Tax & Trade Blog
FCA Upholds Landmark Customs Valuation Case
In Skechers v. CBSA (2015 FCA 58), the Federal Court of Appeal (“FCA”) considered a Canadian International Trade Tribunal (“CITT”) decision which applied a broad interpretation of “price paid or payable” for Customs Act valuation purposes, resulting in a significantly higher value for duty for the imported footwear at issue in the case, and with far-reaching implications for all Canadian goods, especially apparel and footwear items.
By way of background, one of the central factors in calculating applicable customs duties is the valuation of the imported goods. Section 47(1) of the Customs Act deems the primary basis for the appraisal of goods for valuation purposes to be the transaction value of the goods. Section 48(4) requires that the transaction value be determined by “ascertaining the price paid or payable for the goods when the goods are sold for export to Canada.” Section 45(1) defines “price paid or payable” as “the aggregate of all payments made or to be made, directly or indirectly, in respect of the goods by the purchaser to or for the benefit of the vendor.”
Accordingly, the value for duty of goods would generally be expected to include all payments made by the vendor to the purchaser in respect of the goods.
Just how broad a statement that is, was the precise issue in Skechers, with the FCA required to determine if the CITT erred in concluding that various charges for research and development under a cost-sharing agreement between importer and vendor were includable in the value for duty of the goods.
On the facts of the case, Skechers Canada purchased the footwear from Skechers USA. In calculating value for duty, Skechers Canada included the factory price paid by Skechers USA to manufacturers, the cost of shipping the goods to the U.S., warehousing them in Skechers USA’s distribution centre and an arm’s-length profit. Skechers Canada excluded payments that it made to Skechers USA for design, research and development (“R&D”) from value for duty. The Canada Border Services Agency (“CBSA”) audited Skechers Canada and took the position that the R&D payments were to be included in the price paid or payable, thus increasing the value for duty and ultimately duties payable.
Skechers Canada appealed to the CITT, where the CITT concluded that CBSA was correct that the R&D payments, in their entirety, were“in respect of”the goods in issue and accordingly, must be included in value for duty. Skechers Canada then appealed to the FCA.
At the FCA, the Court started with the applicable standard of review (i.e., the basis on which the FCA was actually able to overturn a decision of the CITT). The court found that the applicable standard of review was reasonableness, and that accordingly, the FCA Could allow the appeal only if it found the CITT’s decision to be outside the range of possible, acceptable outcomes, defensible in respect of the facts and the law.
In considering the substance of the appeal before it, and without any reservation whatsoever, the FCA dismissed Skechers Canada’s appeal and concluded that the CITT decision was reasonable. Specifically, the FCA found that the CITT’s conclusion that there was a sufficient link between the R&D payments and the imported goods, such that the payments were “in respect of” the imported goods was reasonable – essentially accepting the CITT’s analysis on these points.
Importers need to understand the ambit of “price paid or payable”, and begin to adjust their value for duty for imported goods to account for same. CBSA will be expected to be reviewing transfer pricing agreements for dutiable inclusions in the “price paid or payable” for the goods. Accordingly, customs advice during the “transfer pricing” process will also be important. Failure to recognize this could result in unintended customs duties consequences.
This article was published in the May 2015 edition of Canadian Tax Focus.