5 things you should know about reconciling import values

| 4/29/2021
5 things you should know about reconciling import values

U.S. importers increasingly are involved in complex international transactions in which the actual value of the goods imported cannot be determined at the time of entry into the United States. Determining value can be difficult for several reasons, including pricing adjustments being applied retroactively; production assets, such as molds and dies, owned by the buyers not being factored into production costs; and the cost of engineering performed abroad being added to the cost of imports.

Under U.S. Code Part 1484 (19 U.S.C. Section 1484), an importer of record is required to exercise reasonable care with respect to the declared value of goods, tariff classification, and rate of duty at the time of entry into the United States. Failing to declare the accurate and correct value at the time of entry may result in an importer underpaying duties, leading to costly penalties (see exhibit) and increased risk of an audit by U.S. Customs and Border Protection (CBP).

Source: 19 U.S.C. Section 1592 Mitigation Guidelines

Introduced in 1998, the CBP’s ACE Reconciliation Prototype allows importers to avoid penalties when the value is not determinable at the time of entry into the United States. CBP also permits importers to use reconciliation for certain free trade agreements and, in very specific cases, tariff classification. Under reconciliation, an importer will avoid penalty for any underpayment of duties if the initial value of the goods declared at the time of customs entry is later found to be less than the actual value and both of the following occur:

  • At the time of customs entry, the importer determines the value of the goods using the best available information.
  • The importer submits a subsequent entry within 21 months with the revised value and deposits any additional duties, fees, and taxes owed to CBP (reconciliation entry).
Sign up to receive the latest tax insights as well as tax regulatory and administrative updates.

Following are five issues importers need to resolve when considering reconciliation:

1. Deciding when to participate in reconciliation

Importers that think the value of their imported products might be amended after entry should strongly consider using reconciliation in the following situations:

  • Transfer pricing adjustments have been made on imports from a related party.
  • Cost-sharing fees and settlements with foreign suppliers exist.
  • Some or all of the materials, components or parts, tooling such as dies and molds, packaging, and certain engineering and design work are performed outside of the United States.
  • Noninventory charges and fees are tied to the imported goods. These include certain royalties and licensing fees, sourcing agent commissions, set-up fees, and mold fees.
  • Proceeds will be paid to the seller upon the subsequent sale of the goods in the United States.

2. Starting a reconciliation program

To participate in reconciliation, an importer needs to add a reconciliation rider to its customs bond. Starting a reconciliation program requires close coordination with the importer’s customs brokers, who will initiate the process of identifying any import entries open for reconciliation. This process, called “flagging,” is performed by customs brokers upon the initial customs entry processing by inputting a “Y” in the reconciliation indicator field. Once an entry is flagged, the importer will be obligated to transmit a reconciliation entry to CBP within 21 months from the date of the initial customs entry. A single reconciliation entry can include up to 9,999 underlying initial customs entries. As such, importers should establish a schedule for submitting their reconciliation entries on a monthly, quarterly, or annual basis.

As part of implementing a reconciliation program, importers should carefully consider what internal reports will be used to calculate the revised value, and they should document the reconciliation process in a written procedure.

3. Maximizing the benefit of a reconciliation program

Most participants use reconciliation only for valuation purposes, but importers should consider whether they are eligible to use the program for free trade agreements and tariff classification:

  • Free trade agreement. Importers that might not possess the necessary information or documents to qualify goods for preferential duty treatment under a free trade agreement at the time of entry have up to 12 months from the date of entry to make a determination on eligibility and revise the duty treatment using a reconciliation entry.
  • Tariff classification. In certain cases, an importer can use reconciliation to change the classification of goods on the original entry based on the outcome of a ruling, protest, or court action tied to a particular good.

4. Choosing the type of reconciliation entry method

Two types of reconciliation entry methods exist. Choosing which method to use depends on the effect of the individual adjustment.

  • Aggregate – a reconciliation filed with summarized data for all flagged entries showing reconciled adjustments at an aggregate level. A list of affected entries is required, but the revenue change does not need to be broken out according to the individual underlying entries. Aggregate reconciliation can be filed only when all of the adjustments covered by the reconciliation result in increases in duties, taxes, and fees or when there is no change. Duty drawback is not available for adjustments reflected on a reconciliation entry using the aggregate method.
  • Entry-by-entry – a reconciliation in which the reconciled adjustment is provided for each affected entry. Entry-by-entry reconciliation can be used to report increases, decreases, or a mix of changes in duties, taxes, and fees. If the reconciliation entry results in a refund, the entry-by-entry method must be used. However, this method cannot be used when filing for no changes.

5. Using different customs brokers for the initial entry and the reconciliation entry

The customs broker used to make the initial entry of goods likely will not be able or willing to submit reconciliation entries as only a small number of customs brokers will do so. Fortunately, no requirement exists that the same customs broker be used for both the initial entry and the reconciliation entry.

Related topics

Stay up to speed on regulatory and legislative tax changes with timely updates from Crowe.

Our leaders offer insights into tax changes the Biden administration might pursue.

Stay up to speed on regulatory and legislative tax changes with timely updates from Crowe.

Our leaders offer insights into tax changes the Biden administration might pursue.

Contact us

Our experienced tax professionals can help you tackle your most pressing tax challenges. Contact the Crowe tax team today.
Kristin Kranich
Kristin Kranich
Partner
people
Dan Swartz
people
Patrick Crowley