Email: jmcnamara@maquilogistics.com
MAQUILOGISTICS
Jim McNamara
Principle / U.S. Customs Broker
6620 S. 33rd St. Bldg. J
McAllen, TX 78503
Phone: 956-630-6377
Fax: 956-630-6617
Cell: 956-227-3928
594 S. Vermillion
Brownsville, TX 78521
Phone: 956-504-6440
Fax: 956-504-2665
Home: 956-618-5155
514 Nafta Blvd.
Laredo, TX 78045
Phone: 956-753-389
Fax: 956-753-3204
420A Pan American Dr.
El Paso, TX 79907
Phone: 915-858-8865
Fax: 915-858-8068
Historical Perspective on Reconciliation
- Began early 1970’s U.S. Customs Import Specialist /Brownsville.
- Originally “U.S. Customs Quarterly Cost Submission” (Custom
. Form CF247).
- Later changed to 6 months and then yearly “Cost Submissions”.
- Almost universally maquilas did a “Cost Submission”
- Yearly “Cost Submissions” due by 3 months after close of year
. but extensions were often granted (month by month often for
. several months… no specific limit)
Historical Perspective on Reconciliation
- Cost Submission necessary because Maquila’s used estimated
. values to pay U.S. Customs duties when importing “finished
. products” into U.S.
- Cost Submission compared “estimated values” with “actual costs”
. and calculated difference in duty “+ or –” based on variances.
- Used concept of “block appraisement” whereby duties were
. “refunded” or “paid” on minimum number of entries possible.
- First 10 or 11 months of entries were liquidated as “no change”
. and all charges concentrated on last 1 or 2 months entries.
- Liquidation is an important legal process whereby Customs makes
. a determination as to whether to accept import entry information.
Historical Perspective on Reconciliation
- Process was totally “manual”; hard copy CF247 submitted to U.S.
. Customs with no receipt or acknowledgement.
- Cost Submission information regarding changes to entries not
. interfaced with other systems that potentially charged duty
. amounts on entry (for example drawback).
- Double dipping, or receiving refunds two times on given entries
. possible.
- If U.S. Customs import specialist changed or import manager with
. Maquila’s changed often files were misplaced by either or both
. parties.
Historical Perspective on Reconciliation
- Customs and importer sometimes didn’t know if an annual
. submission had been filed or how or even if refunds on
. additional payments had been done.
- Refunding money often took a long period of time and was
. sometimes difficult to track.
- Sometimes if variation was large on a refund not enough
. entries were left to refund total amount due on entries.
- Despite it’s potential flaws the cost submission process
. usually worked very well for over 20 years.
Historical Perspective on Reconciliation
- However, U.S. General Accounting Office (GAO) issued a very
. negative audit on U.S. Customs stating that “Cost Submission”
. process lacked proper controls and accountability.
.
.
.
U.S. Customs Headquarters instructed field offices in early 1990’s
to “cease and desist” using the Cost Submission process.
However, with no other viable options field offices continued to
accept Cost submissions.
- When NAFTA began 1/1/94 most Maquilas (after years of paying
. duties) found their products to be free of duties.
Historical Perspective on Reconciliation
.
.
.
Import Specialists with U.S. Customs in 1994 issued letters to
Maquiladoras in Reynosa and Matamoros waiving the requirement for a Cost submission if goods were “duty free” under
NAFTA.
- From 1994 to 1998 almost no maquilas did a “Cost submission”.
Historical Perspective on Reconciliation
Recap of problems with Cost Submission process:
1) With no specific written procedures for handling and limiting
.
extensions, the yearly submissions were sometimes submitted
.
7 or 8 months after the year close.
2) “Block Appraisement” was not provided for under U.S. . .
.
…
Customs law. If Customs gave refunds these refunds ... . . . . .
.
should only be calculated on an entry by entry basis, not on .
.
on only the last 1 or 2 months entries.
.
3) Process was manual, did not interface with other processes . .
that affected duties. Double refunding possible.
.
4) No trackability of receipts, no automated history of filing, of .
status, or of actions taken to resolve “+ or –”.
Reconciliation Prototype
- In response to GAO audit, U.S. Customs devised a “better
. . mousetrap” for the cost submission called “Reconciliation”.
- Voluntary program available to those importers who use .
. estimated information at time of entry or in instances in . .
. . which certain information required to make proper entry of
. . goods, is unknown at time of entry.
- Many different reasons why entries need to be reconciled
. Value, 9802, NAFTA, “Court pending” classification issues) .
. The concept of “Reconciliation” was expanded to cover . . .
. . various type of situations and not just cost submissions. -
Reconciliation Prototype
- Entries flagged for reconciliation are liquidated (legally
. . “finalized” . by Customs) in two separate transactions
. (non-reconcilable issues . and reconcilable issues).
- Two step process
o flag individual entries.
o un-flag via separate reconciliation entry, which may
cover multiple flagged entries (must be filed within
12 months for NAFTA or within 21 months for all other
issues).
-
Reconciliation Prototype
- Flagging; two options
o Blanket (never use this)
o entry-by-entry (only “viable” approach)
- Two types of reconciliation entries:
.
° Aggregate – can use this if no duty impact or you .
owe money to U.S. Customs.
.
° Entry by entry – use this if you want a refund from
U.S. Customs. -
Reconciliation Prototype
- If Reconciliation entry (other than for NAFTA) is filed late . .
. penalties will be imposed, no extensions.
- Can file “no-change”reconciliation, or file part of year but . .
. must always avoid going over 12 months for NAFTA issues .
. or 21 months for all other issues (value, 9802, classification).
- Can file a reconciliation entry to un-flag entries for any . . . .
. time frame, even for individual flagged entries.
- Reason for 21 month limit;
.
.
- 12 month “annual” cost submission
- Plus 9 months allowed to finalize and present cost . .
submission to U.S. Customs
Reconciliation Prototype
- How did reconciliation “solve” problems with old Cost
. Submission process (see pg. 7)
.
.
1) Handled problem of unlimited “extensions” by putting in
Penalties if more than 21 months from 1st flagged entry
until reconciling entry filed.
.
.
.
2) Handled problem of block appraisement by only
Allowing refunds if an entry-by-entry analysis of
refunds owing was shown on reconciling entry (entry
by entry reconciliation).
Reconciliation Prototype
3) Handled problem of manual process by automating with .
. an electronically submitted reconciliation entry which
. was fully integrated into Customs databases.
.
.
.
.
.
4) Handled problem on trackability by issuing a new entry #
. for follow up reconciliation entry. History of all
.
adjustments to flagged entries is shown in reconciliation
entry and one check done or one refund check received
(and any refunds received in much more timely fashions
within 30 days).
Reconciliation Prototype
However, to insure that liquidation process was not delayed
(since under block appraisement Customs could immediately
liquidate the first 10 months) an entry flagged for
reconciliation is liquidated under a two step process:
- liquidation for all factors except flagged issues.
- liquidation for flagged issues
.
.
.
Note: This is the reason a participant under reconciliation
must add a “rider” to their Customs import bond. The two
step liquidation creates another level of liability for the
bonding company (surety)
Reconciliation Prototype
Bottom line on reconciliation:
.
.
A voluntary program, but U.S. Customs has said it is not
“voluntary” for those on computed value to eventually
report “actual” costs to U.S. Customs.
.
Estimated that less than 30% of maquiladoras are
participating in the program.
.
.
Maquilas should always update their cost information
Declared to Customs at least annually based on historical
data and projected changes in operations in the future.
U.S. Customs Valuation
- U.S. Customs valuation governed by Trade Agreement Act
. (“TAA” of 1979) which was an agreement under GATT
.
(now WTO) to formulate a worldwide valuation system.
.
.
“TAA” differed from prior valuation system and fairer in
that it valued goods based on what you “paid” (the
“transaction value”) rather than prevailing “market” prices.
.
Almost all importations were envisioned to be valued
based on “transaction value”, the preferred basis.
U.S. Customs Valuation “Hierarchy”
1st Transaction value
Transaction value is the price paid or payable for goods
when sold for exportation to the United States, plus certain
adjustments.
2nd Transaction of identical merchandise
3rd Transaction of similar merchandise
U.S. Customs Valuation “Hierarchy”
4th Deductive value*
5th Computed value*
6th Other ways and means
*Note: The importer may request Customs reverse deductive
.
and computed value methods.
Valuation for Maquiladoras
For most Maquiladora operations transaction value can
not be found since;
.
.
.
- There is usually no “sale” of merchandise (finished
goods) by the maquiladora to the U.S. Importer.
-
Most maquilas operate as a cost center and is paid
for its “value added” on an as needed basis by
parent company.
Also transaction value for identical or similar merchandise
usually can’t be found.
Valuation for Maquiladoras
.
.
-
Maqulilas therefore immediately drop to option #4
(deductive value) or #5 (computed value).
-
Maquilas can choose to reverse order and use
Computed value before deductive value.
- Computed value is generally easier to document,
and will most likely result in a more favorable
.
valuation for the importer than deductive value.
.
Valuation for Maquiladoras
.
.
.
.
.
.
.
.
.
.
- Computed value when introduced in 1979 was of
major benefit to maquila operators as compared
with the the prior valuation systems for “cost
of production” imports by maquilas called
“constructed value”.
-
Under “constructed value” all costs in Mexico were
included in the dutiable value unless specifically
exempted. Statutory minimum values for G&A
expenses (20%) and profit (8%) were mandated.
.
.
.
.
- However “computed value” only included costs on
.
Mexican books (in pesos) plus certain specifically
.
enumerated assist costs. If a cost didn’t fit any “assist” .
category it didn’t get added in to the dutiable value.
.
Valuation under Computed Value
Elements of computed value are take alternatively from the
books of the Mexican company records using “Generally
Acceptable Accounting Practices” in Mexico, or from the books
of the importer recorded using “GAAP” in the United States.
1.
.
.
.
.
.
Total of the cost or value of the materials and the
.
fabrication and other processing of any kind employed in .
the production of the imported merchandise. (Material
costs include all in-bound freight to move the components
to the point of production if not already included in the
price of the materials.)
Valuation under Computed Value
2.
.
.
.
.
An amount for profit and general expenses. Customs is
supposed to use the producers actual profit and general
expenses if they are not inconsistent with those usually
reflected in sales of merchandise of the same class or
kind.
3.
.
.
.
Any assist if not included in items 1 or 2 above provided
by the U.S. importer to the foreign producer at no
charge or less than full cost. Assist items are commonly
consigned to the Maquiladora.
Valuation under Computed Value
4. All packing costs incurred by the buyer. To be an assist,
. a cost must meet one of the following:
.
A. Materials, components, parts and similar items
Incorporated in the imported merchandise.
.
.
.
.
B. Tools, dies, molds, and similar items used in the
production of the imported merchandise. The phrase
“and similar items” includes depreciation on capital
equipment. You must add to this transportation and
installation costs.
Valuation under Computed Value
.
.
.
C. Merchandise consumed in the production of the
imported merchandise, i.e. solder, chemicals, powders,
and all scrap costs. (Less any value recovered from
the sale or use of such scrap).
.
.
.
.
.
D. Engineering, development, art work, design work,
plans and sketches, that are undertaken elsewhere
than in the U.S. and necessary for the production of
the imported merchandise. These costs, if incurred in
the U.S., will be included only to the extent that their
value has been charged to the producer.
Valuation under Computed Value
.
.
.
Although computed value was originally a more favorable
valuation system for maquilas as compared to “constructed
values” over the past 20 years changes have affected
these “benefits”.
- Beginning with its initiation in 1979 the TAA initially was
. interpreted to narrowly define what constituted an assist.
- All items (even if provided free of charge to the maquila)
. that did not meet the definition of an assist were not to
. be added to the computed value.
- However, over time the interpretation by Customs of what
. formed a part of computed value has been expanded.
Valuation under Computed Value
- The CF247 Cost submission form gives a good outline for
. how to categorize cost under computed value.
- The subsection for the CF247 are:
1. Materials incorporated (an assist item)
2. Foreign operating expenses
3. Assist costs (other than materials)
4. Profit
5. Packing
Major Evolution of Computed Value
As regards “Material Components Cost” if provided as an
. assist;
.
- The exact reference in the TAA is to “materials
incorporated in the imported merchandise.”
.
.
.
- Initially this provision was interpreted literally so
As to exclude the cost related to the scrapping of
materials, since such scrapped components were
obviously not “incorporated” in the merchandise.
.
.
.
.
- In November of 1995 U.S. Customs revoked 5
prior rulings that scrap was not a part of material
cost. Customs held that the cost of such scrap
was includable under another assist category
namely “merchandise consumed in production”.
.
.
.
Major Evolution of Computed Value
-
As regards “Foreign operating expenses”
.
.
.
.
- Initially maquilas in common practice were allowed
to value their product ex-factory and avoid including
in their computed value the cost of “freight-out” and
“brokerage-out” from the plant to the U.S. border
crossing.
.
.
- In January of 1994 U.S. Customs ruled that there
was no valid rationale for excluding such cost from
the computed value of the merchandise.
Major Evolution of Computed Value
-
As regards “Assist costs”
.
.
.
.
.
- Initially maquilas in common practice were allowed
to exclude from the value of the assist concept
“tools, dies, moulds and similar items used in
production” the cost of any equipment that was
not involved in the production process by “working
a change” in the merchandise during production.
.
.
- For example testing equipment was initially treated
as not being an assist, since it did not “work a
change” in the imported merchandise.
Major Evolution of Computed Value
.
.
.
- In June of 1990 U.S. Customs ruled that testing
equipment may constitute an assist if the testing
was performed during the production process and
was essential to the production of the product.
.
.
.
- In October of 1994 U.S. Customs ruled that final
(post production) testing was a dutiable assist if
such testing “directly contributes to the final
product”.
Major Evolution of Computed Value
-
As regards “Profit”
.
.
- Customs initially (circa 1979) tried to make maquilas
declare the same 8% profit level that had been
mandated under the predecessor “constructed value”.
.
.
- Eventually Customs agreed that the actual profit level
was acceptable even if only (as was often the case) a
1% profit.
.
.
.
- Maquilas eventually also lost ground on this point
because the Mexican government now generally
requires a profit in the 5% - 7% range to meet its
transfer pricing requirements.
CONCLUSION
 Customs Valuation especially as regards the cost of
. assists is still a work-in-process.
 Importers need to be aware of any changes in Customs
. interpretation of these valuation provisions so that they
. can adjust their declarations.
CONCLUSION
 Accounting systems for the maquila operations as
. regards the U.S. companies (importers) books
. should be adaptable to the requirements of Customs
. valuation under computed value.
 The value reporting responsibilities of U.S. importers
. operating under computed value are serious matters
. of a highly technical nature.
The End