Have you ever attempted to convince your company management that trade compliance is a good investment? Perhaps there was a pressing need to expand the current trade compliance team, engage an outside consultant to help with a project, implement a new trade tool or system, or even build a new trade compliance team from scratch. If so, you likely were asked to present a budget case for trade compliance.
How do you develop a convincing case? Let’s look at a few ideas.
Quantify the Risk of Fines and Penalties
When management hears one of the main reasons for establishing a trade compliance program is to reduce the risk of government fines and penalties, they often ask what is the potential amount? That depends on the severity of the violation, whether fraud, gross negligence, or negligence.
Using the total value and duty paid for imports during a previous year and U.S. Customs and Border Protection (CBP) penalty rates, it is possible to estimate potential penalty amounts at various levels of risk.
As an example, your company imported goods valued at $5 million last year, and paid $325,000 in duties and fees (an average of 6.5%). If CBP were to issue penalties for violations it determined were negligent, meaning the company failed to exercise reasonable care to ensure its imports were compliant, fines could be 20% of the value of the imported merchandise even if the violation did not affect duties owed. For gross negligence, meaning the company had knowledge of and wanton disregard for its non-compliant actions, fines could be or 40% of the value.
Based on the probability that a certain percentage of the imported value is associated with a violation, the potential penalties can be calculated. For example, if 25% of the value represented negligent or grossly negligent violations, the potential penalty amounts would be $250,000 and $500,000 respectively (25% of 5 million = $1,250,00 x 20% or 40%). Crunch the numbers for various percentages that make sense for your business, such as 5, 10, 25, or even 100%. Although it is highly unlikely that 100% of imports would have violations, it serves as a good reference point for your audience.
Don’t forget about recordkeeping penalties CBP can issue for failure to produce a required customs document, which could be $10,000 per release of affected merchandise or 40% of the value of the merchandise, whichever is less. You can create a similar calculation using the number of import entries from the previous year.
CBP penalty rates for various violation levels (fraud, gross negligence, and negligence) can be found in 19 U.S.C. 1592.
Estimate Potential Savings
A trade compliance team or external experts can identify ways to reduce the duty and fees the company pays on imported goods and implement savings strategies. What senior executive’s eyes do not light up at the words “cost savings”?
Numerous strategies for saving customs duties are available to importers.
- Free Trade Agreements: If imported goods are produced in countries with which the U.S. has a free trade agreement, they may be eligible for duty free treatment if they meet the origin requirements set forth in the agreement. It may be worth the effort to determine whether the goods qualify or consider changing sourcing to take advantage of an FTA.
- Prototypes: Goods that meet CBP’s definition of a prototype can be imported duty free.
- Classification: Correctly classifying imported goods ensures the company does not pay too much duty, or too little.
- Duty Drawback: When exporting goods that were previously imported, a company may be able to claim a refund of the duty paid upon importation.
- Foreign Trade Zones (FTZ): This mechanism allows an importer to bring goods into an FTZ in the U.S. for further processing and either pay duties on the merchandise entering or exiting the zone, whichever is lower.
- Pharmaceutical Appendix: Certain active ingredients and intermediates used in pharmaceutical production can be imported free of duty if included on the list of qualifying items found in the Pharmaceutical Appendices to the U.S. tariff schedule.
Put figures on the strategies that are most applicable to your company. For example, what would be the potential savings if 10, 20, 30, or 50% of duty paid could be saved by utilizing one of these opportunities?
Calculate the Cost of Inefficiency
When your company does not have clearly defined trade compliance processes in place, employees likely spend more time than necessary processing import shipments. This time could be devoted instead to other critical and value-added activities. The unnecessary time expended by an employee can be given a cost based on the employee’s hourly earnings and assumptions about the amount of additional time a task takes. For example, assume the employee earns $50 per hour. If that employee unnecessarily spends an extra one or two hours on a trade-related activity that should take only thirty minutes with more efficient processes, that activity costs the company $75 or $125 instead of $25. That time could be put to more productive use elsewhere.
Measure the Impact of Delays
Without robust trade compliance processes, the data needed to submit the import declaration to CBP or partner government agencies may be unavailable, incomplete, or inaccurate. The result is that shipments may be more likely to be delayed or detained as the agencies request the information needed to determine admissibility. Assign a dollar amount to the cost to the company of a delay of one day, two days, a week, or a month (not unheard of), especially if it would impact a critical development timeline, production run, or a new product launch.
These strategies will enable you to develop a solid, understandable, and credible business case to persuade your company management that assigning resources for trade compliance is a good investment.
