TOPIC:

EXPORT DUTY DRAWBACKS

INDEX
• What is Export & Export Duty Drawbacks
• Use of Export Duty Drawback
• Types of Export Duty Drawbacks
• Drawback is a Privilege, Not a Right
• Duties, Taxes & Fees Subject to Drawback
• Amount of Potential Drawback Available
• Mode of Payment of Drawback: Assign ability
• Drawback Rules & Procedures
• Modes of Drawback
• Costs/negative effects of Duty Drawbacks
• Gold jewellery exports to boom on duty drawbacks
• Other Types of Drawback
• How to Obtain Drawback

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 • Completion of Drawback Claims
• Lessons of Experience
• How Importers & Exporters can Respond
• Conclusion

WHAT IS EXPORT AND EXPORT DUTY DRAWBACKS:

An export is any good or commodity, transported from one country to another country in
a legitimate fashion, typically for use in trade. Export goods or services are provided to
foreign consumers by domestic producers.]Export is an important part of international
trade. Export of commercial quantities of goods normally requires involvement of the
customs authorities in both the country of export and the country of import. The advent
of small trades over the internet such as through Amazon and e-Bay has largely bypassed
the involvement of Customs in many countries due to the low individual values of these
trades. Nonetheless, these small exports are still subject to legal restrictions applied by
the country of export. An export's counterpart is an import.

“ Export Duty Drawback” is one of most important Post- Export Incentives. Though,
over a period of time its popularity had suffered due to DEPB, yet of late, there has been
revival of interest among exporters about this scheme. The process of comparing
Drawback and Advance License as also with incentives is not easy one for an established
exporter. New exporters with traditional export products, with/without import content,
certainly rely only on Duty Drawback. The seminar will give detailed inputs on the
subject.

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USE OF EXPORT DUTY DRAWBACK:

Using Duty Drawback an importer registers the goods at the time of entry, and deposits
the applicable duties and taxes with foreign customs. In Europe, duties and taxes range
from 20-30% of the value of the goods. Often this deposit and payment has to be made
in cash in the currency of the country being entered. Occasionally, they will accept
credit cards. See the chart outlining which countries accept credit cards and be aware
that these procedures and policies can change at any time without warning.

At the time of departure, the exporter presents the goods and appropriate paperwork to
the customs inspector. Assuming the goods and paperwork are in order, exporters can
expect to receive a full refund of the duties and taxes posted at some future point. (For
Europe, refunds are generally made 2-6 months after departure.)

The Duty drawback schemes are used in highly protected economies as means to provide
exporters of manufactured goods with imported inputs at world prices and thus
increasing their profitability, while maintaining the protection for domestic industries that
compete with imports. The choice of export drawbacks is reinforced by international
regulations, namely that GATT rules out the use of direct export subsidies, but allows the
use of drawbacks.

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Types of export duty drawbacks:
1. Direct Identification Manufacturing Drawback

Traditionally, drawback was a refund of duties paid on materials or components

which were previously imported into the United States and used here in the manufacture
or production of goods for export. The goal of the drawback law was to encourage the
production in the United States of articles for export, thereby stimulating United States
foreign trade and assisting United States industry and labor.

Example Assume that Acme Corporation imports 100 electric motors, paying United
States customs duties of $100 ($1.00 per motor). It brings the motors to its Albany, New
York factory, where they are assembled with other components to make 100 winches,
each containing one motor. After manufacture, Acme Corporation exports 50 of the
winches to customers in various foreign countries. Acme is entitled to claim a drawback
equal to 99% of the duties paid on the motors incorporated into the exported winches, or .
99 X $50 = $49.50. This traditional type of drawback is provided under Section 313(a) of
the Tariff Act of 1930, as amended [19 U.S.C. Section 1313(a)], and is known as direct
identification manufacturing drawback.

2. Substitution Manufacturing Drawback

Over the years, the Congress has expanded the concept of drawback. Section 313(b)

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of the Tariff Act [19 U.S.C. Section 1313(b)] provides for substitution manufacturing
drawback. Under this statute, a drawback of duties is payable with respect to imported,
duty-paid components or materials, even if goods are produced for export with other
foreign or domestic components or materials of the "same kind and quality" ("SKAQ").

Example: Acme Corporation imports 100 electric motors, paying United States
customs duties of $100 ($1.00 per motor). It brings the motors to its Albany, New York
factory, where it also maintains an inventory of domestic-origin motors of the "same kind
and quality", as well as imported, duty-free SKAQ motors manufactured in a Caribbean
Basin Initiative beneficiary country. Acme then manufactures 100 winches, each
containing one motor, and exports 50 of these to foreign customers. Perhaps the exported
winches all contain domestic SKAQ motors; perhaps Acme cannot identify the source of
the motors incorporated into the exported winches. Nonetheless, Acme is entitled to a
drawback equal to 99% of the duties paid on imported motors, as if those motors had
been used to manufacture the 50 winches for export, i.e., .99 X $50 = $49.50. However,
the total drawback paid may not exceed 99% of the total duties paid on imported
materials. Thus, if Acme Corporation imported 100 motors as above, and produced 125
winches for export, its maximum drawback recovery would be .99 X $100 = $99.

Congress recently amended the drawback statute to provide for payment of

manufacturing drawback upon the destruction, under Customs supervision, of "drawback
merchandise".

3. Direct Identification Same Condition/Unused Merchandise Drawback

In 1980, Congress amended the drawback law to provide for "same condition"
drawback, a refund of 99% of duties, fees and taxes paid with respect to imported
merchandise which is subsequently exported (or destroyed under Customs supervision)
within three years after its date of importation, without having been changed in condition
or used in the United States prior to such exportation or destruction.

Example: Acme Corporation imports 50 generators, paying Customs duties of $500

($10 per generator). Two years after importation, Acme finds that it only needs 30 of
these generators, and exports the remaining 20 to a foreign customer. The exported
generators are in the same condition as when imported, and have not been used in the
United States. Upon compliance with applicable Customs Regulations, Acme may claim
a drawback equal to 99% of the duties, fees and taxes paid on the exported generators,
i.e., .99 X $200 = $198. This is known as "direct identification same condition
drawback".

Recently, Congress amended the drawback law, replacing the "same condition"
drawback provisions with new provisions for "unused merchandise" drawback. In direct
identification cases, these changes dispense with the requirement that a product be
exported in the "same condition" as when imported, and expand the list of incidental
operations which may be performed without disqualifying a product for drawback. These
changes became effective with respect to claims for drawback filed on and after

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December 8, 1993, as well as for claims filed before that date, but which were not
liquidated and final as of December 8, 1993.

4. Substitution Same Condition/Unused Merchandise Drawback

In 1984, Congress again amended the drawback law to provide for "substitution" same
condition drawback. Under this procedure, a company may recover a 99% drawback of
duties paid on imported merchandise, if, within three years, it exports "fungible"
domestic or foreign merchandise. The exported "fungible" merchandise must be in the
same condition as the merchandise which was imported, and may not have been used
within the United States prior to its exportation. "Fungible" merchandise is defined as
merchandise which is for all purposes commercially interchangeable with the imported
merchandise.

Example: Acme Corporation imports 1000 "Type X" transistors, paying duties of $200
thereon. Within three years, Acme exports 1000 domestically-made "Type X" transistors.
The exported transistors are completely fungible with the imported transistors, are in the
same condition as the imported transistors, and have not been used in the United States.
Upon compliance with applicable Customs Regulations, Acme may claim a drawback
equal to 99% of duties paid on the imported transistors, i.e., .99 X $200 = $198.

Here again, Customs recently amended the drawback law, replacing "same condition"
drawback with "unused merchandise" drawback. The standard of "fungibility" has been
replaced with a more liberal standard of "commercial interchangeability". In addition, the
list of "incidental" operations which may be performed has been expanded. These
changes are effective for all drawback claims filed on or after December 8, 1993, and any
claims which were filed before that date, but which were not final as of that date.

Section 313 of the Tariff Act provides for several other types of drawback, but
manufacturing and same-condition drawback are by far the most important, in terms of
both transaction volume and dollars.

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DRAWBACK IS A PRIVILEGE, NOT A RIGHT

The courts have uniformly ruled that the allowance of duty drawback is a privilege,
not a right. Drawback claimants must follow exactly all of the procedural requirements
for claiming drawback set forth in the Customs laws and regulations.

Thus, careful attention to detail and accurate recordkeeping systems are required in
establishing and administering corporate duty drawback programs.

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DUTIES, TAXES AND FEES SUBJECT TO DRAWBACK

In the case of manufacturing drawback, a 99% refund is payable in respect of all

ordinary Customs duties paid, as well as special marking duties and internal revenue
taxes which are assessed upon importation (e.g., Federal Excise Taxes imposed on tires).
However, drawback of the 0.17% ad valorem "Merchandise Processing User Fee" is not
available under manufacturing drawback.

In the case of same condition/unused merchandise drawback, a 99% refund is payable

in respect of all ordinary Customs duties paid, as well as special marking duties and
internal revenue taxes assessed upon importation. In addition, a 99% drawback of
"Merchandise Processing User Fees may be obtained.

Prior to 1988, antidumping and countervailing duties could also be included in a claim
for drawback. However, the Trade and Tariff Act of 1988 amended the drawback law to
exclude antidumping and countervailing duties from drawback eligibility.

Beginning January 1, 1996, duty drawback (except direct identification same

condition/unused merchandise drawback) will no longer be payable in respect of goods
exported to Canada. Beginning January 1, 2001, a similar termination of drawback will
become effective in respect of goods exported to Mexico. These "drawback sunset"
provisions result from the terms of the North American Free Trade Agreement (FTA).
However, a new "NAFTA drawback" regime will be create, to permit exporters to

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continue claiming drawback on a limited basis, and to avoid double taxation of firms
engaged in North American international trade.

Moreover, effective January 1, 1994, the United States, under the terms of NAFTA,
ceased paying substitution same condition/unused merchandise drawback in respect of
goods exported to both Canada and Mexico. However, it is possible to claim many of
these drawbacks using direct identification procedures and NAFTA-approved accounting
methods to trace fungible commingled goods.

AMOUNT OF POTENTIAL DRAWBACK AVAILABLE

While the United States has granted duty drawbacks in various forms since 1789, duty
drawback is still relatively underutilized. Government and industry sources estimate that
approximately $3 billion in potential drawback refunds are available annually. However,
only about $600 million in drawback refunds are actually paid out each year, suggesting
that up to $2.4 billion in drawbacks go unclaimed.

In our judgment, one reason for the relative underutilization of drawback is that
American manufacturers and exporters often do not think about the "drawback potential"
of goods, materials and components they purchase from foreign and domestic suppliers,
and do not realize that they may be eligible for drawback. In order to better evaluate
drawback potentials, companies should be aware of (1) who is entitled to claim drawback
in particular situations, and (2) when and how drawback rights are transferable.

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MODE OF PAYMENT OF DRAWBACK: ASSIGNABILITY

By law, drawback is payable to the exporter of "drawback products" -- whether or not

the exporter is the person who paid the duties for which a refund is claimed. Thus, if Beta
Corporation exports a drawback-eligible widget it purchased from Acme Corporation,
Beta is the party to whom drawback is paid -- even though Acme may have paid the
duties for which a drawback refund is claimed. The law's unspoken assumption is that the
price paid by the exporter for the widget is a fully cost price which reimburses the seller
for customs duties paid.

However, in order to claim drawback, an exporter must furnish Customs with three
basic items of information: (1) proof of exportation; (2) information concerning any
manufacturing conducted in the United States [e.g., reference to drawback contracts]; and
(3) information concerning the import entries in respect of which a drawback refund is
claimed. In essence, a "paper trail" must be constructed, connecting imported duty-paid
goods to the exported "drawback product". Where the importer, manufacturer and/or
exporter are different entities, a certain amount of cooperation is required in order to
complete claims for drawback.

An essential document in creating this "paper trail" is the Certificate of Delivery

("CD"), which documents the transfer of imported duty paid goods, materials or
components, or the transfer of "drawback products" to an exporter or other purchaser.
When a firm uses imported duty-paid (or substituted) merchandise to manufacture
drawback products, it furnishes a Certificate of Manufacture and Delivery ("CMD") to

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the transferee of the drawback product.

A few examples may help illustrate how these essential paper trails are created.

Example 1: Acme Corporation imports a cement mixing machine, paying duties of

$5,000 thereon. Within three years, it sells the machine, in its condition as imported and
without having been used in the United States, to Beta Corporation, which exports it.
Acme furnishes a CD to Beta for the cement mixing machine, and Beta claims a same
condition/unused merchandise drawback equal to 99% of the duties which Acme paid, or
$4,950.

Example 2: Import Supply Corporation imports polypropylene yarn, paying duties in

the amount of $20,000. Import Supply Corporation then sells the yarn to Very big
Manufacturing Company, which uses it to manufacture carpets. Import Supply
Corporation furnishes Very big Manufacturing with a CD, showing the Customs entry
covering the imported yarn. Very big Manufacturing Company then sells the carpets to
Exporters, Ltd., furnishing a CMD. Exporters, Ltd. then exports the carpets, claiming a
drawback equal to 99% of the duties paid by Import Supply Corporation, or $19,800.

In some instances, multiple manufacturing operations and transfers of materials or

products may be involved. These can be document through CD and CMD procedures.

Example 3: Commodities, Inc. imports a shipload of refined sugar, paying Customs

duties of $100,000. It sells this sugar (providing a CD) to Sweet-Tooth Soda Company,
which uses it to make syrups for soft drinks. Sweet-Tooth Soda Company then sells the
syrups (providing a CMD) to Sweet-Tooth Bottling Southwest, which uses the syrup to
manufacture sodas. In addition to the syrup, the sodas incorporate caffeine imported by
Sweet-Tooth Bottling Southwest, for which duties of $3,000 were paid. Sweet Tooth
Bottling Southwest then sells the finished sodas (providing a second CMD) to Lucky
Trading Company, which exports them. Lucky Trading Company is eligible to claim a
99% drawback of duties paid on both the imported sugar and the imported caffeine.
[Thus, ($100,000 + $3,000) X .99 = $101,970].

Thus, companies which believe their operations have drawback potential should not
only seek a refund of duties which they themselves pay, but should require their foreign
and domestic suppliers to furnish them with Certificates of Delivery (or Certificates of
Manufacture and Delivery) wherever applicable.

In many instances, buyers and sellers enter into agreements whereby the seller
reserves the right to claim drawback, or where the parties agree to divide drawback
refunds among themselves. In the case of manufacturing drawback, exporters may simply
assign their right to claim drawback to another party, usually the seller of the drawback
products. In the case of same-condition drawback, Customs has taken the position that
the exporter must in all instances be the drawback claimant; however, this position has
been rejected by the courts.

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 Where a drawback claimant has established a record of filing repeated claims which
are free from serious error, it may ask Customs to authorize accelerated payment of
drawback. Under the "accelerated payment" program, Customs will pay drawback
refunds to claimants shortly after the claim is filed, without waiting for the import entry
or the drawback claim to be "liquidated" and made final. The claimant furnishes a bond
to secure Customs against the accelerated payment of excessive drawback, and may be
required to repay to Customs accelerated drawback payments found to be excessive.

DRAWBACK RULES AND PROCEDURES

Having provided a basic outline of drawback benefits, it is appropriate to consider in

more detail the rules and procedures applicable to the major forms of duty drawback. For
good order's sake, we will consider manufacturing drawback and substitution drawback
separately.

1. MANUFACTURING DRAWBACK

As noted above, drawback was traditionally defined as a repayment of duties paid on

imported components or materials which are used in the United States to manufacture
goods for export. Customs has generally taken a liberal view of what constitutes
"manufacturing" for purposes of the drawback law.

Among the thousands of operations which Customs has deemed to constitute

"manufacturing" for drawback purposes are the following:
- Refining of crude petroleum into motor fuels, heating oils, and other finished petroleum
products;
- Simple assembly of imported components with each other, or with domestic
components, to produce a new and different article;

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- Dyeing or printing of fabrics (with drawback claimed as to fabrics and/or dyestuffs, as
appropriate);
- Manufacture of shotgun cartridges from imported powders;
- Manufacture of transistors from imported integrated circuits;
- Recording of programs onto blank video or audio cassettes;
- Electrolytic manufacture of aluminum, using imported electrodes which are consumed
during the manufacturing process;
- Programming of imported EPROMS and PROMS with software.
In order for manufacturing duty drawback to be paid, the manufacturer must enter into
a "drawback contract" with the Customs Service. This contract must identify (1) the
imported merchandise which will serve as the basis of the drawback claim, (2) the
product(s) to be produced in the United States with the imported merchandise (or "same
kind and quality" merchandise), (3) the manufacturing process to be conducted, (4) the
facilities where manufacturing will take place, and (5) the manufacturing, inventory and
other records which the manufacturer will maintain to document its drawback claims. In
addition, the manufacturer must agree to abide by the laws and regulations governing
drawback, and to make its books and records available for inspection by Customs
officials at reasonable times. Acceptance of a proposed drawback "contract" is an
undertaking that Customs will pay drawback if the claimant follows the procedures
outlined in the contract and abides by applicable regulations.

For certain common operations (assembly of components, petroleum refining),

Customs has established general drawback contracts. Interested manufacturers may
subscribe to these drawback contracts by writing to Customs identifying their proposed
operations and agreeing to abide by the terms of the general drawback contract.

After a drawback contract has been approved, an exporter may file claims for
drawback upon the exportation of qualifying goods. Where there are a large number of
individual drawback claims (or a large number of transactions giving rising to drawback
rights), drawback may, with the permission of Customs, be claimed according to an
"Exporter's Summary Procedure". Manufacturing operations may be summarized in a
schedule, or in a manufacturing abstract, depending upon the nature of the manufacturing
operation.
Time constraints for claiming manufacturing drawback are as follows:
(1) The claimant must export the completed article within five years after importation of
the imported, duty-paid merchandise which serves as the basis of the claim;
(2) Where "substitution" manufacturing drawback is claimed, the imported and the
substituted goods must be used in manufacture within three years after receipt of the
imported merchandise;
(3) The drawback claim must be filed and completed within three years after exportation
of the drawback product; and
(4) The manufacturer must retain its records for at least three years after the drawback
claim is paid.

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2. SAME CONDITION/UNUSED MERCHANDISE DRAWBACK

unlike manufacturing drawback, it is not necessary for a drawback claimant to enter

into a "contract" with the Customs Service prior to filing claims. However, at least five
working days prior to the scheduled date of exportation, the drawback claimant must
furnish the Customs Service with notice of exportation on Customs Form 7539
(drawback claim). The purpose of this advance notice is to permit Customs to inspect the
goods prior to exportation, to insure that they are in the "same condition" as when
imported (or, in the case of substitution same condition/unused merchandise claims, to
insure that the exported goods are "commercially interchangeable" with the imported
duty paid goods which serve as the basis for drawback).

The requirement of giving a notice of exportation may be waived by Customs (or the
notification period may be shortened). However, failure to provide such notice, or to
obtain a waiver of inspection, will be fatal to the drawback claim, regardless of its merits.

In the case of substitution same-condition/unused merchandise drawback, it is usually

necessary to obtain a ruling from Customs concerning the "commercial
interchangeability" of the imported duty-paid and exported "substituted" merchandise.

Critical time periods for claiming same-condition/unused merchandise drawback are

as follows:
-- The imported goods (or the "commercially interchangeable" goods) must be exported
within three years after importation of the goods for which drawback will be claimed.
-- At least 5 working days prior to exportation, notice of exportation must be given to the
District Director of Customs on Customs Form 7539.

-- The drawback claim must be completed within three years after exportation

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Modes of Drawback:
Direct identification of manufacturers

Substitution drawback

Same condition drawback

Shipment-by-shipment based on predetermined input/output standard

Pre-agreed schedule (fixed drawback schedule) - - a list of the fixed money value of
duties to be refunded for one unit of an export commodity. Countries using such
schedules usually revise them every three to six months.

Costs/negative effects of Duty Drawbacks:

Loss of government revenue

Creates opportunity for cheating and abuse

Absorbs administrative resources for its implementation

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 Drawbacks do not offset non-tariff barriers against imported inputs

Gold jewellery exports to boom on duty drawbacks

The announcement of the India foreign trade policy for 2009-2014 for the gems and
jewellery sector comes at the right hour. The industry is already reveling at the 9 percent
growth in the gold jewellery section for the month of July and India's commerce Minister
Anand Sharma has decided to neutralize duty incidence on gold jewellery exports so that
Duty Drawback on such exports can be allowed. The industry had been requesting and
demanding to ease the export procedures since long and at last it has been made
available.

Rajesh Mehta, chairman, Rajesh Exports Ltd, a leading gold jewellery exporter from
India says: "This is the most welcome step taken for the industry. By deciding on all
these, a lot of export procedural hassles have been saved and an exporter can heave a sign
of relief by exporting anytime he wants. Life has been made easy in a major way".

OTHER TYPES OF DRAWBACK

The Customs laws provide other types of duty drawback which are less commonly
used than the types described above. Nonetheless, it is appropriate to list them here. They
are as follows:
-- Drawback of duties paid on merchandise not conforming to sample or specifications
("rejected merchandise drawback);
-- Drawback of internal revenue taxes paid on alcohol used to make flavoring extracts,
medicinal or toilet preparations for exportation;
-- Drawback of internal revenue taxes paid on bottled distilled spirits and wines which
are exported;
-- Drawback of salt used for curing fish;
-- Drawback on salt used in curing meats which are exported;
-- Drawback on imported articles used to build vessels for foreign owners or registry;
-- Drawback on imported parts and materials used to repair, rebuild or overhaul jet
engines of foreign origin.

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 How To Obtain Drawback
As most manufacturers are interested in sections 131 3(a) and (b), only the procedures for
obtaining drawback under these provisions are discussed. The purpose of drawback is to
enable a manufacturer to compete in foreign markets. To do so, however, the
manufacturer must know, prior to making contractual commitments, that he will be
entitled to drawback on his exports. The drawback procedure has been designed to give
the manufacturer this assurance and protection.

Completion of Drawback Claims

Claims must be filed within 3 years after exportation of the articles. To avoid being time-
barred by the statute of limitations, a claim may be filed before a drawback contract (rate)
is effective, although no payments will be made until the contract is approved. For
completion of unused drawback claims, see your local Customs Drawback Branch prior
to exportation.

Export Procedure

It is necessary for a drawback claimant to establish that the articles on which

manufacturing drawback is being claimed were exported within 5 years after importation
of the imported merchandise which is the basis for the drawback. In the case of unused
drawback, the time period for exportation is 3 years after importation.

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 1. Exportation of articles for drawback purposes must be established
by complying with one of the procedures provided for in Section
191.72 (in addition to providing prior notice of intent to export if
applicable (§§ 191.35, 191.36, 191.42, and 191.91). Supporting
documentary evidence must establish fully the date and fact of
exportation and the identity of the exporter.
2. Export of qualified U.S.-made petroleum products may be shown
by matching production at a specific refinery with exports of qualified
petroleum products of the same kind and quality that occur within 180
days after the refinery produced the designated petroleum product.

Export of qualified imported petroleum products may be shown by matching the amount
imported with exports of qualified petroleum products of the same kind and quality that
occur within 180 days after the import. (Section 1313(p) drawback)

Lessons of Experience

Korea and Taiwan are the notable examples of economies able to achieve strong export
growth with protectionist policies. Their success is associated with unique set of policies
and circumstances not easily replicated in other countries, namely: authoritarian regimes
able to suppress rent-seeking behavior, which in turn made possible the use of other
industry and trade-promotion measures. Furthermore, both economies recognized the
disadvantages of protection and undertook to liberalize imports.

The implementation of Duty Drawback Programs in developing countries has not fared
very well for various reasons, including:

• administrative weaknesses in customs administration,

• poor statistical infrastructure,
• Failure of the government to reimburse pre-paid duties because of financial
difficulties.

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 HOW IMPORTERS AND EXPORTERS CAN RESPOND

There are several ways in which United States importers and exporters might be able
to minimize the burdens resulting from the NAFTA drawback changes, particularly the
elimination of substitution same condition drawbacks/unused merchandise drawbacks.

In the long term, companies may be able to minimize the adverse impact of CFTA and
NAFTA drawback eliminations by utilizing tariff-advantaged facilities, such as Customs
bonded warehouses and Foreign Trade Zones.

1. Customs Bonded Warehouses

Foreign goods may be stored in private or public Customs bonded warehouses for up
to five (5) years without payment of duty. Duties are payable only when and if the goods
are withdrawn from warehouse for domestic consumption. Importers might use bonded
warehouses to store commingled goods from several foreign sources, withdrawing goods
as needed for consumption in the United States (with payment of external tariff) or for
exportation to Canada (subject to payment of Canadian tariffs). The use of a bonded
warehouse would eliminate potential for double taxation of foreign goods, and would
relieve the importer from the burden of keeping a detailed recordkeeping system to
comply with NAFTA requirements relating to drawback.

Similar benefits would be available as the result of the storage of goods in a Foreign
Trade Zone (FTZ) or sub zone.

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 2. Foreign Trade Zones

NAFTA's drawback sunset provisions will prohibit U.S. companies from using
Foreign Trade Zones to avoid external tariffs on foreign goods which are subsequently
exported to Canada and Mexico. Prior to the drawback sunset dates, however, United
States companies can receive the full range of FTZ benefits in respect of goods exported
to Canada or Mexico. This does not mean, however, that FTZs cannot thereafter be used
to obtain United States tariff benefits for goods exported to Canada or Mexico; it only
means that duties must be assessed as if the goods were withdrawn from the FTZ for
United States consumption. FTZs may still be used to effect tariff reductions.

Example: A United States company imports into foreign trade zone Japanese components
valued at $10,000. If entered directly for consumption into the United States, these
components would be subject to duty at a rate of 10% ad valorem, for a total U.S. duty
payment of $1,000. However, the company uses the Japanese component in the FTZ to
make a product which, when withdrawn from the FTZ for domestic consumption, is
dutiable at a rate of 3% ad valorem, and pays duty on the Japanese components at this
lower rate ($10,000 x .03 = $300 duty). Thus, the use of the FTZ saves the company
$700 in duty.
When the product withdrawn from the FTZ is exported to Canada, the U.S. Company
cannot claim drawback on the $300 in U.S. duties paid; however, if the product qualifies,
it can enter Canada with benefit of NAFTA reduced-duty or duty free status.
Prior to the NAFTA drawback sunset date, this company might have simply paid the
$1000 in duty on the Japanese components, secure in the knowledge that it could recoup
99% of those duties as drawback when goods produced there from were exported to
Canada. Once the drawback sunset dates arrive, however, it might be in this company's
interest to convert its manufacturing facility to an FTZ "sub zone". As noted above, such
a conversion might help the company save duties on goods which remain in the United
States, as well as on goods exported to Canada.

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 CONCLUSION

The above is merely an outline of the duty drawback laws. Each proposed drawback
operation must be considered on its individual merits, and careful attention must be given
to insuring that all applicable laws, regulations and documentary requirements are
observed.

Still, the cash refund potentials of duty drawback are enormous, and most companies
which invest the time and effort needed to set up drawback programs quickly recoup their
investment and enjoy substantial cash benefits.

Note: This memorandum is intended for general informational purposes only, and is
not given or intended as advice pertaining to any specific case or circumstances. Readers
having questions concerning particular situations should consult counsel.

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