Category Archives: Finance

Duty Drawback – The Devil is in the Details

Duty Drawback, granted under section 313(a) of the Tariff Act of 1930, as amended in 19 U.S.C. Section 1313(a), costs North American business up to 2.4 Billion a year [Source: Neville Peterson LLP] because the process is so convoluted that most business would rather lose the money owed to them then try to navigate through a process which seemingly requires truckloads of paperwork and which can take 6 months or more to resolve. Why is it so difficult? The US has had 224 years to make it so (as it was the second law passed by the first Congress way back in 1789).

Even though the goal of duty drawback is to promote U.S. business development by allowing a company to secure refunds for products that were exported, the government considers this drawback a privilege, and one that has to be earned (through a rigorous filing process).
Duty drawback is further complicated by the fact that claims are not just limited to importers, manufacturers who purchase imported products for use in their manufactured goods that are to be exported and exporters who purchase products made from imported merchandise are also eligible to make drawback claims, because drawback is paid to the exporter (under the assumption that the importer they bought the goods from charged the buyer enough to make a profit, and thus recovered the duty in this way), who has to have proof that the product is eligible for duty drawback. For a product to be eligible, it has to be an imported product on which duty was paid and which was subsequently substantially transformed and then either exported within five years of import, rejected upon import, or unused and exported or destroyed within three years of import.

What is a substantial transformation? It is one that is complicated, requires money and labour, and results in a new and different product, which has a new name, character and usage. Detailed documentation of the process may be required in filing the claim.

To file a claim on the product that was substantially transformed, the filer needs to prove that the resultant product contains an imported product on which duty was paid. This requires an exact paper trail that documents the product, either by batch, lot, or serial number that was consumed and the product that was produced. If the merchandise that was imported is then exported or destroyed within three years in an unused state, the organization is also eligible for drawback. In this situation, the organization will need to keep a paper trail that proves the unused merchandise that was exported or destroyed was the same merchandise that was subject to an import duty. Finally, an organization also has the option of rejecting import merchandise that does not conform to specifications, that was shipped without its consent, or that was determined to be defective, and file a drawback claim on this merchandise, but to do so the merchandise must be returned to customs. Unless the merchandise has no resale value, this is generally not a good option.

Unless the claim is for goods imported from Canada or Mexico under NAFTA, which has its own drawback filing process, the steps involve:

    • applying for a ruling
      this provides an organization with permission to submit a claim, and will generally require that the organization provide a detailed description of the process that demonstrates it substantially transforms the product on which the organization is intending to file a drawback
    • file the claim
      including all of the paperwork required, which, at a minimum will require the following for proof of import

      • Customs Form 7501
      • Commercial Invoice
      • Documentation necessary to support use of products in a substantial transformation manufacturing process
      • Waste summary documentation for any products discarded
      • Certificate of Delivery

and, at a minimum, the following for proof of export

    • export declaration
    • invoice
    • bill of lading
    • purchase orders and receipts from the customer

And it will take time. As the CBP site says be aware the process of filing for drawback can be involved and the time it takes to receive refunds can be lengthy. But if you do a lot of exporting, the cashflow could make even a six month wait worth it.

H.R. 2775, By the Numbers

Now that H.R. 2775 has passed, the US Government is back to work, for now. (The deal only funds the government until January 15, 2014 and only raises the debt ceiling until February 7, 2014, so Americans face the possibility of another government shutdown early next year.) But what does H.R. 2775 really mean? It means that the government may spend “such amounts as may be necessary, at a rate
for operations as provided in the applicable appropriations Acts
for fiscal year 2013 and under the authority and conditions provided
in such Acts, for continuing projects or activities (including the
costs of direct loans and loan guarantees) that are not otherwise
specifically provided for in this joint resolution, that were conducted
in fiscal year 2013, and for which appropriations, funds, or other
authority were made available in the following appropriations Acts.

And what was specifically provided for in the joint resolution that was H.R. 2775? Not much. While the bill is 14 pages, there are only 18 specific numbers specified. Specifically, in decreasing order of magnitude, it allocates the following 10 amounts:

$9.248418 B for the “Department of Transportation – Federal Aviation Administration – Operations”

$4.821181 B for “The Judiciary – Courts of Appeals, District Courts, and Other Judicial Services – Salaries and Expenses” (and at most 25M shall be available for transfer between accounts to maintain minimum operating levels)

$2.455490 B for the “Department of Veterans Affairs – Departmental Administration – General Operating Expenses Veterans Benefits Administration”

$1.012 B for “The Judiciary – Courts of Appeals, District Courts, and Other Judicial Services – Defender Services”

$600 M for the “Department of Agriculture – Forest Service – Wildland Fire Management” for urgent wild land fire suppression activities

$273 M to meet the terms of section 251(b)(2)(B)(ii)(III) of the Balanced Budget and Emergency Deficit Control Act of 1985, as amended. and $469.369 M in additional new budget authority pursuant to 251(b)(2)(B) of such act from the amounts made available for “Social Security Administration, Limitation on Administrative Expenses”

$186 M for the “Maritime Administration – Maritime Security Program”

$36 M for the “Department of the Interior – Department-wide Programs – Wildland Fire Management” for urgent wild land fire suppression activities (with $15 M earmarked for burned area rehabilitation)

$3.1 M for the “Privacy and Civil Liberties Oversight Board”

$174 K payment to Bonnie Englebardt Lautenberg, widow of late New Jersey Senator Frank R. Lautenberg

And it sets the following three limits:

Amends Public Law 100-676 to $2.918 B from 775 M

Limits the amounts made available to carry out section 125 of title 23, United States Code, under Chapter 9 of Title X of Division A of the Disaster Relief Appropriations Act, 2013 (Public Law 113-2; 127 Stat. 34) to $450 M

Amends Division F of Public Law 112-74 to may retain up to $1.499M instead of $2.499 M

So what does this mean?

Given that it only (re)sets funding levels for about 0.5% of the annual budget (18B of 3.8T), it means its business as usual until the Republicans decide to holde the senate hostage again in January over the Patient Protection and Affordable Care Act.

The real impact is the 17 days of Government shutdown that preceded it and the detrimental effects it had on your (global) supply chain(s).

Banks Have A Place In The Supply Chain – But That Place is Simply Financial!

Supply chains require capital. Lots of capital. And the role of a bank is to provide that capital through financing, even though, these days, private lenders are sometimes doing more through Supply Chain Finance platforms (like those offered by Prime Revenue, Oxygen Finance, and Orbian) than the banks are.

However, and in the United States in particular, the role of a bank is not to invest in, and retain the majority control of, companies that control significant stores of commodities that drive the markets that banks run. It’s an indirect route to a price-fixing monopoly, which is a criminal federal offense under section 1 of the Sherman Antitrust Act. It seems that the banks realize this, and, according to this article on CFO.com that states “A Bank Is Hiding Inside Your Supply Chain”, they’ve found a new way to inflate commodity prices and make extra profit off of your supply chain at your expense.

According to Tim Weiner, Global Risk Manager of Commodities and Metals at MillerCoors LLC, who recently testified at a senate hearing, bank holding companies are slowing the load-out of physical aluminum from warehouses controlled and owned by these U.S. bank holding companies to ensure that they receive increased rent for an extended period of time. According to MillerCoors, they have to wait as long as 18 months for the metal (that is just sitting in a warehouse ready to be used) or pay a high premium in a market where there has been massive oversupply and record production.

And according to the article, and the hearing of the Financial Institutions and Consumer Protection Subcommittee of the Senate Committee on Banking, Housing & Urban Affairs that took place this summer on July 23, 2013, this isn’t the only instance where large U.S. banks have diversified into commodities-markets operations, stretching the limits of rules designed to separate banking and commerce to the point where part of the high prices and price volatility some commodities have experienced is likely due to the banks’ increased involvement in the storage, transportation, and trading of these physical commodities (when they are supposed to stick to the non-physical futures and options markets).

In SI’s view, banks shouldn’t own any business that has any control over a commodity. As the CFO article clearly states, through bank ownership of a commodities business, a financial institution can place its hand on the scale of supply and demand for a commodity and distort the free market. Furthermore, a bank can not only affect the price of the commodity, it can also make profitable bets on its direction in the futures markets. Plus, and this is really scary, a bank that owns a commodities business could choose to deny lending or underwriting to a competitor of that commercial business or even lend at preferential rates to its own commercial commodities business. Thus, SI is in full agreement that regulators need to force banks to be more transparent about their commodities’ operations and divest them where appropriate.

So what does this mean for your supply chain? It means you have to be ever vigilant and know where banks are in, or may be able to take, control in your supply chain and plan appropriately for the disruptive actions to cost or supply that they could take. It means that visibility is key, that transparency from your supply chain partners is more important than ever, and that good record keeping is a must. If banks start to unduly pressure your business, as they are doing to MillerCoors LLC and others, you need to have the data to stand up to them. Price-fixing and manipulation is illegal, and if enough companies stand up to it, it’s a safe bet that something will be done about it (unless the TPP passes. Then all bets are off).

Early Payment Discounts vs. Early Payment Rebates

Are we dealing with six of one and half a dozen of the other? After reading “The Art of the Play” (PCubed.com), I have to wonder.

They are different in that you get one right away and you get the other later, and they are different in that one is just a reduction in spend and the other can be treated as an income stream, if the CFO so desires, but in the end they both have the same effect on the bottom line — less spend.

So why would an organization favour one over the other when the big difference is capturing the savings now versus capturing the savings later? If the organization was limited in cash and was trying to maximize savings, then capturing the savings right away would definitely make more sense, but if the organization was flush with cash and the supplier offered tiered rebates that improved with volume, then the organization might want to wait until later. Otherwise, the doctor can’t see much of a difference.

However, one area where there is a big difference is paying for a platform vs. paying for a service, especially for a big company. For example, the Oxygen Finance model described in the article is to provide you with a service where you pay up to 50% of the discount or rebate captured by transaction. While this is a good deal for a mid-sized company that might not have the up-front cash required to implement the end-to-end e-Procurement solution required to effectively take advantage of discounts and rebates offered by suppliers for quick payments, this can be a very expensive solution for a large enterprise. Consider a company that spends 250 Million a year, the low-end of the market for Oxygen Finance. If the average rebate is 1.5%, and you give one third of that up to the service provider, then the organization is paying 1.25 M a year for the solution, and only achieving a 2X ROI.

A company of this size can acquire a SCF solution for a fraction of this cost and realize a much larger ROI.

When you dive in, you realize that there are only three reasons most companies can’t create or take advantage of most of the early payment discount and rebate opportunities available to them:

  1. Invoices aren’t getting in the system fast enough
    because most of them are coming in as (e-)paper.
  2. Approved invoices aren’t getting to AP fast enough
    because routings for approval take too long.
  3. Procurement doesn’t have the manpower to negotiate rebates on 100% of spend
    because there are too many suppliers.

And while these were valid problems a few years ago, without (m)any real solutions (that an average organization could afford), today:

  1. An organization can acquire a SaaS end-to-end invoice automation framework, such as the one offered by Nipendo, that will convert all incoming invoices into one standard e-format for six figures.
  2. An organization can acquire a number of rules-based e-Procurement and invoice automation solutions (including Nipendo‘s) that will automatically approve and route all error-free invoices that match a PO or contract to the AP system and route those that require manual correction or approval to the right individual for online (e-mail) approval.
  3. An organization can see significant returns addressing only 80% of the spend which is typically with less than 20% of the supply base.

An organization that takes this approach can typically acquire a solution for (much) less than 500K a year, save 1.5% on 200 M of spend, and see a (minimum) 6X return, which is the return you should be looking for from an e-Procurement solution.

Maybe there’s another reason for a large enterprise to go transaction-fee SaaS for discount and rebate management, but if there is, the doctor ain’t seeing it — and he’s been covering SCF for years. As far as he is concerned, the sweet-spot for transaction-fee SaaS for discount and rebate management is the 50M to 250M range, because the implementation cost of the necessary end-to-end e-Procurement, invoice-Automation, and SCF solution isn’t that much cheaper for a mid-sized organization than for a Global 3000, and at less than 200M of addressable spend, the ROI multiplier starts to drop considerably.

Any differing opinions?

Supply Chain Finance: A European Bank Perspective

Late this spring, the Euro Banking Association (EBA) released their “Supply Chain Finance European Market Guide”. This gives us some insight into the European Bank Perspective on Supply Chain Finance.

The guide defines Supply Chain Finance (SCF) as the use of financial instruments, practices and technologies to optimize the management of the working capital and liquidity tied up in supply chain processes for collaborating business partners. It then goes on to state that SCF is largely ‘event-driven’ and that each intervention (finance, risk mitigation or payment) in the financial supply chain is driven by an event in the physical supply chain.

The EBA then goes on to state that the key categories of SCF are:

  • Buyer-Centric Accounts Payable
    Also known as “Approved Payables Finance”, “Reverse Factoring”, “Supplier Finance”, or even “Confirming”, it’s generally based on discounted payment of accounts payable in favour of suppliers by accessing a financial institution’s liquidity. “Dynamic Discounting” is a related instrument.
  • Supplier-Centric Accounts Receivable
    Also known as “Receivables Finance”, “Receivables Purchase”, and “Invoice Discounting” or “Invoice Factoring”, it’s where a supplier finances their operations by factoring their invoices or taking loans against the receivables.
  • Inventory-Centric Finance (PO/Inventory Finance)
    Which can be used by the supplier to gain financing based on a PO or a buyer to gain financing based on inventory.
  • Bank Payment Obligation (BPO)
    As described in this recent post on how it took 40 years, but BPOs are now truly SWIFT, a URBPO (under ISO20022), provides an irrevocable payment guarantee in an automated environment and enables banks to offer flexible risk mitigation and financing services across the supply chain to their corporate customers. An alternative to L/Cs (Letters of Credit), it is a new middle ground between L/Cs and Open Account finance which can be used to offer pre- and post-shipment finance.
  • Traditional Documentary Trade Finance
    Letters of Credit and related trade loans.

In other words, supply chain finance is simply

  • a bank or third party lending the buyer money based on inventory;
  • a bank or third party lending the supplier money based on POs, invoices, accounts receivable, or BPOs; or
  • the buyer paying the supplier early for a discount.

And the primary mechanisms by which a supplier gets financing is:

  • receivables, BPO, or L/C financing from a bank,
  • discounting or dynamic discounting from the buyer, or
  • factoring from a third party.

This is a traditional supply chain finance definition and these are, with the exception of the new SWIFT BPO, the traditional mechanisms, so the guide is good in this respect. And it also has a good discussion of risk. However, when it comes to a discussion of automation, it is pretty much limited to e-Invoicing and this is a problem. e-Invoicing is just the foundation — technology has to go beyond just e-Invoicing if SCF is going to not only take off but become a pillar of supply chain support. But that’s a topic for a future post.