As globalization becomes a reality of our business lives, more and more of our business clients are involved in the manufacturing of goods or distribution of goods (and the supply of services) across international borders. You may not think of them as such, but, in reality they are international traders. They face complex government regulation of imports, commonly referred to as “Customs regulation”. This phrase covers all sorts of legal issues including valuation (base for taxation), classification (statutory nomenclature), origin (establishing duty rate preferences), marking, labeling and other product specific regulation, transfer pricing, GST, and unfair trade/international economic action (arising from allegations of dumping and/or unfairly subsidized pricing and injury).
Before addressing what the corporate/commercial lawyer should know about customs and international trade law, consider why you should know anything about these esoteric rules and regulations. When you deal with or advise clients which import, manufacture, distribute, and/or retail goods, you will enhance the quality and scope of your advice. By adding value to the services you normally deliver, you will enrich your relationship with your clients. By raising these issues with your clients and overseeing their resolution, you will place yourself in a position to monitor the client’s legal affairs. Finally, significant additional corporate/commercial legal work will flow from the implementation of strategies to deal with customs and international trade law.
As with client relations and law firm marketing, they didn’t teach us about these matters in law school. But these customs and international trade laws and practices have become increasingly important and far reaching. There are very few, if any, businesses dealing in cross border trade in goods which would not benefit from sound legal advice in these areas. The benefits include cost savings, enhanced competitiveness, protection from, or the use of, dumping and/or countervailing duty proceedings, safeguards, and penalty avoiding customs compliance. It is clearly an area where an ounce of prevention usually represents a pound of cure. Strategies implemented early may prevent significant problems down the road.
While the field has attracted attention in recent years with the advent of free trade agreements, globalization and the increased importance of, and focus on, trade from a political point of view, the number of practitioners who are truly expert customs and international trade lawyers are few. Many of your business clients have very likely had their needs addressed (or more likely at best partially addressed) by accountants, consultants or customs brokers who, because of the limitations of their business, do not have the training necessary to advise business as to its legal rights, obligations, and opportunities. Being unaware of how their advice might impact on the company’s overall activities, they are unable to advise in an overall legal context.
For example, would an accountant, faced with the issue of dutiability of royalties, be in a position to structure the transaction so as not to impair intellectual property rights? Would the consultant be sensitive to the effects of withholding taxes? Would the customs broker know how to distinguish between a vendor and a licensor/designer/source facilitator of goods?
Business clients of a law firm expect to, or should expect to, receive legal advice from their lawyers, not their accountants, consultants or customs brokers. This does not mean that corporate/commercial lawyers must be experts in customs and international trade law. But they should be aware of the nature of the issues and be in a position to flag them and/or field the inquiries with a general level of understanding. Specialists can then be retained to work with you to ensure the client’s specific problems are solved while, at the same time, ensuring that its other legal interests are not detrimentally affected (and are potentially enhanced). Gottlieb & Associates’ specialized services add value and scope to the advice you give and services you provide to your clients relating to negotiations, set up of direct investments, joint venture projects and subcontracting, agency and distribution contract negotiation and drafting, as well as business planning.
Specifically, our input would relate to customs duty liability, duty relief mechanisms, special tariff rate quotas for clothing and textiles, emergency quotas or surcharges, anti-dumping and countervail trade actions, import licensing and regulation of marking and labeling, government procurement, and other related elements.
What does the corporate/commercial Lawyer need to know about customs and international trade law?
Customs valuation, the value for duty of imported goods and the base on which duties are assessed, is minimized by consideration, analysis and structuring of various elements of the import transaction. These elements include royalties, agency fees, distinguishing goods from services, quota fees, interest charges, discounts, freight and insurance expenses, value added in Canada, and generally the effects of terms and conditions of sale.
Tariff Classification & Preferences
Each imported good is described in nomenclatures contained in a federal statute known as the Customs Tariff. There are domestic and international rules which guide this classification. The rate of customs duty applicable to each good varies with its classification. Additionally, the rate of duty is dependent on the country of origin. Preferential duty rates (such as those accorded to Canada’s preferred trading partner nations under the NAFTA, or the Chile and/or Israel Free Trade Agreements) are only granted to qualifying, originating goods. Country of Origin regulations are voluminous and complex.
Clients require advice respecting timely defences to government actions.
Tariff Rate Quotas
Tariff rate quotas (TRQ’s) have become the tool of choice when the government wishes to regulate import flows. Clients require fair access to available quota and with interested organizations to ensure that TRQ’s are established at levels that respect historic trade patterns.
Customs Duty Relief
Canada has many customs duty relief provisions which include drawback, deferral, special relief programs, inward processing (free trade zones), temporary importation, and Canadian Goods Abroad remissions. As well, clients may obtain special tariff relief and individual customs duty remissions in the event that goods are not as ordered, are defective, obsolete, or surplus. Planning and guidance to ensure access to relief and to safeguard against retroactive assessment of duties is critical.
This contemplates the structuring or restructuring of transactions so as to minimize the total taxes payable. These taxes include customs duties, anti-dumping and/or countervailing duties, sales taxes and income taxes. This also involves compliance with transfer pricing principles established in Canadian and other jurisdictions.
There are tariff and other statutory customs related benefits available to clients.
Import Marking and Labelling
Clients require advice with respect to the labeling and marking of imported goods for country of origin, content, safety and other importation purposes.
Goods and Services Taxes
For most clients, the administration of the Goods and Services Tax (“GST”) has now become a fairly straight forward exercise. However, value for tax issues are as complex as in respect of customs valuation. When problems occur, clients require assistance in resolving them, including ensuring that they obtain full and timely credits and refunds, in responding to audit inquiries, and in defending against the imposition of penalties. There may also be opportunities for deferral of or exemption from these taxes depending on the structuring of import transactions.
Provincial Sales Taxes
Together with customs duties and the GST, provincial sales tax (“PST”) regimes have particular requirements that relate to imported and exported goods. These requirements must be understood, addressed and integrated into clients’ international trade strategies.
Assessments and Compliance
Contraventions of customs programs, such as those relating to customs valuation, tariff classification and country of origin (tariff preferences), lead to assessments of customs duties and GST (and related interest). Clients require advice respecting timely defences to these government actions.
The power of seizure and forfeiture found in the Customs Act has been described by Canadian courts as draconian. Faced with seizure and potential forfeiture of their goods, clients need to be protected from the power of the Canada Border Services Agency (“CBSA”) to enforce penalties. This draconian measure must be matched by an aggressive and focused defense of the interests of the clients.
Customs formalities can hamper the efficient flow of goods. It is necessary to have the clients establish internal systems which comply with regulatory requirements and serve their businesses. This will reduce likelihood of assessments and penalties and will enhance access to preferential procedures.
The Administrative Monetary Penalty System (“AMPS”) places responsibilities on importers, exporters, customs brokers and carriers. Clients need to understand their customs compliance obligations and needs, and benefit from comprehensive AMPS compliance reviews.
As the commercial world becomes more and more electronic, numerous legal implications for the business client arise.
Anti-Dumping, Anti-Subsidy and Safeguard Measures
This involves defending against claims of unfair competition or prosecuting trade actions when faced with such competition. This also involves devising strategies to manage the risks of Canadian and/or foreign trade actions, such as anti-dumping and countervailing (anti-subsidy) duty and other trade actions (including those relating to imposition of quantitive restrictions [quota], safeguards, tariff rate quota and surtaxes). In connection with these strategies, clients benefit from instruction on import and resale pricing practices, market strategies to ensure capture of appropriate levels of market share, and tailoring of requests for government assistance to minimize risks of trade actions. Importers and exporters involved in trade actions should avail themselves of the opportunity to make representations to government officials and at administrative tribunal hearings, by seeking review of existing orders or appealing decisions to the courts or international tribunals as appropriate.
The government procurement markets have opened dramatically as a result of NAFTA and the WTO Agreement on Government Procurement. Clients may be assisted in prosecuting procurement opportunities resulting from trade agreements, in bid preparation and in bid protect in the event that the procurement process is not respected.
Clients need to be protected from the power of the Canada Border Services Agency.
Exporting from Canada
Clients require advice on market opportunities, the regulation of businesses in foreign markets, how to cope with foreign tariff and non-tariff barriers to trade, applications for government financing or other assistance for export sales transactions, and applications for export permits. This may involve collaboration with foreign counsel where necessary.
Import and Export Controls
Canada maintains a system of restrictive import and export controls which can result in roadblocks for traders. Clients need navigational assistance to ensure that they do not improperly restrict their businesses.
North American Free Trade Agreement (NAFTA)
The NAFTA affects everyone doing business in Canada, the United States and/or Mexico, whether they be situated in those countries or in third countries.
Clients, and their interests in the United States, Canada Mexico and other parts of Latin America, are best served when they obtain insight into the manner in which changes in the North American trading environment impact on business strategy and investments. There are tariff and other statutory customs related benefits available to clients.
WTO Agreements (GATT 1994)
In a globalized trade environment, clients need advice on the implications of the WTO Agreements on their business activities with particular emphasis on tariff and non-tariff measures, standards, procurement and market access. Their special interests may be the subject of advocacy on their behalf in connection with implementation of the Agreements.
Trade and the Environment and Standards
Federal, provincial, and local laws and regulations, as well as the NAFTA and the WTO, covering environmental, product and process standards have a significant effect on the ability of businessmen to produce goods in, and/or to export goods to, certain countries. Clients are assisted by the development of strategic plans to cope with these requirements. This involves advocating for them in respect of existing or proposed laws and regulations, working with them and government in a proactive way to structure suitable laws and regulations, and/or ensuring that their competitors do not secure an unfair advantage by reason of non-compliance.
Customs and Trade Aspects of Information Technology and E-Commerce
As the commercial world becomes more and more electronic, numerous legal implications for the business client arise. From a customs/trade perspective, implications are most noteworthy in the contexts of whether the subject of agreements are goods, services, or intellectual properties (or a combination thereof). There are customs duty, GST and PST implications which flow from that determination. There are also exemptions to duty and GST depending on the characterization. Finally there are WTO implications in terms of market access.
We hope this mini opus is instructive. Placed conspicuously within reach, we trust you will refer to it when preparing to meet your business clients and/or will share it with them.
We would be pleased to meet with you and other members of your department to flesh out those elements of particular interest. We would also be delighted to assist you with your clients’ customs and international trade law requirements.
Did you know?
Company A buys the shares of Company B. Two years later, the Canada Border Services Agency (CBSA) audits Company B and concludes that it has underpaid customs duties. Re-assessment of importations going back 4 years for undervaluation costs the company $800,000 in additional customs duties. This could have been identified if Company A had conducted a customs due diligence.
Importer A obtains a license from its foreign parent company, B, to use trademarks in connection with the manufacture abroad, and sale in Canada, of specified products. B, the licensor, requires that A use related Company, C, as it buying agent for locating sources, negotiating contracts, providing quality assurance, and expediting export and delivery. The license royalty and the agency fee may be subject to customs duties adding a significant amount (e.g. upward to 20% of the sum of the royalty and fees for clothing) to the cost of goods. The transaction results in a significant hit to the bottom line and to cash flow which could have been avoided with strategic transaction and corporate planning and documentation.
Canadian manufacturer, “A”, selects a Mexican supplier of inputs for the production of finished goods which “A” will produce in Canada and export to the U.S.A. contracts with its U.S. customer, “B”, that it will supply necessary customs documentation to allow B to claim NAFTA status for the imported finished goods, including an executed Certificate of Origin. A assumes that the finished goods qualify for NAFTA status because the inputs and the finished goods were both “made” in NAFTA countries. The U.S. Customs Service investigates and assesses B duties, interest and penalties which B then seeks to recover from A, together with legal fees. Production in Mexico, U.S. and/or Canada does not equate with NAFTA qualification. Liability could have been eliminated with proper NAFTA planning and contractual terms.
Company A has developed a strong U.S. customer base. It receives orders from U.S. customers and ships goods to its customers declaring its manufacturing cost as the value for duty. U.S. customs authorities reassess duties and penalties on the grounds that A should have paid duties on its selling prices to its customers. This expensive result could have been avoided with proper legal advice on exporting.
Company “A” imports an array of goods subject to duty rates depending on their classification in the Customs Tariff. A relies on its customs broker to “rate” or classify the goods because the broker “should know” and is “cheap”. The broker is a licensee of the Crown and, in any event, tends to be conservative in its recommendations. The importer overpays duty because he refuses to invest in truly expert legal advisors who can provide opinions which are privileged from Crown review. An opportunity to improve the bottom line is foregone.
An importer of ski jackets, lined and stuffed with insulating material, places the jackets in retail stores, coast to coast. It has not reviewed product regulation and fails to note the application of provincial regulation of stuffed articles. At a tremendous cost, the jackets are removed from retail shelves. Some are warehoused, tagged, re-delivered and re-shelved. As to others, the customer refused to take them back. Profit margins, easily earned with due diligence, are eliminated.
Canada’s Administrative Monetary Penalty System involves “ticketing” of customs contraventions. Compliant importers and exporters may enjoy streamlined clearance procedures, reducing administrative costs. The choice is administrative penalties or reduced administrative costs? The prudent business person will invest in a (solicitor-client privileged) internal audit, by a qualified customs attorney, of import practices and procedures if the return is reasonable. The shortsighted will ignore the inevitable and will wait until the company is choking on cascading penalties to make structural changes. What would you recommend?
Canadian producer is facing price competition from imports, resulting in price erosion, lost sales, and reduced profitability. As it turns out, the foreign supplier is selling goods to its Canadian (importer) customer at lower prices than in comparable sales in its home market. The uninformed sits idly by waiting for the inevitable receivership proceedings. Your client petitions the Canadian government to investigate unfair pricing practices. As a result of the proceedings, Canadian producer increases its prices and regains lost market share and then some, raising profits to reasonable levels.
These are a few examples. These and other legal issues are canvassed in these materials.
Customs duties are a business expense. Their reduction drops to the bottom line, thereby increasing profits!
An additional effect of reduced costs is the ability they afford to reduce prices!
These suits have remarkable effects on market share and competitiveness generally.
Canada has recently introduced a sanction based regime comprised of a plethora of administrative monetary penalties, both burdensome and expensive, to “facilitate” customs compliance, i.e. with customs and international trade rules and regulations.
The client (and the advice) should also enjoy the protection of solicitor-client privilege.
Gottlieb & Associates is a boutique firm specializing in customs and international trade law for almost 40 years. Gottlieb & Associates has offices in Montreal and Ottawa.