11 February 2016

The CBSA wins again: the trouble with cost-sharing arrangements

When related companies reimburse one another for goods or services rendered, it's always important to have written agreements in place to justify the amounts being paid. While it's generally viewed as being important in terms of allocating profits for corporate tax purposes on a fair basis, you must not forget that there are consequences in other areas, such as customs duties.

That's right: duty is chargeable on more than the invoice price of goods. One corporate group found out the hard way, and they struck out in the Federal Court of Appeal last year. This is what happened:

  • The US parent sold goods to its Canadian subsidiary at a price that equalled its landed cost into the US from China, plus markups for US warehousing and an arm's-length profit on the sale.
  • There was also a cost-sharing agreement ("CSA") between the two parties that allocated costs relating to the costs of research, development, design, advertising and marketing activities.
  • A Management Services Agreement covered charges for information technology support, accounting, finance and purchasing support, that the US parent undertook on behalf of the subsidiary.
  • There was also a Canadian Intellectual Property and Proprietary Information Licence Agreement that conferred the right to exploit all intellectual property rights in the brand in Canada, in exchange for a lump-sum payment.
The Canada Border Services Agency assessed further duty on the imported shoes, based on the proportion of the cost-sharing agreement charges that related to research, development and design ("RDD"). The US parent appealed the assessment to the Canadian International Trade Tribunal, and lost.

In the end, the reasons for why the assessment was good were quite simple:
  • The transfer price of the goods did not reflect the RDD that had been incurred to help create it, as the cost was being billed directly to Canada rather than through China.
  • Reimbursement for that activity was effected through the CSA, which made it an adjustment to the purchase price, and the dutiable value must include its full amount.
  • The design portion of the RDD could not be considered as a duty-free "assist", as it was not being furnished free of charge.
There is nothing new about the principles involved here, but it's still a useful reminder of what needs to be kept in mind when establishing a group's structure.

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