What You Should Know About Duty-Free Imports and Retroactive Refunds

The Generalized System of Preferences (GSP) is a law providing duty-free status to more than 3,500 diverse products that qualify as GSP-eligible and are imported directly from a GSP-eligible country.

Examples of goods that currently are GSP-eligible include travel sets, plastic kitchen articles, a variety of glasswares and home decorative objects, ballpoint pens, certain athletic equipment and various bathroom articles. GSP-eligible countries (also called a Beneficiary Developing Country, or BDC) include the Philippines, Thailand, Indonesia, India, Egypt, Cambodia, Brazil, Paraguay and Uruguay.

The GSP statute has been on the books since 1976. It periodically expires and is typically renewed. The GSP last expired on July 31, 2013 and was renewed as a result of the Trade Preferences Extension Act of 2015, which became effective July 29, 2015.

Going forward, the GSP renewal extends until December 31, 2017 and permits retroactive claims going back to August 1, 2013. It also broadens certain categories of potentially GSP-eligible goods (subject to presidential approval), most importantly the “travel goods” category including purses, handbags, backpacks, wallets and similar products.

How do importers claim GSP duty-free status for their goods going forward?

Importers claiming GSP duty-free entry for their goods should comply with the following four steps:

Step 1: The product must be GSP-eligible in the tariff (the HTSUS). A GSP-eligible product in the tariff (the HTSUS) has the designation A, A+, or A* in the “Special” column next to the product’s 10-digit tariff code. (You can find the HTSUS on the U.S. International Trade Commission’s website, www.usitc.gov, or the Customs and Border Protection (CBP) website, www.cbp.gov.)

Step 2: The product must be imported directly into the United States. Ensure that the product is imported directly into the U.S. from the GSP-eligible country where it was produced. Do not let the product enter the commerce of any third country en route to the U.S.

Step 3: Ensure the product meets the GSP’s 35-percent value-added and country of origin requirements. Ensure that at least 35 percent of the value of the product is attributable to the sum of (1) the cost or value of the materials produced in the BDC, plus (2) the direct costs of processing operations performed in the BDC. That BDC must also be the country of origin of the imported product.

Step 4: Make the GSP claim to Customs. The importer has to make the GSP duty-free claim on the entry documents when the goods are imported. Usually, this requires placing the A, A+, or A* GSP indicator on the Entry Summary (CBP Form 7501) and/or the Entry (CBP Form 3461) next to the line item covering GSP-eligible goods.

If the importer fails to provide this notice at the time of importation then the importer might be able to amend the entry or notify Customs of the GSP claim before the entry liquidates. (After the entry liquidates, an importer can file a protest against Customs’ denial of a GSP claim already made, but cannot use a protest to make the initial claim.)

How do I claim GSP duty-free status retroactively?

To claim GSP duty-free status retroactively for goods imported during the lapse period (August 1, 2013 – July 28, 2015) the importer must meet the above four requirements, but there is one important additional element: Importers have until December 26, 2015 to make a retroactive GSP claim for GSP-eligible goods (typically A, A+ or A*) that entered during the lapse period. Many importers and customs brokers put the GSP indicator on the entry documents during the lapse period as a precaution, and for those companies no further action is necessary. However, if the GSP indicator for GSP-eligible goods entered during the lapse period was not put on the entry documents, then don’t wait. File the GSP claim as soon as possible.

Follow these helpful GSP tips.

If your goods are just under the 35-percent value-added requirement, don’t give up, but if your goods are just at the 35-percent requirement, don’t cut it too close. If you believe you may have a GSP claim but the goods are just under the 35-percent value-added requirement, check with a GSP expert (your customs broker, a customs consultant or your customs attorney) and review the Customs’ GSP audit guide. You might be surprised at costs permitted in this calculation which are oftentimes overlooked. For example, there are certain fringe benefits, insurance, engineering, quality control, facility maintenance, waste and payroll taxes to name a few. But if you are at or just above the 35-percent requirement, this creates a red flag and there’s no margin for error. In this case, we strongly suggest consulting GSP compliance experts to understand the risks and ensure a cushion if any costs or calculations change.

The list of GSP-eligible products and GSP-eligible countries changes: The GSP is not static; the list of eligible goods changes and the list of countries change. For example, Russia and Bangladesh used to be GSP-eligible; now they’re not. The law used to exclude travel goods (wallets, purses, backpacks, etc.); now the door is open for these products to become GSP-eligible. There are dollar limits on how much of a particular item can enter the U.S. as GSP duty-free goods (also called a Competitive Need Limitation or CNL), but the President has the discretion to waive CNLs. Bottom line: Make sure you’re up to date on what products and countries are GSP-eligible and make sure you’re using up-to-date materials.

GSP engineering is OK, but be compliant: Some importers rely on the GSP for profitability. They structure their purchases and manufacturing carefully to ensure the finished product is GSP-eligible. They purchase raw materials from a GSP-eligible manufacturer. They ensure that non-BDC raw materials are “substantially transformed” into an intermediate component that can be counted as part of the finished product’s 35-percent value-added requirement in the BDC. They analyze and track their costs in the BDC carefully. All of this is fine and even encouraged; however, GSP importers should anticipate that Customs may require substantiation for the GSP claim. Requests for information and supporting documents for GSP claims are not usual. Customs has also been known to audit importers for GSP compliance purposes. So caution and “reasonable care” are essential. Make sure you have written policies and procedures backing up the GSP entries. Retain substantiating documents for at least five years. Internal audits and reviews are encouraged. If necessary, consult a customs expert familiar with GSP requirements.

If you have questions or need to know in advance: GSP imports often raise genuine questions for importers proactively focusing on compliance, or companies considering challenging a Customs decision denying a GSP claim. For example: Does a BDC manufacturing process involving non-BDC materials enable the intermediate product to be counted in the 35-percent value-added requirement? Is the finished product classified in a GSP-eligible tariff provision? Are goods offered for sale outside of the U.S. or shipped through a Foreign Trade Zone “imported directly” into the U.S.? What documents will be required in the event of a Customs audit or inquiry?

Companies that have questions as to whether the goods are GSP-eligible have options. They can get a binding ruling from CBP in advance. If the port and the importer disagree with a GSP claim, the importer can file a protest and enlist the assistance of Customs headquarters. Importers can even go to court on GSP claims (the U.S. Court of International Trade with appeals to the Court of Appeals for the Federal Circuit, if needed). These options provide absolute certainty. Importers can also consult with their customs broker, customs consultant or customs attorney. An opinion by any of these parties does not provide the absolute certainty of a Customs binding ruling or court decision, but oftentimes provides the importer with the comfort level and “reasonable care” necessary to go forward with a GSP program and file GSP claims.

Robert Stang is a partner in the international trade and supply chain practice at Husch Blackwell. He focuses his practice on customs and brings over 30 years of experience to a wide range of issues affecting inbound and outbound goods, including tariff classification, valuation, country of origin and marking matters, free trade agreements and special trade programs, including the GSP. A member of the firm’s Technology, Manufacturing & Transportation team, Stang works with importers and exporters proactively to achieve cost savings and structure programs that meet CBP “reasonable care” requirements. He handles supply chain security issues, including Customs-Trade Partnership Against Terrorism (C-TPAT) matters and regularly assists importers facing CBP audits, penalties, seizures and other agency enforcement activities. He has particular experience with a variety of soft goods and hard goods, including textiles and apparel, footwear, consumer electronics and home appliances. Before joining the firm, he was a member of the global trade practice at an Am Law 100 firm. He also was a director for a company that sourced apparel for U.S. distributors and a senior manager with the international trade practice of a “big four” accounting firm.

Tune In

Increase your knowledge and understanding of the GSP by watching an on-demand webinar presented by Robert Stang. The 60-minute presentation is free to PPAI members and nonmembers. Find it under Education on the e-Learning page at www.ppai.org.

Practical Guide To Generalized System of Preferences (GSP)

Presented by Robert Stang

Recorded September 10, 2015

60 Minutes