On February 11, 2016, the US Congress passed HR 644, the Trade Facilitation and Trade Enforcement Act of 2015 (the Act). The Act includes a broad slate of customs and trade-related reforms. Of particular note are drawback simplification and expansion provisions that will provide significant new financial benefits to US importers and exporters. The bill will next be sent to the President, who is expected to sign the bill in the next two weeks.

Drawback is a mechanism to recover duty, taxes or fees paid with respect to imported merchandise when the imported merchandise, a product manufactured with the imported merchandise, or substituted "like-kind'' merchandise is subsequently exported. Benefits and rules vary based on the kind of drawback. Highlights of the new rules follow:

1) Substitution based on Harmonized Tariff Schedule of United States (HTSUS) or Department of Commerce Schedule B Statistical Classification (Schedule B) – Under current law, manufacturing drawback under 19 USC Section 1313(b) and unused merchandise drawback under Section 1313(j)(2) allow claims to be filed on amounts paid upon importation of merchandise when substituted merchandise "of the same kind or quality" is used in a manufacturing process, exported or destroyed. This "same kind or quality" analysis focuses on whether the imported merchandise and the merchandise used in the manufacturing process, exported or destroyed are commercially interchangeable.

The Act simplifies this analysis by allowing substitution between articles having the same eight-digit HTSUS classification. This form of substitution is similar to that already in effect for petroleum product drawback under 19 USC Section 1313(p). Experience with Section 1313(p) drawback has shown that HTSUS-based substitution not only simplifies the drawback claim process, but also allows for expanded substitution opportunities beyond the limitations that result from the need for products to be commercially interchangeable.

The Act also allows for substitution under Section 1313(j)(2) where the first eight digits of an article's Schedule B number correspond to its HTSUS classification, regardless of whether the Schedule B number corresponds to more than one HTSUS eight-digit subheading. This is a novel form of drawback substitution, and has the potential to significantly increase substitution opportunities.

The Act does not limit HTSUS-based substitution only to certain tariff classifications, as has been the case under Section 1313(p) drawback. It does, however, contain certain limitations on the application of this HTSUS-based substitution for Section 1313(j)(2) drawback where the HTSUS product description begins with "other." While this may limit some claims, the move to HTSUS-based substitutions will likely bring a net gain of opportunities for prospective claimants while simplifying the claim process.

2) Expanded time frame – Under current drawback provisions, an imported or substituted product must be used in a manufacturing process, exported or destroyed within three years from the date of importation in order to support a manufacturing or unused merchandise drawback claim. The Act expands this window for all drawback claims to five years from the date of importation.

3) Taxes and fees included in manufacturing drawback claims – Under current drawback rules, many drawback claims, including those for manufacturing drawback, are limited to 99% of only the duties paid on the imported merchandise. Additional "taxes and fees" recoverable under Section 1313(j)(2) drawback were not available for manufacturing claims. The Act provides uniformity in authorizing drawback for 99% of duties, fees and taxes paid for all types of drawback.

4) Anti-abuse limitation on refunds - The Act includes a new provision which limits drawback to the lesser of the actual duties, fees and taxes paid on import, or the duties, fees and taxes which would have been paid if the exported article were imported. As a result, importers that import a high value item and export a low value item with the same HTSUS classification generally will have drawback claims limited based on the lower value.

5) Relaxation of transfer documentation requirements – Drawback rules currently in effect require a certificate of delivery to be provided when an importer transfers merchandise to a manufacturer or claimant who ultimately relied on the merchandise in submitting a drawback claim. Claimants were required to submit these certificates as part of their claims.

The Act removes this certificate requirement, stating that business records kept in the normal course of business will be sufficient evidence of a transfer.

The provisions of the Act will become effective upon its enactment with a notable caveat - claimants will not be able to file claims under the new provisions until two years after enactment. This delay is to allow for the development of the ability to file drawback claims within the Automated Commercial Environment (ACE). However, when this delay period passes and claimants can begin filing drawback claims in ACE, claimants will be able to take advantage of the expanded time frame described above and file drawback claims on imports that occurred up to five years before the date upon which claims may be filed. For example, if the enactment date is February 20, 2016, claims cannot be filed until February 20, 2018, but can include imports dating to February 20, 2013.

Implications

Companies that will benefit under the new rules include:

— Manufacturers of similar products under different brands in the US and foreign locations. Under previous law the different brands were likely not viewed as commercially interchangeable, while under the new rules the "like kind" determination is made under objective, HTSUS standards. To the extent one branded product is imported and another exported under the same HTSUS, these products will be substitutable for drawback.

— Importers and exporters of products subject to excise tax.

— Commodities traders with international operations.

While the Act promises opportunities for expanded claims and simplified operations, it will be important to structure the transactions, and create and retain suitable documentation, in order to maximize drawback benefits while preserving optimal operational, distributional and taxation structure. Accordingly, companies wishing to take advantage of the opportunities presented by the Act should take steps to understand the full scope of the changes – both statutory and practically – and how they impact each aspect of the drawback claim process and their business. As imports before the effective date will be eligible for drawback under the new rules, businesses which may benefit are well advised to address the structural and operational requirements immediately.

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