Managing U.S. Tariff Costs: Options for Importers

Key Provisions to Consider

First Sale for Export

This one is often a surprise, and it is unavailable outside the U.S.: The EU abolished first-sale valuation under the Union Customs Code from May 1, 2016. In this scenario, goods move through more than one sale before they reach the U.S. For example, a factory sells to a trading company or to a related distributor, which then sells to the U.S. importer. Companies may be able to use the earlier, lower factory price as the customs value instead of the final price, provided the applicable first-sale requirements are met. Potential savings depend on the pricing structure and applicable duty rates and may recur on qualifying imports.

In practice, the program relies on the supply chain pattern and documentation. The transactions must be bona fide, the paper trail must run in order: Purchase Order 1, Purchase Order 2, Invoice 1, Invoice 2, payment. There are many complexities, such as spare parts pulled from general inventory, that will fail the clearly destined test unless they are segregated. One weak link can put the whole program at risk, so pilot one lane first, before applying it everywhere.

Duty Drawback

This is operationally similar to the EUs inward processing special procedure. Duty drawback may refund up to 99% of eligible duties, taxes, and fees paid on imported goods that are later exported, destroyed or used in qualifying manufacturing. It is the single largest pot of money most companies leave on the table, and companies can generally go back five years from the date of import.

Two things make it powerful:

• Substitution. Companies do not always have to export the exact item you imported. Matching the eight-digit Harmonized Tariff Schedule (HTS) commodity code classification may support eligibility, subject to the applicable substitution requirements, which means companies that never thought of themselves as drawback candidates often are.
• The manufacturing drawback: If a company imports a component, builds something with it in the U.S., and exports the finished article, the duty on that component may be recoverable, subject to the applicable manufacturing drawback requirements.

Eligibility varies by tariff program, and companies must check each program. Section 301 duties are recoverable, including the new forced labor tariffs. Ordinary MFN duties, the Merchandise Processing Fee (MPF) and the Harbor Maintenance Fee (HMF) are also recoverable. However, Section 232 is mostly not recoverable: Steel, aluminum and copper allow only a narrow manufacturing drawback on certain derivative goods, and unused and substitution drawback are off the table.

Finished vehicles and semiconductors under 232 get nothing. Antidumping duty and countervailing duty (AD/CVD) have been excluded for decades. IEEPA duties are not a drawback question at all; they are now a refund question.

Here’s where it goes wrong: incomplete proof of export, inventory records that cannot tie an import to an export, and unit of measure conversions that do not reconcile.

Foreign Trade Zones

A foreign-trade zone (FTZ) is a site that sits physically in the U.S. but outside customs territory for duty purposes. Goods come in without duty being paid, and the clock does not start until they leave the zone and enter U.S. commerce. Depending on the operation and applicable requirements, potential benefits include:

• Duty deferral: Companies hold inventory without paying the duty. On a large import program that alone is worth real money.
• Duty elimination on re-exports: If the goods leave the country again, the duty is never paid rather than paid and reclaimed.
• Weekly entry: One entry is done per week instead of one per shipment, which caps merchandise processing fees and cuts broker fees.
• Scrap and waste: Companies do not pay duty on what gets destroyed in production.
• Inverted tariff: When the finished good carries a lower rate than its components, companies can elect to pay the finished-good rate. This requires production authority from the FTZ Board.
• Production equipment: Imported equipment admitted for assembly into a production line can be entered when it is commissioned, not when it arrives.

Goods subject to Section 232, Section 301 and AD/CVD generally have to be admitted in privileged foreign status, which locks in the duty rate at the time the goods are brought into the zone. Implementation also takes time, especially from obtaining approval. Interest in the program has surged due to the enormous benefits some are able to reap.

Basics Companies Should Be Doing

Classification Review

If a product carries significant tariffs and is not a simple commodity, it is worth having a professional classify it. There have been numerous occasions when a broker classified a product into a Section 232 line at 50% when the product belonged in another heading at 25% or 15%.

The chapters in which this pays off are the ones in which a broker had to make a judgment call: Chapters 84 and 85 for machinery and electrical apparatus, 90 for instruments and 73, 76 and 74 for articles of steel, aluminum and copper, which is where Section 232 derivative lists bite.

The classic failure pattern is a component that is genuinely a part of a machine sitting in a basket heading for articles of base metal and therefore picking up a 50% metals tariff it should never have carried. Chapters 39 and 70 for plastics and glass are worth a look for the same reason.

Tariff engineering is the next step beyond classification review. Changing a product's design, composition or condition at import so it lands in a lower duty line is legitimate, provided the change is real and made before importation.

Origin

Beyond preferential origin under an FTA, if a product is processed in more than one country, it is worth taking a deeper look at the non-preferential origin. Origin determines the rate, and in the current environment the rate differences are enormous.

Origin is now an enforcement priority: U.S. Customs and Border Protection (CBP) has been expanding upstream traceability requirements, first for steel and aluminum and more recently for copper, where missing smelt and cast country reporting for certain copper wire and cable lines is now a fatal error in the Automated Commercial Environment (ACE) .

Value

This is where the U.S. and the EU diverge. In the EU, the customs value is built on a Cost, Insurance and Freight (CIF) basis: Transport and insurance costs up to the point of introduction into the EU are part of the value. In the U.S., transaction value is free on board (FOB) in substance, and costs incident to the international shipment can be stripped out of the declared value if they are properly documented. That structural difference means a European finance team’s instinct about what is dutiable will often be wrong in the U.S.

The three exclusions that produce the most money are the following:

• Freight and Insurance: Foreign inland freight, international freight and insurance costs may be excluded from customs value where the applicable requirements are met, including documentation supporting actual rather than estimated costs.
• Origin and Logistics Charges: Certain security, documentation, terminal handling and other charges incident to international shipment may be excluded, subject to reviewing each fee and maintaining appropriate supporting records.
• Warehousing Costs: Costs paid by the buyer to third-party warehouse providers may be excluded from customs value. Payments to the seller or a seller-related party require closer review and may be dutiable.

Related Party Pricing and Post-Import Adjustments

If a company is buying from an affiliate, and most multinationals are, there may be significant transfer pricing implications at play. This could include adjustments to the import price after the goods were imported. If the price is lowered, there may be an opportunity to obtain duty refunds based on the lower price.

This is where customs and transfer pricing work together, and it’s where most companies discover they have a transfer pricing study that was never written with a customs reader in mind.

CBP’s five-factor test requires an objective pricing formula established before importation, written intercompany agreements, consistent application, sufficient accounting records and no other conditions that could affect CBP’s acceptance of the price.

Companies should set up those five things before the goods are imported, not after. And if your company makes retroactive adjustments routinely, it should join CBP’s Reconciliation Program that allows flagging the customs value at entry as provisional and adjusting it, up to 21 months later.

Recovery, Not Just Planning

There are additional options for overpaid tariffs:

• Post-summary correction on unliquidated entries, for classification, origin or value errors found after the fact.
• Protest within 180 days of liquidation.

How We Can Help

For businesses operating across borders, U.S. tariff exposure depends on the interaction between country of origin, product classification and customs valuation. Reviewing these factors together can help organizations assess the potential impact and identify appropriate planning opportunities.

The treatment of EU- and UK-origin goods illustrates these differences. Subject to applicable exemptions, EU-origin goods with a most-favored-nation (MFN) duty rate below 10%, face a combined MFN and Section 301 rate of 10%. Where the MFN rate is already 10% or higher, no additional Section 301 duty applies. UK-origin goods generally face an additional 10% Section 301 duty on top of the applicable MFN rate. Goods covered by Section 232 generally face duty rates of 25% or 50%, but are excluded from Section 301 duties, making product classification and, where relevant, metal content important considerations alongside origin.

Businesses should assess U.S. planning opportunities alongside duty-relief arrangements available in other jurisdictions. In the UK and EU, these include customs warehousing, inward processing and temporary admission, which may be relevant depending on how goods are stored, processed, used or re-exported.

For transactions between group companies, customs and transfer pricing teams should coordinate their approaches, taking account of the distinct requirements of each framework. This is particularly relevant when a U.S. affiliate purchases goods from an overseas group company or when intercompany prices are adjusted.

Kroll helps businesses globally to assess tariff exposure, review classification and customs valuation, identify potential duty-recovery opportunities, and coordinate customs and transfer pricing approaches. To discuss how these considerations may apply to your business, contact our experts for an initial review of your import profile, relevant opportunities, documentation requirements and potential implementation steps.