Lawyer’s Blog

NAFTA Evidentiary Burden

Mon, 30 Dec 2019 13:23:28 -0500

As is the case with most free trade agreements, importers simply claim preferential tariff eligibility at the time of import. This claim can later be subject to verification by the customs administration in view of determining if it was valid. Proving preferential tariff entitlement requires assembling and presenting relevant facts and documents that support the claim. But just how much evidence is necessary in order to discharge that burden? In Canada there has always been a disconnect between what the Canada Border Services Agency (CBSA) deems necessary in the course of an origin verification and what the courts find satisfactory in the course of a judicial review. What follows are certain illustrations of that disconnect and how it usually gets resolved by Canadian courts.
Although Canada is a signatory to many free trade agreements, the North American Free Trade Agreement (NAFTA) is by far the most popular and widely used given the amount of trade that takes place between the United States of America (USA) and Canada. For this reason, we drafted our comments with the NAFTA rules of origin in mind. That said, most of the other free trade agreements work in a similar fashion and our remarks would equally apply as concerns them. We should also mention that, at the request of the USA, the NAFTA was recently renegotiated by the parties. Although a new agreement was reached, it hasn’t gone through the ratification process by the respective legislatures at the time of writing this article and thus our comments relate to the text currently in force as of October 31, 2019.
The burden of proof in NAFTA claims
At the risk of sounding too simplistic, importers and exporters need only prove that which is necessary in order to demonstrate eligibility, not all that the customs administration may find interesting to collect in the context of verifications. CBSA has a habit of asking for the exact same things in every origin verification they undertake regardless of how goods are said to qualify: they always ask for producer records, costed bills of material, sources supply for the materials, etc. At times, most of this information is unnecessary to demonstrate preferential tariff entitlement.
One such example can be found in the DeRonde case (CITT, AP-2011-014). In 2009 the CBSA decided to conduct a NAFTA origin verification of new truck tires that had been exported to Canada by DeRonde Tire Supply Inc, a US-based tire supplier. The US exporter had certified the tires were originating under NAFTA and provided Certificates of Origin to the Canadian importers who made claims of NAFTA preferential tariffs at the time of clearance. CBSA had asked for copies of bills of materials, costed sheets, a listing of all suppliers of materials, even affidavits from the tire producers substantiating the origin of the tires. DeRonde explained that they had made claims of NAFTA eligibility based on their own “knowledge” that the goods qualified, a valid basis that NAFTA specifically allows. However, CBSA denied the NAFTA preferential tariff entitlement for having failed to present all records they had requested. Ultimately the Canadian International Trade Tribunal (CITT) decided in favour of DeRonde. It was satisfied with the case that had been presented, namely that the actual North American plant where the tires had been produced happen to be identified in the marking engraved in the tire itself; this marking was a requirement of the US Department of transportation. To the satisfaction of the Tribunal a valid demonstration had been made of production occurring entirely in North America, a requirement of the NAFTA. DeRonde further made the demonstration, via expert witness, that even assuming the non-originating status of all materials that go into the manufacture of a tire, all such material would undergo the specific tariff shift rule specified in Schedule 1 of the NAFTA Rules of Origin Regulations. But more importantly, the Tribunal was satisfied that DeRonde had discharged its burden of proof and demonstrated on balance of probability that the tires originated under NAFTA and were entitled to the preferential tariffs.
Other eligibility considerations
Over and above the alleged failure of DeRonde to provide sufficient records supporting NAFTA origin qualification, CBSA also attacked said qualification with a myriad of other allegations: the tires had potentially been comingled with other non-originating tires while in inventory, the Certificate of origin prepared at the time was invalid because it indicated that the tires had been produced only with originating materials (a false declaration in the eyes of CBSA), photographs of the tire markings that were introduced in evidence left a doubt as to whether they depicted the actual tires that had been imported at the time. All such allegations, while they could hypothetically be true, were made absent any concrete evidence or even indication they might be true. On the contrary, witness testimony during trial was all it took for the Tribunal to rule them out. Believable statements made by credible witnesses were sufficient to convince the Tribunal.
In a more recent case, Maples Industries, Inc. v President of the Canada Border Services Agency (CITT, AP-2014-009), the rules of tariff classification were used to reject the application of a lesser-known NAFTA rule of origin: intermediate materials. Maples Industries was a US-based producer of carpets. It had certified the NAFTA eligibility of carpets it had exported to Canada. CBSA informed them that a NAFTA verification would be conducted at their facility to validate the claim.
As allowed by NAFTA, Maples elected to choose a self-produced material to be substituted for the actual non-originating materials it had sourced from foreign suppliers in order to show that the Schedule 1 specific rule of origin had been met. This rule described a tariff-shift requirement only, from a raw material tariff classification to a finished carpet tariff classification. Self-produced materials are those that are made by the producer at an intermediate stage of the production cycle, before the finished product is created. CBSA took the position that the self-produced material (a tufted fabric) had the essential character of the finished good (a carpet), hence there was no tariff shift at all, a proposition that Maples disputed. The Tribunal rejected CBSA’s argument after a careful examination of the rules of tariff classification applicable to the intermediate material. This appears to be a new trend and is clearly an indication to the trade that CBSA will use all of the tools at their disposal to attempt to deny NAFTA origin.
Last, let’s mention an older decision that set an important precedent in NAFTA origin justification, that of MRP Retail Inc. v President of the Canada Border Services Agency (CITT, AP-2006-005). This case illustrates the point that a Certificate of origin cannot easily be rendered void to deny NAFTA tariff preference eligibility. The facts are as follows: MRP retail was a Canadian importer of clothing. It had purchased T-shirts from California Sunshine, a California-based clothing company. California Sunshine had cut to shape the various components of the T-shirts, which were then sent to Mexico for sewing, returned to the USA for printing, and then sold and shipped to MRP in Canada.
CBSA had once again alluded to many defects of origin, in particular with respect to the NAFTA Certificate of Origin that had been presented, to deny preferential tariff entitlement. It had stated namely that the Certificate erroneously identified California Sunshine as the “Producer” of the T-shirts when part of the production actually took place in Mexico and had been performed by a Mexican sewer. It had also stated that the field “Blanket period” had been left blank, preventing the connection of the Certificate with the period of importation under review.
The Tribunal made two very important clarifications: the first is that a producer can outsource some of the work as long as it commissions and directs the entire manufacturing process at all times; the second is that, although the Proof of Origin of Imported Goods Regulation requires the existence of a certificate of origin as a prerequisite to NAFTA preferential tariff entitlement, the form itself was never prescribed by the regulations and thus cannot be so easily rejected for certain defects of completion. In the words of the Tribunal, even if California Sunshine had not been the producer, the requirement to present a valid Certificate would have nonetheless been satisfied. The same goes for the absence of dates in the blanket period field.
The Bottom Line
Although the courts have signaled in a very clear way that NAFTA origin and preferential tariff eligibility is something that is demonstrated on balance of probability, CBSA persists in expecting a much higher evidentiary burden. Canadian authorities still wish to question every possible theory of non-eligibility and expect to receive proof beyond a reasonable doubt before ruling out their assumptions. What’s more, NAFTA verification procedures today still expect the same degree of detail and a panoply of documents in order to proceed with the origin analysis and serve as a prerequisite for any determination of eligibility.
In light of the clear disconnect between the authorities’ expectations and the Tribunal’s views, we anticipate many more cases will be brought for judicial review in order to confirm free trade entitlements. Those who are confronted with a NAFTA denial should take the above comments into consideration.

Is GPT dead? A reflexion following the ContainerWest Manufacturing decision of the CITT

Tue, 1 Sep 2015 13:55:36 -0400

After reading the recently rendered Canadian International Trade Tribunal (CITT) decision in ContainerWest Manufacturing Ltd. v. President of the CBSA (AP-2014-025), setting aside for a moment the apparent insatiable appetite of Canadian authorities for supplementary duty collection in response to generally falling tariff rates and revenues derived therefrom, it was a true surprise to learn that one of its agencies regularly bends the rules when it’s convenient to do so in the administration of the Canadian tariff.
Quickly, the issue in this case revolved around the incapacity of an importer to provide what is called a through bill of lading for containers it had imported into Canada directly from China and thus entitle them to GPT preferential tariffs. According to the Canada Border Services Agency (CBSA), only a through bill of lading would justify such entitlement “according to the law”. Apparently the underlying reason for this is that it would be too onerous and costly a burden on the agency to administer and police this tariff otherwise. But what about the burden and costly pursuit of duty collection against ContainerWest all the way to the court might you ask? Let’s just say that economy of taxpayers’ money is an argument too often used when it’s convenient for the tax collector.

Getting back to our case summary, ContainerWest was told that without through bills of lading they would lose GPT entitlements and pay supplementary tariffs on past imports that were unequivocally destined for Canada, a fact undisputed by CBSA by the way. But what was really troublesome to learn in this case was that CBSA has a secret administrative policy of waving the through bill of lading requirement for another tariff, the Most Favoured Nation (MFN).

In other words, when the time comes to collect duties from importers who don’t obey the strict letter of the law for GPT tariffs, the Agency sees no moral problem pulling obscure quotations from legal books of statutory interpretation. But when that same law would create an embarrassment in failing to grant MFN treatment to our WTO trading partners, CBSA has no hesitation tossing aside the law in one secret administrative policy swoop. How convenient.

Surely CBSA could have extended the same courtesy to ContainerWest but chose not to. Why? Did we already mention a certain insatiable appetite somewhere else in this text? The CITT noted this apparent injustice and made similar remarks, perhaps with more subtlety. But the fact remains: GPT preferences are subject to a higher standard of law obedience it seems than the MFN tariff, in the Agency’s view.

And so we learn it is ok for CBSA to “bend” the rules but not when it would serve to benefit the importers. The bottom line? Well, those who are counting on their GPT entitlements to save a few dollars should be pulling drawers and look to see if they are hiding supplementary duty collection risks. Count on the Agency to celebrate their recent court win and get some return on investment. But why don’t importers finally get together and voice their common interest in making GPT a friendlier tariff? Some might even say keep it alive. After all, our dear government took a first hit at that preferential tariff earlier this year when it revoked entitlement to 72 previously eligible countries no less. Now chasing after specific transportation documents seems to serve as their latest attempt to kill the GPT. If that’s the case, why not get rid of it altogether?

Swiveling between home and the office: A case for the common swivel chair

Thu, 15 Jan 2015 13:45:21 -0500

Swivel chairs have been around for centuries. Some even say Thomas Jefferson sat on one while preparing the Declaration of Independence. And so this may come as a surprise but confirming which tariff applies to them when imported into Canada has only been settled just recently. For more than two years IKEA tried to convince the Canada Border Services Agency that their swiveling work chairs should not be viewed as domestic furniture. In customs tariff lingo, “domestic” means “not for commercial use”. Why would anyone insist for so long on being right over what seems to be a trivial question of semantic? Well it’s worth noting that while swivel chairs meant to be used in a business environment are entitled to duty free import into Canada, an 8% tariff would apply if they are meant to be used in a home office. Make sense? Let’s leave the answer for the conclusion. But for now, guess which tariff IKEA was told applied to its swivel chair?
For many importers the simple answer might have been to conceal the 8% tariff in the retail price and charge more to Canadian consumers, a familiar occurrence in the Canadian retail landscape. Well, hiking retail prices was not going to be the answer for this retailer: IKEA decided to fight back!
Domesticating the work chair: Intention is all that matters
The battle ultimately ended up in court in Ottawa in June of 2014 (IKEA Supply AG v. President of the Canada Border Services Agency, CITT AP-2013-053). The Canadian International Trade Tribunal heard from an IKEA witness who reiterated the point that had been made all along: swivel chairs are anything but “domestic” furniture by their very own nature. In fact they are just the opposite. Height-adjustable swivel chairs are ubiquitous objects found in most workplaces. Granted some people might use one in their home office, but there is nothing inherently domestic about this kind of chair.
The Tribunal agreed. It accepted the notion that a work chair like the swivel chair in question was not furniture of a kind normally intended for home use. As it turns out determining whether or not a swivel chair should be treated as domestic furniture happens to be a question of intention, nothing more. And who best to reveal how furniture was intended to be used than the furniture designer? This one actually took the stand. Now normally intention is something that can easily be confirmed: simply by asking. But simply stating that intention was not going to be enough in this case, it would have to be justified a number of ways: by looking at how the chair was constructed, how it was advertised and priced, examining competing products in the market place, etc. Upon looking at the evidence the Tribunal agreed without hesitation that this swivel chair, one that is commonly found in workplaces everywhere, was not meant to serve domestic purposes primarily.
And so there will not be an 8% tariff applied to IKEA’s swivel chair after all. But can other furniture companies count on this favorable precedent for their own imports? What if the precise intention of the furniture designer happens to be unknown? Furniture wholesalers who ignore that intention or who are simply indifferent to it might be at a disadvantage and still be caught with an 8% tariff. Only time will tell but we suspect other similar disputes will find their way to the Tribunal again in the future.
Should tariffs discriminate against home furniture buyers?
In the United States, home furniture buyers are not discriminated against; Canada is unique in that it subjects home furniture to import tariffs while commercial furniture is exempt. But it’s up to anyone’s guess what furniture should be considered primarily as domestic versus commercial. Before delving into a debate of intention, it’s fair to ask what furniture would normally be found in homes as opposed to commercial establishments. In today’s world it’s not infrequent to see home interior designs looking more and more like commercial spaces and vice versa. The line between domestic and commercial furniture is increasingly becoming blurred. Does it make sense for Canada to keep imposing that kind of distinction in respect of most furniture? It certainly appears questionable to impose it on articles primarily intended for public workplaces, such as swivel chairs.
Tariffs serve two main purposes: afford some level of protection to a local domestic industry against imports and provide revenue to governments. From the latter point of view, tariffs collected on all imports contribute less than 2% in total to the Canadian consolidated revenue annually and so one might wonder how much enthusiasm and persistence should be directed at furniture tariffs, who only account for a fraction of that small percentage anyway. As for affording protection to the local furniture industry, we should question whether making a distinction between domestic use and commercial use is the right approach we should have, or continue to have, from a Canadian tariff policy perspective.