US Customs and Border Protection (CBP) recently published revisions to its audit regulations that could result in reduced payments made by companies submitting a prior disclosure. When filing a valid prior disclosure, an importer is required to pay duties and fees, plus interest, owed as a result of the disclosed errors. The revised regulations permit CBP to offset underpayments of duties or fees with overpayments of duties and fees on entries covered by a prior disclosure in all cases. This offsetting, or netting of underpayments and overpayments, can result in significantly lower amounts owed to CBP as a result of filing a prior disclosure, thus enhancing the benefits of an already favorable prior disclosure program.

The final rule becomes effective on December 27, 2011. The final rule is silent on whether the offsetting provisions will apply to prior disclosures filed prior to the effective date but still pending after December 27th, and presumably is an item open for negotiation with CBP. In order to preserve the possibility of using the offsetting provisions, we would recommend that importers now include any applicable claims for offsetting in prior disclosures submitted to CBP.

PREVIOUSLY OFFSETTING HAS ONLY BEEN PERMITTED IN AUDIT SITUATIONS

CBP has historically treated overpaid duties differently when they arise during the course of a customs audit or focused assessment as opposed to outside the audit context. In a customs audit, CBP will evaluate an importer’s customs entries and make findings with respect to the correctness of such entries. The importer also may make valid prior disclosures to CBP during the course of an audit regarding erroneous entries.

The audit and related prior disclosure often reveal situations where both the underpayment and overpayment of duties and fees has occurred. In such circumstances, CBP is required to offset the underpayments with any overpaid duties and fees in order to calculate a net loss of revenue owed by the importer in relation to the audited entries.

However, prior to the revised regulation, an importer making a prior disclosure outside a customs audit could not benefit from offsetting underpaid duties with overpaid duties. Because CBP has not considered its review of prior disclosures outside the audit context to fall under CBP’s audit authority, CBP has not permitted offsetting of underpayments with overpayments of duties and fees in connection with entries covered by a prior disclosure.

REVISED REGULATION ON OFFSETTING

Under the new rule published on October 25, 2011, importers are eligible to receive the benefit of deducting overpayments from underpaid duties owed in all prior disclosures, not just those submitted in connection with a customs audit. When an importer submits a prior disclosure and seeks to use offsetting in calculating the final amount of duties and fees owed, CBP’s Office of International Trade, Regulatory Audit will review and evaluate such prior disclosures and approve offsetting in appropriate cases. Regulatory Audit typically has not been involved in reviewing prior disclosures, unless the prior disclosure is submitted in connection with an ongoing audit.1

WHAT SITUATIONS PRESENT THE BEST OPPORTUNITY TO USE OFFSETTING TO REDUCE PAYMENTS TO CBP?

The use of offsetting in prior disclosures offers potentially significant benefits to importers. We consider disclosures addressing errors in classifying and valuing merchandise as presenting the greatest potential for using offsetting and thus reduced payments.

The tariff classification of imported merchandise determines the applicable duty rates for that imported merchandise. Classification errors may result in a higher or lower duty rate being applied than the duty rate that should have applied with the correct classification. In cases where there are multiple classifications at issue, it is common to find importers that have made both underpayments and overpayments of duties and fees as a result of such classification errors. Under the revised regulations, offsetting can be used in such a disclosure, thus resulting in a lower total payment to CBP.

Another potential area through which importers may be able to take advantage of offsetting is customs valuation. Importers may consider making comprehensive disclosures in instances when they have both overvalued and undervalued imported goods, either through clerical errors, transfer pricing changes or other adjustments of liquidated entries not covered by reconciliation, or otherwise.

CONCLUSION

Compared with other self-disclosure programs in the trade context, including voluntary disclosures in connection with export controls violations, CBP’s prior disclosure program is already attractive to many importers. While an importer is required to pay duties and fees that the importer did not pay at the time of entry as a result of disclosed errors, plus interest, CBP does not assess additional financial penalties on importers that file a valid prior disclosure. CBP’s new rule authorizing offsetting to include prior disclosures made independent of a customs audit can reduce payments owed to CBP as part of a prior disclosure, thus enhancing the benefits of an already favorable prior disclosure process.