The Canada Border Services Agency (CBSA) has informed the Canadian importing community that importers may be entitled to obtain customs duty refunds in connection with downward transfer pricing adjustments having the effect of correcting/reducing invoiced prices that served as the basis of customs valuation of imported goods. On January 19, 2015 (as it happens, a birthday present for this author/international trade lawyer more on this below), the CBSA issued its new policy (Treatment of Downward Price Adjustments in Value for Duty Calculations Customs Notice 15-001). See Canadian Customs Authority Shifts Gears on Import Duty Refunds for a discussion of the policy and its impact for customs and tax purposes.
One would expect that sufficient time to allow for the dissemination of this positive news amongst customs and tax compliance managers responsible for transfer pricing has elapsed, which means that opportunistic Canadian importers are now examining transfer pricing practices over the last several years for purposes of determining whether or not to file refund applications.
Is Application a No Brainer?
At first blush, the decision to proceed with a refund application appears to be a "no brainer". The Canadian government has for years required importers to correct declared values for underpaid duties and pay additional duties and interest resulting from upward transfer pricing adjustments - it's been a one way street! There are overpaid duty monies on the table, and the process of obtaining refunds of those monies is being described by service providers as simple and straightforward, prepare and file a B2 application form with the appropriate CBSA office and wait for the dollars to roll in.
Having successfully pleaded the leading case on the matter before the President of the CBSA prior to the issuance of the new CBSA policy (explaining the reference to my birthday present) and having been an advocate of importers' legal rights for more than 30 years, I am the last person to discourage importers from seeking to obtain what are rightfully their entitlements. To the contrary, importers should move as swiftly as possible to ensure maximum customs duty refunds given the limitation period of four years. But is the process as simple and straightforward as many are suggesting, or is there more to this that needs to be considered?
Conditions Requiring Fulfillment
Granting of refund applications is conditioned on the importer being able to evidence key facts, including:
- the existence of an agreement, in writing, providing that the parties to the sale for export to Canada had agreed to the formula/method of pricing and its correction in advance of importation,
- the transaction value is the correct method of appraisal, which requires, at a minimum, evidence that the price paid or payable is not influenced by the relationship,
- the declared prices were in accordance with the agreed pricing formula/amounts,
- the corrected prices, agreed to be payable, have been paid, that is the total of payments/credits/debits net to the corrected, agreed price, and
- in the case of importers who also make payments to the vendor or other multinational group members for services and/or license rights, evidence that these amounts paid were not influenced by the relationship and were paid for actual services required and rendered, and/or actual intellectual property rights obtained.
Not so simple and straightforward.
On the other hand, every responsible related party Canadian importer should be positioned to provide this type of evidence in preparation for trade verification by the CBSA. If it is not so positioned, the importer is, in a word, "non-compliant".
Opportunities and Solicitor-Client Privilege
The opportunity presented by the new CBSA policy is therefore two-fold: it offers refund possibilities, and it underscores the requirements of customs compliance required in the event that the importer is audited. The new policy also reminds importers of their compliance obligations to amend entries to account for upward transfer pricing adjustments where duties have been underpaid, and of their obligations to do so to account for both upward and downward transfer pricing adjustments that are duty neutral.
In deciding to move forward with transfer pricing duty refund applications, importers must carefully consider their entitlement in law, their ability to meet the evidentiary burden, and their past compliance record. Given the sensitive, commercially confidential information/data that forms part of the narrative, importers are cautioned to deliberate with their Canadian customs legal counsel under the protection of solicitor-client privilege.
Where Parties Unrelated
Finally, the transfer pricing duty refund principles apply equally to import transactions between unrelated parties pursuant which sales for export are subject to formulaic pricing agreed to by the parties in writing prior to importation. Similar evidence, other than that which demonstrates a lack of influence by the relationship on pricing, must be adduced in support of refund applications made in these circumstances.