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Similar to how taxable income is a primary element to determining income tax, the customs value is used to calculate duty liability. To determine an accurate customs value, companies must factor in certain dutiable additions and non-dutiable deductions. In today’s high-tariff environment, maximizing every deduction is critical and many importers are leaving money on the table.

For U.S. importers using transaction value, which is “the price actually paid or payable for the merchandise when sold for exportation to the United States,” the focus is often on validating that the enumerated additions to the price are properly declared to U.S. Customs & Border Protection (CPB). While this is a necessary step for maintaining compliance, trade teams should also consider whether they may appropriately deduct or exclude certain charges.

Historically, these savings opportunities have not been fully explored because the resources required to sustain some of these programs exceeded the savings. However, with the Section 301 tariffs in place for China-origin products, many companies are paying significantly more in duties. Removing these non-dutiable costs can provide substantial savings–making it worth taking a second look at them for many importers.

Eight Overlooked Non-Dutiable Charges

For importers using transaction value, the following savings opportunities should be considered. While some of these programs provide ongoing savings and some are only used in specific circumstances, they all may play a role in reducing the tariff spend.

1. Freight and Insurance

Foreign inland freight, international freight and insurance costs may be deducted from the transaction value if you meet certain requirements. More specifically, with accurate incoterms and supporting costs and documentation, this can provide long-term cost savings. Importantly, importers must verify that they are deducting the actual, not estimated costs, and that the supporting documentation is adequate. While the requirements around deducting these costs may be daunting, the advances in technology make freight deductions more approachable than ever.

Further, insurance costs may be deducted from the entered value when they are separately itemized and the actual costs (not estimated) are claimed. It is important to verify with sellers that they are providing actual costs because CBP will reject deductions based on estimates, even in cases where the importer paid more than it claimed on the entry.

2. Supply Chain (“Origin”) Costs

International transportation costs typically include certain other fees, often referred to as “origin costs.” In many cases, CBP considers these origin costs to be “incident to the international shipment of merchandise” and, therefore, possibly excluded from the customs value. Examples of these charges include security charges, documentation fees, and logistics fees.

On a per-shipment basis, these miscellaneous fees may appear insignificant. However, on an annual basis, they can result in a significant expense for the company by driving up duty payments. As a general rule, the importer must deduct the actual costs, validate that commercial documentation meets all requirements and understand where services are being provided. However, once these steps have been taken, it is likely that little additional work will be required to realize ongoing savings.

3. Warehousing Costs

CBP has found that warehousing costs paid by the buyer to third parties are not included in the price actually paid or payable of the imported merchandise. However, CBP has distinguished this scenario from instances where the seller, or a party related to the seller, provided this same service and the warehousing costs are included in the price actually paid or payable. In that case, those payments were found to be dutiable and may not be deducted.

For importers interested in using this opportunity, a careful review of payments and terms of sale should be conducted to validate that the transaction meets all of CBP’s criteria prior to taking this deduction.

4. Inspection or Testing Fees

Often before shipment, an importer will arrange for products to be inspected or tested to validate it satisfies a buyer’s quality standards. Under certain conditions, these fees may be excluded from the dutiable value in instances when they are made to third parties unrelated to the seller of the goods.

It’s also important to understand that testing that is “essential to the production of that merchandise” is dutiable. In such cases, CBP would consider payments to unrelated third parties for these services as assists that are part of the transaction value. For importers who rely on the seller to perform inspection or testing services, an analysis should be conducted to assess the ROI for engaging a third party to perform these services.

5. Latent Defect Allowances

In certain circumstances, importers may be able to reduce dutiable value post-importation based on repair costs attributable to manufacturing or design defects. For importers with high-value products, such as those in the automotive industry, repair costs can be substantial and this allowance in value provides an opportunity to manage those costs by reclaiming duty.

With proper planning, a program can be implemented to help ensure the importer does not overpay duty on goods that were defective at the time of import. While there are a number of requirements that must be satisfied to receive a duty refund, high-value importers should explore whether this may be an opportunity for them.

6. Instruments of International Traffic – Reclassification of Packaging

In certain cases, pallets, cartons, hangers and other packaging material may be considered instruments of international traffic (IIT), exempting them from duty. To qualify as an IIT, CBP has determined that the article must meet criteria, including that it is “substantial, suitable for and capable of repeated use, and used in significant numbers in international traffic.” Further, the article must be used in commercial shipping or transportation more than twice to qualify as an IIT.

For importers whose supply chains include the reuse of certain containers or other materials used to transport international goods, it may be valuable to assess whether these goods qualify as IIT and are, therefore, duty-free.

7. Post Importation Price Adjustments

When companies make post-importation price adjustments they may be entitled to a duty-refund on the amount adjusted. This typically occurs when downward transfer pricing (“TP”) adjustments are made between related parties, causing a reduction in the products’ customs value.

For companies that routinely make retroactive transfer pricing adjustments, having in place the documentation to support a refund can have a powerful impact on duty spend.

8. Taxes and Other Fees

Companies may be entitled to deduct Value Added Tax (“VAT”) or Goods and Services Taxes (“GST”) from the declared value of the imports when these payments are refunded. Not only should importers maximize their refunds where possible, but in doing so they open another opportunity for savings. When VAT is remitted by the U.S. importer to the foreign seller, separately identified and refunded to the importer, then the refunded amount is not included in transaction value.

Importers should team with their tax departments and foreign suppliers to understand if VAT refunds are obtained and create documentation that reflects separate itemization of the refunded VAT.

The Big Picture

Potential cost savings through the reduction of non-dutiable charges from the dutiable cost basis of imported goods are often overlooked. However, in this high-tariff environment, these programs can help companies easily achieve cost savings.

Additionally, with advancements in technology, managing these programs is more straightforward than it used to be.

Of course, like with any duty-savings program, strong controls must be implemented to preserve compliance. However, as it is likely that steep tariffs will be in place for some time, companies should evaluate which of these programs can help reduce costs, potentially improve the return on investment and then develop an implementation roadmap.

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Andrew Siciliano is a Partner and U.S. Trade & Customs Leader at KPMG LLP. and Elizabeth Shingler is a manager at KPMG’s Trade & Customs Practice.

Exporters and sellers in every industry are feeling the effects of COVID-19, and they will look to their trade credit insurance to cover amounts that their buyers no longer can pay. It has been only ten weeks since the first US resident was reported to be infected with novel coronavirus COVID-19, and the virus has wreaked havoc on businesses in nearly every sector since then.

Trade credit insurance (sometimes called accounts receivable insurance) protects sellers against a buyer’s non-payment of debt, up to a certain percentage – typically 80 to 90 percent of the bill. Most trade credit insurance policies include a “waiting period” after a bill is due before a policyholder can make a claim, and 180 days is typical. It is expected that the first wave of COVID-19 trade credit claims will arrive by early summer and continue throughout the year. The anticipated surge in trade credit claims will likely be met with forceful efforts by insurance companies to get out of paying claims.

PUTTING TRADE CREDIT CLAIMS IN CONTEXT

Economists predict that the country’s GDP will shrink by 34% in the second quarter of 2020. One of the largest trade credit insurance companies estimates that in a typical market, 1 in 10 invoices go unpaid. Even less than a year ago, an industry association counting the world’s largest trade credit insurance companies among its members (ICISA) reported an 8% increase in amounts covered by insurance, coupled with a 1.5% increase in claims paid. In other words, more accounts were being insured, leading to more claims for insurance companies to pay. This increase in paid claims, ICISA noted, occurred “despite favorable economic conditions.”

Economic conditions have certainly taken an unfavorable turn since then.

With a worldwide pandemic that has brought the global economy to a nearly grinding halt, sellers in every industry will be unable to pay bills as they come due. Trade credit policyholders will be making more claims – and they will be making those claims to insurance companies whose investment accounts are suddenly worth much less than they were three months ago.

Insurance companies selling property and liability insurance have already staked out their positions on why policies supposedly will not cover COVID-19 losses. There is good reason to believe their trade credit counterparts will respond similarly.

BE PREPARED FOR INSURANCE COMPANY CHALLENGES TO YOUR CLAIM

Trade credit policies generally promise to indemnify a buyer for a specified percentage of unpaid amounts that become due and payable during the policy period. Trade credit insurance is intended to protect a seller from non-payment caused by many things, including a buyer’s default, insolvency, or inability to pay because of catastrophe or acts of God. Policyholders will have strong arguments that buyers who default on payments because of COVID-19 impacts are amounts that the trade credit policy promises to pay.

But policyholders should be wary of insurance company efforts to break those promises. The following are some expected challenges based on concepts addressed in many trade credit insurance policies.

Non-disclosure

Trade credit insurers often raise the defense of “non-disclosure” to avoid paying claims. The argument goes that if the insurance company had known about some fact or another, it would not have sold you the policy it did. In some jurisdictions, insurance companies can void policies altogether if they successfully prove that a representation or omission in the application process was “material,” meaning it caused the insurance company to take a position it would not have taken otherwise.

In the COVID-19 context, policyholders should expect challenges to what they knew about the creditworthiness of the buyer at the time of contracting. Insurance companies may blame a buyer’s failure to pay on facts about the buyer that are unrelated to coronavirus, arguing that the policyholder failed to disclose things about the buyer that would have changed the insurance picture. Some insurance companies analyze and investigate a buyer’s creditworthiness before underwriting the risk. In those cases, an insurance company will have a harder time using non-disclosure to avoid its obligations.

But in response to any non-disclosure challenges, policyholders will want to look to the insurance company’s prior conduct in similar circumstances. Had they insured contracts involving the same seller before? Has the newly “material” information been asked of the seller before? While it is fact-intensive and likely time-consuming to establish, an insurance company’s previous conduct or silence can go a long way toward discrediting a non-disclosure argument.

Prior Knowledge

Depending on the specific policy period and payment dates, trade credit insurance companies may attempt to raise a “prior knowledge” defense to get out of paying a trade credit claim. Insurance covers risks that are unforeseen at the time the contract is made. Insurance companies will likely seize on the evolving nature of the coronavirus pandemic to argue that sellers had “prior knowledge of facts or conditions” that would alert them to a buyer’s nonpayment.

Any response to the argument that a seller was aware that COVID-19 would impact the buyer’s ability to pay will need to take into account the dates of key pandemic events, both global and local. The dates of COVID-19 actions in the buyer’s home state or country will also likely be at play. As with a response to a “non-disclosure” defense, combatting a “prior knowledge” defense is highly fact-specific.

Policyholders may find that the “reasonable expectations” doctrine of insurance interpretation aids them in this scenario. In many jurisdictions, insurance policies must be interpreted to give effect to the reasonable expectations of the average policyholder. It is fair to say that most policyholders reasonably expect their insurance policies to respond to the losses following the sudden and unprecedented spread of COVID-19, whose impact was not appreciated at the time the policy was entered.

Challenges to the Underlying Sales Contract

While the defenses of non-disclosure and prior knowledge rely largely on what was said, done, or known during the application and underwriting process, policyholders should also anticipate challenges to the insured sales contract.

Trade credit insurance policies contain several provisions that limit insurance company obligations if the underlying sales contract is not compliant with the insurance policy. Successful challenges to the validity of the contract – such as that it was never properly executed or that the transaction at issue was not covered by the insured contract – may jeopardize coverage. Some policies specifically exclude coverage if there is any “express or implied agreement . . . to excuse nonpayment.”

To avoid or rebut a challenge about the sales contract itself, trade credit policyholders should take special care to follow and apply the payment terms and credit control provisions in the contract. While there is no policy exclusion for being a conscientious seller, be prudent in your communications with buyers about your payment expectations.

Like so much about the legal impact of COVID-19, coverage for trade credit insurance claims stemming from COVID-19 losses will be fact-specific and potentially hard-fought. Trade credit policyholders should give prompt notice of their claim, document their losses, and prepare to respond to any insurance company challenges with the assistance of their broker or trusted insurance expert.

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Vivian Costandy Michael is an attorney in the New York office of Anderson Kil P.C. and a member of the firm’s Insurance Recovery Group. Through jury trials, summary judgment, mediation, and settlements, Vivian has helped to recover millions of dollars in insurance assets under liability and property insurance policies sold to corporate policyholders

Eliminating Non-Dutiable Charges from Customs Value

PUTTING TRADE CREDIT CLAIMS IN CONTEXT

BE PREPARED FOR INSURANCE COMPANY CHALLENGES TO YOUR CLAIM

Non-disclosure

Prior Knowledge

Challenges to the Underlying Sales Contract

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