The Bri-Chem trilogy, the rule of law and self-corrections of revenue-neutral tariff treatment under the Customs Act

In three decisions released concurrently by the Canadian International Trade Tribunal (CITT) on September 18, 2015 (collectively referred to as the Bri-Chem trilogy), the CITT instructed the Canada Border Services Agency (CBSA) that the CITT's legal interpretations of the Customs Act are binding on the CBSA unless it successfully appeals to the Federal Court of Appeal or the Supreme Court of Canada.1 The binding nature of the legal precedent applies not only to the case before the CITT, but to all cases considered by the CBSA unless distinguishable on the facts.

It has been the contradictory and erroneously founded opinion of the CBSA that decisions of the CITT are specific to the appeals it determines and otherwise do not bind the CBSA in disputes with other importers that raise the same questions of law and mixed fact and law. As was the case in the Bri-Chem trilogy, the CBSA disagreed with a CITT decision, did not appeal it, and continued to apply its erroneous interpretation of the Customs Act to the detriment of importers who structured their affairs on the basis of the CITT decision. By proceeding in this manner, the CBSA has disrespectfully limited the negative impact of the CITT decision on its own erroneous policies and has breached the rule of law. It is expected that the Bri-Chem trilogy will cause the CBSA to change its approach; if in future it disagrees with CITT decisions, it should be expected that the CBSA will appeal them rather than ignoring their precedential value.2

This article addresses (i) the gap in the Customs Act that gave rise to the substantive issue in Frito-Lay3 and the Bri-Chem trilogy, (ii) the CITT’s justification for overruling the CBSA’s practice of denying concurrent, revenue-neutral corrections to tariff classification and preferential tariff treatment claims, and (iii) the rule of law concerns arising from the CBSA’s conduct. At the heart of the dispute is the CBSA’s precipitation of a troubling challenge to the CITT’s statutory authority to issue binding rulings that govern the CBSA’s day-to-day enforcement of the Customs Act.

The Bri-Chem Trilogy

The appeals required the CITT to resolve a single question: does the Customs Act permit an importer to make a revenue-neutral claim for preferential tariff treatment under a free trade agreement when it corrects an error in tariff classification and originally claimed a zero rate of duty based on classification? The CITT previously answered this question affirmatively in Frito-Lay. The CBSA did not appeal Frito-Lay to the Federal Court of Appeal, yet it subsequently treated the importers in Bri-ChemEverGreen, and Southern Pacific as if the CITT had not reversed the CBSA decision in Frito-Lay. In allowing the Bri-Chem trilogy appeals, the CITT found that the CBSA had engaged in an abuse of process by disregarding the CITT decision in Frito-Lay and forcing the importers to re-litigate the previously established law.

The Gap – Post-importation Corrections to Tariff Treatment Claims

Preferential tariff treatment is a function of the tariff classification under the Harmonized Tariff Schedule to the Customs Tariff (HTS) and the origin of imported goods. The HTS is a 10-digit classification system for goods in which classifications are paired with applicable rates of duty based on origin. The Most-Favoured Nation tariff treatment, also called the MFN duty rate, refers to the default duty rate imposed on the importation of goods, originating anywhere in the world with the exception of North Korea, that are not entitled to a tariff (rate) preference.

Canada’s free trade agreements provide preferential tariff treatment for a given HTS classification in the form of a lower (usually zero) duty rate provided that the goods “originate” in the country that is a signatory to the free trade agreement. For example, under the North American Free Trade Agreement (NAFTA), goods that originate in the U.S. qualify for duty-free tariff treatment under the United States Tariff (UST) when imported into Canada.

The disputes in the Bri-Chem trilogy and Frito-Lay arose from a failure of the Customs Act to address the question of whether an importer can make a revenue-neutral correction to its preferential tariff treatment claim when it corrects a tariff classification declaration, in summary, a gap in the law. The CBSA erroneously interpreted the Customs Act to close the gap against importer tariff preference interests, while the CITT interpretation favoured importer claims that imports remained entitled to duty-free treatment.

Post-importation Corrections to Customs Declarations

The Customs Act requires importers to self-assess and pay duties based on the tariff classification, origin, and value for duty of imported goods. Based on the tariff classification and origin of the goods, the importer claims a tariff treatment (MFN or preferential duty rate) that is applied to the value for duty of the imported goods to determine duties and GST owing to the CBSA.

Errors to customs declarations are a fact of life for importers and their customs service providers. The Customs Act treats the corrections of these errors differently depending on whether the correction results in a refund claim by the importer for overpayment of duties, duties owing to the CBSA because of an underpayment of duties, or a correction that does not affect the duty liability of the importer (i.e., a revenue-neutral correction). An importer has the option of filing a refund claim under section 74 of the Customs Act, but is required to file corrections that result in duties owing or are revenue-neutral under section 32.2.

The mischief in Frito-Lay and the Bri-Chem trilogy arose because of the inconsistent treatment of corrections to tariff treatment claims under sections 74 and 32.2 of the Customs Act.

Under section 74, an importer may file a refund claim for duties paid on goods that qualified for NAFTA tariff treatment within one year of the date of accounting for the imported goods.4 In contrast, section 32.2 of the Customs Act does not require, or expressly permit, an importer to correct a tariff treatment claim. Corrections under section 32.2 are limited to declarations of origin, tariff classification and value for duty. Further, if the importer has “reason to believe” its customs declarations are incorrect, it is required to correct its mistake for all importations within four years from the date of importation. It is implicit in section 32.2 that a correction to the origin or tariff classification of goods may result in a denial of a preferential tariff treatment claim and that the importer will have to pay duties as a consequence. But section 32.2 does not explicitly provide for a revenue-neutral correction to a tariff treatment claim.

The absence of tariff treatment as a “correctable” element to a customs declaration in section 32.2 is consistent with the appeal provisions in sections 57 to 70 of the Customs Act, which apply regardless of whether the importer or the CBSA initiated the change to the customs declaration of imported goods. These provisions apply narrowly to disputes between the CBSA and an importer over the marking, origin, tariff classification, value for duty of imported goods, as well as advance tariff classification rulings issued by the CBSA. This silence means that the Customs Act does not provide a right to appeal tariff treatment claims.

In summary, the Customs Act permits an importer to file for refunds based on a claim for NAFTA tariff treatment within one year of the importation of the goods, requires an importer to pay duties when it improperly claimed preferential tariff treatment based on incorrect declarations of origin and/or tariff classification, but does not address a revenue-neutral tariff treatment claim for imported goods.

The Trap – Imposition of MFN Duties on NAFTA Qualifying Goods

The gap in the Customs Act on revenue-neutral corrections to tariff treatment may seem esoteric. But importers who have experienced the CBSA’s response to this gap have discovered its significant financial repercussions.

The CBSA has interpreted the legislative gap as prohibiting an importer from making a revenue-neutral correction to a tariff treatment claim under section 32.2 of the Customs Act with the effect that when an importer files concurrent revenue-neutral tariff classification and tariff treatment corrections, the CBSA denies the tariff treatment correction and assesses duties on goods that otherwise qualify for a revenue-neutral duty-free treatment under the NAFTA.

The Bri-Chem trilogy neatly summarizes the operation of the “trap” for the importer created by the CBSA’s interpretation of the Customs Act. In each case, the goods were declared as originating in the U.S. Under the tariff classification originally declared by the importers, the MFN and NAFTAtariff treatments were both duty-free and each importer claimed MFN. The importers thus paid no duties at the time of importation. Subsequently, the importers obtained “reason to believe” that their tariff classification declarations were incorrect.5 Under the corrected tariff classifications, the MFN duty rates ranged from four to eight percent while the equivalent NAFTAtariff treatments were of course duty-free. When the importers filed their required corrections under section 32.2 of the Customs Act, they claimed NAFTA tariff treatment because the goods satisfied the rules of origin under NAFTA relating to the correct classifications, with the result that the corrections were revenue-neutral; the importers claimed that no duties were owing to the CBSA.

In each case, the CBSA accepted the tariff classification correction but denied the tariff treatment claim, and required the importers to pay duties at the MFN rate. The importers were thus faced with a situation in which goods that should have been duty-free had become dutiable owing to what should have been a revenue-neutral tariff classification error and their decision to originally account for the goods under MFN instead of UST tariff treatment. But that was not the end of the CBSA’s “administrative solution” to the legislative gap on revenue-neutral corrections to tariff treatment claims.

When the importers sought to appeal the CBSA’s rejection of their preferential tariff claims to the President of the CBSA under section 60(1) of the Customs Act, the President refused to hear the appeals based on a lack of jurisdiction. In making these “non-decisions”, the President relied on the legislative gap: the absence of an importer’s right to appeal a CBSA decision on preferential tariff claims under sections 57 to 70 of the Customs Act arising from a correction made under section 32.2 of the Customs Act.

The reader should keep in mind that the importers in the Bri-Chem trilogy had filed their concurrent, revenue-neutral corrections to tariff classification and tariff treatment in reliance onFrito-Lay. The importer in Frito-Lay had been subject to identical treatment, including the President’s refusal to hear its appeal for lack of jurisdiction. The CITT granted the appeal in Frito-Lay on both on the importer’s right to file revenue-neutral tariff treatment corrections and the President’s obligation to decide the subsequent appeal.

The Spring – Common Sense

The importers in Frito-Lay and the Bri-Chem trilogy subsequently filed successful appeals with CITT under section 67 of the Customs Act.

The President justified the denial of the tariff treatment corrections on the absence of tariff treatment as a “correctable” declaration under section 32.2 of the Customs Act and argued that the importers were therefore “stuck” with their original MFN tariff treatment claim. The President relied on the same argument to justify the President’s refusal to hear the appeals filed under section 60(1) and its assertion that the CITT had no jurisdiction to hear the appeals because "tariff treatment" is not a ground of appeal under the Customs Act.

The CBSA also acknowledged that its interpretation of the Customs Act meant that importers should always claim NAFTA tariff treatment, even if the MFN rate was duty-free, and incur the associated administrative costs, just in case their tariff classification declarations were incorrect. This policy ignores the concern of importers that unnecessary claims of preferential tariff treatment might attract expensive and distracting trade verifications for no useful purpose.6

The CITT found that the CBSA’s positions were unsupported by the Customs Act and absurd in their consequences to the importer. Whereas the CBSA applied a narrow interpretation of theCustoms Act, the CITT interpreted section 32.2 of the Customs Act in light of the commercial reality of tariff treatment claims and the purposes of preferential tariff treatment in free trade agreements.

The CITT characterized the CBSA’s argument that the importer was “stuck” with an unfavourable but “not incorrect” MFN claim following a tariff classification correction as “at best bureaucratically narrow-minded; at worst, it is entirely misleading if not underhanded, and it is also beside the point.” The CITT stated that the CBSA ignored the commercial reality that importers will avoid the additional expense of claiming a preferential tariff treatment when the MFN duty rate is zero. In the CITT’s view, forcing the importer to claim a preferential tariff treatment when the MFN rate is zero imposes a needless administrative burden that defeats the purpose of free trade agreements: the encouragement and facilitation of the importation of goods originating in the territory of a free trade partner.

The CITT rightly pointed out that the CBSA’s insistence that the MFN tariff treatment declarations were not “incorrect” was irrelevant because tariff treatment is not independently subject to correction under section 32.2 of the Customs Act. The CITT identified the relevant analytical starting points for corrections to tariff treatment under section 32.2 as tariff classification and origin. In the CITT’s view, a tariff classification correction permitted the importer to revise its tariff treatment claim because tariff treatment is a product of tariff classification and origin. It follows that if the tariff classification of goods changed, the importer can make the appropriate adjustment to the tariff treatment claim to maintain the revenue-neutral effect of the correction.

Another perspective on the CITT’s reasoning is that if the Customs Act does not explicitly allow an importer to make a revenue-neutral tariff treatment correction, it also does not explicitly allow the CBSA to interfere with a revenue-neutral tariff treatment claim unless it re-determines the origin of the goods declared by the importer. The CITT emphasized that the CBSA had not challenged the importers’ declarations that the goods were of U.S. origin and therefore that the goods were always entitled to NAFTA tariff treatment.

In the CITT's view, nothing in the Customs Act prohibited the importer from revisiting its tariff treatment claim. While the CBSA inferred from the legislative gap that revenue-neutral tariff treatment claim corrections are prohibited, the CITT drew the opposite inference.

Precedent is Binding: the Rule of Law Resides in Canadian Customs Disputes

Up to this point, we have purposely not distinguished between the Frito-Lay and Bri-Chem trilogy decisions because the core issues of law and fact in those cases are essentially the same.

The statement of reasons for the decisions in Bri-Chem trilogy and Frito-Lay are distinguishable in that the former contains a sharp reprimand to the CBSA for challenging the CITT's statutory authority. The CITT characterized the CBSA's actions as "unprecedented", "perhaps contemptible" and left no doubt that it would have sanctioned the CBSA for its actions if it had the authority to do so under the Customs Act.

The CBSA's policy decision to disregard Frito-Lay left the CITT with arguably no choice other than to declare that the CBSA had engaged in an abuse of process by undermining the rule of law and public confidence in the administration of justice. While the abuse of process finding provided no tangible remedy to the importers in the Bri-Chem trilogy, the CITT asserted its jurisdictional supremacy over the CBSA. The Bri-Chem trilogy is ultimately about the CBSA’s duty to apply existing CITT decisions to subsequent cases that raise the same issues of law and mixed fact and law in accordance with the doctrine of precedent. It is certain to become a leading authority in future litigation under the Customs Act.

The Customs Act leaves little room to challenge the proposition that the CBSA is bound to follow CITT decisions made under the Customs Act unless they are overturned by either the Federal Court of Appeal or the Supreme Court of Canada. The CBSA did not appeal Frito-Lay to the Federal Court of Appeal, and that should have been the end of the litigation on the legal issues addressed. Yet the CBSA decided it would not follow the law established by the CITT in Frito-Lay presumably because it was of the view that Frito-Lay, like all decisions of the CITT, applied only to the narrow dispute it decided. The CITT corrected this view in the Bri-Chem trilogy: absent distinction on the facts, the CBSA is bound to apply CITT decisions when the same legal issues arise in its administration and enforcement of the Customs Act. If the CBSA wishes to challenge the CITT's disposition of the Bri-Chem trilogy, its only option is to appeal those decisions to the Federal Court of Appeal.

It remains to be seen how the CBSA will react to the CITT's view of the scope of its appellate authority over the President. Following precedent in an administrative law context requires complex legal analysis. The doctrine of precedent (also known by its Latin appellation, stare decisis) requires lower courts, and administrative-decision makers like the CBSA, to follow the decisions of higher courts, such as the CITT. The precedential value of a decision, however, is limited to the issues of law and mixed fact and law that were decided to resolve the decision (in Latin, the ratio decidendi). All other statements are considered non-binding (and are called obiter dicta). Difficulties distinguishing between the ratio and obiter will likely challenge the CBSA. Courts often avoid precedential decisions by distinguishing the facts or the applicable law in a precedent case from the case at hand.

The affirmation that the CBSA is bound by the CITT's decisions is welcome and greatly increases the value of past CITT decisions and certainty in the importing community. But careful analysis is required to determine whether or not a given statement has precedential value. Importers and their service providers would be well advised to consult with Canadian trade law counsel, who are trained in the deconstruction of decisions to distill precedents that can reliably inform decisions around customs declarations and the resolution of disputes with the CBSA at an early stage.

The Wrap

Subject to appeal or legislative amendment, the Bri-Chem trilogy definitively resolves the issue of the importer’s ability to claim preferential tariff treatment when it files a revenue-neutral correction of a tariff classification and the Tribunal’s jurisdiction to hear appeals of tariff treatment claims. What remains to be seen is how the CBSA responds to the CITT’s admonition in the Bri-Chem trilogy to follow its decisions.

The Bonus

Following the Bri-Chem trilogy, an important question is the existence of a remedy available to importers who did not appeal the CBSA’s denial of their revenue-neutral tariff treatment claims after the CITT issued its reasons in Frito-Lay on January 8, 2013. The effect of the CBSA’s disregard for Frito-Lay was that it assessed duties on goods that would have been duty-free had the CBSA allowed the preferential tariff treatment claim. Normally, these appeals would be time-barred by the 90 day limitation periods to appeal decisions by the CBSA to either the President or decisions by the President to the CITT. But the Customs Act provides a mechanism for an importer to apply for an extension of time to file an appeal with either the President or the CITT within one year and 90 days of the decision at issue. Denials for applications to extensions of time to appeal to the President can also be appealed to the CITT. Given the CITT’s finding that CBSA’s disregard of Frito-Lay constituted an abuse of process, and its explicit concerns about importers who did not appeal the CBSA’s improper assessment of duties following Frito-Lay, the Tribunal may be more than willing to grant extensions of time to appeal to remedy the CBSA’s abuse of process.

Importers who were denied the benefit of Frito-Lay after January 8, 2013, should therefore consider applying for extensions of time to appeal to recover duties improperly paid to the CBSA.