[Recorded by Electronic Apparatus]
Thursday, October 26, 1995
.0903 
[English]
The Chair: Can we come to order?
We are considering Bill C-102. With us from the Department of Finance is Patricia Close, director of the tariffs division, and from Revenue Canada we have Mike Jordan and Candice Breakwell.
Do you have a brief opening statement you want to make about this bill?
Ms Patricia Close (Director, Tariffs Division, Department of Finance): Thank you, Mr. Chairman. Yes, we do have some brief opening remarks.
David Walker was supposed to be here to give the remarks. He's not here yet. If the chairman would like us to start, we certainly can, and when he comes in I can tell him where we are in the remarks so he may continue.
The Chair: Do you prefer to wait for Mr. Walker?
The Clerk of the Committee: He's coming.
The Chair: It might be best if you were to start, and maybe Mr. Walker could pick up when he comes in, if there's anything he wishes to add.
Ms Close: That's fine.
Bill C-102 proposes a number of tariff and related changes, including three major amendments designed to improve the competitiveness of Canadian business and to facilitate the processing of travellers.
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These changes will have an important impact, given that they deal with billions of dollars in trade. They will also have a positive economic impact on Canadian business and on the regions and consumers who support the proposals.
Canadian producers welcome the enhancements to the duty deferral programs and the tariff reductions on imported inputs, since the changes will help reduce input, cashflow and administrative costs and thus improve their competitiveness in domestic and export markets.
Duty deferral programs around the globe help to ease cashflow pressures and reduce the cost of input materials, allowing companies to produce goods for export at lower, more competitive prices. These programs help to promote exports when they are user-friendly and easily accessible by small, medium and large companies.
The changes to Canada's duty deferral program proposed in this bill are designed to be competitive with free trade zones around the globe, both in terms of the duty and tax reduction options they offer and in terms of the administrative ease with which the programs can be accessed and utilized.
The bill's duty deferral section includes changes to the Access to Information Act. The proposed changes ensure that confidential taxpayer information provided to the government by Canadian businesses will not be released to third parties.
The reduction in rates of duties on over 1,500 tariff lines covering a broad range of goods used as inputs in manufacturing is another example of the competitiveness measures contained in the bill. There are also tariff reductions on some finished products that are used in Canadian manufacturing operations.
These tariff reductions will assist business to remain competitive by lowering production costs and allowing them to take advantage of expanding opportunities brought about by freer trade in North America and around the world.
Bill C-102 also increases duty and tax exemptions for Canadian travellers returning to Canada and brings them into line with those of our major trading partners. These changes will benefit travellers and allow Customs to focus on high-priority issues such as smuggling and growing commercial trade.
As you may know, these traveller provisions were implemented on June 13, 1995, the date of the notice of ways and means motion announcing the changes. They have generated positive reaction from the general public.
The process for clearing passengers will also be enhanced by the introduction of basket tariff items, which will streamline duty collection and facilitate faster border clearance.
In recent weeks the customs evaluation measures in Bill C-102 have received some attention. These provisions would clarify a long-standing interpretation by Revenue Canada that the value used as the basis for duty and tax assessment on imported goods is the price paid or payable by the Canadian purchaser. These amendments would maintain the status quo and are consistent with the thrust of the GATT, the WTO valuation code and the NAFTA.
Furthermore, they correct a problem identified and corrected by some of our major trading partners. The amendment would ensure tariff protection intended for Canadian producers and would protect government revenues.
The machinery program refunds duty on certain machinery and equipment that is not produced in Canada. The bill would eliminate the administrative fee required to access the program, which has outlived its usefulness and generates little revenue.
The filing time limit to claim a refund under the machinery program would also be shortened from five years to two years. This change will give Canadian business sufficient time to file refund claims for duty paid on eligible machinery and equipment while ensuring that only those goods truly eligible receive such treatment.
One tariff rate increase in Bill C-102 involves the removal of the duty-free British preferential tariff on certain rubber footwear. This change is necessary to ensure that the protection and jobs of the Canadian shoe industry are not jeopardized. As a result, rubber footwear from BPT countries other than Australia and New Zealand will receive the same tariff treatment as rubber footwear from other countries.
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Finally, Bill C-102 includes a number of other technical and housekeeping changes to the customs tariff. Regrettably, a few technical errors were made when Bill C-102 was drafted. Mr. Walker is therefore proposing motions to amend several clauses of Bill C-102. He is tabling for comment for the committee's perusal a document that outlines the amendments and the rationale for each of them.
The officials from the Department of Finance and Mr. Walker would be pleased to respond to any questions hon. members may have on Bill C-102. Thank you.
The Chair: Thank you very much, Ms Close.
Members, I have the feeling there may not be too many questions right now of the officials, but questions may arise as other witnesses appear before us. Unless you want to ask questions of these witnesses at this time, maybe we could have them stand by and let other witnesses appear, and we could come back to them.
Mr. Grubel (Capilano - Howe Sound): The subject of free trade zones is an interest of mine as an academic. I wrote a study that was published by the Fraser Institute, where I suggested we should follow the American and worldwide examples. I had been in touch with Canadian officials at that time and their answer was that they didn't want the locational incentives to blockade free-trade zone activities in specifically identified areas. I accept that is a cost.
I'm just wondering whether you have looked carefully at the success or problems associated with the free-trade zone method used in the United States and in other countries? Why did Canada reject this model?
Ms Close: The short answer to your question is yes, we have been studying them for several years now. If you remember, there was a joint committee suggestion that we study them. The Department of Finance and the Department of Revenue did that several years ago and a report went back to the committee saying we didn't think it was a good idea for Canada - this was the Minister of Finance and the Minister of Revenue.
Given the advantages of the free trade zone, however, we undertook to review our duty deferral programs to make them more like the free trade zones. So what you have before you in Bill C-102 is doing just that. We have taken the three duty deferral programs we've had, amalgamated them into one program, and made them much more available to small and medium-sized businesses and much more user friendly. In other words, we've looked at them and also made them easier to defer duties up front. Before our programs, they weren't really available to the small and medium-sized businesses. Only the large businesses could really avail themselves of that deferral aspect, which is the major incentive of the free trade zone.
So we have tried to duplicate, as far as we could, the advantages of the free trade zones in the United States and elsewhere, but also make them even better than that by making them available to businesses all across the country, not just in specific zones.
To assure you, we will continue to look at these programs. We will continue to study them. We will continue to see how we can make Canadian businesses competitive with the free trade zones in the United States. It's very important for Canadian business because we often compete with free trade zones right across the border.
Mr. Grubel: I have spoken to people in the United States. The legislation has made possible real estate development and development of specific regions, where geographic areas are set aside to engage in specific activities of the sorts I don't have to elaborate on here.
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I'm wondering if there is anything specific in this legislation that will prevent developers from using the opportunity to get these duty withdrawals and all those kinds of things.
In my riding, for example, is the town of Squamish. It is losing its economic base because it's running out of trees to cut in the area because of conservation and so on. It has a wonderful location at the edge of a harbour, with railroad connections, road connections, proximity to Vancouver, and all those kinds of things. It would be an ideal location to put up warehouses and facilities for small value-added processes for re-export to the United States and elsewhere. There are entrepreneurs there who have tried to persuade the government to let them do this.
Will this legislation, as it now stands, permit these people to go ahead, put a fence around this facility and have those advantages that are available to the Americans and others?
Ms Close: Exactly. The federal government is saying it will provide the federal legislation to enable local regions to market free trade zones. They can call them free trade zones. They can put up bonded warehouses. They can do all the customs and duties. They can throw in municipal infrastructure and provincial infrastructure. This is exactly what we're trying to do. In fact, it has been taken up by various municipalities around the country that are starting to call themselves free trade zones and do exactly that: market it as a competitive tool against the free trade zones in the United States.
Mr. David Walker (Parliamentary Secretary to the Minister of Finance): I would just say, Mr. Grubel, that we prefer not to get into the red-line problems you always get in regional development of who's in and who's out. We're more interested in defining and addressing the activity than the space. If the municipal, regional or provincial governments want to define a particular area to stack on their own programs, then nothing we're doing prohibits that. We're more interested in helping out through activity and measures than through geographical measures.
Mr. Grubel: I appreciate this. It was a great dilemma for me when I was working on this as an academic that if under uniform protection and application of all laws the most efficient allocation for an economic activity, because of roads and other connections, is at a certain place in the country, then if this kind of tariff concession makes that activity move somewhere, then for as long as that activity is in the less efficient place, carrying out that activity involves loss of resources because by definition it's not the most efficient place any more. That is one of the trade-offs.
On the other hand, being able to market a specific area as one where the overhead facilities and especially the services of whomever administers these rules can all be in a concentrated fashion, there are economies of scale and it can be marketed and so on. That is a delicate trade-off from a social point of view. But certainly for economic development the best areas to have the chance to set up such a region I think outweigh the question of efficiency of allocation. But that was an empirical judgment.
Now that you have answered my question, I would say if Squamish wishes to go ahead, take that piece of land and market it as a free trade zone, with or without a fence around it, this legislation now enables it to do so. You will provide the facilities.
Would you say it will be necessary for it to be a duty-free area, isolated and clear, or will it be easy to administer? Everything will be within the factory itself on the basis of bonding and so on? How does it work?
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Ms Close: It works in the same way as if it was an individual company doing it, or groups of companies. They can do it in downtown Montreal; they can do it in Squamish.
Essentially, if they were going to operate it as a zone, they would probably have the customs facility, the paperwork, all being done for them. It's not a duty-free zone per se. They would have the duties deferred and they would have the paperwork done for them.
In order for that to happen, they would probably have a bonded warehouse on site, to take advantage of the bonded warehouse provisions.
That's essentially how it would work. They would market it as facilitating this process, making it easier for people, and they might well throw in municipal infrastructure. They could throw in the real estate development - those sorts of attractions - to get the people to come to Squamish in this particular instance.
Mr. Grubel: On the other hand, there is a problem of enforcement, clearly. Goods come in, and if they're in a bonded warehouse, then access will be limited to people who want to sort, further process, and so on.
To administer it is costly, both to the individuals and to your department.
I would have thought there would be tremendous economies of scale if there was a larger geographically defined area in which the goods that are brought in can move freely, without having to be subjected each time and checked out of a bonded warehouse, and so on.
How have you resolved this conflict of enforcement in the specific legislation that you have approved?
Ms Close: The responsibility for enforcement of the customs tariff lies with the officials of Revenue Canada, so maybe Candice Breakwell could answer that question for you.
Mr. Grubel: If I can just set the stage, let's say you have ten bonded warehouses, each one of them being a major company, and some of the goods will have to be taken out to be processed, then put back, and all those kinds of things.
I would have thought the more efficient way would be to have, around those ten bonded warehouses, one fence, one entry, and then free movement of the goods within that area.
What specific model does this legislation encourage?
Ms Candace Breakwell (Acting Director, Duties Relief Programs, Trade Administration, Revenue Canada): It depends on what the manufacturer wants to do. If it's an operator with a bonded warehouse, there can be a number of companies within that one area and the goods can move within the area. It is the same with manufacturers: goods can move freely.
This legislation will allow the goods to move freely between the two components of the duty deferral program; that is, the bonded warehouse and the manufacturing.
Mr. Grubel: Okay. We will see what comes out of it.
I appreciate, Mr. Chairman, having been given this opportunity. I am very pleased for Squamish and other areas that hopefully will take advantage of this.
Mr. Walker: I have with me, from the correspondence from the departments and the meetings, several initiatives taking place across the country. Some real interest has been shown in this.
Mr. Grubel: The irony, of course, is that the need for and the benefit from having such zones decreases with the overall level of tariffs, and it will not help a great deal where we have quotas, and of course it will not help at all with other regulations that are an impediment to economic activity, from labour laws to laws on the environment and safety, and all those kinds of things.
Clearly, that's not your jurisdiction, but the idea of some of the free trade zones was not that you would have deregulation just with respect to the cost of exports and imports but that you would also have in a sense a more free economic activity, where, as long as there was no spill-over onto the rest of the economy, you would have a more competitive free economy within that area. I think this has worked out very well, and it has been an important factor of development in areas such as Jamaica. That, however, is not as big an issue in Canada, I would say.
The Chair: We certainly want to try to eliminate externalities in this issue.
Mr. Grubel: He's learning economics quickly. He's a very fast learner.
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The Chair: Thank you, Mr. Grubel, for your very interesting contribution to this discussion.
Mr. Pillitteri, you had something to ask.
Mr. Pillitteri (Niagara Falls): Yes, Mr. Chairman. Thank you.
Of course, Mr. Grubel, being here late, I did not have the benefit of hearing all of the lecture you started when you were asking questions. You were in a free trade zone.
Let me ask this question. This legislation is beyond a free trade zone. This is not any designated area. Actually, if one who is in business at the moment were to enter into the free trade zone, that would mean that an individual would have to relocate to an area that was designated, the same as they have in the United States. This one is a little different because you are able to operate from where your existing business is.
If I were a total importer, I could see how much more easily this legislation works. You import, you add on an added value, and then you would export. Therefore, this free trade area or whatever, this legislation, would be much easier.
Let's say that my operation would not be totally as an exporter. This would be of benefit to me. Would I have to designate part of how much I'm importing and how much I'm exporting? Is there a limit? How does it work in this legislation?
Ms Breakwell: Again, it depends which component of the program one is using. If you're using the bonded warehouse, all of the goods can be stored for future removal for exportation. If a manufacturer - an individual, for example - is using the manufacturing component, it would depend on his intent for exportation. In other words, it depends on the number of goods he intends to manufacture and export. It would be based on his plans as to the percentage of duty-free imports.
Ms Close: To answer your question, essentially you can do it on a percentage basis. You can make that assessment and then rectify it at the end of the year if that in fact doesn't turn out to be the case.
Mr. Pillitteri: I have a follow-up to that then. If I were to have the 25%, in accordance I would import 25% of my business and I would export 60%, let's say, but in the meantime I give the lower figure. Are there any penalties because I've profited by using this legislation?
Ms Breakwell: Your question is if your exports are subsequently higher?
Mr. Pillitteri: Yes, if they're higher than the figure I have given.
Ms Breakwell: Then adjustments could be made.
Mr. Pillitteri: Just adjustments? Thank you. You answered my question.
The Chair: Thanks, Mr. Pillitteri.
I have a question for Michael Jordan. Do you play basketball?
Mr. Mike Jordan (Director, Valuation Division, Revenue Canada): I wish I could as well as others.
The Chair: I just didn't know.
Thank you very much. If you could be good enough to perhaps stand by to assist us in dealing with the testimony of subsequent witnesses, we'd appreciate it.
Mr. Walker: Mr. Chairman, the officials will also be available at the end of the day to summarize some of the interventions made by others and to make sure that the committee understands why we're rejecting some of the very detailed objections some people have on some of these key questions. The officials will be available if the committee members wish to have clarifications as to why we're doing what we're doing.
The Chair: That would be wonderful, Mr. Walker. We will welcome your presence at the table as well.
Mr. Walker: From time to time.
The Chair: Thank you very much.
We will take a brief break while our next witnesses come forward from the Chamber of Commerce.
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The Chair: Could we come to order again. Our next witnesses this morning on Bill C-102 are from the Canadian Chamber of Commerce. Mr. Page, will you be making the presentation? Do you care to introduce those who are with you, please?
Mr. Timothy I. Page (Senior Vice-President, Canadian Chamber of Commerce): Thank you very much, Mr. Chairman. I'm delighted to be with you this morning.
I'm joined today by Jana Bogelic, who is with Atlas Copco Compressors Canada; by Larry James of Foster International; and by Eric Miller, who is on staff at the Canadian Chamber of Commerce.
We would propose, Mr. Chairman, to make an opening presentation divided into three parts: a very brief opening remark by myself, an exposé of the technical issues surrounding the matter that brings us before you this morning, and a real-life example of how this particular issue can affect corporate Canada. We'd then be delighted to answer questions from you and your colleagues.
The Chair: Thank you, Mr. Page.
Mr. Page: The Canadian Chamber of Commerce strongly believes that the changes to the machinery program outlined in clauses 45 and 46 of Bill C-102 are counterproductive. This bill seeks to change the period that importers have to receive duty remission refunds from five years to two years. In our view, this would hurt Canadian competitiveness and statute-bar many importers from receiving the refunds that they are currently entitled to.
The machinery program was introduced in 1968 as part of Canada's commitments under the Kennedy Round of the GATT. Its primary objective is to encourage the development of an efficient industrial sector by allowing users of machinery to acquire the most technologically advanced capital equipment at the lowest possible cost and, at the same time, to provide Canadian machinery producers with a measure of tariff protection on domestic production.
If Canadian manufacturers are to increase their productivity and maintain and improve their competitiveness in international markets, it is of vital importance that they acquire the most modern and efficient machinery. Remission of duty on advanced equipment not available from production in Canada is an important contribution in this regard.
Given the program's history and its continuation today, we are somewhat puzzled by this sudden move to amend the refund time limits. Through a ways and means motion, the government announced its intention to review the machinery program, with an eye to eliminating it by 1998. The chamber is not opposed to a review of any program to test its operating effectiveness. However, it seems rather curious that after the government had announced its intended review and probable elimination within three years, it would then seek to change the statutory timeframe for filing remission refunds.
The chamber believes that, at a minimum, the government should study this particular issue while the program is under review. This would provide much needed time to determine the impact of these changes, which to date have not been fully assessed. If the whole program is to be eliminated, then why is it necessary to change the refund provisions alone?
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Taking its own advice, the chamber has studied the issue of the time limit provisions in some depth, and I would invite Larry James to outline the technical concerns that we have in this regard.
Mr. Larry N. James (Senior Consultant, Canadian Chamber of Commerce): Mr. Chairman, I'm here to try to give both you and some of the members some of the nuts and bolts of the program.
Basically, the program works in two stages. There is a stage where, in order to qualify for the initial step and be considered under the program, the goods must be classified under one of approximately 500 tariff items. Once that step is met, it is then a question of whether or not those goods are available in Canada. That concept certainly sounds straightforward, and it is straightforward. Sometimes it works relatively well. Unfortunately, sometimes not everything goes along as it ought to. I won't bog you down with details on this, but what I'd like to do is take you through the process by way of analogy.
If you can, picture this as a hurdles race in which you are given five years to complete the course under the current legislation. There are two hurdles to negotiate on this course. The first, as I mentioned, is the tariff classification stage.
The minister responsible for customs and excise has two years to change that classification from the original classification. This could result in some litigation and further appeals to resolve the classification issue. It's not uncommon for these issues alone to go two or three years.
Our runner - the Canadian importer, for the sake of argument - starts off as soon as the goods are imported into Canada. Bang, the gun goes and he's off to negotiate the first hurdle. He's then bogged down with a tariff classification disagreement. He goes through the appeal process - and we'll say it's a relatively simple case that is resolved within a year and a half. And the reason I say that, Mr. Chairman, is because such appeals can go to the Canadian International Trade Tribunal, and eventually to the Federal Court of Canada in rare cases.
In any event, we'll say for the sake of argument that it takes a year and a half to resolve this particular appeal. Once the appeal is settled, it is then a question of determining the availability, as I've already said. The importer is allowed to submit an application to Customs and Excise Canada for consideration of the availability. It can take between another three to six months to successfully determine whether or not the goods are in fact not available in Canada.
I want to point out that when we talk about the time limits, the time limit does not apply to my submission of the application. It's the time limit on submission of the refund claim. I cannot submit my refund claim until after the Minister of National Revenue has approved my application. So in this example that I'm giving you, you can see that it is already over the two-year time limit. It's difficult enough to run this hurdle race over a five-year period, so I'm sure you can see the difficulties that arise if the rules all of a sudden change.
The Chair: What type of timeframe would you propose?
Mr. James: In my opinion, the current time limit is correct. It is my belief that when they originally put five years into the act, the legislators foresaw the types of problems that I'm talking about. That's why it was allowed for.
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The Chair: Is there anything else in your presentation?
Mr. James: No, that's all.
The Chair: It's up to the members, but I suggest we invite Patricia Close back to respond to that.
Mr. Grubel: Why was it lowered? What was the reasoning?
Ms Close: I'm bringing Candice with me, too, who is the expert in the area. Let me try to give you the policy reasons, and then Candice can fill you in on some of the details.
Essentially, all of the other provisions in Revenue Canada are for two years. This one was out of sync with that, and it caught Revenue Canada in a difficult situation at times, because they had two years for some and five years for others. I'll let Candice go into the details of that.
Here's the other thing. It's my understanding that if there's an appeal in the process that lengthens that two-year period so it's not possible for the importer to meet the two-year deadline, the time gets extended. It's not cut and dried.
Let Candice explain the details of what the problems were for Revenue Canada when in fact this five-year provision was different from all the two-year provisions in Revenue Canada.
Ms Breakwell: First, let me comment on Mr. James' concern about time limits for classification disputes.
It's quite right that classification disputes may sometimes be lengthy. In that case, we propose regulatory amendments to extend those time limits so that classification disputes, when they are resolved, if there is an issue for the machinery program, can come back to the machinery program.
He's also quite right about the two-level step to access the program. The first is classification review. Goods must fall within a certain number to be eligible for the program. Second, they must not be available from Canadian production.
One of the problems we were having was classification. The department may go back and correct the classification within two years. When refunds were five years, it meant that the department was in a position to consider ineligible goods. This legislation ensures that the department will permit refunds only on eligible machinery and equipment items.
The Chair: Are you satisfied with that answer, Mr. James or Mr. Page?
Mr. Page: I wonder, Mr. Chairman, if we might invite Jana Bogelic to provide you with a real-life example of some of the practical concerns that are faced by the business community to bring some context to the technical discussion that is taking place.
The Chair: Sure.
Ms Jana M. Bogelic (Member, Canadian Chamber of Commerce): Good morning, ladies and gentlemen. Thank you for the opportunity, as a Canadian business, of expressing my viewpoint.
[Translation]
Good morning. My name is Jana Bogelic and I represent Atlas Copco Compressors Canada. I am grateful of this invitation that you extended to me to offer the point of view of the company that must operate under this process.
[English]
I would like to give you a live example of the workings of a Canadian company having to do the processes that Mr. James just expressed to you.
We submitted an application to the government in 1989. We did not have a tariff classification problem for a product that we wished to bring into the country and have reviewed through the machinery remission program. This became fruitful to us at the end of 1993. Therefore, there was a four-year timeframe for the work to be completed and accepted with a product that was not a problem with a tariff classification.
So we feel that this new bill would be counterproductive and a little unfair if we look at our experience with one particular product. We've experienced this same type of timeframe - a little greater than two years - with no tariff reclassification problems.
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We feel that if you limit this timeframe, we're not too sure if our products will be ready. Will we be able to introduce these products to the marketplace with this timeframe restriction? You have to do an availability study. We accept that. But we don't know if the timeframe is going to be shortened in order to accept these products.
We're here to promote Canadian business. I think we're all here for the same reason.
I'll just stipulate the benefit of this particular product that was viewed for a four-year period. The pulp and paper industry is now enjoying state-of-the-art equipment, as they always have; however, it's at a lesser cost to them.
Technology is there. The reduced price is there for Canadian business, and we've passed that on to our clients.
Other industries or sectors that have benefited from the machinery remission program, from us together with you, are the pulp and paper, chemical, and mining industries.
With the Department of Finance, we were able to lower our costs and give Canadian business a better grip on competitiveness. And we all know how well pulp and paper is doing today.
The Chair: Thank you.
Ms Close or Ms Breakwell, why is it so important that we reduce this period from five to two years? How does Canada benefit from that?
Ms Close: Mr. Chairman, let me try to explain this. Say Revenue Canada only has two years to catch a classification problem, but there's a five-year availability time period for a company to request a refund. Say something has come in and is classified in the wrong manner. In other words, say somebody brought in, not a piece of machinery, but a table on the machinery remission program. Then, after the two-year period, Revenue Canada hasn't caught that this was classified wrongly when they brought it in, that same company can apply for a refund of duties in the three remaining years that are left. That's because Revenue Canada can't go back and check the classification, because it only has two years to do it.
All we're trying to do in this legislation is say that the period of time for applying for a refund under this program for a remission of duties and the classification should be the same.
The Chair: Would the chamber be willing to accept a five-year period for both?
Mr. Page: Mr. Chairman, we understand the point that Ms Close has just made, particularly as it relates to cases in which a remission application is filed after the two-year period has elapsed and the minister then has no recourse. We see that as a legitimate concern.
However, we don't believe that we should be penalizing the majority of importers for isolated occurrences. If this is a motivating factor behind the proposed changes that have been suggested by Ms Close, we believe that perhaps there are alternatives that could address the concerns that she has legitimately raised.
We suggest, for example, that the minister's authority to change the tariff classification could be extended when an application for remission is filed by making an addition to section 63 of the Customs Act.
I'm not an expert in this field, but this is what Jana and Larry are saying could be a legitimate way of resolving this concern, which has been expressed by the finance department, but which, as you're hearing this morning, is of great interest and concern to business.
The Chair: I must say I'm very sympathetic to the point you have made. I don't know whether or not there's any way to accommodate this under the law.
Mr. Grubel: I must ask a question. What is the total value of remissions in a typical year that the department is sending out under this program?
Ms Breakwell: There are two components to the program: its relief up front, and remission. The figure for relief up front, I believe, is $400 million annually. I don't know the figure for the remission portion, which is the refund portion. I can get those figures.
Mr. Grubel: I'm surprised it's so high. What is the average tariff rate on those items? What is the total value of the imported machinery that benefits from these remissions?
Ms Breakwell: I don't have the figures in front of me, but we can get them.
Mr. Grubel: Would you say it's 5%, 10%, or 20%?
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Ms Bogelic: Taking our case, what the rates can vary from? They can go as high as 12% and go down to 9% or 8%.
Mr. Grubel: How essential are these? Is this protection for the Canadian industry that is competing with these imports?
Ms Bogelic: Perhaps I can elaborate on that. If we use my company's experience in the machines that we offer to the marketplace, in many instances your gross margin is 10%. Therefore, if you have to envision a duty imposition of anywhere from...even if you can go as low as 6%, but in many instances it's 8% and 9% and 10% in our case, you're not competitive with the American counterparts that are producing in the United States and bringing in their goods duty free. You are therefore already 10% off base. There's room for a 10% margin and we're way out in left field.
I also comment on one of the products that we do enjoy on an equal level with an American competitor today. We have increased our products in the Canadian marketplace. We have increased our staff in the Canadian marketplace over the last two years. I think those are substantial and significant important factors to consider for the Canadian marketplace.
Mr. Grubel: What I'm not quite clear on is, are these products you produce with imported machinery? Or are you in the business of producing machinery?
Ms Bogelic: Both, sir. We have three product ranges. Some come in with products ready to sell, shelf products. We have specific products designed, custom made, so it's pretty hard to determine which ones are produced and which ones are not produced. But it's all based on the customer's requirement. Alberta regulations are different from B.C. regulations, from Quebec regulations; therefore it's a little bit difficult to answer your question. But we do manufacture, we do assemble, and provide product to the Canadian marketplace.
Mr. Grubel: To what extent will NAFTA, as it gets phased in, and the new tariff schedule under the World Trade Organization's latest rounds - will these revenues and the need for this entire seemingly ridiculous procedure go away? What is your judgment? How important is this? I thought the world was moving toward free trade. Tariff levels are very quickly approaching zero, certainly within NAFTA, and I would have thought that most of the machinery we need in Canada can be bought within the North American market, and certainly within western Europe.
I'm trying to get a sense for the quantitative importance of all of this wrangling if in a couple of years our duty remissions, now at $400 million, will go down to $5 million. Why don't we just scrap the whole damn thing?
Mr. James: Perhaps I might address that. Currently, the duty rates from the U.S. on machinery are free. There is no duty from the U.S. However, there is still a duty on countries other than the U.S., and other countries, such as Japan, Italy, Germany and other countries in Europe, offer in some cases more technically advanced machinery than is available in the U.S. If you are the country that needs this machinery, I don't think you would appreciate whether it's free from the U.S. or not if you have to pay the duty.
May I make one last comment? As Mr. Page said earlier, the program in its entirety is under review by the Department of Finance.
Mr. Page: A couple of quick points, if I might. We are generally supportive of Bill C-102. Our concerns this morning are directed explicitly and exclusively at clauses 45 and 46, and we would seek through your good counsel to have those clauses removed from Bill C-102 if it is the intention of the government to proceed with third reading, at least for a period during which we can properly review the subject matter. But we are generally in favour of C-102 as a positive contribution. We're just concerned with clauses 45 and 46.
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The Chair: Ms Close, is there any point in you having some further discussions with the chamber to see if there could be common ground here, so your important concerns could be recognized but that importers of machinery, which is critical to our economic future, are not penalized unfairly?
Ms Close: I'm always pleased to talk to the chamber, and I certainly will after this session. Before it comes back to committee we will talk to them.
I think the duty rate question is an important one. Even those duties from Japan, for instance, are going down. Our average duty rate on dutiable products right now is about 8.6%. It will go down to just over 4%, so that's cut in half. Machinery from Korea and places like that will come in at zero under the GPT. So we will really be decreasing duties to a large extent over the coming years. I think that's an important point.
The other important point to have on the record is that Revenue Canada has the ability to extend the time for a refund. It's possible to do that when there is a classification issue ongoing, on a case-by-case basis.
The Chair: Is it a right or is it discretionary by the minister?
Ms Close: It would be discretionary by the Minister of Revenue. Is that right?
Ms Breakwell: It would be a regulatory amendment and it would be a right in every case by case.
The Chair: Did you say you proposed an amendment to deal with the concern expressed by the chamber?
Ms Breakwell: No. The subordinate legislation will provide for an extension of time limits where there is a classification dispute.
The Chair: Does that satisfy your concerns?
Mr. Page: We'd be delighted to work with the department at the point of the drafting of the regulation to ensure that the interests of both sides are clearly met.
The Chair: And you're convinced we can meet your concern through that approach? I'd be delighted then.
Thank you very much.
So we could pass this bill with clauses 45 and 46 as they are, but you can deal with this at the regulatory level.
Mr. Page: Our preference, pending a complete understanding of the impact of clauses 45 and 46, is that they not be part of Bill C-102 unless and until we have.... The concern is that if you pass Bill C-102 and then sit down and discuss regulations, you've lost a margin of -
The Chair: Could you maybe put your heads together and come back to us by the end of the day on this one?
Mr. Page: Thank you, Mr. Chairman.
The Chair: Thank you. I appreciate it.
Mrs. Brushett (Cumberland - Colchester): We talk about a five-year time line before many of your products would be accepted in the marketplace or approved. Most companies are usually history if they haven't had acceptance within a shorter timeframe than five years. I'm wondering what kinds of things you are marketing that would take five years. I've been in the manufacturing business, and if you don't sell your product to the marketplace very quickly today it becomes obsolete anyway and you have to move on to a new product. So five years seems like an extraordinary time.
Ms Bogelic: I'd be happy to answer your question. In many instances, most of our products have a shelf life of 10, 15 or 25 years. Being a solid company, in some cases we can afford to wait because the race is worth it. In many instances, I agree, you can't wait a five-year period. Your product has either been innovated by a competitor or you just can't meet the challenge in the marketplace. It's a combination of a lot of reasons.
When we proposed this application to the government, we felt very strongly toward Canadian businesses, specifically if I can highlight the pulp and paper industry. It is a wonderful customer for us. We work together with it in producing a product it can use and in producing a product five years later at a reduced cost to the industry. We are selling less expensive things to it today than we were five years ago due to the benefit of this program.
Mrs. Brushett: I thank you for your clarification.
Ms Bogelic: You're quite welcome.
Mr. Page: We've sought the advice of not only our own membership but of the membership of the Canadian Exporters' Association and the Canadian Importers Association. They have kindly sent a letter of support to us on this very subject. This is an issue of concern to them as well.
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I would highlight, by way of additional evidence, that in the first quarter of 1995, Canadian investment in machinery and equipment grew by a very healthy 11.3%. So this is an issue that affects not only the short term but our long-term goal of competitiveness.
The Chair: Mr. Page, you have convinced me. I would appreciate it if you could get together with our officials and get back to us later today on whether you have come to any resolution of this issue.
Mr. Page: Thank you. We will leave that in the hands of the clerk to organize a convenient time when we can return to you.
The Chair: Get back to our clerk, or you can come back to us at the end of our session at 12 p.m.
Maybe I am wrong. Maybe there is room for common ground here. I don't know.
Mr. Page: We will do our best. Thank you very much for your time.
The Chair: Thanks very much.
We will take a brief break. Our next witnesses are due before us at 10:15 a.m.
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The Chair: Sorry for the delay. Can we come to order again?
Appearing before us from the Canadian Importers Association is Dennis Wyslobicky.
Mr. Dennis Wyslobicky (Member, Canadian Importers Association Inc.): I was originally supposed to present on behalf of the Importers Association with the president of the association, Mr. Don McArthur. He was on an 8 o'clock flight coming from Toronto this morning, which got cancelled. I'm told he took the next flight out, so he may be here during the course of our submissions.
The Chair: I doubt it. We've ordered all planes to go to Montreal.
Some hon. members: Oh, oh!
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Mr. Wyslobicky: He was going to make some brief introductory comments, and he did ask that I read a page or so from the comments he was going to make concerning the association and some background to the association's position. So I propose to do that and ask that you bear with me, because these are his notes, and I'm just reading from them.
The Canadian Importers Association is a national association. It has over 600 corporate members that basically are involved in all sectors of the economy - manufacturers, retailers, traditional importers that resell and manufacture, and also retailers and firms that generally offer services to people who are involved in international trade.
Also represented by the association are the following sectoral organizations: the Association of International Automobile Manufacturers of Canada, the Canadian Association of Footwear Importers, the Canadian Meat Importers Committee, the Electronics Import Committee and the International Cheese Council of Canada.
Specifically concerning Bill C-102, the association feels the bill has far-reaching implications for all companies involved in international trade. As a consequence, over the past two years the association has consulted frequently with government officials on key aspects of the bill. Our input for these discussions was derived from extensive consultation with the association's members and from public seminars and conferences sponsored by the association.
On balance, the association believes the proposed changes in Bill C-102 are progressive and will facilitate the growth of international trade to the benefit of all Canadians.
However, there are two aspects of the bill that we strongly suggest should be reviewed. The first aspect is the reduction from five years to two years for the submission of refunds of duty under the machinery remission program. In the interest of time, however, the association itself will not address this issue this morning, as we understand it will be raised by the Canadian Chamber of Commerce later today. The association supports the chamber's position in that regard.
The second point is the one I would like to specifically address, because it's technical in nature. Don has deferred it to me. The problem relates to the issue of sale for export to Canada.
Members should have received a copy of the association's submission to the valuation division of Revenue Canada. That particular submission was prepared in response to Revenue Canada's explanation of the change and to draft regulations for defining the concept of ``purchaser in Canada''. This is concerning the amendment in clause 18 of Bill C-102.
By way of background, it would probably be helpful for me, in explaining the association's position, to go over a couple of basic issues. You should have received a set of handouts that I brought with me this morning. There are three diagrams. Does everyone have that in front of them? I think that will be very helpful in explaining what the issue is here.
First I'd like to deal with figure 1. Just to explain the background, we have a few companies that are imposed over the map of North America. To step back from the diagram for a second, what we're talking about here in terms of the sale for export amendment is really a question of determining the value for duty of imported goods.
Under the general rules of the Customs Act, the value for duty is to be based on the transaction value of those goods. Generally speaking, that is the price paid for the goods - and these are the important words - if the goods are sold for export to Canada.
The amendment we're addressing in Bill C-102 is designed to address a situation where there are multiple sales prior to the goods entering into Canada, and that's where figure 1 comes in.
The Chair: How many of these sales are generally through tax haven trading companies?
Mr. Wyslobicky: Generally speaking, in terms of the issue we're talking about, I'm not aware that this really attacks the haven issue at all, although obviously it could in some cases. Generally speaking, my understanding of Revenue Canada's concern is that it's not driven by that type of concern at all. It's really more of a technical concern in normal, ordinary commercial practice.
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The Chair: Okay.
Mr. Wyslobicky: In figure 1 you have a fairly typical case as an example. You have a U.S. middleman, and that middleman could be in the U.S. or it could be anywhere in the world. They do business in Canada and they may have foreign manufacturers, perhaps in the Orient, perhaps in Europe, wherever. They purchase goods from that foreign manufacturer and in my example they have a purchase of goods for $80. Then that U.S. middleman dealing in the Canadian market has a sale of those goods to a Canadian customer for $100.
That U.S. middleman, because he doesn't want to retain the inventory or for a variety of commercial reasons, directs the foreign manufacturer under that particular contract of sale to ship those goods directly to his customer in Canada. It's a very common commercial practice.
So you have two potential sales here. One is from the foreign manufacturer to the U.S. middleman for $80, and the next is from the U.S. middleman to the Canadian company for $100. The goods are shipped directly from the Orient - or wherever - to the Canadian customer.
The issue here is which of those two sales the value for duty should be based upon, the $80 or $100. Many association members over the years have taken and would take the position that the $80 selling price from the foreign manufacturer to the U.S. middleman should be the proper value for duty because, in the context of the legislation, this is a sale of the goods for export to Canada. They are sold to the U.S. middleman for export to Canada from the foreign market.
Customs, on the other hand, has taken a different approach. Their policy was that the value for duty in these types of circumstances should be based on a selling price from the U.S. middleman to the Canadian company. The matter was recently brought to a head in the case of Harbour Sales.
I won't trouble you with the details of that case because I'm sure other witnesses will be going over it, but in that case, Revenue Canada was taking the position that the value for duty should be based on the selling price to the Canadian company - the analogous situation to figure 1 - because that was a sale for export to a purchaser in Canada. In other words, they were reading into the act the requirement that the sale be to a purchaser in Canada and effectively imposing a form of residency requirement on the precondition for valuing goods.
The Canadian International Trade Tribunal and the Federal Court, on appeal, have both disagreed with Revenue Canada's position for a couple of reasons. First of all, they noted in looking at the GATT valuation code to which Canada adheres that there is no residency requirement in the GATT valuation code and they also noted that there was nothing to that effect in the Customs Act. I think the Federal Court's comments were particularly instructive. The Federal Court said, and I quote:
- There is no basis whatsoever for the argument that the Tribunal erred in failing to read into the
act a residency requirement.
So effectively, if you go back to figure 1, what they're saying is they now want to legislate expressly that the value for duty should be based in that case on a sale from the U.S. middleman to the Canadian company.
The Chair: Could I stop you there, please?
Mr. Wyslobicky: Yes.
The Chair: In figure 1, suppose the U.S. middleman is a Bermuda company, owned by either the foreign manufacturer or the Canadian company. Suppose we put the sale price from the foreign manufacturer to the U.S. middleman at $20 and the sale into Canada at $100. Are you still contending that the value for duty should be $20?
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Mr. Wyslobicky: It would depend, in that case. There are safeguards in the Customs Act to ensure that any transaction value, where it involves related parties, must be at an arm's length price. A similar concept would apply for income tax, for example.
The Chair: Okay.
Mrs. Brushett: Thank you, Mr. Chairman.
On that same point, my question is, which invoice does an importer ordinarily see? Do they see the invoice from the middleman or the invoice from the original manufacturer?
Mr. Wyslobicky: I think it would depend on which particular value for duty is being declared.
Mrs. Brushett: Ordinarily, in the course of business.
Mr. Wyslobicky: If he were declaring the lower value for duty, if he were taking that position, then I think he would be compelled to show that particular invoice, because there's an obligation under the Customs Act for you to justify and support your particular transaction value. If you didn't, you would certainly get a call from Canada Customs very quickly.
Mrs. Brushett: But I would like to challenge the fact that in the ordinary course of business the importer is ordinarily going to receive his invoice from the middleman and would probably not know what the manufacturer is actually selling it to him for.
Mr. Wyslobicky: It would depend on who was the importer. Our Canada Customs laws would fully permit the U.S. middleman, in that case, to be the importer, and I would fully expect to see the invoice from the foreign manufacturer to the U.S. middleman to be the commercial invoice presented to Customs.
In summary, the association's position concerning the purchaser in Canada amendment is that it opposes it. The heart of the association's position is that effectively - for a number of reasons that I'll expand upon briefly - it would really work to undermine international trade. There are four aspects that I'd like to just touch upon briefly.
The first one concerns our major trading partners and also the international customs valuation code. Canada and its major trading partners, for example the U.S. and the European Union, are signatories to the World Trade Organization agreement and its customs valuation code. This is an international agreement concerning how goods are to be valued whenever they are entered for domestic consumption in any particular country.
The code's requirement is fairly straightforward, and in fact our major trading partners' and Canada's existing customs legislation prior to this amendment model it. The code says basically that the transaction value of the goods should be the price paid for the goods, and I quote ``when the goods are sold for export to the country of importation''. So it's very similar to the concept that Canada currently has in the Customs Act.
As pointed out in the Harbour Sales case by the Canadian International Trade Tribunal and the Federal Court, the code does not contain any residency requirement. In fact, that was one of the key reasons for the CITT deciding the way that it did.
This is also the position that has been taken by the U.S. and the European Union, both of whom, as I mentioned, model their legislation after the code. There has been recent case law in the U.S. - by recent I mean over the last four or five years - that has confirmed that the transaction value for U.S. customs purposes can be based on a sale to a foreign purchaser. The European Union has also, for many, many years, adopted this principle, and in fact it has recently reconsidered the matter and has again clarified in its legislation that you can in fact, under transaction value, have a value for duty based on a sale to a foreign purchaser.
Going back to figure 1 at the bottom of the page, just to summarize, the U.S. and the European Union would, in this fact pattern, say that the value for duty could be based on the $80 selling price from the foreign manufacturer to the U.S. middleman, if it was an arm's length price. As far as Canada is concerned, as a result of the Harbour Sales case I think most people would conclude that you'd reach the same result - the $80 selling price would be the relevant amount upon which duty should be paid. On the other hand, under Bill C-102 that value would be bumped up to $100.
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The Chair: Do any other countries in the world adopt the same provisions as are contained in this bill?
Mr. Wyslobicky: No one adopts it directly. To the best of our knowledge, there's one country, Australia, that has some legislation that is actually quite different from the legislation that is in the customs valuation code or that's found in Canadian legislation now or in the U.S. or in the European Union.
I was given a copy of some legislation by Revenue Canada in connection with some earlier consultations. They had given us some legislation that has actually been superseded, and the actual wording of the Australian legislation now is quite different.
The Chair: So as far as you know, Australia is the only country in the world that even goes somewhat in this direction. The GATT rules and European Union rules are all against what this bill proposes.
Mr. Wyslobicky: That's correct. To the best of our knowledge, that's right. I think some of the other witnesses will be able to -
The Chair: Then if a Canadian company is using a middle company as a trading arm or something like that, exporting to any of these areas except for Australia, the foreign value for duty would be the $80.
Mr. Wyslobicky: If you change the -
The Chair: That's what I've done.
Mr. Wyslobicky: That's correct.
The Chair: Thank you.
Mr. Wyslobicky: The bottom line on this first point, in terms of international consistency, is that given the language of the customs valuation code and the position taken by the U.S. and the European Union, our major trading partners in this area, the association feels that our international commitments and the need for international uniformity are compelling reasons for why the purchaser in Canada amendment should not proceed. In fact, one of the reasons that the customs valuation code was adopted to begin with was to provide certainty for people dealing with goods internationally.
There are also a couple of other points that I would like to address, and the next one is really that this amendment is not a clarification. It truly is a change in the law in a couple of respects.
The first point is that, as I mentioned, from the standpoint of the Canadian law being clarified in the case of Harbour Sales, this amendment would obviously overrule or be contrary to that decision. Secondly, it's actually a step backwards from what Revenue Canada's policy prior to Harbour Sales had been. The reason is that prior to the Harbour Sales case, Revenue Canada itself had acknowledged and recognized that there were cases where a non-resident importer could qualify as a purchaser in a sale for export to Canada. The best example of that would be figure 2, which you have before you.
If you could turn to the second picture, which is on the second page, I'll give you the best example we know of that. You have a foreign manufacturer that sells to a U.S. company for $80, let's say. That U.S. company has a warehouse in Canada and directs that the foreign manufacturer - again, it could be in the Orient, it could be a sister company, or whomever - physically deliver those goods to its warehouse in Canada.
Now, in that case you'll see the positions outlined at the bottom of that page. In Customs' own memorandum D-13-4-2, where they outline their policy, they acknowledge that the sale from the foreign manufacturer to the U.S. company, the $80 in this case, could form the basis for transaction value and value for duty.
In this specific example, you'd be required to use a different valuation method under Bill C-102. Based on my twelve or thirteen years of experience in dealing with customs matters, my experience is that you would almost surely get a higher value for duty. In some cases it could even be two or three times the purchase price of the goods in issue. So it could have a substantial effect on this particular scenario that Customs has already agreed, even under their pre-existing restrictive practice, that a non-resident could be a purchaser in Canada.
Again, the bottom line on this point is that the amendment will constitute a substantive change, even to Revenue Canada's prior policy, and indeed is a potential step back or retraction from that policy.
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Another point concerns the operation of subsidiaries and branches. The purchaser in Canada requirements has actually caused some concern among branches and subsidiaries in Canada of multinational corporations. In fact, we've heard concerns expressed by very large Canadian operations of companies that you read about every day in the news. The reason for their concern has to do with Revenue Canada's purchaser in Canada regulations.
The concept of purchaser in Canada, as it appears in the bill, is to be defined by regulation. The initial draft of regulations - which in fairness to Revenue Canada were obviously subject to change - proposed to define purchaser in Canada as being a company or person that is domiciled in Canada.
The concept of domicile is not very well known for Canadian tax purposes, but it is used in some other jurisdictions. Generally, the concept is that a company can be resident in several different locations if it has substantial operations in different locations. But the general thought is that you can only have one domicile. That's like your permanent conceptual home.
The Chair: Is there any case law on what the domicile of a corporation is? I've heard of case law on what the domicile of an individual is.
Mr. Wyslobicky: To the best of my knowledge, there is. Perhaps the Canadian Bar Association might be able to address that. Things like Black's Law Dictionary, which Revenue Canada was proposing as a definition of domicile....
Actually, I do have the definition here.
The Chair: For a corporation?
Mr. Wyslobicky: That's right, for a corporation. This is taken from Revenue Canada's proposed regulation. You'll see that it is quite restrictive:
- The concept of corporate domicile is that place considered by law as the center of corporate
affairs and place where its functions are discharged. With respect to an individual, a domicile is
considered to be the individual's legal home.
So we don't really know how that would be proposed to be administered, but the concern expressed by a number of these very large subsidiaries - I'm talking about organizations that have over 1,000 employees - is that if you look at the guidelines issued in the policy, on the face of those guidelines, they have serious concerns that because of the way their strategy at the corporate and corporate group level is implemented and developed, they might not even be considered to be purchasers in Canada.
I understand from Revenue Canada that perhaps wasn't their intent. Nevertheless, this is what has appeared in the draft proposed regulation for circulation to the customs community.
The last point I would like to address is really a conceptual one and a matter of perception. That is, that the association has strongly supported Canada's efforts to reduce duties, and in a number of different ways, because obviously the association is interested in facilitating international trade, and customs duties operate counter to that thought.
Very recently, there have been significant developments or initiatives on the part of Finance, for example, to reduce the general preferential tariff rates of duties that apply to goods that come from developing countries. There is the machinery program whereby duties are remitted if goods are not available from production in Canada.
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Also, an important part of what's in Bill C-102 relates to the reduction of duty on manufacturing inputs.
Again, this is all designed to increase Canada's competitiveness. It's also a general reflection of the trend in the international community that the best interests of commerce and international trade are served by reducing and not increasing duties on goods that are imported into countries.
In contrast - again, just a parenthetical note - the purchaser in Canada requirement should, in most cases, have the opposite effect of increasing the amount of duties paid on imported goods, obviously to the disadvantage of both businesses and consumers in Canada.
By way of summary, there are really four reasons why the association believes that this proposal, the purchaser in Canada proposal, is inappropriate.
The first one is that it's inconsistent with what is being done by our major trading partners, and in that regard will create uncertainty in international trade. The association is concerned that Canada should not be out of step with the international community unless there's a very good reason for that to be the case.
Second, this isn't a clarification. It's a change from the law of Canada as enunciated in Harbour Sales, and in fact it is even a step backward from Revenue Canada's own policy prior to Harbour Sales.
Third, there's a potential concern for branches and subsidiaries of multinational companies.
Finally, it will result in a trend to increased duties when what the rest of Canada and the rest of our competitors seem to be doing is lowering duties.
The Chair: Thank you.
Ms Close, would you like to come up to the table? My favourite basketball player....
It's good to have you with us, Don. You don't have to worry. The young fellow made a good presentation in your absence.
Mr. Donald McArthur (President, Canadian Importers Association Inc.): I knew he would and I'm very happy to hear this. My belief is confirmed.
The Chair: Do you want to respond to what they've said?
Ms Close: First, I'd like to thank the Canadian Importers Association for their overall support on the bill and for all their hard work as we've been trying to help the competitiveness of Canadian industry.
As for the particular issue they've brought before you, I think it's a very good graphical presentation of this issue, better than the one we had prepared for you, so we can continue using theirs. As they summarized, they made four points. What I'd like to do is briefly go through those four points and then turn it over to Mike Jordan from Revenue Canada to expound on those or on any of those that you wish.
First, he made the point that it was inconsistent with our major trading partners. The work we've been doing recently - and when we proposed this change - in fact tells us that's not the case. The European Union has made some changes to the legislation in place that are in line with what we are doing. Mike can take you through the details of those, which does allow for it. If we can use for brevity's sake the $100 and $80 so we know what we're talking about, it does in fact allow the $80, but only in certain circumstances.
The United States continues to use the $100. As I understand it, they've gone to court three times to fight it. They've lost each time. I think the United States' situation is probably similar to the Canadian one where the legislation is not clear. The government keeps challenging it and taking it back to court every time it comes up. They interpret it very narrowly. So in the majority of cases the $100 sale is the one that holds in the United States.
The second point was that it isn't a clarification but a change. I'd like to put to you that the way Revenue Canada was administering this since 1985 was in fact on the $100 basis. The two examples here that do show where the $80 sale would be taken into account are correct, and those are ones that again, Mr. Chairman, Revenue Canada intends to allow by regulation from the provision.
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The third point that was made about purchaser in Canada - it's my understanding, and I would like Mike to clarify this, that we do allow for non-resident importers to be able to import into Canada. It's not solely residential.
The fourth one is about perception: while we're decreasing duties, why are we doing this, which increases duties? You heard earlier how our duties are going down. It's quite right. Canada is trying very hard in the international fora to bring down our duties, to liberalize trade. However, we do have some very high duties on particular products that the government has felt needs protection in adjusting to this freer trade environment. If you have a 20% duty on a sale, assuming it is $100 and it suddenly becomes $80, then you're looking at - my math is probably not right - a 40% duty, and your 20% duty has given you no protection at all at that particular point.
Those are just very brief remarks on those four points. I certainly can turn it over to Mr. Jordan to give you the details on any of those.
The Chair: Do you want to say anything now, Mr. Jordan, or do you want have the chance for our witnesses to come back at that?
Mr. Jordan: I can make some comments on the GATT consistency issue, which I think was one of the major issues raised by Mr. Wyslobicky.
We firmly believe the amendment in our long-standing policy, our policy that has been in effect since 1985, is GATT-consistent. Our policy has been published and widely circulated, not only in Canada but abroad, since 1985. Our trading partners are well aware of our sale for export policy, of our purchaser in Canada requirements.
I'll be quite honest with you. The words don't appear in the agreement in Canada or in the country of importation, but, like many areas of the international agreement, there's clarification required. This is one of the areas that not only ourselves but many of our trading partners have had to elaborate on because there is some confusion. When you have, as chart 1 outlines, two sales that appear to be bona fide sales to the country of importation, where is the certainty for importers and where is the certainty for the customs administration? This is what it's all about. When this agreement was implemented in 1985, one of the chief aims was certainty for the importer and certainty for customs. Which value are you going to choose?
In terms of our trading partners, they've all used different words in law. Australia and Mexico have used wording in legislation - by the way, which is not in the international agreement. The European Union has likewise implemented a regulation and the regulation uses the concept of the last sale prior to introduction into the Community. Those words are likewise not in the agreement.
It's interesting to note, too, that there's an international committee that deals with interpretative matters dealing with the international agreement. They, likewise, have issued an advisory opinion on the issue of sale for export, because it was problematic. The advisory opinion was issued for the guidance of all who applied the agreement, and it is interesting to note that the first example used in the advisory opinion is essentially our policy. It is the first example before you that was tabled.
The Chair: Are you saying the European Community is using the $80 or $100 value for duties?
Mr. Jordan: They will look at the last sale prior to importation.
The Chair: Would that be the -
Mr. Jordan: That would be the $100. They will, under their regulations, accept an earlier sale if there is sufficient evidence and sufficient criteria are met. For example, it must be a sale to the European Community. Another criteria they have put forward is that the goods are made to European specifications. But again, these words are not in the agreement either.
We found recently an interesting phenomenon or regulation in the European Community. While their valuation policy does not include the words ``to a purchaser in the European Community'', they have another regulation dealing with who can declare the customs value. Under that regulation, the declarant in the European Community must be fully resident in the Community and must be in possession of all the facts, the invoices and the records. If they are not in the European Community or do not have in their possession all the information, invoices, books and records, they cannot declare that $80 value.
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In other words, if they were to investigate a particular transaction and went to the declarant, which is, let's say, a company in the European Community, and asked for attestation, books, records and information relating to the $80 value, my understanding is, as I was informed by an official of the European Community, that if all that information is not available or if there is any doubt about that value or any of the elements of that value, that person cannot be the declarant.
If you look at the wording of the valuation regulation of the European Community, you don't see the words ``to a purchaser in the European Community''. You see other words, such as ``the last sale prior to introduction into the Community''. But when you put that with the regulation on who can be the declarant, I wonder if, practically speaking, when all is said and done and all the information is obtained, the results would be that different.
The Chair: What do you mean you wonder? We've had the statement that the European Community charges only on the $80. Are you telling us that no, in fact almost all or 100% of the transactions are on a $100 value for duty?
Mr. Jordan: I don't know what the actual percentage is, but when I look at their regulation, the first paragraph I read says ``the last sale prior to introduction into the Community''. That is their primary method under the regulation. That would be the $100.
They would accept the $80 if there were satisfactory evidence -
The Chair: Understood.
You have no evidence of what number of transactions would be based on the $80 or the $100?
Mr. Jordan: No.
Mr. Wyslobicky: First of all, the question of the U.S. treatment and the European treatment is....
I had the benefit of viewing the Canadian Bar Association's brief. They go into those methods in quite a bit of detail and I think will be able to clarify a number of the points Mr. Jordan has made.
I wanted to make one thing perfectly clear. In the figure 1 example, we don't want you to believe we are suggesting that the sale price from the foreign manufacturer to the U.S. middleman of $80 could be used as a value for duty if there weren't sufficient information and documentation to show that's the proper value for duty. We're operating on the assumption that the importer will be able to have that.
In that regard I would just like to read from Revenue Canada's ``Sold for Export to Canada'' memorandum. The association fully supports this concept. It reads as follows:
- Importations of goods may also occur where there is no purchaser in Canada at the time of
importation but where there is, nevertheless, a sale for export to Canada....
- ...there is a sale for export to Canada where the purchaser located outside of Canada has, at the
time of ordering the goods, directed that they be sent to Canada for his/her own account and risk,
and has agreed to pay, or has paid, a price for the goods.
- Such a purchaser should be prepared to demonstrate by way of documentation that at the time of
purchase it is clear that the goods were destined for Canada, without possibility of diversion.
That's my understanding of the way the European Union will allow an earlier sale. I think the bar association will expand on that a bit later on.
We're not asking for anything more. We just don't want to have anything less.
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Mr. Jordan: I'd just like to refer to the second two examples, which I think Dennis is referring to in terms of accepting earlier sales. In figures 2 and 3, for example, we have a sale from a foreign manufacturer to a U.S. company. The goods are shipped to Canada without having been sold to a Canadian client.
We are trying to craft the regulation right now to capture our policy. In fact, we've asked for public input. Many of the parties who are present today have promised to provide us with wording so that we can craft the regulation so there are no unintended results. In other words, we're not trying to go beyond our long-standing policy; we're trying remain within the policy.
In terms of the paragraphs that Dennis was reading and in terms of figures 2 and 3, the branch operation, for example, I think that with proper wording that fits within the legislation we could craft a regulation that maintains our policy.
We never intended to eliminate bona fide Canadian purchasers, subsidiaries, you name it, from the application of this policy. Many people made suggestions to us during the consultation. In fact, when we issued the regulation, we issued it in draft for consultation purposes because we wanted the input of the practitioners. We wanted their reaction to it, and many of the people and the associations with whom we consulted promised that they could get back to us with wording that we could consider in the redraft of this regulation.
Perhaps with the proper wording we could capture the situation that Dennis was referring to, which we have currently captured in our public policy, in the regulation when we draft it.
The Chair: Is that of consolation to you?
Mr. Wyslobicky: It addresses one peculiar fact situation, but it still doesn't address the fundamental issue, and that is that they're trying to implement their policy, but their policy, prior to the harbour sales case, is out of step with what is being done in the European Community.
The Chair: But they disagree with you totally. Mr. Jordan has said that you are wrong, that the European Community goes the other way and uses the same concept as the purchaser in Canada amendment would achieve.
Mr. Wyslobicky: With respect, I think he is wrong in his understanding of that, and I think most of the witnesses who will be following me today will perhaps help to clarify what the positions of our major trading partners are. Based on the work that I have done and that the association has done, I'm confident that our position is correct.
The Chair: Is there anything else?
Yes, Mrs. Brushett?
Mrs. Brushett: Can we look at figure 1 for a moment? Let me put this hypotheses to you. Perhaps we've left out a step there that does occur quite frequently in the importing-exporting marketplace. If you are in fact a foreign manufacturer in Taiwan, you will have then a person in that country who will be another middleman. He would in fact put a $60 price there. He has an invoice that says he paid $60 for the goods.
He now sells it to the U.S. middleman, but he handles a lot of exports out of Taiwan, so he is an exporter from Taiwan and an importer to the middleman in the U.S. Then, if you use your argument of the sales price of $80 for the U.S. middleman, perhaps you could go the next step and use the argument that $60 is the real value of that piece of goods. Then why couldn't I use that as my import price into Canada?
Mr. Wyslobicky: You're correct in that those types of situations don't happen that frequently, but in our submission, you have to understand what it is that customs value is trying to capture. It's not necessarily trying to capture the sale into Canada.
In fact, that's what Mr. Jordan is trying to suggest. The GATT valuation code contemplates that the value for duty under these international principles should be the value in the sale where those goods are ``sold for export to the country of importation''. That's all it says.
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In those circumstances, if the particular importer would be in a position to have the verifiable information in those circumstances, and if the person you identified as being the purchaser in that case could show that his or her particular sale or particular purchase was a transaction where those goods were sold for export to Canada, then conceptually that should be the value for duty.
It's not a question of duty evasion or minimizing taxes. In the real world this is what is happening in terms of commercial practice. The concept behind the code is what the relevant sale is when those goods are exported to Canada. If that particular transaction is described by that phrase, if you can substantiate it and show it was a transaction where the goods were exported to Canada, the concept behind the GATT valuation code should say that is the value for duty.
Mrs. Brushett: I would like to think the legislation proposes to have a consistent pattern or code for every item before it comes into this country to hit the marketplace.
Mr. Wyslobicky: That's actually not true under the valuation principles. Again, speaking from 13 years of experience in this area, in this particular circumstance under the proposed bill.... If you look at figure 2, where the sale is from the foreign manufacturer to the U.S. company for $80 in that case and the goods come into a Canadian warehouse.... I have seen situations where the transaction value has been disallowed and the value that was used for duty purposes was four times the $80 because of the way in which Revenue Canada applies its valuation formulas.
If you're not under this method, you go to another method, or one of several other methods of valuation that do not necessarily have any bearing at all on the inherent value of those goods.
Mrs. Brushett: Does that not apply whether the goods are sold intact as is or whether the goods have value-added in the form of additional manufacturing or whatever?
Mr. Wyslobicky: No, not at all. The goods can be resold as is and you can have that circumstance. I've had that happen to one of my clients.
Mrs. Brushett: Maybe we could have a response.
The Chair: Mr. Jordan, you wanted to say something.
Mr. Jordan: I would have to know the particulars of the case. If the client was reassessed by one of the regional offices, I'm not sure what the facts were behind that transaction and whether or not, on further appeal to my level, the facts would hold up.
Mr. Wyslobicky: This actually involved dealing with somebody in your office, but my point is not that specific example. My point is that if you look to the other valuation methods, you could have a situation where the value for duty is not $80 or $100, but it could be some other number that might or might not have any bearing on an actual transaction.
Mrs. Brushett: Are you saying the price could deviate from the invoice fairly frequently?
Mr. Wyslobicky: Certainly as a result of these proposed amendments, any time you don't have a purchaser in Canada you're going to be forced to another valuation method. There's the computed value method, which is like a cost build-up approach, which again is not a reference to a particular transaction. It's just a calculation type of thing.
There is what is called the deductive value, which is based on a subsequent selling price in Canada less a bunch of expenses that are incurred in connection with marketing those goods in Canada. It could very well be a highly artificial number.
Mr. Pillitteri: May I say, Mr. Jordan, you do have a nice pass. Maybe you don't play basketball, but I do understand you quite well.
I was just thinking about your explanation to the gentleman and wondering which case I was going to use to ask you about. I was going to use wine or liquor or pasta, but I think I'll use pasta this morning. I think it's a little more clear what its designated price would be for export.
We had a case, I think it was in the summer. The Europeans play a game most of the time and many times we have to adapt to them. Possibly I think we could use words and maybe they would have to adapt to us.
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There's one case with pasta where they're buying durum wheat from Canada and manufacturing it in Europe into pasta. They have two different price levels. One is clearly for their domestic market. They have a tariff, so therefore it brings up their floor price, and this is the price they use within the European common market.
These importers and makers of pasta turn around and tell the government they're not going to be using a certain amount for the domestic market. They're going to be using it strictly for export, so they want the tariff back because it doesn't have anything to do with their own market; it's strictly for export. So their price is on the basis of our import, and then they put on an added value and export it. It has nothing to do with our market.
Which is the rightful price of the pasta that is imported into Canada? Is it their subsidized price, their price value we use in their country, or the price we use in our country?
Mr. Wyslobicky: If I can answer that question...hopefully, Mr. Jordan and I can agree on this one.
If somebody in the foreign market was selling that pasta to a purchaser in Canada, whatever price it was being sold at, as long as it was an uninfluenced price - I hope we agree, Mike - it would be the relevant value on which duty should be paid. I think that's something that's not directly at issue here with the sale for export or purchaser in Canada proposal.
Mike, am I right on that?
Mr. Jordan: Basically. I'll have to agree with you, Dennis, that it is the sale for export issue. One of the premises of the international agreement is that we can't use the agreement to combat dumping or subsidization. In other words, the value for duty is to be a neutral element. There are other international instruments that exist, such as the anti-dumping code, for example.
Essentially, if it's a bona fide sale for export and there are no other influences, we would accept that price. You may still have the issue of middle persons; for example, if a pasta manufacturer sells to somebody else, who in turn sells to Canada. That issue could come up in the pasta example. So there would be a valuation issue from that perspective, but not from the point of view of the subsidy.
Mr. Wyslobicky: We agree on something.
Mr. Pillitteri: We agreed on that part. But I just wanted to show the game they are playing. By having that, we know the premises and how they play. I cannot in any way accept what you call the real price.
Mr. Wyslobicky: I understand what you're referring to.
The Chair: Something occurred to me. The Canadian Bar Association representatives are here. I understand that their brief is entirely on this issue of purchaser in Canada amendment. They are totally in accordance with what you have said about it.
Maybe we could get you up to the table immediately, and if you have any differences you could explain them to them.
I take it Ogilvy Renault, on behalf of Harbour Sales, is absolutely ad litem with these witnesses, as well. Do you want to come up, Kenneth Sorensen and Richard Giggal?
I don't want you at the table, necessarily, if you have major differences of opinion. But it's my understanding from your brief that you are in agreement with the importers. Is that correct?
Ms Tamra L. Thomson (Director, Legislation and Law Reform, Canadian Bar Association): Yes, Mr. Chairman, that is correct.
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The Chair: Is there anything you would like to add in terms of what they have said or not said?
Ms Thomson: Mr. Chair, I think we would like to make a brief opening statement to clarify certain technical matters relating to the position of the sales and commodity tax section of the CBA. It is that section that is appearing today.
The Chair: Is this like when a lawyer puts E.& O.E. on the bottom of my opinion?
Ms Thomson: It simply indicates the particular expertise of those appearing before you today.
The Chair: Oh.
Ms Thomson: The sales and commodity tax section is that part of the Canadian Bar Association where all of the tax practitioners get together and share their expertise. The statement that is being made before you today has been approved as a public statement of that section through the normal procedures of the Canadian Bar Association. The section comprises more than 300 members whose area of practice is specifically in the area of sales and commodity tax.
I will ask Mr. Cranker and then Mr. Somers to elaborate on some of the points that have been made in our brief, which was provided to the clerk this morning.
The Chair: How long will you be taking?
Mr. Glenn A. Cranker (Secretary-Treasurer, National Sales and Commodity Tax Section, Canadian Bar Association): How much time do we have?
The Chair: You have three-quarters of an hour. From the committee's point of view, I'm only interested in whether you have any differences of opinion with what we've heard before. Do you agree completely with what has been said by Dennis?
Mr. Cranker: Thank you, Mr. Chairman. We do agree. We have had the opportunity to see the Canadian Importers Association's submissions prior to this hearing. In fact, what we wanted to do is supplement certain of the points that were made.
The Chair: Okay. How long would you like to take to supplement those points?
Mr. Cranker: I think we probably don't need the full 45 minutes from you. We can do it within.... Would you like 10 minutes, 5 minutes?
The Chair: No. We're here to accommodate you. You've been good enough to prepare this brief for us and to come down here. We'll give you the full time. I just want some indication of -
Mr. Cranker: Mr. Somers is going to be addressing the U.S. and the European legislation. I'm going to be addressing the international customs valuation code.
The Chair: Okay.
Mr. Cranker: I think 10 minutes. We'll try to do our best to stay within that parameter.
The Chair: Okay, thank you.
Having said that, do you people want to stay at the table as well? You're quite welcome to do so, Mr. McArthur and Mr. Wyslobicky.
Mr. Cranker: Thank you.
I think Mr. Wyslobicky has made many of the points we have. You can see from our submission that was circulated that we have the same three major points. One, that this is a fundamental change in our customs valuation provisions. Two, it's inconsistent with the international customs valuation code. And three, it is at variance with the law of our major trading partners, primarily in our examples, the United States and Europe.
I wanted to deal with the Harbour Sales case only by noting that the Canadian International Trade Tribunal dealt specifically with the issue of whether there was a residency requirement in our law. They found to the contrary. What they said in closing, with regard to the residency issue, was:
- ...the Tribunal also notes that Canada is a signatory to the Agreement on Implementation of
Article VII of the General Agreement on Tariffs and Trade...which establishes rules on customs
valuation. None of those rules require that, for purposes of customs valuation, an importer be a
resident of the country into which goods are imported.
- I can see no basis whatsoever for the argument that the Tribunal erred in failing to read into the
Act, and specifically section 48 thereof, a residency requirement.
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We are simply saying this isn't a clarification of the law; this is a fundamental change in the law.
I happen to have some sympathy for the revenue issue. Indeed, if you have a higher value of duty, you will have higher customs duties. It's clear that we need money. However, here we have our law based on an international agreement. That international agreement is article VII of GATT.
I have with me today the provisions from the WTO agreement where we reconfirmed the GATT customs valuation agreement. In it the members agreed, recognizing the need for a fair, uniform and neutral system of valuation of goods. They reaffirmed the GATT code. It says in paragraph 1:
- The primary basis for customs value under this Agreement is ``transaction value'' as defined.
- The customs value of imported goods shall be the transaction value, that is the price actually
paid or payable for the goods when sold for export to the country of importation....
- Those are the words that we say should be in the law and are now in our law.
We've had discussions with Revenue Canada, and I want to say they have been very good with the Canadian Bar Association. They have exchanged the information and we have undertaken to give an input on the regulations. Mr. Jordan is quite correct that we have not given input on what a ``purchaser in Canada'' is because we fundamentally disagree with the addition of those words to the act. If those words are not included, then there isn't any reason to deal with the regulation.
We have a committee on customs valuation. We have a provision in article XXII of the customs valuation code that says:
- Each Member shall ensure...conformity of its laws, regulations and administrative procedures
with the provisions of this Agreement.
- So we have to be consistent. We don't have a choice. This is what we've agreed to
internationally.
- Each Member shall inform the Committee of any changes in its laws and regulations relevant to
this Agreement and in the administration of such laws and regulations.
- I don't know whether the Government of Canada has actually referred to the customs valuation
committee the proposed legislation, but I would say that before it is enacted into law, we should
at least do that to see whether it is WTO-consistent or not.
Thank you.
Mr. Gregory O. Somers (Member, National Sales and Commodity Tax Section, Canadian Bar Association): Just before I turn to the practice of our major trading partners, I would like to follow up on Mr. Cranker's comment.
The interpretive notes that form part of the WTO valuation agreement assist us in interpreting the agreement. An annex to them states, ``imported goods are to be valued in accordance with the provision of Article I'' - from which Mr. Cranker read - ``whenever the conditions prescribed therein are fulfilled''. In other words, if Canada were to add another condition, such as residency, it would be afoul of article I as it's interpreted in those notes.
The association's position - and I'm comfortable being completely unequivocal about this - is it is contrary to the U.S. practice and contrary to the European practice to require residency. Although one of the principles in the European customs code is that the last sale that causes goods to be introduced into the Community can form the basis for customs value, a sale prior to that in the series of sale sequence can also be admitted as a basis for customs value.
In the CBA submission, on pages 8 and 9, the current text of the interpreting provision of the customs code in the Community is set out. I won't read it at length here, but the underlined portion on page 9, which is the second paragraph of section 1 of article 147 of the implementing regulation, allows for a prior sale - a sale prior to the sale that causes the goods to be introduced in the Community - to be used as a basis for customs value; in other words, the $80 rather than the $100, to use the shorthand that's been adopted here this morning.
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To use an example, A in Korea sells to B in Japan, who sells to C in Brussels. Normally, without more evidence, the Community will take the sale from B in Japan to C in Brussels as the basis for the customs value, that being the last sale.
However, if the declarant can give convincing evidence that the sale from A to B, Korea to Japan, is in fact the sale for export to the European Community, then that will be the basis for the customs value. It's really incumbent on the declarant to establish what the true sale for export was. Alternatively, of course, the customs authorities will defer to the higher value, thus maximizing revenue.
The residency of the declarant, on the other hand, really doesn't have any bearing on this issue. What the customs authorities focus on when they're trying to decide what the sale for export transaction value is, is the sale that caused the goods to come to the Community - the sale that was the sale for export. The residency of the declarant relates to the administrative problems of marshalling the evidence, or being in possession of the invoices.
Indeed, Canadian law provides that importer records - records in relation to an importation - have to stay in Canada for a certain amount of time following the importation, to facilitate audits and for housekeeping matters.
In fact, Revenue Canada recognizes this in another separate policy memorandum, the shorthand for the nomenclature of memoranda is D-1-4-1, entitled ``Invoice Requirements of Canada Customs''. In it, Revenue Canada recognizes that a sale prior to the sale causing the goods to come into Canada, if you will, or the sale to the purchaser that is resident in Canada, can form the basis for customs value, and it stipulates the evidentiary requirements that it will look to before it allows the $80 sale, as it were, to be admitted as the customs value.
As for the United States, we've heard this morning, and I can agree, that U.S. customs is stubborn, if not intransigent, in its accepting what the U.S. courts have repeatedly ruled on what the value for duty should be - what sale it should be based on.
The most recent court case, as counsel for the Importers Association pointed out, is the Nissho Iwai case, which occurred in 1992, relating to subway cars being shipped to the United States. U.S. Customs wanted the price to the New York Transit Authority - the purchaser in the United States - to be the basis for the customs value. The transit authority argued that no, it was the sale between the Japanese producer, Kawasaki, and the unrelated Japanese trading house, Nissho Iwai, that should form the basis for the value for duty, because those cars were always intended to come to the United States. That was the sale for export - it happened in Japan, but it was still a sale for export to the United States. The U.S. federal circuit court agreed and told U.S. Customs not that the declarant may rely on that prior sale, but that U.S. Customs must use the first sale for export where it is a bona fide arm's length price transaction.
I think the bar association's position -
The Chair: Mr. Somers, are the authorities in the States trying in practice to get the higher value for duty, in spite of what the courts have ruled?
Mr. Somers: The authorities in the United States are reading the various authorities as narrowly as they possibly can, and there are three primary ones, which are also set out in our brief - I won't go into them in further detail. They are trying to read them as narrowly as possible in order to, in as many circumstances as possible, capture the $100.
The Chair: Why shouldn't our authorities be doing the very same thing, since the U.S. is our biggest trading partner? They're the ones with whom we are most closely involved.
Mr. Cranker: We refer to the U.S. position, and it's a memorandum to all regional directors for commercial operations. We can leave a copy with the clerk if you'd like. It deals specifically with Nissho Iwai and what shall be done. It says:
- Entered values based on a sale from a manufacturer to a middleman may be liquidated once the
importer has demonstrated, to the satisfaction of the import specialist, that the sale from the
manufacturer to the middleman was a bona fide sale for export to the U.S. and was at arm's
length.
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The Chair: In other words, if we go through with this amendment we'll be way out of step with the law and the practice in Europe and, even more importantly, with the United States, yes or no.
Mr. Somers: To a degree, yes.
The Chair: Obviously, our officials don't agree at all with what you're saying and I want to give them a chance to respond.
Ms Close: Thank you, Mr. Chairman.
No, we don't agree. We don't agree we're out of step with our major trading partners. Just to make the point, if we were out of step with them we'd hear very quickly from them, and we have not heard from them.
My understanding is we have not gone to the customs valuation committee and put this legislation before it, but the Americans do have the legislation. They see all of our legislation as it is being proposed, and we have not heard from them.
Certainly, if the customs valuation committee find it inconsistent, we'll hear from them very quickly. We will not be out of step with our major trading partners.
Just to reiterate very quickly the point about being out of step with our major trading partners, the Americans do have the legislation that is in front of you today. They see all of our legislation. They go through it very carefully, as we do theirs. We have not heard that they are at all concerned about this issue.
Furthermore, on the customs valuation committee, no we have not put it before the committee. It's not normally our practice. That is sort of extra-territorial jurisdiction. We do the studies very carefully in-house to make sure we are consistent with the international obligations we have undertaken. But certainly, if they ever did find us inconsistent, we'd hear from them very quickly. We do not think that will occur.
As to article VII of the GATT, I think Mr. Jordan was very careful in his remarks, and did say it many times, that no, it doesn't require a residency requirement and it does talk about export to the country. But as you've seen from the schematic presentation here before, you can interpret export to Canada in two ways. It does require clarification. Our major trading partners as well as ourselves are trying to clarify that to make it consistent with the policy as it has been administered in the past.
One final note, I guess, on that. Our import policy here in Canada, our whole tariff policy, has been based on past practices, how valuation for duty has been run in the last two years in this government. If suddenly that changes.... This is why it was very important that we get that clarification. The legislation we had before was not clear, the CITT was quite right. It was not clear on this. If we don't do it we're back into looking at our whole tariffs policy.
Our tariffs policy is based very much on what the value for duty is and the protection required by Canadian manufacturers, and the liberalizing view that we have is on the basis that we can't afford to liberalize. If the value for duty is changed from $100 to $80, we'll be looking at a whole new tariff policy, and we do have international obligations under the GATT where we cannot raise tariffs. Our tariffs are bound.
I think that leaves our industry in a very awkward position and the tariff policy in an awkward position as well.
Mr. Chairman, we sincerely think this legislation is clarificatory -
The Chair: That's a terrible word.
Ms Close: - and puts into place what was the practice by Revenue Canada since 1985. The regulations will ensure that any of the other examples get caught up, so it is run the same way as it was run before.
The Chair: Going back to the simple issue, these witnesses, who are experts from the private sector and who were directly affected in one case, tell us that we will be out of step with not only our European partners but, even more importantly, with our American partners. Even though the Americans might not have said you can't do this and we don't want you to do it, we will be out of step. To the extent we have to import certain things to be competitive, we will be at a competitive disadvantage.
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Intelligent people are at 180 degrees from one another. I don't know how I or members of this committee can be expected to become expert instantly and resolve this. I'd like to lock you in a room until you come out with a consensus. I don't know whether further discussion among you could lead to anything where we, the committee, could take succour from the fact that we have chosen correctly.
Mr. Grubel: I find the argument that the Americans haven't reacted yet is a very poor defence to the basic, logical argument and documentation I have. After all, there could be an infinite number of reasons they haven't reacted. Why don't you directly attack the evidence that was presented? Are the paragraphs cited incorrect or inapplicable? Is there a misinterpretation in wording?
It seems to me a very weak defence that you have.
Ms Close: The argument was only put because the question was asked: ``Have our trading partners seen the legislation?'' The Americans tend to react very quickly to any legislation we propose that they think is inconsistent with our NAFTA obligations. Very quickly. That was the reason it was put forward.
Maybe Mr. Jordan can answer to the actual clause that was read out, because I'm not so sure of the context of that clause and what it implies.
Mr. Jordan: All I can speak to is my current understanding of the U.S. administration. They administer the same policy as we have in Canada. It's true that they argued the case before the courts and lost three times. What that tells me is they clearly believed that their policy had merit.
Our understanding is they haven't changed either their law or their policy. It is my understanding, based on recent evidence I've obtained from people in the community, that the U.S. will only deviate from that $100 if the fact situations of the transactions are identical or closely similar to those of the three court cases they lost.
I don't believe they've overturned their policy. At least that's not my understanding. That's not what I'm led to believe. Unless you meet the fact situation of one of those three court cases, you will end up with the $100 valuation.
In the European Community, for example, while they don't have a residency requirement in the valuation regulation, they have a de facto residency requirement, because another regulation says that to declare that value, the person who comes to Customs with the values declaration must be a resident in the European Community and must be in possession of all the facts and have no doubts about what they're declaring.
How that translates into an audit or a verification, I'm not quite sure. They may just go and say, ``Do you know this is true? Is there a royalty payable by this foreign vendor? Do they pay a royalty to some other party?'' My understanding is if they get an ``I don't know'', they reject the transaction.
So how far apart are we? I would suggest we would generate essentially the same results as the Australian legislation has. Mexico looks to the selling price to the importer in Mexico. That importer must be registered with the Mexican government as a taxpayer and so obviously must have some presence in Mexico.
On balance, when I look at and try to deal with practical examples, in many of the cases we'll end up with the same results, at least from what I can see.
Mr. Grubel: In understanding these kinds of issues, I always find it useful to see where the motivation is coming from. Clearly we've had a policy in effect for years. You have now taken an initiative to change it.
There are three possible sources, as far as I can see. Maybe there are others. One of them is that you have pressure from Revenue Canada. You want more revenue. The other one comes from people who are feeling that they're not getting enough protection of Canadian domestic producers because the implicit rate of tariff protection has been lowered as a result of this.
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The third one would be from bureaucrats who believe that their lives should be made easier; they don't want to have to go through all the judgments necessary to decide whether this is a bona fide case of arm's length and all the things that we have discussed.
Now, could you enlighten us, if possible, on where the motivating force came for making this change?
The Acting Chair (Mr. St. Denis): Maybe we'll start with Mr. Cranker and then, if you don't mind, we'll come back to Ms Close.
Mr. Cranker: There was, when the notice of ways and means motion was tabled - and I'm sure Ms Close will know this - direct reference to the Harbour Sales case. To put it simply, the department had a policy that read into the law that there must a purchaser in Canada - a residency requirement. That was challenged in the courts and they lost.
They didn't like losing - none of us do - and they put ``purchaser in Canada'' into the law. I don't think the Canadian Bar Association has any great problem with them wanting to put that in. But what we're saying is we've got an international agreement; we have legislation in the U.S. and Europe that doesn't provide for it. To our knowledge there is no country in the world that has a residency requirement. We have a bigger picture that we have to consider here, and we're asking the finance committee to, too.
There's no other country that we were able to identify that has a residency requirement in its valuation laws who are in adherence to the customs valuation code. Now, we could be wrong, but we didn't find any.
The Acting Chair (Mr. St. Denis): Ms Close, please.
Ms Close: First of all, I'd like to say the change proposed before you in the legislation is not a change to our policy.
You're quite right. In the notice of ways and means notion we do refer to the Harbour Sales case, and that is exactly right. We do in this country have the Canadian International Trade Tribunal. That tribunal was set up specifically to look at differing interpretations of the legislation. It's also set up for other things, but that's one of its roles.
It did look at this section of the legislation and it did say it was not clear. It said: Revenue Canada, you've been administering it this way for the last ten years, but it's not clear from the legislation that you can do that.
This happens all the time; it's one of the major reasons we make amendments to our legislation. When the intent of the legislation, the intent of the policy, was not clearly drafted, we propose an amendment. That is in fact the reason for proposing the amendment before you today. It's certainly not to get any more protection or any more revenue. It's to carry on the bureaucratic practice, not change it.
The Acting Chair (Mr. St. Denis): Thank you for clarifying.
Mr. Grubel: Would you agree that it would lead to more revenue?
Ms Close: No, it will lead to the same amount of revenue.
Mr. Grubel: So why would the interests who think they'll have to pay more revenue be fighting it? Do you have any idea on that? Can you speculate on that?
I would suggest that the evidence that you present to me that there is no new revenue being gained is not persuasive. Why would these people be here?
Ms Close: I can't presuppose that. But you could say maybe they would like to pay less duty.
Mr. Grubel: Hold on for a moment. Either you have a change in effective policy or not.
The Acting Chair (Mr. St. Denis): Let Dennis -
Mr. Grubel: Sorry, Dennis.
Mr. Wyslobicky: Perhaps I can try to address that issue.
First of all, when the sale for export policy was being developed back in 1985 and 1986, there were extensive consultations between Revenue Canada and interested people in the importing community as to how that phrase should be interpreted. I think it's fair to say that, after two or three years of the people in the importing community banging heads on this conceptual issue with Revenue Canada, we agreed to disagree.
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I know in terms of Revenue Canada's policy, they did very well have that policy, that you had to be a purchaser in Canada in some situations, as we heard earlier, but not all. A lot of people in the importing community disagreed and continued to claim the lower value, because quite frankly, like Harbour Sales, they thought that was the right answer.
So there's a question of how much of a difference there is going to be in revenue. For anyone who held a differing view and were declaring their goods on a different basis from Revenue Canada's policy - and a lot of people were doing that - if this amendment goes through it's obviously going to mean that they're going to have to pay a higher amount of duty, and there'll be more revenue coming into the coffers, if you will.
Mr. Grubel: Is that considered a desirable feature of this amendment?
Mr. Wyslobicky: It's not desirable from the importers' standpoint, obviously, from a financial standpoint.
Then again, from the Importers Association's perspective, there are a number of reasons why this thing should not go forward. We've tried to articulate those today. Revenue was our fourth point, as you'll recall. That was one of them. It seems to be contrary to the general trend.
Mr. Grubel: Well, I'm also representing the consumer, the average Canadian, and the average Canadian benefits greatly when protection is reduced. Whenever the political system makes it possible to reduce protection because those protected industries don't scream loud enough, I would welcome this. I am disappointed that the department represented here that proposes this amendment for what I consider to be pure legalistic reasons....
I really have no understanding of where the national interest is served by issuing a clarification of a piece of legislation that in this day and age increases protection and therefore hurts the consumer, especially when there is no strong interest - and I asked about it - that says we need more protection at this point. It just makes no sense to me.
The Acting Chair (Mr. St. Denis): Mrs. Brushett, did you want to intervene? We're going to try to wind up in the next five minutes or so.
Mrs. Brushett: It's a point of clarification. My honourable colleague across the way here perceives this to be a new change. I would like to point out, if I am correct, that it is not a new change. It's been the pattern consistently for the last decade that we have charged duty on the price the importer pays when that article comes into Canada for sale. That has been the tradition, and this is simply an amendment that's a point of clarification.
Mr. Grubel: But the evidence is that these people are coming because they expect to have to pay more.
Mrs. Brushett: But they have been coming continuously. They don't expect to pay more. They've been paying the final price for that period of time, but there have been a few exceptions. Now, with the point of clarification, there may not be these exceptions so readily.
The Acting Chair (Mr. St. Denis): In the interests of getting on to our next witnesses, are there any parting shots before we excuse the witnesses?
If not, on behalf of all our members, I thank you for participating in what ended up being a bit of a debate. You probably didn't expect this format when you came. We appreciate your patience and tolerance with the format. It's been very helpful to all of us. No doubt there will be further discussions, including among ourselves and/or officials to follow up. Thank you very much.
Before we call our next witnesses we'll take a short break.
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The Acting Chair (Mr. St. Denis): If we're all set to go -
Ms Brenda Swick-Martin (Ogilvy Renault on behalf of Harbour Sales (Windsor) Ltd.): Mr. Chairman, I'm almost ready.
The Acting Chair (Mr. St. Denis): Thank you for appearing. As we did earlier this morning, we may at some point invite our officials to the table to assist us in getting all points of view, but we'll start out with just you. Do you have a presentation of possibly ten or fifteen minutes to kick things off? I invite you to start.
Ms Swick-Martin: Mr. Chairman, my name is Brenda Swick-Martin from the law firm of Ogilvy Renault. With me I have Ken Sorensen from Livingston Trade Services and Richard Giggal, also from Livingston Trade Services. Our firm represented Harbour Sales (Windsor) before the Canadian International Trade Tribunal in the Federal Court. Our interest here is on behalf of our client, Harbour Sales.
Mr. Chairman, I have provided the committee with some speaking notes, which I believe were circulated to the members yesterday, and I would like to review those briefly.
I will give just a brief description of what this is really all about, which is the agreement on the implementation of article VII of the GATT pertaining to customs valuation.
I would like to point out to the committee two points from the agreement. Reading from the preamble, the agreement was designed to elaborate the rules for the application of customs valuation in order to provide greater uniformity and certainty in their implementation and to avoid the use of arbitrary or fictitious customs values.
Then I would like to refer you to article I of the agreement, pertaining to exactly what constitutes the transaction value of goods that are sold for export to Canada. That provision reads that the customs' values of imported goods shall be the transaction value - that is, the price actually paid or payable for the goods when sold for export to the country of importation, directly mirroring the words in our legislation currently under subsection 48(1) of the Customs Act. I've outlined what the Customs Act currently reads and how it mirrors that interpretation.
Clearly, under the valuation code in article I, and in any of the committee reports of the valuation code, there has never been a requirement that the purchaser in a sale for export be a resident of the country of importation. The location or the nationality of the purchaser is not a relevant factor in the identification of the sale for export.
I'm sure you discussed it at great length before we arrived. The proposed amendment to subsection 45(1) is that suddenly the goods are now to be sold for export to Canada to a purchaser in Canada. So residency has suddenly now reared its head in something that never used to exist under the law or in the international agreement.
I think we've probably heard testimony earlier this morning that, prior to the Federal Court decision in Harbour Sales, the administrative policy of the Department of National Revenue was that it was the sale that sets off this chain of events, the transaction in which the person in Canada is directly involved. That was somehow going to constitute the sale for export to Canada of the goods, thereby implying the residency requirement. Clearly, this was something that did not ring well with my client in terms of Harbour Sales, and this is why obviously it did not ring well with the Federal Court either, nor the Canadian International Trade Tribunal, which is why they struck down the department's interpretation of that legislation, only to both come up and say that residency is a concept that is totally foreign to the determination of the value for duty under the Customs Act. That Customs Act, of course, is mirrored under the GATT valuation agreement, and that interpretation is consistent with Canada's obligations under the agreement.
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My client's concern, of course, is not only that they will be reassessed for increased duties in the event that this proposed amendment passes through Parliament, and reassessed after they have had their rights vindicated on appeal before the Federal Court, but what the proposed amendment proposes to do is to allow Canada to legislate into Canadian law its previously inconsistent interpretation of the meaning of goods sold for export to Canada.
I think what we have to say is that it is an interpretation that is inconsistent with other jurisdictions who are also signatories of the WTO, and it's inconsistent with the European Community's interpretation. It is inconsistent with the American Federal Circuit Court's decision in Nissho Iwai, which clearly stated that residency, nationality, is not a requirement of sale for export, and it brings to bear Canada's credibility in the WTO.
I have to say that at this stage, of course, it's incredibly important, because a representative of Canada is the director of the appellate body for the WTO, and this is an inconsistent application of the valuation code if this proposed amendment goes through.
In my client's view, and in our view, it puts the Canadian credibility, in terms of their interpretation of the code, at great risk. So, of course, we also feel that it does not set a positive example for new signatories to the WTO.
In short, Mr. Chairman, we are opposed in great length to the proposed amendment and we wish that it not be passed.
The Acting Chair (Mr. St. Denis): Mr. Grubel.
Mr. Grubel: I have a question of clarification. If this legislation were passed and you were correct, would you expect there to be repercussions at the international organization level? Would there be appeals? Would there be penalties? Would there be any kind of repercussion?
Ms Swick-Martin: There would be a repercussion in terms of a definite signal going out to the other WTO signatories who do not have a residency requirement that all of a sudden Canada will be pursuing an inconsistent interpretation of the code.
Mr. Grubel: But would they have the opportunity to challenge the validity of this interpretation under their existing codes - an appeals procedure or something of this sort?
Ms Swick-Martin: Yes, I think all of this would be subject to the internal WTO dispute settlement provisions.
Mr. Grubel: Do you have an indication that the department has obtained an opinion from their counsel with respect to world trade law on this thing?
Ms Swick-Martin: No. I would love to have access to such an opinion, but I don't think the department would give it to us. I have no knowledge of that.
Mr. Grubel: Thank you.
The Acting Chair (Mr. St. Denis): Prior to your arrival, previous witnesses have raised the very same issue, and we got into it to some great depth. If I may ask - and this may reflect the view of some of what it's boiling down to - is this provision simply an implementation of Canadian revenue practice over the last number of years, or is it something new? That's one of the points about which a decision will have to be made at some point.
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Ms Swick-Martin: Mr. Chair -
The Acting Chair (Mr. St. Denis): I'll come back to you, Ms Swick-Martin.
The other main point is whether it is consistent or inconsistent with the practice of our main trading partners.
Ms Swick-Martin: I have to say that it is very inconsistent with our trade practice. Our neighbours to the south have been through this process. They have taken the very same, or similar, factual situation in Harbour Sales through the Federal Circuit Court in Nissho Iwai. The court was very clear that residency was not a requirement.
So clearly, this would be an inconsistent interpretation of the code by Canada.
Mr. Grubel: I just wonder if we could have Ms Close up here one more time to inform us on her opinion of the likelihood that our interpretation will be challenged in the international tribunal.
The Acting Chair (Mr. St. Denis): Ms Close, can you please join us?
That was a good suggestion.
Ms Close: I would like my colleagues from Revenue here, too. I'm not an expert at the various customs committees we have, but I do know we have them both...in the NAFTA, there is a customs committee that meets very frequently or committees that meet internationally in both Brussels and Geneva on these issues.
If another government brought a complaint on this issue, I do not think the first place they would take it would be to the committee; they would take it directly to government officials. If it could not be resolved, and they thought it was inconsistent and we were not meeting our obligations and another government felt strongly enough to take it to one of these committees or locales of discussion, they could do so. But the advice we have received from Revenue officials who deal very closely with their counterparts elsewhere is that this is not so different from the way it is being interpreted elsewhere. In fact, if the way they have been interpreting it for the last ten years is this way, and we have not heard from anybody in the last ten years, then I don't think we should hear from them.
Mr. Jordan made the point several times that while ``resident'' was not in the customs valuation code, per se, there is a regulation in the European Union stating a residency requirement. There now are other countries trying very hard to clarify this, because they're running into the same thing the Canadian customs and revenue services are running into: there is a difference of opinion in how you could interpret this.
Everybody is trying to clarify this. The Europeans are trying to clarify it. The Americans haven't tried to clarify it, but they still do take it to court every time to maintain their policy.
So if your question is whether I think it will go to one of these ``international courts'', to use that word in quotations, I doubt it.
The Acting Chair (Mr. St. Denis): Ms Swick-Martin.
Ms Swick-Martin: In response to Madam Close's arguments, I would of course have to say on the record right now that the Americans have a very legally entrenched position that residency is not a requirement in a sale for export.
I would refer the committee to Nissho Iwai American Corp. v. United States, the Federal Circuit Court of Appeals, 982, the federal supplement at 505.
I would also like to just read into the record what the court said in that decision, the case that is followed by U.S. customs authorities:
- The court also rejected the U.S. customs administrative policy of determining which of two or
more sales for exportation to the United States should serve as the basis of customs valuation by
choosing the sale which most directly causes the merchandise to be exported to the United
States. It found this administrative approach to be legally unsound and not supported by the
legislative history of the U.S. customs valuation legislation.
They went on to say that they clearly rejected the requirement that the sale involve at least one party resident in the United States. Rather, the court concluded that if the transaction between the foreign manufacturer and its customers is otherwise a sale - which is the real issue - for customs valuation purposes, and relates to merchandise clearly destined for export to the United States - which is the second real issue, regardless of residency - it should be used as a basis for the transaction value, notwithstanding the fact that the purchaser as a middleman is located outside of the United States. Because that is the real issue - is there a sale and is the product directly destined for consumption to Canada? Residency is not a relevant requirement in the United States of America.
The Acting Chair (Mr. St. Denis): Thank you.
Mr. Pillitteri.
Mr. Pillitteri: My question is relevant to the issue, but I'm going to look at it a little differently. We always make reference to what the United States or the Europeans are doing; it seems that we are somehow trying to follow. Could our department possibly be a leader in this issue? The others have not defined their policies clearly in order to get their house in order; maybe ours is leading the way in trying to get its house in order in an interpretation of it.
My question to you would be, if the Europeans have the issue prior to entry, the last invoice prior to entry, do you think that is a protection on their part? Would you agree with something like that? It's mostly hypothetical, but would you agree with the way that was worded rather than as part of residency?
Ms Swick-Martin: First of all, I would have to say that in our view the issue is not so much who is taking a lead in the interpretation. Countries have signed on the WTO and the WTO expressly does not provide for a residency requirement.
The fact that the Americans are doing something.... I cited the Americans because the Americans and the American courts have applied an interpretation consistent with that of the code.
Mr. Pillitteri: They have not changed, though.
Ms Swick-Martin: But they have changed, because the Nissho Iwai decision was a result of a previous customs administration practice.
Mr. Pillitteri: But they have not changed; they continue to charge the higher of the prices.
Ms Swick-Martin: No, excuse me. In regard to the United States, what the Nissho Iwai decision says is that if you have a foreign manufacturer, a U.S. middleman and the ultimate purchaser in the United States, it is the sale between the foreign manufacturer and the middleman at the lower price or cost that is the proper sale for export to the U.S. It is not the price from the middleman to the U.S. purchaser, at the higher price, at the marked-up price, that constitutes the sale for export.
The Acting Chair (Mr. St. Denis): Mr. Jordan.
Mr. Jordan: I touched on that issue this morning, and as I mentioned, I agree that they took the position to the court three times and lost it. But my understanding is they will apply the policy, as it's essentially our policy, and they will only apply those three court case decisions to fact situations that closely resemble the three court cases lost.
I have this information as late as last week from people in our import community who have contacts with people south of the border, and this is the information I am getting. I recognize they took this position to the court three times and that they lost those cases three times. It's still interesting that they are clearly arguing that position before their courts. All I can say is what I understand of the current administration: they have not changed their law. It remains as is and as I explained the policy.
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In terms of the European Community, again, I'd like to stress that because of the requirement for the declarant to be resident within the Community, there is another regulation outside the valuation provisions stating that to declare value you must be resident in the European Community and you must have access to all the facts.
I can table copies of that regulation, if you wish.
We do not have that requirement in Canada. Any person can be an importer, can declare the values. My understanding, from a reading of the European regulation, is that to be the values declarant you must be resident in the community.
The Acting Chair (Mr. St. Denis): Mrs. Stewart.
Mrs. Stewart (Brant): I just want to be clear on your interpretation of these three particular cases. It seems to me they suggest that the decision will not be made until there is jurisprudence significant enough to make the change. What they're saying is, three cases is not enough. Is that possible?
Mr. Jordan: In the U.S. administration?
Mrs. Stewart: Yes.
Mr. Jordan: It's difficult for me to speculate on what's going through the U.S. administration's...when they consider such cases.
Mrs. Stewart: Let me see if I understand what you are saying.
The United States has not changed their legislation to be significantly different from what we're proposing here, despite the fact that there are three cases that have gone through the courts, with particular dynamics, particular contexts that support the position taken by the three witnesses that have just presented - these, the Bar Association, and the Importers Association.
Mr. Jordan: Yes. That's my understanding. If the fact situations of your transaction meet those three court cases, they may accept an earlier sale.
Mrs. Stewart: As you understand those three cases, to the extent you do, are they all significant and unique enough to suggest that there won't be general jurisprudence?
Mr. Jordan: One dealt with, I believe, subway cars that were being introduced into the domestic market. That contract was very specific. The subway cars were for the New York Transit Authority. I guess they were clearly made to specifications of the New York Transit Authority. I don't know how many more cases would fall within the parameters of that particular court case. I'm not quite sure.
The Acting Chair (Mr. St. Denis): Maybe I could intervene to ask Mr. Jordan or Ms Close, or any of our other witnesses, does the proposal of Bill C-102, as in clause 48, resemble what the U.S. has now, or is what the U.S. has now what we used to have?
Mr. Jordan: Our administrative policy, the concept of our policy, the sale to the purchaser in Canada, would have been consistent with the U.S. policy. Is the wording identical? No. It's not quite identical.
The Acting Chair (Mr. St. Denis): Is there a debate between the revenue officials in the U.S. and their import industry similar to the debate we're having around this table today?
Mr. Jordan: I'm not quite sure, but having taken three cases to court, I assume the debate is still alive in the American administration in the import trade. I just don't know what other cases are going on at the present time.
The Acting Chair (Mr. St. Denis): Are there any other questions?
Ms Swick-Martin: Mr. Chairman, I certainly would be pleased to provide to the committee the American wording, which is very similar. The law in the United States reads that the transaction value of the imported merchandise is ``the price actually paid or payable for the merchandise when sold for exportation to the United States''.
Mr. Grubel: I wasn't here when all this started, and I apologize for that, but may I just ask for a clarification so that I understand this correctly?
If I were de novo designing the law, I would make the following distinction. I am an importer, and essentially I have bought a product, but I have decided that before I take delivery of this product I would like some foreigner to do something that changes the nature of the product, whatever it might be. That's some sort of a service. But I asked; it was on my initiative and essentially at my expense. Then I would say the valuation probably would be the cost of the product before I took that initiative to have these things done.
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On the other hand, say there is a product that gets sold by a foreigner but there is a value-added on the initiative of a wholesaler, somebody who packages it or sorts it or whatever they do, and then the Canadian importer goes to that intermediary who has done that value-added on his or her own initiative. Then, in my judgment, from an economic, efficiency point of view, the valuation basis ought to be the price at which that intermediary is selling it to the Canadian. Is this a rationale that has been applied by the tariff division of Revenue Canada in making this distinction?
The Acting Chair (St. Denis): Mr. Grubel, is your question to our witnesses or to officials?
Mr. Grubel: It's to officials. I'm just trying to understand and maybe put into the record what, on an economically rational basis, would be the appropriate valuation base.
Ms Close: From a policy point of view, what we're trying to capture is the price the importer pays. If there was value-added, he's buying it from the intermediary and he's already paying for that value-added. In your second case, going back to our $80 and $100, you and I agree that $100 was the appropriate price to pay.
On your other example, you added extra costs on for the foreigner and you added extra things to do. I'm not sure whether that was $80 or $100 or $110. I would imagine that might be $110.
Mr. Grubel: No, I would assume it was also $20. It could also be $20. It might be a service that is being added, such as labelling or somehow identifying quality, value and so on. Under those circumstances I would say that rational policy would say the importation of that service of $20 taken at the initiative of the Canadian importer should be subject to a tariff schedule that is applicable to the service or whatever the value-added is, not to the same one that is attached to the original product that costs $80.
I'm just asking a factual question. Did the thought process that I just went through ever enter your mind? Did that ever enter into the determination of the rulings you have made?
Mr. Jordan: I can answer that. It's definitely a consideration, and it's something that I think may lead to a distortion in determining the value.
If I go to the first example that was tabled this morning, it says the Canadian company buys from the U.S. middleman at $100. Let's say the Canadian company directs another company in the U.S. to provide packaging material to the manufacturer. I'll change my example just a bit. Let's say a Canadian company is dealing with a manufacturer and they want goods produced. They go to somebody else in the country of export and ask them to provide packaging material. We will include that in the value for duty.
Now, let's put a slight twist on that scenario. You have the Canadian company dealing with the U.S. middleman. The Canadian company ships or has that packaging material provided to the foreign manufacturer.
If we accept the sale between the foreign manufacturer and the U.S. middleman, the argument will be advanced that we shouldn't include the value of that packaging material because it wasn't part of the transaction value consideration between the U.S. middleman and the foreign manufacturer. That is some of the fallout. If you take earlier transactions in the chain you'll have bona fide dutiable elements.
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An example is a royalty paid by a Canadian corporation, which should form part of the value for duty - and royalties can be very extensive - being paid to the middleman. There could be a distortion.
Mr. Grubel: I understand, but I personally feel the very least the importers have as a case is to say the $20 they buy on their own initiative, having bought a product from one supplier or manufacturer, and the value-added they buy, should be subject to duty at the rate of that process being added. Very often that may be zero, if it's just a wholesale deal or something of that sort.
I just would like to get that on the record. Maybe it's a complication for the whole thing, but if I were to argue the case before a tribunal, that is the rational approach I would suggest...not that I would be asked.
The Acting Chair (Mr. St. Denis): Thank you, Mr. Grubel.
I just have a short question of my own and then we'll wrap this portion up.
In the first example, I would assume that if I'm a Canadian company and I use a U.S. middleman to buy something, I'm doing it for a reason. That middleman searches the market and provides some kind of service to me. If I am having to pay that middleman $100 for something, I have actually acquired $20 worth of benefit, the benefit being purchasing assistance and so on.
Is there any argument on the point that there's a reason for using a middleman that in fact may add some kind of intangible value to the product?
Ms Swick-Martin: All agency fees are dutiable except buying agency fees.
The issue here is you may have done that, for example, in the sense of Harbour Sales. There might have been administrative reasons that a lot of the books and records were kept with the U.S. company. There may be very good reasons, but still the issue under the code and under Canadian law in the pure terms of the legislation is whether there's a sale and whether that product is destined for consumption in the country of importation.
The one thing we did want to add in regard to the European Community regulations - and unfortunately we don't have them before us, but we'd be pleased to forward them to you, unless you already have them - is it is our understanding that they may require the declarant to be a resident, but they simply do not require the purchaser of the goods to be a resident. This of course is an important distinction between the person who declares the value to customs and the actual purchaser in the sale for export to the EC.
We would be pleased to provide those regulations to the committee in the event they are needed. I don't know what the committee has before it.
The Acting Chair (Mr. St. Denis): I'm not aware that I have them. Maybe that's something we can discuss when we adjourn.
Seeing no more questions, I thank our witnesses and our officials, whom we'll see this afternoon.
I'm going to adjourn our morning session. We reconvene here at 3:30. Thank you again.
We're adjourned until this afternoon.