Tax & Trade Blog
Big Win for Importers: Value for Duty Rules Affirmed by CITT!
One of the most hotly contested areas in trade litigation is the “value for duty” (“VFD”) of goods being imported to Canada. “Value for duty” is the base on which one calculates and pays duties and taxes. Canada Border Services Agency (“CBSA”) typically audits in this area with a view to increasing the VFD of the imported goods, increasing revenues.
In a recent Canadian International Trade Tribunal (the “CITT”) case, CBSA was forced to allow non-resident importer to use its ‘factory prices’ as the proper base for duties – which has potentially far-reaching implications for importers!
The Customs Act provides that the VFD of imported goods is calculated using a series of methods, which are ranked (and to be used) sequentially, if applicable. The first of these is called the ‘transaction value method’ (see ss. 47 and 48(1)), and applies where there is a sale for export to Canada to a “purchaser in Canada”. Transaction value is by far the most common valuation method for imported goods, and the meaning of phrases like “sold for export to Canada” or a “purchaser in Canada” become extremely important.
How these phrases are determined, can play important parts in the value for duty, especially where there are possible competing levels of “trade” involved (e.g., a wholesaler and a retailer operating in Canada, where both involved in the ultimate distribution of the goods in the Canadian marketplace).
The Delta Galil USA Inc., 2021 CanLII 16357 (CA CITT), Delta Galil USA Inc. (“Delta”), a non-resident importer of various kinds of branded clothing (the “Goods”), was audited by CBSA, with CBSA concluding that the relevant sale for “sold for export to Canada” was the sale by Delta to various Canadian retailers. Delta’s view was that it was itself a “purchaser in Canada” because arranged to purchase the goods and met the necessary requirements. With 18% duties applicable to the Goods, a lot of money was on the line for the proper VFD base.
Delta viewed itself as the “purchaser in Canada” because it contracted with various foreign factories to produce the Goods and imported same for sale to Canadian retailers. The Goods were purchased by Delta on an FOB basis, with Delta assuming all of the risk of loss and damage to the goods when imported to Canada. Delta then arranged for the warehousing of the imported Good in Canada, using a third-party fulfilment company, which would fulfill the orders, among other things.
Delta’s sales were conducted out of an office building which was subleased by its agent and related company, Dominion Hosiery Inc. (“DHI”). DHI’s employees would then operate on behalf of Delta by engaging with customers and performing other business functions.
CBSA’s view was that this was not enough to create a “permanent establishment” in Canada (one of the requirements on the facts of the case), and the matter proceeded to the CITT.
The CITT reversed the CBSA’s audit, concluding that Delta met the “permanent establishment” test, even though it did not lease its own space or have its own employees. The CITT instead viewed DHI and its employees to be “dependent contractors” operating at a “fixed place of business”, totally controlled by Delta.
The CITT’s finding on the permanent establishment point, resulted in Delta being viewed as “purchaser in Canada”, and being permitted to use its ‘factory price’ as the VFD for its Goods.
The takeaway point here seems to be that non-resident importers have far more leeway to use their ‘factory prices’ as the duty-base for their imported goods than CBSA would otherwise like to admit! Obviously, Delta won its case on its specific facts, and non-resident businesses looking to examine their product’s VFD should seek expert customs advice from a trade lawyer today!
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