28 Sep 2018

Procedural Requirements for Preferential Tariff Treatment under the CETA, Part 3 – Record-Keeping Requirements

To take advantage of the preferential tariff treatment that allows goods to be traded on a duty-free basis between Canada and the European Union, a number of mandatory requirements under the Comprehensive Economic and Trade Agreement (CETA) must be satisfied.

To start with, importers and exporters must ensure that their products qualify as “originating” under the product-specific rules of origin set out in the CETA Origin Protocol. For more information on the CETA rules of origin and how they apply, see “Exploring New Opportunities for Trade in Goods under the CETA – As Easy as Apple Pie”.

In addition, importers and exporters must ensure that certain procedural requirements are satisfied, including: (1) declarations of CETA origin; (2) restrictions on how originating goods may be transported between the European Union and Canada; and (3) obligations to maintain records relating to the exportation, importation, and origin of the goods. A failure to comply with any one of these procedural requirements risks the loss of preferential tariff treatment under the CETA, even if the goods satisfy the product-specific rules of origin. If this happens, customs duties may be applied on a retroactive basis, for a period going back a number of years, to prior shipments of the affected products. This can have a devastating financial impact on importers and create serious liabilities for exporters.

This article is Part 3 in a three-part series. Part 1 (15 September) provides a brief overview of the CETA origin declaration, and Part 2 (20 September) discusses the shipping requirements for originating goods traded between Canada and the European Union. As the final installment, this part addresses the record-keeping obligations associated with the origin declaration and shipping requirements discussed in the previous parts.

Records Supporting the CETA Declaration of Origin

For an importer of originating goods to receive preferential tariff treatment under the CETA, the exporter must provide a CETA “declaration of origin”. This statement must be provided on an invoice or any other commercial document that identifies the exporter and the covered goods. In Canada, implementation of this requirement is indicated in Customs Notice 17-30, Implementation of the Canada–European Union Comprehensive Economic and Trade Agreement (CETA) (Ottawa, September 14, 2017) (paras. 10-11).

The origin declaration, however, is merely the tip of the iceberg. It must be fully supported by records that provide comprehensive proof that the covered products meet the applicable rules of origin. This generally includes invoices, inventory management and accounting records, shipping documents and other commercial records relating to the production processes and the materials used to produce the goods. For exporters, the best approach is to establish internal systems that generate a clear and comprehensive audit trail that covers every originating product for which a CETA origin declaration is provided. Although it will incur administrative costs to set up and maintain, this approach helps to ensure that post-entry audits by customs authorities can be managed efficiently and effectively.

There are important differences between the minimum record-keeping requirements set out in the text of the CETA and the relevant legal requirements in Canada and the European Union. For example, the CETA Origin Protocol requires exporters to preserve, for a period of at least three years, copies of all supporting documents that prove the originating status of the covered products. Importers, on the other hand, are required to keep copies of documents relating to the importation of the products, but only if and to the extent they are obligated to do so under the domestic laws of the country of import.

In comparison, Canadian law requires both exporters of commercial goods from Canada and importers of commercial goods into Canada to keep, for a period of six years, all records that relate to, among other things, the origin, purchase, importation, costs, and value of the imported goods (see subsections 40(1) and 97.2(1) of the Canadian Customs Act, together with subsection 2(1) of the  Imported Goods Records Regulations and subsection 2 of the Exporters’ and Producers’ Records Regulations).

It is therefore important for businesses to carefully determine the specific domestic legal requirements that apply to their imports and exports and set up the internal accounting, inventory management, and record-keeping systems to meet these obligations. If an importer or exporter is unable to substantiate a declaration of origin to the satisfaction of the customs authorities, the preferential tariff treatment that they have relied upon may be denied, resulting in the retroactive application of customs duties.

Records supporting compliance with the CETA shipping requirements

For preferential tariff treatment, the CETA requires originating goods to be shipped directly between Canada and the European Union or, if they must be transported through a third country, to remain under customs control at all times until they reach their ultimate destination.

In order to substantiate compliance with these requirements, Canadian and EU customs authorities may require importers to disclose bills of lading or waybills that indicate the shipping route, including all points of shipment and transhipment prior to importation, and customs documents establishing that the goods remained under customs control at all times.

In Canada, these requirements are implemented in the CETA Tariff Preference Regulations. The regulations provide that originating products are only entitled to preferential tariff treatment if: (a) they are shipped to Canada from an EU country without being shipped through another country, either on a through bill of lading or, alternatively, with documents indicating the shipping route and all points of shipment and transhipment prior to the importation of the products into Canada; or (b) they are shipped to Canada from the European Union through a third country, and the importer can provide documents indicating all points in the shipping route, together with a copy of the customs control documents establishing that the products remained under customs control while in that other country.

Tereposky & DeRose LLP regularly provides advice on how to apply and leverage the provisions of international trade agreements, including the CETA, the NAFTA, and the forthcoming CPTPP, while ensuring compliance with Canadian customs requirements.  Should you have any questions regarding potential opportunities, procedures or requirements under these trade agreements or any other trade related issues, we are at your disposal.

Daniel Hohnstein
613.237.9005
dhohnstein@tradeisds.com