A recent tariff classification decision by the Canadian International Trade Tribunal illustrates how an importer can lower customs duties and avoid anti-dumping duties by carefully structuring the importation of goods.
Safety Footwear Imported in Parts
On July 25, 2007, the CITT issued its decision in Tai Lung (Canada) Ltd. v. President of the Canada Border Services Agency, AP-2006-034, in which the Tribunal stomped on the Canada Border Service Agency’s position on how footwear components imported together should be classified for customs purposes. At issue in the appeal were two types of goods imported by Tai Lung. The first good was a boot upper made of leather and incorporating a metal toe cap. The second good was a plastic outer sole. Tai Lung imported the components and subjected them to a number of manufacturing operations in Canada, ultimately producing finished safety footwear. The safety footwear was sold at Canadian Tire locations.
Parts vs. Unassembled Footwear
In the course of a customs audit, the CBSA concluded that the imported footwear components constituted complete footwear and re-classified them under tariff subheading 6403.40 of the Customs Tariff. In 2007, footwear classified under this subheading is subject to an 18% tariff on an MFN basis. Tai Lung argued instead that the footwear components were merely parts of footwear and therefore ought to have been classified under tariff heading number 6406.10.90 and dutiable at the rate of 8% in 2007. After due consideration, the Tribunal concluded that Tai lung was a shoe-in to win and booted out the CBSA’s position.
Canadian Legislation Governing Tariff Classification
Pursuant to section 10 of the Customs Tariff, the tariff classification the classification of imported goods is determined in accordance with the General Rules for the Interpretation of the Harmonized System and the Canadian Rules set out in the schedule. The General Rules are comprised of six rules structured in cascading form. The Explanatory Notes to the General Rules indicate that if the classification of goods cannot be determined in accordance with Rule 1, then regard must be had to Rule 2 and so on until the classification is complete.
Arguments of the Parties
Tai Lung argued that the footwear components at issue should be classified according to Rule 1 of the General Rules. Rule 1 provides that "classification shall be determined according to the terms of the headings and any relative Section or Chapter Notes, and provided such headings or Notes do not otherwise require, according the following provisions." Tai Lung claimed that if the goods could be classified in accordance with Rule 1, there was no need to consider any additional rules. Tai Lung proposed that the imported goods fell squarely within heading 64.06 as "parts of footwear".
The CBSA argued instead that the footwear components should be classified in accordance with General Rule Rule 2(a). Rule 2(a) stipulates that "any reference in a heading to an article shall be taken to include a reference to that article incomplete or unfinished, provided that, as presented, the incomplete or unfinished article has the essential character of the complete of finished article." The CBSA argued that effect of Rule 2(a) was to expand the scope Rule 1 by allowing unassembled and unfinished goods to be classified as though they were assembled and finished. In the CBSA’s opinion, the imported goods had the essential character of the finished product. The processes Tai Lung performed did not alter the principal features of the footwear, which in the opinion of the CBSA was to cover the foot, ankle and part of the leg. Furthermore, the outer soles were imported with the corresponding number and sizes of uppers, attached to which were hang tags describing the product and the price, labels and laces.
Tai Lung argued that its processes involved more than simply assembling the two components. It subjected the goods to a variety of processing methods, including priming, gluing, heating, trimming, polishing, grinding, quality control and testing. In addition, the footwear could not be sold until the footwear conformed to CSA safety standards. Tai Lung contended that these processes resulted in the goods taking on a new form and possessing different qualities and properties than the original components. The imported components, without further processing, could not be worn as a safety boot. For this reason, Tai Lung argued that the goods in issue did not satisfy the requirements for Rule 2(a) of the General Rules regarding articles presented unassembled or disassembled.
General Rule 1 Applied, Rule 2(a) Not Applicable
The Tribunal agreed with Tai Lung that the imported goods belonged under tariff heading number 64.06. It held that the language of tariff heading number 64.06 clearly encapsulated the imported goods, as it precisely covered "parts of footwear" including uppers whether or not attached to soles other than outer soles. As Rule 1 resolved the classification, resorting to Rule 2(a) was unnecessary and improper. Furthermore, even if there was ambiguity about whether tariff heading 64.06 applied , the Tribunal held that Rule 2(a) would not enable to goods to be classified as unassembled complete footwear under heading 64.03. The Tribunal was convinced by Tai Lung that its operations went beyond mere assembly. The ‘further working’ by Tai Lung changed the essential character of the goods. The Tribunal noted that the goods could not have been worn for their intended purposes in the absence of additional work by Tai Lung. Therefore, the goods fell outside Rule 2(a) in any case.
The Tribunal’s decision in Tai Lung illustrates well the distinction between goods that are "parts" and goods that are "unassembled or disassembled" for purposes of tariff classification. The decision also illustrates the benefits of carefully structuring an import transaction so that duties are minimized or eliminated. By importing "parts of footwear" rather than the fully assembled footwear, the applicable tariff rate dropped from 17.5% to 8% (in 2007). Also, because the components originated in China, importing components rather than completed footwear saved the importer an additional 39.4% anti-dumping duties for importations occurring prior to December 27, 2006.
Greg Kanargelidis is a partner with Blake, Cassels & Graydon LLP who practises exclusively in the areas of international trade, customs, and commodity tax. Greg is recognized as a leading lawyer in Canada by The Canadian Legal Lexpert Directory, Legal Media Group's Guide to the World's Leading International Trade Lawyer, Chambers Global: The World's Leading Lawyers for Business, and The Best Lawyers in Canada.
Elysia Van Zeyl is an associate with Blake, Cassels & Graydon LLP and a member of the firm’s International Trade Group. Elysia is based in the firm’s Ottawa Office.
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