The Canada Border Services Agency ("CBSA") has released its H2 2019 customs verification priories (that is, is targets list). The verification (also known as an audit) targets for valuation are (1) apparel and (2) footwear. This is the third round of audit targeting for apparel and the second round of audit targeting for footwear. If you import these items, you should expect a letter from the CBSA asking to schedule a time for an audit.
The CBSA has been targeting clothing and apparel for some time and we have seen numerous audits and assessments. The top 5 customs valuation issues for importers of apparel and footwear are:
- Use of the incorrect valuation method (usually the importer incorrectly reports the original cost);
- Whether the importer is a purchaser in Canada (a defined term in Canadian law);
- Whether the importer has added to the reported value for duty an amount for assists relating to the design activities of a person other than the foreign manufacturer;
- Whether the importer has added to the the reported value for duty royalties; and
- Whether the importer has adjusted the reported value for duty to report "subsequent proceeds" paid to a parent company or related party.
The CBSA reports statistics relating to its verification activities. With respect to apparel, in Round 1 of audits, the CBSA found 63% non-compliance and issued detailed adjustment statements valued in excess of $6,000,000. In Round 2, the CBSA found 54% non-compliance and issued detailed adjustment statements valued at $166,269. With respect to footwear, in Round 1 of audits, CBSA found 44% non-compliance and issued detailed adjustment statements valued in excess of $380,334. Some of the audits are still underway and these figures are likely higher.
The CBSA is also conducting audits of the tariff classification of clothing and apparel. The risk identified by the CBSA is that goods could be incorrectly classified within Heading 39.26 (which attracts lower duty rates) instead of being properly classified under tariff item 6210.40.90 (other men's or boys' garments) or 6210.50.90 (other women's or girls' garments), which are subject to the significantly higher duty rate of 18%. The CBSA has also found that clothing containing a layer of plastic, combined with textile fabric that is not considered as reinforcement to the plastic, is incorrectly being classified under Chapter 39.
The CBSA is also conducting origin audits of bedding and drapery. The CBSA has found that goods labelled as "made in the USA" do not meet the NAFTA textiles rule of origin.
If you import clothing, apparel, footwear, bedding or draperies and have not yet been contacted by the CBSA for a customs audit/verification, you should review your Canada customs paperwork and proactively determine if you need to make changes. You may be able to file adjusting entries to correct past mistakes and avoid administrative monetary penalties. You will have to pay any duties and taxes owing.
If you are contacted by the CBSA for a customs audit/verification, you should quickly take steps to understand what positions you have taken and whether you have any exposure. You can manage your audit risk with help from a Canadian customs lawyer. It is important to understand the Canadian customs laws. For example, Canada does not have a "first sale" rule, but CBSA officers attempt to get importers to adopt what is similar to the U.S first sale rules. This might not be consistent with Canadian law. The CBSA have recently taken the position that the same importer may be a purchaser in Canada and not a purchaser in Canada at the same time depending on whether the imported apparel goods were pre-sold or not. Incorrect positions can be challenged before the detailed adjustment statement is issued or by way of an appeal.
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