While most of us were enjoying the tail end of the Canadian summer, officials at the Canada Border Services Agency (CBSA) were putting the finishing touches to their latest list of audit priorities. With the cottage closed up for the season and canoes locked away, it's a good time to review those audit priorities and determine whether your company is facing a high risk of an audit.
CBSA's audit priorities are grouped into three areas: tariff classification, valuation and origin. In all cases, the audits will focus on areas where noncompliance will result in significant, retroactive assessments against the importer. This is the full list of audit priorities, and the rationale for each.
Many of the goods targeted for review have been on CBSA's list for several years, yet CBSA continues to find significant non-compliance. For example, goods classified as "furniture for non-domestic purposes" have been an audit priority since January 2013. Furniture that is properly classified as being for non-domestic purposes is duty-free, but other furniture attracts a duty rate of 9.5%. The original round of audits in this area found a non-compliance rate of 60%, but the last round for which figures are available found a 95% non-compliance. Non-compliant importers face four years of retroactive assessments of 9.5% duty, additional Good and Services Tax (GST), interest and penalties.
The products slated for increased audit attention include clothing and clothing accessories, cell phone cases, parts of machinery of Chapter 84, pasta, olive oil, pickled vegetables, articles classified in Chapter 39, stone table and counter tops, and bags.
CBSA field officers will also be auditing imports of goods that may be subject to import quota. For example, chicken classified as "spent fowl" or goods declared as having import quota allocation that do not have import quota allocation. In these cases, non-compliance can lead to retroactive duties of an eye-watering 249% on all imports over the last four years.
The valuation audit priorities will again focus on the apparel and footwear industries, sectors that continue to face Canada's highest duty rates. Within these sectors, expect to see multinational companies facing the greatest scrutiny as transfer pricing practices continue to provide fertile ground for retroactive assessments. We will shortly be publishing a bulletin on the most common customs valuation errors with transfer pricing, so stay tuned for that.
In the origin area, and, in particular, NAFTA preference claims, CBSA has indicated that its officers will pay particular attention to imported bedding and drapery. That said, we continue to see basic non-compliance in the origin sector, and importers struggling to document that they are entitled to preferential treatment.
To avoid retroactive assessments of duties and taxes, interest charges, and penalties, importers should know they cannot claim preferential tariff treatment without a valid certificate of origin in hand, and they should take reasonable steps to ensure the certificate of origin will stand up to the scrutiny by CBSA auditors.
All importers should assume they will, at some point, be subjected to a CBSA audit. Such audits are intrusive, demanding and consume inordinate amounts of executive and administrative time. They may also result in a four-year retroactive assessment of duties and taxes, plus additional interest and penalties. One of the keys to surviving such audits is to implement a robust customs compliance program well before any audit occurs. A good customs compliance program will ensure that requested documents can be quickly produced, rationales for particular practices are already established, and decisions on customs issues can be supported. In sum, a good compliance program is an exercise in risk management; it will ensure a smooth audit and go a long way to protecting the company from retroactive duty assessments. Given the potential cost of non-compliance, it is important to work with customs law experts who understand the regulatory framework and who have experience in building and monitoring effective compliance systems in complex regulatory environments.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.