CBSA Announces 2018 Trade Verification Priorities

Written By Darrel H. Pearson, Jesse I. Goldman and Jessica L. Roberts

In a New Year's tradition, the Canada Border Services Agency (CBSA) has published its trade verification (audit) priorities for 2018. The audits cover three programs that affect the amount of duties and Goods and Services Taxes (GST) importers pay: tariff classification, customs valuation, origin, as well as customs compliance generally. The audits are intended to ensure that the correct amount of import taxes are collected and that the Canadian government obtains accurate data necessary to best enable its trade negotiations.

As a refresher, the three programs (tariff classification, customs valuation, and origin) operate as follows. The rate of duty applicable to imported goods is derived from their tariff classification, (that is the description of the category of goods they fall in as set out in the Schedule to the Customs Tariff) and their origin (meaning the tariff preference applicable based on the application of rules of origin). Customs valuation relates to the method of appraisal of their import value. Duty amounts are calculated by multiplying the value for duty by the tariff rate. GST applicable at the border is five percent of the duty paid value of the imported goods (the sum of the value for duty and the applicable customs duty).

From a Canadian importer's point of view, CBSA trade verifications are time-consuming, business disruptive and can result in assessments of significant amounts of duties, GST, interest, and penalties. Being alerted to the CBSA's stated priorities for the coming year gives importers an important incentive to review their customs practices.

Not all trade verifications are established by priority or published in advance. The CBSA also conducts random verifications designed to measure compliance rates and revenue loss for the purposes of risk assessment, revenue assessment and to promote voluntary compliance. All importers are at risk of random verifications. Trade verifications may also arise from complaints from competitors.

The CBSA's verification priorities are determined through a risk-based, "evergreen" process, meaning that new targets are added throughout the year. The CBSA targets imported goods for verification of one or more of tariff classification, valuation and origin, and seeks to cover a high percentage of the volume of targeted imports. Verification of certain imported goods covered by previously initiated audits will continue this year, with the addition of some new targets.

Continuing verification priorities for tariff classification are:

• air brakes and parts thereof;
• articles of apparel and clothing accessories; 
• articles of plastic; 
• batteries;
• bicycle parts; 
• cell phone cases; 
• certain sacks and bags;
• chemical products;
• curling irons;
• dextrins and other modified starches;
• disposable and protective gloves;
• footwear (with values for duty in excess of $30);
• furniture for non-domestic purposes;
• geophysical and oceanographic instruments;
• hair dryers and electric smoothing irons;
• hair extensions;
• handkerchiefs/towels/related paper products;
• interchangeable tools;
• live plants;
• mountings/fittings/similar articles;
• olive oil;
• parts for machinery;
• parts for power trains;
• parts of lamps;
• pasta;
• photographic film;
• prepared meat of swine;
• railway equipment;
• sausages and similar products;
• seaweed;
• special purpose motor vehicles;
• stone blocks and slabs;
• stone table and countertops;
• tubes/pipes/hoses;
• vices and clamps.

• bags;
• castors with mountings of based metal;
• gloves;
• mineral waters and aerated waters;
• nails and similar articles of iron or steel;
• pebbles and limestone and granules;
• pickled vegetables;
• safety headgear;
• spent fowl;
• yeasts and other micro-organisms.

Lastly, the CBSA has identified a new verification priority for tariff classification relating to import permit numbers, meaning a subset of tariff classification pertaining to tariff rate quota where import permits impact accessibility to preferred rates of duty.

For customs valuation, apparel is an eternal and continuing priority for the CBSA, and is now in its third round of verifications. The applicable rates of duty are quite high, unless benefiting from tariff preference, and as the following illustrates, importers have been shown to make erroneous classification declarations. The first round (issued in February 2012) resulted in 15 out of 24 targeted companies being found non-compliant. The second round (issued in September 2015) resulted in 36 out of 119 targeted companies being found non-compliant. The current, third round of verifications began in April 2017 and is ongoing.

The non-compliance will have resulted in retroactive duties, GST and administrative monetary penalties for many of these companies.

Importers should note that transfer pricing and related party transactions are very impactful on valuation audits that have been targeted.

For origin, T-shirts are a continuing priority, now in its second round of verifications. The first round (released in June 2013) found 25 out of 51 cases of non-compliance. To date, the continuing second round has resulted in 8 cases of non-compliance out of 33 companies targeted, with 6 verifications still outstanding. The second round of verifications is ongoing.

"There is no time like the present" applies to importers in terms of their review of customs program compliance. Random trade verifications remain an important aspect of CBSA trade verifications. Preparation for audits is particularly important for importers of any of the priority verification items.

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