Unused goods, by definition, are goods that are in apparent good conditions but are not utilized for the purpose of manufacturing or retail. Raw materials, automotive parts, or retail toys for example, if returned back to the country of origin, can be classified as unused goods.

Duty drawback on cargoes also does not need to be on the exact same cargo that was previously imported.

Should there be a regular imported automotive part that is imported on a regular basis, the manufacturer does not need to identify the actual parts that were imported, track the exact import documentation, and use that particular parts and accompanying document to file for a duty drawback claim.

As long as the commodity description matches the commodity exported, and was accompanied by the import document, the manufacturer can submit for a duty drawback claim. This is beneficial specifically if the commodity imported is homogenous and tracking each commodity is hard.

This is known by the US Customs Border Patrol as the Substitution Standard. Recently US CBP has reformed the duty drawback procedure and simplified the substitution standard. So long as the substituted goods are within the same 8-digit HS Tariff code, the cargo is eligible for duty drawback.

Manufactured Goods

Duty drawbacks also allow claims on dutiable goods that are utilized to manufacture new goods to be exported globally. In other words, the manufacturer has, to a certain degree, add value to the goods imported.

The caveat is, however, that the primary use of the manufactured goods has to differ from the primary use of the imported goods. In other words, the manufactured goods have to have a different use as compared to the initially imported goods.

A curtains manufacturer can import textiles from Bangladesh, once the textile has been manufactured and exported, the manufacturer can use the import documents for the textiles to claim for a duty drawback.

Note that processed products are eligible for duty drawback, the manufacturing waste are not. The textile waste from the curtain manufacturer can be exported to other countries, but they are not eligible for duty drawback claims.

One way for manufacturers to be certain that they are eligible for duty drawback claim is that the processed goods have a different harmonized tariff code (HTS Code) from the HTS Code used for the materials initially imported.

Rejected Goods Drawback

As the name suggests, goods that do not meet the importer’s requirement are allowed for duty drawback.

Importers have to bear the significant loss in production delay, administration cost, shipping and logistics fee. If the customs do not allow for a drawback for rejected goods, the monetary loss is further compounded once more.

When is Duty Drawback Not Necessary?

In retrospect, a duty drawback is a form of cash incentive, the condition where duty drawback makes sense is when there are actual duty and tax paid to the local customs office.

Hence, if a cargo imported is non-dutiable or non-taxable, there is essentially no need for a claim of duty drawback.

Another circumstance where manufacturers are free of duty and tax is where the manufacturing premise is situated in a free trade zone, where all international trade is free of duty and tax. One condition, however, is that the cargoes manufactured are exported to another country, instead of exporting them to the local nation for local consumption.

If the importing country and the exporting country are in some form of a bilateral or multilateral free trade agreement, the traded goods among the two countries are also free from duty and tax. For a manufacturer to benefit from the free trade agreement, they have to import from countries that have a standing free trade agreement, such as NAFTA. The imported goods have to be accompanied by a certificate of origin to determine that the imported goods originated from that country.  

Are All Cargoes Eligible for Duty Drawback?

Strictly no, depending on the harmonized tariff code, certain controlled articles are not eligible for duty drawback claims. One of the motivations behind this sort of restriction is to ensure the imported cargo is retained for local consumption, especially if the article or commodity (Steel or Aluminium) is in short supply.

Restriction of duty drawback is applied not only on the commodities, identified by the HS Code but also at a country level. Meaning to say, a country can restrict duty drawback incentives for cargoes coming from a list of pre-determined countries.

Primary use of Duty Drawback
Primary Use of Duty Drawback , Source: kpmg

How to Prepare Your Company for Duty Drawback Program?

Implementing an effective duty drawback program is not only logical but also fiscally beneficial. But there are some hidden costs that come from implementing a duty drawback program. Here are some tips for you to prepare yourself: –

  1. Consult a licensed customs broker to make sure the HS Code provisions are eligible for duty drawback
  2. Understand to the full extent the regulation of duty drawback
  3. Collect all data pertaining to import to estimate the potential savings from maintaining a duty drawback program
  4. Maintain an extensive record-keeping system for all import document and tracking information
  5. Be well versed with the US ACE (Automated Commercial Environment) System.

Documents Required for Duty Drawback

This is an excerpt extracted from the US Custom Border Protection website.

  1. Drawback Entry Number
  2. Filing Port Code
  3. Claimant ID Number
  4. Drawback Provision
  5. Drawback Claim Date
  6. Total drawback claim amount requested
  7. Import Entry Summary/HTS Data
  8. Information on Exportation or Destruction
  9. Notice of Intent to Export or Destroy (if applicable)

Useful Resources

https://www.cbp.gov/trade/programs-administration/entry-summary/drawback-overview

https://www.cbp.gov/trade/automated/news/drawback

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