CBSA Valuation Verifications Target Apparel Imports

The Canada Border Services Agency ("CBSA") publishes a list of its active trade compliance verification priorities twice a year, outlining the industries or goods that it is prioritizing for compliance verification. This year the Canadian Apparel industry has been targeted, and has been issued a spate of Trade Compliance Notification Letters. The five most critical things that Apparel importers need to know before responding to these Notification letters are as follows.

First, the Trade Compliance initiatives can include general compliance audits, but can also be more specialized, and include "valuation" verifications (seeking to confirm whether proper values were used when importing goods to Canada), "tariff classification" (seeking to confirm proper coding and identification of the goods imported), and "origin" (seeking to confirm where the goods were manufactured for purposes of possible beneficial tariff treatment, e.g., NAFTA). While the Canadian Apparel industry has been targeted for “valuation”, that does not mean that obvious errors in tariff classification or orgin will be overlooked, and these valuation verifications can often morph into full blown compliance audits. Where errors are found, financial exposures can be high, as many apparel goods can have duties as high as 18% -- and these duties quickly add up.

Second, Valuation Verifications by CBSA will usually start with a Trade Compliance Notification Letter from CBSA, alerting the importer that it has been selected by the CBSA for Trade Compliance Verification. While the stated objective is to "ensure compliance with customs accounting obligations", and start as a "desk verification", rest assured it can be expected that the desk verification will transform into an on-site verification - which is essentially a full blown customs audit.

Third, "Valuation Questionnaires" or "System Questionnaires" are typically sought at the advanced stage of the "desk verification". Importers need to understand that the information sought in these Questionnaires is often one-sided in nature, and usually aimed at trying to determine if the duties paid in respect of the goods should be higher than what was originally declared. Accordingly, the information that is provided in these Questionnaires is in error or inaccurate (because, for example, the intricacies of the question were not fully appreciated, or the words and phrases used – “assists”, “subsequent proceeds” – not fully understood), the importer's financial position can often be detrimentally (and irrevocably) impacted.

Fourth, following the initial verification, CBSA will typically provide the importer with an “Interim Verification Report”, and a period for providing submissions. The problem at this point is that while CBSA will always listen with an open mind, the CBSA’s position on key points may already have been solidified, leading to a quick finalization of the audit, and the issuance of a Final Verification Report, and Detailed Adjustment Statement, providing for the actual assessment of additional duties, interest, and administrative monetary penalties (AMPs) owing.

Lastly, and perhaps most critically, importers often fail to understand that even though an audit may be for a fairly limited window (e.g., Calendar Year 2012), CBSA will expect the importers to extrapolate the CBSA’s negative findings, and make voluntary corrections to all import entries for the prior 4 years. If the importer fails to carry out those changes – and pay the consequent additional duties – punitive penalties are assessed, and CBSA makes those changes themselves.

The bottom line here?

When an importer receives a Trade Compliance Notification Letter from CBSA, the importer really needs to get the ball rolling, and contact a Customs Lawyer for assistance. Even a small amount paid for an initial consultation and advice on how to respond to the Valuation Questionnaire or the Systems Questionnaire can save an importer a significant amount of exposure.

It is thus common for non-resident importers to retain Customs Counsel to assist with all facets of the Verifications, including presence at on-site Verifications. The reason? CBSA Verifications are not designed to be an afternoon tea party; they are an adversarial process.  And as pleasant as CBSA representatives will be (and in my experience, CSBA has some of the best audit staff out there both inter-personally, and technically) they also have a job to do.  And that job that is usually diametrically opposed to the interests of the importer!