R&D Payments to Foreign Suppliers Subject to Customs Duties

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R&D Payments to Foreign Suppliers Subject to Customs Duties

A Canadian International Trade Tribunal (CITT) ruling earlier this year means that Canadian companies must add payments for design and development to the declared customs value of imported goods under certain circumstances.

Recent Decision is a Game Changer

The decision in Skechers USA Canada Inc. v The President of the Canada Border Services Agency (2013), AP-2012-073 (CITT) arose out of an appeal against the CBSA’s determination that the R&D fees the shoe company paid to its American affiliate should be apportioned among the goods it purchased from that affiliate and imported into Canada.

Skechers bought the shoes at an invoice amount that incorporated the US entity’s cost to purchase them from an overseas manufacturer, transport and storage costs, and an arms-length profit. It also included some money for prototypes of the imported shoes.

Meanwhile, under a cost-sharing agreement (CSA), the Canadian unit made payments to its American counterpart towards expenditures on general R&D and the design and development of various shoe models. Since only about 10% of the developed models were ultimately produced, and only about a third of those were shipped to Canada, the vast majority of the CSA payments were not reflected in the invoice price. However, those payments actually depended on the number of pairs of shoes imported into and sold in Canada, because they were set according to the operating profit of the Canadian company.

The CITT applied the transaction value method of valuation and upheld the CBSA’s contention that the CSA payments were part of the “price paid or payable” for the imported footwear as defined in Subsection 45(1) of the Customs Act because they were clearly made “in respect of the goods”.

Skechers argues to no avail

Although Skechers argued that the payments went towards brand development and other intangibles, not the imported shoes themselves, the tribunal noted a seamless pathway leading from R&D and design to production of the specific shoe models that were eventually purchased and imported. It also found it significant that the method for calculating the payments meant that they would increase or decrease according to the volume of footwear actually imported. Because the payments were “directly aimed” at developing the imported models and “directly linked” to the import volume, they constituted part of the “price paid” under the Customs Act.

Following the CITT ruling, Canadian companies should regard any R&D payments to a foreign supplier which are linked to sales and/or imports as being part of the customs value of goods purchased from that supplier. While it would be possible to avoid adding such payments to the customs value by showing that they were not made “in respect of” those goods, it must be remembered that the burden of proving this is on the importer.

These considerations make it more important than ever for proper customs planning to take its place alongside tax and logistics planning when developing supply chain strategy. That seems to be especially true for transactions between related companies, but buying directly from an overseas manufacturer could also bring customs complications if any “assists” are involved. Advice from a customs broker familiar with CBSA policies and recent CITT rulings can ensure customs compliance and maximize supply chain efficiency, and is highly recommended in the prevailing atmosphere of aggressive CBSA enforcement.