The importer is ultimately responsible for the declaration made on their behalf, meaning that they hold the legal obligation to “get it right” upon entry. An importer is considered to be legally negligent if an error has occurred as it relates to tariff classification, import value, tariff treatment, the applicability of NAFTA or other free trade agreements, trademarks, government agency regulations affecting importation, and more.
Here are four common errors you can avoid:
1. Obtaining Duty Benefits of Free Trade Agreements (such as NAFTA) by Applying the Wrong Tariff Treatment.
In order to be eligible for NAFTA, your goods must satisfy the following criteria:
i) The requirements as outlined in ‘Annex 401’ that provides the specific rules of origin that is applied to goods to determine whether it qualifies as “originating” in accordance to the Harmonized Tariff Schedule
ii) Qualify as a NAFTA origin good in accordance to the appropriate Marking Rules
An importer or exporter is legally obligated to analyze its product’s NAFTA eligibility before claiming NAFTA or issuing a NAFTA Certificate of Origin. Not having the necessary audit trail in place puts your organization at risk, as one misstep can cost big dollars – both in duties and penalties.
2. Intentionally Marking the Wrong Country of Origin
Both Canada and the United States have specific regulations that require foreign products be marked in the prescribed formats of their respective legislative authorities. For additional information please review the country specific regulations:
Customs Memorandum D11-3-1 Marking of Imported Goods
19 U.S. Code § 1304 – Marking of Imported Articles and Containers
There are a significant number of Customs rulings and case laws that have interpreted these regulations. Although it can be confusing to interpret, the law is clear about the requirements and the civil and criminal penalties for violations.
For example, it has been widely documented that importers/exporters seek to conceal the true country of origin because U.S. origin products are highly sought after, often commanding higher prices in the U.S. marketplace. Customs authorities are vigilant about country of origin marking violations, and frequently impose large penalties, whether criminal and/or civil.
3. Under Valuation of Imported Goods
It is the importers responsibility to ensure that the correct value of imported goods is accurately declared to the respective Customs authority. However, there are circumstances where undervaluation may occur. As the majority of import tariffs are assessed on an ‘ad valorem’ basis, the declared value directly impacts the amount of Customs’ duties payable to the Customs authority. By undervaluing the imported goods, the importer is knowingly attempting to evade the applicable duties and taxes owed to the Customs authority.
Some other circumstances that may result in the value being underreported include:
i. Doing business with related suppliers, where the relationship may affect the price (related party transactions must be declared as such on the customs entry).
ii. Cost of “assists” provided to foreign suppliers that are not reflected in value declared to Customs (e.g., importer provides tools, dies, materials, pays for foreign engineering/design services).
iii. Value does not reflect pre-payments, indirect payments, or future payment obligations.
iv. Value is not determined in the context of an arms-length transaction and alternative valuation procedures are not followed, etc.
Incorrect declarations of relationship, valuation errors, and value underreporting can go on for years, and can cause a substantial underpayment of duties, leading to substantial penalty exposure.
For additional information, please review the country specific regulations as outlined below:
Subsection 48(1) of the Customs Act and Valuation for Duty Regulations SOR/86-792
40 U.S. Code § 1304 – Transfer of federal property to States
4. Recordkeeping Non-Compliance
The term “Records” is any information made or normally kept pertaining to imported merchandise, the filing of a drawback claim, the issuance of a NAFTA export certificate, or the payment of fees and taxes to the applicable Customs authority regardless if the documents were required at the time of entry.
Both Canada and the United Sates have specific regulations that require importers, exporters, carriers, and customs brokers to maintain customs records.
In accordance to Customs Memorandum D17-1-21 Maintenance of Records in Canada by Importers, records must be kept for six years. If an importer fails to comply with the requirements of record maintenance under subsection 40(1) of the Act, the CBSA may:
• (a) assess Administrative Monetary Penalty System (AMPS) penalties in accordance with subsection 109.1(1) of the Act;
• (b) detain under the authority of section 41 of the Act, any goods imported by the importer until the importer has complied with the requirements.
1st Offence: $300*2nd Offence: $450
3rd Offence, and Subsequent: $900
Penalty Basis: Per Instance
* A 30-day delay in the escalation of penalty levels from the first to the second will apply to this contravention. Should a second penalty with the same contravention be issued against the same client, the system will not escalate the penalty level to level two unless 30 days have transpired from when the first Notice of Penalty Assessment (NPA) was issued or the infraction occurred. The non-escalation rule applies from the first level to the second level only; it does not apply from the second to the third level.
The U.S. Customs and Border Protection (CBP) require that entry records are kept for five years from date of entry, or five years from the date of the activity that required the maintenance of the records.
Failing to produce records, upon demand, an entry record enumerated in the Customs Regulations pursuant to 19 U.S.C. 1509(a)(1)(A), commonly known as the “(a)(1)(A) list,” may be subject to recordkeeping penalties. Recordkeeping penalties can be substantial, with penalties varying by whether the failure is due to negligence or willfulness.
Negligence: the lesser of $10,000 or 40 % of the value for each release of merchandiseWillfulness: $100,000, or 75% of the value
Participation in a Customs recordkeeping compliance program will greatly reduce or eliminate recordkeeping penalties.
Avoiding these four common errors can save you hundreds of dollars in the long run, and more importantly, ensures that your company is compliant with trade regulations.