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Customs Duty Implications in COVID-19 Supply Chain Management

Importers hit by the economic fallout of the COVID-19 outbreak must consider customs duties as part of their financial contingency planning. Importers must structure and document emergency arrangements, such as transfer price adjustments, price renegotiations, intercompany loans, purchase order cancellation penalties and other variations, to the normal supply chain transactions resulting from the COVID-19 outbreak. Companies should be familiar with U.S. Customs and Border Protection (CBP) guidance to ensure that the company will not face unexpected duty liability and will retain the rights to duty refunds where available.

Significantly, CBP considers all payments made by an importer/buyer to a related or unrelated seller to be part of the dutiable value of imported merchandise. Still, CBP’s presumption that payments made to the seller are dutiable may be rebutted where an importer can show that specific payments are not related to imported merchandise. Importers must carefully review transfer price adjustments, emergency loans to or from overseas suppliers, cancellation payments, price adjustments and other supply chain adjustments resulting from the COVID-19 outbreak for customs duty implications as well as any tax benefits.

The following summarizes the customs duty implications of some of the likely changes that may occur during these uncertain times:

Transfer Price Adjustments

The economic downturn and shuttering of retail stores in the United States have forced companies to reassess their existing intercompany financial arrangements, especially where the importer and supplier are related parties. Upward transfer price adjustments must be reported to CBP and additional duties paid. Downward transfer price adjustments can potentially improve an importer’s liquidity position and result in year-end duty refunds. In order to obtain duty refunds resulting from a downward transfer price adjustment, importers need to adhere to CBP’s guidance relating to transfer price adjustments and monitor statutory deadlines.

Price Adjustments

Many importers have been forced to renegotiate purchase orders with foreign vendors to reduce the prices in order to make the goods more saleable. Such renegotiation must be documented before exportation of the goods. In such case, the lower price can be used for dutiable value. However, retroactive price adjustments which occur after exportation will not be taken into account. Duty will be collected on the original price payable.

Emergency Loans

Interest payments made by an importer/buyer to a seller may be excluded from customs value as long as the interest charges are identified separately from the price actually paid or payable for the goods, the financing arrangement in question is made in writing and other requirements are met.

Order Cancellations

Order cancellation payments may be treated as non-dutiable if properly documented as a cancellation fee. If, however, the payments are characterized as reimbursement for the seller’s costs (e.g. production and related costs the supplier was not able to recover because an anticipated level of production was not achieved) or associated with an increase in price of other goods, CBP is likely to treat the payment as being part of the price paid or payable for the imported goods and therefore dutiable.

In these unprecedented times, importers have to be nimble and able change course quickly. While doing so, it is important to understand the customs duty consequences in order not to create increased duty liabilities.

Peter Klestadt

Kevin W. Leonard

Grunfeld, Desiderio, Leibowitz, Silverman & Klestadt LLP

599 Lexington Avenue, 36th Floor

New York, NY, 10022

212-973-7728