Rare is the manufacturer, trader or publishing company that is not engaged in international trade. Companies are comfortable in working with corporate counsel to create a corporate structure, negotiate contracts, and to assist in assembling all of the pieces of a business. However, if the company is importing or exporting merchandise, consultation with customs counsel can add to the company's bottom line.
Our Customs and trade laws are over 200 years old. They are a hodgepodge, a patchwork quilt of laws that often defy logic. While the Customs Service publishes reams of Customs directives and rulings, it is difficult to cull out the relevant information for your individual company. Moreover, Customs does not provide practical information as to how a company can take advantage of the benefits that may be found in the Customs laws. This article will identify some of the penalties that can be imposed and the planning advantages that may be found in the Customs Laws.
Liability Under The Customs Laws
Importers and exporters must understand that U.S. Customs and Border Protection ("Customs") and their foreign counterparts are primarily enforcement agencies. Customs has the power to seize shipments (and other assets), subject importers and exporters to extensive audits, and to commence Civil Penalty cases against importers, exporters, and their corporate officers. Additionally, Customs will act by itself, or in conjunction with the United States Attorney's office, to impose penalties available under various criminal or quasi-criminal statutes. Customs matters cannot be ignored because the power of the agency to inflict business disruption and massive penalties is too great. The company must have a structured plan to achieve compliance, prepare for a Customs audit, and even to interface with Customs on a day to day basis.
If Customs does not possess enough information to recommend criminal prosecution, then civil penalties may be assessed through various statutes. 19 U.S.C. 1592 is frequently used to assess civil penalties for violations of the Customs laws. This statute seeks to penalize any person who enters merchandise into the United States by means of a document or statement that is materially false or has a material omission.
Significantly, the Customs Modernization Act incorporated in the NAFTA legislation has imposed additional responsibility on importers. Before the Mod Act, the importer was responsible to provide complete and accurate invoices at the time of entry, and Customs was responsible to classify and appraise merchandise. Under the Mod Act, importers must use "reasonable care" in the preparation of entry documents . Importers are expected to conduct due diligence in selecting their classification, proposed valuation, claims for reduced duty treatment, etc. incorporated in their entry documents. The due diligence standard may be satisfied by consulting with Customs (which is like asking IRS to prepare tax returns), or experts in this field. Where goods are not properly classified, valued, or released, failure to have met the due diligence standard may subject the importer to penalties under 19 U.S.C. 1592.
A penalty can be assessed under this provision if the materially false statements (or omissions) occur through fraud, gross negligence, or negligence. No loss of revenue is required for the assessment of a Section 592 penalty. The amount of the penalty to be imposed depends upon the degree of culpability of the violator. The maximum penalty to be assessed under this provision is equal to the domestic value of the merchandise. However, as a practical matter, penalties will be fixed as a multiple of the loss of revenue in loss of revenue cases [ e.g., fraud - 500%-800%, gross negligence - 250%-400%, negligence - 50%-200%], and as a percentage of dutiable value in non-loss of revenue cases.
Material omissions frequently occur because importers do not provide Customs with all of the facts surrounding the purchase of the merchandise so that Customs can properly assess duties in connection with that entry. For example, importers frequently omit to disclose payments for buying commissions, royalties, side payments for currency conversion adjustments, and payments for interest charges which are not reflected on the invoice. Additionally, importers frequently forget to advise Customs that they have provided molds or materials (free of charge) to the manufacturer.
Finally some importers who have the best intentions to pay additional duties do not act quickly enough to put Customs on notice as to their liability and have received significant penalties. Mismarking or removal of country of origin markings and violations of registered copyrights and trademarks have been increasing areas of Customs enforcement. The origin rules are very complex and errors can result not only in penalties but in the seizure of the goods.
Prior Disclosure and Compliance Programs
It is important to note that Customs has a prior disclosure program that enables violators to limit their liability to Customs in such matters. In fraud cases, companies who are willing to tender the loss of revenue will receive a penalty equal to only 100% of the loss of revenue. In gross negligence and negligence cases, the penalty will be equal to the interest on those lawful duties from the date of liquidation of the merchandise to the date that the duties are paid. Similar penalty liability reduction is available in non-loss of revenue cases.
The prior disclosure program is a critical tool for corporate counsel to minimize Customs penalty potential exposure. When the benefits of the prior disclosure program are linked with the sentencing guidelines which strongly encourage corporate compliance and audit programs and are viewed in light of Sarbanes-Oxley obligations, there can be no doubt that corporate counsel should initiate and monitor the company's customs compliance and disclosure programs.
Structuring Importations Can Save Duties
All merchandise imported into the United States is subject to appraisal under the Customs valuation formulas, and classification under one of the provisions of the Harmonized Tariff Schedules ("HTS") which is an international tariff classification system that has been modified to incorporate certain preexisting U.S. tariff preferences. Customs and trade matters can be treated like any other tax or corporate matter. That is, with the proper planning and disclosure to Customs, transactions can be structured to take advantage of different aspects of our trade laws to minimize Customs duties.
Customs valuation involves a number of complex formulas by which Customs determines the dutiable value of imported merchandise. The manner in which various elements of cost are structured will frequently determine whether such costs are properly included in the customs value. For example, most imported merchandise is appraised under Transaction Value which is defined as the price paid by the buyer to the seller when the merchandise is sold for exportation to the U.S. (plus certain costs incurred by the buyer and not included in the invoice price of the merchandise). Where merchandise is purchased through an intermediary and not directly from the manufacturer, dutiable value may be reduced to exclude buying commissions and trading company profit. In addition, U.S. installation charges, U.S. Customs duties and certain non-production costs (e.g., royalties, quota charges, international and inland freight charges, intercompany management charges, finance charges, warehousing charges) can be excluded from dutiable value through proper structuring.
Intercorporate relationships also affect the valuation of products for duty assessment purposes (e.g., transfer pricing and intercompany taxation). Structuring in this area requires coordination with tax counsel to maximize and balance tax and customs benefits, while ensuring compliance with all applicable rules and regulations.
Classification under the Harmonized Tariff Schedule ("HTS") determines the rate at which duty is paid, the possible applicability of import restrictions and dumping duties, the availability of special tariff treatment or concessions, and the admissibility of goods.
Favorable Tariff Provisions can be identified by researching the HTS provisions and a number of interpretative sources that can be consulted to support a claim for reclassification. Sometimes, results in this area can be achieved by making minor changes in the product itself. Other successful encounters involve shipping products together to change their tariff status. (For example, individual shipments of parts of a machine may be grouped together and shipped as an "unfinished machine" to change the classification of these articles.) Finally, tariff classification shifts which save duty may also be available in Foreign Trade Zones which all enjoy special classification programs.
Special Tariff Provisions can be located which provide duty allowances for certain: American goods used overseas and imported as part of a foreign article; goods sent overseas for repair or alteration and then returned to the United States; goods imported on a temporary basis or for use as samples to take orders.
Special Duty Programs have been implemented to encourage trade with developing countries (Generalized System of Preferences, Caribbean Basin Initiative, Israeli Free Trade Agreement) and special trading partners (NAFTA). Conducting cost analysis reviews, shifting the country of origin of certain materials, and shifting the processing of certain materials to the originating country, can all be employed to achieve favorable duty treatment under these programs.
Maintaining the requisite documentation to claim the benefits of these programs has been a growing area of Customs enforcement. The failure to maintain proper records can result in retroactive loss of duty free treatment, and record keeping penalties that can be a multiple of any duty savings.
Exportations To Other Venues
Most of our trading partners employ the International Valuation Code and the Harmonized Tariff Schedules to appraise and classify merchandise. Accordingly, the benefits derived from restructuring goods or products for U.S. importations may also pay dividends in other jurisdictions.
Robert B. Silverman is a Partner in Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt LLP, a law firm specializing in Customs law and related trade matters. GDLS&K is one of the largest law firms specializing in this field. Mr. Silverman has been involved with Customs issues for over 30 years, including four years as a trial attorney with the Department of Justice (Customs Section).