Settling into TFTEA drawback

Filing for duty drawback with U.S. Customs and Border Protection (CBP) remains one of the most complex and time-consuming processes for American shippers, but it has become easier during the past year as filers get more familiar with the agency’s new requirements for filing claims electronically.

A drawback is a refund of customs duties paid on imported materials that are later exported or used in the manufacture of exports. With documented proof, U.S. exporters can receive refunds from CBP of up to 99% on duties paid.

As of Feb. 24, 2019, duty drawback filers had to file claims in the Automated Commercial Environment (ACE) according to the requirements of the 2015 Trade Facilitation and Trade Enforcement Act (TFTEA). The legislation provided significant enhancements to U.S. drawback laws, namely eliminating the filing of remaining paperwork associated with those claims.

“There was certainly a learning curve with the new process,” said Dave Corn, vice president of one of the nation’s oldest drawback specialists, Comstock & Theakston Inc., and co-chairman of the Association of American Exporters and Importers’ Drawback and Duty Deferral Committee.

“There are so many more validations that the TFTEA drawback claims undergo upon the initial submission,” he said. “Understanding these validations, the order in which they occur, translating the validations and then correcting them has been a process that has become easier with time.”

“No question that during that first year, issues cropped up with particular validations or data processing that resulted in CBP updating and fixing bugs and filers addressing issues in their own software programs,” said Michael Cerny, chief legal officer for Charter Brokerage and drawback committee chair for the National Customs Brokers and Forwarders Association.

Charter Brokerage has been filing TFTEA drawback claims in ACE since Feb. 24, 2018, when the option first became available and before becoming mandatory a year later. “Our company worked closely with Customs to address those issues and in some cases even proposed fixes that Customs could implement,” Cerny said.

Corn said the turnaround between filing claims and recovering drawback duties has narrowed since the new filing rules took effect last February.

“The system is receiving and validating claims, but those claims still need to be processed at the CBP drawback offices and agency drawback specialists are working through their own internal process changes to use and leverage all of the additional data in order to liquidate claims,” Cerny said.

The drawback industry is also waiting for CBP to release its business rules and updates to the drawback CATAIR (Customs and Trade Automated Interface Requirements) in ACE.  

Corn said, “There has been some confusion from the trade regarding specific policies that are outlined in the CATAIR, and CBP is working to clarify the inconsistencies in their messaging.” 

How U.S. duty drawback basically works. [Source: U.S. Government Accountability Office]

Drawback may apply to a variety of import/export transactions. The two most popular uses in the U.S. for the measure involve substitution manufacturing and unused merchandise. Substitution manufacturing includes both imported merchandise and any merchandise of the same kind and quality that are then exported or destroyed. Unused merchandise drawback covers imported materials that are unused and exported or destroyed.

Cerny noted that issues have arisen related to CBP’s Manufacturing General Ruling for Component Parts, also known as 81-300, which applies to many claimants who file substitution drawback.

“After the final regulations were issued, it became apparent that the 81-300 format did not provide for the eight-digit [harmonized tariff scheduled number] substitution that is available under TFTEA,” he said. “We are working with CBP for a new general ruling that does allow full eight-digit substitution and hope to see that issued soon by CBP.”

In addition, the transition to TFTEA drawback resulted in a backlog of privilege applications and manufacturing ruling applications at CBP. The agency is starting to work through this backlog, but numerous drawback claimants are still waiting on those approvals.

“CBP has said that it is starting to chip away at this backlog,” Cerny said. “Both CBP and the trade would like to get back to the shorter approval time frames that existed before TFTEA and ACE,” Cerny said.

Source: U.S. Customs and Border Protection/Government Accountability Office

It’s estimated that more than $1 billion in drawback was returned to American companies during fiscal year 2018. However, drawback specialists believe that there’s another $3 billion to $4 billion that goes unclaimed each year.

The value of drawback claims filed by the industry in recent years has increased.

“It may be that companies are taking advantage of different drawback types than they did before,” Corn said regarding the gradual increase in drawback claims. “It’s probably too early to tell for any quantifiable statistics for industry claims in TFTEA.”

The application of Section 301 duties by the Trump administration on Chinese imports, starting in July 2018, has resulted in traditionally low-tariff product manufacturers experiencing significant import duties.

“We are seeing drawback for commodities/products where we did not see it before,” Cerny said. “Many products that were previously duty free now face 301 tariffs and drawback becomes a viable option. For example, many high-tech products have been duty free for close to 20 years, but the 301 tariffs have pushed companies importing and exporting these products to pursue drawback.”

Cerny expects this trend to continue through 2020 and beyond. “Even if 301 tariffs go away, companies are seeing the advantage of having a duty drawback program to support their export program. The expanded substitution standards available under TFTEA make this a reality,” he said.

However, the Government Accountability Office recently warned CBP must continue to exercise strict fiscal oversight of drawback claims refunds.

“CBP has not targeted certain claims for a full desk review since switching to the new system on February 24, 2018,” the GAO said in a December report. “The lack of review of claims, which numbered over 35,000 and represented an estimated $2 billion in claims filed as of August 23, 2019, increases the risk of improper payments.”