Case Studies & Examples – Practical and legitimate duty reduction strategies
Practical and legitimate duty reduction strategies applicable to different cross-border movement scenarios. Our approach includes gaining specific approval from the authorities wherever possible, working with you to implement robust procedures and providing ongoing support and using objective data to identify and support the strategies wherever possible.
Moreover, until recently, it was not possible to apply these deductions retrospectively. However, in the EU, for example, a recent European Court of Justice Decision has opened up the way to make duty reclaims going back up to three years. The planning ideas outlined below are just a sample of the opportunities available to reduce your customs duty costs, sometimes with retrospective effect.
PLEASE NOTE THAT THE EXAMPLES AND CASE STUDIES HIGHLIGHTED BELOW ARE INTERNATIONAL EXAMPLES AND MAY NOT APPLY IN A SPECIFIC DESTINATION COUNTRY OR TO A SPECIFIC CROSS-BORDER MOVEMENT SCENARIO. THIS INFORMATION IS TO BE CONSIDERED SOLELY AS A GUIDE AND SHOULD NOT BE QUOTED AS, OR CONSIDERED TO BE, A LEGAL AUTHORITY. IT MAY BECOME OBSOLETE IN WHOLE OR IN PART AT ANY TIME WITHOUT NOTICE.
CASE STUDY 1: Minimum references prices
Some revenue authorities (e.g. China) use minimum prices as references to determine the customs value of goods. To assess a value, a valuation database that lists appropriate valuations for various imports is used. This valuation database is based on international market prices, foreign market prices and domestic prices. As a general rule the relevant Customs Authority will determine duty based on the highest price reflected in the valuation database. For various agricultural products, the information in the valuation database does not reflect seasonal changes in pricing or the effects of quality/grade on pricing. In these cases a lower valuation than the value as per the valuation database can be achieved if that lower value can be supported by evidence.
CASE STUDY 2: Moving away from transaction value
In most countries, following the World Custom Organisation (WCO) guidelines, six methods of Customs valuation can be used, in strict hierarchical order. The primary method (whenever possible) is the transaction value. The transaction value is generally calculated by taking the price paid or payable for the imported goods (shown on the invoice), and adding amounts not included in the price that should have been included or deducting amounts that should not have been included.
CASE STUDY 3: Toll manufacturing
Using alternative valuation methods, such as cost plus or resale minus for toll manufacturing we have been able to reduce duty cost significantly in a number of cases, including, for example, on the import of canned meat into a number of African territories.
CASE STUDY 4: Delivery costs
In general, the costs of transport, insurance, loading or handling, connected with delivering the goods to the border must be included. Especially in respect of road removals into Africa, we have discovered that the delivery costs to the depot inside the destination country are often included in the Customs values. These incidents were identified on the basis of in-depth data analyses on BOTH SIDES of the border. In most of these cases we were able to correct the values and brief the clearing agents so as to ensure that the correct values will be used for future movements. In most African territories, it is unfortunately not possible to adjust the mistake retrospectively. If the seller’s or carrier’s charge covers delivery beyond the border of the destination country you may, for example, deduct the additional charges for such delivery, provided that they are shown separately from the price paid or payable for the goods. In respect of cross-border liquor shipments to Botswana, for example, we managed to remove in-country delivery costs, resulting in a significant saving on the extraordinary liquor tax in respect of liquor imports.
CASE STUDY 5: Commissions
In terms of the WCO guidelines on Customs valuation, certain commissions and brokerage, including selling commission, must be included in the Customs value. Buying commission may, however, be excluded if it is shown separately. For example, for imports into the EU and into South Africa, separately disclosed fees or brokerage paid to the agents representing them outside the EU or South Africa may be excluded for valuation purposes. Stripping out buying commissions where applicable has enabled us to achieve significant savings for clients within the electronics, clothing and FMCG sectors.
CASE STUDY 6: Royalties and licence fees
Generally, licence fees and royalties payable in respect of imported goods as a condition of sale are included in the customs valuation. Changing the structure of licence and royalty agreements has allowed us to exclude these payments legitimately from the Customs value of the imported goods.
CASE STUDY 7: Goods and services provided free of charge or at reduced cost by the buyer
As a general rule, engineering, development, artwork, design work and plans and sketches, necessary for producing the goods are provided to the importer outside the destination country, any part of the cost or value related to these items be included in the Customs value. However, in a number of territories, WCO guidelines have allowed us to exclude the cost of research and preliminary design sketches. Clearing agents are often not equipped to identify and substantiate the exclusion of these charges. In the clothing industry, preliminary trend analysis and related research often form a significant component of Customs value.
CASE STUDY 8: Containers and packing
Container and packing costs are included in the value for Customs purposes. We have identified and corrected a number of cases where the hire-cost of freight containers, actually forming part of the transport costs, were mistakenly included in the Customs value. These errors are not easily identified or picked up as companies do not have sight of the data and documents in a format that allows for the effective management of exceptions. In respect of movements to Botswana (where a significant liquor tax is levied) we have reduced the value on which this liquor tax is calculated by excluding the value of re-usable/returnable containers. Where containers are for repeated use (for example, reusable bottles and crates) the cost may be spread over the expected number of imports. If a number of the containers may not be re-exported, this must be allowed for. Properly defining the value of the relevant items on the invoices used for these imports is critical.
CASE STUDY 9: Proceeds of resale
Any profit share arrangement you may have with a supplier in respect of the re-sale of goods (whether directly or indirectly) requires the supplier’s share of the profit to be added to the customs value If at the time of importation the amount of profit is not known, the goods are to be released against a deposit or guarantee. However, it is generally accepted that dividend payments to the seller may be excluded from this value. We have been able to redesign the global value chain of a number of clients so as to successfully move them from a profit share to a dividend structure.
CASE STUDY 10: Export Duty and taxes paid in the country of origin or export
When export duty and taxes are incurred by the buyer they are dutiable. Eligibility for specific relief in respect of, or repayment of these taxes, may allow exclusion from the customs value. Our data analytical methodology (e.g. examining declaration data from the origin and destination countries) enables us to identify locked in duties and then redesign the supply chain so as to ensure that these duties are excluded where possible.
CASE STUDY 11: Discounts
In the case of a contractual entitlement to a discount in respect of imported goods, such discount may be excluded from the customs value. Contingent or retroactive discounts on earlier imports cannot be claimed in full at the time of importation. Quantity or trade discounts may be excluded upon accrual of these. In other words the price paid or payable net of these discounts is acceptable. If you are related to the seller the discounts will also be allowed if that relationship has not affected the price of the goods. Subject to certain conditions, cash and early settlement discounts may also be excluded from the customs value.
CASE STUDY 12: Marketing activities related to the imported goods
Payments for general marketing support, unrelated to the imported goods, should not be included in the customs value. Charges for marketing activities by the seller are to be included in the Customs value even if they are charged for separately.
CASE STUDY 13: Export quota and licence payments
Payments for export quotas and licences may be excluded from the transaction value for Customs valuation purposes in certain cases. (Payments for certificates of authenticity for meat, imported into the UK, must, however, be included in the Customs value.
CASE STUDY 14: Interest charges
Separately charged interest, paid under a financing arrangement for buying the imported goods, may be excluded from the customs value.
CASE STUDY 15: Rights of reproduction
Separately charged for rights of reproduction may be excluded for valuation purposes. Licence and royalty agreements often include these kinds of rights, which are very seldom split out correctly.
CASE STUDY 16: Post-importation work
For goods such as industrial plant, machinery or heavy equipment the following charges may be left out:
- • construction work
- • erecting
- • assembling
- • maintaining
- • technical assistance
The work may be carried out before or after importation so long as it relates to the imported goods and the charge is shown separately from the price paid or payable for the goods.
CASE STUDY 17: Management fees
Management fees payable to the seller, including general service fees for administration, marketing and accounting, not related to the imported goods, can be excluded.
CASE STUDY 18: Prior Sale (or First Sale)
Where imported goods were subject to a chain of sales before import, an election of an earlier sale in the chain as the basis for customs duty is possible in certain cases. Subsequent mark-ups may then be disregarded for valuation purposes. As a condition, proof of access to earlier sales prices is required, which usually limits this type of planning to related party movements.
CASE STUDY 19: Duty Relief on Export
Economic customs regimes, such as processing under customs control and inward and outward processing relief, allow the reduction of duties inward processing relief allows relief on raw materials, components and goods imported for processing and subsequent sale outside the destination territory. Processing in this context could include the inspection and repacking of the goods, through to complex manufacturing, depending on the nature of the goods and the specific territory. Prior authorisation is generally required to benefit from inward processing relief. Outward processing relief allows for total or partial relief on goods sent outside of the territory for process or repair. Returned goods relief applies where goods previously exported are re-imported in the same state. This can apply to goods rejected by international customers.
CASE STUDY 20: Bonded Warehouse Regime
The use of a bonded warehouse regime can suspend the duty liability in the country of first entry where goods are to be re-exported. Duties, taxes and other fees such as the merchandise processing fee are paid when the goods are withdrawn for consumption. The importer has several removal options when placing goods in a bonded warehouse. The goods can be withdrawn for consumption with duties and taxes paid on the rates in effect at the time of withdrawal; the goods can be withdrawn for export; the goods can move in bond to another port; or the goods can be transferred to another bonded warehouse. Importers can transfer the right to withdraw if the goods are sold while in the bonded warehouse.
CASE STUDY 21: Preferential Routes
Duty relief may be achieved by routing goods to destinations where preferential origin relief may be claimed. Specific tax-effective supply chain models for procurement and manufacturing may also provide significant benefits. DataSmart has developed a comprehensive data-driven map of preferences created by trade agreements (constantly updated and maintained) that can assist with the design of a duty efficient global value chain.
CASE STUDY 22: Indirect Imports
Often goods are procured for export by a company from an in-country supplier that imported the dutiable goods (i.e. so-called indirect imports). This is often extremely difficult to identify. We have been able to unlock significant savings for companies by identifying the indirect imports (and locked in duties) and removing the duties by redesign of their supply chain.
CASE STUDY 23: Free Trade Agreements (FTAs)
A free trade agreement (“FTA”) reduces trade barriers between trading partners. Customs authorities often require evidence of production in an FTA country in the form of purchase orders, production records, time sheets for the factory workers, and proof of payment to the supplier. Note that textile shipments under FTAs are considered high risk by Customs and draw a red flag in an audit as compliance tends to be very low. The effective benchmarking of the product values against similar products from the same origin and destined for the same market is quite important. For imports into the USA, we have been successful in assisting companies to utilise FTAs effectively by re-aligning their global value chains.
CASE STUDY 24: Trade Agreements
Trade Agreements allow qualifying imports to attract reduced or nil rates of duty, subject to a range of conditions – a key one being that the goods must 'originate' in the beneficiary country. Assessing whether or not the product meets the origin rule is often complex and leads to error as these rules depend on the classification of the product. Even if you think you are benefiting under Trade Agreements, it is advisable to check imports on a regular basis. If the supporting documentation is not available at time of import, the importers eligibility for relief under the Trade Agreement may escape the clearing agent, resulting in full duty being paid. Identification of these errors allows the recovery of duties retrospectively in most territories for a limited period.
CASE STUDY 25: Incoterms
Incoterms, or terms of sale, dictates which party is responsible for the cost and risk for each leg of the cargo’s international journey. Under the C and D terms, the seller must contract for the main carriage and will include the freight cost in the cost of the goods. If costs are estimated and not documented, most Customs Authorities consider this a failure to exercise reasonable care on the part of the importer. Customs will disallow the deduction and the importer can be faced with penalties. We have been very successful in utilising incoterms to move risk and ownership up and down the global value chain, thus reducing the duty cost within the supply chain. Changes to the terms of sale are often used in conjunction with a number of the other mechanisms.
CASE STUDY 26: Foreign Trade Zone
Foreign Trade Zones (FTZ) are secure areas located at or near ports of entry, and are legally considered to be outside the Customs territory of the specific country, e.g. the USA. Goods in an FTZ are generally considered to be in international commerce. FTZs are very beneficial to local economies and can save importers money by deferring duty payments and streamlining entry procedures. Additionally, manufacturing processes in FTZs can lead to what is known as inverted tariffs. When goods are manufactured in a zone, the finished product may have a lower duty rate than the foreign inputs. E.g. duties are not paid on labour, overheads, or profit attributed to FTZ manufacturing operations.
CASE STUDY 27: Temporary Importation Bond
Merchandise may enter a territory temporarily without payment of duty or merchandise processing fee by posting, for example, a temporary importation bond (“TIB” - in the USA). Goods entered under a TIB may not be imported for sale or sale on approval. The intent must be to export or destroy the merchandise within a certain period of time, not to exceed three years from the date of importation. Typical TIB conditions apply in the case of articles to be repaired or processed (note that simply repackaging an item does not count as processing); samples for use in taking orders; articles for examination and reproduction; articles for testing, experimental or review purposes; works of fine art or scientific apparatus for exhibition; and automobiles for show purposes. Note that different time limits apply in different countries and territories.
CASE STUDY 28: Carnet
A carnet is an international Customs document that simplifies Customs procedures for the temporary importation of goods duty free. Carnets are typically used for commercial samples, professional equipment and exhibition goods. The carnet is valid for one year only but permits unlimited entries and exits. A carnet does not exempt the holder from obtaining the necessary licenses and permits.
CASE STUDY 29: Reclassification & Correcting the Classification
The applicable customs duty rate is determined by the tariff classification and origin of the imports. Reclassifying products to commodity codes attracting a lower or nil duty rates can generate enormous savings. There are various legitimate opportunities available. Each imported product should only be classified to one specific commodity code in the customs tariff. However, the tariff includes over 16,000 codes and so, finding the correct one sometimes presents a very difficult challenge. The line between one classification and another is sometime very fine. For example (in the EU):
- Wet noodles (in water) attract a lower duty rate than dried noodles;
- Dolls based on mythical creatures attract a lower duty rate than dolls representing humans.
CASE STUDY 30: Stripping Down Products
Assuming that imported products are correctly classified to the code attracting the lowest rate, a further opportunity to reduce costs may exist by stripping down imports in to kits to achieve a more favourable net duty rate.
- In the EU a stereo turntable attracts duty at 2% but the stylus, which is a high value item, could be imported free of duty. Stripping the stylus from the turntable and presenting the two items separately reduces any import costs. These savings have to be weighed against the costs of subsequent re-assembly.
- In various territories the software and chip set that controls most modern vehicles are removed post-import and replaced by a new chip and country specific software. Obviously, the vehicle without the software and chip is worth considerably less and there is a significant cost associated post-import in inserting the new chip, installing the software and testing the vehicle. This allows for a significant savings opportunity.
CASE STUDY 31: Bundling Products
There may be an advantage in presenting various components at the same time in kit form if the finished item attracts a lower rate of duty than the individual components. For example, most parts used to make digging machines are subject to duty whereas the finished digger could be imported free of duty. Presenting a kit of parts could result in the digger parts being classified as the finished digger and realise material duty savings. This approach is specifically supported by the legal classification rules and under a specific duty relief.
CASE STUDY 32: Tariff Engineering
A slight modification of your product specification can sometimes push imported goods in to another classification resulting in a reduced or even zero duty category. For example, a dress made of 51% polyester and 49% cotton is considered a polyester dress and has a duty rate of 16%. A change to 51% cotton and 49% polyester makes it a cotton dress for duty purposes, attracting a much lower duty.
CASE STUDY 33: Guarantee, Warranty & Returns
Costs incurred through the initiative of the buyer/importer in respect of a guarantee or warranty services may be excluded for valuation purposes. In the context of the growing importance of consumer protection internationally, for example, most companies include a “returns” policy. Properly structured, a “returns” policy may constitute a guarantee or warranty service, resulting in the value of such a “returns” policy being deductible from the Customs value.