A leading manufacturer of household accessories was able to save over $6,000,000 annually in duty by designing and implementing an effective NAFTA management strategy.
NAFTA and Duty Recovery Saves $6 Million
An industry leading organization specializing in window covering was able to save over $6M in duty as a result of having an effective integrated trade compliance strategy. By coordinating NAFTA with organizational processes by use of a compliance champion, the company was able to assign tariff to every item. This then allowed the organization to have clear visibility of duty payments thus allowing the option of duty recovery for particular items. By integrating a well structured NAFTA program throughout the industry, the organization was able benefit from multiple drawbacks and save both time and cost.
Case Analyzed
The message is clear, by using the model of an Integrated Trade Compliance Strategy, this firm created efficiencies in terms of process but also cash management with an integrated strategy that factored NAFTA status and duty drawback for Non-NAFTA related products. The resulting $6 million savings were a result of their in-house trade compliance champion who oversaw the entire process on imports as well as exports and worked in conjunction with their professional trade services provider to handle the claims paperwork on both sides of the border.
This post highlights the importance of doing the appropriate research and background checks of all the cost and regulatory elements BEFORE you commit buying components or finished goods from new off shore vendors.
International Sourcing Strategies
Taking a proactive approach to the implications of offshore sourcing helps protect your bottom line. Many North American manufacturers are finding it increasingly challenging to deal with a growing influx of imported materials and products originating from off competitors, especially those based in China and India.
These competitive pressures are compelling Canadian and US companies to consider various measures to protect market share, including shifting their sourcing arrangements for components, peripherals and finished products outside of North America, to take advantage of lower cost alternatives originating in the emerging economies of Asia, Eastern Europe and South America.
This post highlights the importance of doing the appropriate research and background checks of all the cost and regulatory elements BEFORE you commit buying components or finished goods from new off shore vendors.
Why is this more important than ever?
Because North American manufacturers have traditionally sourced most of their materials in the US., Canada or Mexico, where duty is generally not an issue of the goods are NAFTA qualifying, and Customs and regulatory issues are well documented and understood. These assumptions can not be taken for granted when sourcing goods outside North America. Canadian and US importers are encouraged to review the full spectrum of variables, including currency exchange ratios, marking and packaging requirements, duty rates and tariff treatment, anti-dumping/countervailing duty applicability, duty drawback eligibility, and NAFTA eligibility, if the offshore components are incorporated into products ultimately sold in Canada or the US.
For example, purchasing motors in China that are incorporated into machines you manufacture in Canada for sale to a customer in the US, may negate the finished product’s NAFTA eligibility and duty free status, thereby increasing the ultimate cost of the product, and possibly eroding your margin or forcing you to raise your retail price and risking your competitive position.
Conversely, if you purchase the motors from China and sell them to an US customer in the same condition and without modification, you may be eligible to recover all Canadian duties paid at time of import under the Duty Drawback program. Of course you will need to assess all the trade offs to arrive at a bottom line comparison that takes all the factors into consideration, and gives you and “apples to apples” view of the offshore versus North American sourcing options.
Taking a proactive approach to studying the implications of off shore sourcing can confirm that you will achieve the desired competitive cost advantage, help you avoid unexpected costs or surprises, and minimize the probability of unexpected regulatory issues with Canada Border Services Agency or United States Customs and Border Protection
United States Customs and Border Protection estimates that 3 billion dollars per year of US import duties are eligible for drawback, of which 80% are not recovered.
Do you use imported merchandise to produce or manufacture products for export ?
Are you paying import duties on finished goods which are eventually exported ?
If the answer is “yes”, Duty Drawback is an opportunity to increase profitability and reduce costs. You may be entitled to duty recoveries and not even know it !
United States Customs and Border Protection estimates that 3 billion dollars per year of US import duties are eligible for drawback, of which 80% are not recovered.
Although there are no published statistics available from Canada Border Services Agency, it is our belief that the unrecovered amounts are also significant.
Up to 99% of all US Customs duties can be refunded on imported merchandise subsequently exported, or in some cases used to manufacture a new article for export. Duties paid up to 6 years ago may be refunded against exports over the past 3 years.
Up to 100% of all Canadian Customs duties can be refunded on imported merchandise subsequently exported, or in some cases used to manufacture a new article for export. A claim for drawback must be filed within 4 years of the date the goods were released from Customs.
The growth of off-shore and near-shore sourcing has made it increasingly important for Canadian and United States firms to adopt strategies that factor into account opportunities to reduce or eliminate cost inputs through programs like Duty Drawback.
You should talk to your professional trade services provider about filing for retroactive duty drawback claims in both Canada and USA, or to establish a new drawback program, so you can take advantage of costs savings on a regular basis.
Case in Point, Engineering a Product to meet a Beneficial Tariff Classification. The fact is that by understanding the how on both sides of the trade compliance equation can you maximize the ultimate value of a integrated Trade Compliance Strategy for your organization and make international trade a strategic benefit for your organization.
Recently an article by Lauren Meling of the software firm, Management Dynamics, was brought to my attention. The article is titled, Understanding the Science of Importing for Small to Mid-sized Companies, Lauren was writing a summary of an article that appeared in the CFO Magazine website titled, Import Duties: Bend Me, Shape Me, Any Way You Want Me.
Portions of Lauren’s article is reprinted here with permission.
Lauren did an excellent job summarizing 5 key tips from the CFO article.
From this article, I have composed 5 simple tips on how to reduce costs in your company as an importer:
1. View your import tax policy.
2. Understand the subtle differences with the tariff schedule.
3. Audit your Supply chain.
4. Discuss tactics with your vendor.
5. Practice “tariff engineering.”
For this case in Point article I want to focus on her #5 item, Practice “Tariff Engineering”, in which she defined in her article as;
5. Practice “tariff engineering.”
According to CFO, “tariff engineering is the practice of designing and marketing a product with a tariff schedule in mind.” Understand how you will market the product. The terms and use of the product derives back to tip #2, how you classify your product can help you save money.
“How you import products is actually a science. If you know the [importing] categories and how to work with the categories, you’ll save your company money.” states Billy Pymm, CFO of Maverik Lacrosse
Understand the ‘How’
The fact is that by understanding the how on both sides of the trade compliance equation can you maximize the ultimate value of a integrated Trade Compliance Strategy for your organization and make international trade a strategic benefit for your organization. The how questions being how is it manufactured (sourcing) and how it is sold (sales) in reference to end use and markets.
Here is a case in point to demonstrate what I mean;
A ‘L’ shaped metal bracket when imported is classified as a metal bracket. But that bracket is welded onto a machine and therefore the bracket is no longer a bracket but a part of a larger machine. So when that bracket breaks and requires repair, the bracket is removed and needs to be exported for repair, is it a metal bracket again? NO it is a part of a machine and therefore can benefit from tariff classification as part of that machine, and not a metal bracket.
Disassemble of items from source can create tariff shift and thereby qualify for tariff benefits such as NAFTA or duty free status, because work to remove items must be considered as further rework, disassembly of an item is really manufacturing in reverse.
What about goods that require Quota?
Products subject to quota have conditions that make them quota applicable, question is what conditions make it quota applicable and what can be changed to no longer make that product quota applicable.
By adding or removing something that changes the definition of the end product while not changing it’s use, may in fact allow the product to be engineered to have a tariff shift that is in fact not quota applicable.
In Closing
While each case is unique and must be reviewed by your professional trade services provider, you can see that you can in fact engineer products to meet with tariff changes that benefit your organization once you understand the ‘how’ questions.
Tell us about your experience with this? Did it work out for you?
A multi-national vehicle manufacturer, serving markets in Europe and North America, failed to accurately classify a major component
A multi-national vehicle manufacturer, serving markets in Europe and North America, failed to accurately classify a major component imported by one of the their Canadian divisions, resulting in overpayment of duties by $250,000 annually. It is estimated that the impact of this omission after production burden costs and overheads were applied, was double that amount at the point of sale, resulting in margin erosion.
we cant create a dialogue if we don’t know each other, in this post we introduce the key players behind tradecompliance.ghy.com
We can’t establish a relationship if we don’t know each other:
I am Nigel Fortlage, Vice President Information Technology at GHY International. I have been in this industry since 1988 and before that I worked for an importer/distributor/Manufacture as their in-house customs specialist. For the last 16 months I have had a second hat I have been wearing in partnership with our Executive VP, Reynold Martens working on understanding the social media space and how we can connect with you in a two-way conversation. We will be specifically sharing details around the concept we have been introducing you to, an Integrated Trade Compliance Strategy. We believe by providing you good information, education and awareness that we hope to engage in a conversation that results in helping you solve problems, creating that Ah Ha moment for you, or addressing moments of truth in your international trade operations that adds value
Martin Rayner is an independent consultant with more than 27 years of diverse experience working in various operational facets of the customs brokerage and international trade logistics field. Martin has also held executive-level positions in the industry with a number of the leading trade service providers across Canada and during his career has acted in both professional advisory and advocacy capacities for companies seeking to leverage opportunities in the regulatory environment to their benefit.
Reynold Martens is Executive Vice President and Corporate Secretary of GHY International, and he is the President and co-founder of the firm’s subsidiary, GHY USA, Inc. He is the Author of the white paper titled, a Case for an Integrated Trade Compliance Strategy. Reynold is also actively involved outside of GHY, he is active in various industry and community leadership roles, including directorships with the Canadian Manufactures and Exporters Association, current chair for IE Canada Manitoba Chapter and member of the National Board
Rick Riess, President & CEO, GHY International. We can not talk about our current president and 4th Generation owner of the firm without, acknowledging the background from which he comes,
GHY–over a century old and still “Young.”
Yes it’s true. Geo. H. Young & Co. Ltd. turns 110 in 2011, making the company one of the oldest and most established privately held enterprises in Canada that continues to grow and evolve as both a pioneer and innovator in the Customs brokerage industry.
In the late 1800’s, Canada was a work in progress, with only seven provinces (Alberta and Saskatchewan joined in 1905). The young nation was struggling to protect its development by means of high tariffs on goods that were manufactured—or could be—in Canada. Duty rates of 20 – 40 percent accounted for most of the government’s revenue of about $50 million, as income taxes weren’t initiated until 1917.
At the time, George Henry Young was the Chief Inspector of Customs Ports stationed in Winnipeg. In 1901, recognizing the opportunity when he saw it, he opened one of the first brokerage houses in Western Canada. This pre-dated the automobile era, and the majority of goods moved by rail. However, the winds of change were blowing, and in 1903, Wilbur and Orville Wright took their first flight, and by 1929 the first international commercial flight into Winnipeg arrived from Minneapolis. That was likely Northwest Airlines, one of the company’s longest standing international relationships. George led the company for its first 43 years until 1944, when the reins were turned over to his son George Donald Young, known as Don.
In 1950, under Don Young’s leadership, Geo. H. Young & Co. Ltd. formally incorporated, and so began an exciting era of growth in revenue and clients. News of those years is well documented in the formal corporate minute books, which include colourful details about the business of the day, the people and events, as well as the challenges and opportunities. There is reference to some of our long-term clients who have become pillars of the Manitoba business community, and indeed some of these relationships span more than eight decades and have contributed significantly to our success.
In 1968, GHY’s leadership transitioned to Charles Riess, son-in-law to Don Young. As the Prairie economy continued to expand and with it cross-border trade, so did the company, which opened an office at Emerson, Manitoba to accommodate the growing volume of truck traffic originating in the US bound for the Prairies. Charles’ son, Richard Riess, became President in 1992, and so began an unprecedented period of growth and expansion in products, services, locations, and strategic partnerships.
Today, GHY International as it is known, is recognized as a leader in the industry for its strategic focus on trade facilitation and regulatory risk management, use of innovative technologies, solid core values, and principled approach to working with clients, associates, Customs regimes of Canada and the US, supply chain partners in all modes of transportation, and yes, even competitors.
The scope of the enterprise has expanded to include locations in British Columbia (1994), Ontario (2005), a strategic partnership in Alberta (2005), a nationally licensed US subsidiary based in North Dakota (1995), and numerous strategic partnerships. It has grown to include over 100 employees serving a client base from a broad cross-section of industries, including many top 500 companies in Canada and the US.
Canada Border Services Agency (CBSA) ranks GHY Canada 13th out of 504 reporting entities; United States Customs Border Patrol (CBP) ranks GHY USA 39th out of 2523 reporting entities; GHY Canada is the largest prairie-based member of the Canadian Society of Customs Brokers (CSCB), which includes the vast majority of Brokers in Canada.
GHY has survived the calamities of two world wars, the Great Depression, dozens of economic cycles, fast-paced growth in trade and the regulatory environment, and a technology revolution, and through all those waves of change, has been an innovator, while staying true to its core values, and maintaining a relentless pursuit of creating value for our clients.
Ascertaining NAFTA in motor vehicles is a complex process as referenced in the case of Duhamel & Dewar Inc. vs. the Department of National Revenue. Just because you have an NAFTA Certificate signed by the United States Exporter doesn’t ensure ‘duty free status’. When claiming NAFTA the importer is always in a position of ‘Buyer Beware’.
Importing a North American Made Vehicle – doesn’t mean it’s ‘Duty Free’
Ascertaining NAFTA in motor vehicles is a complex process as referenced in the case of Duhamel & Dewar Inc. vs. the Department of National Revenue. Just because you have an NAFTA Certificate signed by the United States Exporter doesn’t ensure ‘duty free status’. When claiming NAFTA the importer is always in a position of ‘Buyer Beware’, says Alan Dewar, Vice President Canadian Operations, GHY International
CBSA can request import duties up front or EVEN UP TO 4 YEARS LATER (perhaps after you no longer own the vehicle)
Importers should always exercise caution including a NAFTA indemnification clauses to minimize their risks on retroactive duty assessments
Be aware that when importing a vehicles there are 2 Canadian Government agencies that have regulations that must be met;
- Transport Canada – controlling the registration, recalls, etc. (which is really a hindrance to dealerships or organizations who buy vehicles for sale)
- Canada Border Services Agency (CBSA) import declaration purposes and taxation
Additional resources…….
We have worked with a partner who can add a LOT with respect to vehicles (challenges, regulatory elements, etc.) heading either north or southbound (including RIV process, Motorhomes, etc.) You can check out their offerings on this topic at:
Linkedin: Inspired Solutions International
Website: Inspired Solutions International
CentrePort Canada is North America’s new 20,000-acre inland port that has been designated Canada’s first Foreign Trade Zone (FTZ). Located in Manitoba next to Winnipeg’s James Armstrong Richardson International Airport, CentrePort Canada offers greenfield investment opportunities for a wide variety of business operations including distribution, warehousing and manufacturing.
CentrePort Canada – Better Faster Cheaper
CentrePort Canada is North America’s new 20,000-acre inland port that has been designated Canada’s first Foreign Trade Zone (FTZ). Located in Manitoba next to Winnipeg’s James Armstrong Richardson International Airport, CentrePort Canada offers greenfield investment opportunities for a wide variety of business operations including distribution, warehousing and manufacturing.
CentrePort Canada is strategically located in the central time zone in the heart of North America. It boasts a modern, well-established network of highways, railways, air and sea connections to important regional and international markets, including eastern and western Canada, the United States, Mexico and Latin America, as well as Europe and Asia.
As an FTZ, CentrePort Canada has significant tax and cost savings to offer foreign investors and businesses looking for new ways to bring their products to the North American marketplace. FTZ benefits include deferral of customs duties and a GST exemption on products imported to Canada for warehousing or processing before re-export out of country.
CentrePort Canada features an impressive collection of transportation assets that are unmatched anywhere in the region and provide businesses with real advantages such as:
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- Flying through Winnipeg is cheaper than flying into U.S. destinations; airlines landing in Winnipeg can cycle their aircraft faster and more time in the air increases revenue; and international cargo flights are exempt from provincial fuel tax.
- Winnipeg is home to one of Canada’s top cargo airports, has more than 1,000 for-hire trucking companies, is at the junction of three major continental railways (CN, CP and BNSF), and is closer to European and Asian markets via the polar routes.
- Winnipeg offers great road, rail and air connections to North America – in fact, many major U.S. and Canadian cities are less than 24 hours away by truck.
Winnipeg also boasts extremely competitive business costs including affordable office space and land, low construction costs and hydro-electric energy rates that are among the lowest in North America. Winnipeg’s taxes are also lower than those of most major cities in Canada and the U.S. In fact, Winnipeg has a lower effective Corporate Income Tax Rate and a lower Total Effective Tax Rate than 58 of 59 major U.S. cities, according to a recent KPMG study.
All of these advantages mean that it is more efficient and cost-effective for international businesses to ship North American-bound goods through Winnipeg.
To find out how CentrePort Canada can work for you, email us at busdev@centreportcanada.ca or telephone 1-204-784-1300.
As a member of IE Canada we are pleased to share with you the following event that is coming to western Canada later this month, please read on for an outline of the event and registration information. Speakers for this event include Joy Nott, President of IE Canada, and Susan McDonald of Perseus Trade Solutions Inc.
Understanding Incoterms® 2010 & NAFTA Audit Workshops
IE Canada Incoterms 2010 & NAFTA Audit workshop Western Canada Series Brochure
As a member of IE Canada we are pleased to share with you the following event that is coming to western Canada later this month, please read on for an outline of the event and registration information. Speakers for this event include Joy Nott, President of IE Canada, and Susan McDonald of Perseus Trade Solutions Inc.
To raise your awareness before this event, Click here to watch a short video on these new Incoterms.
Sessions scheduled for the following dates and cities:
• November 15, 2010 – Winnipeg
• November 16 – Calgary
• November 18 – Vancouver
AM Session:
Effective January 1, 2011, Incoterms® 2000 will be replaced by Incoterms® 2010.
Incoterms® serve to allocate costs and responsibilities between buyer and seller and their use is expected to increase in drafting both international as well as wholly domestic contracts for the sale of goods. Incoterms® are considered by customs and tax authorities in conducting customs and tax audits and therefore a clear understanding of Incoterms and the implications of their use is critical by in-house counsel, CFOs, buyers, as well as those involved in customs, transportation and logistics functions. The changes from Incoterms® 2000 are intended to clarify the terms and the obligations they impose on the vendor and purchaser in each case and to expand the use of the terms for use in domestic transactions not involving any import/export of goods. Certain terms have been eliminated and new terms added. There are better distinctions between the terms, and cargo security obligations have been incorporated into the terms, among other changes. This workshop will: review the Incoterms® rules; review the changes; discuss best practices in using Incoterms® on contract negotiation and drafting; identify potential pitfalls; and discuss the interpretation of Incoterms® in Canadian law
PM Session:
Most importers and exporters are eager to take advantage of the duty relief granted under the North American Free Trade Agreement (NAFTA), but remain unaware of the risks and liabilities associated with claiming the NAFTA tariff treatment. Many still do not know that more than 50% of NAFTA Certificates of Origin either contain errors which render them invalid or are not supported with the necessary documentary evidence. With NAFTA origin audit activity on the rise, more importers are being shocked by assessments of financial penalties and/or retroactive duty and GST, while some Canadian manufacturers and exporters are losing their competitive advantage in the North American market. In this down to earth, easy to understand session, we’ll cover the following:
- What importers and exporters should expect during a NAFTA audit conducted by either the Canada or U.S. Customs Agencies.
- Learn from the mistakes of others – Common errors made on Certificates / Statements of Origin, and during NAFTA audits.
- Sharing NAFTA strategies used by manufacturers, exporters and importers.
- Do you really know how your Customs Broker is handling this issue? Are you at greater risk than you thought?
Registration Options:
Sessions scheduled for the following dates and cities:
• November 15, 2010 – Winnipeg
• November 16 – Calgary
• November 18 – Vancouver
Online: www.iecanada.com
By Phone: 416-595-5333 x 37 or 1-866-616-2243 x 37
By Fax: 416-595-8226 (attention: Jesse Arsenault)
By Mail: 160 Eglinton Ave. E, Suite 300, Toronto, ON, M4P 3B5 (attention: Jesse Arsenault)
