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Legal Trade Tips:

Like any good bridge that gets you from point A to point B, these "Legal Trade Tips" are designed to help importers quickly increase their understanding of common trade/compliance strategies.   We add a new "tip" every month or so.

Analyze whether a “Substantial Transformation” might effectively sidestep 301 duties on products from China

The section 301 duties on goods from China are limited in scope - to items from China. If unfinished goods are shipped from China to a third-country (such as Taiwan, Indian, Vietnam, Mexico, etc.) for additional manufacturing operations then it’s sometimes the case that those third-country operations will work change to the Country of Origin of the product. If the finished good then becomes a legal “Product of Vietnam”, then section 301 duties won’t apply (they only apply to Chinese goods). It is critical that importers understand that NOT ALL third-country processing operations will cause an Origin change under U.S. law. The legal standard in the United States is a “substantial transformation” and the analysis for such a substantial transformations has been made more difficult recently due to recent court and customs decisions. One example is the decision in Energizer Battery (CIT 2016). Importers considering third-country processing should consult with an experienced customs attorney to obtain a written opinion as to whether third country will indeed qualify for the requisite substantial transformation.

Seek Exclusions from USTR to potentially avoid section 301 duties

The section 301 tariffs on goods from China hold the potential to disrupt the business and supply-chains of U.S. importers. LIST 1 and LIST 2 are open to requests from importers to secure 1 year exclusions from these section 3901 tariffs. LIST 3 may be opened to such requests in the future. We can help you review your imports for such section 301 duty liabilities and help to identify arguments that might support such exclusion requests.

Update 12/20/2018: LIST 1 and LIST 2 exclusion applications have closed. LIST 3 may be opened pending a resolution of the section 301 negotiations between the US and China (TBD by March 2019).

Explore Cost-Savings around the new Section 232 and/or 301 duties

The imposition of U.S. additional tariffs has given many companies pause for thought.  Consider consultation with an attorney as there are many other avenues to reduce this exposure (aside from resourcing).  Explore whether items can be properly reclassified out of these dutiable provisions (tariff engineering concepts may apply here).  Complex valuation techniques may further reduce exposures.  Participation in the administrative processes may result in exemptions.  If resourced goods are going to be subject to tariffs, perhaps GSP, CBERA, or AGOA benefits may be extended to cover these classes of goods.  Finally, it also remains to be seen how and whether future rounds of the MTB may relate to items subject to 232 and 301 tariffs.

Foreign Trade Zones can be a Source of Flexibility and Cost Savings

Foreign Trade zones allow for cumulative MFP savings, the ability to speed a supply chain by gaining Customs immediate delivery privileges, the ability to manufacture, warehouse and export from a zone without duties or tax accruals, the ability to defer such duty/tax payments until withdrawal/entry into U.S. commerce, and the ability to seek "inverted" tariff savings.  In the right contexts and volumes, Zones provide the flexibility and cost benefits that certain businesses need. If your business has grown substantially, consider contacting an experienced Customs attorney to quickly assess these cost savings, and to plan for a smooth implementation.

Develop Your Compliance Program by Setting Long-Term Goals

Constant improvement is a hallmark of solid compliance programs, however, adaptation itself is a process, not a goal.   If drawing a blank - then metrics can be helpful.  Consider contacting an attorney to perform a “Compliance Review.” The attorney studies your import compliance programs and provides a report that summarizes: (a) weaknesses and liabilities, (b) assessment of duty saving opportunities, and cost-control suggestions, and (c) a prioritized list of short, medium, and long-term goals to move the company towards a better management of its overall risk levels on all fronts.

Exercise Due Diligence on Exports with Internal Compliance Reviews

Importers and Forwarders should be aware that there are ongoing attempts at sanctions evasion, therefore OFAC advises all persons to exercise enhanced due diligence to avoid unwittingly processing fraudulent shipping documents that facilitate prohibited activities.  Hence, the bona fides of unfamiliar entities issuing shipping documents should be checked and verified.  It's also an easy step to verify container numbers for accuracy, particularly when unfamiliar with the issuer of the shipping documents.  Tools for such verification are readily available: for example, Google “shipping container validation.”

Take Organized Measures to Assess and Guard Against Legal Risk

In international trade, "risk" comes in innumerable forms:  currency risk, political risk, risk of theft, risk of disaster, risk of unacceptable quality, risk of delay, market risks, etc. etc.  Successful businesses take actions to mitigate that risk where possible: for example, diverse product sourcing strategies can spread risk across multiple vendors in multiple countries.  Legal risk however can often go unaddressed.  This requires specific knowledge of operations combined with actual legal knowledge - in this regard having an outside legal adviser can be important.

Expand your Network to be Made Aware of Issues  and Opportunities

Network and have relationships with various types of experts in different fields to increase the likelihood that risks & opportunities are brought to your attention.  For example, if you are an importer, then setup an intake session with a trade attorney to discuss your supply chain and compliance operations.  You may be surprised at the feedback that can result from even a short conversation.


Secure Supply Chain Information from Prying Eyes

The commercial data that appears on inward and outward manifests is by default released by the U.S. government to data aggregators (PIERS, Panjiva, etc).  Those companies then sell that data in a searchable online format as "business intelligence".   That data will often expose the sourcing and supply chain strategies that an importer may have invested heavily in securing.  Competitors and new businesses typically leverage this supply chain information to enter markets with minimal investments of their own time and resources.  Fortunately, importers can take steps to prevent the release of their sourcing information, through the submission of requests (every 18 months) to block the government from releasing such information. 

Assessing Risk: What are the Largest Risks and Liabilities to your Business? 

Do you know what areas of the law present the greatest areas of risk to your imports and exports?  Is it related party valuation?  AD/CVD exposure?  The potential for Intellectual Property Rights violations?  Export Control violations?   In order to make that assessment, you need to either educate yourself, or work with professionals who already have such understandings.  Understanding and evaluating risk, is a fundamental exercise that allows compliance resources be directed correctly into the right areas.   Exercises such as external "compliance reviews" and self-assessments can be very effective.


As Your Company Expands Compliance Abroad  Understand that Legal Principles May Be Different Overseas

While it is often very helpful to have a starting point for compliance principles in a developed nation, different countries may obviously have different laws and even different interpretations of familiar laws (such as the Harmonized Tariff System).  While U.S. legal requirements are often highly accessible to attorneys, these principles are often less well-defined in other foreign countries.   For example, it is often possible to obtain a ruling from U.S. Customs that details the proper origin, classification, valuation or admissibility of a good; whereas such rulings in other foreign countries are often far less detailed (e.g., BTI issued by Europe), or simply unavailable.  We maintain a large network to address foreign issues for clients using respected, in-country practitioners.

Seek Scope Determinations to Confirm that  Antidumping and Countervailing Duties will Not Apply to Imported Product

Antidumping and Countervailing Duties (AD/CVD) can impose prohibitive costs to a supply chain.   The application of AD/CVD is governed "scope" of the Order.  It is often possible to carefully engineer a product around the scope language of an Order, and sometimes it is possible to to avoid the application of AD/CVD, and to confirm that exclusion by obtaining a scope ruling from the Department of Commerce.

Consider Using the MTB as a Backup for Expiry of NAFTA and GSP provisions

President Trump's campaign promise was the elimination of the NAFTA agreement in order to revitalize American manufacturing.  Further, some GSP provisions may soon face expiry.  For those importers currently using those provisions within their supply-chain, these changes in 2017, could be problematic -what can be done?  The revised MTB petitioning process could prove helpful.   It allows importers to seek duty reductions and suspensions now being administered by the International Trade Commission.  Importers interested in this option need to act quickly!  The filing deadline is about to close in late December, 2016.

Responding to Informed Compliance Letters

Some importers are receiving Informed Compliance Letters from Customs Regulatory Audit in Texas.  There is some misunderstanding about what these letters represent, including articles written that these represent Customs using advanced analytics to let importers know that Customs perceives the likelihood of errors in their transactions.  Because of these letters from Customs, many law firms and consultants have stressed the need to initiate audit preparations.  So what's the truth of the matter?  In fact, these letters were merely issued to the top 1,000 importer of record numbers that have not been subject to a Customs audit within the past 10 years.  In other words, Customs realized that with a minimal amount of effort, they might encourage greater compliance from the 1,000 largest importers around the country.  While Customs indicates that these large importers can be expected to be subjected to either a Focused Assessment or a Quick Response Audit in the near future - well, they already knew that didn't they?  Does this mean that audit preparations are needed - perhaps.  Different importers will hold radically different risk profiles from a Customs audit perspective; for example, an importer that ships only one duty-free product and a well-trained compliance department holds a radically different risk profile from an importer shipping a wide-variety of dutiable goods, and goods subject to FTA qualification.

Buying Agency Commissions  Should Be Adequately Documented in a Contract

Buying Agency Commissions are widely used to avoid dutiable payments to a foreign intermediary who assists with non-manufacturing services related to imported goods (for example partial list of services might include: quality control inspections, translation and communication with factories, routing of orders, coordination of materials ordering, and logistics).  Customs however is frequently able to invalidate the relationship as that of a "buying agent" - and in those instances, Customs may claim these payments are fully dutiable (often extending this back across 5 years of imports).  Importers using a buying agency should counsel to review the program so that it will stand up to Customs eventual review.


Examine "First Sale" duty savings opportunities  

"First Sale" duty savings opportunities are a powerful means of optimizing your supply chain costs; however, first sale has many levels of understanding and many techniques developed around first sale are not effectively published.  As a result, the implementation of these programs is often profoundly misunderstood, and often performed incorrectly.  In such instances, the duty savings can quickly become an unforeseen duty bill extending back against perhaps 5 years of imports.   For example, in HQ H272113 Customs invalidated the detailed proposal for a first sale duty savings plan on the basis of both inconsistent incoterms and inadequate support of a transfer price. Importers considering a first sale program absolutely should be contacting an experienced Customs attorney.

Examine Issues of Related Party Valuation

Related party valuation is common in international trade.  Related parties might obviously exist, for example, when a parent company sells to a subsidiary, or a person sells to another blood relative; but there are many forms of "relatedness" (defined at 19 CFR 152.102(g)).  These transactions are of concern to U.S. Customs, because if the parties choose to voluntarily lower the value of the imported goods, then the U.S. government may be deprived of duties, taxes and/or fees.  Unfortunately, small importers are usually not concerned with the arcane subject of customs transfer pricing; and therefore, when the business grows and U.S. Customs does raise the valuation issue, there may be 5 years of imports whose valuation becomes legally in question. To make matters worse, the customs valuations statute (19 USC 1401a) is absurdly complex and nuanced.  Related party issues usually requires importers to seek experienced legal counsel.


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Junker & Nakachi, P.C., is known nationally and internationally as a top law firm in customs and trade law.  The firm's customs attorneys are located in San Francisco, California, Seattle, Washington, and Los Angeles, California. 

Our practice areas include classification, valuation, admissibility, customs detentions, seizures and penalty proceedings, and customs audits.  We bring litigation, and handle numerous other types of issues arising in international trade. See our services listings.