What is a Duty Drawback?
A drawback or duty drawback refers to the whole/partial refund, reduction, or exemption of customs duties paid when importing goods into the US. This benefit can be availed only when the imported merchandise is subsequently exported from the US or destroyed.
To summarize, duty drawback is the refund of customs duties, taxes and fees paid on imported items that are matched with subsequently exported or destroyed items. Duty drawback also helps prevent double taxation as the import fee paid to the Customs and Border Prevention (CBP) can be reimbursed by the importers who are liable to receive a 99% refund of the duties under certain conditions.
The CBP supervises duty drawback in the US. It is codified under Title 19 of the United States Code 1313 (g).
Types of Duty Drawback
The main types of duty drawback are listed below:-
1. Manufacturing direct identification drawback
When an imported material is used to manufacture a product in the US and then the same is subsequently exported from the country, the import duty paid earlier can be recovered. It is necessary to track and trace the duty-paid imported material through manufacturing and export processes.
2. Manufacturing substitution drawback
When duty-paid, duty-free, or domestic materials of the same type, kind, and quality, as the duty-paid imported designated materials are used to produce an exported item, the import duty can be reclaimed. The same can be recovered even when none of the designated goods have been used to produce the exported products.
3. Unused merchandise direct identification drawback
The import duty can be recovered when a duty-paid material is imported into the US and subsequently exported unused. It is necessary to track and trace the duty-paid imported material through the export process.
4. Unused merchandise substitution drawback
The import duty may be recovered when any unused material that is commercially interchangeable with any imported duty-paid material is exported. For the import duty to be recovered, the imported duty-paid material doesn’t have to be exported if it exported the substituted merchandise.
Duty Drawback Process
The duty drawback program has undergone several changes over the years. The requirements and processes for applying for duty drawback have also been modified. According to the latest updates that came into effect under TFTEA of 2015, all duty drawback applications must be filed electronically. Also, business owners can now apply for duty drawback within five years from the date of import to the filing date. They must provide proof of export, among other proofs to claim the benefit.
To file a drawback claim with an accelerated payment request indicator, the importer must have a valid bond with the CBP. The claim won’t be rejected if the bond is insufficient, or has expired. Only the accelerated payment request indicator will be removed. The importer must work with a consultant or a specialist to rectify the bond issue and to add it again.
Given below are some points importers can keep in mind when claiming duty drawback:-
- Ensure accurate record-keeping of all data including invoices, shipment receipts, cash receipts, exportation documents, and transfers of merchandise.
- Maintain all the above records for an additional three years from the date of export.
- File for duty drawback within five years of the date on which the goods were imported.
- File an online application for claiming the duty drawback.
When the procedure is completed, the importer is liable to receive a 99% refund on duties, taxes, and fees.
Duty Drawback Application Form/Filing
While the duty drawback process might seem simple, it is important to convince the CBP of your eligibility to file for duty drawback. For this, a series of documentation processes must be complied with. It requires the importer as well as all the other entities involved in the supply chain to keep a record of all the documents for at least three years following the final export. These documents may vary depending on the kind of drawback scenario that best suits your business. Some of the vital forms that have to be submitted are listed below.
1. Proof of duties paid
Importers and manufacturers who purchased goods must produce a Delivery Certificate for Purposes of Drawback to prove that they received and paid the duties on the imported goods that were later exported. This customs form 7552 is regarded as proof of duties paid and that there is a case for recovery of the same.
2. Entry Summary form
The Customs Form 7501 - Entry Summary is used to gather relevant information about the shipment. The imported commodities are allocated an entry number that can be used by the CBP for tracking.
3. Proof of import
The proof of import can be shown through customs form 7551. It provides details of the shipment’s contents and tariff classification code which determines the duty amount paid. The invoice that accompanied your shipment must also be provided for the CBP. This will help them get an in-depth description of the shipment and its contents.
4. Proof of export
Proof of export can be provided through documents like a shipment invoice, shipment declaration, or a bill of lading. All the parties involved in the manufacturing and supply chain process must also retain other documents required for claiming duty drawback and should include the following:-
- Commercial/sales invoices
- Purchase orders
- Receiving reports
- Dated delivery records
- Payments documents
- Cash receipt records
- Inventory records
- Proof with dates that the items were used in manufacturing
- Possible proof of waste value
- Shipper’s export declaration
- Export invoices
- Export bills of lading
Even after you have accurately provided all the relevant documents on time, you may be contacted by the CBP agents for further documentation requests. They might wish for further clarification that has to be submitted by mail or even opt for an on-site compliance review under rare instances.
In short, business owners must be able to demonstrate every step of their importing, manufacturing, and exporting processes. Separate divisions and entities must work as a team when it comes to record-keeping.
The list of documents that are normally required for drawback documentary evidence is mentioned below.
- Purchase order, vendor confirmation
- Accounts payable, disbursement records, payment documents
- Import bills of lading, invoices, packing lists
- Customs form 7501-Entry Summary
- Import invoice and other entry documents
- Transportation document from the entry port to factory
- Importer factory dock receipts, warehouse/factory inspection reports
- Certifications regarding grade, specifications, or content
- Internal laboratory inspection reports
- Inventory records, transaction logs, stores control
However, the CBP may request more records for a specific case.
How is a Duty Drawback calculated?
You can arrive at your potential drawback refund estimate by considering the duty you paid on the imported merchandise that was/is to be exported. You can start the calculation with the exports and then work backward to the duty paid on the imported merchandise.
These calculations can be done in a few different ways:
- Annual duty paid percent of merchandise that is exported 99% = Drawback Potential
- Value of exported merchandise duty rate on imported merchandise 99% = Drawback Potential
OR (for manufacturing opportunities)
- Annual duty paid on components percent of components in exported articles 99% = Drawback Potential
Below is a hypothetical example to calculate drawback potential :-
Annual Duty: $20,000,000
Annual Export Sales: 40%
$20,000,000 x 20% = $8,000,000
$8,000,000 x 99% = $7,920,000
Many complexities based on various factors, including regulatory restrictions are involved while calculating the duty drawback. So, the best way ahead is to consult a drawback specialist to get an accurate drawback opportunity assessment.
When can a Duty Drawback be claimed?
According to the Trade Facilitation and Trade Enforcement Act (TFTEA), all types of duty drawbacks can be claimed within five years from the date of import to the date of filing the claim. This five-year window includes all the manufacturing details, information about the imports and exports, as well as the date of filing the claim.
Advantages and Disadvantages of Duty Drawback
A duty drawback program can boost a company’s revenue and improve its cash flow. If a company has never filed a drawback, it can do so retroactively on exports shipped within the past three years. This can bring in major windfalls to the company.
A duty drawback can also facilitate global competitiveness by providing all the companies with a level playing field. Any firm that recovers 99% of import duties when it exports is in a position to manufacture in the US virtually duty-free. A provision that is often overlooked is the ability of domestic suppliers of imported materials to transfer their drawback rights. This allows exporters to recover 99% of the duties paid.
There are several obstacles one might face while claiming duty drawback refunds. So, companies must follow stringent record-keeping practices and filing processes. Loss or misplacement of even a single document can create major hassles. This problem can be resolved by choosing a service provider of excellent standing and repute.
Tips for new businesses for claiming Duty Drawback
The following tips can be useful for an import and export business in the US who are claiming duty drawback for the first time.
- Maintain records accurately and in an organized manner. Your record-keeping must be impeccable.
- As only the exporting company of record is entitled to receive the drawback, you can endorse the drawback rights back to the manufacturer if you operate as two distinct and separate entities.
- You can receive the money faster by availing a pre-approval from the CBP by using the accelerated payment program. Pre-approvals help you get a refund as early as few weeks.
- You can use the services of experienced logistics professionals in making the duty drawback process as smooth and simple as possible. It can also help dismantle the potential barriers to getting your money back.
FAQs on Duty Drawback
How to check your duty drawback application?
You can visit the CBP website and check for the status/update on your duty drawback application. If you are filing through a consultant/agency, they will take care of the follow-up procedure.
What is the time limit for claiming duty drawback?
All types of duty drawbacks can be claimed within five years from the date of import to the date of filing the claim. This five-year window includes all the manufacturing details, information about the imports and exports, as well as the date of filing the claim.
Is duty drawback a government grant?
No, it is a refund, reduction, or exemption of customs duties assessed and collected when an item is imported into the US and then either subsequently exported from the country or destroyed.
How are duty drawback rates fixed?
Duty drawback rates are fixed based on the different types of products/materials/categories involved in the export process. The rates can be viewed on the CBP website.
Is duty drawback taxable?
A duty drawback is a refund on specific duties, fees, and taxes recovered for importing goods. Typically, imports and exports are taxed. Duty drawbacks help to alleviate the tax burden for US exporters.
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