Managing Customs in a Small or Medium Size Organization

Most small and medium sized organizations do not import often enough to hire a full-time customs manager. The job tends to be a part-time responsibility of someone in accounting or logistics or, in many owner-managed businesses, the President. The biggest challenge for this part-timer is having sufficient knowledge of trade and customs matters to provide the customs broker with complete and accurate information.

This article describes the basic knowledge that a customs manager needs to make the best use the more extensive knowledge possessed by their customs broker. It also provides links to articles that provide more in-depth information and links to outside sources of knowledge.

Importers tend to assume that brokers have all the knowledge required to prepare the customs entry documents. Brokers do know a lot about customs and trade. However, their knowledge of a particular import shipment is generally limited to the information on the customs invoice and other transaction-related documents provided to them. They do not review underlying legal documentation, such as purchase and sale contracts, and they don’t have much time to ask probing questions.

For example, if a customs invoice states that the price includes installation of a machine on site in Canada, the broker will ask for the information necessary to deduct the installation costs in determining the value. However, if the invoice simply describes the machine, the broker will assume the price includes delivery only. It is up to the importer to be aware of both the terms of the purchase contract and that the installation portion of the price may be deducted. If he is not, and the goods are dutiable, the importer will overpay.

Customs and trade knowledge falls into three broad categories: valuation, origin and tariff classification.

Valuation

Where transaction value forms the basis of valuation, as it does for 90% of imports, there are a number of statutory additions and deductions from the invoice price. Both are often missed because the customs manager lacks knowledge of the underlying contracts and/or the adjustment requirement. The most common deductions are:

  • Transportation charges and insurance from the place within the country of export from which the goods are shipped directly to Canada, and
  • Costs for construction, erection and assembly after importation.

The most common additions are:

  • Selling commissions and brokerage;
  • Certain royalties and license fees payable after importation;
  • Subsequent proceeds payable to the purchaser; and
  • Assists (goods and services provided free to the exporter).

All of the adjustments to the invoice price are described in the article entitled The Basics of Customs Valuation. The article also identifies the situations where transaction value may not be used.

Origin

The person managing customs at an importer should know the basic principles of origin. Every good that crosses a border anywhere on earth has an economic nationality known as its “non-preferential origin”. This is generally the country where the good was manufactured. However, a good must be “substantially transformed” by the manufacturing process for origin to be conferred. Not all forms of manufacturing meet this test.

A common misconception is that goods originate in the country from which they are shipped.  That is not true.  A pair of soccer boots manufactured in Indonesia, stored a warehouse in the United States and subsequently sold to a customer in Canada, remains of Indonesian non-preferential origin.  This may or may not be clear on the customs invoice provided by the American exporter.

The rules of origin that confer preferential tariff treatment under a free trade agreement are not based on the principle of substantial transformation.    Rather, they are product specific according to their tariff classification, and often quite detailed.  The rules for determining “preferential origin” under the USMCA are summarized in this article.  While the details of origin rules are different for other free trade agreements, the general framework is similar for all.

A common misconception among importers is that receipt of a certification of origin under a free trade agreement from the producer or exporter is a guarantee that the goods qualify for preferential (often duty free) treatment.  This is not the case.  If the producer has not done the work necessary to substantiate that the goods qualify under the rules of origin, or mistakenly concluded that they do, the importer is the person who is assessed for any duties, interest and penalties owing.  

The fundamentals of preferential and non-preferential origin are discussed in the article entitled The Basics of Origin in International Trade.

Tariff classification

Tariff classification is the area where study and legwork by the importer may pay the most dividends. Most brokers are experienced at classification. However, they cannot know your goods as well as you do. They can’t walk out to the warehouse to look at them and they don’t have access to the people that use them or to the product literature. Studies by customs authorities around the world have generally found that a quarter to a third of imported goods are misclassified. These errors, generally caused by poor communication within an organization, or between the importer and broker, often lead to costly assessments or overpayments of duties and taxes.

The basics of tariff classification, described in this article on the Harmonized System, are not difficult to learn. However, it takes time and experience to get used to the nuances of the system. Not all goods are specifically listed in the Nomenclature, which looks like the Manhattan phone book. Some goods are classified in obscure places; many may be classified in more that one place. If you are willing to put in the effort, you may generate significant savings in duty, interest and penalties. Your broker will be more than happy to review your work and conclusions.

Organization of the customs management function

The person managing customs at a small or medium sized organization should be the primary, and preferably only, contact with the customs broker.  That manager would co-ordinate input from others in the organization to ensure that the broker has the information to properly carry out his or her primary tasks; i.e., preparing complete and accurate customs entry documents and having the goods promptly released at the border.  The customs manager should report to a senior executive, likely the Vice-President Finance or Controller, who takes an interest in ensuring that customs and trade issues are properly addressed in the organization.

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