Memorandum D13-4-13: "Post-Importation Payments or Fees: Subsequent Proceeds" (the "Guidelines") issued last month by the Canada Board of Services Agency ("CBSA") may be seen as a "shot across the bow" from CBSA regarding the inclusion of administration, management and other post-importation payments in the value for duty of goods imported into Canada. CBSA’s views on the law in this area will be of particular significance for importers engaged in related party transactions for goods, services and technology.

Importers should be carefully reviewing the Guidelines, a copy of which can be found at http://www.cbsa-asfc.gc.ca/publications/dm-md/d13/d13-4-13-eng.pdf, to address any potential exposure in terms of their liability for customs duties, GST, penalties and interest.

CBSA takes an aggressive position throughout the Guidelines that all amounts paid by importers directly or indirectly to vendors will be presumed to be dutiable as subsequent proceeds unless acceptable evidence to the contrary can be provided.

Amounts to be included for purposes of determining customs duty and GST liability

Canada’s Customs Act (the "Act") provides for the addition of a number of different amounts to the price paid or payable for imported goods, to the extent that they are not already included, for purposes of determining value for duty, i.e., the basis for determining an importer’s customs duty and GST liability. These include certain commissions and brokerage, royalties and license fees, packing costs, assists, transportation and related charges up to the point of direct shipment to Canada, and subsequent proceeds.

The Guidelines set out CBSA’s views of the kinds of payments that fall within the phrase "subsequent proceeds" as it appears in subparagraph 48(5)(a)(v) of the Act. That provision states that "the value of any part of the proceeds of any subsequent resale, disposal or use of the goods by the purchaser thereof that accrues or is to accrue, directly or indirectly, to the vendor" must be included in the value for duty of the goods. A typical example arises when an importer pays a specified percentage of the resale price of the goods to the vendor, in addition to the price paid for the goods. In those circumstances, that amount is usually considered a subsequent proceed that must be included in the value for duty declared to CBSA.

Key elements of CBSA’s policy

The Guidelines, however, go on to identify a number of circumstances in which CBSA will consider amounts paid to be subsequent proceeds, some of which may come as a surprise to importers that make payments for management and administration fees. These kinds of payments are generally made for services of the various departments of a business, including marketing and promotion, accounting, financial, legal, employment, management consultation, and taxation.

Briefly put, the key elements of CBSA’s policy on its interpretation of the Act’s requirements in this regard are as follows:

1. CBSA excludes management and administration fees from value for duty on the basis of a discretionary administrative policy.

CBSA takes the position that there is no statutory exemption from value for duty for these amounts. Under their "discretionary administrative policy", such payments will not be considered dutiable subsequent proceeds only if all of the following conditions are satisfied:

(a) the services are rendered for the operation of the business in Canada

CBSA will examine whether the services were actually performed for the importer. Where the specific service was not provided or there is no agreement to specifically charge for such an amount, CBSA is of the view that the payment would not meet the requirements of its policy and therefore should be included in the value for duty.

(b) the amount of the charge is in accordance with arm’s length principles

The amount of the payment must be comparable to the price that would be charged by an unrelated party. In cases where costs are shared among a number of related companies, including the importer, the method of allocation must be reasonable and appropriate in the circumstances. CBSA also notes that apportionment of these costs among related parties must be based on a comprehensive review of the expenses which should be carried out in advance of determining the share allocated to the Canadian importer. Management fees determined after the fact are more likely to be challenged by CBSA. Although it is appropriate to include an amount for profit in such charges, CBSA will challenge profit amounts that they feel are excessive — i.e., such amounts will be treated as being dutiable.

(c) the services provided are justified for the operation of the business in Canada

CBSA expects an importer will establish that the specific activity performed by the related party is a service for which a charge is justified. This involves the question of whether the importer for whom the management and/or administrative services are being carried out would either have been willing to pay for the activity if performed by an unrelated service provider or have performed the activity itself.

2. The importer’s method of determining the charge for the services is important.

A methodology based on the total cost incurred by the vendor and distributed amongst the recipients of the services, including the importer, based on usage is viewed as a "legitimate approach". An approach that calculates payment based on a percentage of the net sales of the goods is viewed as problematic because it may not necessarily meet the requirements that the payment must be for the services rendered for the operation of the business in Canada. In such a case, CBSA will demand further substantiation of actual costs before excluding the payment from value for duty.

3. CBSA presumes that service fees paid by the importer to the vendor are dutiable.

An importer may rebut this presumption by providing evidence, i.e., "sufficient information", indicating that the fees are in accordance with the arm’s length principle and that they relate to justifiable services actually rendered for the Canadian business operation. "Sufficient information" is defined under the Act as "objective and quantifiable information that establishes the accuracy of the amount … or adjustment".

CBSA states that this information consists of documentation that describes the nature of the service for which payment is being made, the basis on which it is paid, and proof that actual services are being provided and paid for. This includes commercial invoices, inter-company agreements and other proof of payment.

4. Financial transactions such as dividend payments are not to be included in value for duty but certain conditions must be met.

CBSA recognizes that dividends are not subsequent proceeds but requires that in order to take advantage of this exclusion the dividends must meet the definitions and requirements under Canadian tax law (including the non-resident Part XIII requirements of the Income Tax Act) and be substantiated by Canada Revenue Agency dividend payment forms regarding payments to non-residents. CBSA also explicitly excludes other financial payments from subsequent proceeds, including payments for the issuance, assumption, redemption or repayment of a debt, payments for the issuance, redemption or acquisition of share capital, and other financing activities.

5. Research and development fees are generally viewed as being dutiable.

Appendix A of the Guidelines specifies that amounts paid to a vendor by the importer for research and development must be included in the value for duty of the goods. These do not appear to fall within CBSA’s policy for the exemption of management and administration fees. In contrast, Appendix B discusses marketing and promotional fees which CBSA appears to exempt on a similar basis as described further above. CBSA will, however, exclude R&D amounts where the foreign vendor is contracted to undertake research for a Canadian importer, all costs and risk of failure are borne by the importer, and ownership of research accrues to the importer.

What does this mean for importers?

Importers, and particularly those dealing with related parties, should be carefully reviewing all payments made in addition to the selling price of imported goods to determine whether any are vulnerable to inclusion in value for duty. The payment of management and administration fees should be examined to ensure sufficient factual and documentary support exists to meet the requirements of CBSA’s policy on exemption from value for duty.

Missing from CBSA’s Guidelines is any discussion of payments made by importers to parties related to the vendor instead of the vendor itself. Often, importers may purchase goods from one related party and make payments for management and administrative services to another related party. It is unclear whether under CBSA’s subsequent proceeds policy such payments would not be dutiable or whether CBSA would engage in a fact-specific analysis as to whether such payments "directly or indirectly" accrue to the vendor. In these circumstances, it would be prudent for importers to ensure that payments to parties related to the vendor also meet the requirements of the Guidelines for exclusion from value for duty.

Importers can expect that this policy will be followed in audits, assessments, customs rulings, administrative appeals, and other CBSA enforcement activities. It is important to keep in mind that these are only administrative guidelines setting out CBSA’s interpretation of the law. Their application will be subject to the requirements of legislation (including the Act), case law and Canada’s international treaty obligations regarding customs valuation. Notably, the World Trade Organization’s Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994 provides a general rule that payments made by importers to vendors which "do not relate to the imported goods" must not be included in value for duty.