When importing goods into the U.S., companies must comply with the law. Pete Mento, managing director in global tax services at Crowe, helps companies avoid nine deadly sins of importing goods.
1. Manufacturing assists
The first sin, manufacturing assists, is also the most heavily scrutinized by U.S. Customs and Border Protection (CBP). Manufacturing assists are when goods that are required to make a finished product are sent from one country to another.
For example, Mento recalls a client based in the Midwest who manufactured bowling shirts in China. The buttons for the shirts were made in the Midwest before being shipped to China to be put on the shirts. Because a shirt is not a shirt without buttons, the shipment of the buttons to create the shirt was an assist.
In cases when an assist is made, the value of the imported goods being shipped must be added to the final value of the finished product. This value can be added to each individual shipment or as a lump sum. Either way, these evaluations should be present in foreign inventory vouchers in case CBP decides to take a closer look.
2. Additions to the price paid or payable
Throughout the process of shipping, there are a variety of ways to alter the price of goods. A price alteration becomes a deadly sin when companies claim an item at a lower value than the value for which it is eligible to be priced. Any time imported goods are classified at a lower price point than the price at which they are eligible to priced, an import professional, whether in-house or third-party, should take a closer look to make sure that the goods meet the necessary qualifications to be priced at a reduced value.
3. Nondutiable costs
In addition to various means to lower the price of goods, many classifications allow imported goods to be shipped free of duties. As with additions to the price paid or payable, companies must make sure that the items being shipped genuinely qualify as duty-free.
4. Country of origin
Different countries have different duties placed on their goods, which makes some shipments more valuable to governments than others, even if the shipments contain the same items. It is important to know the history of a shipment before classifying it with CBP to prevent any mistakes that could lead to more significant problems.
For example, just because goods are ordered from Canada does not necessarily mean those goods come from Canada. They could have been manufactured in China before being shipped to Canada and, eventually, to the U.S. In such a case, the duties owed on the imported goods would be the duties owed on Chinese goods rather than Canadian goods.
Imported goods of all kinds are classified by a 10-digit number. Depending on the classification, the goods are eligible for certain benefits, including lower duty rates or even the potential to be completely duty-free. These classifications are stringent, and it can be challenging to find one that fits. As a result, complete information regarding the goods is required to avoid mistakenly misclassifying them.
Mento recommends classifying items in-house to prevent any lack of knowledge about the product.
6. Free-trade agreements
When claiming that goods were shipped under a free trade agreement, such as the North American Free Trade Agreement, numerous certifications are required to validate that claim. If this work is incomplete or incorrect, the imported goods legally will not be eligible under the free trade agreement, which will lead to significant penalties.
7. Chapter 98 exclusions
Under Chapter 98 exclusions, if an item is manufactured in the U.S., exported to another country, and reimported back into the U.S., there are no duties paid on it being reimported.
The biggest problem Mento sees with these exclusions is that companies often claim Chapter 98 on imported goods that are already duty-free. While claiming the exclusion on duty-free items might not seem like an issue, it creates unnecessary work and gives CBP the right to demand proof that every single item is eligible for Chapter 98 exclusions.
8. Related-party transactions
When a company buys something from an overseas branch of its own company, the transaction is referred to as a related-party transaction. To CBP, this transaction directly affects the price of the product being manufactured. When setting a transfer price, CBP must always be kept in mind to make sure it’s not neglected the duties it is owed.
Companies shipping anything to another country are responsible for five years of records of their imported goods. There is a $10,000 fine every time a company is unable to produce its documents upon request.
Mento advises companies to dispose of records older than five years since that is the time period that the CBP requires companies to keep import records. In essence, if a company has records for its last 20 years of shipments, CBP can ask to see the entire shipping history of the previous 20 years and impose fines based on its findings. On the other hand, if a company only keeps the five years of records legally required of it, customs cannot punish it for anything outside of that five-year window.
If your company needs help avoiding the nine deadly sins of importing goods, Crowe can help with issues related to import compliance, reducing costs, and mitigating risks of global trade.