Deal or No Deal: GSP Edition

Before I get into this, I need to make an important point (that I have made before): I like and respect most of the the folks at Customs and those at the Department of Justice who represent the agency. Over the three years I have been blogging, I have reviewed cases that I think Customs and Border Protection should have won and I have given a virtual high-five to Customs for the good and important work it does. There have been times when I have been called out for being unfair and on at least one such occasion, I changed my position. I just write about what strikes me as interesting and, sometimes, I feel it is appropriate to criticise certain actions. OK? Are we all still friends?

That said, I have a new problem . . . GSP.

Customs and Border Protection recently published this document providing compliance information for importers making claims under the Generalized System of Preferences. It is great that CBP does this and is consistent with the notions of shared responsibility and informed compliance.

Back in the day (as the kids like to say), an importer would ask the exporter for a Form A to substantiate a claim for duty-free entry under the GSP. This created a document trail for Regulatory Audit. By completing a Form A, the exporter was certifying that the merchandise met the 35% value-added and direct shipment rules. When a claim turned out to be false, the Form A pointed the finger of wrongdoing squarely at the exporter. Several years ago, I can't quite remember when, Customs eliminated the Form A.

In this new document, CBP continues its apparent push to make the importer primarily responsible for false statements by the exporter. Think about it: Who knows the origin of the materials used in production? Who knows the value of the labor and overhead involved in production? How many vendors want to tell their customers where they get materials and how much they cost? None. They want to just provide a basic statement that the goods qualify; something like a Form A. When backup is needed, many would rather give it directly to CBP than to their customer.

Despite all that, this document states (and this is not new policy) that documentation supporting the GSP claim must be readily available to Customs upon request to the exporter, importer, or both. As a practical matter, CBP is going to start with a request to the importer. Among the information Customs may request are:

if processing operations are performed on articles;
(a) description of processing operations and country of processing, and
(b) direct costs of processing operations,
if materials are produced in a beneficiary developing country or members of the same association then;
(a) description of material, production process, and country of production, and
(b) cost or value of materials.

This again raises the question of what importer is going to be able to get the direct cost of processing and the value of materials from a supplier, assuming the supplier is unrelated? This is a very high burden that may put importers at serious risk. Now that this requirement has been published, is CBP going to take the position that failing to have access to these documents is a recordkeeping violation or that making an entry without reviewing the backup is an absence of reasonable care? Customs has show good faith by saying that it will exercise flexibility and good judgment is accepting alternative documents to support the claim. Give the agency credit for that.

Customs has also provided some guidance on compliance. This is useful. But, keep the context in mind. Customs begins by saying: "The importer should establish internal controls that identify and gather records to support GSP claims." Clearly, the onus is on the importer and it is not enough to simply accept the representations of the supplier. This is made clear again when CBP says:

Documentation and records supporting the GSP claims must be verifiable by linkage to inventory and accounting records, including summary records such as monthly production reports and accounts payable records. Again, this list is not considered absolute and Regulatory Auditors are charged with making a reasonable attempt to solicit and identify other alternative recordkeeping sources. However, the responsibility to substantiate the GSP claim ultimately resides with the claimant.

What to do? Here are more thoughts:

• Document your supplier's representations as to GSP qualification.
• Request reports showing the supplier's analysis. You may need to negotiate the level of specificity of information involved. An alternative is to designate a third party reviewer such as broker or law firm.
• Conduct announced and unannounced plant visits to confirm: point of production, receipt and origin of materials, production process, etc. This will likely require a contract clause permitting inspections. Inspections may be by a third party.
• Put a clause in your contract requiring that the supplier indemnify you for any losses resulting from the GSP claim being unprovable. This should include duties, penalties, and legal fees. Then, hope that the clause is enforceable wherever your supplier happens to be.

The bottom line on this seems to be that GSP is of increasingly questionable utility. Ask yourself whether you can prove your current claims. Now calculate the duty saving and the potential penalties (including legal fees and administrative expenses) associated with your claims. Does GSP still look like such a great deal?

Now, flip it around. If you were Customs, what would you do? Your only real point of contact is with the importer. Also, it is the importer who pays the duties. The importer is required to be reasonably careful about making claims. So, this position makes some sense. For the immediate future, we probably need to live with it.

In the bigger picture, though, it seems like the burden falls on the wrong party. A process modeled on NAFTA verification makes much more sense. CBP should be conducting verifications of the exporter who asserts that the goods qualify. Rather than put the burden on American business, Congress and the President should be looking at some means of international facilitation for GSP verifications of the exporter. An obvious point of leverage is continued participation in the program. If a country wants to continue to receive GSP benefits, it should be required to permit U.S. Customs and Border Protection personnel to conduct GSP verifications on their soil. If that is unpalatable, perhaps the local authorities could be required to gather certain specified information and provide it to CBP. If it turns out that the claim is invalid, the U.S. importer will still have to pay up but there would be no penalties assessed unless it was apparent that a reasonable importer would have known that the claim was false.

It seems to me that either approach is a fairer allocation of resources and a better deal for U.S. business.