Quota Payments

Memorandum D13-3-14

Ottawa,

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In Brief

The editing revisions made in this memorandum do not affect or change any of the existing policies or procedures.

Quota Payments

This memorandum provides guidance on the treatment of payments made for export quota when determining the value for duty of imported goods under sections 48 to 53 of the Customs Act.

Legislation

Sections 48 to 53 of the Customs Act.


Guidelines and General Information

1. The term "quota", in respect of imported goods and for the purposes of this memorandum, refers to a right granted in an exporting country to an allocation of a specified quantity of certain goods for export to Canada. The goods identified in the quota allocation will be under some form of export restraint negotiated by the appropriate authorities in Canada and the country of export. The total quantity of the goods that may be exported to Canada is usually allocated by the authority in the country of export, free of charge, among manufacturers who have a history of exporting to Canada. Each manufacturer may then use their quota allocation to obtain the necessary export licence authorizing the export of a specified quantity of their goods to Canada.

2. When the quota holder is permitted by its domestic government to transfer part or all of its allocation to another exporter, the initial quota holder may receive payment for the transferred quota allocation. The new quota holder may then obtain an export licence in respect of the goods it seeks to ship to Canada. It is the payment or charge for the transfer of the quota allocation (the "quota payment") which is addressed in this memorandum.

3. Ordinarily, a quota allocation is obtained in one of the following four scenarios:

  • (a) a manufacturer is allocated quota by its domestic government and manufactures goods for export sale;
  • (b) the initial quota holder sells the quota to a vendor who intends to sell goods for export;
  • (c) the initial quota holder sells the quota to a broker or to an intermediary who in turn sells the quota to a vendor who intends to sell goods for export; or
  • (d) an agent in the country of export, acting on behalf of the purchaser, purchases the quota from a quota holder or quota broker to effect a sale between a vendor in the country of export and the purchaser.
  • Note: In scenario (a) above, the vendor in the sale of goods for export to Canada is the manufacturer. In scenarios (b), (c) and (d) above, the vendor can either manufacture the goods subject to quota allocation, or can acquire them in the domestic market of the country of export.

Quota Payments and the Transaction Value Method

4. In the scenario provided in paragraph 3(a) of this memorandum, any amount invoiced by the exporter for the quota whether or not invoiced separately from the goods, will be considered to be a payment made or to be made, in respect of the goods, directly to the vendor in accordance with subsection 48(1) of the Customs Act (the Act), and will form part of the price paid or payable for determining the value for duty of the imported goods.

5. Where the vendor of the goods has purchased the quota, as described in paragraphs 3(b) and 3(c) above, and either invoices the purchaser in Canada for an amount which includes the cost incurred by the vendor for the quota, or invoices the purchaser separately for the two charges, the total amount to be paid by the purchaser is to be included in the price paid or payable for the goods. The payment for the quota is made in respect of the goods, directly to the vendor in accordance with subsection 48(1) of the Act, and is included in the price regardless of whether or not the vendor was aware that there was a purchaser for the goods when the quota was obtained.

6. In the scenario provided in paragraph 3(d) of this memorandum the purchaser through their agent, acquires and pays for the quota and provides it to the vendor, who exports the goods from the country of manufacture. The payment made for the quota by the agent on behalf of the purchaser is not to be included in the price paid or payable of the goods imported to Canada. The fact that the payment for the quota was necessary to effect the export of the goods does not of itself constitute a benefit to the vendor, as required by section 45(1) of the Act.

7. If a vendor/exporter derives a financial benefit from the payment for quota made to a third party quota holder by or on behalf of a purchaser, then any portion of the quota payment made to the vendor may be considered to be for the vendor's benefit and included as part of the payment made in respect of the goods by the purchaser to the vendor.

8. The treatment of quota payments under the transaction value method is addressed in the situations and policy interpretations included in the Appendix to this memorandum.

9. Memorandum D13-4-3, Customs Valuation: Price Paid or Payable outlines and explains the types of payments included as part of the price paid or payable for the purpose of determining transaction value.

Quota Payments and the Transaction Value of Identical Goods and Similar Goods Methods

10. Goods that are deemed "identical" to the goods for which a quota has been obtained will ordinarily have been subject to quota as well. Goods that are deemed "similar" may or may not have been exported subject to quota. If either the transaction value of identical or similar goods methods is used to value goods subject to quota, the transaction value of the identical or similar goods is an acceptable basis for the calculation of value for duty, regardless of whether or not an amount paid for quota is required to be included in their price paid or payable (as indicated in paragraphs 4 to 6 of this memorandum).

11. Memorandum D13-5-1, Application of Sections 49 and 50 of the Customs Act explains the methods for determining value for duty based on the transaction value of identical or similar goods.

Quota Payments and the Deductive Value Method

12. If the deductive value method is used to value imported goods subject to quota, any amount that an importer has paid to obtain a quota allocation is an expense related to the purchase of the goods abroad. As such, this expense is not considered to be "in connection with sales in Canada" and cannot be included in the amount of deduction for profit and general expenses in the calculation of value for duty under this method.

13. Memorandum D13-7-3, Deductive Value Method - Deductions From the Price per Unit explains the deductions to be made from the price per unit in determining the deductive value.

Quota Payments and the Computed Value Method

14. If the computed value method is used to determine the value for duty of imported goods which are subject to quota, the amount to be included in the value for duty calculation for profit and general expenses shall reflect the profit and general expenses of producers in the country of export who manufacture and sell for export to Canada the narrowest group or range of goods of the same class or kind as the goods being appraised. "Of the same class or kind" in this context, refers to goods which are subject to a quota allocation of the same category, group or class as the goods being appraised.

15. Memorandum D13-8-1, Computed Value Method explains the requirements for the calculation of value for duty under this method. Memorandum D13-1-1, Value for Duty of Imported Goods present the Regulations respecting the determination of value for duty under the Customs Act and provides information on establishing an amount for profit and general expenses under the computed value method.

Application of Residual Basis of Appraisal Method

16. If the residual method is used to determine the value for duty of imported goods which are subject to quota allocation, the flexible application of a previously rejected method cannot exclude an amount paid for quota that would have been included if the provisions of that method were used to determine value for duty.

17. Memorandum D13-9-1, Residual Basis of Appraisal Method outlines and explains the application of this method.

Additional Information

18. The Appendix to this memorandum includes examples that illustrate the treatment of quota payments in the determination of value for duty under the transaction value method.

19. For more information, within Canada call the Border Information Service at 1-800-461-9999. From outside Canada call 204-983-3500 or 506-636-5064. Long distance charges will apply. Agents are available Monday to Friday (08:00 - 16:00 local time/except holidays). TTY is also available within Canada: 1-866-335-3237.

Appendix

Examples of Quota Payments and Their Treatment Under the Transaction Value Method

This appendix includes two situations involving payments for quota. Two examples, each with a corresponding solution that illustrates the interpretation of policy included in this memorandum, are provided for each situation.

In situation 1, quota may have been obtained by the vendor (exporter) in the circumstances outlined in scenarios (a), (b) and (c) of paragraph three of this memorandum. In situation 2, quota is obtained by the vendor (exporter) in the circumstances outlined in scenario (d) of paragraph three of this memorandum.

Situation 1

Where a purchaser in Canada buys goods from a vendor who is either a manufacturer or a re-seller and the vendor has paid an amount to obtain a quota, the amount paid for the quota will usually be included in the price paid or payable for the goods. If the amount paid for the quota is not already included in the price paid or payable for the goods and is separately invoiced by the vendor, the amount paid for the quota must be added to the price paid or payable for the goods by the purchaser. The quota payment is made directly for the benefit of the vendor.

Example #1 to Situation 1

ABC Co. of Toronto, Ontario enters into a contract of sale with a foreign manufacturer for the sale for export to Canada of goods for which an export license is required. The manufacturer has the necessary quota needed to obtain the export license. ABC Co. is charged by the manufacturer a price for the goods which includes the manufacturer's cost incurred in the purchase of the quota.

Solution to Example #1 of Situation 1

The manufacturer's expense in purchasing the quota is a cost and is factored into the price of the goods. The total price paid for the goods, inclusive of the quota cost, forms the basis for the determination of the transaction value.

Example #2 to Situation 1

ABC Co. enters into a contract of sale with a foreign manufacturer for the sale for export to Canada of goods for which an export license is required. The manufacturer does not own the necessary quota and must purchase it from an independent quota broker. Instead of factoring the cost of the quota into the manufacturing cost of the goods, the manufacturer generates separate invoices to ABC Co. for the quota charge and for the price of the goods.

Solution to Example #2 of Situation 1

Where a purchaser in Canada buys goods from a vendor who is either a manufacturer or a re-seller and the purchaser in Canada had to purchase quota from a third-party quota holder, then the price paid for the quota will not usually be included in the price paid or payable in a calculation of the transaction value. A payment for quota that is not made for the benefit of the vendor is not an element of the price paid or payable for the goods.

If a vendor benefits directly or indirectly from the payment for quota made to a third-party quota holder, then any portion of the quota payment identified as "for the vendor's benefit" must be included as part of the price paid or payable for the goods.

Situation 2

Where a purchaser in Canada buys goods from a vendor who is either a manufacturer or a re-seller and the purchaser in Canada had to purchase quota from a third-party quota holder, then the price paid for the quota will not usually be included in the price paid or payable in a calculation of the transaction value. A payment for quota that is not made for the benefit of the vendor is not an element of the price paid or payable for the goods.

If a vendor benefits directly or indirectly from the payment for quota made to a third-party quota holder, then any portion of the quota payment identified as "for the vendor's benefit" must be included as part of the price paid or payable for the goods.

Example #1 to Situation 2

ABC Co. enters into a contract of sale with a foreign manufacturer for the sale for export to Canada of goods for which an export license is required. However, ABC Co., believing that they can negotiate a better price for the required quota on their own, purchases quota from an independent quota broker and supplies the quota they have purchased to the manufacturer free of charge in order to expedite the manufacture and sale for export of the goods.

Solution to Example #1 of Situation 2

The amount paid for the quota by purchaser ABC Co. does not form part of price paid or payable for the imported goods. Although the quota was acquired on behalf of, and supplied to the vendor, the payment is not considered to form part of the price paid or payable for the imported goods. The contract of sale between ABC Co. and the manufacturer was for the manufacture and sale of goods. The quota was purchased on the account of ABC Co. and was not an element of the contract of sale between the purchaser ABC Co. and the vendor (the manufacturer).

Example #2 to Situation 2

ABC Co. engages an overseas agent to enter into a contract of sale with a foreign manufacturer for the sale for export to Canada of goods for which an export license is required. Acting on ABC Co.'s instructions, the agent purchases quota in the foreign manufacturer's country and provides it without charge to the manufacturer to expedite the manufacture and sale for export of the goods. The agent then invoices ABC Co. for the quota at the agent's cost of acquisition.

Solution to Example #2 of Situation 2

The quota obtained by the agent was purchased on the account of ABC Co. and was not an element of the contract of sale between the purchaser (ABC Co.) and the vendor (the manufacturer). The contract of sale between the purchaser and vendor was for the sale of the goods, and the payment made for the quota does not form part of the price paid or payable for those goods.

If the buying agent was related to the vendor of the goods, or had earned a profit on the charge to their principal (the purchaser) for the quota acquired on the principal's behalf, the "bona fides" of the buying agent/purchaser relationship may be examined to determine if any commission paid to the agent should be included in the value for duty of the imported goods. Memorandum D13-4-12, Commissions and Brokerage provides additional information on the treatment of commissions in calculating value for duty under the transaction value method.

References

Issuing office
Trade Programs Directorate
Headquarters file
79070-4-3
Legislative references
Customs Act, sections 45 and 48 to 53
Other references
Superseded memorandum D
D13-3-14,

Services provided by the Canada Border Services Agency are available in both official languages.

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