U.S. Customs Reconciliation

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Email jmcnamara_at_maquilogistics.com
MAQUILOGISTICS
Jim McNamara
Principle / U.S. Customs Broker
6620 S. 33rd St. Bldg. J McAllen, TX 78503
Phone [phone] Fax [phone] Cell
956-227-3928
594 S. Vermillion Brownsville, TX 78521
Phone [phone] Fax [phone]
Home 956-618-5155
514 Nafta Blvd. Laredo, TX 78045 Phone
956-753-389 Fax [phone]
420A Pan American Dr. El Paso, TX 79907
Phone [phone] Fax [phone]
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Historical Perspective on Reconciliation

• Began early 1970s U.S. Customs Import
  Specialist /Brownsville.
• Originally U.S. Customs Quarterly Cost
  Submission (Custom . Form CF247).
• Later changed to 6 months and then yearly Cost
  Submissions.
• Almost universally maquilas did a Cost
  Submission
• Yearly Cost Submissions due by 3 months after
  close of year . but extensions were often
  granted (month by month often for . several
  months no specific limit)

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Historical Perspective on Reconciliation

• Cost Submission necessary because Maquilas used
  estimated . values to pay U.S. Customs
  duties when importing finished .
  products into U.S.
• Cost Submission compared estimated values with
  actual costs . and calculated difference in
  duty or based on variances.
• Used concept of block appraisement whereby
  duties were . refunded or paid on
  minimum number of entries possible.
• First 10 or 11 months of entries were liquidated
  as no change . and all charges concentrated
  on last 1 or 2 months entries.
• Liquidation is an important legal process
  whereby Customs makes . a determination as to
  whether to accept import entry information.

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Historical Perspective on Reconciliation

• Process was totally manual hard copy CF247
  submitted to U.S. . Customs with no receipt or
  acknowledgement.
• Cost Submission information regarding changes to
  entries not . interfaced with other systems
  that potentially charged duty . amounts
  on entry (for example drawback).
• Double dipping, or receiving refunds two times
  on given entries . possible.
• If U.S. Customs import specialist changed or
  import manager with . Maquilas changed often
  files were misplaced by either or both .
  parties.

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Historical Perspective on Reconciliation

• Customs and importer sometimes didnt know if
  an annual . submission had been filed
  or how or even if refunds on .
  additional payments had been done.
• Refunding money often took a long period of
  time and was . sometimes difficult to
  track.
• Sometimes if variation was large on a refund
  not enough . entries were left to
  refund total amount due on entries.
• Despite its potential flaws the cost
  submission process . usually
  worked very well for over 20 years.

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Historical Perspective on Reconciliation

• However, U.S. General Accounting Office (GAO)
  issued a very . negative audit on U.S.
  Customs stating that Cost Submission .
  process lacked proper controls and
  accountability.
• U.S. Customs Headquarters instructed field
  offices in early 1990s . to cease and desist
  using the Cost Submission process. .
  However, with no other viable options field
  offices continued to . accept Cost
  submissions.
• When NAFTA began 1/1/94 most Maquilas (after
  years of paying . duties) found their products
  to be free of duties.

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Historical Perspective on Reconciliation

• Import Specialists with U.S. Customs in 1994
  issued letters to . Maquiladoras in Reynosa
  and Matamoros waiving the require- . ment
  for a Cost submission if goods were duty free
  under . NAFTA.
• From 1994 to 1998 almost no maquilas did a
  Cost submission.

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Historical Perspective on Reconciliation
Recap of problems with Cost Submission process
1) With no specific written procedures for
handling and limiting . extensions,
the yearly submissions were sometimes submitted .
7 or 8 months after the year close. 2)
Block Appraisement was not provided for under
U.S. . . . Customs law. If Customs
gave refunds these refunds ... . . . . . .
should only be calculated on an entry by
entry basis, not on . . on only the
last 1 or 2 months entries. 3) Process was
manual, did not interface with other processes .
. . that affected duties. Double refunding
possible. 4) No trackability of receipts, no
automated history of filing, of . .
status, or of actions taken to resolve or .
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Reconciliation Prototype
   - In response to GAO audit, U.S. Customs
devised a better . . mousetrap for the cost
submission called Reconciliation. -
Voluntary program available to those importers
who use . . estimated information at time
of entry or in instances in . . . . which certain
information required to make proper entry of . .
goods, is unknown at time of entry.      - Many
different reasons why entries need to be
reconciled . Value, 9802, NAFTA, Court
pending classification issues) . . The concept
of Reconciliation was expanded to cover . . . .
. various type of situations and not just cost
submissions. -                    
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Reconciliation Prototype
- Entries flagged for reconciliation are
liquidated (legally . . finalized . by
Customs) in two separate transactions .
(non-reconcilable issues . and reconcilable
issues).  -  Two step process o flag individual
entries.
o un-flag via separate
reconciliation entry, which may cover multiple
flagged entries (must be filed within 12 months
for NAFTA or within 21 months for all other
issues).                  -                    
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Reconciliation Prototype
    - Flagging two options o Blanket
(never use this)
o entry-by-entry (only
viable approach) - Two types of
reconciliation entries Aggregate can use
this if no duty impact or you . . owe
money to U.S. Customs. Entry by entry use
this if you want a refund from . U.S.
Customs.  -                    
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Reconciliation Prototype

• If Reconciliation entry (other than for NAFTA)
  is filed late . . . penalties will be imposed,
  no extensions.
• Can file no-changereconciliation, or file part
  of year but . . . must always avoid going over
  12 months for NAFTA issues . . or 21 months for
  all other issues (value, 9802, classification).
• Can file a reconciliation entry to un-flag
  entries for any . . . . . time frame, even for
  individual flagged entries.
• Reason for 21 month limit
• - 12 month annual cost submission
  . - Plus 9
  months allowed to finalize and present cost . .
  . submission to U.S. Customs

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Reconciliation Prototype

• How did reconciliation solve problems with
  old Cost . Submission process (see pg.
  7)
• 1) Handled problem of unlimited
  extensions by putting in . Penalties
  if more than 21 months from 1st flagged entry .
  until reconciling entry filed.
• 2) Handled problem of block appraisement by
  only . Allowing refunds if an
  entry-by-entry analysis of .
  refunds owing was shown on reconciling entry
  (entry . by entry reconciliation).

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Reconciliation Prototype
3) Handled problem of manual process by
automating with . . an electronically
submitted reconciliation entry which .
was fully integrated into Customs databases.
4) Handled problem on trackability by issuing a
new entry . . for follow up
reconciliation entry. History of all
. . adjustments to flagged entries
is shown in reconciliation . entry and
one check done or one refund check received .
(and any refunds received in much more
timely fashions . within 30 days).
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Reconciliation Prototype

• However, to insure that liquidation process was
  not delayed (since under block appraisement
  Customs could immediately liquidate the first 10
  months) an entry flagged for reconciliation is
  liquidated under a two step process
• liquidation for all factors except flagged
  issues.
• liquidation for flagged issues
• Note This is the reason a participant under
  reconciliation . must add a rider to
  their Customs import bond. The two . step
  liquidation creates another level of liability
  for the . bonding company (surety)

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Reconciliation Prototype
Bottom line on reconciliation - A voluntary
program, but U.S. Customs has said it is not
. voluntary for those on computed value to
eventually . report actual costs to
U.S. Customs. - Estimated that less than 30
of maquiladoras are .
participating in the program. - Maquilas
should always update their cost information
. Declared to Customs at least annually
based on historical . data and projected
changes in operations in the future.
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U.S. Customs Valuation
- U.S. Customs valuation governed by Trade
Agreement Act . (TAA of 1979) which was an
agreement under GATT . (now WTO) to
formulate a worldwide valuation system. -
TAA differed from prior valuation system and
fairer in . that it valued goods based
on what you paid (the .
transaction value) rather than prevailing
market prices. - Almost all importations
were envisioned to be valued . based
on transaction value, the preferred basis.
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U.S. Customs Valuation Hierarchy
1st Transaction value Transaction value is the
price paid or payable for goods when sold
for exportation to the United States, plus
certain adjustments. 2nd Transaction of
identical merchandise 3rd Transaction of similar
merchandise
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U.S. Customs Valuation Hierarchy
4th Deductive value 5th Computed value 6th
Other ways and means Note The importer may
request Customs reverse deductive .
and computed value methods.
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Valuation for Maquiladoras
For most Maquiladora operations transaction
value can not be found since -
There is usually no sale of merchandise
(finished . goods) by the
maquiladora to the U.S. Importer. - Most
maquilas operate as a cost center and is paid
. for its value added on an as
needed basis by . parent
company. Also transaction value for
identical or similar merchandise usually cant
be found.
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Valuation for Maquiladoras
- Maqulilas therefore immediately drop to
option 4 . (deductive value) or
5 (computed value). - Maquilas can
choose to reverse order and use .
Computed value before deductive value.
- Computed value is generally easier to
document, . and will most likely
result in a more favorable .
valuation for the importer than deductive
value.
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Valuation for Maquiladoras
- Computed value when introduced in 1979 was
of . major benefit to
maquila operators as compared .
. with the the prior valuation
systems for cost . .
of production imports by maquilas
called .
constructed value. - Under
constructed value all costs in Mexico were
. . included in the dutiable
value unless specifically . .
exempted. Statutory minimum values for
GA . . expenses
(20) and profit (8) were mandated. -
However computed value only included costs on
. . Mexican books (in
pesos) plus certain specifically .
. enumerated assist costs. If a cost
didnt fit any assist . .
category it didnt get added in to the dutiable
value.
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Valuation under Computed Value
Elements of computed value are take alternatively
from the books of the Mexican company records
using Generally Acceptable Accounting Practices
in Mexico, or from the books of the importer
recorded using GAAP in the United States. 1.
Total of the cost or value of the materials and
the . . fabrication and other
processing of any kind employed in . . the
production of the imported merchandise. (Material
. costs include all in-bound freight to
move the components . to the point of
production if not already included in the .
price of the materials.)
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Valuation under Computed Value
2. An amount for profit and general expenses.
Customs is . supposed to use the producers
actual profit and general . expenses if they
are not inconsistent with those usually .
reflected in sales of merchandise of the same
class or . kind. 3. Any assist if not
included in items 1 or 2 above provided .
by the U.S. importer to the foreign producer
at no . charge or less than full
cost. Assist items are commonly . consigned
to the Maquiladora.
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Valuation under Computed Value
4. All packing costs incurred by the buyer. To
be an assist, . a cost must meet one of
the following A. Materials, components,
parts and similar items .
Incorporated in the imported merchandise.
B. Tools, dies, molds, and similar items used
in the . production of the
imported merchandise. The phrase . and
similar items includes depreciation on capital
. equipment. You must add to this
transportation and . installation
costs.
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Valuation under Computed Value
C. Merchandise consumed in the production
of the . imported merchandise,
i.e. solder, chemicals, powders, . and
all scrap costs. (Less any value recovered from
. the sale or use of such scrap).
D. Engineering, development, art work,
design work, . plans and
sketches, that are undertaken elsewhere .
than in the U.S. and necessary for the
production of . the imported
merchandise. These costs, if incurred in .
the U.S., will be included only to the extent
that their . value has been charged to
the producer.
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Valuation under Computed Value
- Although computed value was originally a more
favorable . valuation system for maquilas as
compared to constructed . values over the
past 20 years changes have affected .
these benefits. - Beginning with its
initiation in 1979 the TAA initially was .
interpreted to narrowly define what constituted
an assist. - All items (even if provided free
of charge to the maquila) . that did not
meet the definition of an assist were not to
. be added to the computed value. - However,
over time the interpretation by Customs of what
. formed a part of computed value has been
expanded.
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Valuation under Computed Value
- The CF247 Cost submission form gives a good
outline for . how to categorize cost under
computed value. - The subsection for the CF247
are 1. Materials incorporated (an assist
item) 2. Foreign operating expenses
3. Assist costs (other than materials)
4. Profit 5. Packing
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Major Evolution of Computed Value
- As regards Material Components Cost if
provided as an . assist - The exact
reference in the TAA is to materials .
. incorporated in the
imported merchandise. - Initially this
provision was interpreted literally so .
As to exclude the cost related to the
scrapping of . .
materials, since such scrapped components were
. . obviously not
incorporated in the merchandise. - In
November of 1995 U.S. Customs revoked 5
. prior rulings that scrap was not a
part of material . cost.
Customs held that the cost of such scrap
. was includable under another
assist category .
namely merchandise consumed in production.
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Major Evolution of Computed Value
- As regards Foreign operating expenses -
Initially maquilas in common practice were
allowed . to value their
product ex-factory and avoid including .
in their computed value the cost of
freight-out and .
brokerage-out from the plant to the U.S. border
. crossing. - In
January of 1994 U.S. Customs ruled that there
. was no valid rationale for
excluding such cost from .
the computed value of the merchandise.
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Major Evolution of Computed Value
- As regards Assist costs - Initially
maquilas in common practice were allowed .
to exclude from the value of the
assist concept . tools,
dies, moulds and similar items used in
. production the cost of any
equipment that was . not
involved in the production process by working
. a change in the merchandise
during production. - For example testing
equipment was initially treated .
as not being an assist, since it did not
work a . change in
the imported merchandise.
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Major Evolution of Computed Value
- In June of 1990 U.S. Customs ruled that
testing . equipment may
constitute an assist if the testing .
was performed during the production
process and . was essential
to the production of the product. - In
October of 1994 U.S. Customs ruled that final
. (post production) testing
was a dutiable assist if .
such testing directly contributes to the final
. product.
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Major Evolution of Computed Value
- As regards Profit - Customs initially
(circa 1979) tried to make maquilas .
declare the same 8 profit level that
had been . mandated under the
predecessor constructed value. - Eventually
Customs agreed that the actual profit level .
was acceptable even if only (as was
often the case) a . 1
profit. - Maquilas eventually also lost ground
on this point . because the
Mexican government now generally .
requires a profit in the 5 - 7 range
to meet its . transfer
pricing requirements.
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CONCLUSION
? Customs Valuation especially as regards the
cost of . assists is still a
work-in-process. ? Importers need to be aware
of any changes in Customs . interpretation of
these valuation provisions so that they .
can adjust their declarations.
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CONCLUSION
? Accounting systems for the maquila operations
as . regards the U.S. companies
(importers) books . should be
adaptable to the requirements of Customs .
valuation under computed value. ? The value
reporting responsibilities of U.S. importers
. operating under computed value are serious
matters . of a highly technical nature.

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The End