Value For Duty 'Last Sale' Proposed Changes
In May 2023, Canada Border Services Agency published a proposed amendment to the value for duty regulations. The intent of their proposal is to remove, in CBSA’s view, the unfair advantage to Non-Resident Importers (NRIs) by basing Value for Duty (VFD) on the last sale price, in a series of sales, regardless of when that sale took place (either before or after importation). However, the proposed amendment does not limit the changes to NRIs but is an overall change to the regulations that therefore have a broader application leading to potentially unintended consequences for resident Canadian importers.
6 Methods Of Valuation
Under the Customs Act the value for duty must be established using one of the 6 mandated methods of valuation. These methods must be reviewed and applied in order based on the transaction or reason the goods are entering Canada. The transaction value method is to be used whenever possible and is by far the most often applied to importations into Canada.
Current Transaction Value Methodology
The transaction value method is based on the price paid or payable of the goods “sold for export” to a “purchaser in Canada” and has specific conditions that must be met:
- Sold for export, meaning where the title of the goods passes to the importer
- Purchaser in Canada is defined by the World Trade Organization's definition as
- “A resident an entity the management and control of which is in Canada”
- “A non-resident with a permanent establishment, which is a fixed place of business through which the person carries on business”
- “A person who is neither a) nor b) and who imports the goods for their own consumption in Canada or for sale if the person has not entered into an “agreement to sell” the goods to a Canadian resident prior to the purchase of the goods”
Basically, this means that under the transaction value method, importers must use the price paid or payable (taking into account required additions or deductions) for the goods in the transaction that brings those goods into Canada as the basis for the value for duty.
- For resident importers, this is the price they have paid their foreign supplier for the goods. If they are receiving goods for reasons other than a purchase they have made, they cannot use the transaction method of valuation. Instead, they are required to use one of the subsequent five methods of valuation for determining the value for duty.
- For NRIs this equates to the sale price to the first Canadian Buyer. However, when an NRI is sending goods to Canada that have not been sold or otherwise sent to a purchaser in Canada, under current regulations, they can utilize the “sale for export to Canada rule”. This rule allows the NRI to declare the sale price between themselves and their supplier as the value for duty.
Proposed VFD Amendments
The proposed amendments will fundamentally change these understandings and definitions, therefore changing how goods will be valued for duty and tax application. The amendment is as follows:
Definitions for the Purposes of Subsection 45(1) of the Act
2.01 (1) For the purposes of subsection 45(1) of the Act, sold for export to Canada means, 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.
(2) If the goods are subject to two or more agreements, understandings or other types of arrangement described in subsection (1), the applicable agreement, understanding or arrangement for the purposes of that subsection is the one respecting the last transfer of the goods in the supply chain among the transfers under those agreements, understandings or arrangements, regardless of the order in which the agreements, understandings or arrangements were entered into.
2.1 For the purposes of subsection 45(1) of the Act, purchaser in Canada means, 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.
Representation Of VFD Amendment Changes
Under the current methodology, a typical sale of goods under the transaction method would look like this:
Company A (resident importer) sells a CNC machine to the consumer (in Canada) for $15,000.
Company A does not stock the CNC machine in Canada and instead has to purchase it from the manufacturer overseas. They place the order with their supplier for $10,000 and have it shipped to Canada.
Under today's rules, the relevant sale to use for the VFD would be between Company A and the overseas manufacturer. Duties and taxes would therefore be paid on $10,000.
Under the proposed regulations, the “last sale” in the supply chain must be used for the value for duty.
The last sale is “a supply chain involves the material and informational interchanges in the logistical process, from the acquisition of raw materials to delivery of finished products to the end user. All vendors, service providers, and customers are links in the supply chain.” Source
The relevant sale would therefore be between Company A and their resident consumer because that is what ultimately caused the goods to come to Canada. Duties and taxes would be paid on $15,000.
Issues with Importing for Resale
Importing for resale presents a potential issue under the proposed amendment. If a manufacturer sells to a Canadian resident distributor, that distributor sells to a retailer, and the retailer sells to the final consumer, the VFD would be on the last transaction. However, at the time of import, the last transaction sale is unknown. The last sale price is also sensitive business information that the reseller may not want the distributor to know.
Intent Of VFD Amendments
CBSA’s intent of the proposed VFD amendments is to broaden the definition of “sale for export to Canada,” “purchaser in Canada” and align Canada with the international consensus of the “last sale rule” therefore closing the loop on NRI valuation.
According to CBSA, the current regulatory framework surrounding the value for duty methods is creating “an unfair advantage for Non-Resident Importers (NRIs).”
“This advantage exists due to NRIs’ ability to declare a lower VFD on goods they import to Canada by using an earlier sale price and not the sale to an actual buyer located in Canada that brought the goods into Canada. The earlier sale price that is used in these instances occurs in the earlier stages of the supply chain, including a sale transaction between a foreign-based manufacturer and an NRI.”
“The ability to declare a lower VFD means that these NRIs pay less customs duty on the goods they import into Canada when compared to Canadian importers, i.e. importers residing in Canada. Since Canadian importers are paying higher amounts of duties, the existing framework puts Canadian businesses at a competitive disadvantage, while simultaneously resulting in lost customs revenues to Canada in duties paid on lower VFD.” Source
CBSA has consulted with industry stakeholders since the announcement. Should the proposed amendment be ratified as currently written, many importers into Canada will likely see an increase in complications in determining the correct value duty, obtaining the required information to declare and support the valuation, and ultimately increases to the assessed duty and tax.
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