What Every Multinational Should Know About … The New Customs Enforcement Realities (Part IV): Ten Dubious Tariff-Saving “Opportunities” Every Importer Should Avoid

The Trump administration’s new tariff initiatives are reshaping the customs compliance landscape. As discussed in the prior articles in this series, higher tariff rates and new customs requirements are increasing customs bond requirements, new executive actions are signaling a more aggressive enforcement posture, and importers face a growing likelihood of audits, investigations, and other enforcement activity. Together, these developments are creating what may be described as the new customs enforcement reality.

Against this backdrop, many importers are understandably searching for opportunities to reduce tariff exposure and manage landed costs. There is nothing inherently problematic about such efforts. Indeed, customs law provides a variety of legitimate planning opportunities that may reduce duty liability when implemented correctly.

The challenge, however, is distinguishing between lawful tariff-planning strategies and positions that create significant compliance and enforcement risks. As tariff exposure increases, so too does the incentive for companies to adopt aggressive customs positions. At the same time, U.S. Customs and Border Protection (CBP) is expected to devote greater attention to classification, valuation, country-of-origin determinations, and other customs issues that directly affect duty liability.

As a result, some strategies that may appear attractive in the current environment can create substantial legal and financial exposure when pursued beyond what the law permits. In some cases, these approaches are based on misunderstandings of customs law. In others, they involve theories that have little support in existing statutes, regulations, or CBP guidance. And in still others, they may create risks that far outweigh any potential duty savings.

This final article in our series examines ten dubious tariff-saving “opportunities” that importers should approach with caution and explains why seemingly creative customs strategies can sometimes become the starting point for significant enforcement problems.

Classification and Tariff Scope Fallacies

Fallacy #1: “Come on, Customs processes millions of entries. They will never connect the dots!”

Many customs compliance strategies are built upon a surprisingly outdated assumption: that CBP reviews transactions one entry at a time and evaluates each filing in isolation.

That assumption is increasingly incorrect.

Modern customs enforcement is heavily data-driven. Through ACE and other enforcement tools, CBP has access to enormous amounts of import data and routinely employs sophisticated analytics to identify anomalies, trends, and potential compliance risks. Rather than beginning with a single problematic entry, CBP frequently begins with a pattern and then works backward to determine whether that pattern reflects a legitimate business change or a potential compliance issue.

This reality has become particularly important in the current tariff environment. CBP understands that importers have strong incentives to reduce exposure to Section 232 duties, Section 301 tariffs, antidumping and countervailing duty liability, and other trade restrictions. As a result, the agency is increasingly focused on identifying data patterns that may suggest aggressive tariff-avoidance strategies.

Classification changes are a good example. A sudden shift from one tariff provision to another shortly after a new tariff measure takes effect may attract attention, particularly where the products appear unchanged. The same is true of significant changes in declared value, abrupt country-of-origin shifts, unusual pricing trends, or sourcing changes that coincide with the implementation of new trade restrictions.

CBP also has the ability to compare importers against their peers. If one importer is declaring dramatically different values, classifications, duty rates, countries of origin, or sourcing patterns than similarly situated competitors importing comparable products, those differences may become visible through data analysis.

Importers should not assume that a questionable position will escape scrutiny simply because it appears reasonable on a single entry. Customs enforcement increasingly focuses on patterns, trends, and anomalies that become apparent only when transactions are viewed across products, suppliers, countries, and time periods.

The most effective compliance programs operate on the assumption that CBP will eventually connect the dots.

Fallacy #2: “Come on, there are at least three HTS codes that could apply. Why not use the cheapest one?”

For many importers, tariff classification is the first place they look when tariff costs increase. That is entirely understandable. A single classification decision may determine whether a product is subject only to ordinary customs duties or also faces substantial additional duties under Section 232, Section 301, antidumping and countervailing duty orders, or other trade restrictions.

In the current tariff environment, companies should be reviewing classifications. Many classifications were established years ago, when the duty consequences of a particular tariff provision were relatively modest. Today, however, the difference between two potentially applicable tariff provisions may result in dramatically different duty outcomes.

The challenge is ensuring that the analysis begins with the product rather than the desired tariff result. The proper question is not, “Which classification produces the lowest duty rate?” Rather, it is, “Which classification is supported by the terms of the Harmonized Tariff Schedule, the Explanatory Notes, CBP rulings, and applicable judicial precedent?”

CBP generally has little concern when importers undertake thoughtful classification reviews supported by sound legal and technical analysis. Problems arise, however, when classifications appear to have been selected primarily to avoid tariffs rather than to accurately describe the imported merchandise.

Importers should also recognize that classification changes are often highly visible to CBP. A sudden change in classification for the same product, or a classification change affecting products that appear substantially similar to merchandise previously entered under a different tariff provision, can be an obvious red flag. Likewise, if a significant number of importers begin shifting products into lower-duty classifications shortly after a new tariff measure takes effect, CBP is likely to notice.

A classification change that can be explained and defended is a legitimate compliance decision. A classification change that exists only because the tariff rate is lower is far more likely to attract scrutiny.

Fallacy #3: “These Section 232 tariffs are so unfair! Just pick a reasonably close alternative that is not covered and call it a day.”

Few customs issues have attracted more attention in recent years than Section 232 tariffs. As tariff rates on steel, aluminum, copper, and derivative products have increased, importers have devoted significant resources to evaluating whether particular products actually fall within the scope of the applicable measures.

There is nothing improper about undertaking that analysis. Indeed, importers should periodically revisit whether their products remain properly subject to Section 232 duties.

The challenge is that Section 232 reviews often begin with a legitimate question but can quickly become outcome driven. Once a company realizes that a particular classification or scope determination carries a significant tariff consequence, the temptation naturally arises to search for an alternative interpretation that places the product outside the scope of the applicable measures.

For numerous products, Section 232 applicability turns directly on tariff classification. A change in classification may therefore have the effect of moving a product from a tariff-bearing provision to one that falls outside the scope of the applicable Section 232 measures.

CBP is acutely aware of these incentives. Classification changes, revised product descriptions, and newly adopted scope interpretations that coincide with the imposition or expansion of Section 232 duties are likely to receive heightened scrutiny.

Importers should therefore approach Section 232 reviews with the same discipline that they would apply to any other customs analysis. The relevant question is whether the product’s physical characteristics, technical specifications, and legal classification support the conclusion being advanced.

Valuation Fallacies

Fallacy #4: “If we don’t put it on the invoice, how would Customs even know about it?”

As tariff rates have increased, customs valuation has become an increasingly important area of focus for importers seeking to manage landed costs.

Not surprisingly, many companies have begun scrutinizing whether royalties, license fees, engineering payments, software fees, tooling charges, product development costs, molds, dies, technical assistance, prototypes, and other contributions must be included in customs value.

A common misconception is that a cost somehow falls outside the customs valuation analysis simply because it does not appear on the commercial invoice. Customs valuation, however, focuses on the economic reality of a transaction rather than the accounting treatment chosen by the parties.

This issue has become particularly important as companies pursue China+1 sourcing strategies and establish relationships with new manufacturers. In many cases, importers provide substantial support to overseas producers in the form of engineering assistance, tooling, product specifications, testing protocols, software, prototypes, manufacturing know-how, and other valuable inputs. While these contributions are often necessary to establish production capability, they may also create “assist” obligations that must be reflected in customs value.

One reason royalties and assists remain recurring compliance issues is that the relevant information frequently resides outside the customs department. Engineering teams, procurement personnel, product development groups, legal departments, tax departments, and sourcing teams may each possess pieces of relevant information.

Whether a royalty must be included in customs value, or whether a particular contribution constitutes a dutiable assist, depends on a highly fact-specific analysis. As tariff exposure has increased, CBP has devoted greater attention to arrangements that appear designed to remove otherwise dutiable amounts from customs value or that fail to account for significant contributions provided to foreign manufacturers.

An assist that is overlooked does not cease to be an assist simply because no one informed the customs department that it existed.

Fallacy #5: “What’s the harm in unbundling a few costs? The supplier gets paid the same amount.”

Closely related to the assists and royalties issue is another common misconception: that a cost becomes non-dutiable simply because it appears somewhere other than the commercial invoice.

As tariff rates have increased, so has the incentive to reduce the value declared to CBP. Not surprisingly, some companies begin exploring whether costs associated with imported merchandise can be moved into separate contracts, invoices, entities, or payment streams.

Engineering services may be invoiced separately. Tooling charges may be placed in a side agreement. Royalties may be reflected in a licensing arrangement rather than a purchase order. Software fees, commissions, development costs, technical assistance charges, and other payments may be carved out from the primary purchase transaction.

The compliance risk arises when the structure is driven primarily by the desire to remove otherwise dutiable amounts from customs value.

CBP generally looks beyond invoice labels, accounting treatment, and contractual terminology to evaluate the substance of the transaction. The key question is not whether a payment appears on a separate invoice. The key question is whether the payment is sufficiently connected to the imported merchandise that it must be included in customs value under the applicable valuation rules.

Separating a payment from the commercial invoice may change the paperwork. It does not necessarily change the customs treatment.

Fallacy #6: “If our transfer pricing study is good enough for the IRS, it’s good enough for Customs!”

As tariff rates have increased, customs valuation has become an increasingly important component of overall trade compliance.

Many multinational enterprises already maintain extensive transfer pricing documentation for income tax purposes. Faced with the cost and complexity of customs valuation compliance, some companies naturally wonder whether those existing transfer pricing studies can simply be repurposed to support customs value.

Unfortunately, the answer is not always that simple.

Although tax and customs authorities both examine related-party transactions, they often do so from different perspectives and for different purposes. Transfer pricing analyses prepared for the IRS typically focus on whether profits are allocated appropriately among related parties and whether the pricing is consistent with the arm’s-length standard. CBP, by contrast, focuses on whether the declared customs value satisfies the requirements of the customs valuation statute and whether the relationship between the parties influenced the price paid for the imported merchandise.

The overlap between tax and customs is significant. The rules, however, are not identical.

Fallacy #7: “If there are three invoices, why aren’t we using the cheapest one?”

As tariff rates have increased, many importers have begun exploring First Sale programs as a means of reducing customs value and lowering duty liability.

Unlike many of the strategies discussed in this alert, First Sale is not a loophole or an aggressive compliance position. When properly implemented, it is a well-established customs valuation methodology recognized by CBP and the courts.

One of the most common misconceptions, however, is that First Sale simply permits the importer to use the lowest invoice in a multi-tier supply chain as the basis for customs value.

To qualify for First Sale treatment, importers generally must establish that there was a bona fide sale for export to the United States, that the relevant parties dealt with one another at arm’s length, and that the transaction satisfies the requirements established through CBP rulings and judicial precedent. Equally important, the importer must possess sufficient documentation to demonstrate that those requirements have been satisfied.

Simply selecting the lowest invoice in the transaction chain is not a First Sale program. It is merely a lower number.

Origin Fallacies

Fallacy #8: “If we assemble the product in Vietnam, doesn’t it become a product of Vietnam?”

Few customs concepts have become more important in recent years than country of origin.

Not surprisingly, many importers have pursued China+1 sourcing strategies, relocating production or portions of their supply chains to countries such as Vietnam, Thailand, Malaysia, India, and Mexico.

The challenge is that not every supply-chain change results in a new origin.

One of the most persistent misconceptions in international trade is the belief that country of origin changes simply because merchandise is subject to some processing in another country. It does not. Minor assembly operations, repackaging, relabeling, testing, inspection, sorting, or other limited processing activities generally do not change origin if they do not result in a substantial transformation of the product.

Because China+1 strategies have become so widespread, country-of-origin claims associated with third-country manufacturing have become a major enforcement focus. CBP is well aware that importers have strong incentives to reduce exposure to Section 301 duties and other trade restrictions.

Country-of-origin determinations should be driven by the facts of the production process and the substantial transformation analysis, not by the tariff result the importer hopes to achieve.

Compliance Fallacies

Fallacy #9: “Just let the customs broker handle everything; it’s what we pay them for.”

As customs compliance becomes increasingly complex, many importers rely heavily on their customs brokers to help navigate classification, entry filing, admissibility requirements, tariff programs, and a growing array of trade restrictions.

The challenge is that importers sometimes assume that the broker’s involvement means that someone else is responsible for evaluating all customs compliance issues.

More importantly, many of the customs issues discussed in this alert involve facts that the broker may never see.

A broker can review the commercial invoice and entry documentation that it receives. What the broker often cannot see are royalty agreements negotiated by the legal department, transfer pricing policies developed by the tax department, engineering services provided by product development teams, tooling supplied by procurement personnel, or sourcing decisions made months earlier as part of a China+1 initiative.

Many customs disputes arise not because anyone intentionally ignored a compliance issue but because the importer assumed that someone else was evaluating it. The logistics department assumed the broker was handling it. The broker assumed the importer had already analyzed it. Meanwhile, the underlying issue was never reviewed by anyone.

A customs broker is an important part of a compliance program. It is not a substitute for one.

Fallacy #10: “if everyone else in the industry is doing it, why should we be the only saps who are paying the highest tariff rate?”

As tariff rates have increased and customs compliance has become more consequential, importers have devoted significant attention to understanding how competitors classify products, determine country of origin, value merchandise, and address other customs issues.

The challenge arises when industry practice becomes a substitute for legal analysis.

One of the more common justifications for an aggressive customs position is the belief that the position must be acceptable because it is widely used throughout the industry. Whether that belief is accurate or not, it generally misses the point. CBP does not determine compliance based on the number of companies taking a particular position. Rather, the agency evaluates whether a specific importer’s customs treatment is consistent with the applicable legal requirements.

Moreover, widespread adoption of a particular practice does not necessarily reduce enforcement risk. In some circumstances, it may increase it. When CBP identifies a potential issue affecting a particular product category or industry sector, it is not uncommon for multiple importers of similar merchandise to receive CF-28 Requests for Information or become part of a broader enforcement initiative.

In those situations, the fact that everyone is doing it may simply mean that everyone receives the same questionnaire.

If a company genuinely believes that a competitor is obtaining an unfair advantage through customs violations, CBP maintains mechanisms, including its e-Allegations program, through which suspected customs violations may be reported. The appropriate response to suspected noncompliance is to evaluate available legal remedies, not to assume that another company’s conduct creates a safe harbor for everyone else.

Ultimately, customs compliance is determined by the correctness of an importer’s own entries, not by whether its competitors are making the same decisions.

The common theme running through all ten of these fallacies is that they begin with the desired tariff result and work backward. Customs compliance works best when the process runs in the opposite direction.

There is nothing improper about reducing tariff exposure. In fact, importers should continuously evaluate legitimate opportunities to improve classifications, optimize supply chains, implement First Sale programs, review valuation methodologies, and qualify for preferential tariff treatment where appropriate. Many of the most effective tariff-saving strategies are entirely lawful and have been recognized by CBP and the courts for decades.

The challenge is ensuring that the facts and the law support the result.

As tariff rates increase, so too do the incentives for aggressive customs positions. CBP understands those incentives and has increasingly focused its enforcement efforts on classification changes, valuation adjustments, country-of-origin claims, and other positions that materially affect duty liability. In today’s data-driven enforcement environment, assumptions, industry practices, and undocumented conclusions are becoming increasingly difficult to defend.

Ultimately, the best tariff-planning strategy is not the most creative one. It is the one that remains supportable when CBP asks a simple question:

“Please provide the documentation supporting your position.”