Customs brokers are usually compensated on

Marketing Discussion

6-16 Chapter 16: Customs Clearance

Chapter 16: Customs Clearance 16- 15

Chapter 16

Customs Clearance

lEARNING oBJECTIVES
At the end of this chapter, YOU SHOULD:

Identify the characteristics of duties that may be imposed upon imports.

Identify the characteristics of non-tariff barriers to imports.

Identify the functions and requirements of the Customs clearing process.

Identify the functions of Foreign Trade Zones.

Preview
In this chapter, we will look at some terms and procedures in Customs clearance. It is important to keep in mind that some of these things are artificially complex because most countries dislike imports that compete with local business people.

Chapter Outline
16-1 Duty
I. Duty is the tax an importer must pay to allow goods into a country.

II. Duty is classified in three different ways:

a. Type of goods imported, determined by rules of classification that are basically standardized worldwide

b. Value of goods:

i. Based on invoice value

ii. Based on rules that differ country to country, called the valuation rules

c. Country from which goods are imported, based on rules of origin

III. From the three ways, Customs determines the tariff that will be charged on the import

16-1-1 Classification
I. Worldwide coding scheme—Harmonized Commodity Description and Coding System, also called Harmonized System (HS)

II. Classifies both imports and exports

III. Code uses up to 10 digits:

a. First six digits represent “root” of the international coding—they’re the same in all countries

b. Last four digits are country-specific, used to differentiate different subcategories of main product

c. Example: 6402.19.05 = golf shoes

i. .30 = for men

ii. .60 = for women

iii. .90 = for other persons (presumably children)

IV. Harmonized System divided into 21 sections logically determined by type of product and material

a. Sections are divided into one or more chapters

b. There is a total of 97 chapters

V. Six General Rules of Interpretation.

a. The section, chapter, and heading only serve as guides, and the correct classification may be in a different section, chapter, and heading altogether

b. The classification of an incomplete or unfinished product is that of the finished product

c. When in doubt between two classifications, the one with the most specific description is the correct one. However, if the product is made up of several parts, each of which would lead to a different classification, then the classification that lends it its “essential character” is the correct one

d. When there is no category under which a specific product can be classified, then the classification that should be used is that of a product that would be most like it

e. Containers and packaging materials are classified with the products with which they enter. However, if the container has usage beyond the product itself, then it must be entered and classified separately

f. When comparing classifications, only descriptions at the same level should be compared; it is not appropriate to compare a heading to a sub-heading, for example

VI. Correct classification is subject to interpretation by importer and Customs officers

a. Classification determines tariff

b. Classification determines if product is subject to quota

c. Customs office will issue a binding ruling in which it will determine the correct classification of goods prior to their entry

d. Importer generally determines correct classification of good and Customs Office verifies

16-1-2 Valuation
I. Most duty is collected ad valorem—on the value of goods imported into a country

II. Importer must determine correct value through rules of Customs Office in importing country

III. Countries of World Trade Organization (WTO) value goods based on transaction value of sale

a. In most countries, it is “landed” value or CIF/CIP Incoterm value of goods

i. Invoice value

ii. Plus packaging costs, transportation costs in exporting country, international transportation costs to country of destination, and international insurance costs

b. In United States, value is FAS or FCA Incoterm value

i. Invoice value

ii. Plus packaging costs and transportation costs in the exporting country, but excluding costs of international shipping and insurance

c. Requires detailed invoice

d. If Customs suspects undervaluation or overvaluation on invoice, it can determine value using other methods:

i. Comparative method—value of goods is based on value of identical or similar goods imported in similar quantity in same country

ii. Deductive method—what price are identical or similar goods sold within 90 days of importation?

iii. Computed or reconstructed value method—value of goods determined by computing manufacturing costs of goods plus usual profit and expenses

iv. Method of last resort—Customs officials decide in way they claim is not arbitrary, but it often is

e. Value of goods can be increased by items not included on invoice:

i. Royalty paid by importer to exporter

ii. Commission paid by importer to purchasing agent in exporting country

iii. Percentage of price at which importer sells goods to final purchaser

iv. By what Customs calls an assist, an item importer provided to exporter to produce the good, such as a mold or die exporter used in making the product. Value of assist must be added on a per-item basis to value of imported goods

v. Exchange rates must be factored in

16-1-3 Rules of Origin
I. Goods are given country of origin based on “rules of origin” which follow one of two methods:

a. Substantial transformation—country of origin is where most fabricating or transformation of a product takes place

b. Change in HS classification—country of origin is where last change in Harmonized System classification occurred

II. Often difficult to determine country of origin of complex product

III. Transshipping—attempting to hide country of origin of certain products by making them transit through another country

IV. Marketing consequences, “country-of-origin effects”

V. Rules of origin affected by bilateral or multilateral agreements

16-1-4 Tariffs
I. An importing country usually manages its imports under a tariff system that is dubbed “N-column tariff system”, with N, the number of columns, corresponding to the number of different classes of countries that the importing country considers

II. Most tariff schedules are known as 2- or 3- or 4-column schedules

III. The United States is considered to operate under a 2-column tariff schedule, with which it has normal trade relations (NTR) subject to Column 1 tariffs and others to Column 2 tariffs

a. In 2000, the most-favored nations (MFN) designation was officially changed to normal trade relations (NTR)

IV. The number of columns is often quite an oversimplification of the actual tariff system

a. For the United States, there are only two trading partners that do not have NTR status, both of which are minor trading partners

i. Cuba

ii. North Korea

b. Among the NTRs, there are trading partners with which the U.S. has free-trade relations

i. Canada, Mexico, Israel, Chile, Jordan, Singapore, Australia, New Zealand, all Caribbean countries, all Central American countries, and all sub-Saharan African countries

c. Several countries have a special status on specific products, such as most developing countries under the Generalized System of Preference.

d. There are several bilateral agreements on specific products

e. The system is much more than a 2-column system.

f. Therefore, the first column is actually split into two sub-columns:

i. One is labeled “general” for all NTR countries

ii. The other is labeled “special” for all countries for which, for a given HS number, there has been a special negotiation

V. Tariffs are generally calculated ad valorem or as a percentage tax on the value of the goods imported.

VI. Other methods exist:

a. A fixed amount per unit imported

b. Others are calculated with a mixed system, such as a fixed amount per unit in addition to a percentage of the value of the goods imported; such a tariff is called a compound duty rate

16-1-5 Dumping
I. Sometimes, Customs can determine that the invoice value is lower (in some rare cases, higher) than the actual value of the goods

II. This is generally uncovered by comparing the value of a given invoice with a database of import entries with the same Harmonized System number made in preceding year(s)

III. When invoice’s value is much below what Customs has historically accepted and when a much higher valuation is reached with one of the alternative valuation methods, Customs can determine that the exporter is dumping the goods in the importing country

a. Dumping is selling goods at a price which is below their commercial value

b. Exact definition of “dumping” varies from country to country:

i. Most prevalent definition is a price that is below the wholesale price of the goods in the exporting country and that causes injury to competitors (or some other group, such as a labor union) located in the importing country

ii. For some countries, such as the United States, there must be a complaint from an injured party before Customs considers that the undervaluation is a case of dumping

iii. In addition, an organization independent from Customs—in the United States, the International Trade Commission—is asked to determine whether there is actual injury to competitors and ascertain whether the goods are sold at below their commercial value before an exporter is found guilty of dumping

IV. In cases considered to be dumping, Customs can add an additional duty to the regular duty rate of the commodity, called an “anti-dumping” duty

V. Dumping accusations have been one of the most commonly used tools of certain countries to restrict imports, and is still one of the most commonly used methods of protectionism

VI. In addition, Customs can also use a “countervailing” duty to tax products that the exporting government is found to have subsidized

16-1-6 Other Taxes
I. These are taxes in addition to duty

II. Designed to get more tax revenue while still complying with General Agreement on Tariffs and Trade (GATT) and rules of the WTO

III. List of taxes:

a. Punitive duty of United States puts 100 percent duty on certain products of European Union countries in retaliation for EU preferential treatment for bananas from former European countries

b. Border traffic tax of Russia puts 1 percent tax on all goods crossing borders; Russian travelers taxed 0.8 percent of monthly income.

c. Safeguard tax of Argentina used emergency tax designed to protect its footwear industry against foreign competition

d. Temporary protection tax of United States put 33 percent additional tariff on brooms of Mexico to allow U.S. broom industry to become more efficient (tariff dropped when industry did not become more efficient)

16-1-7 Value-Added Tax
I. Value-Added Tax (VAT) is a consumer tax on the value added by each firm involved in developing or adding value to the good

II. For imports the VAT is collected from the importer, but the importer can deduct the VAT it has paid from the VAT it eventually collects from its customers—the tax is not an actual cost to the importer except for accounting and cash flow

16-2 Non-Tariff Barriers
I. WTO has pressured most countries into bringing tariffs down to about 10 percent

II. WTO is also pressuring countries to get rid of non-tariff barriers to imports

16-2-1 Quotas
I. Quotas limit the quantity of goods that can enter a country

II. Two types of quotas:

a. Absolute quota places yearly limit on the number of items entering a country

b. Tariff-rate quota places a two-tiered tariff on a specific category of products

i. Up to a specific quantity, tariff is low

ii. When specific number is reached, tariff becomes much higher

III. Quotas can be aggregate quotas, applying to a specific product from all countries

IV. Quotas can be voluntary in that exporting countries agree to limit the amount of goods they will send to a specific country

16-2-2 Adherence to National Standards
I. Sometimes countries enact “safety measures” designed to ostensibly protect their populations from defective, dangerous, or unhealthy products from abroad

a. While most of these restrictions are justified and necessary, some of them are based on dubious data

b. They are simply a form of undisguised protectionism for less efficient domestic producers

II. Most of these requirements are legitimate in that they reflect national preferences and sentiments toward consumer protection, health standards, and safety

III. The point at which these requirements become non-tariff barriers is unclear

a. Often an exporter is unwilling to incorporate in its products an additional feature which is costly, or which it deems unnecessary, and claims that the requirement is a non-tariff barrier

b. Such a requirement may not be a non-tariff barrier, even if it is required only of imported products and not of domestic manufacturers, if it is to protect a country from “importing” a disease that has not yet been observed domestically (such as “mad cow disease”)

16-2-3 Other Non-Tariff Barriers
I. Excessively laborious, slow Customs requirements

II. Excessive document requirements

III. Requests for additional papers that are not readily available or hard to gather

IV. Patriotism campaigns

V. Excessive inspection requirements

16-2-4 Pre-Shipment Inspections
I. Pre-shipment inspections (PSIs) are inspections performed by independent companies at the point of departure of goods destined to be exported

a. The firm determines that the goods shipped are the ones ordered by the importer

b. The firm determines that the goods shipped are in the correct quantity

c. The firm determines that the goods shipped are sufficiently well packed for an international shipment

II. When the independent firm has ascertained that all of these aspects conform to the invoice, it issues a certificate of inspection to the importer

III. PSIs sometimes requested by importers to ensure that the exporter is shipping the correct product and the correct quantity

IV. PSIs used when the importer is purchasing on a cash-in-advance or on a letter of credit basis

V. Most PSIs are required by countries as part of their import process. There are several reasons for that requirement:

a. Country wants expert opinion on classification and value of products entering its territory

b. Country wants to fight corruption at its own points of entry

c. Country wants estimate of currency requirements it will have in short term. Value of shipments subject to PSI help forecast this

d. Countries may have inspection fees funneled to themselves to gain extra revenue

16-3 Customs Clearing Process
16-3-1 General Process
I. In some countries, the process usually starts with an application for an import license

II. For most countries, the process starts when an importer files an entry, i.e. notifies the Customs authorities that it will import—or has imported—a particular product

III. There is usually a paper form that has to be filed and accompany of all the documentation necessary for the import:

a. Invoice

b. Certificate of Origin

c. Certificate of Inspection (when required)

d. Certificate of Insurance

e. Other forms as required by the Customs rules of the importing country

IV. In most developed countries, the importer is usually responsible for:

a. Classifying the goods according to the tariff schedule of the importing country

b. Determining the amount of duty

c. In many developing countries, this task is still left to the Customs authorities, which often delays the process of clearance

V. In most instances, the goods are not released to the importer cleared until after the duty is paid or after there is evidence from the importer that it will pay, a requirement often met with a Customs bond

VI. Customs authorities will usually review a percentage of the entries made by importers after the goods have been cleared and will have a few months to a couple of years to challenge them

VII. If an entry is reviewed satisfactorily, the entry is deemed liquidated

VIII. In some countries, such as the United States, an importer dissatisfied with the final decision of Customs authorities has a brief period of time to protest a liquidated entry and request a review before it is finally settled

16-3-2 Customs Brokers
I. A Customs broker is a representative of the importer that has acquired the knowledge and experience required to deal effectively and efficiently with Customs

II. In many countries, Customs brokers are the only entities qualified to enter goods, i.e., fill out the paperwork necessary to import goods

III. It is not the case in the United States, though, where importers can complete their own entries, as long as they have posted a Customs bond

IV. Customs brokers are usually compensated on a fee basis, for each entry they handle

V. In the United States, Customs brokers are highly qualified individuals who have to take a grueling test on issues of classification, duty computation, and quotas before being allowed to manage importers’ entries

16-3-3 Customs Bonds
I. In most countries, the importer has to pay the duty to Customs before the shipment can be legally released

II. This can be extremely unwieldy, especially in those cases where the shipment is an express package or a shipment of time-sensitive produce, for example

III. Therefore, Customs authorities allow importers or Customs brokers entering goods on their behalf to post a surety bond, which is a guarantee that the importer or the Customs broker will pay the duty due

IV. This process allows goods to be entered before the duty is paid. In some cases, actually, the goods are sold much before the entry is liquidated

V. In the United States, the bond is also a contract that obligates the importer or the Customs broker to perform all Customs-related functions in a timely manner and present Customs with the goods after they have physically entered the country, generally for inspection purposes

16-3-4 Reasonable Care
I. Major operating procedures of United States Customs Service

II. Concept of informed compliance—if importer has been compliant, likelihood of inspection is minimal

III. To be found compliant, importer must show that it exercised reasonable care in filing of its Customs entries by following a long list of obligations provided by U.S. Customs Service

16-3-5 Required Documentation
I. Ideally there should be only three documents required in every country to make entry:

a. Country-specific form for entry

b. Certificate of Origin

c. Commercial invoice with enough information to determine value and classification

II. Many more items can be included:

a. Import license

b. Series of certificates

c. Usually on a per-transaction basis—each import needs its own set of paperwork

III. Efforts to simplify:

a. Automated, electronic entry processing

i. U.S. Customs Service systems

1. Automated Commercial System (ACS) of 1984

2. Automated Commercial Environment (ACE) is replacement

ii. Other countries have systems, but they are not compatible.

b. Great Britain’s Customs agency has International Trade Prototype which avoids documents of product exported from U.S. being duplicated when imported to Britain

c. U.S. CBP is evaluating a process that would allow periodic, instead of by-transaction, filing of documents

16-3-6 Required Markings
I. Imported products often require a marketing indicating where the product was made

II. U.S. requires marking for most products

III. “Made in the USA” label is considered marketing advantage

a. Requires U.S. content to be “all or virtually all” of product

16-3-7 Merchandise Visas
I. For those products whose importation is limited by quotas, and particularly for textile products, a bilateral monitoring system has been implemented by the importing and exporting countries

II. Since there is a maximum quantity of goods that can be imported in a given country in a calendar year, the government of the country of export will grant—in some cases, sell,—the right to export a set quantity of a specific good to an exporting firm

III. Such authorization is a merchandise visa. The visa specifies:

a. The type of good

b. The quantity

c. The destination country to which the exporter is allowed to sell

IV. For products for which such a system is in place, the visa is one of the required documents that must be presented to the Customs authorities of the importing countries, and often as well, to the Customs authorities of the exporting country

16-3-8 Duty Drawbacks
I. Duty drawbacks are tax breaks to exporters using imported parts in products they export

II. Except for products exported to NAFTA countries, in the United States there is a 99 percent duty refund for an importer:

a. For merchandise rejected by importer as non-conforming to original purchase order

b. For imported products re-exported unused

c. For imported parts that are used—without substantial transformation—in the assembly or manufacturing of products that eventually are re-exported

III. Few firms take advantage of duty drawbacks:

a. Through ignorance

b. Through fear of paperwork (which has been reduced)

16-4 Foreign Trade Zones
I. Foreign Trade Zones (FTZ) are specific locations in a country that for Customs purposes, still are considered to be “outside” of a country

a. That means that goods can be shipped to the FTZ without being subject to the duties, quotas, and Customs regulations of the host country

b. In most countries, however, including the United States, goods admitted in an FTZ must be legal in the country in which the zone is located

c. Once in the FTZ, the goods can be warehoused until they are sent to their final destination, either in the host country or to a foreign destination

d. If the goods are sold in the host country, they are only dutiable at the time of that transaction

e. If they are sold abroad, they are dutiable only to the importing country; the country in which the FTZ is located will never collect any duty on the value of that merchandise

f. The country of origin used for Customs purposes remains the country from which the goods originated, and not the country in which the FTZ is located

II. Foreign Trade Zones exist in one form or another in just about every country.

III. The most common form of FTZs is that of a location where cargo transits, as in ports. In the United States, these types are called General Purpose (Foreign Trade) Zones

IV. Another type of FTZ is at the place of business of a corporation, such as a plant or refinery

V. FTZs can be quite advantageous:

a. To hold goods in inventory until they are sold

b. To improve cash flow of their owner

c. To wait for a numerical quota to open

d. To wait for an inspection by the host country’s government

VI. Due the progress of the WTO to lead countries to lower tariffs and increase trade, Foreign Trade Zones created for other purposes than cargo transfers may have a limited future since their advantages are dwindling

Key terms
ad valorem duty rate

A duty rate based on the value of the imported item.

assist

An item provided by the importer (customer) to the exporter (seller) so that the exporter can manufacture the goods: a mold or a die, for example. The value of an assist must be included in the valuation of the imported goods for U.S. Customs purposes.

binding ruling

A determination, made by U.S. Customs, and only applicable to the United States, that classifies a specific product and assigns it a tariff rate before the goods are imported. The ruling is binding on U.S. Customs, which means that it cannot “change its mind” after the product is imported.

classification

The process of determining what the correct Harmonized System Number is for an import. There are six rules of interpretation to help determine the correct classification.

cleared

The term used to signify that goods were imported into a country and that the importer paid the duty that was due on those goods, and thus the goods were released by the Customs authorities.

compound duty rate

A duty rate based on a combination of value, number, or some other measurement of the imported item (weight, dimensions,…).

Customs broker

A person authorized by Customs authorities to file entries.

Customs bond

A sum of money collected by Customs from Customs brokers, that is held as a guarantee that duty will be paid in the correct amount.

dumping

The strategy followed by some exporters to sell the products they are exporting at a price that is considered “too low” by the importing country’s Customs office. Depending on the importing country, a product’s price is considered too low when it is either below its manufacturing costs or below its “normal” wholesale price.

duty

The amount of tax paid on an imported good; the duty is calculated using the tariff rate and the value of the goods.

duty drawback

A process by which the U.S. Customs and Border Protection agency refunds up to 99 percent of the duty it has collected on goods that are imported into the United States if the same goods are later exported from the United States.

entry

The process by which an importer notifies Customs that it has imported a particular product. The entry process encompasses an entry form and is accompanied by a number of other documents: invoice, Certificate of Origin, Certificate of Inspection, and so on.

Harmonized System of classification

A system of classification for goods, developed by the World Customs Organization, and followed by 179 countries.

informed compliance

A standard of behavior, set and enforced by U.S. Customs, that is expected of importers if they want their Customs entries to be cleared quickly and Customs inspections kept to a minimum.

liquidated entry

An entry that has been successfully reviewed by Customs authorities and for which duty has been paid; no further processing is required when an entry is liquidated.

merchandise visa

A document provided by the government of an exporting country for a product that is subject to a quota in the United States. It is a document granting the exporter the “right” to export such goods. United States Customs will not allow the import of a product subject to quotas if the shipment is not accompanied by a merchandise visa from the exporting government.

pre-shipment inspection (PSI)

The inspection, conducted by an independent company, that allows the determination that the goods conform to the description contained in the exporter's invoice.

protest

In a Customs transaction in the United States, the formal request by an importer to have Customs reconsider its classification, its valuation, or its determination of a country of origin. A protest is generally filed when an importer feels that the amount of duty paid is excessive, or when a good is not allowed in the United States because a quota has been met.

quota

A limit, set by the importing country’s government (sometimes in agreement with the governments of the concerned exporting countries), on the quantity of a specific commodity that can be imported in a given year. There are two different types of quotas: (1) an absolute quota, which limits the quantity of goods imported, and beyond which no good can be imported, and (2) a tariff-rate quota, which places a low duty rate on goods imported until the quota is reached, and a very high duty rate on quantities of the goods imported beyond the quota. See also export quota.

reasonable care

A standard of behavior, set and enforced by U.S. Customs, that is expected of importers if they want their Customs entries to be cleared quickly and Customs inspections kept to a minimum.

rules of interpretation

A series of six rules developed to help importers and Customs determine the correct HS classification of a good.

rules of origin

The rules used to determine the country of origin of a particular product. Two commonly-used interpretations for country of origin are (1) the country where the Harmonized System Number classification of a product changed for the last time, and (2) the country in which the greatest value was added to the product.

tariff rate

The rate at which an import is taxed; the tariff rate is dependent on the classification of the goods, as well as their country of origin. The tariff rate is also called the duty rate.

tariff schedule

A document listing all the possible Harmonized System classification categories, as well as their associated tariff rates for the different types of countries. Most tariff schedules have two or more “columns,” which refers to the number of categories of countries of origin the tariff schedule uses.

valuation

The process of determining the value of an import, or the amount upon which the duty will be calculated. The value of an import generally includes not only the value of the goods but also the value of some of the transportation services used to get the goods into the importing country.

Value-Added Tax (VAT)

A tax perceived by many countries that is very similar to a sales tax, but that is collected whenever the product’s value is increased. Only the final consumer eventually pays the tax, but every company involved in the production or supply chain is required to collect the VAT that its customers pay and pay the VAT to its suppliers. The difference between what a firm collects and what it pays must be sent to the government. The VAT on imports is collected at the point of entry into the country. The basis for the tax is the sum of the value of the goods and of the duty paid.

PowerPoint SLIDES – STUDY THEM – PRINT THEM OUT !
· Duty (26 slides):

· Introduction (1 slide)

· Classification (5 slides)

· Valuation (6 slides)

· Rules of Origin (3 slides)

· Tariffs (6 slides)

· Dumping (1 slide)

· Import Taxes (3 slides)

· Value-Added Tax (1slide)

· Non-Tariff Barriers (6 slides)

· Customs Clearing Process (6 slides)

· Duty Drawbacks (1 slide)

· Foreign Trade Zones (2 slides)

Additional reSources
Johnson, Thomas E., Export/Import Procedures and Documentation, 2002, Fourth Edition, Amacom, American Management Association, 1601 Broadway Avenue, New York, NY 10019.

A Basic Guide to Importing, U.S. Customs Service, Department of the Treasury, Government Printing Office, Washington, DC 20402.

The UNZ & Co. Sourcebook: A How-to Guide for Exporters and Importers, Unz & Co., 190 Baldwin Avenue, P.O. Box 308, Jersey City, NJ 07303.

“Rules of Origin,” North American Free Trade Agreement, U.S. Customs and Border Protection, http://www.cbp.gov/xp/cgov/trade/trade_programs/international_agreements/free_trade/nafta/rules_of_origin.

Harmonized Tariff Schedule of the United States (2013), United States International Trade Commission Publication 3249, United States Government Printing Office, Washington, DC 20402. Also available at http://hts.usitc.gov.

The discussion example and question;

If you were the Customs Minister of a small country, which would be the non-tariff barriers that you would use to help your country? Why?