As the world's largest import nation with an annual import volume of 3.2 trillion USD (2022), the U.S. is indispensable as import market for international businesses. With the Presidential Election uprising, the country’s import policies come under the media’s spotlight once more, with Donald Trump promising huge tax cuts financed by levitation of higher import tariffs in general, and with particularly higher tariffs on imports from China.

International and importing businesses require a fundamental and up to date understanding of the U.S. Customs Duty system to navigate the ever changing landscape of Customs tariffs and ideally find ways to minimize their own import costs by exploiting existing regulation.

The following article provides international and U.S. inbound businesses an overview of the tariff system and Customs regulations. It cannot provide an individual assessment nor legal advice for any particular request. We hope, nonetheless, to kick start your journey to create Customs efficiencies.

Determination and Calculation of Custom Duty Liability

In general, Customs duty fees are calculated “ad valorem”, by multiplying the specific duty tariff and the good’s particular value, by applying specific tariffs per quantity ($ per kg / oz.) or by compound tariffs combining both methods.

Valuation of a good is regularly performed by the “transaction valuation method” under the WTO Valuation Agreement (See Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade (GATT) 1994). As the most commonly used method, it is based on the price of the imported goods. In most cases, the so-called “Transaction Value” is determined by the price actually paid or payable for the imported merchandise, meaning the total payment for the actual product minus additional fees (“Adjustments”) for freight, transport insurance etc. Under specific circumstances, for example with related entities transferring goods in a cross-border transaction, other methods of valuation might apply to determine a comparable market value of the imported goods and to diminish the influence of business relations on the duty liability.

The applicable Customs duty tariffs depend on a variety of factors, especially the good’s origin country and contents. For example when importing clothing, the tariffs vary depending on the type, contents or fabric of a certain garment and if it is meant for children, women or men. The tariffs for each product are categorized and classified under the Harmonized Tariff System (HTS) in the HTS Schedule (See HTS Schedule at https://hts.usitc.gov/).

The Schedule is divided into 12 sections, each classifying different types of goods to be imported and applying individual tariffs to particular products. Different tariffs are applicable depending on whether the country of origin has “Most Favored Nation” trade status (which is the regular status of most nations except e.g. Russia or North Korea) or is a party of a Free Trade Agreement. In the latter case, importing might even be free of charge.

Examples of HTS Schedule classification:

• Your company belongs to the apparel industry and you wish to import clothing, in particular a men’sanorak, mainly consisting of cotton → Tariff No. 6101.20.00 10 applies with 15.9% custom duty for MFN countries (otherwise: 50%) or is free of charge under a Free Trade Agreement.
• Your company belongs to the food and beverage industry and you wish to import fresh apples and corn chips → Tariff No. 0808.10.00 applies for fresh apples, so the apples are free of duty charge coming from a MFN country (otherwise: 1.1¢/kg) AND Tariff No. 1905.90.90 30 applies for corn chips and similar crisp savory snack foods with a 4.5% duty rate for MFN countries (otherwise: 20%)
• Your company belongs to the agricultural sector and you wish to import cattle, inter alia for dairy purposes → Tariff No. 0102.29.20 applies for for dairy cows classifying them free of charge coming from a MTN country (otherwise: 6.6¢/kg) OR Tariff No. 0102.29.40 applies for all other purposes, e.g. slaughter, and applies a tariff of 1¢/kg for cattle from a MTN country (otherwise: 5.5¢/kg). Under a Free Trade Agreement, the import would be free of charge.

Options to Lower Import Duty Liabilities

As Customs duty may be a significant financial burden, compliance and strategy to lower costs might help reduce costs.

Further, import amounts with a total value of USD 800.00 and below (de minimis threshold), have no import charges.

Free Trade Agreement by Engineering: Adjusting your products import route could make you eligible for a Free Trade Agreement. The core of this exercise is to ensure that your goods comply with the “rules of origin” of the particular Free Trade Agreement.

In order to be eligible for the Free Trade Agreement treatment,

1. the product must be wholly obtained, meaning produced entirely, in the territory of one or more of the FTA countries.
2. the product must be a good produced exclusively originating materials, meaning none of the material can originate outside one of the FTA parties’ countries.
3. the product must qualify for preferential treatment as for its substantial transformation, with value added content of more than 35% of the good’s initial value within the Free Trade Agreement party (so-called 35% appraised value method, special regulations apply for Israel or Jordan).
4. the product has to include a certain percentage of regional value content (“RVC”) making it reach a certain level of Regional Value Content to benefit from the Free Trade Agreement as an originating good, in particular depending on the Free Trade Agreements regulations.
5. With regard to the HTS Schedule, also a Tariff Shiftmight help to qualify under the rules of origin. Transforming the good, might allow changing the HS classification of the non-originating components to the HS code of the final product (e.g., processing wood into furniture = change of HTS chapter). This type of tariff classification change shows that non-originating components have been sufficiently transformed in either the United States or FTA partner country(ies) to allow them to qualify for a preferential tariff under the FTA.

There are further combinations of (4) and (5) applied with further buildup or build down formulas and specific rules varying for each Free Trade Agreement. Global players benefit from the rules of applicable FTAs, for example Samsung from imports under the United States-Korea Free Trade Agreement (KORUS FTA). When trade sanctions were imposed by the U.S. in 2017, Apple moved many of its production facilities from China to Vietnam to still be eligible for imports from a Most Favored Nation (“MFN”) country (See Souring US-China Relations Threaten to Make Your iPhone More Expensive).
Also, Apple has initiated to reroute its products from formerly mainly China to other Asian countries, e.g. Vietnam or India, after the U.S.-China trade sanctions were imposed.

Tariff Engineering: Tariff Engineering may lower the duty charges by changing the product partially and along the HTS classifications. While at first glance, the classification in the HTS Schedule may seem to be set in stone, it can be very helpful to double-check if the classification is eligible for changing. The mechanism and effect are best understood with an example:

• HTS tariffs for clothing are influenced by the type of garment and the materials used, as well as they are meant for Women or Men. Changing the fabric content rates can make a specific garment applicable for lower duty fees, as for example, tariffs for cotton clothing are lower than for polyester. To determine the applicable tariff, it is inevitable to do well-founded research.

• By this method, Converse was able to let their imports be qualified as slippers instead of regular outdoor shoes by adding felt soles to its shoes. By this, the company managed to decline the applicable duty tariffs from around 37.5% to only 3% (See Here's Why Converse Sneakers Have Fuzzy Bottoms - Business Insider).

Reduction of Imported Value: Reducing the import value of your goods can help decrease the levied tariffs. Careful compliance can help determine the actual goods’ value as a calculation base. Therefore, deducting invoice charges unrelated to the product value, e.g. freight, insurance, port charges can have a direct impact on the imposed tariffs.

As it is a common misunderstanding, it is important to keep in mind the Customs value of a good is based upon the amount of money paid by the buyer to the seller including all costs for bringing the merchandise to the point of import and not the intended sales price. This method requires substantiated proof of the actual merchandise or product value by handing in invoices, contracts, bills or other evidence showing the additional payments to a third-party. If costs are estimated and not documented, U.S. Customs and Border Protection considers this a failure to exercise reasonable care on the part of the importer. It will disallow the deduction and the importer may face penalties.

First Sale: The “First Sale” strategy might further allow the use of a lower price as the foundation of calculating the payable fees. In a multi-tiered transaction, companies might be allowed to only pay customs on the “first” (earlier) sale in a series of multiple transactions. Therefore, the earlier sale has to be documented as a sale for exportation to the United States and the importer has to meet all other Customs requirements. A high level of transparency in a company’s supply chain is required to comply with the evidence requirements.

There are a number of further options to save money and to take control of your company’s cash flow and liquidity, for example by drawbacks or the use of Foreign Trade Zones, which are beyond the scope of this article and are therefore reserved for individual advice.

Balancing Tax Law and Customs Law

When engineering the value of imported goods, a business will have to consider tax law and reporting requirements applicable to the same transaction, in particular to the extent that the import value equals the taxable transfer price for income tax calculation. As Customs and Tax authorities use different methods to evaluate transactions, avoiding a negative financial outcome requires an interdisciplinary approach to assess each individual situation (See The Link Between Transfer Pricing and Customs Duties | BDO).

Conclusion: better stay in your local market?

As portrayed, the Customs situation is more complex than quickly and easily mastered and, above all, implemented. Identifying the particularly applicable calculation method and correct HTS classification for your goods can be a challenging task. Nevertheless, it provides the groundwork for economical performance optimization that can directly and largely impact costs and profits.

In general, we see clients benefit from the following considerations:

1. determine or review your goods’ classification under the HTS Schedule, as well as the applicable tariff,
2. review the correct valuation and (re-)evaluate your goods,
3. reconsider the invoice “Adjustments”,
4. check whether your goods qualify for preferential treatment under Free Trade Agreements or further trade exemptions, or if a general redirection to a Most Favored Nation (“MFN”) country would be useful,
5. and only then reconsider the other displayed reduction options such as Tariff Engineering.

As the best practice applicable may vary case-by-case, appropriate interdisciplinary consultation and advice by service providers, lawyers and accountants is essential, as negative consequences may result with respect to tax and corporate law. Following the right advice and business plan, the Customs situation can become a valuable tool in market competition and thus, hopefully, another reason to stay active in the international business.

On January 16, 2024, the U.S. Supreme Court refused to consider appeals from both Apple and Epic Games (See Reuters: US Supreme Court snubs Apple-Epic Games legal battle).

The appeals pertained to the antitrust case initiated by Epic against Apple in 2020, resolving a several year battle over Apple’s 30% charge for every purchase made through the App Store and making digital platforms more competitive, arguably with the better outcome for Apple.

What Was This About?

Unfortunately, the Supreme Court did not explain why it rejected the appeals. Hence, we would like to backtrack. In 2020, Epic filed an antitrust lawsuit against Apple, alleging that Apple engaged in unlawful monopolistic practices because Apple required users to download applications exclusively through the App Store and make in-app purchases exclusively through Apple's in-app system. At the core of this is the financial issuethat Apple typically applies a commission of 30% on in-app purchases – thereby likely cutting Epic’s margins by 30%. However, Epic’s main legal claimwas that Apple should have allowed developers to direct users to systems other than Apple’s in-app system, which would increase competition, lower prices, and lead to a net gain for users.

While the antitrust claim failed, crucial findings by the lower courts (in 2021 and 2023) have been confirmed, namely that Apple had violated California's unfair competition law by preventing developers from directing users to purchase digital goods through a system other than Apple's in-app system. Consequently, Apple is now obligated to permit developers to provide links and buttons that direct users to other ways to pay for content within the apps, but is not prohibited from charging a fee for a transaction.

Neverending Story: Increasing Competition By Restricting Business?!

The underlying topic of Epic’s claim is antitrust law’s purpose to prohibit anti-competitive conduct that deprives consumers of the benefits of competition. Historically, antitrust claims have targeted industries like railroads, telecom companies, and oil corporations, aiming to curb monopolistic control that harms competition and consumers through e.g. stifling the entry of new competitors and setting unfair prices.

This is not an uncommon narrative that major platforms are regularly confronted with, but which has yet to prevail under current law. It should also be noted that Epic brought a similar claim against Google, where the jury in United States District Court for the Northern District of California decided in Epic’s favor, finding that Google’s practices were monopolistic and anti-competitive. However, the remedies are yet to be decided. The underlying concern is the reason why the European Union has passed a new law called the Digital Markets Act (“DMA”), which will come into effect on March 7, 2024. Based on the DMA, Apple will have to permit third-party app stores and billing systems in the European Union.

While a successful antitrust claim could potentially take down Apple’s 30% fee, Epic’s concerns were not heard, and the courts only penalized Apple’s exclusionary behavior with respect to its prevention of downloads and purchases outside of the App Store.

That, however, is that from antitrust law. While antitrust laws' primary focus is on promoting competition and preventing practices that could lead to monopolies or anti-competitive behavior, unfair competition law is a broader term that encompasses a variety of practices that are considered unfair or deceptive.

While it would seem that the U.S. Supreme Court’s rejection is a lifeline for major digital platforms, indicating that they are not subject to antitrust laws in the classical sense in this instance, the limitations and requirements with respect to their download and sale practices show that courts are dissatisfied with how the platforms are conducting themselves and treating competitors – but through antitrust’s step sister: unfair competition law.

What are the Direct Implications of the Rejection?

As a result of the U.S. Supreme Court’s rejection of Epic’s and Google’s appeals, the ruling by the U.S. Court of Appeals for the Ninth Circuit stands. This means that Apple must enable developers to add external links, buttons, or similar features within their apps to direct users to payment systems other than Apple’s in-app system.

Apple has chosen to comply with the injunction, i.e., permit users to circumvent its in-app system related to in-app purchases. However, Apple is still requiring developers to pay a commission of 27% of any purchases made through a system other than Apple’s in-app system that users have been directed to by the developers, which, arguably, defeats Epic’s intent to get rid of the 30% commission. In practical terms, due to the additional effort and lack of benefit in directing users to other payment systems, we do not expect this decision to change much for any party at this point in time.

What Happens Next?

Epic’s CEO Tim Sweeney expressed in X that "Epic will contest Apple's bad-faith compliance plan in District Court” (See X: TIm Sweeney). Sweeney claimed that the 27% commission “kills price competition”, and that Apple purposefully detached the process from the standard payment flow on iOS. The latter means that users have to log in to a separate browser session and search and select the digital goods again that they wish to purchase. If Epic does, in fact, file a new lawsuit against Apple based on Apple’s way of complying with the injunction, it may take up to years before a final judgment is received.

For a developer, that means that you now can offer in-app purchases through systems other than Apple’s in-app system. However, when you are making the decision on whether or not to provide such an option, you need to be aware of the 27% commission that is to be paid to Apple, as well as the other limitations mentioned above.

Author: Jesper Rantatulkkila and Daniel Koburger