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Amid trade turmoil, manufacturers may be leaving money on the table

22 August, 2019

Chris Desmond
Value Chain Transformation, Global Trade Services Principal, PwC US
Mathew Mermigousis
Managing Director, Customs and International Trade, PwC US
Todd Benigni
Principal, Operations Consulting, PwC US

Trade is a top concern for global business executives this year, according to PwC’s 22nd Annual CEO Survey. Trade conflicts and protectionism were both among the top 10 threats to growth cited by respondents, and given the seemingly endless parade of headlines about tariffs and currency manipulation, it’s easy to see why. With Washington and Beijing locked in conflict, perhaps U.S. businesses can be forgiven if they feel at the mercy of forces beyond their control.

But there is one underappreciated tool that companies can leverage to help manage their exposure to tariffs. They could be eligible to recover significant amounts of money they paid to the U.S. government in the form of customs duties, taxes and fees under a mechanism called duty drawback. Nearly as old as the United States itself, it offers the opportunity to secure a refund of 99% of the duties, taxes and fees paid on goods imported into the U.S. that are subsequently exported to a third country, or destroyed. Recent changes to U.S. trade law make it an even more attractive tool.

Companies hit hard by Section 301 tariffs on Chinese goods are among those with the most to gain. But middle-market companies without strong in-house customs capabilities and non-U.S. companies with significant U.S. income also stand to be major beneficiaries. Even very large, domestic firms may not be getting all they’re entitled to.

While companies with significant tariff exposure may benefit the most, the reality is that many others stand to reap significant benefits but are unaware that they’re eligible to take advantage of the program. That’s largely due to three pervasive myths about who can benefit.

  • Myth #1: Companies that export U.S. origin goods stand to gain little from duty drawback. The reality is that current law allows companies to export duty-free and/or domestically produced parts or materials, and file duty drawback on duty paid imports with similar Harmonized Tariff Schedule of the United States (HTSUS) classification.
  • Myth #2: Only companies with imports subject to customs duties are eligible for duty drawback. This isn’t the case, as some companies with large volumes of imports and exports but no historical tariff exposure have obtained significant refunds of other eligible costs paid upon importation of products into the United States.
  • Myth #3: Only companies that import and export can take advantage of duty drawback. Some companies that purchase imported products from U.S. companies for export or manufacture may still be eligible to recover tariffs, taxes and fees that were passed along to them from their U.S. suppliers upon export or destruction.

Now is an especially important time for companies to examine whether they have the opportunity to take advantage of duty drawback because of some recent federal policy changes. U.S. Customs and Border Protection finalized regulations at the end of last year that streamlined some of the rules around duty drawback, as required under the Trade Facilitation and Trade Enforcement Act of 2015. These include setting a five-year window from date of import in which claims can be filed, and simplifying rules around substitution. This will make it easier for companies to take advantage of duty drawback — not just today, but in the future as well by clearing the way for more efficient planning.

We have seen companies of all sizes take advantage of duty drawbacks, from a sub-$1 billion industrial component manufacturer that recovered $4 million to a global Fortune 100 automaker who received $70 million. With little reason to believe that trade tensions will cool down anytime soon, it behooves every company with imports into and/or exports from the U.S. to closely examine the duty drawback opportunity.