The USMCA and Its Impact on Drawback and Duty Deferral Programs

July 28, 2020

As the blush of the USMCA begins to fade, we turn our attention to some of its lesser discussed provisions that impact trade between the three countries.

One of these provisions is found in Chapter 2 of the Agreement, and it impacts goods that are subject to duty drawback and duty deferral programs, such as bonded or Free Trade Zones in the U.S., and Maquiladora or IMMEX programs in Mexico.  These are often referred to as “inward processing programs.”  Chapter 2 of the USMCA Agreement covers national treatment and market access.  Article 2.5 covers drawback and duty deferral programs.

What is Duty Drawback?

Duty drawback is a refund of all or almost all of the duties, fees and taxes paid on goods imported that are then subsequently exported.  When the goods are exported, you can file a claim for the refund of duties and or fees deposited on the item that was previously imported. 

There are several different categories of duty drawback, but the two most common categories are manufacturing and unused merchandise.  The differences between these two types of drawback are important under the USMCA.

Manufacturing duty drawback applies when you import an item that is used in the manufacturing of a different article. For example, if you import small electric motors and export a finished electric drill, you can recover the duty you paid for the motor when you export the finished drill.

Unused merchandise duty drawback, on the other hand, applies when you import something and then export it in the same but unused condition. So, if you import the electric drill and later export it without changing it, you can receive a refund for the duty you paid when you originally imported it.

There are a number of restrictions and time limitations for filing for drawback, so be sure to consult with your broker or other trade professional if you would like to know more about claiming drawback.

What are Duty Deferral Programs?

There are many different types of duty deferral programs available to importers in the United States, Canada and Mexico.  A “duty deferral program” is simply a program which postpones the payment of duty upon arrival of a good until it is later withdrawn or removed for entry or it is withdrawn and exported to another country, in which case no duty is paid. In the U.S. we have duty deferral programs for bonded warehouses, foreign trade zones, and temporary importations under bond.  These programs can be used to warehouse or store goods without depositing duty, to fully fledged manufacturing operations.

Mexico has similar programs, the most popular of which are known as “maquiladoras.” A maquiladora is a manufacturing operation or factory in Mexico, usually near the U.S.-Mexico border, that operates under a favorable duty- or tariff-free basis granted by the Mexican authorities. Similar to U.S. Foreign Trade Zones, parts, components and materials can be imported into Mexico and used in the plant to make products for exportation.  As long as the goods are exported from Mexico, Mexican import duties are not paid.

Modern-day maquiladoras can take the form of IMMEX programs. IMMEX stands for “Industrial Manufactuerera Maquiladora y de Servicios de Exportacion,” which roughly translates to the “Maquiladora, Manufacturing and Export Services Industry.”

Maquiladoras have been popular for U.S. companies because they can import U.S.-made parts and components into Mexico for use by the maquiladora without paying duty into Mexico, produce the product and import the finished product back to the U.S. without paying customs duties on the U.S. parts.

What is the Impact of the USMCA on Drawback and Duty Deferral Programs?

Like NAFTA, Article 2.5 of the USMCA restricts the amount of refund of drawbacks or the amount of duties deferred under the duty deferral programs to the lesser of the duties paid either at the time of admission into the first USMCA country or upon exportation and importation into the second USMCA country.

The “Lesser of” Rule Drawback

Under the USMCA, the amount of customs duties that will be refunded, reduced or waived is the lesser of the total amount of customs duties paid on the goods or materials when imported into the USMCA country and the total amount of customs duties paid on the finished good in the USMCA country to which it is exported.

For example, if I paid a total of $10 in duty upon the importation of parts for my electric hand drill, and I then export the hand drill to Canada, where it is entered duty free as a USMCA qualifying article, my drawback amount is $ 0 because that is the “lesser of” the duty paid.

It is important to understand that the “lesser of” rule on drawback does not apply to claims for same condition merchandise drawback. Drawback will still be granted for non-USMCA goods imported and duty paid and then subsequently exported to another USMCA country, provided it is exported in the “same condition” as when imported. Processes such as testing, cleaning, repacking, or inspecting a good, or preserving it in its same condition are not considered to change the condition of the good for the purpose of receiving drawback.

The “Lesser of” Rule Duty Deferral Programs (Inward Processing)

The USMCA continues the limitation on duty deferral programs that was initiated under the NAFTA when goods were the subject of a duty deferral program in a NAFTA country.

Under the limitation, the import of goods under the duty deferral programs that are subsequently exported to another USMCA country will be treated as if withdrawn for domestic consumption, and thus subject to the applicable customs duties for that country. The customs administration assessing such duties may then waive or reduce them by an amount that does not exceed the total custom duties paid to the USMCA country to which the goods are exported.

Such reduction or waiver will be made when the claimant presents satisfactory evidence of the customs duties paid in the USMCA country to which the article was exported. The claimant has 60 days to present this satisfactory evidence, otherwise the customs administration of the exporting country will collect the duties. Should a claimant subsequently obtain satisfactory evidence, the duties may be refunded to the extent allowed, upon timely presentation of the evidence according to the laws and regulations of each USMCA country.

There are a number of limitations on the applicability of Chapter 2.5 to drawback and duty deferral programs (for example, it does not apply to a good entered under bond for transportation and exportation to the territory of another Party), and regulations have not yet been published.  Be sure to consult your broker or other trade professional if you would like to know more about the impact of Chapter 2.5 on drawback and duty deferral programs.

If you have questions about these or other Customs matters, contact George R. Tuttle, III at geo@tuttlelaw.com or at 415-254-5986.

 

The information in this article is general in nature and is not intended to constitute legal advice or to create an attorney-client relationship with respect to any event or occurrence and may not be considered as such.

Copyright © 2020 by Tuttle Law Offices. 
All rights reserved. 

Information has been obtained from sources believed to be reliable.  However, because of the possibility of human or mechanical error by our offices or by others, we do not guarantee the accuracy, adequacy, or completeness of any information and are not responsible for any errors, omissions, or for the results obtained from the use of such information.

 

 

 

 

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