On March 2, in re Skechers USA Canada Inc. v. Canada (Border Services Agency) 2015 FCA 58, the Federal Court of Appeal (the “Court”) has upheld the December 13, 2013 decision of the Canadian International Trade Tribunal (“CITT”) in which the CITT (AP-2012-073) had itself upheld the seven decisions – one for each of the years 2005 through 2011 – of the President of the Canada Border Services Agency (CBSA) under subsection 60(4) of Canada’s Customs Act.
By applying the letter of the Law, hasn’t the Court put its Skechers in its mouth?
As a reminder, Skechers Canada, a Canadian subsidiary of Skechers USA (a footwear company), purchases the footwear it sells in the Canadian market from its parent at a price equal to the factory price paid by Skechers USA to its manufacturers, the cost of shipping the goods to the US and warehousing the goods there, and an arm’s length profit.
Skechers Canada also makes payments to Skechers USA pursuant to a cost sharing agreement (CSA) to compensate the parent for activities associated with the development and maintenance of the Skechers brand and to the creation and sale of footwear.
The Court ruled that CSA payments relating to research, design, and development (R&D) were “in respect of” the goods sold for export into Canada and were thus part of the “price paid or payable” for the goods for customs purposes. As a result, Skechers Canada must add the amounts of these R&D payments made to Skechers USA to the customs value of imported footwear supplied by its parent.
In its conclusion, the Court called the CITT’s December 13, 2013 decision “transparent, intelligible, and justifiable.”, adding that the CITT’s conclusion “(…) falls within the range of possible, acceptable outcomes, defensible in respect of the facts and the law.”
The interesting consequence of this decision is that in Canada, in total contradiction with the transaction-by-transaction approach in transfer pricing traditionally recognized by the CRA, in cases of related-party transactions where a Canadian distributor imports goods from a related-party manufacturer (or contract manufacturer) while paying at the same time in a separate transaction for the R&D in respect of those goods, the dutiable value for Customs purposes must be equal to the arm’s length price of the imported goods for income tax purposes plus the amount of the separate R&D payments, if any, made by the importer in respect of those goods.
This appears to be congruent with the underlying logic of the Canadian Customs Law according to which, in line with the 19th Century and beginning of 20th Century economics (and protectionist) thinking that pervaded its initial drafting, a Canadian importer of goods never owns the intellectual property (IP) pertaining to the goods he imports into Canada (one would guess it should have been duly owned by a British or American parent). And in that logic, if the Canadian importer happens to own that IP, the price of the imported goods for calculating the value for duty should be adjusted upwards to ensure that the dutiable value duly represents what would be the (higher) arm’s length price in normal circumstances, thereby duly penalizing the importer for his straying from normalcy.
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- Posted by Stéphane Dupuis
- On 20 March 2015
- 0 Comments
- R&D payments in Cost sharing arrangement, Skechers USA Canada Inc. v. Canada (Border Services Agency) 2015 FCA 58, Value for duty in Canada