Merging Accounts in ACE

Dear Friends,

We recently discovered a strange feature of U.S. Customs and Border Protection’s (CBP’s) automated commercial environment (ACE) that we wanted to flag for you.   

As you know, ACE provides importers with easy-access to a wide range of reports that provide extensive visibility into the company’s import activity.  ACE also provides specific functionality that allows the merging of top-level ACE accounts, which might be appropriate in the wake of a merger or acquisition.  (ACE guidance on the topic of merging accounts from 2012 can be found here:  Merging Ace Accounts.)  What we found strange is that what CBP describes as a “merging” of accounts, is really more like the “deleting” of an old account and the creation of a new sub-account that is unrelated to the old account (the old data is no longer accessible).

To illustrate, suppose Company A acquires Company B, and Company B will become a division of Company A, losing its old EIN, and continuing operations using a new suffix under Company A’s EIN.  Given that Company B’s import activity is being merged into the new consolidated entity, it might seem reasonable to “merge” Company B’s ACE account into Company A’s existing ACE account.  What’s odd is that merging accounts in ACE will cause the historical data from the subsumed entity to be eliminated.  Historical import data for Company B will no longer be accessible.  CBP plainly acknowledges this fact in the attached guidance, and recommends running ACE reports to capture the acquired entity’s import activity, prior to merging accounts.

This seems odd, to say the least (Company A should be able to continue to access Company B’s historical data in such a situation – it most likely assumed the liability for it).  We asked CBP’s ACE Business Office if they could explain why the system is designed in this way.  We were told that (1) CBP aims to “prevent unauthorized access by one (new) IOR of another no longer existing (old) IOR”, and (2) CBP aims to “prevent unauthorized access [by the old ACE account users] to the data they no longer own.”  While there certainly is an interest in maintaining the security of data in ACE accounts, it is difficult to discern the rationale for deleting historical import data for which the acquiring entity will, in most circumstances, bear liability on a going forward basis. 

If faced with the fact pattern described above, it may be better for Company A to allow the Company B ACE account to remain intact.  Post-acquisition, user accounts within Company B’s ACE account could be cancelled (as needed) and the Trade Account Owner might be swapped out (e.g., if the former TAO of Company B is not staying on is part of the new consolidated Company A).  That way, Company A would preserve access to the historical data of Company B it acquired—and now likely bears liability for—when it purchased Company B.  This advice may become especially important if CBP eventually eliminates the ability of companies to request historical ITRAC data, as has been rumored with the ACE transition.

So, in short, be wary of “merging” ACE accounts because, as things currently stand, you may lose access to the historical data of the entity being merged.

We hope you find this useful.  If you have any questions, please let us know.

Best regards,
Ted

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Customs Conference Update

Dear Friends,

Yesterday, I had the privilege of speaking at ACI’s Advanced Forum on Customs & Trade Enforcement here in Washington, DC.  I spoke on a panel with an attorney from US Customs and Border Protection (CBP) Headquarters about the interplay between transfer pricing and customs valuation.  I have attached the slides from our presentation here for your reference.

I also wanted to pass along a tidbit I picked up from one of the other panels that addressed CBP audits.  As we have advised previously, CBP is conducting more audits, but fewer of those audits are traditional Focused Assessments (FA’s).  Instead, with the transition of enforcement responsibilities to the Centers of Excellence and Expertise (CEE’s), CBP is conducting many more “targeted” or “single-issue” audits (e.g., quick response audits, survey audits, etc.).  These focused audits are aimed at issues of perceived non-compliance, rather than at the internal controls the company has in place over one or more areas (like a traditional FA).  Also, the CBP speaker on the audit panel made it clear that, while the primary benefit of the Importer Self-Assessment program (ISA) is being removed from the CBP audit pool, that means being removed from the FA audit pool only.  Stated differently, ISA member can be (and frequently are) the subject of the targeted audits being directed by the CEE’s and conducted by Regulatory Audit.  If CBP is conducting fewer FA’s, and more targeted audits, this calls into question whether ISA members are really getting much benefit from the ISA program.

We hope this is helpful.  If you have any questions about either intercompany customs valuation or the audit issues discussed above, please let us know. 

Best regards,
Ted

 

Interesting Customs Enforcement Action

Dear Friends,

I recently came across a story about customs enforcement in Singapore that I thought you might find to be of interest.

The case involves a marketing manager in Singapore who was sentenced by a Singapore court to a fine of SGD$92,000 (roughly, $68,000) for counterfeiting U.S.-Singapore Free Trade Agreement Certificates of Origin provided to a U.S. customer, and for making false statements to the Singapore government when applying for the certificates.  It appears that the marketing manager was engaged in a scheme to help defraud the U.S. government of antidumping duties (i.e., passing Chinese-origin uncovered innerspring units as being of Singapore origin) and, in the process, making false statements to Singapore Customs.  A copy of the Singapore Customs press release is available here.

There are several interesting things about this case.  First, the prosecution was based on information supplied to Singapore Customs by U.S. Customs and Border Protection (CBP).  It appears that CBP may have uncovered the fraud on the U.S. side and then provided information about the exporter to the Singapore authorities.  Second, it appears that CBP may have uncovered the fraud when the U.S. importer/customer underwent a CBP audit.  See Headquarters Ruling #h270834 (March 2, 2017).

We hope you find this interesting/helpful.  If you have any questions, please let us know.

Best regards,

Ted

 

Post-Entry Preference Program Claims II

Dear Friends,

We wrote to you back in November about a development which was expected to expand the number of preferential duty claims that could be asserted for the first time via protest. 

U.S. Customs and Border Protection (CBP) has now issued updated guidance specifying that all preferential trade agreements for which post-importation refund claims were previously limited to post-entry amendments (PEAs) or post-summary correction (PSCs) may now also be raised for the first time via protest.  This includes preferential claims under GSP, AGOA, the Australia, Bahrain, Israel, Jordon, Morocco and Singapore FTAs, and the Pharmaceutical Products Agreement, among others.

As noted below, this is a significant development since it expands the period in which post-entry refund claims may be made under certain preference programs.  It also breathes new life into protests filed for such claims that were previously rejected as “non-protestable”.  We have been helping clients secure refunds from CBP on such protests and would be happy to discuss this with you further, if relevant.

We hope this is helpful.  If you have any questions about this issue, please let us know.

Best regards,
Ted

 

GAO Report on C-TPAT

Dear Friends,

The U.S. Government Accountability Office (GAO) recently released a report on the U.S. Customs and Border Protection (CBP) Customs-Trade Partnership Against Terrorism (C-TPAT) program that we thought you might find to be of interest.  In conducting this review, the GAO sought to assess the extent to which (1) CBP is meeting its security validation responsibilities, and (2) C-TPAT members are receiving the benefits promised by CBP for participation. 

While the full report is worth a quick read (available here), the GAO concluded that problems with the data management system (i.e., the Portal) have led to problems with C-TPAT validations (e.g., incorrect tier levels being reflected in the system, incorrect dates for profile updates/reviews, lack of standardized guidance from CBP HQ, etc.) and that CBP cannot determine the extent to which C-TPAT members are actually receiving benefits because of these data problems.  On this latter point, GAO stated:

Since 2012, CBP has compiled data on certain events or actions it has taken regarding arriving shipments—such as examinations, holds, and processing times—for both C-TPAT and non-C-TPAT members through its C-TPAT Dashboard.20 However, based on GAO’s preliminary analyses of data contained in the Dashboard, and data accuracy and reliability concerns cited by C-TPAT program officials, we concluded that CBP staff are not able to determine the extent to which C-TPAT members are receiving benefits, such as reduced likelihood of examinations of their shipments and expedited shipment processing, compared to non-members.

We conducted preliminary analyses of C-TPAT program data from the Dashboard to understand, for example, how the examination rates of C-TPAT members’ shipments compared with those of non-C-TPAT members across different modes of transportation (air, truck, vessel, and rail) for each year from fiscal year 2011 through fiscal year 2015. The results of our analyses showed that C-TPAT members’ shipments did not consistently experience lower examination and hold rates and processing times compared to non-members’ shipments across the different modes of transportation.

Report at 18. 

While the findings of this report many not come as much of a surprise to the companies that participate in the program, it is good to see the government auditing the program and trying to make it better. 

If you have any questions about the report, or C-TPAT more generally, please let us know.

Best regards,
Ted

 

Dutiability of Royalties

Dear Friends,

U.S. Customs and Border Protection (CBP) recently published a customs valuation ruling that we thought you might find to be of interest.  The ruling, HQ H233376 (Sept. 19, 2016) involves the dutiability of royalties paid to a licensor unrelated to the importer or the manufacturer of the imported merchandise.  The issue in the ruling was whether the payment of royalties to a third party licensor unrelated to the manufacturer were considered to be a “condition of the sale” of the imported merchandise.

This ruling is worth a quick read, but we have summarized the key facts for your reference below.

The importer entered into an agreement with an unrelated U.S. patent holder to license certain utility patents.  The license covered, among other things, the right to “make, have made, use, sell, offer for sale and import” licensed devices.  The technology covered by the patents was developed in the United States.

The importer also entered into a manufacturing agreement with an unrelated Malaysian manufacturer to have the imported merchandise made.  The agreement authorizes the manufacturer to use the technology disclosed to it by the company to make the imported merchandise.  The importer declared upon importation the price it paid to the manufacturer for the goods.

The importer pays the U.S. patent holder a royalty based on the resale price of the imported merchandise in the United States.

Based on these facts, CBP concluded that (i) the royalty was related to the imported merchandise, and (ii) the importer was required to pay it directly to the licensor.  As a result, the only remaining issue was whether the royalty payments were a “condition of the sale” of the imported merchandise.  This is was particularly important here since the royalties were paid to a licensor who was unrelated to the manufacturer of the imported merchandise (i.e., is a royalty payment to an unrelated third party licensor a condition of the sale of merchandise between two other parties?). 

CBP ultimately adopted what it referred to as a “practical, common sense” approach to this issue and concluded that the royalties were part of the dutiable value of the imported merchandise.  CBP found it relevant that the royalties were for patents, as opposed to trademarks, and that the licensed technology was necessary to produce the imported merchandise. 

The ruling highlights several important points all importers should keep in mind, namely:

(1) royalties paid for patents are more likely to be dutiable under U.S. law than are royalties paid for trademarks, regardless of to whom they are paid (i.e., to the seller or even to a party unrelated to the seller);

(2) the request for internal advice grew out of a Focused Assessment – which demonstrates how closely Regulatory Audit looks at such issues; and

(3) the ruling was issued more than 4 years after the request for internal advice was originally submitted to CBP HQ — which demonstrates how long it takes CBP HQ to issue customs valuation rulings, in particular.

In light of the foregoing, all importers should confirm internally whether any royalties or licenses fees are paid in relation to any imported merchandise.  If so, then the agreements should be reviewed to determine whether the royalties or license fees are dutiable additions to value.  This is not particularly difficult to do.  We regularly help importers with this issue and would be happy to discuss with you how best to do so, if helpful.  If such a discussion would be helpful, just let us know.

We hope this is helpful.

Best regards,

Ted

Post-Entry Preference Program Claims

Dear Friends,

There has been some recent developments in the world of post-entry preference program claims that we wanted to make sure you were aware of, as they could provide meaningful refund opportunities.  A recent decision by the U.S. Court of International Trade (CIT) raised serious concerns about the legality of U.S. Customs and Border Protection’s 2014 policy limiting the filing of post-importation claims for preferential tariff treatment under a number of programs, including GSP, AGOA, the US FTAs with Australia, Bahrain, Israel, Jordan, Morocco and Singapore, the Pharmaceutical Products Agreement, and others (“the 2014 Policy”).  It is now being reported that CBP may have abandoned the 2014 Policy altogether.

There are two key outcomes from this development.  First, post-entry claims under certain preferential duty programs may now be raised for the first time in a protest.  Second, for companies which have filed protests asserting such claims, there may be an opportunity to revive such protests and obtain the duty savings, regardless of how long ago such protests were filed.

Background

Preferential duty programs (such as free trade agreements, GSP and the like) can be grouped into two buckets when it comes to post-entry preference claims—the programs which explicitly authorize post-entry claims (e.g., NAFTA), and those which do not.  When it comes to asserting post-entry preference claims for the second bucket of programs, CBP has, since 2014, taken the view that such claims could only be made prior to liquidation.  In other words, for this second group of programs, a preferential duty claim could not be raised for the first time in a protest.  Once an entry was liquidated, the window for claiming a duty preference was closed.

In August, the CIT issued an opinion in a case captioned, Zojirushi America Corp. v. United States, which questioned the legality of CBP’s 2014 Policy.  The CIT said that the 2014 Policy was based on a misreading of two key Federal Circuit cases.  Both of those cases had addressed post-entry claims for NAFTA (which belongs to the first bucket of preferential duty programs), and according to the CIT, it was a mistake for CBP to try and apply the outcome of those cases to post-entry claims made under preferential duty programs falling in the second bucket. 

Zojirushi was dismissed by the CIT for lack of jurisdiction, because the Court found that the importer had not followed the appropriate course to get into court.  The importer claimed that it could not follow the traditional course for bringing a customs case at the CIT, because CBP would not deny its protests.  Instead, its protests had been “rejected as non-protestable”, leaving the protests in a state of limbo— having been neither allowed nor denied. 

The Court pointed out that there is a way to get your protest denied, even where CBP merely rejects them.  Namely, an importer can file a request for “accelerated disposition”.  Any such protest that is not granted within 30 days is deemed to be denied, thereby satisfying one of the prerequisites for getting into court.  Interestingly, there is no limit on the time for requesting accelerated disposition on a protest that has not been denied.  In other words, any protest that (1) has not been approved or denied, or (2) has been rejected as non-protestable, can be “revived” by filing a request for accelerated disposition.  At the very least, the request for accelerated disposition will trigger a deemed denial, which will in turn start the 180-day clock for filing a summons with the CIT.

Just this week, it has been reported that Zojirushi took the Court’s advice.  It went back to CBP and requested accelerated disposition for all of its rejected protests.  CBP could have denied the protests, or just waited 30 days until they were deemed denied, giving Zojirushi a path back to court.  Instead, we understand that CBP has relented with respect to its 2014 Policy, and has decided to allow these protests, rather than denying them.  While this change in policy by CBP has not been formally announced, we believe that a similar outcome is likely available to any importer with similar facts.

What To Do Now

(1)  Make a note of this change in the law.  If you need to make a post-entry preference claim under a preferential program in the second bucket (i.e., a program which does not include an explicit post-entry refund provision), you may now seek to do so by filing a protest, which extends the period available to file the claim.

(2)  Review your records to identify any protests that your company may have filed that were “rejected as non-protestable”, particularly protests that were rejected for the reasons set out in CBP’s 2014 Policy. 

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We hope this is helpful.  If you have any questions on this potential refund opportunity, please let us know.

Best regards,
Ted