Customs Verifications (Audits): Planning To Succeed – Part I

September 12, 2019 | Daniel Kiselbach

Introduction

The process of handling a customs verification can be an extraordinarily difficult undertaking for the uninitiated. There are several types of customs verifications in Canada.  They include:  a multi-program verification, a single-program verification, and a transaction line review.  Business-specific verifications may also be required in connection with, for example, duty-free stores.  Other verifications may be conducted respecting certain programs such as duties relief or remission.  The following outlines what the government is looking for, the primary considerations for company counsel, common issues that arise, and what happens if one fails a verification.

Preparation

The Canada Border Services Agency (CBSA) is tasked with the responsibility of conducting verifications.  CBSA verification officers are responsible for checking to ensure that a business has been compliant during a verification period (most often the previous year). A business that is able to establish that it has proper controls and procedures in place, that can respond to a verification letter and request for information quickly, and that has a good understanding of any regulatory requirements, will be best equipped to handle a verification. Preparation for a verification should focus on key areas, including: (1) systems and methodologies for accounting for duties and taxes; (2) controls to track information underlying customs declarations; (3) means to monitor corrections; and (4) means to monitor compliance with special customs programs (such as temporary imports, duty relief and remission).

Verification Management

Business leaders who are in the midst of a verification often want to know where to focus their attention.  First and foremost, the leader must assign adequate resources and priority to the verification.  Many leaders are unaware of the adverse consequences that may result from a verification report that indicates that a business has “failed” a verification.

Prompt responses are critical. Senior corporate officers may be required to give prompt attention to verification letters, questionnaire and requests for documents and information.  The failure to promptly, accurately and completely respond is the single greatest source of difficulty that we have observed in handling verifications.  A business that is the subject of a verification may need to “act like a duck”, keeping calm above water and working hard under the surface.

Another essential matter is the appointment of a lead spokesperson for the business who can respond to and address verification questions, visits and reports.  The involvement of many spokespersons with inadequate knowledge and information can be the source of difficulty, misinformation and, ultimately, unfavourable verification decisions.  A lead spokesperson should understand the scope of the verification, whether a verification question is relevant, and the impact that a response might have on the verification.  At the start of the verification, the importer’s representatives should know the position of the importer respecting the verification issues (or, to use a litigator’s term, the “theory of the case”).

Verification Issues

Various issues may arise in a verification, valuation being one of the most common.  CBSA officers tend to focus on matters related to the use of the primary method of valuation, namely, the transaction value method.  In many cases, officers are concerned with the issue of whether the importer is entitled to use lower supply costs as the basis for the value for duty of the goods rather than higher Canadian customer costs. Resolving this question may involve a review of the Valuation for Duty Regulations, a determination of whether there has been a “sale for export”, and a determination of whether the importer is a “purchaser in Canada”.  Other issues relate to the adjustments that are required post-importation.  Such post-importation adjustments may include “subsequent proceeds”, being post-importation payments made by the importer to a related supplier.  Other common adjustments concern royalties, assists and freight costs.

Classification is another common verification issue. The classification of a good may be critical since different rates of duty are levied in respect of different tariff classifications. This is especially so in the case of supply-managed goods, such as chicken, eggs and dairy.  In such cases, importers may obtain a quota allocation and import goods duty-free within a certain tariff rate quota.  Permitted goods are typically classified as within access quota.  If the importer has not obtained an import allocation and the goods are not imported under an import permit, they may be classified as “in excess of access quota” and subject to punitive rates of duty.

The origin of goods is also important. Historically, one of the most significant origin issues for Canadian importers has been eligibility of goods for preferential tariff treatment under the North American Free Trade Agreement (NAFTA). Canada has been busy negotiating and ratifying a new set of important trade agreements, including the Canada European Economic Trade Agreement (CETA) and the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). Importers of goods that qualify for preferential tariff treatment under these free trade agreements may be able to import them duty-free. We expect that the CBSA will use its NAFTA verification experience in order to ramp up for CETA and CPTPP verifications.

Disclaimer

This publication is provided as an information service and may include items reported from other sources. We do not warrant its accuracy. This information is not meant as legal opinion or advice.

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