Just participated in a KPMG Tax Watch webinar on Country of Origin- Substantial Transformation.
The presenters did an excellent job, as usual, covering a lot of detail. Some of the information served as a refresher to me, while other segments offered new material. Here are my takeaways:
- Marking rules of origin- Part 34….articles wholly obtained from one country.
- Rules of origin- Part 102…pertain to NAFTA and other FTAs
- Preferential rules of origin can be found in FTA General Notes…HTUS
- Other…Product of Jurisprudence applies substantial transformation test
- Note- 2 sets of rules can apply to same transaction…marking or tariff rules
Substantial Transformation Rule….used to determine country of origin if articles or components are not wholly obtained from one country…Does article have new name, character, or use?
- Change in character- altered physical characteristics of article or components. Were changes cosmetic? What was the process that resulted in change?
- Change in use- Is end use of article interchangeable with end use of components? Is end use of component predetermined at time of importation? What was the process that resulted in change of use? Predetermined end use generally precludes substantial transformation but subject to specifics of article/components in question.
- Change in name- this is the least compelling of the factors supporting substantial transformation. Do components retain original name after processing?
- Subsidiary/Additional Factors- extent and nature of operations (complex or simple); value added and/or cost incurred during transformation process; essential character of article (components transformed into finished product); change from producer to consumer good; tariff shift.
The Role of Software of Firmware
- Mere downloading of software or firmware does not generally result in substantial transformation.
- Software development location is given more weight than where downloaded.
- Software which enhances existing functionality is generally not considered substantial transformation.
- PCB manufacturing is complex and each situation needs to be considered separately re: Country of Origin and Substantial Transformation.
KPMG Recommended Action Steps for Importers
- Develop well documented analysis or obtain binding rulings before importation.
- Train suppliers and trade partners and communicate plans.
- Conduct periodic internal audits and risk assessments.
- Documents policies and procedures.
I’m always amazed when clients tell me that they leave export compliance in the hands of their shipping department.
If you are relying on your busy shipping department or your logistics service provider for export compliance you may be at risk. Both upper management commitment and front line training are essential parts of an Export Management & Compliance Program. While risk management always gets C level attention, export compliance is often a mid-management or lower level function.
Fines and penalties for violations should make export compliance a basic part of risk management. Best practices, including an EMCP, will reduce exposure to steep fines and penalties as described by BIS (Bureau of Industry and Security) on their website https://www.bis.doc.gov/.
BIS offers a number of on-line courses at no cost. Check them out under the Training and Compliance tab and get started!
Penalties- Violators of the Export Administration Act of 1979, may be subject to both criminal and administrative penalties. When the EAA is in effect, criminal penalties can reach 20 years imprisonment and $1 million per violation.
Privileges – A denial of export privileges prohibits a person from participation in any transaction subject to the EAR.
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An annual customs review is a good business practice. Another good practice is to make sure you are taking advantage of regulations that allow importing on a duty free or preferential basis. Here are a few basic items for your annual customs review. Contact email@example.com if you need help.
- Classification– review annual updates to Harmonized Tariff to make sure your codes and descriptions are accurate. Proper classification and valuation of imported goods are the first step in compliance. If you do nothing else, do this.
- Duty Drawback– this is a refund of duties paid on imports that are later exported. As supply chains expand there may be new opportunities for drawback. Record keeping is key here.
- Chapter 98 of the Harmonized Tariff allows duty free entry of certain categories of goods. Examples are: American Goods Returned, American Goods Repaired or Altered Abroad, and American Components Assembled Abroad.
- Trade agreements– programs which allow duty free or reduced duty rate entries. There are many agreements (such as NAFTA) in place.
- Customs rulings– consider requesting formal customs rulings prior to large transactions. This ensures compliance and eliminates uncertainty about imports. Rulings can be requested thru the CBP website.
- Correcting errors– when an entry mistake is discovered it can be corrected by a prior disclosure to CBP. The formal process is a Post-Entry Amendment/Post Summary Correction. A prior disclosure can help mitigate penalties.
Canada Border Services Agency has updated their customs tariff effective January 1, 2020.
Canada is the 2nd biggest US trading partner, ranking just below China. Here is a link to the Canada Customs Tariff 2020. For 10 digit harmonized codes, the first 6 are universal and the last 4 differ from country to country.
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January is a good month to review harmonized codes. The United States International Trade Commission has updated the Harmonized Tariff Schedule of the United States effective January 1, 2020.
Using obsolete codes can result in customs delays, inaccurate duty assessments, or fines and penalties so it is a good business practice to check the tariff. While you are at it are you sure EAR99 and NLR apply to your exports?
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