Import Compliance Issues Review and Customs and Border Protection Guidelines
THREE MAJOR PLAYERS IN THE IMPORT PROCESS
1. Importer of Record. Person or party who is responsible for duties and penalties to Customs and Border Protection.
2. U.S. Customs Service. Division of the Department of Homeland Security responsible for protecting the U.S. borders against illegal importation of commodities, persons, and contraband. Revenue collection agency.
3. Customs Broker. Person or party licensed by the Department of Treasury to conduct “customs business” on behalf of an importer of record.
Customs and Border Protection is collecting less and less funds each year in the form of duties and taxes due to special tariff treatment programs and yearly rate reductions of general duties and taxes. To offset this reduction in funds collected, customs is aggressively pursuing fines and penalties from importers through the customs audit process.
The Customs Modernization Act of 1993 was passed to encourage the following:
1. Reasonable care standards
2. Informed compliance standards
3. Supervision and control standards
4. Recordkeeping standards
5. Proper valuation of imported goods
Every U.S. importer will be audited by Customs and Border Protection. There is no importer that is totally compliant. Most importers do not understand their responsibility to Customs and Border Protection and their total liability pending a customs audit.
Most importers rely on their customs broker for compliance standards. However, most customs brokers do not have the operational expertise to properly operate in a compliant manner themselves. As a result, most customs brokers give improper advice to importers.
REASONABLE CARE
The Modernization Act mandated and passed into law the concept of reasonable care, so defined as. . . .
That degree of care which a person of ordinary prudence would exercise in the same or similar circumstances.
Reasonable care is the “legal responsibility” to fix the final classification and value.
MEETING REASONABLE CARE STANDARDS
Customs Brokers
A broker shall not withhold information relative to any “customs business” from a client who is entitled to the information.
A broker shall exercise due diligence to ascertain the correctness of any and all information which he or she imparts to a client.
A broker shall not knowingly impart to a client false information relative to any customs business.
Importers of Record
Following are some of the responsibilities of importers of record:
Should seek guidance from customs for proper compliance through the formal rulings program.
Should consult with qualified experts such as a customs broker, customs consultant, or customs attorney who specializes in customs law.
If using a broker, must provide such broker with full and complete information sufficient enough for the broker to make an entry properly or for the broker to provide advice on how to make an entry.
When appropriate, obtain analyses from accredited labs to determine the technical qualities of imported merchandise.
Use in-house employees such as counsel, customs administrators, and customs managers who have experience in customs law proceedings.
Follow any customs binding rulings requested and received from customs.
Cannot classify own identical merchandise in different ways.
Notify customs when receiving different treatment by customs for the same goods in different ports of entry.
To examine Import Declarations CF 3461 prepared by the broker to determine the accuracy of information in relation to classification and valuation.
CUSTOMS BONDS
A customs bond is a contract that obligates the importer to perform certain functions in the importing process. These, among others, include:
1.The obligation to pay duties and related charges on a timely basis
2.To pay as demanded by customs, all additional duties, taxes, and charges subsequently found due
3.To file complete entries
4.To produce documents where customs releases merchandise conditionally
5.To hold the merchandise at the place of examination until the merchandise is properly released
6.To redeliver merchandise in a timely fashion to customs custody; where, for example, the merchandise is inadmissible (e.g., product of convict labor, non-compliance automobile, etc.) or, more commonly, where it does not comply with the country-of-origin marking rules
The requirement for a bond is found in 19 U.S.C1623. This section of the U.S. code allows Customs to take bonds or other security (other security meaning cash deposits, U.S. bonds (except saving bonds), treasury notes, or treasury bills) in an amount equal to the amount of the bond.
Parties to a Bond
Principal (importer)
Surety (insurance company)
The beneficiary–Customs and Border Protection
A bond is not designed or intended to protect the importer (rather it protects the government of the United States), nor does it relieve the importer of any of their obligations.
The surety (insurance) company by bonding the importer assumes the same duties and responsibilities of the importer. If an importer fails to honor any condition of the bond, surety can be compelled to do so in their place.
Types of Bonds
1. Single Transaction. Covers a particular entry (declaration) at a particular port.
2. Continuous. Covers all entries (declarations) at all ports in the United States.
Amount of Bond
1.Single transaction.
Unrestricted Merchandise. Entered value, plus all duties, taxes, fees.
Restricted Merchandise. Entered value x3. (Restricted merchandise is that subject to other government agency requirements where failure to redeliver could pose a threat to the public health and safety).
2.Continuous Bond. Ten percent of all duties, taxes, and fees paid in the preceding calendar year. If no duties, taxes, and fees were paid in the preceding calendar year, then 10 percent of all duties, taxes, and fees, estimated to be paid in the current calendar year.
Breach of Bond (Failure to comply with bond conditions)
Liquidated damages assessed in the following amounts:
Unrestricted Merchandise. Entered value, plus all duties, taxes, and fees.
Restricted Merchandise. Three (3) times the entered value.
Requirements to Issue
Because the bond is a guarantee by surety (insurance company) of performance by the importer, prior approval from surety must be obtained in the following situations:
1.For importers who previously have not paid estimated duties timely.
2.For foreign principals (individuals and corporations).
3.For importers in bankruptcy or any insolvency proceedings.
4.For bond covering the importation of an automobile.
5.For bond covering merchandise subject to food and drug regulations.
6.Financial statement may be required.
INVOICE REQUIREMENTS
Invoice requirements as set forth in the CFR 19 Pt 141.86 are crucial element of the customs clearance process. Many penalty case situations develop and stem from incorrect invoices submitted on behalf of imported merchandise. It is the importer’s responsibility to present to the broker a proper invoice as established in the mentioned customs regulations.
It is the broker’s responsibility to ensure that a proper invoice is received from the importer for presentation purposes to U.S. Customs. If the invoice is incomplete or in violation of the rules and regulatory standards in Pt 141.86 of the CFR, the broker is to request from the importer a corrected invoice. Failure to do so is a violation of lack of reasonable care on behalf of the broker. The broker then would possibly face a penalty for the submission of incomplete or incorrect documentation in connection to an import clearance.
Carefully review CFR 141.86 to ensure all levels of understanding of the proper and regulatory invoicing requirements. You will note that most invoices used on a common practice basis are incomplete or contain a basic error. Avoid future penalties and correct this situation immediately.
INVOICE REQUIREMENTS
General Information
Each invoice of imported merchandise must set forth the following information:
1.The port of entry to which the merchandise is destined.
2.If merchandise is sold or agreed to be sold, the time, place, names of buyer and seller. If consigned, the time and origin of shipment, and names of shipper and receiver.
3.A detailed description of the merchandise including:
The name by which each item is known
The grade or quality
Marks, numbers, and symbols under which sold by the seller or manufacturer to the trade in the country of exportation
Marks and numbers of the packages in which the merchandise is packed
4.The quantities in weights and measures.
5.If sold or agreed to be sold, the purchase price of each item in the currency of the sale.
6.If the merchandise is shipped on consignment, the value of each item in the currency in which the transactions are usually made or, in the absence of such value, the price in such currency that the manufacturer, seller, shipper, or owner would have received or was willing to receive, for such merchandise if sold in the ordinary course of trade and in the usual wholesale quantities in the country of exportation.
7.The kind of currency (yen/U.S. dollars, etc.).
8.All charges upon the merchandise, itemized by name and amount including:
Actual amount of insurance
Actual amount of any commission paid
Actual cost of packing
All charges, costs, and expenses incurred in bringing the merchandise from alongside the carrier at the port of exportation in the country of exportation and placing it alongside the carrier at the first U.S. port of entry
9.All rebates, drawbacks, and bounties, separately itemized, allowed upon the exportation.
10.The country of origin (manufacture).
11.All cost for goods or services furnished for the production of the merchandise not included in the invoice price. These costs are termed “assists” and defined as dies, molds, tooling, printing plates, artwork, engineering work, design, and development, financial assistance, etc.
12.Must state in adequate detail the packing information (what merchandise is contained in each individual package).
13.Set forth in detail for each class or kind of merchandise every discount from list or other base price that has been or may be allowed in fixing each price or value.
14.Must be in the English language or shall have attached thereto an accurate English translation containing adequate information for examination of the merchandise and determination of duties.
15.Shall identify by name a responsible employee of the exporter who has knowledge or who can readily obtain knowledge of the transaction.
Additional Information
Special information is required on certain goods or classes of goods in addition to the general information outlined previously.
Frequent Errors in Invoicing
The fundamental rule is that the shipper and importer must furnish customs with all pertinent information with respect to each import transaction to assist customs in determining the tariff status of the goods. Some examples of omissions and inaccuracies to be avoided are:
1.On CIF transactions, actual prepaid amounts for freight and insurance are not shown. In many situations only estimated amounts are shown. In others, none are shown.
2.The shipper assumes that a commission, royalty, or other charges against the goods is a so-called nondutiable item and omits it from the invoice.
3.A foreign shipper who purchases goods and sells them to a U.S. importer at a delivered price shows on the invoice the cost of the goods to him instead of the delivered price.
VALUATION VERIFICATIONS
Transaction value
Transaction value of identical or similar value Deductive value
Computed value Derived value
Methods of valuation are contained in the preceding hierarchy. Knowledge of this order is essential in the comprehension of proper valuation concepts as outlined in CFR 152.
All transactions contain a term of sale:
CIF duty paid CIF
CF FOB FAS
Ex-Works
Verifications must be made to determine the correct term of sale for every invoice and every import declaration of merchandise.
Proper deductions from price can only be calculated after categorizing the proper term of sale through solid identification from the commercial or proforma invoice. For example, prepaid freight, insurance, duty paid calculations, are nondutiable charges. Foreign loading and foreign inland freight and packing are subject to duty charges.
CUSTOMS AND BORDER PROTECTION REGULATORY AUDIT GENERAL COMPLIANCE ASSESSMENT QUESTIONNAIRE FOR IMPORTER AUDITS
A. General Organizational Information.
Please provide the following information on the organization of your company:
1.Description of overall organization structure, organization charts, and similar information.
2.Company’s full name and IRS identification number(s).
3.Name and title of the company’s officers.
4.Name, title, and telephone number of the person who will be the Customs and Border Protection contact during the review.
5.Name, title, and telephone number of the official(s) preparing information for this questionnaire.
6.General information on company operations such as a description of business operations, number of employees, location of facilities and related operations, products, divisions, and customers.
7.Names and addresses of any other U.S. and foreign-related companies (as defined in section 152.102(g) of the Customs Regulations).
8.Similar material as items 1 through 6 for the company’s parent, sister, subsidiary, and joint venture organizations and relationships.
9.Name and contact person for internal preparer of year-end financial statements.
10.Name and contact person for external financial auditors, such as a certified public accountant, and authorization to contact those auditors.
B. Customs-Related Activities.
1.Identify the organizational element (departments, divisions, subsidiaries, etc.) involved in customs-related operations.
2.List names under which the company imports. Does the company import under a broker’s bond?
3.List customs identification numbers and suffixes (importer ID numbers) applicable to customs-related business and the organizational element that imports under each number or suffix.
4.List the names and locator information for key individuals associated with customs-related operations.
5.List the name(s) and addresses of broker(s) your company uses.
6.Provide the names and addresses of all foreign sellers and suppliers.
7.Describe the disposition of imported products (manufacturing, resale, etc.).
8.Identify and explain situations in which the company exports merchandise from the United States.
9.Identify situations in which the company imports merchandise in accordance with binding rulings received from customs.
C. Recordkeeping System.
The Tariff Act of 1930 as amended (Title 19 USC 1508) establishes recordkeeping requirements for organizations dealing in customs operations. Organizations conducting customs-related operations are required to maintain and produce records that are normally kept in the ordinary course of business. During the audit, specific recordkeeping requirements that are being defined in accordance with the Customs Modernization Act will be discussed.
Describe the recordkeeping system supporting customs-related operations, including accounting and financial record-keeping systems, documents, and information. This information may be available in the company’s internalprocedures manuals. Include the following:
1.The identity of the source records and information used to prepare customs information. Please explain how they are created, maintained, and transferred to and from originating, using, and storing organizations. Please provide other information necessary to understand operating procedures and associated internal controls over record production and retention.
2.Location of records. If records are maintained at multiple locations, list each location by address and identify documents and information at each. Include the name and telephone number of the contact person at each location.
3.Procedures or techniques to link records and information to customs entry submissions.
4.Retention period. Length of time records are retained within department before moving to storage and length of time retained in storage.
5.Storage medium.
6.Retrieval procedures with contact names and phone numbers.
7.Description of alternative storage procedures (conversion and maintenance of information in other than original formats), if applicable.
8.Internal and management controls concerning recordkeeping practices.
9.Other appropriate information.
10.A description of the company’s accounting and financial system as it relates to and supports customs-related operations.
11.The company’s fiscal year.
12.General ledger accounts typically used to record customs-related transactions.
D. Internal Controls.
1.Provide the company’s formal policies and procedures manuals or other written directives related to the handling of customs matters and documents. If there are no formal written procedures, provide a written summary of your procedures for ensuring compliance with customs laws, regulations, and rulings.
2.If transaction value is the method of appraisement, explain procedures to ensure that import values reported to customs accurately reflect the price actually paid or payable for the imported merchandise. Explain procedures to assure that indirect and additional payments are included in the transaction value.
3.Explain procedures to ensure that assists, commissions, royalties, license fees, freight, and other dutiable costs are correctly reported to customs.
4.Explain procedures to ensure that import quantities reported to customs are accurate. Include procedures for reporting overages and shortages of merchandise receipts.
5.Explain procedures to ensure that nondutiable costs such as international freight and insurance are accurate and fully supported by documentation.
6.Explain procedures to ensure that harbor maintenance fees and merchandise processing fees are accurately calculated and timely paid on imports. Explain procedures to ensure that harbor maintenance fees are accurately calculated and timely paid on admissions to the foreign trade zones, domestic shipments, and exports. See section 24.24 of the Customs Regulations.
7.Explain procedures to ensure that imported merchandise is accurately classified and all admissibility requirements are met. List other agencies for which compliance requirements on importations must be met.
8.If different procedures are used for nonrelated and related foreign sellers, explain the procedures used for each.
9.Explain the company’s merchandise entry procedures. For example, does the company rely exclusively on a customs broker to fulfill all of the company’s responsibilities related to customs, or does the company maintain an internal staff responsible for conducting customs entry operations? If an internal staff is maintained, provide the names of the individuals, a description of the job performed by each, and identify those who have a customs license and provide the license number.
10.Provide and explain results of evaluations of the effectiveness of the company’s system of internal controls, particularly with respect to customs-related operations. Please include evaluations by internal or independent parties.
E. Customs Value Information and Company Internal Procedures for Import-Related Operations
1.Identify the method of appraisement, as prescribed in sections 152.103 through 152.108 of the Customs Regulations, used to value imported merchandise from each of your major suppliers (consider any supplier who provides 10 percent or more of the total value of your importations as a major supplier).
2.If transaction value is used for importations from related parties, do the importations qualify for transaction value based on the circumstances of the sale or on the basis of test values? Provide an explanation and support documentation for the method that you use to support transaction value.
3.Describe how prices for imported merchandise from major suppliers are determined.
4.If the company is an exclusive U.S. importer of merchandise from foreign suppliers, explain the circumstances of sale and relationships with the foreign suppliers. Provide written agreements, if applicable.
5.If applicable, identify situations in which foreign related suppliers sell the same or similar merchandise to other U.S. companies.
6.Explain how and when the company takes title to the imported merchandise. Explain differences that may exist between different importing situations.
7.Explain transportation procedures and responsibilities for foreign, international, and domestic transportation of merchandise from the foreign plant to the place of international shipment, to the port of importation, and to the final U.S. destination. Include explanations and information concerning responsibilities for foreign inland freight charges. For example, is foreign inland freight included on the invoice with the merchandise or is it invoiced separately? If included on the invoice with the merchandise, is it separately identified or included with the charge for international freight? Identify general ledger accounts used to record the various freight charges.
8.Explain contractual agreements between the company or foreign suppliers with shippers or freight forwarders. Identify and explain any rebates received by the company or foreign affiliate from shippers or freight forwarders. Identify general ledger accounts used to record rebates, if any.
9.Identify and explain loans payable to or receivable from foreign suppliers and sellers.
10.Identify situations in which the merchandise price from the foreign seller does not include all costs plus a profit.
11.Identify and explain retroactive price increases or adjustments for imported merchandise at the end of the accounting period or other times that are paid to or accrue to the company and/or the foreign supplier. Identify the general ledger accounts used to record the transactions.
12.Explain procedures and accounting for foreign currency fluctuations. Identify general ledger accounts used to record the fluctuations.
13.Identify and explain situations in which the company receives price adjustments, variances, rebates, or allowances directly or indirectly from foreign exporters or sellers. Identify the general ledger accounts used to record the transactions.
14.Identify and explain payments to foreign companies for expenses other than imported merchandise, such as management fees, research and development, tooling, and similar matters. Identify general ledger accounts used to record the transactions.
15.Identify and explain situations in which the foreign seller influences or controls the resale price of merchandise imported into the United States.
16.Identify and explain situations in which prices for imported merchandise are subject to restrictions or conditions as explained in sections 152.103(j)(1)(i–iv) of the Customs Regulations.
17.Describe how packing costs are calculated and declared to customs in accordance with section 152.103(b)(1)(i) of the Customs Regulations. Identify general ledger accounts where packing costs are recorded.
18.Identify and explain situations in which the company uses the services of foreign selling agents. Explain procedures for declaring selling commissions on entries in accordance with section 152.103(b)(1)(ii) of the Customs Regulations. Provide names and addresses of agents and agency agreements, and identify the general ledger accounts used to record commissions and related transactions.
19.Identify and explain situations in which the company provides assists to foreign suppliers in accordance with 152.103(b)(1)(iii) and 152.103(d) of the Customs Regulations. Describe the form of any assists (tools, molds, fabrics, loans, design and engineering costs, machinery used in production, etc.), their values, and identify general ledger accounts used to record the transactions.
20.Identify and explain situations in which third parties provide assists to foreign suppliers in accordance with 152.103(b)(1)(iii) and 152.103(d) of the Customs Regulations. Describe the form of any assists (tools, molds, fabrics, loans, design and engineering costs, machinery used in production, etc.), their values, and identify general ledger accounts in which the transactions are recorded.
21.Identify and explain situations in which royalties or license fees were paid for importer merchandise. Provide copies of the royalty or license agreement. Identify the general ledger accounts used to record the transactions.
22.Identify and explain situations in which proceeds of any subsequent resale, disposal, or use of the imported merchandise accrue directly or indirectly to the seller. Identify the general ledger accounts used to record the transaction and provide documentation on how the proceeds are calculated.
23.Identify and explain situations in which the company makes indirect payments to foreign sellers as covered by section 152.103(a)(2) of the Customs Regulations? Include supporting documentation, agreements, and the identity of general ledger accounts used to record the transactions.
24.Identify and explain the company’s usual form of payment (e.g., letters of credit, wire transfers, checks, open accounts, etc.) for imported merchandise. Explain whether the payment is made in U.S. dollars or in a foreign currency, frequency of payments made to foreign sellers, and the identity of general ledger accounts used to record the payments.
25.If applicable, explain circumstances and responsibilities for obtaining and paying for quota, visa, and licenses. Identify general ledger accounts used to record the payments.