Resolving a problem before it arises is a time tested strategy. You don’t leave your house without locking your doors, you don’t walk across the street without looking both ways, and you don’t drive to work without putting on your seatbelt. You might ask what these analogies have in common with international trade law; the answer is simple – prevention. Getting to the root of an issue as quickly as possible is the best way to prevent future problems. When it comes to importing products into the US, a good starting point is the contract. It is helpful if importers arrange their international contracts with an eye towards lowering Customs liability and duties. Unfortunately, most importers do not consider the advantages of addressing Customs issues in international contracts, and U.S. Customs and Border Protection (CBP) collects millions of dollars in duties every year that would not be collected had importers considered the duty consequences in forming their contracts.
The reason why international contracts often fail to take into consideration issues related to duty liability and Customs compliance is because the field of international trade law is a specialized field, with few international transactional attorneys having extensive knowledge of Customs law. As a result, the transactional attorneys whose life mission it is to negotiate the best deal for their client often overlook this key area which can represent huge savings to their clients down the line. In addition, the typical transactional attorney often has other issues on their mind, such as income tax liability.
However, with an eye towards Customs law, a contract can be framed in a way that lowers transaction costs and saves money. The following are just a few key areas where the international trade attorney can help you avoid common pitfalls in framing your contract:
- Shipping terms
- Export Control Compliance
Finding the Best Shipping Term
In international transactions, it is crucial that the contract clearly define rights and obligations between the seller and the buyer, and make sure that what is stated in the contract is followed in practice. This is largely because those international contracts will be subject to scrutiny by CBP who will use them as evidence of what happened in practice. This means that if a contract is written in a way that imposes contractual liability on the importer, the importer can end up liable to Customs for duties or failure to comply with CBP regulations.
The first thing to know about international contracts is that the shipping terms should come from the Incoterms, not from the Uniform Commercial Code (UCC). The Incoterms were established by the International Chamber of Commerce (ICC) for the purpose of defining rights and obligations in relation to international trade, an area where the UCC is not applicable. For instance, the UCC can tell you nothing as to who is responsible for export clearance, import clearance, payment of import duties, purchase of cargo insurance, and a whole host of other issues unique to international trade.
Deducting Transportation Costs
The second thing to know is that foreign inland transportation costs are deductible from the total price paid or payable if incurred by the importer. An example of when this deduction may be difficult to claim occurs when Incoterms used in the contract place the responsibility for freight costs for foreign inland transportation on the seller, but in practice the importer is paying the freight costs. For instance, the Incoterms in a given contract may be “Free on Board” (FOB) or “Carriage Paid to” (CPT), both of which require that the seller pay the freight of the carriage and bear the risk of loss or damage to the goods for the foreign inland transportation. However, despite the contract terms, the importer is assuming all the risks and costs of the foreign inland transportation. When the importer tries to deduct those costs from the total price paid or payable they will have to explain to CBP why their contract says one thing, but they did another. Additionally, importers need to have documentation evidencing actual charges of the foreign inland transportation.
Paying duties on the manufacturer price instead of reseller price
Finally, another area where shipping terms can come into play is when there is an intermediary who purchases the goods from a manufacturer and then resells them to you for importation. In this scenario, you are normally entitled to pay duties on the “First Sale for Export” price, or the price paid by the intermediary to the manufacturer rather than the price paid by you to the intermediary. This will normally reduce the dutiable value of the goods at issue. However, you will have to prove to CBP that the whole transaction from bottom to top is at “arm’s length.” The key indicators of an arm’s length transaction are whether the intermediary:
- Provided or could provide instruction to the seller;
- Was free to sell the imported merchandise at any price it desired;
- Selected or could select its own customers without consulting the seller; and
- Could order the imported merchandise and have it delivered for its own inventory.
Determining whether the transactions were truly arm’s length will require examining the shipping terms for the goods delivered from the manufacturer to the intermediary, and then from the intermediary to the importer.
For example, a problem can arise if your intermediary arranges for shipment by the seller “Free Carrier” (FCA) port of embarkation, which would require the seller to clear the goods for export and deliver the goods to the port of embarkation for the buyer to take charge. However, if the transaction is structured in such a way that title passes simultaneously from the seller to intermediary, and then to you on the same terms, this may signal to CBP that the intermediary is acting as an agent for the seller rather than as an independent reseller. This in turn, could lead to any commission charged by the “agent” being non-deductible from the price paid or payable.
Reviewing the contract according to international trade law and terms can help you to select the most appropriate shipping term for your transaction, and may help you avoid paying unnecessary duties or creating unnecessary complications with Customs.
Avoiding Selling Commissions
Depending on the role of the intermediaries in a given transaction and how they are compensated, an importer can make sure they are paying the correct amount of duties on their imports. Again, the way the contract is formulated can make deducting commissions easier or harder. One common issue is that CBP considers selling commissions to be included in the price paid or payable, and dutiable. Selling commissions are broadly defined as any commission paid to an agent who is related to, or controlled by, or works for or on behalf of, the manufacturer or the seller. The way to avoid paying duties on a commission is by showing CBP that the payments made to the intermediaries did not benefit the seller, or only did so incidentally in the course of serving your interests as a purchaser. This can be accomplished by showing that you are not paying a representative or agent a selling commission, but rather a buying commission. This is where the contract comes into play, since CBP will see the contract between you and your intermediary as the best evidence for your arrangement. If you have a written contract with a buying agent or representative to perform services for you, this written agreement goes a long way towards demonstrating that the intermediary is working for you, not for the seller. You will want to frame the contract in a way that allows you to show that you are in control of the representative and his services are performed for you, not the seller. Review the contract according to international trade law to make sure that you are framing it properly by ensuring your contract shows that the representative or agent is:
- Compensated by you;
- Controlled by you;
- Recognized by the seller as your representative;
- Subject to contract termination by you for specified reasons;
- Required to perform specified services for your benefit;
- Paid his compensation separately from the import sale transaction; and
- Not related to, or controlled by the seller.
Compliance with Other U.S. Regulations on International Transactions
In addition to the liability to CBP that can arise from failing to structure and carry out your contract according to guidance in Customs regulations and international shipping terms, there are other areas of concern where knowledge of international trade law can be valuable in reviewing your contract. Among those areas are compliance with the Foreign Corrupt Practices Act, Office of Foreign Assets Controls (OFAC)Regulations, Foreign Trade Regulations (FTR), Anti-boycott regulations, International Traffic in Arms Regulations (ITAR), Export Administration Regulations (EAR), and others. For instance, a contract between your company and a subsidiary who works closely with Chinese state-owned entities can pose serious FCPA risks. Another example would be an information technology company having a licensing contract with subsidiaries that may involve the sharing of controlled technology. These are only a few examples.
While this article mostly addresses preventative measures that can be addressed in your international contracts in regards to Customs compliance and duty liability, there are many other regulations related to international trade that pose an equal, if not, greater level of risk. By having your contract reviewed in light of international trade laws prior to carrying out the transaction, you may be able to preemptively manage many of the risks associated with international transactions or, at the very least, have a greater understanding of the risks involved.
By Devin Sefton, Attorney