With the publication of Customs Notice 15-001 on January 19, 2015, the Canada Border Services Agency (the "CBSA") has made some significant changes to its position on the treatment of downward price adjustments in value for duty calculations, including situations in which the downward price adjustment is caused by a transfer pricing agreement between related parties. As discussed below, the changes amount to a complete reversal of the CBSA's prior published positions on downward adjustments and, as such, will be of considerable benefit to many importers.
Downward price adjustments agreed to prior to importation - A welcome change
From a legal standpoint, it is noteworthy that paragraph 48(5)(c) of the Customs Act (the "Act") disregards, for purposes of determining the value for duty, any rebate of, or other decrease in, the price paid or payable that is effected after importation. The CBSA's previous position was that any post-importation rebate should be disregarded under paragraph 48(5)(c) of the Act even if the parties had agreed to the rebate prior to importation. The CBSA's new position, as outlined in the Notice, appears to be in line with the March 21, 2014 ruling of the Canadian International Trade Tribunal (the "CITT") in Hudson's Bay Company v. President of the Canada Border Services Agency (AP-2012-067). In that decision, the CITT determined that a post-importation price reduction is not to be disregarded on the basis of paragraph 48(5)(c) of the Act to the extent that the reduction results from an agreement to reduce the price that was in effect at the time of importation. Indeed, the Notice makes it clear that paragraph 48(5)(c) actually addresses downward adjustments effected after importation but only where the agreement between the vendor and purchaser to reduce the price paid or payable of the imported goods is entered into after the importation of such goods. Under those circumstances, no correction of the declared value for duty of the goods can be made and no refund is available.
However, if there is an agreement in place at the time of importation which provides for a subsequent price rebate or other reduction, a correction of declared value for duty for the goods may be necessary to the extent that the price reduction would have no impact on the amount of duties payable (i.e. if the goods were originally duty-free). To this end, the CBSA states: "where an agreement in writing was in effect at time of importation to later reduce the [price paid or payable] of imported goods and the price reduction subsequently occurs, a correction made under the authority of section 32.2 of the [Act] is necessary if the importer is provided with specific information giving reason to believe that a declaration of value for duty is incorrect, and the correction would be revenue neutral." On the other hand, where the correction would not be revenue neutral and would instead result in a claim for a refund of duties, the CBSA is now taking the view that the importer may request a refund of duties pursuant to paragraph 74(1)(e) of the Act.
Finally, in what should come as positive news to a number of importers, the Notice also mentions that disputes filed under subsection 60(1) of the Act, which have been held in abeyance, will now be processed in accordance with the Hudson's Bay decision.
Transfer pricing adjustments - Another beneficial development
In another change that will be well received by importers, the CBSA has reversed its long-standing policy of denying rebates in situations involving downward price adjustments in the context of an intercompany transfer price agreement.
Historically, the CBSA's position on the treatment of transfer pricing adjustments between related parties for customs purposes was set out in Memorandum D13-3-61. Generally, pursuant to the transaction value method, the CBSA accepted the transfer price used for income tax purposes for determining the price paid or payable for imported goods for customs valuation purposes, subject to certain statutory additions and deductions. However, where related parties made a downward transfer price adjustment in the price paid or payable for goods after importation (generally at the end of the year), the CBSA's official position was that such reductions would be treated as rebates or deductions within the meaning of paragraph 48(5)(c) of the Act and would be disregarded for customs valuation purposes2. As a result, a Canadian importer was theoretically not allowed to receive a refund on duties already paid to the CBSA by filing a request under paragraph 74(1)(e) of the Act based on a downward transfer pricing adjustment made at the end of the year.
Nonetheless, in the 2012 CITT decision Jockey Canada Company v. President of the Canada Border Services Agency (AP-2011-008), a CBSA auditor stated that the CBSA's "customary practice" was to allow importers to self-correct their value for duty declarations for downward transfer pricing adjustments. While this statement was, at that time, contrary to the CBSA's official published position, in the Jockey Canada case the CITT quoted the CBSA auditor and stated that "downward price adjustments . that occur post-importation do not necessarily constitute rebates in the price paid or payable for the imported goods within the meaning of paragraph 48(5)(c) of the Act." As such, the CITT suggested that taxpayers could claim rebates based on downward price adjustments.
More than two years after the release of the Jockey decision, it appears that the CBSA has finally decided to re-evaluate its current stance of disallowing downward transfer price reductions for customs purposes. Indeed, the Notice indicates that where an intercompany transfer price agreement has been established between a vendor and a related purchaser, "corrections to the value for duty must be submitted to the CBSA when the net total of upward and downward transfer price adjustments occurring in a fiscal period is identified. It is at that specific moment that the importer has reason to believe that corrections to declarations of value for duty are necessary." In this respect, we understand that pursuant to subsection 32.2(5) of the Act, no self-adjustment corrections would be required if such corrections would result in a refund of duties. In the latter case, the Notice specifies that "if the net total result is a downward price adjustment and the imported goods are subject to duties, a request for refund can be made for importations occurring within four years of the date of this notice."
Amended D13-series memoranda are expected to be released to reflect the new CBSA's position as disclosed in the Notice.
Responding to the policy changes -- Some "next steps" to consider
The Notice is good news for importers into Canada. The CBSA should be congratulated for revising its policies in this area to make them fairer and more fully aligned with recent CITT decisions. Any person who has imported products into Canada and who has had a contractual rebate that took effect after importation should review their customs entries for the last four years to determine if they are entitled to claim a refund of duties. In addition, if an importer has had a downward transfer pricing adjustment over the last four years, it should determine whether it is entitled to a refund for any customs duties paid during this period and also whether corrections to customs entries are required in circumstances where the downward adjustment was revenue neutral.
The authors would like to thank Melissa Carew for her contribution to this article.
1.Memorandum D13-3-6 (Income Tax Transfer Pricing and Customs Valuation).
2.Ibid, para 63.
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