Canada Customs: Transfer Pricing Adjustments

On January 19, 2015, the Canada Border Services Agency (the "CBSA") issued Customs Notice 15-001 making some significant changes to its position on the treatment of downward price adjustments in value for duty calculations.

Previously, the CBSA's position on the treatment of all transfer pricing adjustments between related parties for customs purposes was set out in Memorandum D13-3-6. Generally, pursuant to the transaction value method, the CBSA accepted the transfer price used for income tax purposes for determining the price paid or payable (“PPP”) for imported goods for customs valuation purposes, subject to certain statutory additions and deductions. However, where related parties made a downward transfer price adjustment in the PPP for goods after importation the CBSA's official position was that such reductions would be disallowed pursuant to paragraph 48(5)(c) of the Customs Act and would be disregarded for customs valuation purposes. As a result, a Canadian importer was theoretically not allowed to receive a refund on duties already paid to the CBSA by filing a request under paragraph 74(1)(e) of the Customs Act based on a downward transfer pricing adjustment made at the end of the year.

Paragraph 48(5)(c) of the Customs Act addresses downward adjustments to the PPP effected after importation, and continues to apply in scenarios where a purchaser and vendor enter into an agreement to reduce the PPP of goods after those goods have been imported to Canada. No correction of declared value for duty of the goods can be made in these circumstances. For example, after importation a vendor agrees to reduce the PPP of goods already imported because the purchaser is unable to resell those goods in Canada. The decrease in the PPP is effected after importation, and a downward adjustment to the PPP is precluded by paragraph 48(5)(c) of the Customs Act.

However, in circumstances where an agreement in writing to later reduce the PPP for goods exists at time of importation then the importer can apply for a rebate if the PPP is actually reduced.

The change in position by CBSA resulted from a decision on March 21, 2014, by the Canadian International Trade Tribunal (CITT) in Appeal No. AP-2012-067, Hudson’s Bay Company v. President of the Canada Border Services Agency, concerning the treatment of rebates made after importation. The CITT ruled that a price reduction made after importation is not addressed by the Customs Act if it results from an agreement to reduce the price that was in effect at time of importation.

The CBSA Notice deals with self – adjustments and refunds, stating:  

5.In situations where an agreement in writing was in effect at time of importation to later reduce the PPP of imported goods and the price reduction subsequently occurs, a correction made under the authority of section 32.2 of the Customs Act is necessary if the importer is provided with specific information giving reason to believe that a declaration of value for duty is incorrect, and the correction would be revenue neutral. An importer may elect to pursue a refund of duties under the authority of paragraph 74(1)(e) of the Customs Act if the price reduction would result in a decrease of value for duty. Such a request can be made for importations occurring within four years of the date of this notice.

6. In situations where a transfer price agreement between a vendor and a related purchaser exists, the intercompany transfer price is considered by the Canada Border Services Agency (CBSA) to be the uninfluenced PPP of imported goods. For the PPP to remain uninfluenced, corrections to the value for duty must be submitted to the CBSA when the net total of upward and downward transfer price adjustments occurring in a fiscal period is identified. It is at that specific moment that the importer has reason to believe that corrections to declarations of value for duty are necessary. If the net total result is a downward price adjustment and the imported goods are subject to duties, a request for refund can be made for importations occurring within four years of the date of this notice.

D13-series memoranda that address the treatment of price reductions made after importation will be amended to reflect the information included in the Notice.

The Notice is good news for importers.  Importers should review their customs entries for the last four years to determine whether they are entitled to claim a refund of duties. Customs brokers should advise their customers of this important change.