As we reported in previous editions of the Stikeman Elliott Tax Law Update, the 2013 federal budget proposed to eliminate access by high-income, export-competitive countries to Canada's General Preferential Tariff (GPT) program. We mentioned that, starting on January 1, 2015, these proposed changes to the GPT regime will most likely trigger an increase in customs duties levied on goods imported from 72 countries. The countries affected by the reform notably include the BRIC countries - Brazil, Russia, India and China. Because China manufactures a large proportion of the world's electronic goods, including the iPod, a popular MP3 player, the reform of the GPT regime was referred to in the media as the "iPod tax."
The media's extensive coverage of the iPod tax prompted the Canada Border Services Agency (CBSA) to release a statement to the effect that MP3 players (including iPods) would continue to benefit from special tariff-exempt classification under tariff item 9948.00.00 of the Customs Tariff.1 By doing so, the CBSA essentially took the position that MP3 players manufactured in China and imported into Canada would not be affected by the changes to be made to the GPT regime in 2015 because they could generally take advantage of an alternative favourable tariff classification under tariff item 9948.00.00.
In spite of this, many practitioners and others involved in the industry remained skeptical. Their concern centered on the practicality of applying tariff item 9948.00.00 to consumer goods such as MP3 players. One reason for this is that CBSA's Memorandum D10-14-51 (Tariff Classification Policy - Tariff Item 9948.00.00), published in 2007, provides that "importers are expected to provide end-use certificates confirming that the goods were solely used for the purpose for which they were imported." Given that the end users of MP3 players are usually ordinary Canadian consumers, any requirement to obtain a certification of actual "end use", if taken literally and strictly enforced by the CBSA, would pose serious practical problems for importers. The result would almost certainly be to diminish the usefulness of tariff item 9948.00.00 with respect to such devices.
In order to make the application of tariff item 9948.00.00 more flexible, on June 28, 2013, Customs Notice 13-015 was issued by the CBSA to clarify that the end-use certificates relating to tariff item 9948.00.00 were no longer required at the consumer level but rather at the importer level. The Notice specifies that importers do not have to obtain end-use certificates from users certifying the actual use of the goods. Instead, they are allowed to fulfill the administrative requirements of the CBSA simply by attesting to the contemplated use of the goods. Importers are however obligated to retain records of the relevant written attestations that are sufficient to confirm the precise intended use to be made of the goods as set out in the Imported Goods Records Regulations ("IGRR").
The Remission Order
Prior to the publication of the Notice in June 2013, 23 companies that had imported televisions and other electronic appliances (including MP3 players) into Canada on a duty-free basis using tariff item 9948.00.00 were subjected to verifications by the CBSA. Customs duties were then imposed on past importations on the ground that these companies had failed to comply with IGRR record-keeping requirements. Specifically, they had failed to collect the necessary end-use certificates from consumers.
These 23 companies were all reassessed before the record-keeping requirements were clarified by the CBSA on June 28, 2013. Obviously, further to the issuance of the Notice, these importers argued that it created a flagrant injustice. To remedy this inequity, the federal government issued a remission order entitled Certain Televisions Remission Order (the "Remission Order") which provides:
Remission to 23 television importers who were impacted by the CBSA compliance verifications of certain importations made under tariff item 9948.00.00. Remission is being provided in recognition that the related record-keeping requirements set out in the IGRR were subsequently clarified so that end-use certificates related to this tariff item are not required at the consumer level but rather at the importer level.
The Remission Order provides relief to a precise situation which arose under very specific circumstances. It gives to the 23 companies a remission of duties paid or owing in an amount not exceeding $26,965,456, in respect of televisions and other similar goods "that were imported by them before June 28, 2013 and for which duty relief under tariff item 9948.00.00 was either denied as a result of a verification conducted by the CBSA during the period beginning on January 1, 2012 and ending on June 27, 2013, or not claimed following such a denial."
Moreover, the remission was only granted under certain specific conditions, including that the importer file all evidence that is required by the CBSA to determine eligibility for remission, including importer-level end-use certificates.
Considering that the Remission Order was an exceptional remedy used to reverse an exceptional situation, we believe that importers should still err on the side of caution with respect to the use of tariff item 9948.00.00 in the future.
Indeed, as we mentioned in a previous Tax Law Update, it remains uncertain precisely how the CBSA will handle the attestations in practice. The Customs Notice states that the importer of the goods must attest to the "intended use" to be made of the goods. In this respect, will the customs authorities accept attestations from importer-wholesalers or only from importer-retailers who deal directly with the end consumers? What degree of knowledge or evidentiary support will be required of the importer in connection with its attestation as to the contemplated use of the goods? In other words, what exactly is the CBSA's standard for "sufficient" written attestation to confirm the intended use to be made of the goods? These and other questions remain unanswered.
Finally, it is worth noting that all other requirements relating to classification under tariff item 9948.00.00 remain unchanged. Of particular significance for the electronics industry is the requirement that goods must still meet the "for use in" requirement.2 Because of this, certain electronic products that are manufactured in countries affected by the GPT reform may not necessarily fulfill the criteria for classification under tariff item 9948.00.00. For those particular products, the dreaded increase in customs duties is likely inevitable.
Importers should definitely exercise some degree of caution if they presently use tariff item 9948.00.00 or contemplate using it in the future. In short, when GPT reform comes into effect in 2015, tariff item 9948.00.00 will be helpful in some circumstances but is unlikely to be the panacea that some had hoped for. As a result, we agree with Mike Moffatt, assistant professor at Western University's Ivey Business School, who is "hoping this incident will lead to significant reform of the tariff code."3
While the Remission Order and the clarifications conveyed by Customs Notice 13-015 can surely be viewed as positive steps forward in eliminating a practical application of tariff item 9948.00.00, it is likely still too early to consider these events as putting a definitive end to the iPod tax saga. Stay tuned!
1. Tariff item 9948.00.00 is a special classification for imported goods which provides, inter alia, duty relief to the extent such goods are capable of being for use in computers.
2. The term "for use in" is defined in subsection 2(1) of the Customs Tariff and means "...that the goods must be wrought or incorporated into, or attached to, other goods referred to in that tariff item." Decisions from the Canadian International Trade Tribunal clarified that the goods in issue must be "physically attached to and functionally joined" the other goods referred to in the tariff item.
3. Mike Moffatt, Canada's iPod Tax is Dead, Canadian Business Online, Blogs and Comments, June 4, 2014, www.canadianbusiness.com/blogs-and-comment/canada-ipod-tax-is-dead/.
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