August 14, 2009

No. 2009-25

 

 

Customs Duty Surprise for Importers of Goods from Related Companies

If your Canadian company imports goods from a related company in another country and also pays fees to that non-resident company for services such as management or administration, the Canada Border Services Agency (CBSA) may require you to include these fees in the value of your imported goods for duty purposes unless you can provide evidence that the fees should not be included.

The CBSA recently issued new information on its policy concerning the treatment for customs duty purposes of certain payments or fees made by a Canadian purchaser to a related vendor after the goods have been imported into Canada. The CBSA says that many types of these “post-importation payments or fees” and “subsequent proceeds” may have to be included in the value of the imported goods declared for duty.

Post-importation payments or fees
According to the CBSA, post-importation payments or fees may include:

·         Any payment based on the resale of the goods that cannot be related by the importer to services received

·         Management or administration fees

·         Contributions to research and development

·         Contributions to worldwide marketing or promotion

·         Overhead expenses related to the manufacturing of the goods but not captured in the selling price and recovered after importation

·         Interest on deferred payments

·         Other payments made after importation.

Subsequent proceeds
Under customs law, subsequent proceeds, a type of post-importation payment, must be added to the price of the goods for duty purposes.

Subsequent proceeds are subject to the following two conditions:

·         The payments accrue directly or indirectly to the vendor of the goods

·         The payments are based on, or a result of, the resale, disposal or use of the goods in Canada.

These subsequent proceeds do not have to be a condition of sale of the goods or be directly related to goods being imported. 

As such, importers should examine any payments they make to the vendor separately from the payment for the goods to determine whether they have to include these payments when determining the value of the goods for duty purposes.

When are fees excluded from duty?
In particular, importers should carefully examine any management and administrative fees they pay to a related company from which they import goods. To determine whether these fees can be excluded from the price of the goods for duty purposes, importers need to consider the following three elements:

·         The services must have been rendered for the operation of the business in Canada

·         The amount of the charge must be in accordance with an arm’s length charge

·         The services provided are justified for the operation of the business in Canada.

The onus is on the importer to prove the nature of the services provided and that the fees paid are truly for the operation of the business in Canada. The CBSA says it will presume that service fees are subject to duty unless the importer can provide evidence that the fees are in accordance with the arm’s-length principle and that they relate to justifiable services that were actually rendered for the Canadian operation. 

Importers must be able to provide the CBSA with documents that verify:

·         The nature of the services for which payment is made

·         The basis on which the payment is made

·         That actual services are provided.

Documentation must include commercial invoices, agreements or other proof of payment, depending on the circumstances.

If the CBSA determines that such fees are subject to duty and have not been included in the declared value of the goods, the importer may risk costly assessments, penalties and lengthy appeals.

We can help
KPMG’s Trade & Customs professionals can help your company with this or any other customs-related matters that may affect your business. We can help you manage your customs compliance obligations as well as help ensure that you are not missing refund opportunities. For details, contact your KPMG adviser.

 

 

 

Information is current to August 13, 2009. The information contained in this TaxNewsFlash-Canada is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG’s National Tax Centre at 416.777.8500.

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