[Federal Register Volume 59, Number 123 (Tuesday, June 28, 1994)]
[Unknown Section]
[Page ]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-15527]
[Federal Register: June 28, 1994]
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DEPARTMENT OF THE TREASURY
Customs Service
Accounting Procedures for Drawback
AGENCY: U.S. Customs Service, Department of Treasury.
ACTION: Proposed Change of Position; solicitation of comments.
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SUMMARY: This notice advises the public that Customs proposes to amend
the general drawback rate for crude petroleum and petroleum derivatives
to permit first-in-first-out (FIFO) accounting for exports and drawback
deliveries of petroleum products with different drawback factors which
are commingled in inventory. Currently, such accounting is required on
the basis of lower-to-higher drawback factors, and is not consistent
with recent changes to the Customs Regulations in this regard or
commercial accounting procedures. Additionally, Customs proposes to
revoke a published ruling and any unpublished rulings to the same
effect under which identification of merchandise and articles for
drawback purposes is permitted on a higher-to-lower basis. This change
is consistent with the Customs Regulations, commercial accounting
procedures, and efficient administration and will result in revenue
neutrality when drawback claimants choose to commingle merchandise or
articles and to identify them by an accounting procedure.
DATES: Comments must be received on or before August 29, 1994.
ADDRESSES: Written comments (preferably in triplicate) may be addressed
to the U.S. Customs Service, Office of Regulations and Rulings,
Regulations Branch, 1301 Constitution Avenue, NW., Washington, DC
20229. Comments filed may be inspected at the Regulations Branch,
Franklin Court, 1099 14th Street, NW., Suite 4000, Washington, DC.
FOR FURTHER INFORMATION CONTACT: Paul Hegland, Entry Rulings Branch,
Office of Regulations and Rulings (202) 482-7040.
Background
Section 313, Tariff Act of 1930, as amended (19 U.S.C. 1313),
authorizes ``drawback''. Drawback is a refund or remission, in whole or
in part, of a Customs duty, internal revenue tax, or fee. There are a
number of different kinds of drawback authorized under law, including
manufacturing and same condition drawback. Under paragraph (a) of
Sec. 1313, drawback is authorized when imported merchandise is used in
the manufacture of articles which are exported. Under paragraph (j)(1)
of Sec. 1313, drawback is authorized when imported merchandise is
exported (or destroyed) in the same condition as when it was imported,
if the merchandise is not used in the U.S. Paragraphs (b) and (j)(2) of
Sec. 1313 respectively provide for the substitution of domestic or
other merchandise for the imported merchandise in manufacturing and
same condition drawback. Paragraph (l) of Sec. 1313 provides that the
allowance of drawback shall be subject to compliance with such rules
and regulations as the Secretary of the Treasury shall prescribe.
The Customs Regulations pertaining to drawback are found in Part
191 of the Customs Regulations (19 CFR Part 191). Under the Customs
Regulations (19 CFR Part 191, Subparts B and D), manufacturers or
producers of articles intended for exportation with drawback under
Sec. 1313(a) or (b) must apply for and obtain approval of a drawback
contract (sometimes called a drawback ``rate'') describing the
manufacturing or production operations covered and setting forth the
conditions which are to be met to obtain drawback.
The general requirements in the Customs Regulations for records,
storage, and identification pertaining to drawback are found in 19 CFR
191.22. Section 191.22(c) authorizes the identification for drawback
purposes of commingled lots of fungible merchandise and articles by
applying first-in-first-out (FIFO) accounting principles or any other
accounting procedure approved by Customs.
Section 191.22(c) was added to the Customs Regulations in its
current form when the drawback regulations (formerly in Part 22 of the
Customs Regulations) were revised in 1983 (T.D. 83-212, published in
the Federal Register on October 14, 1983 (48 FR 46740)). Before this
revision, the corresponding provision in Part 22 of the Customs
Regulations (19 CFR 22.4(f)) permitted identification of fungible
merchandise and articles commingled in storage on the basis of the lot
or lots of merchandise or articles with the lowest drawback value or
allowance first, then the next-lowest, and so on (i.e., ``lower-to-
higher'').
The Notice of Proposed Revision of Part 22 (published in the
Federal Register on August 26, 1982 (47 FR 37563)) would have limited
the accounting method for identification of merchandise and articles
commingled in storage to FIFO only (47 FR 37565, 37573). The reason
given for the introduction of the FIFO accounting procedure was that
the then existing provision was difficult to administer and
inconsistent with commercial accounting techniques. Section 191.22(c)
was changed to its current form when the final revision was issued as
T.D. 83-212. The change (i.e., permitting other accounting procedures
in addition to FIFO) was made in response to a comment that
identification should not be limited to FIFO. Customs stated, in the
T.D., that the comment was believed to have merit and ``[t]herefore,
other accounting procedures such as `low-to-high,' `identification,'
and `blanket identification' may be used.'' (``Identification'' is
direct or actual identification (i.e., identification without recourse
to an accounting method such as FIFO) and ``blanket identification'' is
similar to lower-to-higher.)
Customs has issued a number of rulings on the accounting procedures
which may be used to identify merchandise or articles for drawback
purposes. In a memorandum dated September 3, 1981 (File: 213253), all
Regional Commissioners were directed to permit the use of FIFO in place
of lower-to-higher identification and 19 CFR 22.4(f) (requiring lower-
to-higher identification) was waived pending the promulgation of
Sec. 191.22(c) in the proposed revision of the Customs Regulations
pertaining to drawback. The reason given for this action was to ``. . .
create savings for both Customs and industry by eliminating an
antiquated procedure which is not cost effective.''
In Customs Service Decision (C.S.D.) 79-252, Customs held that
fungible merchandise commingled in storage or manufacture could be
identified on a FIFO basis for purposes of 19 U.S.C. 1313(b) (see also
C.S.D.'s 79-301 and 79-448). In C.S.D. 82-35, Customs held that when
fungible merchandise belonging to several persons is commingled in
storage, each person could identify for drawback purposes his
withdrawals on a FIFO basis, considering only his inputs and
withdrawals. In C.S.D. 83-54, Customs held that when fungible drawback
and non-drawback products were commingled in storage, withdrawals for
drawback purposes may be identified against the drawback material in
the order of its receipt into the commingled storage facility. In
C.S.D. 84-82, Customs held that when fungible drawback and non-drawback
input was placed in commingled storage, withdrawals for drawback
purposes could be identified on a ``higher-to-lower'' basis against the
drawback input commingled therein.
In C.S.D. 88-1, Customs held that the use of FIFO for drawback
purposes, as provided for in the above-described rulings, required that
the products be actually commingled in the same tank and that the FIFO
procedure must be applied on a date-by-date basis, as illustrated in
the ruling. (Section 484A, Customs and Trade Act of 1990 (Pub. L. 101-
382; 104 Stat. 629, 707; 19 U.S.C. 1313(p)), provided alternative
monthly accounting procedures for certain crude petroleum and petroleum
derivative products in certain conditions. In its directive
implementing this statute (Customs Directive 3740-006, March 17, 1992),
Customs stated that the legal principles set forth in C.S.D. 88-1 would
continue to apply to articles not provided for in Sec. 484A.)
In 1965 (see T.D. 56487, published in the Federal Register on
September 25, 1965 (30 FR 12280)), Customs published a general drawback
rate for substitution manufacturing drawback under 19 U.S.C. 1313(b)
for crude petroleum and petroleum derivatives. General rates are
manufacturing drawback contracts describing standardized procedures
(e.g., steel, provided for in T.D. 81-74, or piece goods, provided for
in T.D. 83-73). Because the procedures covered in general rates are
standardized, a manufacturer or producer who can comply with the terms
and conditions of the general rate may seek application of the general
rate to its operations through a Customs regional office instead of
having to apply for and obtain approval from Customs headquarters, as
is true of specific substitution manufacturing drawback contracts (see
19 CFR Part 191, Subparts D and B, respectively). Because of its
extreme complexity, the general drawback rate for crude petroleum and
petroleum derivatives is an exception to this practice, requiring
application to Customs headquarters for approval.
T.D. 56487 promulgated the general drawback rate for crude
petroleum and petroleum derivatives by adding it to the Customs
Regulations then pertaining to drawback (19 CFR 22.6(g-1); Sec. 22.6
then contained the general drawback rates). (When Part 22 of the
Customs Regulations was revised into Part 191, the general drawback
rates were not included in the revised regulations, as not being of
sufficient general applicability for such inclusion. Thereafter,
general drawback rates were published separately as T.D.'s. The general
drawback rate for crude petroleum and petroleum derivatives, formerly
in 19 CFR 22.6(g-1), was published, without substantive change, as T.D.
84-49.) T.D. 56487 provided for a monthly period of manufacture, unless
a different period was authorized. T.D. 56487 was issued after very
thorough review by the government and after the public was given an
opportunity to comment (see Notice of Proposed Rule Making, published
in the Federal Register on June 16, 1965 (30 FR 7756)).
In the Notice of Proposed Rule Making for T.D. 56487, the reasons
given for promulgation of the general drawback rate were to meet the
complex problems of refiners who produce large groups of widely
diversified petroleum products and to provide a better basis for the
proper allowance of drawback on such products, and to ensure compliance
with the applicable statutory provision (19 U.S.C. 1313(b)). Although
the T.D. permitted the designation for drawback of imported crude
petroleum or petroleum derivatives used at one refinery of a refiner as
the basis for the allowance of drawback on petroleum products
manufactured or produced at another refinery of the same refiner, the
T.D. applied to manufacture or production of the latter, or substitute
merchandise, on a refinery-by-refinery basis.
A basic feature of T.D. 56487 was that refiners could, at their
option, attribute to designated imported crude petroleum or petroleum
derivatives a quantity of an exported petroleum product in excess of
the quantity of that petroleum product actually produced from either
the designated imported crude petroleum or petroleum derivative or the
crude petroleum or petroleum derivative that was substituted for the
designated import. This feature, called ``producibility,'' permits
drawback to be claimed on a given quantity of designated imported crude
petroleum or petroleum derivatives up to the quantity of an exported
petroleum product which could have been produced from the designated
imported crude petroleum or petroleum derivatives. Under the
producibility concept, as provided for in T.D. 56487, a refiner is not
required to establish that the exported articles were actually produced
from the substituted crude petroleum or petroleum derivatives; the
refiner need only show that the exported articles could have been
produced from the designated imported crude petroleum or petroleum
derivative.
The application of the producibility concept to petroleum refinery
operations is illustrated in the following example, quoted from the
ruling published as T.D. 78-419.
Suppose that 100 barrels of crude petroleum are refined into 10
products in equal amounts, including 10 barrels of motor gasoline.
One half of the crude is imported duty-paid, which can be designated
for drawback, and one half (50 barrels) is domestic of the same kind
and quality. Only the motor gasoline is exported.
The production standards for petroleum, unlike those for most
chemicals, are subject to variation at the election of the refiner.
In other words, the refiner could have produced 91 barrels of motor
gasoline from 100 barrels of crude [i.e. Class III], had he wanted
to.
To require the refiner to designate a quantity of imported crude
sufficient to have produced concurrently each product actually
produced, whether or not exported, would either require him to
designate more than the 50 barrels of imported crude that was used,
or to accept drawback on only 5 barrels (one-half) of the total
quantity of motor gasoline exported.
On the other hand, disregarding the nonexported products for the
purpose of determining the quantity of imported crude to designate,
it is clear that up to 91 percent of the 50 barrels of imported
crude could have been refined into motor gasoline. Therefore, the
refiner would have to designate only slightly more than 10 barrels
of imported crude to cover all of the motor gasoline exported. This
is the Treasury Department position.
The quantity of a given petroleum product which could have been
produced from a given quantity of crude petroleum or petroleum
derivative is determined on the basis of ``Industry Standards of
Potential Production on a Practical Operating Basis.'' These standards
were published in T.D. 66-16. The standards listed the quantity of 17
petroleum products which could have been produced from four classes of
crude petroleum and 12 petroleum derivatives (e.g., the producibility
percentages for class III crude petroleum for motor gasoline and
aviation gasoline are 91 and 40 respectively, meaning that 91 gallons
of motor gasoline or 40 gallons of aviation gasoline could be produced
from 100 gallons of class III crude petroleum).
In addition to establishing procedures for the use of the concept
of producibility for the refining of crude petroleum and petroleum
derivatives, T.D. 56487 divided crude petroleum and petroleum
derivatives into classes for purposes of determining same kind and
quality. (In order to claim drawback under 19 U.S.C. 1313(b) on the
exportation of articles manufactured from domestic or other merchandise
substituted for designated imported merchandise, the designated
imported merchandise and the substituted merchandise must be of the
same kind and quality.) Four classes, based on API gravity, were
established. Crude petroleum in any one class would be considered as
being of the same kind and quality as any other crude petroleum
included in the same class and any named petroleum derivative in any
class would be considered as being of the same kind and quality as the
same named derivative in the same class. As stated above, under T.D.
56487, a refiner was not required to establish that the crude petroleum
or petroleum derivative used to produce the exported article was of the
same kind and quality as the designated imported crude petroleum or
petroleum derivative; the refiner was required to establish that this
could have been the case. (I.e., If a refiner used different classes of
crude petroleum during a production period subject to different
standards of producibility, the refiner was required to establish only
that a sufficient quantity, taking into consideration the applicable
standards of producibility, of crude petroleum of the same class as the
designated imported crude petroleum was used in the refinery during the
period; not that it was actually used for the production of exported
article.)
Distribution of drawback among the products produced during a
production period under T.D. 56487 is based on the relative values of
all products manufactured or produced during the production period, as
of the time of separation of the products. (The time of separation of
the products is considered to be the monthly period of production.)
Relative values are stated in terms of drawback factors, which attach
to each of the products manufactured or produced during the production
period. (E.g., If, under T.D. 56487, crude petroleum was used to
produce 50 barrels of motor gasoline valued at $30 per barrel, 25
barrels of distillate oils valued at $20 per barrel, and 25 barrels of
all other petrochemical products valued at $80 per barrel, the drawback
factors would be: motor gasoline--.75; residual oils--.5; and all other
petrochemical products--2.) The quantity of crude petroleum which may
be designated for the exportation of a particular product is determined
by multiplying the quantity of the article exported by the drawback
factor. (E.g., In the above example if 10 barrels of motor gasoline
were exported, 7.5 barrels of crude petroleum could be designated; if
10 barrels of petrochemical products were exported, 20 barrels of crude
petroleum could be designated.)
T.D. 56487 emphasized the statutory requirement that the total
amount of drawback allowed may never exceed 99 percent of the duty paid
on the designated imported merchandise. To ensure compliance with this
requirement, the T.D. provided that the exportation of a given quantity
of a manufactured product affords a proper basis for the allowance of
drawback only to the extent that the product could have been produced
in that quantity (together with the quantities of related products
produced concurrently) from the designated imported crude petroleum or
petroleum derivatives. The T.D. provided that this requirement meant
that such concurrent production must be practicably possible by
ordinary manufacturing techniques.
T.D. 56487 contained explicit accounting procedures for
manufactured articles. When the inventory of a particular product
contained product with different drawback factors (e.g., if the
inventory of motor gasoline was from more than one month's production,
each month's quantity could have a different drawback factor),
withdrawals from the inventory for exports were required to be ``[f]rom
lowest [factor] on hand'', withdrawals for drawback deliveries (i.e.,
for further manufacture resulting in a product on which drawback could
be claimed) were required to be ``[from] lowest on hand after exports
are deducted'', and withdrawals for domestic (non-drawback) shipments
were required to be ``[f]rom earliest on hand after [withdrawals for
export and drawback deliveries] are deducted.''
The basis for the above accounting procedures is explained in the
Notice of Proposed Rule Making for T.D. 56487, in which it is stated,
``[t]he total amount of drawback allowable * * * shall be computed by
multiplying the quantity of product exported by the drawback factor for
that product, with due consideration for the `lower-to-higher'
principle established in [19 CFR 22.4(f)].'' (Emphasis added.)
Customs has been requested to amend T.D. 84-49 (as stated above,
when the Customs Regulations pertaining to drawback were revised in
1983, the general drawback rate for crude petroleum and petroleum
derivatives was not included in the revised regulations but was
subsequently published, without substantive change from its initial
publication as T.D. 56487, as T.D. 84-49) to permit the accounting for
withdrawals for export and for drawback deliveries from the inventory
of a particular product containing product with different drawback
factors on the basis of FIFO or higher-to-lower. The basis for this
request is stated to be that when T.D. 56487 was published, Customs
permitted such accounting only on a lower-to-higher basis but now other
bases of accounting, including FIFO and higher-to-lower are permitted.
It is Customs position that the above-described rationale for
amending T.D. 84-49 to permit the accounting on a FIFO basis in the
described situation has merit (although, in the interest of
administrative simplicity, Customs believes that the order of such
withdrawals should continue to be the same; i.e., first exports, then
drawback deliveries, then domestic shipments). The reasons given for
the introduction of FIFO to accounting procedures for drawback still
apply; i.e., that FIFO is less difficult to administer and is
consistent with commercial accounting procedures (see, e.g., Miller's
Comprehensive GAAP Guide (1985), page 2401 et seq., Inventory Pricing
and Methods). The basis for requiring use of the lower-to-higher
accounting procedure in this situation was that that was the only
accounting procedure permitted to be used for drawback at the time.
Customs position has now changed. Furthermore, we note that under T.D.
84-49, there are procedures guaranteeing that the total amount of
drawback allowed may never exceed 99 percent of the duty paid on the
designated imported merchandise, as required by the drawback law.
However, it is Customs position that T.D. 84-49 should not be
amended to permit the accounting on a higher-to-lower basis and,
furthermore, that C.S.D. 84-82, the only published Customs ruling
permitting higher-to-lower accounting for drawback purposes, as well as
any unpublished Customs rulings to the same effect, should be revoked.
As described above, when the Customs Regulations on drawback were
revised in 1983 and the use of FIFO, or any other accounting procedure
approved by Customs, was authorized, the applicable provision (19 CFR
191.22(c)) was modified from that proposed in the Notice of Proposed
Rule Making for the revision. In the Notice of Proposed Rule Making,
only FIFO would have been permitted. In the Final Revision it was
explained that this change was in response to a comment which was found
to have merit, and therefore other accounting procedures could be used.
Illustrations of these other accounting procedures were given. The
illustrative accounting procedures (``low-to-high'',
``identification'', and ``blanket identification'') are either as
conservative as the lower-to-higher procedure then permitted or consist
of direct identification without recourse to an accounting system.
Each of the illustrative accounting procedures referred to in the
Final Revision of the Customs Regulations on drawback is either revenue
neutral or favors the Government. When a drawback claimant uses an
accounting system to identify merchandise or articles for drawback
purposes, it does so for its own convenience (i.e., to avoid having to
physically identify the merchandise or articles). It is Customs
position that any accounting procedure authorized under 19 CFR
191.22(c) must be revenue neutral or favorable to the Government.
Furthermore, it is Customs position that any such authorized accounting
procedure must be consistent with commercial accounting procedures, as
is true of FIFO, must be consistent with the accounting procedures
generally used by the drawback claimant, and must be consistent with
ease of administration.
Authority
This notice is published in accordance with Secs. 177.9 and 177.10,
Customs Regulations (19 CFR 177.9, 177.10).
Comments
Before adopting this proposed change in position, consideration
will be given to any written comments timely submitted to Customs.
Comments submitted will be available for public inspection in
accordance with the Freedom of Information Act (5 U.S.C. 552),
Sec. 1.4, Treasury Department Regulations (31 CFR 103.11(b)), on
regular business days between the hours of 9 and 4:30 p.m. at the
Regulations Branch, Franklin Court, 1099 14th Street, NW., Suite 4000,
Washington, DC.
George J. Weise,
Commissioner of Customs.
Approved: June 9, 1994
John P. Simpson,
Deputy Assistant Secretary of the Treasury.
[FR Doc. 94-15527 Filed 6-27-94; 8:45 am]
BILLING CODE 4820-02-P