Lessons · Lesson 6 of 6

When not to claim it

Work through three cases where a duty relief costs more than it returns, and end with a four-part test you can apply to any input before you put it inside a regime.

Lesson 6 of 6 · 12 min

Did you know

The cost of a formality is not meant to be a revenue line, and a small paperwork slip is not meant to be a fine. Article VIII of the GATT limits fees and charges connected with importing and exporting to the approximate cost of the services rendered, and says they must not be an indirect protection or a tax on imports for fiscal purposes. The same article says no substantial penalty is to be imposed for minor breaches. A penalty for an omission or mistake in customs documentation which is easily rectifiable and obviously made without fraudulent intent or gross negligence should be no greater than a warning requires. Knowing that changes the tone of the conversation you have when you find your own error.

Source: General Agreement on Tariffs and Trade 1994, Article VIII, Fees and Formalities connected with Importation and Exportation

Relief is not free money

The arithmetic of the last five lessons points one way. On fabric, relief is overwhelmingly worth having. It would be a poor course that stopped there, because the same arithmetic run on three other things in the same factory comes out the other way. And getting those three wrong is how a well-run authorisation picks up the exposure that eventually costs it.

One: the input that is too small to be worth a ratio

Halvern imports the tipping for its drawcords and its woven main labels: USD 9,600 a year, at an illustrative 6.0% duty for trims. The relief available is USD 576.00 a year.

To claim it, each of those inputs needs its own consumption ratio (tips per garment, labels per garment), its own entry line under the authorisation, its own stock account and its own discharge. Serhan Adiye prices the clerk and broker time at roughly USD 1,340 a year.

USD 576.00 relieved for USD 1,340 spent. A loss of USD 764.00 a year, and that is only the visible half.

The invisible half is worse. A label ratio is fragile. A style with a size label, a composition label and a care label is three numbers, they change with each buyer, and a mistake in any of them is a mistake inside the same authorisation that holds USD 220,800 of fabric relief. A small input with a shaky ratio does not fail on its own. It gives an auditor a reason to open the file that matters.

Leave the trims out and pay the duty. Put that decision in writing on the file, with the arithmetic, so that in two years nobody re-opens it as an oversight.

Two: the goods that might not leave

On 24 September, Tolgate and Byrne cancel 4,200 of the 26,400 chinos. The garments exist. Halvern finds a domestic wholesaler who will take them.

Under an inward-processing suspension those 4,200 chinos cannot simply be sold in Marnesa. The cloth in them entered duty-free on a declaration that it would leave again. Selling them at home means entering the cloth for home use, 196 days after it arrived:

Line	USD
Cloth in 4,200 chinos at 1.5185 metres and 4.15	26,467.46
Duty at an illustrative 12.0%	3,176.09
Turnover tax at an illustrative 14.0%	4,150.10
Compensatory interest, illustrative, at 0.05% a day for 196 days	311.26
Cash on the day	7,637.45
Of which permanently borne, the tax being recoverable	3,487.35

Diverting 4,200 chinos to the domestic market, out of suspension

That is USD 0.8303 a piece of cost you never get back, on garments already sold at a discount. And the compensatory interest is the interesting line. It exists precisely because the suspension was a loan of money, and the loan is being called in.

Now re-read lesson 2. Bonded warehousing looked the worst of the three regimes there, losing money on a 26-day deferral. Its whole value is the thing that just happened: under a bonded regime the decision is taken when the cloth is issued, not when it lands. For a buyer whose orders get cut, for a style with a domestic sister-brand, for a fabric bought on programme rather than against a confirmed order, the right regime is the one that keeps the question open. Price the option, not just the interest.

Three: the clock nobody put on the calendar

Marnesa's authorisation requires discharge within an illustrative nine months of import. The cloth landed 12 March, so everything must have left by 12 December.

The last sailing was booked for 28 September. It rolls twice, and the remaining 7,900 chinos are now due to sail in the first week of January.

Line	USD
Cloth in 7,900 chinos	49,784.02
Duty at 12.0%	5,974.08
Turnover tax at 14.0%	7,806.13
Falls due if the authorisation is not extended	13,780.21

What 7,900 undischarged chinos are worth at the deadline

The options are an extension application, for which Marnesa charges an illustrative USD 320.00 and takes about 21 days, and which it may refuse, or paying the charges and claiming back what can be claimed afterwards.

The point is not the fee. It is that a nine-month customs clock was running from 12 March and appeared on nobody's time and action calendar. Ship dates were on it. Fabric in-house was on it. The date by which the last garment must have physically left the country, or the relief disappears, was in a filing cabinet. Put it on the calendar the day the authorisation is granted, with the same status as a ship date, because it behaves like one. Track 7 owns the calendar. This is a line on it.

The four-part test

Before putting any input inside a relief regime, ask four questions. Relief is worth claiming when all four are yes, and the case weakens quickly as they turn:

Is the duty relieved large? Compare it with a realistic estimate of the clerk, broker and guarantee time the input will consume. Fabric on a chino: yes, by a factor of ten. Woven labels: no, by a factor of two the wrong way.
Is the input single and measurable? One cloth with one marker is a ratio you can defend. Nine trims across four buyers is nine ratios you will not maintain.
Is the consumption ratio stable? A style whose marker is still moving in week six has a ratio that will be wrong when it matters. Re-declare it, or stay out.
Will the goods definitely leave, and in time? A confirmed order with a booked vessel is one answer. A programme fabric, a buyer who cancels, or a ship date inside a month of the discharge deadline is another.

Check yourselfWhich regime would you have chosen for a fabric bought on programme, before any order is confirmed?Show the answer

Bonded warehousing, and this is the case it exists for. Programme fabric has no confirmed destination, so an inward-processing declaration is a promise you are not yet in a position to make. If the cloth ends up sold at home, you pay the duty and the tax plus compensatory interest for the whole suspension period. Under a bonded regime nothing is declared until the cloth is issued, and what you pay is the storage and the authorisation rather than the interest on a broken promise. On TR-7715 that option was worth less than it cost. On programme fabric it is the whole point.

What to take away

Relief on a small input can cost more than it returns, and it puts a fragile ratio inside the authorisation that holds your big one.
Suspension is a promise that the goods will leave. Broken, it costs the duty, the tax and compensatory interest, which is USD 0.8303 a piece here.
Bonded warehousing is the regime that keeps the decision open, and that is worth paying for whenever the destination is genuinely unknown.
The discharge deadline is a ship date. Put it on the time and action calendar the day the authorisation is granted.
Four questions decide it: is the duty large, is the input single, is the ratio stable, will the goods leave in time.