J.B. Ellis - International Trade 
Services

Customs audit -
Ready or not, here they come!

There's a knock at your door. You open it and find four eager looking civil servant types. They smile at you, offer identification and say..."Hello, we're from the Customs audit team and we're here to help you". Now I ask you ... are you filled with confidence?

Revenue Canada Customs (Customs) has made yet another change in how they conduct their business. Gone are the days when officers merely reviewed import documentation files on a shipment by shipment basis. Today, on the front end, we have electronic release of shipments (ACROSS) and electronic accounting (CADEX). On the back end, we now have PVI.

Periodic Verification Initiative (PVI)

PVI was actually announced in 1996 by the Minister of Revenue at the time, Jane Stewart. The program is in fact just a part of Revenue Canada's overall initiative to streamline the customs process for importers of goods into Canada. PVI creates the opportunity for a Revenue Canada audit team to meet with importers and to review not only their level of compliance over a pre-determined period of time, but also the company's internal reporting systems. For example, they will examine the audit trail between procurement, receiving and accounting - and also look at how these functions are linked to their customs activities. How are overages and shortages handled? How are diversions handled? NAFTA certificates of origin will be scrutinized. Remember that it is the obligation of the importer to have properly completed NAFTA certificates of origin on hand before the benefits of the US Tariff Treatment are claimed. NAFTA is very much "conditional free trade". PVI gives Customs the same type of audit access that was previously available to the income tax and sales tax branches of Revenue Canada.

How it works

The first notification by Revenue Canada is not exactly as described in the first paragraph. Rather, Customs notify the importer in writing 90 days in advance of the on-site multi-program verification (the audit). Generally, the letter will indicate the period of time under review and the documentation to be available. It will also likely introduce the audit team. In most cases, the team will consist of three of four individuals with different areas of expertise. One of the team members will probably be a systems specialist.

Phase I of the audit will deal with the importers internal programs making sure the appropriate checks and balances are in place to verify compliance on an on-going basis. Phase II deals with the examination of the books and records to determine the importer's level of compliance throughout the time period in question.

Preparation

Because no two firms are alike in terms of size and procedures, it goes without saying that no two audits will be alike. Having said that however, there are some basic things we would recommend:

  1. Call us! We have the expertise available to guide your company through the audit process. We are familiar with all of the Customs rules and regulations and have a good working knowledge of your firm and your product lines.

  2. Determine the individuals you want to make up your audit team. Make sure the corporate expertise you enlist has the full breadth of knowledge required to satisfy all questions arising from the audit. Depending on the size of your firm and the number of different departments involved, you may want to appoint a single co-ordinator to act as the spokesperson.

  3. Set up a pre-audit meeting with Customs to break the ice and to establish the objectives and parameters. The corporate team should exchange names and telephone numbers with the audit team.

  4. In preparation for the audit, if you find that duty is owing on certain import transactions, adjustment entries (voluntary amendments) should be filed to make the payments. Customs accept voluntary disclosures without penalty up to the date of the official commencement of the audit.

  5. This audit should be handled no differently than an income tax or sales tax audit. Good communication is critical. Deal with any questions that arise quickly and efficiently. Set out realistic time frames and stick to them. Make sure any agreements or other significant issues are confirmed in writing. Don't commit to anything you can't deliver.

  6. At the end of the audit process, assuming your firm has not been as compliant as Revenue Canada would have liked, there will be some discussion and eventual agreement about the minimum requirements respecting proper maintenance of books and records. This is perhaps the most crucial part of the audit. Reaching a balance between the minimum regulatory requirements and the wishes of Revenue Canada can be very difficult and costly if not handled in the proper manner.

Should you wish to obtain further information concerning your Customs audit, please contact us.


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