Standing Committee on Public Accounts: Office of the Auditor General Audit on Taxation of E-Commerce (December 3, 2020)
Milestones

Accounting for goods

Speaking points

Following this Audit, the CBSA reviewed the means by which goods are accounted for in the Courier Low Value Shipment program in order to ensure taxes, including provincial sales taxes, are fully reflected.

This review took into account the current accounting limitations for validating and collecting provincial sales taxes. As noted in the OAG report, the CBSA's current Form B3 was not originally designed to account for provincial sales taxes.

The B3 was originally intended to account for commercial goods; e-Commerce goods are typically considered to be non-commercial goods and are therefore treated as casual goods.

In order to streamline our efforts, the Agency launched the CBSA Assessment and Revenue Management (CARM) project. This is a multi-year initiative that will transform the collection of duties and taxes for goods imported into Canada. Through CARM, the CBSA will modernize and streamline the process for importing commercial goods. If all goes according to plan, we will be implementing CARM in the fall 2022.

CARM will introduce the Commercial Accounting Document (CAD) that will replace the previous Form B3, accounting document, and will now include fields to separate GST, HST, and PST. In addition, it will allow the Agency to identify non-commercial goods, and calculate these taxes within the system.

These system enhancements will ensure applicable taxes are collected and calculated correctly on all accounting documents, including goods imported through the CLVS program, thereby meeting this recommendation of the OAG's audit report.

Anticipated question and answer

Key statistics

In fiscal year 2018 to 2019, the CBSA processed 21.4 million commercial shipments and collected over $35 billion CAD in duties and taxes.

Background information

Commercial goods imported into Canada are accounted for using the Form B3 - Canada Customs Coding Form. This form is a customs document used to account for imported goods, regardless of value, destined for commercial use in Canada. The OAG found that the CBSA Form B3 was poorly designed to meet current business practices used by courier companies as there was no specific field to account for provincial tax. At present, the GST field is leveraged to accommodate this. The original Form B3 was not intended for use in accounting for non-commercial goods as it was designed for commercial goods where the CBSA is not responsible for collecting provincial sales tax. Provincial sales tax is only collected on non-commercial goods.

The CBSA's current accounting and revenue management system does not identify non-commercial goods; therefore, there is no way to determine whether or not provincial sales taxes are required. The onus is currently on the Trade Chain Partner (TCP) to report any taxes owing. In addition this is a manual calculation, whereby the TCP is required to complete the calculation separately and there is no system verification of the calculation.

These system limitations create reporting restrictions, and do not ensure that provincial sales taxes are fully collected and reflected.

The CBSA Assessment and Revenue Management (CARM) project is a multi-year initiative that will transform the collection of duties and taxes for goods imported into Canada. Through CARM, the CBSA will modernize and streamline the process for importing commercial goods. CARM will introduce the Commercial Accounting Document (CAD) that will replace the previous Form B3, accounting document, and will now include fields to separate GST, HST, and PST. In addition, it will allow the agency to identify non-commercial goods, and calculate these taxes within the system. This document will also include the ability for the TCP to designate whether the goods are commercial or non-commercial, thereby determining what type of taxes should be collected.

For non-commercial importations it will allow the TCP to identify the province of applicability in the Province of Destination field. The CARM system will then determine the applicable provincial rate, calculate the amount owing and ensure it is collected and reported on.

Participation in the World Customs Organization Working Group on E-Commerce

Speaking points

Currently, there exists gaps in the global standards regarding cross-border E-Commerce. This means that there is a direct impact on trade facilitation, security, revenue and compliance not only in Canada but in other countries as well.

To provide some context, the World Customs Organization Working Group on E-Commerce was established in 2016 to discuss opportunities, challenges, best practices, and collaborative solutions respecting the growth in cross-border E-Commerce.

I am happy to note that the Canada Border Services Agency (CBSA), as the current Chair of the Working Group on E-Commerce, plays a vital role in providing strategic direction; leading to the development and adoption of the World Customs Organization Cross-Border E-Commerce Framework of Standards in June 2020.

This Cross-border E-Commerce Framework provides global standards where none existed previously. It is composed of the following features:

• Advance Electronic Data and Risk Management
• Facilitation and Simplification
• Safety and Security
• Revenue Collection
• Measurement and Analysis
• Partnerships
• Public Awareness, Outreach, and Capacity Building
• Legislative Frameworks

The World Customs Organization Working Group on E-Commerce is comprised of 175 delegates from Customs administrations, international organizations, express carriers, postal operators, customs brokers, and other private sector stakeholders. All of these members contributed to the development of the Cross-Border E-Commerce Framework of Standards.

As part of its international commitments, the CBSA will implement a comprehensive E-Commerce Strategy that builds upon the World Customs Organization's global standards. The Agency will continue to work on keeping the tools and documents developed evergreen.

The CBSA recognizes that enhancements will allow the Agency to make informed risk assessment decision and improve revenue collection, including the collection of taxes.

The Agency, along with its stakeholders and partners such as the United States Customs and Border Protection, are working towards a consistent approach to this line of business.

The Agency remains committed to establishing effective Canadian solutions for cross-border E-Commerce.

Anticipated questions and answers (Committee)

Key statistics

N/A

Background information

The World Customs Organization (WCO) Working Group on E-Commerce (WGEC) was established in 2016 to develop global standards for the voluntary implementation of an E-Commerce model by Customs administrations and industry stakeholders. The WGEC was comprised of 175 delegates from Customs administrations, international organizations, express carriers, postal operators, customs brokers, and other private sector stakeholders.

In its early stages, the WGEC drafted a Resolution on Cross-Border E-Commerce, referred to as the Luxor Resolution. The Luxor Resolution provided key principles of cross-border E-Commerce and acted as a basis for establishing the WCO Cross-Border E-Commerce Framework of Standards.

Following the WCO Policy Commission's endorsement of the Luxor Resolution in June 2018, the WGEC proceeded to develop the Cross-Border E-Commerce Framework of Standards and its supporting material (in other words, annexes). The Framework focuses on eight key elements:

• Advance Electronic Data and Risk Management
• Facilitation and Simplification
• Safety and Security
• Revenue Collection
• Measurement and Analysis
• Partnerships
• Public Awareness, Outreach, and Capacity Building
• Legislative Frameworks

In June 2019, the Cross-Border E-Commerce Framework of Standards and its associated reference material (in other words, annexes) were presented to the WCO Policy Commission for endorsement. The Policy Commission approved the Framework of Standards including its associated annexes with the exception of three (3):

1. Reference Data Set for E-Commerce
2. Revenue Collection Approaches
3. Stakeholders Roles and Responsibilities

The Policy Commission agreed that the work required to finalize the above noted would be conducted over the next twelve (12) months – to June 2020.

In June 2020, the WCO Permanent Technical Committee endorsed the Framework's outstanding annexes and put forward a maintenance mechanism to ensure revisions based on the evolving E-Commerce environment.

The WCO Framework's endorsement allows the Canada Border Services Agency (CBSA) to fully develop its E-Commerce Strategy, as recommended by the Office of the Auditor General's (OAG) Audit on the Taxation of E-Commerce.

Automatic CLVS

Speaking points

The Canada Border Services Agency (CBSA) acknowledges the recommendations made by the Auditor General, which identified the need for an automated system to manage the high volumes in the Courier Low Value Shipments Program as well as to improvement to data management.

The CBSA has developed and began testing an interim solution to alleviate the operational challenges mainly associated with the current manual risk assessment processes.

In collaboration with industry volunteers, the interim solution enables the CBSA officers to use electronic pre-arrival data to process shipments and conduct risk assessment and targeting. This is a major improvement in our former approach which required officers to review shipments. This has resulted in a more efficient and innovative border.

This has resulted in a more efficient and innovative border where officers spend less time on administrative processes.

Lessons learned from this interim solution are being used as a baseline to develop a fully integrated platform that will leverage artificial intelligence and advanced analytics to assess health and safety risks.

The Agency will have a more complete and comprehensive view of cross-border E-Commerce once the capability is developed and implemented.

The CBSA has internally funded the planning phase of this initiative in the current fiscal year (fiscal year 2020 to 2021). The Agency is prioritizing a business case to seek funding for a full solution, we are hopeful that we will have a fully working system in the coming years.

Anticipated questions and answers

Key statistics

In the last 5 years there has been a 40% increase nationally in CLVS volumes (from 40+ million to 56+ million).

The interim solution began as a pilot with two couriers in Hamilton. The pilot has been expanded to Vancouver and Calgary. The solution is currently being tested with other couriers. Expansion to Toronto, Montreal and Ottawa is being assessed.

The upcoming LVS platform is currently in planning phase. Once it reaches the testing stage, the CBSA will be inviting industry volunteers that are ready to begin testing the data interchange.

Background information

The Auditor General in his Spring 2019 Report on the Taxation of E-Commerce recommended that the CBSA "ensure that it receives shipment data electronically in advance of the goods arriving at the border to facilitate compliance activities."

To this, the CBSA responded that it would "examine options to further automate the program, including the ability to receive, process, and analyze customs data by March 2023."

To follow-up on this response, an interim solution was introduced to automate and streamline much of the Courier Low Value Shipment (CLVS) process, allowing for more efficient processing of electronic data from couriers on a CBSA system. It is designed as a tool for the purpose of reporting, release, and targeting of CLVS shipments. It enables CLVS data to be imported, risk assessed and displayed to officers.

The solution automates and replaces the practice of using the courier's privately owned systems. It has helped to establish referral and targeting protocols as well as ensure that a release decision occurs based on accurate data and an improved risk assessment capability. This will improve data management by enabling the Agency to link compliance activities to any single transaction to ensure accurate reporting and revenue collection. The interim solution was developed in 2019, at the Hamilton International Airport to alleviate the operational challenges mainly associated with the manual risk assessment process.

It will provide the foundation on which the upcoming low value shipment platform will be based. The upcoming platform will incorporate more data and analytics, while leveraging artificial intelligence in a simplified application. This will ensure better risk assessment capabilities and will expedite the decision making process for the accelerated movement of low-risk goods at the border.

By obtaining a holistic view of the trade chain (analyzing the continuum of the movement of a shipment from origin to destination) the Agency is much better able to find inconsistencies and discrepancies. The CBSA is currently working on planning phase activities related to this LVS platform, with the expectation to have a prototype of the new low value shipment platform in 2021. Having this solution will provide the CBSA with historical data which enables enhanced risk assessment and will create the foundational infrastructure to enhance and streamline revenue collection in the future.

Compliance activities in CLVS

Speaking points

In order to protect revenues of the Crown and facilitate the free flow of admissible goods, the Canada Border Services Agency (CBSA) is developing a stronger and integrated Commercial Compliance Framework.

This Framework will help balance health, safety and security objectives while meeting the need to protect Crown revenues and facilitate the free flow of admissible goods. The compliance framework will serve as a foundation for all commercial program-specific compliance strategies.

Based on the findings and recommendations of the audit, the CBSA has established baselines and develop strategies for national compliance management in the CLVS program.

Results were used in determining overall compliance of couriers and eligibility in the CLVS program. Non-compliance was identified with respect to the participant requirements, reporting, as well as declaration and accounting discrepancies. (Details identified under "Key Statistics".)

Due to COVID-19 the work on the updated CLVS compliance framework has been on hold since March 2020.

The CBSA continues its operations to address instances of non-compliance within the CLVS Programs, for example when clients fail to present shipment data as per modal timeframes, and fail to present parcels for inspection.

Anticipated questions and answers

Compliance exercise key statistics

Main findings include compliance issues with CLVS reporting of data to be true, accurate and complete, and proper accounting of duties and taxes on shipments.

The requirements CLVS participants must follow for eligibility into the program were not met in all cases. An approach to address non-compliance regarding participant requirements was initiated beginning with outreach to each client.

Ten (10) Administrative Monetary Penalties (AMPs) for contravention C033 (Person moved, removed, or caused to be moved goods that have been reported but not released from a CBSA office or sufferance warehouse, without CBSA authorization) were issued.

Due to the limitations and challenges surrounding ability to issue AMPs for non-compliance in the CLVS stream, outreach was conducted to address non-compliance identified regarding declarations and accounting. Each of the CLVS participants was provided with a recap of the findings including a list of non-compliance issues complete with recommendations to assist them in improving their compliance.

The below information includes a recap of compliance/non-compliance issues regarding all three categories –"Participant Requirements"; "Reporting Requirements"; and "Declaration and Accounting" Requirements"-assessed for all three phases of courier compliance exercises conducted in 2019 to 2020.

Phase 1:

• Participant Requirements: 16% – Not Met
• Reporting Requirements: 6.71% – Non-Compliance
• Declaration/Accounting Requirements: 12.05% – Non-Compliance

Phase 2:

• Participant Requirements: 29.03% – Not Met
• Reporting Requirements: 2.18% – Non-Compliance
• Declaration/Accounting Requirements: 7.14% – Non-Compliance

Phase 3:

• Participant Requirements: 10% – Not Met
• Reporting Requirements: 25% – Non-Compliance
• Declaration/Accounting Requirements: 30.77% – Non-Compliance

Background information

The CLVS Program was implemented in 1993 as a means to expedite the release of authorized low value shipments (LVS) utilizing the practice of exporter pre-arrival shipment data reporting to the CBSA.

Each year, millions of shipments valued at less than $3300.00 CDN are reported on summary cargo manifests called cargo release lists (CRL) under the CLVS program.

The CLVS Program currently has twelve participants, five of which are Casual Mail-Order/Internet Retailers (e-commerce).

The current threshold of $3300 under the CUSMA, will further increase the volume of shipments in the Courier stream.

CUSMA came into force in July in the middle of the pandemic. The new threshold has been introduced for all commercial programs at the same time and Industry is still adapting.

Courier companies wishing to participate in the CLVS Program must request authorization from CBSA. They must meet the requirements as set out in D17-4-0. All CLVS Program participants and authorized persons who report and account for shipments released under the CLVS Program are subject to compliance verification by the CBSA.

New and improved compliance management activities will help to ensure the postal and courier programs will improve revenue collection and compliance rates for E-Commerce revenue collection.

The CBSA is implementing a renewed CLVS Compliance Framework. This framework will be managed and improved on an ongoing basis to balance the current program requirements with the end-state compliance vision.

A strong compliance management regime is required to enable required compliance levels and to verify that the fundamental requirements of the CLVS Program are being met with respect to: the mitigation of health, safety and security threats; the facilitation of trade; and the collection of appropriate revenues.