Regulatory Compliance updates June 2023

Canada: Canada proposed amending the Valuation for Duty Regulations (Last sale rule)

The Canada Border Services Agency (CBSA) proposes amendments to the Regulations to provide clearer direction to importers when determining which sale is to be used for assessing the value of their imports, with the intention of establishing a level playing field among all importers, while simultaneously reducing lost customs revenues to the Government of Canada in duties paid on lower VFD.

The proposed regulatory amendments would clarify which sale is to be used to calculate the duty on imported goods in order to address a regulatory gap that unduly benefits businesses located outside of Canada (NRIs) that ship goods to customers in Canada by (i) defining the term “sold for export to Canada”; and (ii) amending the definition of the term “purchaser in Canada”.

Currently, the term “sold for export to Canada” is not defined in the Customs Act. In 1997, the Valuation for Duty Regulations amendments came into force (SOR/97-443, Canada Gazette, Part II, Vol. 131, No. 20), giving effect to a definition of “purchaser in Canada” in the Customs Act. The intent was to prevent the undervaluation of imports by preventing the importer from using a sale between two foreign entities to value the goods, rather than the sale to a person in Canada.

While there is no definition of “sale” in the Customs Valuation Agreement, international consensus among World Trade Organization members was established at the World Customs Organization that the term “sale” is to be interpreted in its widest sense,footnote3 meaning the sale does not need to be concluded prior to the importation of the goods (i.e. not be restricted to a sales contract, but also include agreements to sell, which could be in a form of purchase commitments, purchase orders, intents to purchase or any other agreement that causes goods to be imported to Canada). More importantly, it was also agreed that the last sale to the buyer in the country of import, and not an earlier sale between two foreign entities, is to be used as a basis for determining the VFD (“last sale rule”).

The proposed regulatory amendments would:

• ensure that Canadian importers that compete with NRIs are not at a disadvantage as a result of the current regulatory framework, which allows the latter to declare a lower purchase price when calculating VFD;
• provide a legal basis to ensure the government collects duties on the sale that brought the goods to Canada, thereby preventing revenue leakage stemming from NRIs ability to declare an earlier sale in the supply chain;
• ensure that Canada meets its obligations under the World Trade Organization’s Customs Valuation Agreement and to Canada’s trading partners regarding the methods of calculating VFD; and
• ensure that Canada fosters a fair and predictable environment for the trading community that is consistent with the objectives of free and liberalized trade and in compliance with the internationally agreed methods of calculating VFD.
• In addition, these amendments would contribute to Canada’s domestic economic recovery priorities by minimizing the risk of foregone customs revenues, creating enforceable measures that generate revenue, removing any incentive for businesses to minimize their operations or presence in Canada, and removing disadvantages to Canadian businesses in a post-COVID-19 environment.

EU Regulation 2021/821 for dual-use goods published and entered into force on, 26th May

EU commission has amended Regulation (EU) 2021/821 of the European Parliament and of the Council as regards the list of dual-use items. The list of dual-use items set out in Annex I to Regulation (EU) 2021/821 needs to be updated regularly in order to ensure full compliance with international security obligations, to guarantee transparency, and to maintain the competitiveness of economic operators. The control lists adopted by the international non-proliferation regimes and export control arrangements have been changed during 2022, and therefore Annex I to Regulation (EU) 2021/821 should be amended to include items subject to control under the Australia Group. In order to facilitate references for export control authorities and economic operators, Annex I to that Regulation should be replaced.

EU defines new rules on crypto-asset information exchange for tax purposes

On 16 May 2023, the Commission welcomed the political agreement reached by EU Finance Ministers on new tax transparency rules for all service providers facilitating transactions in crypto-assets for customers resident in the EU. Fair and effective taxation is key to securing revenues for public investment and services, while creating a business environment in which innovation can flourish. However, tax authorities currently lack the necessary information to monitor proceeds obtained by using crypto-assets which are easily traded across borders. This severely limits their ability to ensure that taxes are effectively paid, which means European citizens lose important tax revenues.

United Kingdom: Notice to exporters on Russia Trade sanctions circumvention 

This notice to exporters is a guidance note for companies to help them understand what they need to do to ensure they are complying with the Russia sanctions. The Russia sanctions regulations impose financial, trade, aircraft, shipping and immigration sanctions for the purposes of encouraging Russia to cease actions which destabilise Ukraine, or undermine or threaten the territorial integrity, sovereignty or independence of Ukraine. Trade sanctions seek to deny Russia access to the goods, technologies and revenue necessary to pursue its illegal war. The aim of this notice is to prevent the undermining of trade sanctions, export controls, and other restrictive measures designed and implemented in response to Russia’s invasion of Ukraine. Awareness of the risk and obligations in relation to sanctioned goods is an important first step for trade. Direct trade between the UK to Russia has fallen significantly since sanctions were introduced. However, Russia will seek to procure restricted goods via other routes. As such, there are risks around displacement of trade and diversion of goods to Russia. Traders should ensure that as part of their due diligence they consider these risks.

Ensuring Due Diligence

The true end-users of procured goods are unlikely to approach international suppliers directly or be named as end-users on paperwork. Instead, organisations often use a layered approach to conceal their procurement activities. Closer scrutiny of intermediary companies and apparent end-users can uncover discrepancies.

Strong due diligence on counterparties and internal governance in relation to sanctions is essential. Even on established counterparties, due diligence will need to be repeated at intervals to ensure that the risk has not changed; for example, change of directors/change of products traded, etc.

Procurement Cycle

The procurement cycle below illustrates the different stages and types of entities likely used to acquire goods covertly. Not all stages may be used in every procurement attempt. Using this model, the end-user typically uses a ‘cover’ or ‘front’ company to request goods from networks of complicit intermediaries.

1. International suppliers
   Commodities from a range of industrial fields are sourced from specialist manufacturers or distributors.
2. Intermediary
   (Overseas) Trading companies could be complicit but probably has legitimate business too. May claim to be the end-user, or name another intermediary or cover company.
3. Cover/front company
   An entity acting entirely on behalf of the sanctioned entity. May be a registered business, or may be solely a cover name. These companies may be seen named in international trade paperwork.
4. The true end-user
   A sanctioned destination, person or organisation

Key Risk Indicators

Risks need to be considered in the circumstances of individual companies and due diligence/internal governance tailored accordingly. These can be broadly grouped by customer, product and location. There are a number of initial risk indicators below. This list is not exhaustive and the examples below are intended to be indicative.

Customer:

• customer is, directly or indirectly, involved in the supply, sale, delivery or purchase of restricted or high-risk goods, particularly to higher risk destinations
• customer is physically located in or adjacent to countries/diversion concern
• customer maintains connections with a country of concern
• customer has previously had dealings with individuals or entities now designated
• customer who has entered into a joint venture or cooperation agreements with designated persons
• customer sells goods with a disproportionate delivery cost without a justified reason
• complicated structures to conceal involvement – use of layered letters of credit, front companies, intermediaries and brokers
• personnel, address or telephone number matching or suspiciously similar to any found on publicly available lists, including sanctions lists
• customer is vague about details, especially end user and end use. Provides incomplete information and is resistant to providing additional information when sought
• vendor is vague, particularly about source of materials, provides incomplete information or is resistant to providing additional information when sought

Product:

• the transaction concerns sanctioned, dual-use, proliferation-sensitive or military goods, whether licensable or not
• the transaction involves an individual or entity in a foreign country of proliferation concern
• the description of the goods on the trade/financial documentation is non-specific or misleading
• shipment of goods inconsistent with normal geographic trade patterns; for example, where the country involved does not normally export or import the types of goods
• the country of the stated end-user is not the same as where the order was placed from
• evidence or suspicion that documentation or material particulars therein are fraudulent

Country/Jurisdiction:

• countries which are actively engaged with a sanctioned country
• a route of shipment of goods or transactions inconsistent with normal geographical or trade patterns or the customer’s expected business activity
• payments or transfers made to importers, exporters, agents or brokers that export to countries and ports near the border of sanctioned countries
• shipments involving individuals, companies or a shipment route located in a country with weak export control laws or weak enforcement of these laws.