Last week, the US Senate Finance Committee and the US House of Representatives Ways and Means Committee approved draft legislation that would significantly increase costs on US importers. The legislation, which would implement free trade agreements (FTAs) that the United States has negotiated with South Korea, Panama, and Colombia, would increase Merchandise Processing Fees (MPF) assessed on imports entering the United States.
Barring unexpected developments, we expect a sizeable increase in the MPF rate to be included in the final legislation. For some importers, these costs could be in the hundreds of thousands of dollars. Facing these future increased costs, companies should carefully consider whether they are eligible for an MPF exemption under one or more trade preference programs. However, with greater revenue at stake, the government is likely to further ratchet up enforcement efforts in relation to trade preference claims, including the MPF exemption, thereby presenting greater compliance challenges for importers.
What is MPF and How Much More Will I Pay?
Established in 1986, MPF is a user fee that is intended to cover the costs of processing merchandise entering the United States. MPF is assessed (ad valorem) on the declared value of formal merchandise entries (i.e., entries valued at greater than $2,000). Importers of record are responsible for paying MPF along with any duties assessed on the imported merchandise. Since 1995, the MPF rate has been 0.21 percent of the value of the import. Thus, under the current rate, an import valued at $100,000 would be assessed $210 of MPF, plus applicable duties. For imports valued under $11,904, a minimum MPF of $25 is assessed. The maximum MPF assessed on any import is $485, which applies to imports valued at more than $230,952.
As part of a “mock mark up” of legislation implementing the Korea-US Free Trade Agreement (KORUS), the Committees approved provisions that would increase the MPF rate by more than 50 percent. Specifically, the House version would increase the MPF rate to 0.3464 percent. The Senate version proposed an increase to 0.329 percent, while the Finance Chairman’s mark raised it to 0.343 percent. With both Committees approving significant increases in MPF, we expect the Administration to include a similar increase in the MPF rate in the final KORUS implementing legislation submitted to Congress.1
For an importer that imports $100 million of merchandise in a year, that importer could pay $210,000 in MPF under the current fee structure (subject to the application of minimum and maximum MPF, which depends on the value of each entry). The MPF paid by the same importer using the rate approved by the House would be $346,400 – an increase in MPF of $136,400 per year.
Implications of Higher MPF for CBP Enforcement, Importer Compliance
There are several categories of imports that are exempt from MPF, including imports under FTAs such as the North American Free Trade Agreement (NAFTA) and the Central American Free Trade Agreement – Dominican Republic (CAFTA-DR), and similar trade preference programs. Under trade preference programs such as these, imports can enter duty free and are exempt from MPF if they comply with complicated, program-specific rules. Even if imports would otherwise qualify for duty preference and the MPF exemption under a trade preference program, many importers choose not to claim the preference and exemption because the costs of compliance are greater than the amount of duty/MPF savings. However, given the significant increase in MPF that could be collected on such imports, companies should revisit their cost-benefit analyses as the cost savings may now justify the incremental increase in compliance costs.
By the same token, as MPF will likely become a source of significant additional revenue to the government, CBP may ratchet up its enforcement efforts with respect to imports for which an importer claims an MPF exemption, including imports under various trade preference programs. Already a CBP enforcement priority, importers claiming an MPF exemption under a trade preference program will likely be the target of increased audits and information requests issued by CBP. Importers availing themselves of the MPF and duty exemptions afforded under certain trade preference programs should revisit their compliance programs to ensure that they can support their MPF exemption in response to a CBP inquiry or audit.
MPF Rate Increase Subject to International Scrutiny?
The World Trade Organization agreements limit the assessment of user fees such as MPF on imports. Specifically, WTO members such as the United States can impose such fees only to the extent they cover the cost of the services provided. In the case of MPF, the United States should collect only an amount that covers the cost of processing merchandise entering the United States. While the Administration has generally alluded to increased costs, there does not appear to be any formal or detailed analysis that supports a 50 percent increase in the MPF rate.
To the contrary, the increased MPF rates appear as “offsets” in the draft KORUS implementing legislation. The increased MPF collections are intended to offset the “cost” of reduced duty collection as a result of implementing the FTAs and the cost of extending Trade Adjustment Assistance. Neither of these costs is associated with processing imported merchandise, thereby calling into question the WTO-consistency of the MPF rate increase. While a foreign government could potentially challenge the US MPF rate increase and structure at the WTO, such a dispute would likely take years to resolve and would not bring any near-term relief to US importers.
After long delays and much debate, it appears that KORUS and the Panama and Colombia FTAs are on the verge of finally being implemented. While the headlines will focus on the economic gains derived from these FTAs, it appears that implementation will entail significant increased costs on US importers. These increased costs should compel importers to consider whether they can take advantage of an MPF exemption under a trade preference program. However, importers should take care in availing themselves of such programs to ensure that they are in compliance so that they can effectively respond to a likely increase in enforcement by CBP to ensure proper revenue collection.