NAFTA News from Canada
This is a follow up to my tweet from last week about the Canadian International Trade Tribunal determination in the long-running dispute between Frito-Lay Canada and Canada Border Services Agency.
The issue had to do with Cheetos erroneously entered into Canada classified as cardboard boxes. [Insert your own cardboard Cheetos jokes here.] Frito-Lay paid the MFN duty applicable to cardboard, which was zero. Apparently because of the zero duty, Frito-Lay did not make a NAFTA claim at the time of entry, although the goods were originating.
Subsequently, Frito-Lay discovered the error and corrected it under subsection 32.2(2) of the Customs Act. Because Cheetos are dutiable, Frito-Lay included a NAFTA claim and supporting NAFTA certificates of origin in the corrections. In Frito-Lay's eyes, this was a revenue-neutral correction, and should not have been very controversial.
Unfortunately, CBSA disagreed. There are complications in the written decision because CBSA treated groups of entries differently. What is important for our discussion is that CBSA chose to accept the corrections as to classification but applied the MFN rate of duty because no NAFTA claim had been made at the time of entry.
Keep in mind that under NAFTA, an importer must make a claim for duty preference at the time of entry or within one year from the the date of importation. On the other hand, the Customs Act in Canada requires the correction of entries for up to four years. Frito-Lay did what it was supposed to do by correcting the entry, but CBSA only allowed it to correct the classification and not correct the rate of duty to what it should have been at the time of entry. This results in a bit of windfall for Canada as it is clear that the goods were originating and CBSA appears to have never challenged that fact. So, Canada was attempting to collect duties on entries that, if fully corrected, should have been duty free.
Thus, the question is whether the one year limit on post entry NAFTA claims trumps the four year requirement to correct errors in entries.
The wise Canadian International Trade Tribunal looked at the NAFTA claim process, embodied in section 74(1)(c)(1) of the Customs Act. The Tribunal noted that post-entry NAFTA claims are requests for a refund of duties paid. According to the Tribunal, a refund is wholly different from a revenue-neutral correction. The Tribunal said:
Of course, it may be appealed to the Federal Court in Canada.
Peter Kirby, who represented Frito-Lay deserves congratulations for his solid work on this issue.
The issue had to do with Cheetos erroneously entered into Canada classified as cardboard boxes. [Insert your own cardboard Cheetos jokes here.] Frito-Lay paid the MFN duty applicable to cardboard, which was zero. Apparently because of the zero duty, Frito-Lay did not make a NAFTA claim at the time of entry, although the goods were originating.
Subsequently, Frito-Lay discovered the error and corrected it under subsection 32.2(2) of the Customs Act. Because Cheetos are dutiable, Frito-Lay included a NAFTA claim and supporting NAFTA certificates of origin in the corrections. In Frito-Lay's eyes, this was a revenue-neutral correction, and should not have been very controversial.
Unfortunately, CBSA disagreed. There are complications in the written decision because CBSA treated groups of entries differently. What is important for our discussion is that CBSA chose to accept the corrections as to classification but applied the MFN rate of duty because no NAFTA claim had been made at the time of entry.
Keep in mind that under NAFTA, an importer must make a claim for duty preference at the time of entry or within one year from the the date of importation. On the other hand, the Customs Act in Canada requires the correction of entries for up to four years. Frito-Lay did what it was supposed to do by correcting the entry, but CBSA only allowed it to correct the classification and not correct the rate of duty to what it should have been at the time of entry. This results in a bit of windfall for Canada as it is clear that the goods were originating and CBSA appears to have never challenged that fact. So, Canada was attempting to collect duties on entries that, if fully corrected, should have been duty free.
Thus, the question is whether the one year limit on post entry NAFTA claims trumps the four year requirement to correct errors in entries.
The wise Canadian International Trade Tribunal looked at the NAFTA claim process, embodied in section 74(1)(c)(1) of the Customs Act. The Tribunal noted that post-entry NAFTA claims are requests for a refund of duties paid. According to the Tribunal, a refund is wholly different from a revenue-neutral correction. The Tribunal said:
because none of the transactions involve a request for a refund, section 74 is wholly inapplicable to this matter. Rather, according to subsection 32.2(4), the obligation to make the corrections provided under subsection 32.2(2) exists for a four-year period after the initial accounting, and the record shows that Frito-Lay was within that time frame (under under the obligation) for all of the corrections . . . that it filed . . . .The obvious question is how this line of reasoning might affect American importers. That remains to be seen. U.S. law does not require a correction in the same way Canada does. We have the notion of a voluntary prior disclosure, which benefits the importer by reducing potential penalties. A similar scenario can arise if the disclosure involves a change in tariff classification that results in goods originally thought to be duty-free being dutiable. If the goods originate under the NAFTA, the reasonable disclosing importer might provide a NAFTA CO with the disclosure and assert "no harm, no foul." Like the Canadian situation, that would not be requesting a refund. Rather, it would be a revenue-neutral correction. And, like Canada's section 74, our § 1520(d) explicit states that it relates to requests for refunds. So, it seems entirely possible that the Canadian International Trade Tribunal has provided a reasoned and eminently reasonable solution to this problem.
Of course, it may be appealed to the Federal Court in Canada.
Peter Kirby, who represented Frito-Lay deserves congratulations for his solid work on this issue.
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