FCA Upholds Landmark Customs Valuation Case

In Skechers USA Canada Inc. v. Canada (Border Services Agency) (2015 FCA 58), the FCA considered a Canadian International Trade Tribunal (CITT) decision that applied a broad interpretation of “price paid or payable” for Customs Act valuation purposes, resulting in a significantly higher value for duty for the imported footwear at issue. The case has far-reaching implications for all Canadian goods, especially apparel and footwear items.

One of the central factors in calculating applicable customs duties is the valuation of the imported goods. Section 47(1) of the Customs Act deems the primary basis for the appraisal of goods for valuation purposes to be the transaction value of the goods. Section 48(4) requires that the transaction value be determined by “ascertaining the price paid or payable for the goods when the goods are sold for export to Canada.” Section 45(1) defines “price paid or payable” as “the aggregate of all payments made or to be made, directly or indirectly, in respect of the goods by the purchaser to or for the benefit of the vendor.” Accordingly, the value for duty of goods would generally be expected to include all payments made by the vendor to the purchaser in respect of the goods.

The breadth of that statement was the precise issue in Skechers; the FCA was required to determine whether CITT erred in concluding that various charges for research and development under a cost-sharing agreement between importer and vendor were includible in the value for duty of the goods.

Skechers Canada purchased the footwear from Skechers USA. In calculating value for duty, Skechers Canada included the factory price paid by Skechers USA to manufacturers, the cost of shipping the goods to the Untied States, the cost of warehousing them in Skechers USA’s distribution centre, and an arm’s-length profit. Skechers Canada excluded payments that it made to Skechers USA for design and R & D from value for duty. The CBSA audited Skechers Canada and took the position that the R & D payments were to be included in the price paid or payable, thus increasing the value for duty and ultimately the duties payable.

On the appeal from Skechers Canada, CITT concluded that the CBSA was correct in its view that the R & D payments, in their entirety, were “in respect of” the goods in issue and accordingly must be included in value for duty. Skechers Canada then appealed to the FCA.

The FCA began with the applicable standard of review (that is, the basis on which the FCA was actually able to overturn a decision of CITT). The court found that the applicable standard of review was reasonableness, and that therefore the FCA could allow the appeal only if it found CITT’s decision to be outside the range of possible acceptable outcomes defensible in respect of the facts and the law.

In considering the substance of the appeal before it, and without any reservation, the FCA dismissed Skechers Canada’s appeal and concluded that CITT’s decision was reasonable. Specifically, the FCA found that CITT’s conclusion that there was a sufficient link between the R & D payments and the imported goods, such that the payments were “in respect of” the imported goods was reasonable—essentially accepting CITT’s analysis on these points.

Importers need to understand the ambit of the phrase “price paid or payable,” and they should begin to adjust their value for duty for imported goods to account for it. The CBSA can be expected to review transfer-pricing agreements for dutiable inclusions in the “price paid or payable” for the goods. Accordingly, it will also be important for importers to obtain customs advice during the transfer-pricing process. Failure to recognize this need could result in unintended customs duties consequences.

Rob Kreklewetz and Bryan Horrigan
Millar Kreklewetz LLP, Toronto
rgk@taxandtradelaw.com
bh@taxandtradelaw.com

Canadian Tax Focus
Volume 5, Number 2, May 2015
©2015, Canadian Tax Foundation