Back to List

Customs Report - 4

Non-Resident Importer and Value for Duty

by John Brooks

The calculation of Customs Duty and the Goods and Services Tax (GST) is reliant on the appropriate valuation of the goods imported into Canada. Since the GST and the majority of duty rates are based on the “ad valorem” (according to value) method of assessment, reporting the correct value is extremely important.

Value for duty in Canada is based on the International Valuation Code adopted under the General Agreement of Tariffs and Trade (GATT) in 1979 and implemented in Canada on January 1, 1985. However, although the methodology is the same, there are significant differences in the interpretation and application of the code within the various signatory countries.

The legislation covering Value for Duty is found in the Customs Act Sections 45 to 55. The Regulations are found in Customs Memorandum D13 that is comprised of more than 40 individual memoranda.

When a foreign exporter assumes the status and responsibility of “Non-Resident Importer” the lid to “Pandora’s Box” is opened.

Valuation in its simplest form, that is, a transaction between two unrelated parties, at arms-length, is relatively straightforward. However, introduce a relationship and you soon become mired in the intricate complexities of the valuation code. When a foreign exporter assumes the status and responsibility of “Non-Resident Importer” the lid to “Pandora’s Box” is opened.

The primary method of valuation is the Transaction Value (TV). This is defined as the “Price paid or payable for goods, as adjusted, when sold for export to Canada to a resident in Canada.”

The TV method can often be used even when a relationship exists between the purchaser and the vendor. In such cases, it must be demonstrated that the relationship did not influence the price. Frequently, in the case of non-resident importers, a sale has not occurred at the time of importation and the TV cannot be used. When the requirements of TV cannot be satisfied, one of the five alternative methods of valuation must be applied. These are:

Transaction Value of Identical Goods: The price paid or payable, as adjusted, for goods sold by the same exporter to another purchaser in Canada. The comparative sale must be made in relatively the same period, quantity and trade level. Nominal differences may be accounted for with adjustments to the price. A sale of identical goods must have actually taken place in order for this method to be used.

Transaction Value of Similar Goods: This resembles the identical goods method, with the exception that the comparative sale is for similar goods rather than identical goods.

Similar is defined as goods closely resembling the imported goods in respect of their component materials and characteristics and capable of performing the same function and of being commercially inter-changeable with the goods being appraised.

Deductive Value: The sale price, per unit, is adjusted by deducting all costs, charges and expenses, including profit, incurred in Canada. The sale price is also defined and should be reviewed in specific, individual cases.

Computed Value: The cost of manufacturing is used as a base and various elements are added, including general administrative expenses and profit earned in the country of export. As with the Computed Value Method, one should review this method in detail, taking into account the specifics of the actual situation. (It’s also noteworthy that the Deductive and Computed Valuation Methods can be reversed in order, however, you must notify Canada Customs in writing should you elect to do so, informing them of the method chosen. You must then apply this method consistently on all future transactions.)

Residual Method: This is a last resort and is used infrequently. When it becomes necessary to resort to this method, the situation is unique and each case must be dealt with individually.

It has been my experience that companies are assuming the status of non-resident importer, a decision often forced upon them without understanding the associated responsibilities and potential liabilities. Perhaps nowhere is this more apparent than in the area of valuation. Customs audit and investigative resources are focusing considerable effort on the enforcement of valuation requirements. Great care needs to be taken, particularly by non-resident importers, to ensure that the appropriate value is declared.

In conclusion, Verification Audits require a review of importers’ systems at their premises. Within Canada, the costs of on-site visits are borne by the Canada Customs and Revenue Agency. However, in the case of non-resident importers, all expenses for audit team travel are borne by the non-resident importer.

John Brooks is Manager, Trade Compliance Services, Russell A. Farrow Limited. He is currently in his 33rd year with the company. John is a former President of the Southern Ontario Division and National Director of the CSCB.