Contributing Lawyers

Canada

Cyndee Todgham Cherniak

United States

Susan Kohn Ross

Australia

Andrew Hudson



Canadian Importers Need to Reconsider Value For Duty If Pay Management/Administrative Fees to Exporter

On July 13, 2009, I posted an blog posting entitled "Canada Border Services Agency Releases D-Memo on Subsequent Proceeds" - see the following link - http://tradelawyersblog.com/blog/archive/2009/july/article/canada-border-services-agency-releases-d-memo-of-subsequent-proceeds/?tx_ttnews[day]=13&cHash=b299de7443

A copy of D-Memo D-13-4-13 can be obtained at the following link - http://www.cbsa.gc.ca/publications/dm-md/d13/d13-4-13-eng.pdf

I would like to highlight that importers who pay management/administrative fees to a foreign parent, who is the exporter of goods to Canada, or another person in the same corporate group as the importer and/or exporter may be required to voluntarily amend Customs Declarations after the initial importation if there is a subsequent payment of management/administrative fees. In addition to the adjustment to the customs declaration of the valuation for customs duty purposes, the importer must pay any additional duties AND GST/QST/HST. It is expected that this will be a significant verification issue and a basis for redeterminations of duties/taxes payable, plus interest and penalties.

On June 11, 2009, Bill S-2 received Royal Assent. Bill S-2 contained a change to the Customs Act, which requires subsequent proceeds to be added to price paid or payable for the purposes of calculating value for duty. Paragraph 48(1)(c) of the Customs Act provides as follows:

"when any part of the proceeds of any subsequent resale, disposal or use of the goods by the purchaser is to accrue, directly or indirectly, to the vendor, the price paid or payable for the goods includes the value of that part of the proceeds or the price is adjusted in accordance with paragraph (5)(a)".

Paragraph 48(5)(v) of the Customs Act previously required for customs valuation purposes, that the price paid or payable be adjusted by adding amounts equal to "the value of any part of the proceeds of any subsequent resale, disposal or use of the goods by the purchaser thereof that accrues or is to accrue, directly or indirectly, to the vendor.

The CBSA has recently provided importers guidance on its interpretation of these requirements in D-Memo D-13-4-13 "Post-Importation Payments or Fees "Subsequent Proceeds"" (July 8, 2009). The CBSA has stated that:

[12] Management and/or administrative fees are one type of payment that should be examined to determine whether they are "subsequent proceeds"/ "Management and/or administrative fees" are not defined in the Customs Act, as such, there is no legislative basis for their inclusion as an addition to price paid or payable. CBSA allows the exclusion of management fees and/or administrative services as a discretionary administrative policy based on the CBSA's definition of management fees and/or administrative services. The definition generally includes the functions of planning, direction, control, coordination, systems or other functions at a managerial level. These functions may involve services fir various departments of a business, such as accounting, financial, legal, electronic data processing, employee relations, management consultation, labour negotiations, taxation, relating to management and/or administration.

[13]Sometimes, in addition to selling goods, vendors will offer management and/or administrative services to their purchasers. This is common between related parties, particularly in multinational groups where one member will provide services to other members within the group.

[14] To illustrate, a Canadian importer purchases goods from its parent company located in the United States. The related parties have determined their affairs are best organized by centralising some or all of the management functions. Both parties enter into an agreement where the vendor performs these activities for the importer for a fee. The payments for there services are made separately from any payments related to the purchase of goods.

[15] Payments made for management and/or administrative services may meet the criteria to be subsequent proceeds, since the payments are remitted to the vendor after the importation of the goods and they are often based on the resale, disposal, or use of the goods in Canada. However, in certain circumstances (as outlined in paragraph 12), CBSA allows some payments made for management or administrative services to be excluded from the subsequent proceeds provisions of the Act."

The above statements undoubtedly MUST be interpreted to be a warning by the CBSA that they plan to review management and administrative fees on a going forward basis (and potential retroactively prior to June 11, 2009). As a result, it is critical that multinational companies consider the effects of payments of such management and administrative fees for customs compliance purposes.

The CBSA gives further guidance in D-Memo D-13-4-13 where it will exclude payments from the requirement to adjust the price paid or payable, make adjustment filings, and pay additional duties and GST/HST/QST. The CBSA provides the following test that must be satisfied if a payment is not recorded as an adjustment upwards to the price paid or payable:

1) the services must have been rendered for the operation of the business in Canada;

2) the amount of the charge must be in accordance with an arm's length charge; and

3) the services provided are justified for the operation of the business in Canada.

Whether or not the test is satisfied will be determined on a case-by-case basis.

It should be noted that the CBSA has raised a few warnings, such as:

  • The question of whether a payment was made in respect of identifiable management and/or administration services depends on the nature of the service provided and whether the services were actually performed. A foreign related party company may charge a management fee amount to its subsidiary for a number of services including, for example, a management consultation when in fact the specific service may not have happened. In such circumstances this charge would not meet the requirements of CBSA’s administrative policy on excluding a recognized management fee from the value for duty and would be added to the price paid or payable.

  • There might not be an agreement to specifically charge for such an amount and the specific billing for the exact service may not have been submitted. In such circumstances this charge would not meet the requirements of CBSA’s administrative policy on excluding a recognized management fee from the value for duty and would be added to the price paid or payable.

  • A management fee charged by a U.S. parent company to its Canadian subsidiary that is based on a percentage of sales in Canada may not bear any relation to the actual value of the services rendered. In such circumstances this charge would not meet the requirements of CBSA’s administrative policy on excluding a recognized management fee from the value for duty and would be added to the price paid or payable.

  • Payments based on a percentage of the net sales of the goods (e.g., 10% of the net sales will be remitted to the vendor) does not necessarily meet the requirement that the payment must be for the services rendered for the operation of the business in Canada. The amount of the charge is required to accurately reflect the actual management and administrative costs for Canadian operations and not a percentage based on other criteria. In such situations, further substantiation of actual costs would be required in order to meet the requirements of sufficient information.

  • For the management and/or administration services to be considered rendered, no portion of the amount charged should be for services already provided by Canadian personnel.

  • Management and/or administration services are often centralized to share the costs between numbers of related companies. In cases where costs of services are distributed among various departments, branches, or subsidiary corporations, (including the purchaser in Canada), not only must the amounts themselves be comparable to the price that would be charged by an unrelated party, but also the method of allocation of these costs must be reasonable and appropriate to the circumstances of the importer’s business.

  • The apportionment of management fees and /or administrative services costs between related parties should be based on a comprehensive review of the expenses; this process should be carried out in advance of determining the share allocated to the Canadian importer. The basis of allocation should result in costs being shared in proportion to the benefits received, for example, the allocation of costs of a centralized department based on an estimate of time spent on duties performed for each entity (branch, subsidiary, etc.). Note that management fees and/or administrative services costs determined after the fact are more likely to be challenged by CBSA. In all cases the basis used for charging a fee must be available for examination by CBSA.

  • The allowable management and/or administration fees excluded from the amount of subsequent proceeds added to the price paid or payable does not include amounts for services not related to the Canadian operation.

  • In order to be considered a legitimate fee for management and/or administration services, an importer must establish that the specific activity performed by their related party is a service for which a charge is justified. In an arm’s length relationship, the unrelated Canadian business would be willing to pay for management and/or administrative services only to the extent that the service is needed and delivers some kind of benefit.

For more information about which fees should be added to price paid or payable, which fees are not required to be added to be added to price paid or payable, and/or the appropriate procedures to follow to communicate the additions of management and administrative fees to price paid or payable, please contact Cyndee Todgham Cherniak at 416-307-4168.

 

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