Faster import clearance, duty savings, predictable costs, reduced regulatory oversight and a competitive advantage are all reasons to ensure that your business is compliant with international trade regulations. Canadian and U.S. trade laws are far reaching and pervasive. In addition, there are foreign laws that may apply to international transactions.
If you are an importer or exporter, you need a clear understanding of the rules that govern trade in your area. Here are a few of the legislative requirements and regulations you need to understand:
1. The Harmonized System of Tariff Classification
What it is:
Developed and maintained by the World Customs Organization, this multipurpose classification system is comprised of names or terms for goods used as the basis for customs tariffs and for the compilation of trade statistics. It is reviewed and updated periodically to clarify, add, or delete any confusing wording, as well as to incorporate new products entering the market place. The next amendment is scheduled for January, 2017
Why it’s important:
Not knowing the proper classification of imported goods may result in an error, leading to a chain reaction of errors on rate of duty, import and export controls, restricted goods, etc, resulting in hefty fines or delays at the border.
2. Transfer Pricing
What it is:
Transfer pricing refers to the pricing of contributions (assets, tangible and intangible, services and funds) transferred within an organization. For example, goods from a parent company may be sold to a foreign subsidiary, typical market mechanisms that would normally establish prices between third parties don’t exist. Therefore, the transfer price will affect the allocation of profit among the parts of the company. The value of your product impacts the duty and taxes calculated. Value is defined as all costs that go into getting your goods to its final destination, including price paid, associated costs and transportation. If a transfer price agreement is in place it could also impact the calculation of duties or refunds.
Why it’s important:
Customs valuation and transfer pricing have a lot in common but have competing interests. Customs and Tax authorities worry that multinational entities set transfer prices on cross border transactions to reduce taxation, making customs value a major tax compliance issue. Lack of attention to customs valuation methodologies exposes companies to audits, investigations and /or penalties. If duty calculated is less than it should be, penalties can result. In other cases, you may be paying more duty than you need to.
There are different rules developed for transfer pricing depending on the authority both attempting to reach arm’s length values. However, due to differing methodologies and standards, the transfer pricing value may not be suitable for customs value and vice versa. The one thing that is certain is that multinational companies need to comply with both Tax and Customs valuation rules.
3. Trade Agreements and the Specific Rules of Origin
What it is:
A free trade agreement is a treaty between two or more countries where commerce in goods and services can be conducted across common borders, without tariffs or hindrances. However, capital or labour may not move freely. Member countries usually impose a uniform tariff on trade with non-member countries. Free trade agreements offer duty relief for many imported goods and eligibility often relies on the specific rules of origin to determine whether goods meet the required transformation to benefit from duty free status. The most widely used free trade agreement is the North American Free Trade Agreement (NAFTA).
Why it’s important:
Trade agreements can offer significant cost savings in the form of reduced duty or even duty-free. It is important to note that importers must understand the legislative requirements and ensure the appropriate audit trails are in place when qualify goods for the benefits of the any agreement. Each agreement has a set of “Specific Rules of Origin: that must be adhered to while maintaining the proof of origin for those eligible goods.
To take advantage of the benefits of these agreements and avoid costly penalties, importers and exporters must ensure compliance with the applicable rules and regulations of the agreement.
4. The U.S. Food Safety Modernization Act
What it is:
The U.S. Food Safety Modernization Act (FSMA) was signed into effect in 2011 by President Obama and was created to improve America’s food supply while increasing safety.
Why it’s important:
FSMA requires importers to verify the safety of their food from suppliers with the Food & Drug Administration (FDA) by submitting documented preventive control programs with clear visibility into their supply chain. This verification from the FDA enables them to focus on preventing food safety problems rather than reacting to problems after they occur.
However, this means importers must be compliant with the FDA’s import regulations to ensure that their food products are able to cross the border.
5. Amends, Refunds, Duty Relief and Remission Orders
What they are:
The B2 Canada Customs Adjustment Request form is used to request a refund, reduce the amount of duty and/or tax payable, make a non-revenue correction, to pay additional duty and/or tax, or to file an appeal/dispute against a decision made by the Canada border Services Agency.
Duty Relief enables companies to import goods without having to pay customs duties at the time of import. Qualifying companies can import goods for subsequent export without having to pay the Canadian Customs duties as long as the goods are exported within four years from import.
All goods imported into Canada are subject to the provision of various legislative acts and regulations by which customs duties and taxes including the Goods and Services Tax/Harmonized Sales Tax (GST/HST) are assessed. However, there are situations where the Governor in council may remi all or a part of the customs duties. In order to qualify for this provision, an importer must complete a detailed application outlining the reasons for the request.
Why they’re important:
As outlined in the Customs Act, the importer is ultimately responsible for the goods they import into Canada. They are obligated to make corrections whether or not the corrections results in money owing to the CBSA, is revenue neutral or results in a refund to the claimant.
Taking advantage of your options for potential refunds, duty relief programs and remission orders can significantly lower your duty spend thereby reducing the cost to import products. Not doing so may place you at a competitive disadvantage.
6. Customs Compliance, Verification and Audit
What they are:
Compliance refers to conformity in satisfying official requirements of various customs services (in our case usually the U.S. or Canada). Verification is providing evidence that confirms the accuracy of your submissions to customs, and Audit refers to a formal examination of records and documents.
Why they’re important:
Compliance, Verification and Audit help to establish your importer profile, thereby facilitating the movement of your goods across borders.
All three processes provide for security, along with the proper collection of duties, taxes, and correct application of preferential duty tariffs so governments can protect selected industries. For the importer, these processes prevent supply chain bottlenecks, costly production downtime, or errors which may result in expensive penalties.
7. Export Controls and Documentation
What it is:
There are many controls in place for exporting. Specific commodities such as softwood lumber, firearms and peanut butter are controlled and require a special permit. There could be the situation where the destination country may require an export permit.
Why it’s important:
You must understand whether the product and the destination of that product are controlled, regulated or prohibited and whether a permit is required to proceed with the export.
In Canada, exporters are subject to the same rules and regulations as importers in regard to penalties. If you are operating as a Non-Resident Importer, you would also be subject to US CBP penalties for any situation involving fraud, negligence and gross negligence.
Your company should take the appropriate steps to ensure compliance with Canada’s export laws and implement an internal export compliance program, have documented record keeping policies, have an internal audit procedure, and work closely with both your Customs Broker and Freight Forwarder.
Finally, never assume the steps you took six months ago for an export are the same steps you should take today – regularly review regulations!
8. Non-Resident Importing into the U.S. or Canada
What it is:
A Non-Resident Importer (NRI) is an individual or company who, depending on where they are importing, does not have residence in the U.S. or Canada and elects to act as their own Importer of Record for imported shipments.
Why it’s important:
Becoming an NRI allows you to have complete control over your shipment throughout the importing process. It also allows you to compete directly with larger businesses using pricing advantages like ‘landed costs’ while removing stress from your clients, since they no longer have to deal with paperwork or customs issues.
However, this means that you are now responsible for all custom compliance with each government agency and are also subject to audits.
9. The Regulations of U.S. Participating Government Agencies (PGA’s) or Canadian Other Government Departments (OGD’s) that oversee your specific commodities
What it is:
Participating Government Agencies (PGA’s) or Other Government Departments (OGD’s) are branches of government whose sole area of responsibility, unlike that of CBP (U.S.) or CBSA (Canada), is not the movement of goods and people across borders. Nevertheless, these PGA’s or OGD’s can influence trade.
In the U.S. PGA’s include: the Department of Agriculture (USDA), Food and Drug Administration (FDA), and the Bureau of Alcohol Tobacco and Firearms (ATF). In Canada, Other Government Department’s include: the Canadian Food Inspection Agency (CFIA), Transport Canada and Natural Resources Canada.
Why it’s important:
Each of these PGA’s or OGD’s often have rules or regulations which must be adhered to when importing goods, and adherence to their rules is important, as they can influence both the level and speed of international trade.
10. The Courier Low Value Shipment Program (CLVS)
What it is:
The Courier/LVS program is a special program that streamlines the reporting, release and accounting procedures for certain goods valued at less than $2,500 and are imported by approved couriers.
Why it’s important:
Importers that use this program take advantage of an expedited border clearance process, getting their goods to their destination faster.
If you are shipping goods valued at less than $2,500 and meet other specific criteria, you may qualify for the LVS program.
Failure to understand and comply with these 10 trade requirements, even without intent, can lead to fines, audits, seizures, inspections, investigations, and possibly imprisonment. These regulations have been established by national governments for setting rates of duty and to fulfill the requirements of international trade agreements.
