Editor: Please explain the nature of your firm's practice.
Silverman: Our firm limits its practice to customs and trade law - meaning that we work with clients who are importers and exporters - to make sure that they are in compliance with import and export rules and minimize customs duties for goods that enter the U.S. or other countries. A prospective client who wants to enter into the trade world may do everything possible at the highest levels of the company to develop and produce state-of-the-art merchandise in facilities that meet all social compliance obligations, but will leave their customs arrangements to lower-level logistics employees who may not be sensitive to the risks and opportunities that are available in this area..
Editor: What is involved in customs law? How are customs duties similar to taxes? Please give us some illustrations of how not to do customs planning.
Silverman: We start with structuring products and structuring purchase transactions in creating corporate structures so that clients can obtain the most favorable rates of duty as well as assuring that they are in compliance with the law. Customs duties are similar to taxes in that they can be planned. Customs law often offers a more favorable forum than tax law, because the configuration or shipment of the product is totally within the control of the importer. In addition, the ability to determine the product valuation may be in the control of the client, whereas in the tax law forum the taxpayer can only set up rough guidelines and has to wait for final P&L numbers before it can finalize results for the entire year. Our country's customs laws are over 200 years old. They are a hodge podge of different elements based upon the efforts of different lobbying groups over the years. They do not follow any logical progression. Many new importers who are active in other markets assume that customs requirements in the United States are the same as the requirements in other countries.That may not always be the case, and guessing wrong can be expensive.
Editor: What is your firm's involvement in trade law?
Silverman: In trade law we represent manufacturers and importers in antidumping duty cases and countervailing duty cases. In those cases there is a complaint by a domestic manufacturer, trade association or union alleging that goods are being imported into a country at less than fair value, and that the imports are injuring their businesses. There are different stages in this process: we do pre-antidumping reviews to help position our clients in the event a dumping case is filed; we represent clients in the actual proceedings; we work with clients during annual reviews where clients can participate, and we perform new shipper reviews for companies who want to enter the market at a later time.
Editor: What are some of the U.S. trade laws that require special attention in terms of national security? Please explain briefly their scope.
Silverman: Because we are living in a post 9/11 society, cargo security is very much in the forefront of the customs services' agenda. Certain filings have to be made before goods are put on vessels, and the failure to do so may result in the detention of goods in the exporting or the importing port. In terms of exports the issue there is always whether these goods require licenses from the Department of Commerce (BIS) with respect to technology-type items, State Department (ITAR)with respect to munitions, or OFAC with respect to shipments to certain "unfriendly" nations. The biggest problem that arises is when a product is suitable for use both in the military and in a non-military context. Often companies may not realize that if a product is subject to use in a military context, it has to be licensed.
Editor: I understand you will be giving a webinar on November 17 entitled "Taking Advantage of Customs Law." Please give us a sneak preview of what you will be discussing.
Silverman: We're going to identify for international traders and their corporate counsel opportunities that they can find in the customs laws. We will talk about such matters as tariff engineering to change products or change shipments to lower duty rates; structuring customs value to minimize duty; identifying different databases that are available through customs or outside providers that importers can use to give themselves a good sense of what current obligations they have for duties, whether their entries are being closed out regularly by Customs, and information about the importer profile, and possible trade data about competitors. We're also going to talk about free trade programs, special duty programs, and foreign trade zones, all of which can be used to reduce or defer duty.
Editor: So you will be discussing savings on duties ?
Silverman: Yes, savings on duties through classification and special programs is one key subject. If the proper disclosures are made to customs, an importer can structure its products to reduce customs duties. This occurs by classification in a more favorable tariff provision. In addition, it is permitted to import unassembled parts together on the same shipment or withdraw them together from a foreign trade zone to save duties where the duty rate on the final product is lower than the duty rate on the parts.
Editor: What will your remarks be on customs valuation?
Silverman: Customs valuation is like tax planning in that it, too, can be structured. We shall discuss a number of different scenarios that an importer can use to lower dutiable value. We have implemented these programs successfully for a number of our clients, resulting in savings of millions of dollars.
Editor: Are customs values and taxable income calculated in a similar manner? How does transfer pricing affect customs valuation?
Silverman: The customs service has a number of value formulas they use to determine the value of goods. Customs valuation is not done the same way as is tax evaluation where inter-company pricing is involved, because in tax evaluations you have to take into account the risks or each party and the overall enterprise. Both disciplines arrive at a fair market price, but customs value must be determined on an entry-by-entry basis and through different standards than a tax analysis. In addition, tax attorneys and accountants often fail to realize that the structure they create for tax purposes often puts the company in worse shape for customs duties. By working together with these service providers, we can come up with a joint solution that solves both problems.
Editor: Do the customs services value formulas change?
Silverman: They change as the various customs authorities around the world change their interpretation of the law. All of our trading partners have adopted the same value code, but they don't apply it the same way in all jurisdictions.
Editor: What other subjects will you be discussing that will be of interest to our readers?
Silverman: We'll also be discussing intellectual property issues - another very important issue for Customs. There are ways to register trademarks and copyrights with the Customs service and provide Customs with schematics so that they can distinguish counterfeit trademark goods from genuine goods. In essence the Customs service can work as part of your team to enforce your trademark rights.
Editor: Tell us briefly about the harsh nature of customs penalties both in the U.S. and with our trading partners.
Silverman: There are a number of laws, both customs laws and laws enforced by other agencies relating to goods they oversee, which provide serious penalties for importers who run afoul of the law. First, there are criminal sanctions for smuggling, and intentional fraudulent entry of merchandise into the United States. In addition to these criminal penalties, there are civil penalties that can be equal to the value of the goods or eight times the loss of revenue, which is extremely high compared to tax penalties, which can sometimes reach 50 percent of the loss of revenue. These penalties are not only prevalent in the United States, but our trading partners, including China, Korea and Hong Kong, have similar penalties. It is important to mention that Customs penalties can be imposed even where there is no loss of revenue. Customs encourages importers to make prior disclosures, which can seriously limit an importer's exposure to these penalties.
Editor: Can there be Customs penalties as well as tax penalties levied on the same products?
Silverman: Yes, and there are two different dynamics. In fact, if you look at the valuation issue, it's interesting that the Internal Revenue Service favors lower valuations of goods because that results in higher U.S. income to be taxed. Customs, on the other hand, wants the valuation to be as high as possible so more customs duties will be generated. It may be possible to have different values for Customs and IRS purposes so the importer can have its cake and eat it too.
Editor: What other structuring issues will you be discussing related to trade cases? What about exporters' ability to restructure products to get the benefit of lower rates?
Silverman: Because the United States had adopted a harmonized tariff system and the international value code, we find that the database that we have at hand to determine classification and valuation issues is often helpful in resolving conflicts overseas about a given product. We have a customs-ruling database, which provides helpful information; we have legislative history; and we have a number of other tools that importers can use to determine legislative intent and to show how the law is interpreted in different jurisdictions. These tools may win the day on Customs issues in other jurisdictions.