While there may be perfectly valid business reasons for generating multiple commercial invoices for a single import transaction, the mere existence of a dual invoice model is likely to set off alarms if discovered by Customs and Border Protection (CBP) Import Specialists or Auditors, and Immigration and Customs Enforcement (ICE) Special Agents. That is why there needs to be solid, approved processes and systems in place to manage international transactions when multiple invoice situations exist.
As an example where there could be legitimate reasons for multiple invoices; consider a transaction where a company has set up a related party intermediary to handle an intercompany transfer pricing model. This could create a scenario where a non-related supplier is selling to the intermediary, and the intermediary is then creating a second invoice to represent a transfer price sale between the intermediary and the related importer. This assumes that there has been adequate internal legal, tax, and trade compliance review of the pricing to ensure compliance with both the Internal Revenue Service (IRS) and CBP regulations regarding transfer pricing and related party transactions.
Another example could be an importer’s usage of the First Sale Rule, which if all aspects of the rule are followed, allows the import declaration value to be the sale between a foreign seller and a middleman as opposed to the subsequent sale between the middleman and an importer. For a brief description of the First Sale Rule, see here.
So why would CBP and ICE be pre-disposed to take a suspicious view of “double invoicing” when discovered? Understandably, it would be great way to cheat the government out of import duties and fees. All that has to exist is an agreement between a supplier and an importer for the supplier to create an invoice with a lower value for import purposes, and secretly provide a higher value second invoice to the importer for billing purposes. Since most import duties are ad valorem (based on a percentage of monetary value), it’s a simple but dishonest way to reduce costs.
Why would an ambitious government official salivate over the prospect of busting open a double invoicing scheme? Take for example a case reported by ICE back in July of this year. A clothing manufacturer based in China agreed to pay around $13.4 million dollars in fines for cheating the government through a double invoicing scheme (read the announcement here). This type of scheme is ripe for penalties under the False Claims Act, which reads in part:
“… any person who…knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, …is liable to the United States Government for a civil penalty of not less than $5,000 and not more than $10,000, as adjusted by the Federal Civil Penalties Inflation Adjustment Act of 1990 …, plus 3 times the amount of damages which the Government sustains because of the act of that person.”
On a much smaller scale, but indicative of CBP’s alertness to double invoicing, take for example the situation on the Southern Border where I worked as a U.S. Customs Import Specialist. For small shipments that fall under the limit required for formal entry (goods valued at less than $2500) processing, the informal entry process is simple enough that a truck driver can get away with making the declaration on behalf of the importer. If a CBP inspector suspected that the value of the shipment was unreasonably low (not only saving the importer in duties but the expense of having to make a formal entry), one of the first things the inspector would do is search the glove box of the truck to see if they could find a “real” second invoice. It is a no-brainer for the inspector to try and locate one.
What should importers do to remain above suspicion and not waste time trying to explain the legitimacy of an import transaction where a CBP audit or inquiry reveals the existence of multiple invoices? Importers should have documented policies and processes in place that lay out the entire import process and where the data populating the invoices is derived. There also needs to be in place documentation supporting any intercompany transfer pricing arrangements or first sale initiatives.
Scaling the business, achieving operational efficiencies, maintaining compliance, and performing internal assessments are all made easier by incorporating a Global Trade Management (GTM) solution with a company’s enterprise system, and can go a long way to giving CBP a level of comfort for what at first glance to them can seem like an attempt to do something illegal.
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