What Is Duty Drawback? An Expert Guide

Duty drawback is a program designed to let companies recover duties paid on imported goods under certain conditions. Many types of imported goods are subject to tariffs and other import duties. However, they can be exempted if those goods aren’t sold to an end user within the importing country, or if they’re sold but subsequently destroyed or returned due to defects. This article will review the main types of duty drawback available to businesses that import goods, how to calculate them, and best practices for filing and maximizing the benefits. (Editor’s note: The term “duty drawback” is always presented in the singular.)

What Is Duty Drawback?

A duty drawback is a refund of tariff-based duties, fees, and other taxes levied on imported goods that are later exported or destroyed. These goods may be unused and in their original state, or they may have gone through a manufacturing process.

Key Takeaways

• Duty drawback is a mechanism wherein countries encourage exports by exempting imported goods from tariffs if they’re subsequently exported.
• Businesses that wish to claim duty drawback should keep all relevant records—such as invoices, bills of lading, and packing lists—and be sure to apply for the appropriate type of drawback.
• Businesses can use software to help automate the filing of duty drawback claims so that such claims are filed for the appropriate drawback type, all necessary documentation is completed, and other regulations are complied with.

Duty Drawback Explained

Duty drawback, known in some countries as inward processing, allows companies that pay duties or other import-related fees to recuperate those payments if the imported goods are subsequently destroyed or exported from the country that charged those duties. An example of a duty drawback is when an aircraft manufacturer pays duties on the jet engines it imports and then gets reimbursed for those fees when it exports the finished airplanes to airlines based overseas. Another example is when a sporting goods retailer pays duties on the baseball helmets it imports and later gets reimbursed for those fees when it must destroy the helmets or send them back to the overseas manufacturer due to defects.

The US, Canada, Mexico, and most European countries are among the many nations that offer duty drawback. In the US, duty drawback has been available in some form since 1789. As noted by KPMG, it has become more prevalent since the passage of the Trade Facilitation and Enforcement Act of 2015, which modernized and broadened the scope of items eligible.

Duty drawback is one means for governments to encourage exports and help domestic companies price their products more competitively in global markets. In most cases, the timeframe for a company to claim a duty drawback is five years.

In many instances, importers seeking duty drawback will store imported goods that are destined for re-export in so-called bonded warehouses. These are secure facilities where goods can be stored, modified, or manufactured until they’re re-exported. Duty is not immediately due for goods stored in such locations.

Companies can also sell certain duty drawback credits to other businesses that need relief from import duties but don’t qualify for duty drawback.

Duties Eligible for Drawback

Drawback is the refund of certain duties, taxes, and other fees that are collected when goods are imported. Such fees are eligible for refund only in certain cases, such as when imported merchandise is later re-exported or destroyed. In the US, these fees include the so-called Section 301 duty, which refers to a provision of US trade law that allows the Office of the US Trade Representative to issue retaliatory tariffs against countries it believes are engaged in unfair trade practices. Other eligible duties include:

• Ordinary customs duties, including those stipulated by the Trade Act of 1974 in the US
• Anti-dumping duties, also known as anti-subsidy duties, imposed on goods whose manufacture is deemed to be unfairly subsidized by the country of origin
• Merchandise processing fees charged to examine imported goods at the border
• Harbor maintenance fees charged to offset the cost of maintaining harbors where imports arrive
• Federal excise taxes levied on imported beers, wines, tobacco, fuel, airline tickets, and other goods and services

While most excise taxes are consumption taxes paid by consumers, certain classes of imports—including alcohol—may be subject to excise tax paid by the importer. In some such cases, the importer can claim duty drawback. A business importing beer on which it pays US excise tax, for instance, can claim duty drawback if it also exports beer it produces in the US.

In general, certain types of goods, such as agricultural goods and goods made of steel or aluminum, may be excluded from drawback eligibility.

Key Duty Drawback Types

Duty drawback is made available by governments worldwide to encourage export activity by exempting imports from customs duty when those imports are part of the supply chain for subsequent exports. Examples in the United States include:

• Manufacturing drawback: a refund of tariffs or customs duties paid on imported materials used in manufacturing goods that are subsequently exported.
• Unused merchandise drawback: a refund of such fees paid for unused imported goods that are returned to the supplier or destroyed without any further processing.
• Manufacturing substitution drawback: a refund of duties paid on imported goods that are offset by exports of like domestic products. For example, a California-based business that produces and exports red wine while also importing red wine from France can claim duty drawback on the imported wine up to the amount of the red wine it exports.
• Direct identification drawback: a refund of duties paid on imported goods that are used to make exported goods. The term “direct identification” implies that the manufacturer must be able to identify the exact imported materials used and the purpose for which they’re used.
• Rejected merchandise drawback: a refund of duties paid on imported goods that are defective, don’t conform to specifications, or are shipped without consent.
• Same condition drawback under the US-Mexico-Canada Agreement (USMCA): a refund for duties paid on imported merchandise that hasn’t been materially altered and has been re-exported to Mexico or Canada within three years of its import into the US. This drawback was created by Congress in 1980 to stimulate exports to those countries as part of the USMCA, which is the updated North American Free Trade Agreement.
• Petroleum drawback: a refund that applies to duties paid on imported crude petroleum, or goods made from petroleum or petroleum derivatives, that is exported within 180 days.

How to Calculate Drawback

In most cases in the United States, businesses can obtain refunds of up to 99% of the duties and fees paid, claiming against the lower amount of either (1) the total duties paid or owed on the good in the US or (2) the total amount of duties paid on the exported good upon subsequent importation into Canada or Mexico.

Most drawback refunds occur within two years, but businesses using Accelerated Payment Privilege (which requires depositing a bond with an accredited institution) can expect to receive a refund within 90 days.

In other countries, such as India and South Korea, businesses can expect to recover anywhere from 85% to 99% of duties and fees paid depending on how much time elapses between when a good is imported and when the claim is filed.

7 Tips for Filing Duty Drawback

Duty drawback filings require much of the same information gathering, document retrieval, and rote bureaucratic processing as filing personal income taxes. Some businesspeople entrust this task to a tax accountant, others file duty drawback manually themselves, and an increasing number of business professionals use software that guides them through the process. Painstaking record-keeping and attention to detail are essential. Here are a few best practices:

1. Maintain accurate documentation. Keep detailed records for all the goods your business imports (e.g., purchase orders, invoices, packing lists, and import entry summaries) and exports (e.g., invoices and bills of lading). As a part of this effort, digitize any records that were originally paper documents.
2. Verify duty drawback eligibility. Make sure that the goods for which you intend to claim drawback meet the necessary criteria under current regulations.
3. Gather relevant documents. Assemble all required documentation, such as proof of duties paid, manufacturing records, commercial invoices, and proof of export or destruction.
4. File in a timely manner. File your duty drawback claim within five years of importing the goods.
5. File electronically. Use the digital Automated Commercial Environment portal to submit your drawback claim.
6. Consult a customs broker. Consider working with a customs specialist to navigate complex drawback rules and help ensure accurate claim filing.
7. Use specialized software. Seek out specialized software that can guide you through the filing process, much like a broker would. This type of software can be especially useful if your business doesn’t have a drawback specialist on staff.

6 Tips for Maximizing Duty Drawback Benefits

Here are some of the best practices adopted by leading import/export companies:

• Establish a rigorous record-keeping process. As with almost any other type of refund request, careful documentation is a must for duty drawback reimbursements. Messy record keeping can lead to an administrative nightmare when it’s time to file a claim, and any missing or incorrect information could lead to a denial. To maximize refunds and pass audits by government authorities, your business should establish a dedicated process to track all relevant documents. Per US law, your business must retain import and export documentation for five years, including commercial invoices, bills of lading, and the export declaration. You should also keep all manufacturing and financial records for five years.
• Understand the different types of duty drawback. There are several types of duty drawback, the three main ones being manufacturing drawback, unused merchandise drawback, and rejected merchandise drawback. It’s important to have an in-depth understanding of each drawback type so you can correctly classify your products.
• Understand the links in your supply chain. As well as having a firm grasp of the types of available duty drawback, you should also understand the intricacies of your company’s supply chain. This means familiarizing yourself with where imports are coming from and where exports are going, as well as other aspects such as the provenance of all components, where goods are finished, and how they’re shipped. Your business should also maintain documentation for all these elements.
• Coordinate with a duty drawback expert. About 95% of duty drawback claims are filed via a customs broker. These professionals generally have established electronic connections with relevant agencies, making it easier to file claims. Even if your business has experienced import/export specialists on staff, such as traffic managers, freight coordinators, and compliance and logistics coordinators, you should consider hiring a customs broker. Hiring a customs specialist can help ensure your filings are compliant, filed in a timely manner, and that they take full advantage of all available duty drawback benefits.
• Keep up with changing laws and regulations. The laws and regulations governing imports and exports change frequently, often with changing government administrations. But these rules can also shift outside of the political calendar, so be sure to continuously monitor trade laws. For instance, The US Trade Facilitation and Trade Enforcement Act of 2015, which went into effect in 2019, expanded eligibility for the country’s drawback program, changed the drawback claims filing process, and altered the length of time for which records must be kept.
• Invest in automation for accurate tracking and claims. The right technology can help your business maximize refunds and reduce the amount of time spent collecting documentation, checking eligibility for (and compliance with) various regulations, and actually filing duty drawback claims.

How Can Oracle Help with Duty Drawback?

Oracle can help businesses check the eligibility of imports for duty drawback and help automate key processes such as document gathering, regulatory compliance, and filing duty drawback requests with relevant government bodies using Oracle Global Trade Management. In addition, Oracle can help businesses apply these capabilities around the world without requiring end users to learn new processes for each country, or requiring IT to implement a separate application for each jurisdiction.

Duty Drawback FAQs

What qualifies for duty drawback?
Broadly speaking, imported goods that are later exported without being sold in the country that charged the duty, or that are returned or destroyed due to defect, are eligible for duty drawback. In the US, businesses can claim duty drawback for a five-year period from when they imported the goods.

What is the difference between duty drawback and refund?
A duty drawback is a type of refund applied to duties paid on imported goods.

What is a 301 duty drawback?
Section 301 of the US Trade Act of 1974 is the legal basis under which the Office of the US Trade Representative can order retaliation, in the form of tariffs, against countries it believes have engaged in illegal subsidies of their industries or other forms of “unfair” trade barriers. Even duties paid under Section 301 tariffs are eligible for duty drawback.

How do I get a duty drawback refund?
US businesses can file claims with US Customs and Border Protection by submitting forms manually or electronically using specialized software. Either way, this is typically done with the help of a customs broker.