Export Prices for Related Importers and Exporters Under the Special Import Measures Act

June 2004

This document is also available in French. / Ce document est également disponible en Français.

Introduction

The Special Import Measures Act (SIMA) helps to protect Canadian manufacturers and producers from unfair competition originating from abroad. The Act contains provisions to ensure that the protection intended by an anti-dumping action is not jeopardized due to related importers and exporters, intentionally or otherwise, in some way absorbing the impact of the anti-dumping action. The most frequently encountered example of such circumstances is when importers purchase goods from a related exporter and resell the goods in Canada at a price that is too low. When the importer's resale prices in Canada are found to be too low, the Anti-dumping and Countervailing Directorate (Directorate) generally refers to this as hidden dumping. In such cases, the provisions of the Act ensures that the resale price in Canada of the imported product increases to eliminate the injurious effect on Canadian producers or consequently that additional anti-dumping duties are assessed.

Legislation and Policy

SIMA provides two methods of determining export price.

The usual method is to base export price on the exporter's selling price to the importer in Canada. This method of determining export price is commonly referred to as the SIMA section 24 export price.

Where there is no selling price between the exporter and the importer or where the export price determined under the first method is considered unreliable because of a compensatory arrangement or because the sale is between a related exporter and importer, a second method of determining export price is used. This second method starts with the importer's selling price in Canada and makes certain deductions to arrive at an export price. This deductive method of determining export price is commonly referred to as the SIMA section 25 export price. It is important to note that the word "unreliable" is used in the SIMA context and does not suggest prices are inappropriate for commercial business purposes.

The President of the Canada Border Services Agency must be of the opinion that the export price using the first method is unreliable in order to use the second method. The usual method of determining if the transaction prices from the related exporter to the importer are reliable normally involves the Directorate carrying out a "reliability" test of the selling prices from the foreign exporter to the related importer. This test will in effect establish whether the importers resale prices in Canada are too low and constitute hidden dumping. It should be noted, that, depending on the circumstances of the case, considerations other than the reliability test results may be determining factors in concluding that export prices under section 24 are unreliable.

Reliability Test

To perform the test, export prices are first calculated pursuant to the methodology of section 24, which, in its simplest terms, is the ex-factory selling price by the exporter to the related importer. A second export price is then calculated using the methodology in section 25 of SIMA. This price is the "deductive" export price noted above and is based on the importer's resale price of the imported goods in Canada less all costs incurred in preparing, shipping and exporting the goods to Canada, all costs incurred in re-selling the goods in Canada, including duties¹ and taxes, and an amount representative of the average industry profit in Canada (as determined by the Directorate). Where the section 25 deductive export price is less than the section 24 export price for 20% or more, by value or volume, of sales to the related importer, the export prices as determined under section 24 between the exporter and its related importer are usually considered unreliable. When such a result occurs, it normally indicates that the importer's resale prices in Canada are too low and hidden dumping is taking place.

While the reliability test is normally based on the analysis of individual sales, the resulting "reliability" decision will apply equally to all sales. That is, all selling prices between the exporter and the related importer will be deemed reliable or unreliable, as the case may be, and will have the export price calculated accordingly until the next review by the Directorate.

Action to Address Hidden Dumping

Where the President is of the opinion that section 24 export prices are unreliable, the Directorate normally estimates an export price for future shipments using actual section 25 deductive method export prices based on Canadian resale prices of past importations. The export price for future shipments may either be fixed as an actual figure or it may be pegged as a percentage of the normal value or the declared invoice price from the exporter to the importer. The effect of fixing or pegging the export price in this manner is that the importer is subject to anti-dumping duties on all future importations until such time that the Directorate reviews the matter and is satisfied that the selling prices in Canada no longer constitute hidden dumping.

Action Required By Importer to Eliminate Hidden Dumping

A hidden dumping situation can have significant liability implications for importers. When importers are notified that hidden dumping is occurring, they should calculate the necessary price levels in Canada required to eliminate the hidden dumping. This price may be established by calculating the sum of the following (all in Canadian funds):

• Normal value of the goods (ex-factory);
• Freight charges for delivery to importer;
• Other charges (prior to delivery to importer), if applicable;
• Duties on importation, if applicable;
• Customs broker fees;
• GS & A normally incurred by importer in reselling goods in Canada;
• Freight charges for delivery in Canada;
• Other charges incurred by importer, if any;
• An amount for industry profit as determined under the Special Import Measures Regulations (SIMR) 20 to 22.

Failure to raise resale prices in Canada sufficiently to eliminate the hidden dumping, will result in increased dumping margins and will result in additional assessments of anti-dumping duties due to the "cascading" effect inherent in section 25.

An Amount for Industry Profit

As mentioned previously, an amount for profit for section 25 of SIMA is determined pursuant to regulations 20 to 22 of the SIMR. These regulations set out the methods by which the amount for profit will be determined using sales made by vendors in Canada who are at the same or substantially the same trade level as the importer. The first approach is to use the amount for profit generally realized on the sales of like goods. If this amount cannot be determined, the profit generally realized on sales in Canada of goods deemed by the Directorate to be the most comparable to the imported goods is used.

Related importers will be notified of the percentage amount for industry profit that the Directorate has determined. As noted in the previous section, importers should take this percentage into consideration when establishing pricing levels for future sales in Canada.

During each subsequent re-investigation, a percentage amount for industry profit will be calculated in the same manner as per regulations 20 to 22. The amount of profit determined will be used to test the reliability of export prices; however, where the amount of profit determined in the current review is higher than the amount of profit determined in the previous review, the lower amount will be used.

At the conclusion of each re-investigation, the related importers will be informed of the amount for profit determined during the current review and are expected to take this amount into consideration when establishing pricing levels for future sales in Canada.

Future Action

In hidden dumping situations, the Directorate will conduct a follow-up export price review, normally within four to six months, and the reliability test will again be applied. If it is determined at that time that the importer has raised its selling prices in Canada to levels necessary to eliminate all hidden dumping, the prices from the exporter would normally be declared reliable from that point on until the next export price review. The automatic anti-dumping duty liability would also cease. Periodic export price reviews would continue to be conducted to ensure that an appropriate selling price is maintained in the Canadian market and that hidden dumping does not commence again. If the review reveals that hidden dumping has occurred again, anti-dumping duties may be assessed retroactively.

From the time importers are found to be in a hidden dumping situation, they may file appeals in the prescribed manner and within the legislated time limits on subsequent importations. To this effect, concerned parties should consult Memorandum D14-1-3. In situations where a subsequent review determines that the importer has raised its selling prices in Canada to a sufficient level, the Directorate may refund any anti-dumping duty paid, where appeals have been filed.

If, the result of a subsequent review indicates the prices are still unreliable and the related importer is still found to be in a hidden dumping situation, the Directorate will re-calculate the export price and the margin of dumping by deducting the anti-dumping duties already paid or payable from the previously determined export price.

For example, if the importer does not raise its resale price in Canada and simply absorbs the added costs of the anti-dumping duty, a recalculation of the deductive export price using section 25 will result in an additional margin of dumping equal to the amount of the anti-dumping duty liability. In effect, the anti-dumping duty would be assessed again because of the "cascading" effect to the application of section 25. Such cases will result in increased margins of dumping and additional anti-dumping duties will be collected retroactively back to the date that the importer was cautioned and advised in writing of the action required in respect of its resale prices in Canada.

Where hidden dumping is continuing, the importer will be issued a new ruling for the future and will continue to be subject to anti-dumping duties at an appropriate level based on the results of the Directorate's review of the previous months. In addition, the importer will again be advised of the action required to eliminate the dumping for future shipments, including the appropriate industry profit amount based on the most recent profit information available to the Directorate for use in calculating price levels in Canada which will eliminate the hidden dumping.

Illustrative Exhibits

Attached are Illustrations 1 to 3 which are intended to explain the concept of price reliability and hidden dumping. Illustration 3 goes on to demonstrate first the cascading effect of a section 25 deductive export price calculation where importers fail to take action to eliminate the hidden dumping and finally, the result when importers do respond with appropriate price increases in their selling prices.

Further Information

Officials of the Anti-dumping and Countervailing Directorate are prepared to meet with importers who are affected by hidden dumping. Indeed, a meeting is strongly encouraged to ensure that importers fully understand the duty liability implications of section 25 of SIMA.

Any party who has questions on this matter or wishes to discuss the matter further, should contact the case officer responsible for the review or by writing to the Director of Operational Policy at:

Director of Operational Policy
Anti-dumping and Countervailing Directorate
Canada Border Services Agency
100 Metcalfe Street, 11^th floor
Ottawa, ON  K1A 0L8

Export Price Illustration #1

US Widget Inc. ships goods to a related importer, Canada Widget Ltd. For purposes of this illustration, all amounts are in Canadian dollars. Goods are dumped if the export price is less than the normal value.

A. US Widget's normal value (NV) of a widget is $100.

B. US Widget sells each widget to Canada Widget for $110.

C. Canada Widget resells the widget for $150 in Canada.

D. US Widget incurs $10 freight on each widget shipped to Canada.

E. Canada Widget pays $7 customs duty on each widget imported.

F. Canada Widget incurs $20 GS&A on each widget sold in Canada.

G. Canada Widget incurs $8 freight on each widget sold in Canada.

H. Average industry profit is $5 for each widget sold in Canada.**

** Industry Profit is based on the Directorate's industry survey. Profit is usually expressed as a percentage, but has been expressed here as a dollar amount for ease of calculation.

Section 24 Export Price equals B minus D and is $100.

Since this export price is not less than the NV (see A above), it would initially seem that the goods are not dumped. Nevertheless, the Directorate would perform the reliability test to determine if there is hidden dumping.

Section 25 Export Price equals C minus (D+E+F+G+H) and is $100.

Since the section 25 deductive export price is not less than the section 24 export price, the section 24 export price is deemed to be reliable for SIMA purposes and section 24 will be used. Furthermore, since the section 24 export price is not less than NV, the goods are not dumped.

RESULT: Section 24 export price is reliable.
                 Hidden dumping is NOT occurring.
                 The goods are not dumped.
                 No anti-dumping duty is payable.

Export Price Illustration # 2

US Widget Inc. ships goods to a related importer, Canada Widget Ltd. For purposes of this illustration, all amounts are in Canadian dollars. Goods are dumped if the export price is less than the normal value.

A. US Widget's normal value (NV) of a widget is $100.

B. US Widget sells each widget to Canada Widget for $100. <Note change>

C. Canada Widget resells the widget for $150 in Canada.

D. US Widget incurs $10 freight on each widget shipped to Canada.

E. Canada Widget pays $7 customs duty on each widget imported.

F. Canada Widget incurs $20 GS&A on each widget sold in Canada.

G. Canada Widget incurs $8 freight on each widget sold in Canada.

H. Average industry profit is $5 for each widget sold in Canada.**

** Industry Profit is based on the Directorate's industry survey. Profit is usually expressed as a percentage, but has been expressed here as a dollar amount for ease of calculation.

Section 24 Export Price equals B minus D and is $90.

Since this export price is less than the NV (see A above), the goods are dumped by $10. A reliability test would still be performed to see if there was also hidden dumping.

Section 25 Export Price equals C minus (D+E+F+G+H) and is $100.

Since the section 25 deductive export price is not less than the section 24 export price, the section 24 export price is deemed to be reliable for SIMA purposes and section 24 will be used.

RESULT: Section 24 export price is reliable.
                Dumping is occurring.
                No hidden dumping is occurring.
                Anti-dumping duty of $10 is payable.

Export Price Illustration # 3

US Widget Inc. ships goods to a related importer, Canada Widget Ltd. For purposes of this illustration, all amounts are in Canadian dollars. Goods are dumped if the export price is less than the normal value.

A. US Widget's normal value (NV) of a widget is $100.

B. US Widget sells each widget to Canada Widget for $110.

C. Canada Widget resells the widget for $130 in Canada. <Note change>

D. US Widget incurs $10 freight on each widget shipped to Canada.

E. Canada Widget pays $7 customs duty on each widget imported.

F. Canada Widget incurs $20 GS&A on each widget sold in Canada.

G. Canada Widget incurs $8 freight on each widget sold in Canada.

H. Average industry profit is $5 for each widget sold in Canada.**

** Industry Profit is based on the Directorate's industry survey. Profit is usually expressed as a percentage, but has been expressed here as a dollar amount for ease of calculation.

Section 24 Export Price equals B minus D and is $100.

Since this export price is not less than the NV (see A above), it would initially seem that the goods are not dumped. A reliability test would still be performed to see if there was hidden dumping.

Section 25 Export Price equals C minus (D+E+F+G+H) and is $80.

Since the section 25 deductive export price is less than the section 24 export price, the section 24 export price is deemed to be unreliable for SIMA purposes and section 25 will be used. This means that, as a result of the selling price in Canada being too low, hidden dumping is occurring.

RESULT: Section 24 export price is unreliable.
                 Hidden dumping is occurring.
                 Anti-dumping duty of $20 is payable.

Based on these results, the importer will need to raise its prices in Canada to at least $150 to eliminate the hidden dumping or risk additional retroactive duties at the time of the next review, due to the cascading effect of section 25 of SIMA. In addition, for the next few months, $20 anti-dumping duty will be payable on each widget imported from the related exporter.

Follow-up Review # 1 (Showing the Cascading Effect)

After a few months, Directorate officials commence a follow-up review of the export prices.

To illustrate the cascading effect of section 25, it is assumed that the importer raised prices in Canada but only by $10 to $140. That is, the importer paid $20 anti-dumping duty, increased the price in Canada by $10 and simply absorbed the other $10. For this illustration, it is assumed that all other factors remained the same.

The Directorate starts the review by again conducting a reliability test. It must be remembered that when conducting the reliability test, anti-dumping duties paid are not a part of the calculation. The calculation would be as follows:

A. US Widget's normal value (NV) of a widget is $100.

B. US Widget sells each widget to Canada Widget for $110.

C. Canada Widget resold the widget for $140 in Canada. <Note change>

D. US Widget incurs $10 freight on each widget shipped to Canada.

E. Canada Widget pays $7 customs duty on each widget imported.

F. Canada Widget incurs $20 GS&A on each widget sold in Canada.

G. Canada Widget incurs $8 freight on each widget sold in Canada.

H. Average industry profit is $5 for each widget sold in Canada.

Section 24 Export Price equals B minus D and is $100.

Section 25 Export Price equals C minus (D+E+F+G+H) and is $90.

Since the section 25 deductive export price is less than the section 24 export price, the section 24 export price is deemed to be unreliable for SIMA purposes. In effect, hidden dumping is still occurring as a result of the selling price in Canada being too low.

The Directorate will now re-calculate the export price of the goods under section 25. For this calculation, however, the anti-dumping duty paid becomes a factor in the calculation. The calculation would be as follows:

A. US Widget's normal value (NV) of a widget is $100.

B. US Widget sells each widget to Canada Widget for $110.

C. Canada Widget resold the widget for $140 in Canada.

D. US Widget incurs $10 freight on each widget shipped to Canada.

E. Canada Widget pays $7 customs duty on each widget imported.

F. Canada Widget incurs $20 GS&A on each widget sold in Canada.

G. Canada Widget incurs $8 freight on each widget sold in Canada.

H. Average industry profit is $5 for each widget sold in Canada.

I. Canada Widget paid $20 anti-dumping duty on each widget imported.

Section 25 Export Price (recalculated) equals C minus (D+E+F+G+H+I) and is $70.

Since the export price is now less than the NV by $30, increased hidden dumping is taking place. The margin of dumping has now increased to $30 because of the added cost to the importer of $20 anti-dumping duty of which only $10 was recovered through a higher price in Canada. Additional duty will be collected retroactively on past importations.

RESULT: Section 24 export price is unreliable.
                  Hidden dumping is occurring.
                  Margin of dumping is now $30.
                  AD duty of $20 was already paid.
                  Goods are re-assessed an additional $10 duty.

The importer will be informed that it needs to raise its prices in Canada to eliminate the hidden dumping or risk additional retroactive duties at the time of the next review. Also, for the next few months, $30 of anti-dumping duty is payable on each widget imported from the related exporter.

Follow-up Review # 2 (Showing the Solution)

Again after a few months, Directorate officials advise that a follow-up review of the export prices is being undertaken.

As a result of the Directorate's last review, the importer raised prices in Canada to $150. For this illustration, it is assumed that all other factors remained the same.

The Directorate starts the review by again conducting a reliability test. It must be remembered that when conducting the reliability test, anti-dumping duties paid are not a part of the calculation. The calculation would be as follows:

A. US Widget's normal value (NV) of a widget is $100.

B. US Widget sells each widget to Canada Widget for $110.

C. Canada Widget resold the widget for $150 in Canada. <Note change>

D. US Widget incurs $10 freight on each widget shipped to Canada.

E. Canada Widget pays $7 customs duty on each widget imported.

F. Canada Widget incurs $20 GS&A on each widget sold in Canada.

G. Canada Widget incurs $8 freight on each widget sold in Canada.

H. Average industry profit is $5 for each widget sold in Canada.

Section 24 Export Price equals B minus D and is $100.

Section 25 Export Price equals C minus (D+E+F+G+H) and is $100.

Since the section 25 deductive export price is not less than the section 24 export price, the

section 24 export price is deemed to be reliable for SIMA purposes. And since the section 24 export price is not less than the normal value, no dumping is occurring.

In summary, the importer eliminated the hidden dumping by increasing its resale price in Canada to $150. For those imported widgets that were resold in Canada during the past few months at the increased price of $150, the importer would receive a refund of the $30 anti-dumping duty paid if requests for re-determination had been filed in the proper form and manner.

¹ Duties normally include duties under SIMA, i.e., anti-dumping duties and countervailing duties.However, when applying the reliability test, only regular duties and taxes are deducted in the calculations