U.S. CUSTOMS SERVICE'S ABIUTY TO ACCU- RATELY DETERMINE THE VALUE OF IMPORTED GOODS ENTERING THE UNITED STATES Y 4. W 36: 103-20 U.%. Custons Service's ftbilitf to ft... HEARING BEFORE THE SUBCOMMITTEE ON OVERSIGHT OF THE COMMITTEE ON WAYS AND MEANS HOUSE OF REPRESENTATIVES ONE HUNDRED THIRD CONGRESS FIRST SESSION JUNE 17, 1993 Serial 103-20 Printed for the use of the Committee on Ways and Means OCr 2 I fvc^oJ.O U.S. GOVERNMENT PRINTING OFFICE WASHINGTON : 1993 ForsalebytheU.S.GovernmentPrintingOffice SuperintendentofDocuments,CongressionalSalesOffice.Washington.DC 20402 ISBN 0-16-041351-6 U.S. CUSTOMS SERVICE'S ABIUTY TO ACCU- RATELY DETERMINE THE VALUE OF IMPORTED GOODS ENTERING THE UNITED STATES Y 4. W 36; 103-20 U.S. Custons Service's ftbilitj to ft... HEARING BEFORE THE SUBCOMMITTEE ON OVERSIGHT OF THE COMMITTEE ON WAYS AND MEANS HOUSE OP REPRESENTATIVES ONE HUNDRED THIRD CONGRESS FIRST SESSION JUNE 17, 1993 Serial 103-20 Printed for the use of the Committee on Ways and Means 007 21 U.S. GOVERNMENT PRINTING OFFICE WASHINGTON : 1993 ForsalebytheU.S.GovernmentPrintingOffice SuperintendentofDocuments,CongressionalSalesOffice,Washington,DC 20402 ISBN 0-16-041351-6 COMMITTEE ON WAYS AND MEANS DAN ROSTENKOWSKI, Illinoie, Chairman SAM M. GIBBONS, Florida BILL ARCHER, Texas J.J. PICKLE, Texas PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York BILL THOMAS, Califo.-T»la FORTNEY PETE STARK, California E. CLAY SHAW, Jr., Florida ANDYJACOBS, JR., Indiana DON SUNDQUIST, Tennessee HAROLD E. FORD, Tennessee NANCY L. JOHNSON, Connecticut ROBERTT. MATSUl, California JIM BUNNING, Kentucky BARBARA B. KENNELLY, Connecticut FRED GRANDY, Iowa WILLIAM J. COYNE, Pennsylvania AMO HOUGHTON, New York MICHAEL A. ANDREWS, Texas WALLY HERGER, California SANDER M. LEVIN, Michigan JIM MCCRERY, Louisiana BENJAMIN L. GARDEN, Maryland MEL HANCOCK, Missouri JIM MCDERMOTT, Washington RICK SANTORUM, Pennsylvania GERALD D. KLECZKA, Wisconsin DAVE CAMP, Michigan JOHN LEWIS, Georgia L.F. PAYNE, Virginia RICHARD E. NEAL, Massachusetts PETER HOAGLAND, Nebraska MICHAEL R. McNULTY, New York MIKE KOPETSKI, Or^on WILLIAM J. JEFFERSON, Louisiana BILL K. BREWSTER, Oklahoma MEL REYNOLDS. Illinois Janice Mays, ChiefCounsel and StaffDirector CharlesM. Brain,Assistant StaffDirector Philup D. Moseley, Minority ChiefofStaff SUBCOMMnTEE ON OVERSIGHT JJ. PICKLE, Texas, Chairman HAROLD E. FORD, Tennessee AMO HOUGHTON, New York CHARLES B. RANGEL, New York WALLY HERGER, California WILLIAM J. JEFFERSON, Louisiana MEL HANCOCK, Missouri BILL K. BREWSTER, Oklahoma RICK SANTORUM, Pennsylvania GERALD D. KLECZKA, Wisconsin JOHN LEWIS, Geoi^a (II) CONTENTS Page Pressrelease ofFriday. June 11, 1993, announcingthe hearing 2 WITNESSES U.SF. ICnucshtoDmisreScetrovri,ceO,fTHiocen.ofGReeogrugleatWoeriyseAudSiTt",^!afn^d^S«a^m'uuePllSH^.'BCaknsk^sA,sAssis^issi^ ^ ant CommissionerforCommercial Operations SUBMISSIONS FOR THE RECORD FAlmoorraiTcTarnaAdsesoCcoiuantciioln,ofTEixmpSohrtyerJs.aHnadleIym,poDratverisd,Fs.taMtaecmhetnetl, Jr., .E^ugene •L•.• H^'^^^ Ti^^S^'c^nt^lJlS^si^^tXSche^ ^^5 ment and attachment an) U.S. CUSTOMS SERVICE'S ABILITY TO AC- CURATELY DETERMINE THE VALUE OF IMPORTED GOODS ENTERING THE UNITED STATES THURSDAY, JUNE 17, 1993 House of Representatives, Committee on Ways and Means, Subcommittee on Oversight, Washington, D.C. The subcommittee met, pursuant to call, at 9:37 a.m., in room B-318, Rayburn House Office Building, Hon. Harold E. Ford pre- siding. [The press release announcing the hearing follows:] (1) . FOR IMMEDIATE RELEASE PRESS RELEASE #10 FRIDAY, JUNE 11, 1993 SUBCOMMITTEE ON OVERSIGHT U.S. HOUSE OF REPRESENTATIVES 1135 LONGWORTH HOUSE OFFICE BLDG. WASHINGTON, D.C. 20515 TELEPHONE: (202) 225-5522 THE HONORABLE J. J. PICKLE (D., TEXAS), CHAIRMAN, SUBCOMMITTEE ON OVERSIGHT, COMMITTEE ON WAYS AND MEANS, U.S. HOUSE OF REPRESENTATIVES, ANNOUNCES A HEARING TO REVIEW THE U.S. CUSTOMS SERVICE'S ABILITY TO ACCURATELY DETERMINE THE VALUE OF IMPORTED GOODS ENTERING THE UNITED STATES SubcTohmemitHtoeneoraobnleOveJ.rsiJg.htP,ickCloemmi(tD.te,eTeoxnasW)a,ysChanadirmMeaannso,f tU.hSe. House of Representatives, announced today that the Subcommittee will conduct a hearing to review the ability of the U.S. Customs Service (Customs) to accurately determine the value of imported goods entering the United States. The hearing has been scheduled for Thursday, June 17, 1993, beginning at 9:30 a.m., in room B-318 Rayburn House Office Building. The Subcommittee will receive testimony from the Commissioner of Customs. BACKGROUND Customs collects annually approximately $20 billion in duties, taxes, and fees from importers and international travelers. In almost all cases, the amount owed to Customs (whether it is in the form of duties, taxes, or fees) is a percentage of the value of imported goods. Importers must disclose to Customs the value of imported goods at the time they are entered into the United States. However, it is Customs' responsibility to determine whether an importer's claimed value is correct. Under current law, Customs may demand documentation to support an importer's claimed value. Current law also provides Customs with access to an importer's books and records and, in cases involving foreign-based multinational corporations, access to the parent corporation's books and records. However, Customs does not have access to taxpayer information maintained by the Internal Revenue Service (IRS) PURPOSE AND SCOPE OF THE HEARING The purpose of the hearing is to receive testimony from Customs about its regulatory audit program and how Customs determines whether an importer's valuation of goods, for duty and other purposes, is correct. Of particular interest is Customs' experience in using voluntarily-supplied tax return information in the process of determining an import's correct value, and the utility of this information in the audit process. During the hearing, the Subcommittee will examine several cases where Customs has used tax returns, voluntarily supplied to Customs by the importers, in the course of conducting audits of the value claimed by the importcrc. Ir. or.e ccsc, ar. i-pcrtcr's tax returns showed much higher amounts for its costs-of-goods-sold deductions than it had claimed as the Customs value for its imports during the same period. When Customs asked the importer to document its costs by using cancelled checks and other bank records. Customs discovered that the importer had paid almost $3 million more for the imports than it claimed they were worth when it filed its entries, and additional duty was assessed. In another case, an importer represented to Customs that he was in the business of facilitating assembly of wearing apparel in Mexico for a number of U.S. wholesalers. The importer, a sole proprietor, claimed that he had an arms-length relationship with the assembler, a maquiladora, in Mexico. At the same time, he reported to IRS on his tax return that he was an employee of the maquiladora and earned no (MORE) income other than the salary paid to him by the maquiladora. Customs determined that this importer undervalued his imported merchandise by over $2 million during the period from 1986 to 1989, and additional duty was assessed. In another case, Customs used an importer's tax returns to identify payments made to an overseas trading company totaling approximately $3 million. These payments were included in the costs-of-goods-sold deductions claimed on its tax returns, but were not included in its statements of value reported to Customs. In investigating the nature of these payments, Customs determined that the $3 million was not related to the importer's business and, therefore, not dutiable. Also, since these payments may not be deductible for tax purposes either. Customs referred the case to IRS. Finally, in another case, an importer retained two sets of invoices for its imports, one for Customs purposes and the other for tax purposes. When the importer filed its entries with Customs, it attached only one set of invoices and claimed that the total value of its imports for a two-year period was approximately $27 million. When filing its tax returns for the same period, it used amounts from both sets of invoices and claimed costs-of-goods-sold deductions of more than $119 million, a difference of over $90 million. Again, this case was referred to IRS. In announcing the hearing Chairman Pickle said: "The Subcommittee has been aware for some time that some importers, particularly some importers who are related to their overseas suppliers, have been taking advantage of how our Government administers our tax and tariff laws. They know that our various agencies, such as Customs and IRS, are not able to share information systematically and effectively. Consequently, an unscrupulous importer may not get caught when claiming a low value on imports for Customs purposes and, at the same time, claiming a high costs-of-goods-sold deduction for tax purposes. Engaging in these abusive practices creates a "win-win" situation for the importer, minimizing both the duties that they pay Customs and the taxes they pay IRS. The public does not expect our Federal Government to accept such behavior. Something needs to be done!" DETAILS FOR SUBMISSION OF WRITTEN COMMENTS ; Persons submitting written comments for the printed record of the hearing should submit six (6) copies by the close of business, Thursday, July 8, 1993, to Janice Mays, Chief Counsel and Staff Director, Committee on Ways and Means, U.S. House of Representatives, 1102 Longworth House Office Building, Washington, D.C. 20515. FORMATTING REQUIREMENTS ; Each itatemeni presented for printin( tothe Committee by a witnesi, any written statementor exhibit submitted for the printed record or any written comments in response to a request for written comments must conform tothe guidelines listedbelow Any statementorexhibitnotincompliancewiththeseguidelineswillitotbeprinted,butwillbe maintainedintheCommitteefilesforreviewandusebytheCommittee. 1. All statements and any accompanying exhibits for printing must be typed in single spaceon legal-sizepaper andmaynotexceedatotalof10pages. 2. Copies of whole documents submitted as exhibit material will not be accepted for prirtipg Instead, exhibit material should be referenced and quotedorparaphrased. Allexhibit materialnotmeetingthesespecifications willbemaintainedintheCommitteefilesforreviewandusebythe Committee 3. Statements must contain the name and capacity in which the witness will appearor, for written comments, the name and capacity of the person submitting the statement, as well as any clients or persons, or any organizationforwhomthewitnessappearsorforwhomthestatementissubmitted. 4. A supplemental sheet must accompany each statement listing the name, full address, a telephone number where the witness or the designated representative may be reached and a topicaloutlineor summary of the comments and recommendations in the full statement This supplemental sheet will not be included in the printedrecord. The above restrictions and limitations applyonly to materialbeingsubmittedfor printing Statementsandexhibits or supplementary material submitted solely for distribution tothe Members, the press and thepublic during thecourse ofapublic hearingmaybesubmittedinother forms ***** Mr. Ford. The Subcommittee on Oversight will come to order. I am delighted to chair these hearings today for the subcommittee chairman, Mr. Pickle, who is back at home in his district for a fu- neral today. I am delighted to join with my other colleagues on the Commit- tee on Ways and Means, Subcommittee on Oversight's hearing on the review of the U.S. Customs Service's import duty and audit program in this subcommittee hearing today. We are here today to examine how the U.S. Customs Service de- termines the correct value and therefore the correct duty, taxes and fees owed for goods imported into the United States. More specifically, we are going to examine whether and to what extent Customs has used voluntarily provided tax return informa- tion in the process of determining an importer's correct value, and the specific utility ofthis information in the audit process. I have asked the new Customs Commissioner, the Honorable George Weise, an old friend and former employee ofthe Committee on Ways and Means, to first give the subcommittee some back- ground on Customs' audit program. I have also asked the Commis- sioner to explain to the subcommittee how Customs determines the value ofimported goods and for what purposes. More importantly, I have asked the Commissioner to describe several cases illustrating how Customs uses voluntarily provided tax returns in the process of determining the correct value of im- ported goods and the results. The subcommittee has been aware for some time that some im- porters have been taking advantage ofhow our government admin- isters our tax and tariff laws. They know that Customs and IRS are not able to share information systematically and effectively. Consequently, an unscrupulous importer will probably not get caught when claiming a low value ofimports for Customs purposes and at the same time claiming a high deduction for tax purposes. Engaging in these abusive practice creates a win/win situation for the importers, minimizing both the duties that they pay Customs and the taxes they pay the IRS. Something needs to be done. So today we will look to Customs to sort out the issue for this subcommittee and hopefully would have the oversight subcommittee in the Treasury Department and especially the new Commissioner of Customs to lead us and give us some clear direction. I welcome you, Mr. Weise, before the committee, once again wel- come back to our subcommittee and the full committee on Ways and Means, and it is a real delight to have worked with someone over the years and to see now that you are on the other side ofthe table and we certainly look for your expertise and your willingness to lead us and to guide us and certainly to inform us and hopefully we will not only in this instance, but in many others, have an op- portunity to continue to work together. It is a policy of this subcommittee to have all witnesses sworn in and we would like to ask you to take the oath this morning. As is the practice for this subcommittee, I ask the panelist to raise his right hand to be administered the oath. [Witness sworn.]