evaluating customs risks

Evaluating Risks and Exposures In Customs Transactions

June 20, 2012 Presented by George R. Tuttle, III George R. Tuttle Law Offices One Embarcadero Center, Suite 730, San Francisco Tel: (415)986-8780 Fax (415) 986-0908 E-mail: [email protected]

mailto:[email protected]

Tuttle Law Offices Tuttlelaw.com

Tuttle Law Offices (c) 2012 2

About the Speaker

George R. Tuttle, III, Esq. George R. Tuttle, III is an attorney with the San Francisco law firm of

George R. Tuttle, P.C. For the past 25 plus years his practice has focused on import

regulation, Customs and Export Control matters. He has a wide range of experience handling Administrative, Judicial and enforcement matters, including classification determinations, rulings and regulatory interpretations, disclosures, investigations, and penalty cases. He also assists importers develop, and implement compliance programs.

Mr. Tuttle is a frequent speaker and instructor on Customs and export matters for various trade groups, including: AAEI, the Professional Association of Exporters and Importers (PAEI), Women-in-International Trade-Northern California (WIT-NC), San Francisco Customs Brokers and Freight Forwarders Association and the International Compliance Professionals Association (ICPA).

Mr. Tuttle can be contacted at: George R. Tuttle Law Offices One Embarcadero Center, Suite 730, San Francisco Tel: (415)986-8780 E-mail: [email protected]

mailto:[email protected]



Why Evaluate Risks and Exposures In Customs Transactions?

Compliance extends beyond voluntary programs like ISA

Basic obligation of all importers Cost of non-compliance

– Disruption of business – Disruption of supply chain – Distraction to employees and

management – Penalties and Liquidated

damages – Detention and seizure of goods



Evaluating Risks and Exposures In Customs Transactions

Like in life . . . – It is not what you see that

can hurt you . . .

– It is what you don’t see . . .



What is a Risk Assessment?

“Risk Assessment and Self-testing Plan” described in Appendix I to the 2011 ISA Handbook – CBP allows flexibility and does not dictate specific

testing requirements “[E]ach company must perform its own risk assessment,

develop its own control procedures, and design its own self-testing program in order to monitor and mitigate risk and ensure that import transactions are accurate and compliant.”



What is a Risk Assessment?

Appendix I -- August 2011 ISA Handbook states:

“Risk is the degree of exposure that would result in loss to the trade, industry, or the public.”

“Potential risk exists in ordinary day-to-day transactions as well as those extraordinary transactions that happen infrequently or unintentionally.”



The Risk Equation

How do we measure risk? Subject + # transactions + Cost = Risk Cost of noncompliance

– Monetary (duty/ fee under or overpayment/ fines)

– Operational (i.e., supply chain impact) – Reputation



Common Customs Penalties

False Statements 19 USC 1592 – 2x to 4x loss of Revenue (Negligence (+)

Liquidated Damages – 1 to 3x the entered value

Record keeping Up to $10K and loss of SPI benefit C/O Marking

– Detentions, Liq damages or 10% of value Imports contrary to law 1595a(c)

– Detain and seized



Risk Matrix (Example)

Subject Area

Transactions Cost of Noncompliance

Risk

Classification All High High

Valuation Many Medium Medium

Origin Few Low Low

Special Trade None None Low

Recordkeeping All High High



Risk Matrix



Evaluating Your Risks and Exposures

What is a “risk assessment?” – Identify transactions that are

risks to CBP compliance

– Evaluate risks for effects, and

– Design control activities to manage/ minimize those risks.



Where to Begin?

Identify Customs programs use by your company

Identify persons knowledgeable about products and programs;

Assemble compliance team

Review regulations and legal requirements

Determine what records must be maintained and/or procedures that must be followed



Evaluating Your Risks and Exposures

Common subject areas associated with risk assessments --

– Classification – Valuation (multiple sub categories) – Special Trade areas / Transshipment – Quantity – Recordkeeping – Antidumping/ Transshipment

New “risk” areas include: – Product safety—CPSC/ FDA/ Medical – Trademark / trade names



Where to Begin?

Select a Subject (i.e., Class, Value, FTA, etc) – Where should my data come from?

ACE/ ITRAC/ Special Broker Reports Company Business Reports

– Purchase Order Reports – Payment Records Reports – Receiving Records Reports

– Period of Review? – What is my sample size?

Statistical Judgmental



Where to Begin: Data Collection and Analysis

Obtain copy of importer activity report “ITRAC” or ACE reports from Customs

– Review data for information on Exporters/manufacturers values tariff classifications Special duty /preferences

Link CBP web page – http://www.customs.gov/xp/cgov/admin/fl/foi

a/making_a_request/itrac/itrac.xml

http://www.customs.gov/xp/cgov/admin/fl/foia/making_a_request/itrac/itrac.xml

http://www.customs.gov/xp/cgov/admin/fl/foia/making_a_request/itrac/itrac.xml



Where to begin: Data Collection and Analysis

Available ITRAC information includes:

– Filer Number – IOR – Ultimate Consignee – Entry Number – Entry Date – HTS Number/Desc. – Entered Value – Manuf. Id – Est. Duty/ Rate – Country of Export

– Country of Origin – Related Party Status – Special Program Indicator – Liquidation Date – Entry Type – Mode of Transport – Discrepancy Types – Export Date – Exams



Specialized Broker Reports

Practice Tips – Considered Specialized Broker Invoice line item Reports

(See example) – Brokers/ Filers can added information to 7501 for:

Supplier Invoice Number Purchase Order

– Can you trace supplier/ vendor payments to Customs Entry? Do payment records reference vendor name and invoice

Number or Purchase Order?



Specialize Broker Reports



Risk Review Process

Review the company’s risk environment, such as: – Imports from specific manufacturers or suppliers

– Large volumes of imports under special duty provisions or special trade programs

– Large volumes of imports under tariff classifications with no or low duty rates or complex classification requirements

– Shipments from new suppliers or vendors

– Use of “First sale” or multi-tiered” purchase transactions

– Imports subject to antidumping, textiles and other sensitive Customs issues



Tariff Classification Risk Reviews

Practice Tip – Use PO or Receiving Reports to

identify high value or high volume SKUs

– Identify products with unique classification requirements / duty free / low duty rates

– Match part or SKU with import tariff classification

– Test accuracy of tariff classification for high value / volume SKUs



Tariff Classification Risk Reviews

– Does company: Maintain a record of the tariff classifications at the part or SKU level

(product/classification matrix)?

Document classifications with technical information and reference to pre-existing rulings or HTS classifications and Explanatory Notes

Rely on Broker to classify?

– Review high value or high volume SKUs

“Top 20” by volume or value of imported products?

Products that account for 70% of 80% of imports?

New suppliers or new products?



Valuation: Where to begin-- Valuation Issues

Basis of Appraisement – What is my company’s “Basis of

Appraisement?” Valuation methods When does “transaction value” apply?

– Do I have imports from related parties? – Do I have no-charge shipments? – Do I have shipments based on assembly charges only?



Transaction Value

When is transaction value appropriate? – Must have a sale of the imported goods for export to the United

States.

– No restrictions on disposition or use, except those

Imposed by law

Geographical resale territory

Which do not otherwise substantially affect the value



Customs Valuation: 1401a(b)(2) The Related Party Rule

The transaction value of imported merchandise shall be the appraised value of that merchandise for the purposes of this chapter only if -

– *** (iv) the buyer and seller are not related, or – the buyer and seller are related but the transaction value is

acceptable

Burden is on importer to establish that the relationship does not affect the price

Customs has published ICP on valuation for related party transactions



Acceptability of Inter-company Prices Based On “IRS” Transfer Pricing Methodology

CBP and IRS Transfer Pricing rules are not the same --

– “Customs approach to related party transactions differs from the IRS approach . . . the [IRS] methods review profitability on an aggregate basis, not a product by product basis.”

– “Customs generally analyzes related party transactions at a more detailed product by product level . . .



Related Party Imports

Inherently A “Risk” – Need to evaluate related party transactions

against CBP Rules, i.e., “All costs plus a profit” Other methods may be acceptable New Ruling from CBP dealing with Post-import transfer

price adjustments – Customs Bulletin and Decision dated May 30, 2012 (Cust.

Bul. and Dec., vol. 23, no. 46) – Broker errors in categorizing supplier as (R)



Valuation: Other Valuation Issues

• Focused Assessment Questionnaire Valuation Issues

Price Actually Paid or Payable Assists (e.g., Materials / Component Parts, Tools, Dies, Molds,

Merchandise Consumed, Engineering, Development, Art Work, Design Work, Plans)

Packing Charges Selling Commissions Royalties and License Fees Proceeds of Subsequent Resale Transportation Costs (e.g., International Freight, Foreign inland

Freight, Insurance)



Valuation: Other Valuation Issues

Retroactive Price Adjustments (such as: Periodic and year end transfer price adjustments)

Price Reductions to Buyer to Settle debts (e.g., Reductions for Defective Merchandise)

Price Increases

Rebates and Allowances

Indirect Payments to 3rd Parties that benefit seller

Payment of Seller’s Debt by Buyer (e.g., quota)

Purchases on Consignment

Currency Exchange Adjustments



Valuation: Where to begin Data Collection and Analysis

Obtain financial information related to:

– Accounts Payable and Vendor reports

– Sort ITRAC or ACE entry line by MID code and determine total value for period

– Sort vendor payments for same period

– Compare totals and determine reason for discrepancies



Valuation: Where to begin

Review high value and/or high volume suppliers

– “Top 10” suppliers by volume or value?

– Suppliers that account for 70% of 80% of imports?

– New suppliers or new products?



Price Paid Risk Analysis

Example: – Rank Supplier Transactions by value & quantity

MID # 1 - 20% by value of all import transactions MID # 2 -- 23% by value of all import transactions Others? Low value but high entry or line count Use ACE or ITRAC

– Consequences Under/ over report customs value Under/ over paid customs duties and/or fees (MPF) Potential Monetary penalties: 20%-40% value of merchandise

– Risk – High



Valuation: Price Paid

The Generra Rule – All payments made by a buyer to a seller, or a

party related to the seller, are part of the price actually paid or payable for the imported merchandise. (Generra Sportswear Co. v. U.S., 8 CAFC 132 (1990))



PRICE ACTUALLY PAID OR PAYABLE

Importers are often invoiced separately by vendors / suppliers for:

– tooling, molds, packaging items

– Expedited or “hot lot” manufacturing fees

– Small lot or small quantity surcharges

– Product modifications

– NRE or separate tooling charges for startup production costs

– Testing costs -- 542187 dated Nov. 7, 1980 (TAA No. 11); 543645 dated Feb. 17, 1987.



PRICE PAID OR PAYABLE

Use P/O and Accounts Payable Data For Vendor selection and review: – Review account data, journal entries and

descriptions

– Match payment transactions to import entries If there are there differences in value, why?

Are there payments for separate services/ tooling/ Equip?



Customs’ Four-way Match

(2) Invoice

(3) Payment

(1) Purchase Order

(4) Customs Entry Value



Data Collection and Analysis

Key Business Documents – Finance Dept -- what are key general ledger accounts used

to record payments for goods, materials, equipment, royalties/ license fees and R & D ?

– Supply Contracts

– Production Agreements

– Royalty or License agreements

– R & D or Design and Development Cost Sharing Agreements



Assists: What are they?

Generally, tangible items sent by the buyer – Directly or indirectly to the foreign supplier;

– Free of charge or at reduced cost;

– For use in connection with the production or the sale for export to the United States of the merchandise.

Legal Definition 1401a(h) – Materials, components, parts, and similar items incorporated in the

imported merchandise.

– Tools, dies, molds, and similar items used in the production of the imported merchandise.

– Merchandise consumed in the production of the imported merchandise.




Non-U.S. “intangibles” originating: – Engineering, – Development, – Art and design work – plans and sketches

Necessary for the production of the imported merchandise.

Will include U.S. and foreign based workers located at foreign production/ Mfg site working on development/ production. (excludes: management and QC services)



Assists

Interview Manufacturing/Production for assist issues Sort Accounts Payable by Vendor

– Review vendor activity – Look for Vendors with high dollar value or frequent transactions – Review A/P and requester – Ask/ document whether assists (tooling/ components/equip) are

provided

Identify high value/ quantity vendors and suppliers of imports– – Review company export data/records from shipping for shipment of

components, tooling and equipment, to those vendors – Obtain Capital or Fixed asset report and check location of equipment



Assists

Identify new product vendors or shifts in production Review

Supply Contracts

Production Agreements

R & D or Design and Development Cost Sharing Agreements

Profit split or profit sharing Agreements (may be treated as “Proceeds of subsequent resale”)




Machinery and Equipment – General treated as “fixed assets”

– Fixed asset ledger or register identifies the value and location of company owned fixed assets.

– Fixed assets which have a useful life of less than one year are not capitalized.

– Improvements or alterations made to an existing asset justifying capitalization, such additions should be made to the cost of the original asset.



Valuation Issues

Deductions for Transportation Costs (e.g., International Freight, Foreign inland Freight, Insurance) – Does company engage in:

CFR — Cost and Freight CIF — Cost, Insurance and Freight DAP — Delivered at Place DDP — Delivered Duty Paid DAT — Delivered at Terminal

http://www.searates.com/reference/incoterms/cfr/

http://www.searates.com/reference/incoterms/cfr/

http://www.searates.com/reference/incoterms/cif/

http://www.searates.com/reference/incoterms/cif/

http://www.searates.com/reference/incoterms/dap/

http://www.searates.com/reference/incoterms/dap/

http://www.searates.com/reference/incoterms/ddp/

http://www.searates.com/reference/incoterms/ddp/

http://www.searates.com/reference/incoterms/dat/

http://www.searates.com/reference/incoterms/dat/



Valuation Issues: Deductions

Does Broker take deductions from Invoice Price for:

– International Fright – Insurance – incidental international loading & transportation costs

HQ H178135, November 22, 201; H092560, dated April 7, 2010; HQ H119858, dated September 9, 2010; and HQ H119857, dated September 9, 2010.

– T.D. 00-20: importer may only deduct the actual costs for these charges from the price actually paid or payable.



Valuation Issues: Royalties & License Fees

Fees paid for patents generally part of “price paid or payable” Fees paid for trade marks and copyrights may not, unless paid as a

condition of “right to import” Does company have Royalties & License agreements?

– What are General ledger accounts? – Are fees paid to exporter or party related to seller?

Use G/L Account to identify existence of agreements – Review language of Agreements – Some agreements reference both right to use patents and trademarks – Identify product suppliers and products



Valuation Issues: Packing Charges

Separately charged packing materials are part of “price paid.” – See, HQ 545154 , dated June 3, 1994; HQ H028000, dated June

20, 2008. Review requirements with Purchasing

Sort Accounts Payable by Vendor – Review vendor activity or A/P reports

– Ask/ document whether

– Look for Vendors with high dollar value or frequent transactions Review A/P accounts with manager and requester



Valuation Issues: Commissions

True “Buying Commissions” are not part of price paid

“Selling Commissions” are part of price paid

Does agent take “title” or ownership of goods (independent seller)?

Discuss Subject Matter with Procurement/ Buyers/ Sourcing teams – Identify vendors or agents that receive a commission – Evaluate relationship and/or language of specific agency agreement – Review CBP Rulings & Informed Compliance Pub. on “Buying

Commissions.” See HQ H125835, May 18, 2011.

Review A/P for possible unidentified commission payments related to imported merchandise



Valuation: The “First Sale” Rule

The “First Sale” Rule

– CBP presumes that the price paid by the importer is the basis of transaction value

– In a multi-tiered distribution system the manufacturer's price constitutes a viable transaction value when the goods are: Clearly destined for export to the United States and the manufacturer and the middleman deal with each other at arm's

length. Manufacturer must have a “sale” to middleman for export to the United

States



Valuation: The “First Sale” Rule

What data will you use for your “First Sale” Risk Analysis? – Vendor / AP list – ITRAC or ACE entry line data

Select transactions for testing: – High value/ quantity (line item) suppliers

– High value/ quantity items

– Does price paid mach declared customs value?

Is appropriate documentation available to support claim?



Risk Analysis: Special Trade Programs

Sort ITRAC or ACE entry line data by SPI codes or tariff classifications (i.e., 9801/ 9802/ 9813)

Select entry line transactions for testing: – High value/ quantity claims

– High value/ quantity (line item) suppliers

– High value/ quantity items

Is appropriate documentation available to support claim? – Do you need certifications and/ or Mfg affidavits? – Do you need access to underlying production or Mfg source documents?

§181.22 NAFTA Certificate of origin and supporting records



Risk Analysis: Special Trade Programs

9801/9802 claims require (19 CFR 10.1): – Foreign Shipper Declarations – Evidence of US export – U.S. Manufacturer declarations – Has company applied for and received waiver

from Port? – Review HQ H007668, dated June 20, 2007



Recordkeeping

Importers are required to maintain entry records and related documentation for five years from date of transaction

Entry Records ((a)(1)(A) List) subject to Recordkeeping penalties (examples):

– 7501 and other “entry” forms – Commercial invoice – Bill of lading – Declarations/ supporting document for special claims – FDA/ FCC/ TSCA-- other OGA forms

Appendix to Part 163-Interim(a)(1)(A)List



Record-keeping Risk Review

Sort ITRAC entry line data and summarize by entry and filer.

ACE Entry Summary report (AM_68) by date

– Perform 100% entry audit against (AM_68) or ITRAC to insure 100% entry records

Can do monthly, quarterly or annually.

(a)(1)(A) List Document Check – Create (a)(1)(A) document check List – Determine sample size/ stratification for you – Stratification ideas: broker/file and supplier



Risk Analysis: Dumping & CVD

Scope of case may or may not include HTS

Goods may be transshipped through non-assessed country

Broker/filer may use wrong assigned rate

Summary of AD/CVD cases: http://pubapps2.usitc.gov/sunset/



AD/CVD order In Place



Department of Commerce AD/CVD Scope Descriptions

http://web.ita.doc.gov/ia/CaseM.nsf/136bb350f9b3efba852570d9004ce782?OpenView

http://web.ita.doc.gov/ia/CaseM.nsf/136bb350f9b3efba852570d9004ce782?OpenView



Risk Analysis: Quantity

Quantity – Unacceptable practices: declaring numbers of containers

rather than number of units – Does Receiving report unresolved quantity discrepancies

to Trade Compliance? – Audit receiving discrepancy reports for accuracy – Does Trade Compliance report quantity discrepancies to

CBP?



Conducting Your Risk Assessment

Identify risks and compliance goals – Identify legal and regulatory compliance objectives

– Sample entry and financial transactions

– Identify errors and causes, and

– Share results with other affected groups

– As a group determine how errors can be eliminated – develop written procedures that “reasonably ensure”

compliance objectives are met.



What Are “Internal Controls”

Definition

A process directed by company management and other personnel

Designed and implemented to provide reasonable assurance that any given import transaction fully complies with U.S. import requirements.



Preparing Internal Controls

Each control should include

– A statement of purpose (why control is necessary)

– Define accountability and responsibility for reporting in internal control documents and job descriptions.

– Description of procedure(s) to be followed

– Explanation of verification process

– Process for reporting & correcting errors, as appropriate using PEA or similar program



Preparing your Internal Controls

Each process should explain . . . – Who does what? – What do they do? – When do they do it? – How do they document that they do it? – Who checks that they did it?



Preparing your Internal Controls

Keep procedures simple!

Don’t reinvent the Wheel

Say what you are going to do & Do what you say!

Test and verify to make sure you have done what you said you were going to do!



Resources: Customs Publications

– Customs Valuation Encyclopedia of Rulings and Decisions – Informed Compliance Publications

• Bona Fide Sales & Sales for Exportation to the United States • Buying & Selling Commissions • Customs Value • Determining the Acceptability of Transaction Value for Related

Party Transactions • Importation of Commercial Samples • Proper Deductions for Freight & Other Costs

http://www.cbp.gov/linkhandler/cgov/trade/legal/informed_compliance_pubs/icp010r2.ctt/icp010r2.pdf



http://www.cbp.gov/linkhandler/cgov/trade/legal/informed_compliance_pubs/icp089.ctt/icp089.pdf





Resources: Customs Publications and FA Guidance

– Exhibit 4F - A Guide for Supporting Generalized System of Preferences (GSP) Claims

– Exhibit 5E - HTSUS 9801.00.10 - U.S. Goods Returned - Technical Information for Pre-Assessment Survey (TIPS)

– Exhibit 5H - HTSUS 9802.00.80 - U.S. Articles Assembled Abroad - Technical Information for Pre-Assessment Survey (TIPS)

– Exhibit 5M - Generalized System of Preferences - Technical Information for Pre-Assessment Survey (TIPS)

– Exhibit 5Q - Israel Free Trade Act (IFTA) - Technical Information for Pre-Assessment Survey (TIPS)

– Exhibit 5R - African Growth and Opportunity Act - Technical Information for Pre-Assessment Survey (TIPS)

– See Exhibit 5S - Quantity - Technical Information for Pre-Assessment Survey (TIPS)

http://www.cbp.gov/linkhandler/cgov/trade/trade_programs/audits/focused_assessment/fap_documents/exh4f.ctt/exh4f.pdf

http://www.cbp.gov/linkhandler/cgov/trade/trade_programs/audits/focused_assessment/fap_documents/exh5e.ctt/exh5e.pdf

http://www.cbp.gov/linkhandler/cgov/trade/trade_programs/audits/focused_assessment/fap_documents/exh5e.ctt/exh5e.pdf

http://www.cbp.gov/linkhandler/cgov/trade/trade_programs/audits/focused_assessment/fap_documents/exh5h.ctt/exh5h.pdf

http://www.cbp.gov/linkhandler/cgov/trade/trade_programs/audits/focused_assessment/fap_documents/exh5h.ctt/exh5h.pdf

http://www.cbp.gov/linkhandler/cgov/trade/trade_programs/audits/focused_assessment/fap_documents/exh5m.ctt/exh5m.pdf

http://www.cbp.gov/linkhandler/cgov/trade/trade_programs/audits/focused_assessment/fap_documents/exh5m.ctt/exh5m.pdf

http://www.cbp.gov/linkhandler/cgov/trade/trade_programs/audits/focused_assessment/fap_documents/exh5q.ctt/exh5q.pdf

http://www.cbp.gov/linkhandler/cgov/trade/trade_programs/audits/focused_assessment/fap_documents/exh5q.ctt/exh5q.pdf

http://www.cbp.gov/linkhandler/cgov/trade/trade_programs/audits/focused_assessment/fap_documents/exh5r.ctt/exh5r.pdf

http://www.cbp.gov/linkhandler/cgov/trade/trade_programs/audits/focused_assessment/fap_documents/exh5r.ctt/exh5r.pdf

http://www.cbp.gov/linkhandler/cgov/trade/trade_programs/audits/focused_assessment/fap_documents/exh5s.ctt/exh5s.pdf