Canada: CBSA Proposes Amendments To Customs Valuation Rules Having Potentially Significant Impact On Importers

On Friday, May 26, the Canada Border Services Agency ("CBSA") issued notice in the Canada Gazette that it had commenced consultations (the "Consultations") on proposed amendments that would have the effect of instituting a "last sale" rule for customs valuation purposes. This substantial shift in valuation rules is to be made via certain amendments to the Valuation for Duty Regulations under the Customs Act ("Amendments"). The Amendments have been proposed to address the perceived "loophole" that the government claims allows non-resident importers ("NRIs") to claim its purchase price of the good for customs valuation purposes, as opposed to the "last sale" price, which is the (higher) price to the Canadian purchaser.

If adopted, the Amendments would cause an importer (resident or non-resident) to use the "last sale" price to the customer in Canada as the basis for customs valuation, which will result in an increase of customs duties and GST payable when such goods are imported into Canada. As will be further described below, however, the Amendments could have a much broader impact on the Canadian importing community, and the impacts will be felt by NRIs and resident importers alike. We anticipate some businesses will reconsider whether their presence in Canada makes sense from a commercial perspective should the Amendments be implemented as currently drafted.

The Consultations describe the issue as follows:

In the scenarios to which the CBSA is referring, the NRI is usually relying on what is known as the "transaction value", the primary and first in the hierarchy of six customs valuations methods contemplated in the Customs Act. Three conditions must be satisfied in order to claim the transaction value:

• The imported goods are sold for export;
• The purchase in the sale for export is the purchaser in Canada; and
• The price paid or payable for the goods can be determined.

"Purchaser of Canada" is defined in the Valuation for Duty Regulations as:

• a resident;
• a person who in Canada who is not a resident but who has a permanent establishment in Canada; or
• a person who is neither a resident nor has a permanent establishment in Canada, and who imports the goods, for which the value for duty is being determined,
  • for consumption, use or enjoyment by the person in Canada, but not for sale, or
  • the sale by the person in Canada, if, before the purchase of the goods, the person has not entered into an agreement to sell the goods to a resident.

The Consultations set out the proposed text for the Amendments, which would implement definitions for the two fundamental concepts: "sold for export to Canada" and "purchaser in Canada". "Sold for export to Canada" would mean "[.] in respect of goods, to be subject to an agreement, understanding or any other type of arrangement - regardless of its form - to be transferred, in exchange for payment, for the purpose of being exported to Canada, regardless of whether the transfer of ownership of the goods is completed before or after the goods are imported." "Purchaser in Canada" would mean "in respect of goods that are the subject of an agreement, understanding or any other type of arrangement referred to in section 2.01, the person who, under that agreement, understanding or arrangement, purchases or will purchase the goods, regardless of whether the person is the importer of the goods or when the person makes payments in respect of the goods." The Amendments also propose language requiring that, if there are two transfers that could constitute a sale for export to Canada, the appropriate one to use for valuation purposes is the later transfer of the two.

Misalignment with Canadian Jurisprudence

Such Amendments purport to address what the CBSA has termed an "unfair advantage" that applies to NRIs, which are not Canadian-based businesses. In the typical scenario, an NRI will claim its acquisition cost as value for duty, while their Canadian purchaser will be charged a higher sale price. The CBSA is presumably concerned, at least in part, about tax and customs duty leakage, where the duties and taxes are applied on the lower sales value in the series of sales between the manufacturer/exporter and the ultimate Canadian purchaser. Whether or not the CBSA characterizes these transactions as "unfair", Canadian jurisprudence indicates that, in the scenario described above, the sale that is the "sale for export" is the sale as between the foreign seller and the NRI when title passes at importation, and the "purchaser in Canada" is the NRI where it satisfies one of the three "purchaser in Canada" criteria. Thus, the transaction value for that sale can be appropriately claimed by the importer as the value for duty. In fact, in light of the court's and tribunal's decisions, many (resident) subsidiaries of multinational corporations and NRIs alike have based their trade and Canadian domestic sales strategy on this customs valuation set of rules.

When applied as proposed, the Amendments can actually have the effect of causing the importer to claim a domestic sales price as the value for customs, where the "last sale" that occurred in the series of sales is between an importer and a Canadian purchaser. If administered in this manner, Canada would be largely out-of-step with our trading partners, and with general principles of international and domestic customs law - as we discuss further below.

Misalignment with Trading Partners and WTO Obligations

When these Amendments were first proposed in 2021, there was some criticism (including by the Canadian Bar Association) that the Amendments would result in a misalignment between Canada and vital trading partners like the United States. The Consultations themselves raise this possible issue, noting that the United States had attempted to regulate a 'last sale rule' only to withdraw it, in part due to opposition from the U.S. trading community. Accordingly, if the CBSA moves forward with the Amendments, the valuation approaches taken by Canada and the United States will be starkly different for certain importers and related entities. This lack of uniformity in valuation methodology could lead to significant compliance issues for businesses engaging in trade across the U.S.-Canada border in both directions.

There have also been questions regarding the degree to which the Amendments comply with Canada's obligations under various World Trade Organization ("WTO") agreements. Article 1 of WTO's Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994 (commonly referred to as the "Customs Valuation Agreement") explicitly states that "[t]he customs value of imported goods shall be the transaction value, that is the price actually paid or payable for the goods when sold for export to the country of importation, adjusted [as applicable]". There is no limitation in terms of how the transaction value can be used in this context; no restriction in connection with NRIs, no contemplation of "unfair" supply chain management by Canadian resident subsidiaries or NRIs, no rule around using the very last sale in a series of sales (ie: the customer's purchase price) as the transaction value, nothing of the kind. As a matter of fact, the WCO Technical Committee on Customs Valuation has opined on "series of sales" events, and has clarified that the price paid or payable for customs purposes is the last sale occurring prior to the introduction of the goods into the country of importation. This means that any series of sales occurring after the importer has imported and acquired title to the good, are largely irrelevant to customs valuation.

Furthermore, in closing the alleged "loophole", it could be argued that Canada is privileging importers with a warehouse in Canada who may use their warehouse to import goods at a lower non-retail price, pay duties based on that lower price, and then sell onward to a Canadian consumer at the retail price. An NRI, which does not necessarily have a warehouse in Canada, would not have that option available to it. This could be considered contrary to the general principle of national treatment, which is noted in the preamble to the Customs Valuation Agreement. Specifically, the preamble to the Customs Valuation Agreement, to which Canada is a signatory, states that:

The CBSA has clearly indicated that the Amendments are designed to "level the playing field" between NRIs and resident importers, raising the question of whether the desired impact on NRI importations runs contrary to the principle of national treatment and Canada's WTO obligations.

Practical Implications for Importers

As currently drafted and described in the Regulatory Impact Statement, the Amendments will not only capture the sales and NRI importations that the CBSA purports to be isolating. As noted above, there are a number of scenarios where Canadian entities and well-established subsidiaries, wholesalers, distributors, and retailers will be exposed to what could be significantly higher duties and taxes based on the "last sale" customs value.

This will also have particularly acute implications for e-businesses that import goods for resale, including those that operate as sales platforms, merchant communities, or marketplaces. Importers may be forced to revisit their import and broader supply chain strategies if the Amendments are implemented as proposed.

To view the original article click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.