Quota. While it's still around, let's try to make its sting less painful. One way to do that is to avoid paying duty on quota charges.

The US position on quota charges is that they are always dutiable if paid to a SELLER. Thus, if a Hong Kong vendor is selling merchandise to a US importer on an FOB IQ (inclusive of quota) basis, the quota component of the selling price is dutiable because the vendor is the seller for US customs purposes. The quota charges would be dutiable even if the importer made separate payments to the vendor for the goods and for the quota. They should also be dutiable if the importer pays the quota charges to a party that is related to the seller.

The trick is to pay the quota charges to a party who is not the seller or related to the seller and who will not pass any of the quota charges to the seller. Practically speaking, such an arrangement is only possible in jurisdictions, such as Hong Kong and China, where the party supplying quota to the transaction need not be the party selling or manufacturing the goods in question.

There is scope to avoid duty on the quota charges in jurisdictions that allow for such "third party quota holders". In this article, I will discuss avoiding paying duty on PRC quota charges. While Hong Kong allows for third party quota holders, Hong Kong is a unique animal because it requires (as set out in Hong Kong's Quota Supply Condition) that quota holders become involved in the orders to which they supply quota. I will discuss the Hong Kong quota situation in my next article.

Way back when, US Customs took the view that all payments for PRC quota were dutiable, even if the quota holder was not related to the seller, because China was a state-controlled economy in which everyone was related. This position has softened in recent years, and it is now possible to avoid duty on PRC quota charges if the transaction is structured properly.

A few tips. First, the goods must be sold on an FOB EQ (exclusive of quota) basis. Second, the importer must pay the quota charges separately and directly (not through the seller) to the quotaholder or more likely to a quota broker. This does require the importer to take on quota risk, particularly if the importer wishes to cancel the order. Where the importer bought on an FOB IQ basis, the risk of procuring the quota fell on the seller, not the importer. Third, the quota broker must not be related to the seller. The quota broker should issue a certification to this effect. Fourth, the PRC visa should, if possible, show the FOB EQ price, not the FOB IQ price, to underscore that the goods are being sold to the importer exclusive of the quota charges. Fifth, once all the elements are in place, the importer should apply to US Customs for a binding ruling or at the very least make a presentation to the US Customs import specialist at the port in question.

I realize that not all transactions can be structured on an FOB EQ basis. Vendors need to sell on an FOB IQ basis for certain orders, either for reasons of quota performance or otherwise. However, where there is scope for a vendor to sell on an FOB EQ basis, the following question should always (at least for as long as quota is around) be asked: "Can we avoid paying duty on the quota for this transaction?"

Roy Ian Delbyck
Law Office of Roy Ian Delbyck

Disclaimer: The above article is not intended as legal advice. Please consult your lawyer should you seek advice on any of the matters discussed in this article.
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