The Impact of Transfer Price Adjustments on the Value for Duty

Does your organization make downward or upward adjustments to its transfer prices? Does it also act as the Importer of Record on imports into Canada? If the answer to both questions is “yes,” then a thorough review of your organization’s Canadian trade compliance might be warranted.

Trade compliance refers to meeting all the requirements governing the movement of commercial goods into and out of Canada by importers and exporters. To be trade compliant, an organization must ensure that the tariff classification, origin, and valuation of goods are all accurately declared in accordance with the legislative requirements and that the appropriate duties and taxes are paid. However, those requirements are only part of the picture. 

In Canada, there is a clear obligation under the Customs Act (the “Act”) to provide true, accurate, and complete trade information, including a proper description of the goods. There is also a requirement to correct any wrong information, regardless of the dutiable status of the goods.

In accordance with this requirement, changes to an organization’s transfer pricing can necessitate a corresponding adjustment to the values declared on import records. The Canada Border Services Agency (CBSA) addresses this issue in Customs Memorandum D13-4-5, which outlines the impact of transfer pricing agreements and subsequent adjustments on the value for duty and an importer’s obligations to report any adjustments to a transfer price.

Transfer Pricing Adjustments

The CBSA will generally accept a transfer price established through an advance pricing agreement (APA) as the price paid or payable for imported goods and the basis of the value for duty. Provided the APA is in writing and is in effect at the time of import, the CBSA will consider the transfer price to be the “uninfluenced” (i.e., acceptable) price of the goods. However, the CBSA may also require a correction to the value for duty if adjustments are subsequently made to a transfer price. 

Transfer pricing adjustments may be made for several reasons, one of the most common being a compensating adjustment, where the conditions of the APA require the actual transfer price to be modified periodically. These adjustments may be upward or downward and can occur during a year, at year-end, or after the end of a year, depending on the circumstances and the terms of the agreement. Compensating adjustments are often evidenced by debit or credit notes issued by the importer to its supplier after the fact. These adjustments must be declared to the CBSA.

Corrections to Value for Duty

Corrections to import declarations are typically made through a self-adjustment process that is activated when the importer has “reason to believe” that a declaration of origin, tariff classification, or value for duty was incorrect. Customs Memorandum D11-6-6 provides further discussion on the CBSA’s definition of “reason to believe.” Based on this definition, the current position is that “Corrections to the declared value for duty must be submitted […] when the net total of upward and downward transfer price adjustments occurring in a fiscal period is identified.” Furthermore, the CBSA has indicated that it “[…] is at that moment that an importer has specific information giving reason to believe that corrections to declarations of value for duty are necessary.” As a result, the timing of corrections can be critical to avoiding customs duty disputes and penalties. 

Indeed, section 32.2 of the Act places the responsibility on the importer to make a correction to an accounting declaration of origin, tariff classification, or value for duty when the importer has “reason to believe” that the declaration was incorrect. This obligation applies to both corrections that result in amounts payable to the CBSA and those that are revenue neutral. Furthermore, the requirement to report an upward price adjustment also applies to importers in cases where the imported goods are not subject to duty. The importer has 90 days to make the required corrections and the 90-day period starts on the date that the importer has, or was considered to have had, specific information that a declaration was incorrect. 

For example, the date of a vendor’s supplemental invoice showing a price increase for previously imported goods would generally be regarded by the CBSA as the day on which the importer has specific information that a correction is required. Similarly, the date on which an importer accounts for any assistance provided to its vendor prior to the production of imported goods would normally trigger the start of the 90-day period. The obligation to make a correction lasts until four years after the goods are accounted for under the Act.

Corrections to value for duty are generally reported on a net total basis for a fiscal period. In Memorandum D13-4-5, the CBSA provides the following example of an importer’s net total upward adjustment:

     The transfer price of goods purchased by a Canadian subsidiary from its foreign parent in a fiscal period was adjusted as follows:

(a) January to March (Q1), upward adjustment of $10,000 (payment from the Canadian importer to the foreign parent company);

(b) April to June (Q2), upward adjustment of $20,000;

(c) July to September (Q3), downward adjustment of $10,000 (credit note received from the parent company);

(d) October to December (Q4), upward adjustment of $30,000; and

(e) Last adjustment to close the fiscal period (“Q5”), downward adjustment of $10,000.

Per the CBSA, the net total adjustment would be calculated as follows:

(f) Net total of upward and downward adjustments: (10,000+20,000+30,000) - (10,000+10,000) = +$40,000.

In the above example, the net total adjustment amount of $40,000 would have to be added to the value for duty. The same methodology applies to other types of post-import adjustments, such as the payment of sales commissions or design fees. This is a common customs duty exposure area for importers, as the CBSA routinely scrutinizes both direct and indirect payments made to vendors by importers in relation to the subsequent resale, disposal, or use of imported goods. Unless such a payment can be attributed to a reasonably identifiable service that would not normally be included in the selling price of the goods, the CBSA will usually take the position that the payment should be included in the value for duty.     

The adjustment process can also lead to a potential duty refund where the imported goods are subject to duties and the net result is a downward price adjustment, subject to the requirements of section 74 of the Act. However, price reductions after import are generally only permitted when the transfer pricing adjustments are made in accordance with a valid agreement in writing at the time of import.

Ryan can help you navigate the customs requirements for upward and downward transfer pricing adjustments, minimizing exposure and maximizing potential duty recoveries. If you have any questions about your organization’s obligations, please reach out to us.

Maureen Gilfoy
Director, Customs Duty