Canada-U.S. Blog

Trade Lawyers Cyndee Todgham Cherniak and Susan K. Ross

Canada Announced New Marking Rules for Steel and Aluminum

Posted in Antidumping, Border Security, Canada's Federal Government, Customs Law, origin, Trade Remedies, U.S. Federal Government

On May 30, 2018, Canada’s Minister of Finance announced new marking rules for steel and aluminum products.  In a News Release entitled “Canada Bolsters Prevention of Transshipment and Diversion of Steel and Aluminum Products Through Country of Origin Marking Regime“, the Department of Finance announced that Canada was aligning its marking rules with the United States’ marking rules (the U.S. regime requires all foreign-origin steel and aluminum products to be marked with a country of origin). as a result of the new marking rules, foreign steel and aluminum that is not properly marked with country of origin will not be released into Canada by the Canada Border Services Agency.  It will either be sent back to the country of shipment or it will be destroyed.

Changes will be made very soon to two regulations:

(1) Determination of Country of Origin for the Purposes of Marking Goods (NAFTA Countries) Regulations; and

(2) Determination of Country of Origin for the Purposes of Marking Goods (Non-NAFTA Countries) Regulations.

Foreign manufacturers of steel and aluminum products will be expected to mark the goods with a country of origin marking.

The following changes were proposed in the Canada Gazette on April 28, 2018:

Table 1: Proposed amendments to the Determination of Country of Origin for the Purposes of Marking Goods (NAFTA Countries) Regulations and the Determination of Country of Origin for the Purpose of Marking Goods (Non-NAFTA Countries) Regulations

Existing Text Proposed Amendments
None (add in new section in Schedule 1) Add in new text after Schedule 1 (Subsection 2(1)):

1 Goods of Steel or Aluminum

Goods of steel or aluminum classified in headings 72.06 through 72.15, subheadings 7216.10 through 7216.50 or 7216.99, headings 72.17 through 72.29, subheading 7301.10, 7302.10, 7302.40 or 7302.90, headings 73.04 through 73.06, heading 76.01, headings 76.04 through 76.09 or castings or forgings of subheading 7616.99, except wire (other than barbed wire)

2(12) Iron or steel pipes and tubes Delete “or steel”
Renumber sections to reflect new section 1
Schedule II (Subsection 2(2))

4. Used goods, with the exception of iron or steel pipes and tubes

4. Used goods, with the exception of iron pipes and tubes, or goods of steel or aluminum listed in Schedule 1, section 1
5. Goods that are for the exclusive use of the importer or the importer’s employees and not for resale to the general public, with the exception of iron or steel pipes and tubes 5. Goods that are for the exclusive use of the importer or the importer’s employees and not for resale to the general public, with the exception of iron pipes and tubes, or goods of steel or aluminum listed in Schedule 1, section 1
8. Goods that are imported for subsequent exportation from Canada, with the exception of iron or steel pipes and tubes 8. Goods that are imported for subsequent exportation from Canada, with the exception of iron pipes and tubes, or goods of steel or aluminum listed in Schedule 1, section 1

Table 2: Additional amendments to the Determination of Country of Origin for the Purposes of Marking Goods (NAFTA Countries) Regulations (Schedule III — Tariff Shift Rules)

Existing Text Proposed Amendments
Schedule III

  • 72.01 – 72.29
  • A change to headings 72.01 through 72.29 from any other heading, including another heading within that group.
Replace rules 72.01 through 72.29 with the following:

  • 72.01 – 72.06
  • A change to headings 72.01 through 72.06 from any other heading, including another heading within that group.
  • 72.07
  • A change to heading 72.07 from any other heading, except from heading 72.06.
  • 72.08
  • A change to heading 72.08 from any other heading.
  • 72.09
  • A change to heading 72.09 from any other heading, except from heading 72.08 or 72.11.
  • 72.10
  • A change to heading 72.10 from any other heading, except from headings 72.08 through 72.12.
  • 72.11
  • A change to heading 72.11 from any other heading, except from headings 72.08 through 72.09.
  • 72.12
  • A change to heading 72.12 from any other heading, except from headings 72.08 through 72.11.
  • 72.13
  • A change to heading 72.13 from any other heading.
  • 72.14
  • A change to heading 72.14 from any other heading, except from heading 72.13.
  • 72.15
  • A change to heading 72.15 from any other heading, except from headings 72.13 through 72.14.
  • 72.16
  • A change to heading 72.16 from any other heading, except from headings 72.08 through 72.15.
  • 72.17
  • A change to heading 72.17 from any other heading, except from headings 72.13 through 72.15.
  • 72.18
  • A change to heading 72.18 from any other heading.
  • 72.19 – 72.20
  • A change to headings 72.19 through 72.20 from any other heading outside that group.
  • 72.21 – 72.22
  • A change to headings 72.21 through 72.22 from any other heading outside that group.
  • 72.23
  • A change to heading 72.23 from any other heading, except from headings 72.21 through 72.22.
  • 72.24
  • A change to heading 72.24 from any other heading.
  • 72.25 – 72.26
  • A change to headings 72.25 through 72.26 from any other heading outside that group.
  • 72.27 – 72.28
  • A change to headings 72.27 through 72.28 from any other heading outside that group.
  • 72.29
  • A change to heading 72.29 from any other heading, except from headings 72.27 through 72.28.
  • 76.01 – 76.06
  • A change to headings 76.01 through 76.06 from any other heading, including another heading within that group.
  • 7607.11 – 7607.20
  • A change to subheadings 7607.11 through 7607.20 from any other subheading, including another subheading within that group.
  • 76.08 – 76.15
  • A change to headings 76.08 through 76.15 from any other heading, including another heading within that group.
  • 76.01 – 76.04
  • A change to headings 76.01 through 76.04 from any other heading, including another heading within that group.
  • 76.05
  • A change to heading 76.05 from any other heading, except from heading 76.04.
  • 76.06 – 76.15
  • A change to headings 76.06 through 76.15 from any other heading, including another heading within that group.

It should be expected that the regulatory changes will be published soon.

The Department of Finance also announced that it was hiring more CBSA Officers to enforce border laws.  The new funding is to allow the CBSA to identify and stop companies that try to avoid AD/CVD duties and give the CBSA greater flexibility in responding to situations where home market pricing is problematic.

If you have any questions, please contact Cyndee Todgham Cherniak at 416-307-4168 or at cyndee@lexsage.com.

The United States Imposed 25% Steel Tariffs and 10% Aluminum Tariffs on Canada and Canada Responds

Posted in Antidumping, Border Security, Canada's Federal Government, Exports, NAFTA, NAFTA Renegotiations, Trade Remedies, U.S. Federal Government

On May 31, 2108, President Trump issued two Presidential Proclamations, which impose steel and aluminum tariffs on Canada. All exports of covered steel will be subject to a 25% import tariff (Canadian steel into the United States) and all exports of covered aluminum products will be subject to a 10% tariff (Canadian aluminum into the United States). This is a sad day for Canada-US trade relations. The two Presidential Proclamations are:

  1. Presidential Proclamation Adjusting Imports of Steel into the United States; and
  2. Presidential Proclamation Adjusting Imports of Aluminum into the United States.

These measures are Presidential Proclamations and are decisions made by President Trump personally.  These are not anti-dumping and countervailing measures that result from complaints by domestic industry participants. These are not safeguard measures. These are unilateral measures taken pursuant to section 232 of the Trade Expansion Act of 1962, as amended (19 U.S.C. 1862).  President Trump has taken the position that Canada poses a national security threat to the United States.  If Canada agrees to all of President Trump’s NAFTA renegotiation demands, then and only then will Canada be viewed as not a threat to the national security of the United States.

Covered Steel Under Trump Steel Tariffs

The Trump Steel Tariffs cover a wide range of steel products, classified under the Harmonized Tariff Schedule (HTS) 6 digit levels 7206.10 through 7216.50, 7216.99 through 7301.10, 7302.10, 7302.40 through 7302.90, and 7304.10 through 7306.90.  See Presidential Proclamation on Adjusting Steel Imports Into the United States (March 8, 2018).

Covered Aluminum Under Trump Aluminum Tariffs

The Trump Aluminum Tariffs cover products falling under HTS headings for (a) unwrought aluminum (HTS 7601); (b) aluminum bars, rods, and profiles (HTS 7604); (c) aluminum wire (HTS 7605); (d) aluminum plate, sheet, strip, and foil (flat rolled products) (HTS 7606 and 7607); (e) aluminum tubes and pipes and tube and pipe fitting (HTS 7608 and 7609); and (f) aluminum castings and forgings (HTS 7616.99.51.60 and 7616.99.51.70). The Trump Aluminum Tariffs do not cover bauxite or alumina feedstock, aluminum waste and scrap, and/or aluminum powders or flakes. See Presidential Proclamation on Adjusting Aluminum Tariffs Into the United States (March 22, 2018).

Canada Will Retaliate

Canada has indicated it will retaliate against the Trump Steel Tariffs and the Trump Aluminum Tariffs by imposing countermeasures on certain U.S.-origin goods. These countermeasures will only apply to goods originating from the U.S., which shall be considered as those goods eligible to be marked as a good of the U.S. in accordance with the Determination of Country of Origin for the Purposes of Marking Goods (NAFTA Countries) Regulations.

Canada’s Department of Finance has posted a list of proposed retaliatory tariffs ranging from 10% (see Table 2) – 25% (See table 1) (steel products) .  Canada is imposing tariffs on U.S. goods totaling $16.6B (which is the calculated value of Canadian steel and aluminum exports to the U.S. affected by the Trump Steel Tariffs and Trump Aluminum Tariffs). Canada will impose tariffs on U.S. steel (see table 1) at a rate of 25%,  and aluminum and various items at a rate of 10% (see table 2). The other retaliatory tariff items include plywood, veneer, boats, playing cards, beer kegs, whisky/bourbon, coffee, orange juice, strawberry jam, tomato ketchup, mustard, mayonnaise,  maple syrup, licorice candy, soup, gherkins and cucumbers, toilet paper, dishwasher detergent, candles, hair lacquers, combined refrigerators/freezers, laundry-type washing machines, dishwashers, water heaters, mattresses, sleeping bags, lawn mowers, ballpoint and felt-tip pens, etc.

The duties will not be imposed until after a consultation period has ended on June 15th.  It is expected/planned that the Canadian retaliatory tariffs will start on July 1, 2018.  The countermeasures will remain in place until the United States ends the Trump Steel Tariffs and Trump Aluminum Tariffs.

Canadian Importers Should Start Planning Alternative Sources of Supply

Canadian importers will be affected by the new tariffs.  Canadian importers and manufacturers should undertake the following steps:

  1. review imports/inputs and identify whether any goods will be affected by the new tariffs;
  2. review H.S. codes of imported items and certificates of origin for NAFTA goods;
  3. review current purchase orders – do you need to cancel shipments that will arrive after July 1, 2018 or attempt to speed up delivery before the tariffs are imposed;
  4. review contracts for supplies on inputs – do you need to cancel shipments that will arrive after July 1, 2018 or attempt to speed up delivery before the tariffs are imposed;
  5. review supply alternatives – can these goods be purchased from another source country (e.g., EU member as the Canada-EU CETA may apply);
  6. review pricing of goods sold in Canada and determine whether price increases are necessary;
  7. update posted pricing to reflect and price increases or changes to sourcing of goods;
  8. review whether any changes to sourcing affects NAFTA treatment of downstream goods and NAFTA certificates of origin; and
  9. be ready for change.

U.S. Exporters Should Submit Consultation Letters

U.S exporters do not have to stay silent.  U.S. exporters who are affected by Canada’s countermeasures have 14 days to reach out to their buyer/Canadian importers and ask them to help convince the Government of Canada to remove their items from the countermeasures list. If you do nothing, there will be Canadian countermeasures unless the Trump Steel Tariffs and Trump Aluminum Tariffs are reversed.

If you would like more information, please contact Cyndee Todgham Cherniak at 416-307-4168 or at Cyndee@lexsage.com.

America First – America Alone?

Posted in Corporate Counsel, Customs Law, Export Controls & Economic Sanctions, Legal Developments, Politics, Trade Remedies

Originally published by the Journal of Commerce in May 2018

The White House website defines the foreign policy of the Trump Administration as follows: “President Trump is bolstering American influence by leading a coalition of strong and independent nations to promote security, prosperity, and peace both within America’s borders and beyond. The promise of a better future will come in part from reasserting American sovereignty and the right of all nations to determine their own futures.”

Since the start of the current administration, the U.S. has withdrawn from the Paris Accord, the Trans-Pacific Partnership, and now the Iran JCPOA deal, to list the most significant international actions taken to date. The Paris Agreement provides internationally agreed upon standards to manage climate change. The current Environmental Protection Agency Administrator, Scott Pruitt, does not believe that human actions contribute significantly to climate change. See https://www.washingtonpost.com/news/energy-environment/wp/2017/03/09/on-climate-change-scott-pruitt-contradicts-the-epas-own-website/?noredirect=on&utm_term=.74315ce11367, where Mr. Pruitt is quoted as saying: “… so no, I would not agree that [human activity is] a primary contributor to the global warming that we see…” Nonetheless, other countries are proceeding with the Paris Accord.

Then, there was TPP. Whereas the expectation may have been that the deal would be dead when the U.S., withdrew,  that hardly turned out to be the case.  The agreement itself has been adopted and renamed. Alternately known as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP),  and also as TPP11, the agreement was signed, but not-yet ratified by  Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.  Equally interesting is the 20 or so provisions which were originally inserted at U.S. insistence and have now been “suspended”!  Also worthy of note is the expressed interest of the U.K. to join the talks after Brexit.

Subsequently, we have seen events related to NAFTA, KORUS, aluminum/steel tariffs under 232, and the threat of significant tariffs on Chinese goods in the context of 301. Most recently, of course, is the withdrawal of the U.S. from the Joint Comprehensive Plan of Action or JCPOA, the nuclear non-proliferation agreement between Iran, China, France, Russia, the United Kingdom, the U.S. and Germany. The justifications for withdrawal have been well-covered in the general press. Less attention has been paid to the process that will apply.  See the updated OFAC Frequently Asked Questions at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/jcpoa_winddown_faqs.pdf. Certain actions will be subject to a 90 day wind-down period which expires on August 6. 2018, and the remaining activities must be wound-down no later than November 4, 2018.

The 90 day wind-down period applies to sanctions on:

  1. The purchase or acquisition of U.S. dollar banknotes by the Government of Iran;
  2. Iran’s trade in gold or precious metals;

iii.        The direct or indirect sale, supply, or transfer to or from Iran of graphite, raw, or semi-finished metals such as aluminum and steel, coal, and software for integrating industrial processes;

  1. Significant transactions related to the purchase or sale of Iranian rials, or the maintenance of significant funds or accounts outside the territory of Iran denominated in the Iranian rial;
  2. The purchase, subscription to, or facilitation of the issuance of Iranian sovereign debt; and
  3. Iran’s automotive sector.

Plus any and all activities related to General License I, the license associated with contingent contracts related to passenger aircraft and related parts and services.

On or around August 6, 2018, the U.S. will also revoke any authorizations related to:

  1. The importation into the United States of Iranian-origin carpets and foodstuffs and certain related financial transactions pursuant to general licenses under the Iranian Transactions and Sanctions Regulations, 31 C.F.R. part 560 (ITSR);
  2. Activities undertaken pursuant to specific licenses issued in connection with the Statement of Licensing Policy for Activities Related to the Export or Re-export to Iran of Commercial Passenger Aircraft and Related Parts and Services (JCPOA SLP); and

iii.        Activities undertaken pursuant to General License I relating to contingent contracts for activities eligible for authorization under the JCPOA SLP.

The 180 day wind-down period applies to sanctions on:

  1. Iran’s port operators, and shipping and shipbuilding sectors, including on the Islamic Republic of Iran Shipping Lines (IRISL), South Shipping Line Iran, or their affiliates;
  2. Petroleum-related transactions with, among others, the National Iranian Oil Company (NIOC), Naftiran Intertrade Company (NICO), and National Iranian Tanker Company (NITC), including the purchase of petroleum, petroleum products, or petrochemical products from Iran;

iii.        Transactions by foreign financial institutions with the Central Bank of Iran and designated Iranian financial institutions under Section 1245 of the National Defense Authorization Act for Fiscal Year 2012 (NDAA);

  1. The provision of specialized financial messaging services to the Central Bank of Iran and Iranian financial institutions described in Section 104(c)(2)(E)(ii) of the Comprehensive Iran Sanctions and Divestment Act of 2010 (CISADA);
  2. The provision of underwriting services, insurance, or reinsurance; and
  3. Iran’s energy sector.

Also subject to the 180 day timeframe are all activities involved transactions by foreign entities which are owned or controlled by U.S. persons, see General License H.

Pending license applications will be returned without action. No sanctions will be reimposed retroactively, but OFAC makes clear that engaging in new projects between March 8, 2018 and the relevant wind down deadline will be treated negatively.

France, Germany and other long-considered close U.S. allies pushed to keep the U.S. in the JCPOA. They were already disappointed with the outcome, but the situation is no doubt going to get more challenging. The focus of the U.S. sanctions which are being reimposed are the Government of Iran and its financial institutions. The stated goal of course is to get Iran to agree to what the U.S. considers a better deal.  Is such a deal even possible? Why would Iran sit down with this administration when it can wait for the next one and seek reinstatement of the existing deal or something similar? Who will pay the price in the meantime?

The way the U.S. sanctions are written and applied, many European and Asian companies, especially financial institutions, will be barred from making deals with Iranian businesses and/or processing their funds. When that happens, it is entirely possible a larger gap in cooperation will occur between the U.S. and Europe. Does the word “isolation” come to mind?

There is a saying that to avoid making the same mistakes, one must learn from history. The last time the U.S. seriously attempted isolationism was between the end of World War 1 and the bombing of Pearl Harbor which drew the U.S. into World War II.  In those days, the U.S. was a dominant world power, with no real rivals. That is hardly the case today.  Certainly there is the EU. China is also on the rise.  The world is too connected for any one country to totally withdraw from the rest of the world. One has to hope that Mr. Trump’s approach works, especially with the upcoming North Korea meetings, but the lingering question remains what is Plan B?

In the end, what seems to be going on is akin to a neighborhood dispute. No one questions the right of a new administration to take a fresh look at existing policies, but most of us learned early in our youth that you end up with a greater degree of cooperation if you don’t constantly bloody your neighbor’s nose!

The Bumpy Ride Continues!

Posted in Antidumping, Border Security, Corporate Counsel, Cross-border deals, Cross-border litigation, Cross-border trade, Customs Law, Legal Developments, Politics, Trade Agreeements, Trade Remedies, World Trade Organization

Originally published by the Journal of Commerce in May 2018  as part of its 100 Top Importers and Exporters Edition

Old movie buffs immediately recognize the inspiration for the title. There was a movie released in 1950 starring Bette Davis called All About Eve. Its most famous lines have bearing on current events impacting global trade. To paraphrase them – “Fasten your seatbelts. It’s going to be a bumpy [ride].”  Since the start of the current Administration, the U.S. has withdrawn from the Paris Accord and the Trans-Pacific Partnership, KORUS and NAFTA have been or are being renegotiated, 232 steel and aluminum tariffs were imposed, 301 triggered duties on Chinese goods from China, and renunciation of the Iran JCPOA deal occurred, to list the most significant international actions to date.

The bottom line for this Administration is America first, but in a way that seems to turn us inward, with a longing for the good old days, when American was self-sufficient, thereby wholesale ignoring the world is now totally interconnected.

Ironically, just as the U.S. has essentially ticked off all our friendly trading partners, China has stepped up: “We are seeing profound changes in economic globalization  …   We should uphold multilateralism, pursue shared growth through consultations and forge close partnerships.” President Xi delivered these remarks at November 2017 APEC CEO Summit.

It seems as though we are seeing life imitate art. In 1995, Michael Douglas starred in a movie called An American President. The closing scene finds Douglas’ character – the President – stating:

“We have serious problems to solve, and we need serious people to solve them. And whatever your particular problem is, I promise you, Bob Rumson [his opponent from across the aisle] is not the least bit interested in solving it. He is interested in two things and two things only: making you afraid of it and telling you who’s to blame for it. That, ladies and gentlemen, is how you win elections. You gather a group of middle-aged, middle-class, middle-income voters who remember with longing an easier time, and you talk to them about family and American values and character…”

This point was underscored yet again by Commerce Secretary Wilbur Ross’ [no relation] speech to the National Press Club on May 14, 2018. Mr. Ross states: “Does anyone doubt that China’s trade surpluses with us have boosted their economic growth? Second question: If their surpluses with us have been good for China, how can our trade deficits with them not be bad for us? I believe that deficits do matter? But not all trade deficits are the same.” He then mentions the U.S. is not oil self-sufficient and so any country providing the U.S. with “our needs” is part of a “blameless deficit”. All other forms of trade deficit are actionable.  So, obviously the boon to American consumers of cheaper products is irrelevant!

Mr. Ross goes on to say: “Both China and Europe eloquently espouse free-trade rhetoric, but – in actual practice – are far more protectionist than the United States. Our trade policy’s main objective is to make their real-world behavior match their free-trade speeches. A second objective is to have our trading partners abide by the rules … Instead, of the 424 trade actions the U.S. has in effect against violations of the rules, half are antidumping or countervailing cases against China. They have subsidized their industrial expansion far in excess of demand. And have disrupted global markets … China has forced technology transfers from companies wanting to sell to its vast market, and it has stolen intellectual property … A third objection of our trade policy is reforming prior errors made by our government.”  Mr. Ross then goes on to list U.S. efforts to open markets, such as the establishment of GATT and then the WTO, and complains others have taken advantage of the U.S.’s open system to its detriment.  He goes on to complain that Mexico is part of NAFTA, but Mexico also has a free trade agreement with Europe. So, Mexican made vehicles going to Europe are free of duty, but those made in the U.S. are subject to Europe’s 10% duty rate.   Next, he complains that the U.S. only has one vote at the WTO and again is being taken advantage of! Stop whining! If the U.S. has stuck with the TPP and completed efforts at the free trade agreement with Europe, things would be much different!

Secretary Ross then states the U.S. has the largest trade deficit in the world and it is “unreasonable” for it to “bear the burden of bolstering the economic fortunes of the entire planet.”   One has to agree with him here, the U.S. should not shoulder the entire burden, but it is?  If we consider the value of services exported by U.S. companies– what does the trade deficit look like then? By at least one estimate, the value of services exported in 2017 was $780.88 billion!  Since the value of goods exported is in the trillions, the trade deficit will not be wiped out, but at least draw an accurate and complete picture!

While every Administration has the right to review existing policies and procedures, this is the first one in recent memory that has come in with a chip on its shoulder and basically told business, we will totally disregard what our actions do to you and your workers! Against that backdrop,  here is a list of actions businesses might consider:

1)         If you are a member of a trade association, get active with it, bring issues of concern to the right committees and get those associations to take action, including filing comments with the Administration, but more importantly, keep in regular contact with your Member of Congress and Senators.  If you are not already a member of at least one trade association, get cracking!

2)         Members of Congress and Senators prefer to hear from constituent outside the beltway, so  when you can, join association members and visit D.C., or visit with your Member and Senator in their district offices. Congress does not vote on all trade policy, but it still has influence through the purse string. Does anyone think the push to renegotiate NAFTA by the end of May isn’t drive by the political calendar – elections are in November!

4)         Take another look at your roster of advisors.  Do you have the right mix to keep you informed and help support any advice and counsel you may need?

5)         Dust off and update your strategic plan. As various trade remedies are announced, when was the last time you looked to see if you could identify a vendor in a different country with whom you could do business?

6)         Finally, keep innovating – whether with new products, new designs, new methods of production or in any other manner – stay competitive.

The one word answer to what things will look like for the next year is – unpredictable! It has been that way since January 20, 2017. No reason to think things will change anytime soon!

Trump’s withdrawal from the Iran JCPOA Deal: What does this mean for Canadian companies and trusts?

Posted in Aerospace & Defence, Corporate Counsel, Cross-border trade, Export Controls & Economic Sanctions, Exports, U.S. Federal Government

On May 8, 2018, U.S. President Donald Trump announced that the U.S. will withdraw from the Joint Comprehensive Plan of Action (“JCPOA”) with Iran. Canada was not a party to the JCPOA.  So, the U.S. being in or out of the JCPOA does not affect Canada directly.

That being said, President Trump’s decision has consequences that would affect some Canadian-based businesses.  President Trump has directed the U.S. Administration to immediately start the process to re-impose economic sanctions against Iran.  Whether this means the Trump Administration will re-impose the pre-JCPOA sanctions or develop a revised list that comprises old and new sanctions against key sectors of the Iranian economy (e.g., energy/oil, airlines, financial sectors) is anyone’s guess.  What we do know is that new U.S. economic sanctions against Iran are imminent and will be meant to punish Iran.

What does this mean for Canadian Companies?

The short answer is that some Canadian businesses will not be able to engage in certain business activities with Iran or Iranian persons.  What is currently legal may become illegal or restricted under U.S. law.

Canadian companies (including subsidiaries of U.S. companies, affiliates of U.S. companies, and trusts) should undertake a risk assessment as soon as possible to determine whether any aspect of their business will be affected by the new U.S. economic sanctions against Iran.  The time to ask the questions is now.

First Question: Is there exposure?

Canadian companies, Canadian subsidiaries of U.S. companies, Canadian branches of U.S. companies and Canadian companies that purchase business inputs from the United States need to ask questions to define their exposure, such as:

  • Does the company/branch have any dealings with Iran or Iranian persons?
  • Are any existing contracts with Iran or Iranian persons?

If the answer is “yes” to either of these question, it will be necessary to ask more questions.

U.S. sanctions can and do reach subsidiaries and branches of U.S. companies. U.S. subsidiaries and branches will need to consider whether certain future transactions (or completion of existing transactions) will be prohibited by the re-imposition of sanctions by the United States.  We will talk about the exposure of wholly owned Canadian companies below.

Second Area of Inquiry: Employees/Officers/Directors

For Canadian companies and multi-nationals, an important question is whether decision makers are Americans.  U.S. law applies to Americans in the United States and outside the United States. If there are American individuals in the company, it may be that the decision tree within the organization may need to be adjusted to remove Americans from decisions on business with Iran and/or you may need to take further steps to ensure they are not in violation of U.S. sanctions.

Third Area of Inquiry – the Goods

If there is business with Iran, what is the status of that business? Will there be deliverables after the re-imposition of US sanctions.  Will the Canadian company need to apply for a U.S. export permit or OFAC approval before completing a contract?

We do not yet know the details about what is to be covered by the new economic sanctions.  In the meantime, each Canadian company with business in Iran needs to identify the contracts with Iran and what goods will be delivered and to whom.  Canadian companies need to be ready to stop certain export transactions. Even though the transaction may not be prohibited under Canadian economic sanctions, the U.S. sanctions may apply.

Canadian Export Permits

Canada controls the export from Canada of goods and technology that originates in the United States.  As a general rule (and pursuant to item 5400 of the Export Control List), exporters from Canada must obtain an export permit from Global Affairs Canada for U.S. origin goods and technology.  ECL Item 5400 covers:

“All goods and technology of United States origin, unless they are included elsewhere in this List, whether in bond or cleared by the Canada Border Services Agency, other than goods or technology that have been further processed or manufactured outside the United States so as to result in a substantial change in value, form or use of the goods or technology or in the production of new goods or technology.”

Canadian companies who export goods and/or technology to Iran must obtain a Canadian Individual Export Permit for each shipment.  Global Affairs Canada will require a  copy of a U.S. export permit.  If sanctions cover the goods in question, it is unlikely the U.S. Administration will grant the export permit required by Global Affairs Canada.

There is an important clarification to the above rule.  Goods and technology that “have been further processed or manufactured outside the United States so as to result in a substantial change in value, form or use of the goods or in the production of new goods” are excluded from the controls is item 5400.  There is no written guidance on what “significant change” means.  While, as a rule of thumb, a “significant change” normally is normally around 50% of the regional value content in Canada, there are no rules for the calculation of regional value content in the context of Item 5400.  Other factors and considerations come into play.

When conducting the analysis, it is important to prepare a bill of materials for the finished product to be exported from Canada and identify which inputs are of U.S. origin. You will need to include the B3 customs documentation relating to the imports of the U.S. origin goods or the invoice received from a distributor or seller in Canada.  This is a starting point and the result can be influenced by the role of particular inputs in the finished product. For example, if the essential character of a finished product is derived from U.S origin goods, it can be that the finished good is controlled.

Canadian companies and trusts that sell Canadian manufactured goods to Iran will need to undertake a compliance review with respect to goods made from U.S. inputs and revisit their analysis.

Getting Paid

If the U.S. imposes economic sanctions on Iranian financial institutions, Canadian companies may find it more difficult to get paid.  Most business is conducted in United States dollars.  Many USD payments go through U.S.-based financial institutions.  If U.S. financial institutions cannot deal with certain Iranian banks, Canadian companies may run into difficulties getting paid too.

Canadian companies doing business with Iran should review the financial arrangements in contracts and restructure payment arrangements as needed.

Review Existing Lines of Credit and Loan Documentation

Canadian companies that do business with Iran should review all existing credit facility and loan agreements.  Many contracts contain representation and warranty provisions and covenants to comply with all laws, including U.S. economic sanctions laws.  Some agreements specify compliance with U.S. economic sanctions laws.  It is possible that a Canadian business will have to report certain business to their financial institutions under the credit facility and loan contracts and that activities relating to Iran would put those agreements in jeopardy.

If you require any assistance in conducting a risk assessment, please contact Cyndee Todgham Cherniak at 416-307-4168 or at Cyndee@LexSage.com or Heather Innes at 416-315-1234 or at Heather@LexSage.com.

 

 

Are Actors/Actresses/Performers/Directors Required to Register for GST/HST?

Posted in Canada's Federal Government, Cross-border trade, GST/HST

Canada is known as Hollywood North because many movies and television shows and commercials are filmed in Canada. However, unlike the United States, Canada has a federal sales tax called the goods and services tax (“GST”) and in some provinces harmonized sales tax (“HST”) is imposed.  GST/HST is exigible in respect of supplies of services (including the services of acting or directing or performing in a movie, video, television program/series, commercial, music video, acting in a theatre production or musical, etc.). GST is imposed in all provinces and territories at a rate of 5%.  HST is imposed in Ontario, Quebec (called QST), Nova Scotia, New Brunswick, Newfoundland/Labrador and Prince Edward Island at varying rates between 13%-15%.

An issue arises for non-resident actors, actresses, performers, directors, producers, etc. – Do they need to charge GST/HST on their services.  Non-resident actors, actresses, performers, directors, producers and others who work on sets in Canada earn fees for their services either directly as employment income or as an independent contractor or through a company.  Many actors, actresses, directors, etc. have companies that enter into a services contract with a services/production company that is producing a work in Canada.

When the actors, actresses, performers, directors, producers and others earn employment income (that is, they are an employee of the person who pays them for their services), GST/HST is not payable or collectible. The reason for this is that the definition of “commercial activity” excludes an office or employment.

The term “commercial activity” does include business activity and adventures or concerns in the nature of trade.  When the actors, actresses, directors, producers and others enter into a services contract (either as an independent contractor who contracts directly or through a services/production company), GST/HST may be collectible/remittable on top of the consideration payable for the acting/directing services.  In other words, an actor who provides services as an independent contractor or through a production company may be required to charge, collect and remit GST/HST.  The acting or directing services are considered to be taxable (from a GST/HST perspective, not necessarily income tax) supplies made in Canada.  Another issue is Canadian income tax – but we will not be addressing income tax and withholding tax in this post. It is important to know that the test for income tax is different than for GST/HST – they are different types of taxes.

Whether or not a specific contract is subject to GST/HST on the facts.  The most important question is whether the actor, actress, director, producer, etc. is “carrying on business in Canada” or carrying on business with Canadians.  If the actor, actress, director, producer, etc. is “carrying on business in Canada, the actor, actress, director, producer, etc. is required to register for GST/HST purposes and to charge, collect and remit to the Government of Canada GST/HST on the service fees charged in the contract (with respect to the fees earned in relation to activities in Canada).  If the actor, actress, director, producer, etc. earns a portion of the fees based on the success of the movie or work, a portion of that amount may also be subject to GST/HST.

Whether a person is “carrying on business” in Canada is a factual question that must be reviewed on a case-by-case basis.  At one end of the spectrum, an actor/actress/performer/director/producer comes to Canada one time for a few days to film a few scenes on location.  This person is not likely to be considered to be carrying on business in Canada.  At the other end of the spectrum, a person moves to Canada for a year or longer to film a television series or movie that is set in Canada or to perform in a long running theatre engagement in Canada.  This person is likely to be considered to be carrying on business in Canada.  The range of scenarios in the middle is endless – this is where further consideration of the facts is always necessary..

The starting point of the analysis as to whether a person is “carrying on business” in Canada is set out in Policy  P-051R (2005) “Carrying on business in Canada”, which is the Canada Revenue Agency’s (“CRA”) written administrative positions on the general subject of carrying on business in Canada.  There isn’t a specific policy for actors, actresses, directors, producers, etc.  Policy Statement P-051R has a number of examples.  Examples 18-21 deal with the provision of services in Canada by a company.  In most cases where an employee performs services in Canada, the CRA takes the position that the company is carrying on business in Canada.  Given the complexity of the factual analysis for actors, actresses, performers, directors and producers and the amount of money involved, it is important to ask the questions as the contract is being negotiated. Policy P-051R sets out a number of factors that the CRA will consider. However, no one factor is considered to be determinative.

The CRA issued a headquarters letter in 1999 (HQR0001927) in which it took the position that the following scenarios would be considered by the CRA to involve a performer carrying on business in Canada:

  • a non-resident performer who provides acting services in Canada during the making of thirteen episodes of a series for television; or
  • a non resident performer who provides acting services in Canada during the shooting of three specific films in one calendar year.

The CRA took the position that a non-resident performer who provides acting services in Canada during the shooting of a film may not be considered to be carrying on business in Canada.  That being said, more recently, the CRA has taken the position that a non-resident performer who provides acting services in Canada in connection with a single film was carrying on business in Canada based upon other relevant facts, including the fact that the film was produced by a Canadian incorporated entity (not a non-resident production company), the amount of remuneration earned for the acting services, the living arrangements of the performer while in Canada, and the length of time in Canada the performer would spend filming.

Most Canadian productions involve a Canadian company as the buyer of the acting, directing or producing services.  If that entity is registered for GST/HST purposes, it may recover GST/HST paid to actors, actresses, directors, producers, etc.  As a result, the entire production may be structured so that any GST/HST payable is a flow-through.  In other words, the actor’s company collects the GST/HST and remits it and the production company that pays the GST/HST gets in back.  Sometimes, it is better for companies of actors, actresses, directors and producers to register and collect the GST/HST rather than being audited by the CRA.

We have provided legal services to many actors, actresses and directors directly or through their Canadian agents or U.S. accountants.  We have to review the questions each time the actor, actress, director, producer, etc. comes to Canada for another movie, television series, guest appearance, theatre or musical performance, etc.  It is necessary to have GST/HST addressed within the services contract.

If you have any questions about GST/HST, please contact Cyndee Todgham Cherniak at 416-307-4168 or at Cyndee@LexSage.com.

 

The Canada Border Services Agency demands to be told of your prescriptions

Posted in Border Security, Canada's Federal Government, Customs Law, NEXUS, Personal Comments

Are Canadians, residents of Canada and visitors to Canada required to report prescription medications to the Canada Border Services Agency (“CBSA”)? The answer appears to be “YES”. The CBSA takes the position that you must declare all legally prescribed medications to them upon your return to or entry into Canada.  I am not kidding.  I have a client who lost his NEXUS card because legally prescribed medications were in his baggage.

The CBSA bases the requirement to declare prescription medications on a short statement written in an administrative policy D-Memo D19-9-2 “Importation and Exportation of Controlled Substances and Precursors“, Appendix “A”, which states:

“In accordance with the Section 56 Class Exemption for Travellers Who Are Importing or Exporting Prescription Drug Products Containing a Narcotic or Controlled Drug, individuals may import or export a controlled drug or narcotic if the following conditions are met:

  • The controlled drug or narcotic was obtained under a prescription and is contained in pharmacy or hospital dispensed packaging with appropriate labelling;
  • The individual is importing or exporting the controlled drug or narcotic for their own use, or for the use of a person for whom they are responsible and who is travelling with them, and when the controlled drug or narcotic meets the medical need(s) for which it has been prescribed;
  • The quantity imported or exported of the controlled drug or narcotic does not exceed the lesser of a single course of treatment or a 30-day supply based on the usual daily dose prescribed;
  • The controlled drug or narcotic must be in their possession at the time of entry or departure;
  • In the case of import the controlled drug or narcotic must be declared to a CBSA officer at the point of entry into Canada and at the time of import; and
  • In the case of export, the exportation of the controlled drug or narcotic must not contravene the laws and regulations of the country of destination.” (Emphasis added)

Yes, the CBSA takes the position that all travelers (Canadian citizens, Canadian residents, visitors to Canada) MUST declare all prescription medications (most prescription medications are controlled substances – you need the prescription to obtain the medications from the pharmacy) to a CBSA officer at the port of entry.  The CBSA takes the position that travelers MUST be aware of every statement they have written in a published policy statement.

What this means is that all travelers MUST go up to a CBSA officer and report their prescription medications.  You must have your written list of prescription medications ready for communication to a CBSA officer when you arrive in Canada/return to Canada.  If you do not have a complete and written list and you forget one medication, you can get into trouble with the CBSA (your declaration was not complete).  All senior citizens must report their legally prescribed medications.  Any woman who uses prescribed birth control must report this information to the CBSA.  Any man who has been prescribed viagra or erectile dysfunction or prostate medication must report this information to the CBSA.  Any person who is taking anxiety medications must report this information to the CBSA.  You see where I am going with this – most people will have to report prescription medications to the CBSA under their administrative position.

The reality is that travelers do not go up to the nearest CBSA officer and discuss their medications.  It would unnecessarily prolong the customs clearance process if every traveler was to report of a CBSA officer their prescription medications.

However, if a CBSA officer patrolling the Customs Clearance Area (at the baggage carousel) asks about prescription medications, the traveler is required by law to answer the question truthfully, completely, and honestly (another reason to have your list ready).  If a traveler is sent to the Secondary Inspection Area, the traveler is required by law to answer the question truthfully, completely, and honestly.  This has always been the case.

What is new and different is that the CBSA has taken the position that a traveler MUST report prescription medications without being asked.  The CBSA determined that my client contravened the Customs Act for failing to declare prescription medications without being asked.  The CBSA took away his NEXUS membership card because he did not go up to a CBSA officer and offer information about a minor prescription he obtained while outside Canada.  A secondary inspection was non-resultant but for the prescription medication that was within his declaration (the value reported) upon returning to Canada.  My client has filed an appeal (a request for decision of the Minister of Public Safety and Emergency Preparedness) and the Recourse Directorate has confirmed that every traveler MUST report all prescription medications upon entry to Canada even though the question is not on the E311 Declaration Card or asked by the NEXUS automated kiosk.  This rule would also apply at land border crossings and ports.

This might be something that Canada’s Privacy Commissioner will look into – what medications are prescribed to a person is often sensitive and embarrassing information.  What is important to know is that there isn’t a specific law in the Customs Act or the Food and Drugs Act (or regulations) that clearly require every traveler to report prescription medications).  Since the question is not asked on the E311 Declaration Card or included in automated kiosk questions, the requirement to report medications is not advertised by the CBSA.

If you require more information about Canada’s customs laws, please contact Cyndee Todgham Cherniak at 416-307-4168 or at cyndee@lexsage.com.  Other articles are posted on the LexSage website.

Canada’s New Formalized Process for AD/CVD Scope Rulings

Posted in Antidumping, Canada's Federal Government, Trade Remedies

There is a new/formalized antidumping (AD) and countervailing duty (CVD) procedure in Canada.  Importers may now request a formal AD/CVD Scope Ruling from the Canada Border Services Agency (“CBSA”).  Only the CBSA can make Scope Rulings relating to a Canadian International Trade Tribunal (“CITT”) AD/CVD Order.  Importers should consider filing a request for a Scope Ruling if they want a formal decision as to whether specific goods will be considered to be subject to an existing CITT AD/CVD Order.

Until recently, the CBSA had an informal process whereby an importer could obtain a confidential advance ruling as to whether certain goods would be considered by the CBSA to be subject to a CITT AD/CVD Order.  The Scope Ruling procedures were formalized in the 2017 Federal Budget and new sections 62-66 was added to the Special Import Measures Act (“SIMA”).  In Bill C-44 received Royal Assent on June 22, 2017. Sections 62- 66 of SIMA entered into force came into effect April 26, 2018.

On March 31, 2018, the Governor in Council published amendments to the Special Import Measures Regulations and the Canadian International Trade Tribunal Regulations in order to implement regulatory changes to enact the Scope Rulings Procedures.  The amendments to the Special Import Measures Regulations also entered into force came into effect April 26, 2018.

The new procedures are formalized and more transparent.  However, the new procedures also allow for opposition by the domestic industry, unions and competitors (where before the process was behind closed CBSA doors).  Previously, approvals were behind closed doors and unopposed.

What is a Scope Ruling?

A Scope Ruling is a binding ruling by the CBSA under section 66 of SIMA with respect to whether certain goods are subject goods under a CITT AD/CVD Order or undertaking.  In other words, it is a decision by the CBSA as to whether specific goods are goods subject to AD/CVD duties.

Who may request a Scope Ruling?

A Scope Ruling may be filed by any of the following interested persons:

  1. A person who is or who may become an importer of goods that are or could be subject to the applicable CITT AD/CVD Order or an Order of the Governor in Council;
  2. A person who is or who may become an exporter of goods that are or could be subject to the applicable CITT AD/CVD Order or an Order of the Governor in Council;
  3. A foreign producer of goods that are or could be subject to the applicable CITT AD/CVD Order or Order of the Governor in Council;
  4. A domestic producer of like goods in relation to goods that are subject to the applicable Order, finding or undertaking; or
  5. Any person, who in the opinion of the President of the CBSA has a substantial interest in the matter.

What is the Scope Ruling Process?

The process starts with an application for a Scope Ruling being made pursuant to new section 62 of the SIMA.  As stated above, any interested person may file an application for a Scope Ruling.  The President of the CBSA must decide within 30 days (can be extended to 45 days by the President of the CBSA) whether the application for a Scope Ruling should be accepted or rejected.  If the application for a Scope Ruling is rejected, the President of the CBSA must provide write reasons for the rejection.  If the application for a Scope Ruling is accepted, the President will initiate a Scope Ruling review.

If the President commences a Scope Ruling review, upon an application by an interested person or on his/her own initiative, the President must provide written notice to the applicant, any foreign government of the country of export of goods that are covered by the Scope Ruling review, the exporter, the importer and the domestic producers.

The Scope Ruling Review decision must be made by the President of the CBSA within 120 days (can be extended to 210 days by the President of the CBSA).  The President may terminate the Scope Ruling review after initiation.  The CBSA must notify the foreign government of the export country of the decision of termination.

What Must the Request for a Scope Ruling Include?

The Scope Ruling must include the following information in order to be considered to be complete:

  1. The name and civic address/or postal address) of the interested person/requestor;
  2. An indication as to how the requestor is an “interested person”;
  3. An identification of the applicable AD/CVD Order of the CITT or Order of the Governor in Council;
  4. An indication as to whether the goods subject to the request are of the same description as the goods subject to the applicable AD/CVD Order, finding or undertaking, including arguments that support the requestors position;
  5. A description of the goods subject to the request, including a description of their physical characteristics, their composition, their uses, their packaging (including any other goods contained in the packaging), technical specifications and trade name;
  6. The applicable H.S. tariff classification numbers for the goods that are the subject of the request;
  7. An indication as to whether the goods have been sold or consigned to an importer in Canada and whether those goods have been imported;
  8. The name and civic address of each importer;
  9. The name and civic address of each producer and exporter of the goods (if known);
  10. The name and civic address of each Canadian domestic producer of like goods and any association of those domestic producers (if known); and
  11. Any other relevant information.

If the basis for the Scope Ruling is that the goods originated in a subject country (covered by a CITT AD/CVD Order) or originate in a third country, the following information must also be provided:

  1. Identify the subject country or third country;
  2. A description of the goods at the time of export from the subject country;
  3. A description of the movement of the goods from the third country to Canada or from the subject country to a third country to Canada, including all transshipment points;
  4. A description of production activities that are undertaken in a subject country, third country and/or any intermediate country; and
  5. Any other relevant information.

For more information about what must be in a Scope Ruling Request, please refer to the new CBSA guidance entitled “Information relating to Scope Proceedings and Guidelines for Preparing an Application for a Scope Ruling“.

Reasons for Rejection of a Scope Ruling by the CBSA

The CBSA may reject any application for a Scope Ruling if the application is incomplete.  Further, the CBSA may reject any application for a Scope Ruling if the goods are subject of a separate Scope Ruling request.

In addition, the CBSA may reject an application for a Scope Ruling:

  1. The goods for which the ruling is applied have not been produced and at the day the application is received;
  2. The basis for which the ruling is applied is subject of a court proceeding, CITT appeal or a bi-national panel proceeding;
  3. If the Tribunal has amended its AD/CVD Order after a circumvention proceeding under section 75.3 of SIMA;
  4. A decision by the CITT or a Canadian court or bi-national panel applies in respect of the ruling requested; and
  5. If the President of the CBSA is of the opinion that the application for a Scope Ruling is frivolous, vexatious or made in bad faith.

Effect of Scope Ruling

A CBSA Scope Ruling decision would apply to determinations or re-determinations made under sections 55, 56, 57 and paragraphs 59(1)(a) and (e) of SIMA.  A Scope Ruling will be binding with respect to any decision or determination or re-determination of the CBSA or President of the CBSA.  In other words, if the Scope Ruling covers new goods, the CBSA must impose antidumping and/or countervailing duties on the goods and issue an assessment against the importer or record.

A Scope Ruling decision may also apply to an undertaking (which are not common in the Canadian trade remedies process).

The effect of a Scope Ruling may be retroactive going back two years – yes, on previously accounted goods going back 2 years.  For this reason, importers need to be very concerned and will have to factor this risk when pricing goods.  If the volume of imports were significant and the anti-dumping duties/countervailing duties rates are high, the re-determinations after a Scope Ruling could bankrupt an importer.

Appeal

Any interested person will be entitled to appeal a Scope Ruling made under section 66 of the SIMA.  A written appeal must be filed with the CITT (with a copy to the President of the CBSA) within 90 days after the Scope Ruling decision is made by the CBSA.  The CITT will have to publish rules for the conduct of Scope Ruling proceedings.  The CITT is granted the authority to make an order or finding as to the nature of the matter may require and declare what duty is payable or that no duty is payable on the goods that are the subject of the appeal.

The appeal decision of the CITT will be final and conclusive subject to a further appeal to the Federal Court.

Interim Review

The President of the CBSA may, pursuant to new section 67 of the SIMA, review a Scope Ruling after it is issued.

For more information about Canada’s antidumping and countervailing duty laws, please contact Cyndee Todgham Cherniak at 416-307-4168 or at cyndee@lexsage.com.  More information has been posted on the LexSage website.

Where Do Your Goods Originate?

Posted in Aerospace & Defence, Agriculture, Antidumping, Border Security, Buy America, Corporate Counsel, Cross-border deals, Cross-border trade, Customs Law, Exports, FCPA/Anti-Corruption, Government Procurement, Imports Restrictions, Legal Developments, origin, Trade Agreeements, Trade Remedies

Originally published by the Journal of Commerce in April 2018

The brewing trade war between the U.S. and China serves as a reminder to international traders that knowing where your goods are made and being able to prove it are two very different issues.  At a time when it remains common place for U.S. Customs to deny duty deferral benefits to American importers over the lack of adequate paperwork, companies would do well to again examine what they are doing and how they are documenting it.

Customs auditors have been open for many years that duty deferral programs are “low hanging fruit.” What they mean is lots of companies make those claims, but few have the documentation to back them up. Given the current climate, let’s start with the obvious context – free trade agreements (“FTA”).  It has never been enough to just rely on a certificate of origin from your supplier.  It has always been necessary for the importer to conduct a proper written analysis and make sure his products qualify, or not make the claim.  It has always been necessary to make sure that you track any sourcing changes and timely analyze their impact on your FTA qualification. It has also always been necessary to keep those records for five (5) years. Do you?

GSP is another duty deferral program where the lack of documentation routinely ends up with claims being denied.  The requirement to qualify is that the product and country both be designated as GSP eligible.  Then, at least 35% of the materials and labor must originate in the GSP eligible country.  What frequently trips up successful claims is there is a foreign raw material or component and it represents a significant portion of the overall value. In other words, the remaining labor and materials cannot meet the 35% requirement.  Put another way, because the raw material is foreign, the resulting good does not qualify, unless that foreign item undergoes double substantial transformation, and the intermediate product is itself something that is a commercial product.   Substantial transformation is the concept of taking a raw material, further processing it and ending up with a new and different article of commerce.  In the simplest terms, you take wood from Country A and cut it to size and shape in Country B. Once it is cut in Country B, it is ready to be assembled into a bookcase. In so doing, you have substantially transformed the wood into a bookcase, even if you import it into the U.S. unassembled.  If bookcases and Country B are both GSP eligible, that is great, except the wood has to go through the substantial transformation twice to be GSP eligible, and, in this example, it did not.

A circumstance where double substantial transformation is more likely is with steel.  We will assume the steel is made in Country A.  It is then formed, shaped and finished it into a cylinder out of which a lunch pail is made.  We will also assume the lunch pail (the intended end product) and Country B are GSP eligible.  What the importer needs to have in his records when Customs asks for it is evidence of the origin of the steel, where it is formed, shaped and finished into the cylinder, and then how that cylinder is further manufactured into the resulting lunch pail, and how that change confers Country B origin and so GSP eligibility on the lunch pail which exported to the U.S.  The importer will succeed only if he can document the first change – from raw steel into the cylinder shape – is substantial transformation, and then the second change – from cylinder into lunch pail – is the second substantial transformation. Additionally, the importer also has to be able to prove the 35% local content requirement is met, and the closer you are to 35%, the more closely our claims will be examined (and likely rejected). The cylinder itself is a product of its own, one from which lunch pails are made, so the requirement of it being a commercial product  should be clear, but importers would be nonetheless wise to have evidence of that fact in their records.  It has been our experience that importers do not have those details in their files and, in fact, typically rely on the supplier to provide information if it is requested.  All too often we have seen the supplier go out of business or the parties no longer do business together (perhaps over a billing dispute), and so the importer cannot document his claims, they are denied and the importer ends up paying the duty plus interest.

With the recent 232 tariffs, a number of international traders have started looking more closely at how their goods are classified.  They want to see if they properly belong in one of the assessed classifications. The legal obligation on importers is to exercise reasonable care.  This has been interpreted by Customs to mean at time of entry, the declarations made about value, classification and other admissibility factors should be correct. If you are relying on your broker and do not check their work, that is not reasonable care.  It is not required that each entry be audited, but a spot check at least should take place.   We frequently hear about importers whose broker or forwarder says, we did you a favor and saved you some money – by using a different classification  – not a good position with Customs is demanding proof of eligibility!

We should also be clear, this is not just an importer issue.  If you are an exporter and supply product to buyers, every time you change sourcing, an analysis of on-going qualification for a given, for example, FTA claim should be conducted.  It is equally troubling how often we hear – well, the product was made in the U.S., but what they really mean is it was purchased in the U.S. Where it is purchased is generally not relevant to whether it qualifies under a given duty deferral program.

Exporters, of course, also have compliance concerns when it comes to export license and economic sanctions issues. And again in this context, what analysis did you perform and how have you documented it?

It is true that many companies do not have their own compliance departments. Nonetheless, someone on the staff should be the resident expert on what is required to keep your products compliant, and that those decisions are properly documented.  It is always a significant loss to a company when it has to pay additional duties, or loses a customer because somebody overlooked a sourcing change!  When asked how he was doing, a former boss used to say – “Putting out fires!” Right now, there seems to be a lot of that going on unnecessarily!

As a starting point, here is a list of basic questions:

1)         What is the correct classification for your products? Who makes the classification decision and how it is documented? If you are relying on your broker (for imports) or forwarder (for exports) does your contract with your broker or forwarder make clear they have agreed to assume that responsibility and are liable if it is wrong? How are you making sure any classification assigned to your products is correct? Your service provider classifying your goods does not get you off the hook for any mistakes made with the enforcing agency, even if the service provider agreed by contract to assume the responsibility.

2)         What is the correct value for your products? Have you considered the typical additions to value? Assists, royalties, commissions, packing and subsequent proceeds? What is the INCOterm of sale on which we are selling or buying the goods? If you are entering the goods into the U.S., what documentation do you have of the actual amounts paid or to be paid for any deductions if the term of sale is other than FOB?  Is duty paid in the importing country based on the FOB or CIF value of the imported goods? Are you related to the other party with whom you are doing business? If so, how are you documenting the arms-length nature of the pricing between you?

3)         What other requirements apply to your goods? Are they only for the export of the goods? What more do you or your buyer need to import the goods at destination?

All too often international traders wait until a problem arises to figure out the requirements, or they rely on a service provider and while some of them are very good, honestly, some simply are in over their heads. So, even if you think your broker or forwarder is really good, you have to take reasonable steps to make sure they are giving you sound advice. Otherwise, you are the one who will pay the price when something goes wrong! Are you ready for that?

What We Have is a Failure to Communicate: Computer Programmers Should Not be Expected to Know Customs and Trade Compliance

Posted in AMPs, Corporate Counsel, Cross-border deals, Cross-border trade, Customs Law, Export Controls & Economic Sanctions, Exports, GST/HST, Imports Restrictions, origin, Sales Taxes, tariff classification, Tax, valuation

This is a common problem – too common.  The people in the company responsible for customs and trade compliance do not work closely with the computer programmers as software is being developed — and mistakes are made.  The computer programmer does his or her job in preparing the code, but does not have any knowledge of customs and trade law and cannot incorporate customs and trade compliance into the software. Without effective communication (a download) of customs and trade compliance rules, the computer programmer cannot make sure that the rules are being implemented and the correct information is bring communicated to the customs authorities and that the proper paperwork is being developed.  When there are omissions or mistakes, this can lead to significant assessments of customs duties and the imposition of penalties.  The reputation of the company may be at risk.

Common Scenario: A company outside Canada (e.g., the United States, but could be any where) sells goods to Canada (either direct B-to-C electronic sales (e-sales or Internet sales) to customers or B-to-B sales to Canadian distributors or Canadian retailers or Canadian manufacturers).  The company outside Canada hires a computer programmer to develop a fantastic computer program to receive the orders, print shipping documents, send information to customs brokers/freight forwarders, record the sales in the financial reports, monitor inventory, etc.  However, no one in the legal department or compliance department or finance department communicates to the computer programmer the customs and trade rules applicable to the business (e.g., the customs rules relating to origin).

Common mistakes we have seen:

  • Computer programmers are not told that shipping a good from one country (e.g., the United States) does not mean that the good is considered to be originating in that country (e.g., the United States).  As a result, the computer programmer creates a program to issue NAFTA certifications of origin for all goods shipped from the a United States warehouse when goods in the warehouse were not actually manufactured in the United States.
  • Computer programmers are not told that different goods must be identified separately on customs documents and the computer program write code so that the company computer that sends information to the customs broker only provides the total invoice price.
  • The computer programmer is not informed that the company will be the importer of record and that delivery will take place in Canada.  The computer programmer does not know that Canada imposes sales sales and charges federal GST/HST at different rates and provincial sales tax in some provinces. Sales taxes are not included on the invoice.
  • The computer programmer is not informed that the company will be the importer of record and the computer programmer writes code to put the value of a complimentary item at $0 rather than the cost of goods.
  • Different computer programmers write the code for the invoice generating software and the software to communicate with the customs broker. The customs broker uses a different currency (e.g., USD) than the currency used on the invoice (CDN$).  The computer programmer does not consider that prices would be anything other than USD.
  • The computer programmer is not informed that certain goods require export permits before they can be shipped and code is not prepared to flag potentially problematic transactions or trigger the application for the export permit. The goods are shipped without an export permit.
  • The computer programmers is not informed that certain goods require import permits before they can be shipped to certain countries and the computer program does not flag potentially problematic transactions or trigger the application for the permit. The goods are shipped without the import permit.
  • The Computer programmer is not informed that the exporting country (e.g., Canada) has imposed economic sanctions on certain persons from certain countries or certain goods and the computer program does not flag potentially illegal transactions. The goods are shipped.
  • The computer programmer is not informed of the Incoterm that is being used and the financial accounting software books the transaction on the date of entry into the database and not when the goods are delivered to the customer.

If you have not conducted a customs or trade compliance audit of your software, you may want to take a moment to do so.  If you have not asked “what information is our customs broker receiving and is is accurate”, it is time to investigate. If you have not asked whether the information your company provides the customs broker is correct with respect to origin, valuation, tariff classification, currency, description of goods, quantity of goods, etc., it is time to compare the invoices that are generated against the appropriate customs documentation. If you have not asked whether the computer program flags certain problematic transactions that are placed by Internet customers, you might want to input a transaction that should be flagged and see what happens.  If you have not asked when electronic transactions are booked in your financial records, you might want to investigate further.

We have worked with many clients (and their computer programmers) to prepare computer programs that communicate the correct information.  We have worked with clients to ensure that the computer program continues to accurately communicate information – adjustments are made when the law changes.  This is not something that you “set it and forget it”.  Computer programs need to be tested just like any other internal recordkeeping.  It is important to conduct internal reviews and external reviews (e.g., with the assistance of your customs broker or freight forwarded) to ensure that what you think is accurate information is being received and processed as true, accurate and complete information (and does not raise audit flags).  You might be surprised to find that computers play “broken telephone”.  We rely so much on computers, but do not take the steps to make sure that there are no “glitches”.

If you require customs compliance assistance or assistance in determining origin of goods, please contact Cyndee Todgham Cherniak at 416-307-4168 or at cyndee@lexsage.com.