Should NAFTA Be Applied to Duty Free Goods?

In 2013, a case between Frito-Lay and Canada Border Services Agency (CBSA) provided significant insight to Canadian importers regarding the application of the Most Favoured Nation (MFN) tariff treatment versus applying benefits under NAFTA, particularly refund processes and limitation periods applicable to claims under NAFTA tariff preference.

In Frito-Lay v. President of the CBSA, the Canadian International Trade Tribunal (CITT) ruled that importers are allowed to make revenue-neutral changes to NAFTA status under Section 32.2 of the Customs Act. CBSA disregarded the CITT decision, resulting in a series of similar court proceedings with Bri-Chem Supply Ltd., Ever Green Ecological Services Inc., and Southern Pacific Resource Corp..

In each case the Most Favoured Nation (MFN) tariff treatment was applied at the time of importation as the tariff classification was duty free. Although the goods qualified for NAFTA tariff treatment, NAFTA status would not provide any benefit to the rate of duty, and therefore the importers were confident in declaring MFN. Approximately 4-5 years later the companies were audited and, as a result, CBSA applied an alternate and dutiable tariff classification to the goods. The importers held NAFTA Certificates of Origin and, therefore, made the assumption that the tariff treatment on the goods could be changed and remain duty free.

Unfortunately, CBSA regulation stipulates that NAFTA status may only be changed within 1 year from the date of accounting against the original release (per transaction). As the audit required adjustments to importations during a 4 year period, the importers were forced to pay duties and taxes for the subsequent 3 year period.

Although the first appeal by Frito-Lay was allowed by the CITT, CBSA maintains their position. Bri-Chem Supply Ltd., Ever Green Ecological Services Inc., and Southern Pacific Resource Corp. all pursued and won appeals at their own expense. CBSA is appealing the Bri-Chem decision to the Federal Court.

Pending the outcome, CBSA has published Customs Notice 16-04, outlining how similar B2 Adjustment Requests will be processed. In light of CBSA’s decision, it recommended all Canadian importers consult with their Customs Broker and provide clear written instructions regarding the handling of shipments that originate and are shipped from a NAFTA country.

Contact us for more information on this issue, a NAFTA Evaluation of your account, or to obtain a NAFTA SOP Agreement Option Form.